 | | The Daily Reckoning | Tuesday, April 26, 2011 |
- Dollar slumps as Geithner and The Bernank fall for "the fatal conceit,"
- A review of Dr. Ron Paul's latest literary contribution to freedom,
- Plus, Bill Bonner on inflation in the air, the Billion Prices Project and more...
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|  | | | Touting the Strength of Deliberate Weakness | | Why the US’s “Strong Dollar Policy” is Anything But | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
The colors are turning here in this capital city. Trees lining the Palermo streets, once a vibrant green, are lately tinged with auburn. Their leaves resist the fatal kisses of the cooling night air, before being taken up by the breeze and falling to the ground. The days, too, are shrinking before our very eyes.
We've just returned to Buenos Aires after a couple of weeks in Uruguay and Brazil. It's good to be back. Some things - the weather, for example - have changed. Others - like depressing/entertaining news headlines - remain more or less the same. Let's have a look...
"Fed approaches crossroads as growth slows..." says one paper...
"Euro strikes 16-month high against dollar..." reads another...
And then, "Geithner vows to defend strong US dollar policy..." from the very same wire...
Hmmm... What to make of all this? We're reminded of that joke about how you can tell when a politician is lying. (His mouth is moving.) A strong dollar policy? He must surely be kidding. How can Mr. Geithner vow to defend something he has never had?
"Our policy has been and will always be, as long as I will be in office, that a strong dollar is in the interest of the country," Geithner told a New York conference organized by the Council of Foreign Relations.
Then, threatening to add perjury to comedy, "We will never embrace a strategy to weaken the dollar."
Remember when Geithner stood in front of those university students in Beijing a couple of years ago to assure them of his same strong dollar policy? "Chinese [dollar] assets are very safe," he said, without even cracking a smile or giving a wink. As far as we remember, the students took his deadpan delivery very well. They laughed right in his face.
Two years later - thanks largely to some crafty collusion between Mr. Geithner and the man we now know as "The Bernank" - the dollar continues on its up and down rollercoaster ride. Mostly though, it heads lower. One year ago today, the dollar index stood at 86.5. This morning, it is seen languishing around 73.8, testing lows not seen since 2008. So far this year, the once-mighty greenback has lost 6.5% of its value compared with a basket of currencies held by her major trade partners.
What are the Feds doing about this dismal - and accelerating - decline in the value of the nation's compulsory, unquestionable currency? Why, they're having a meeting, of course. Good for them.
"The Federal Reserve's top policy panel will on Tuesday begin a two-day meeting in Washington, where it will weigh whether the recovery can make do with less central bank stimulus," reports Bloomberg.
"The seven men and three women who vote on the Fed's rate-setting panel will decide whether or not to extend a $600 billion stimulus plan that is scheduled to end in June."
The report goes on to reveal that, until recently, the recovery was, in the Fed's own words, "on a firmer footing." But now, thanks to "higher oil prices and government spending cuts, the economy now appears to be slowing."
How, we wonder, can an economy be slowing when the government spends less of the productive class's money? Only economists who judge government spending to be an asset, rather than a liability, could possibly claim such an absurdity. And how can an institution that is openly attempting to light inflationary fires blame rising prices - an effect of their very own policy - for hindering their efforts? Aren't higher prices exactly what they desire? Well, now they are getting them...only not in the assets they want.
Housing, for example, is still in the dumps. The latest figures available from Standard & Poor's Case Schiller housing index show February to be the eighth consecutive month of declines. Housing prices shed 3.3% against the same month last year and are barely half a percent off their 2009 recession lows. Measured against their bubble highs of 2006, S&P/Case-Shiller's index of home prices in 20 cities shows a 32% decline.
But wait, gold is up. Silver is up...and up...and up some more. Coffee just hit a 34-year high at three bucks a pound, alongside multi-year records for a slew of other commodities. And oil, as bemoaned by the Feds, is firmly over $110 per barrel.
Oops.
Of course, it's not that the Feds don't want to control the economy. (We're quite convinced they do, alas.) It's simply that they can't. This is the error that F.A. Hayek called "The Fatal Conceit."
In short, central planners are not possessed of an all-knowing omnipotence. At best, they can probably only hope for an unknowing impotence. Price signals, not policy wonks, enable market participants to make better, more informed decisions. Until we see a bear market in Fed confidence, therefore, we'll continue to see a bear market in the state of the overall economy they attempt to manage.
P.S. If you haven't read Hayek's classic, feel free to swing by our virtual bookstore to add one to your library. In the meantime, the intrepid Gary Gibson has a review of another important book below for your consideration. Please enjoy...
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| | The Daily Reckoning Presents | | A Review of Ron Paul’s Liberty Defined | |  | | Gary Gibson |
Sometimes Ron Paul seems too good to be true. For decades he has championed the cause of liberty and sound monetary and geopolitical policy. He has done this in the very heart of the Leviathan state even as the federal government has accelerated its expansion in the postwar years. Further Dr. Paul has repeatedly presented his case in print in clear language. Liberty Defined is the latest timely addition to those efforts.
The format is one we've seen before in books like Libertarianism A to Z. InLiberty Defined, the introduction lays out the overarching principles of liberty and anti-authoritarianism. The book itself then devotes each chapter to an individual issue, starting with abortion, then moving through things like Austrian economics, capital punishment, evolution and creation, global warming, hate crimes, Keynesianism, taxes, unions and much more. The chapters are fairly short at just a few pages each, written in clear language that seeks to discuss and educate. Each chapter is a delight to read, particularly for lovers of liberty, but even when you don't fully agree with Dr. Paul, you'll find his position compelling and his honesty and consistency incredibly refreshing.
"The phrase 'Austrian School' or 'Austrian economics'" Dr. Paul writes, "is not something I ever expected would enter into the vocabulary of politics or media in culture. But since 2008, it has. Reporters use it with some degree of understanding, and with an expectation that readers and viewers will understand it too. This is just thrilling to me, for I am a long-time student of the Austrian tradition of thought."
And no doubt many readers will share Dr. Paul's joy. They will also note that it is Dr. Paul himself who has been tirelessly campaigning for the free market principles of the Austrian School for the past several years. He tells about the founder of the Austrian School, Carl Menger (1840-1921) "who wrote that economic value extends from the human mind alone and is not something that exists as an inherent part of goods and services; valuation changes according to social needs and circumstances. We need markets to reveal to us the valuations of consumers and producers in the form of the price system that works within a market setting."
Dr. Paul notes that Keynes' "entire agenda presumes the existence of a wise activist state that is involved in every level of economic life. Liberty was not an issue that concerned him."
The Austrian School, however, believes, "We are not cogs in a macroeconomic machine; people will always resist being treated as such."
Liberty Defined is certain to make people on both sides of the left- right political debate uncomfortable. Dr. Paul decries the welfare state beloved by those on the left, but repeatedly shows that such a state is just the other side of the coin of the interventionist foreign policies of those on the right. Dr. Paul himself is a man of religious and spiritual conviction, but he also doesn't shy away from analyzing how the neoconservatives of the modern right adulterate religion and patriotism to garner support for their imperialist adventures.
"Instead of religious beliefs being the cause of war, it is more likely that those who want war co-opt religion and falsely claim the enemy is attacking their religious values. How many times have we heard neoconservatives repeat the mantra that religious fanatics attack us for our freedoms and prosperity? Neoconservatives use religion to stir up hatred toward the enemy."
Dr. Paul also isn't given to idealism. He admits, for example, that a truly libertarian position would have porous borders, but he points out that that just isn't possible right now. He notes that even in a stateless society, all property would be privately owned and those property-owners at the borders would have the right to decide who cross their land. Dr. Paul handles the issue deftly and his proposals of work permits and conditional green cards as opposed to deportation, among other things, struck even this anarcho-capitalist leaning reader as reasonable.
And Dr. Paul is certainly no anarchist, but he is close enough for government work. He is the kind of politician even an anarcho- capitalist could love. Dr. Paul is well versed in the dangers of governments and their tendencies to grow; yet he thinks there is room in the world for a minimal amount of government. It's a delicate balance. He pulls it off with aplomb. In the chapter on prohibition he says:
"Government should not compel or prohibit any personal activity when that activity poses danger to that individual alone. Drinking and smoking marijuana is one thing, but driving recklessly under the influence is quite another. When an individual threatens the lives of others, there is a role for government to restrain that violence.
"The government today is involved in compulsion or prohibition of just about everything in our daily activities. Many times these efforts are well intentioned. Other times they result from a philosophic belief that average people need smart humanitarian politicians and bureaucrats to take care of them. The people, they claim, are not smart enough to make their own decisions. And unfortunately, many citizens go along, believing the government will provide perfect safety for them in everything they do. Since governments can't deliver, this assumption provides a grand moral hazard of complacency and will only be reversed with either a dictatorship or a national bankruptcy that awakens people and forces positive change."
Liberty Defined is layered with a practical view of the political realities, but it never fails to stay true to its moral core. Dr. Paul repeatedly points out that many of his solutions - which ultimately come down to the federal government getting out of the way - simply won't be applied because the federal government is just too intertwined with the problem.
But Dr. Paul never wavers. With the fearlessness for which he has become famous, Dr. Paul continues to assault all the bad central planning policies and popular misconceptions that allow them to continue even in the face of failure.
On Keynesianism:
"...Something did change with the publication of The General Theory. Keynes gave the governments of the world a seemingly scientific rationale for doing what governments wanted to do anyway." On unions and government labor laws:
"Union power, gained by legislation, even without physical violence, is still violence. The laborer gains legal force over the employer. Economically, in the long run, labor loses.
"...If only it were so easy to help the working class. Just dictate wages and everyone will be financially better off. Unfortunately, this leads to disastrous results, whether it's the prolonging of the economic mess as it did in the 1930s or the tragic results in American industry that we're witnessing today.
"What good is it to mandate a $75 per hour wage if there are no jobs available at that price? What good is a minimum wage of $7.50 if it significantly contributes to overall unemployment?
"The reaction to the economic argument explaining the shortcoming of labor unions and minimum wage laws is that it's heartless and unfair not to force 'fairness' on the ruthless capitalists. But true compassion should be directed toward the defense of a free market that has provided the greatest abundance and the best distribution of wealth of any economic system known throughout history." The chapter on taxes, however, is probably the best (and certainly this reviewer's favorite). It sums up so many of the important themes: private property, liberty versus coercion, public education, economic misallocation, and the voracious appetite of the state.
"'Taxes are the price we pay for civilization,' according to Oliver Wendell Holmes. This claim has cost us dearly... If we as a nation continue to believe that paying for civilization through taxation is a wise purchase and the only way to achieve civilization, we are doomed."
I am tempted to quote the chapter in its entirety, but at this point I would simply urge you to buy the book so you can read it there, along with the rest of this wonderful work. Interested readers can do so here.
Regards,
Gary Gibson,
for The Daily Reckoning
Joel's Note: Also, for readers interested in discovering the secrets of Dr. Paul's lost "Gold Bible" please find more info here...and directly below.
| | | | The book the US Congress never wanted you to see... |
Ron Paul's "Lost" Gold Bible
Buried away in secret since late in the last century, this 200-page guide shows you:
- Why $15,000 gold is likely inevitable, BUT why that's not a GOOD thing for investors...
- The only REAL way out of our monetary crisis...
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We're spreading the word... Click here to find out more.
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| | | | Bill Bonner | | Consumer Price Inflation on a Diet of Gold and Wheaties | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
We've always wondered why there is so much debate about the rate of inflation. It seems like such a simple thing to track. You go in the store. You buy a box of Wheaties. You write down the price. Next month, you do the same thing. What's so hard about that?
But what if the box is smaller next month? What if the Wheaties are twice as good? What if you can get the same enjoyment from a box of Wheatie-Puffs at half the price?
What's the real rate of inflation? It depends on how you figure it. The Labor Department shows consumer price inflation at barely over 2%. John Williams' ShadowStats puts the figure close to 8%.
We say "close to" and "about" because the numbers are never more than approximations; no point in dressing them up with decimals as though they were precise and reliable.
But comes now MIT University with a project to track prices by monitoring them on the worldwide web. Instead of creating a small sample of prices and checking them periodically, the Billion Prices Project looks at a huge number of prices from all over the web, in real time.
The resulting numbers may not be perfect, but there sure are a lot of them. Using such a huge volume of price information, the Billion Prices Project is probably the most reliable measure of consumer price inflation developed so far.
So, you're probably wondering... Well, what's the story? How much consumer price inflation is there?
Over the last 12 months, prices have gone up 3.2%, say professors Alberto Cavallo and Roberto Rigobon, who developed the index.
But get this, the rate of consumer price inflation is speeding up. Annualize the data from the last 3 months and you get 7.4%.
We don't need to tell you, Dear Reader. If that rate sticks, today's financial world comes unglued.
By the most recent calculation by the Billion Prices Project, US government bond yields measure only half the rate of consumer price inflation. How could that be? Why would investors buy a bond yielding only half the inflation rate? Are they idiots?
Maybe they are betting that the latest inflation numbers are a fluke. Ben Bernanke said so himself.
"I think the increase in inflation will be transitory," said the man more responsible for the price hikes than any other living human being. Mr. Bernanke says gasoline at $4 a gallon...and a box of Wheaties at $5...are features of "global supply and demand conditions."
Fair enough. Perhaps they are. But what about $1,500 gold? The supply of the yellow metal is barely any greater than it was when it was priced at $1,000 an ounce.
You may say that demand has increased by 50%...but that only introduces a string of other questions. Gold has no uses - other than ornament and money. What happened that would increase demand for it so suddenly? And if something has increased the demand for gold, perhaps that same thing might have affected oil and wheat too.
The feds are insincerely trying to figure it out. They've been asked by President Obama himself to look into price increases and report any funny business. Of course, the real funny business is right in plain sight. The Fed has tripled its holdings of private and public debt - and added nearly $2 trillion in extra cash to do it. Most of that money is still frozen in the banking system. But what will happen when things heat up...and it's multiplied, maybe ten times over? Won't that cause prices to rise even faster?
Maybe that's what people are worried about. And to protect themselves, they're buying tried and true money, traditional money. Because they're afraid the more modern variety won't hold up.
And more thoughts...
"Dollar's Slide Accelerates," reports The Wall Street Journal.
As predicted in this space, the feds have failed. Pouring more liquidity onto a saturated marketplace did not work. The economy already had more than enough debt; it didn't need more.
More debt and dollars did not create a genuine recovery. Instead, they merely drowned millions of ordinary households...
The New York Times has the story:
WASHINGTON - The Federal Reserve 's experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.
But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.
Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.
"These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy," Mr. Bernanke said in a February speech, an argument he has repeated frequently.
But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next. And now, we'll make another bold prediction. What happens when the QE2 program expires? Probably nothing...at first. But just wait. The Japanese, as usual, are setting the pace. In the two weeks following the tsunami/nuke crisis, they expanded their central bank balance sheet by two and a half times - adding huge new stockpiles of money for the banking system to draw upon.
The US feds won't be left behind for long.
Regards,
Bill Bonner
for The Daily Reckoning |
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