Home . Archives . Unsubscribe The Daily Reckoning | Saturday, October 1, 2011
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The Mother of All Financial Bubbles is Just Now Starting to Pop...
It’s time to learn the truth...and to get prepared. If you have the right plan set up, you won’t suffer when this bubble fully bursts.
But — and this is the most important point — you must have a plan. And you must be prepared before this epic crisis hits. Click here now.When More Is Less
Scribbling from Mendoza, Argentina...Joel Bowman
More isn’t always better. Sometimes, in fact, more yields less...less of what you want, that is.
The end of “more is better” is a theme we’ve been exploring, in various ways, in these pages for a while now. More Mendozan Malbec, for example, yields a decidedly less productive morning after (though it sure tastes good at the time). Similarly, more energy input doesn’t always yield more output. Corn-based ethanol — with a net negative ERoEI (energy returned on energy invested) — comes to mind. And where politics meets economics, more is almost always so much less it’s a complete disaster. More intervention. More regulation. More scheming, fixing and, now, twisting...and always the market poorer for it.
Here’s a paragraph that caught our eye earlier this week, one that makes the point with regards to Fed-sponsored fixing and twisting:
“During the 1980s,” observed Mr. Frederick Sheehan, “the change (rise) in non-financial domestic debt divided by the change (rise) in nominal Gross Domestic Product was 2.2. That is, for every $2.20 borrowed, the United States produced $1.00 of additional goods and services (nominal). In the 1990s, debt was less efficient. The US borrowed $2.70 for every $1.00 of growth. More recently, between 2001 and 2008, this ratio soared all the way to $4.20 for every $1.00 of growth.
“In other words,” continued Mr. Sheehan, “every incremental unit of credit has been less and less productive.”
What, exactly, does this mean in the context of the Fed’s latest “more” program? Read on for Mr. Sheehan’s excellent column, the feature piece for this week.
[An Absolute Zero first appeared in the Daily Reckoning on Sept. 30, 2011]The Daily Reckoning Presents An Absolute Zero
The Federal Reserve Open Market Committee (FOMC) concluded a two-day meeting last week by initiating “Operation Twist.” The FOMC’s press release explained: “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”Frederick J. Sheehan
This announcement initiated sell programs in almost every financial market. There are many reasons for this reaction, one of which was the recognition that the Federal Reserve is 0-for-whatever-it-has tried. All the Fed’s initiatives have failed, and now, all that Bernanke can think to do is drive down yields that are already below 2.00%!
The Fed’s efforts to revive the economy are failing because of the four topics that never enter the mind of Federal Reserve Chairman Ben S. Bernanke: money, credit, leverage, and capital.
The productivity of capital is an important consideration, one which most people understand, in their own words. A bank does not lend money to a business that cannot earn its way to paying back the loan. A potential borrower understands the banker’s hurdle. Similarly, an investor buys shares of common stock in a company that will produce the most from the least. The higher the profits produced per share, the more the shares should be worth.
In other words, most folks understand the classic connection between risk and reward. And most folks also understand that merely borrowing more money, without putting that money to productive use, will never solve anything.
Ben & friends do not think this way. They believe that funneling more credit into the economy is a surefire means of “kickstarting growth.” But the facts say otherwise.
During the quantitative easing programs, the Fed’s credit-from-the- heavens produced zero growth.
During the 1980s, the change (rise) in non-financial domestic debt divided by the change (rise) in nominal Gross Domestic Product was 2.2. That is, for every $2.20 borrowed, the United States produced $1.00 of additional goods and services (nominal). In the 1990s, debt was less efficient. The US borrowed $2.70 for every $1.00 of growth. More recently, between 2001 and 2008, this ratio soared all the way to $4.20 for every $1.00 of growth.
In other words, every incremental unit of credit has been less and less productive. But that’s the only tool Bernanke has in his toolbox, so he just keeps using it. Since the Fed rolled out its various quantitative initiatives in early 2009, the ratio of debt- to-production has been 3.7:1 (through June, 2011). But, the increase in transfer payments (1-in-7 Americans now receive food stamps, Cash for Clunkers, shovel-ready bank bailouts) exceeds the rise in nominal GDP by a wide margin. Thus, as a measure of financial efficiency, the ratio is now meaningless.
The additional debt being manufactured is not producing any additional goods and services. The more Bernanke applies his senior thesis to the real economy, the less the economy is able to pay down old debt, much less manufacture additional goods and services to pay down the new debt.
The Fed has pegged short-term interest rates at zero; Operation Twist is an attempt to drive long-term rates to zero (or, close to it); the rise of incomes in the United States since 2008 has been zero; “real” GDP growth since QE1 has been less than zero; the FOMC is an absolute zero.
Physical elements tend to behave very strangely as they approach absolute zero (-273 Celsius).
Economic elements, as it turns out, are not so different. The move toward “absolute zero” along the yield curve is producing some very strange behavior — in both the financial markets and the economy at large.
The Authorities have lost control of the markets they have been manipulating. Desperate tactics, with untold unintended consequences, such as the Swiss National Bank doubling its monetary base last month, ensure more fanatical outbursts from the Fed, the ECB, and the Bank of Japan.
In this setting, gold fell more than $150 last week. Strange, isn’t it? Other than remote islands, gold is the best bargain around.
Regards,
Frederick J. Sheehan,
for The Daily Reckoning
Joel’s Note: For reasons oft-cited in these pages, by Mr. Sheehan and others, the gold story — sometimes known as the “anti-dollar” story — is becoming an increasingly important one for individuals who wish to distance themselves from the Fed’s unscrupulous, dollar- debasing clutches. In fact, the story is so important, Addison has made it a mission to get a copy of Ron Paul’s “Lost Gold Bible” into as many hands as possible. Be sure to grab your copy — and a few issues of Addison’sApogee Advisory — right here.
Mr. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and The Coming Collapse of the Municipal Bond Market(Aucontrarian.com, 2009)Why China Is About To Bring America To Its Knees...
The world is 97% dependent on supply of these little-known resources from the red dragon.
At stake is America’s ability to create cell phones, hybrid car batteries, even our high-tech military equipment...
They are about to shut supplies of this vital resource off from the rest of the world... FOREVER!
Click here to see how to make gains from the greatest global supply squeeze in modern history.ALSO THIS WEEK in The Daily Reckoning... The Biggest Threat to the Gold Mining Industry
By Matt Badiali
My friend Brent Cook is buying gold right now... But not for the reasons you’d expect. Brent is no “doom and gloom” gold bug. He doesn’t think the dollar is going to collapse any time soon. Brent simply knows the world is running low on gold... which could drive the price of his favorite stocks much, much higher.
After the Fall: How Far Can Gold and Silver Climb?
By Jeff Clark
Stowe, Vermont
With gold a stone’s throw away from $2,000 and already up 27% on the year, the objective investor might begin wondering how much higher both it and silver can climb. After all, gold is nearing its inflation-adjusted 1980 high — and that peak was a spike that lasted only one day.
Remember This
By Ray Blanco
Marco Island, Florida
Periodically, we see articles heralding the imminent death of Moore’s law and accelerating progress in the world of electronics. For the sake of your portfolio, don’t buy it. Creative destruction, using Joseph Schumpeter’s term, will continue to create breakthrough profit opportunities.
Stocks Go Boom! — A Buying Opportunity!
By Byron King
Pittsburgh, Pennsylvania
What a nasty stock market swoon! It’s been painful to watch hard-won share price gains drift downward. It compounds the pain when I watch the downward share price drift, while I KNOW that great things are happening with the companies I have recommended in my investment service, Energy & Scarcity Investor. Heck, just in the past six weeks, I have traveled to Alaska, Manitoba and Quebec with my eyes wide open, looking for what needs to go on to build great companies.What to Do Now that Government Retirement Is Going Broke...
The government “safety net” has officially begun to shrink.
Protect yourself — and find out how to collect regular income checks from the “other” gov’t-backed “retirement program” — in this shocking new presentation.Details here.The Weekly Endnote... Usually in this section of the weekend edition we feature a few reader emails. Well, in this issue, we’d like to solicit some instead. Specifically, we’d like to know what you think of Utah’s Legal Tender Act, passed earlier this year.
Writes Ron Hera, who earlier this week attended the Utah Monetary Summit in Salt Lake City, Utah:
“The morally and literally bankrupt nature of the current US financial system is transforming America into a dog-eat- dog society where every person seeks to live at the expense of someone else rather than by producing wealth, because production is systematically stolen by the federal government and by banks through the clever device of an inflationary monetary system...”
“A stable society requires sound principles,” continues Mr. Hera. ”A moral society requires sound money. Today, the United States of America has neither.”
Beneath Mr. Hera’s thoughtful email, he appended a copy of the Utah Monetary Declaration, which he, among many others, signed on Monday evening, September 26, 2011, in the Post Chapel on the University of Utah campus at Salt Lake City.
We include below a complete, unedited version of the text for your consideration:
Utah Monetary Declaration
WHEREAS, money, as a medium of exchange, a store of value, and a unit of measure promotes economic activity, growth and productivity by facilitating specialization and trade, the accumulation of wealth and its long-term investment, as well as accountability in setting prices, tracking progress, and settling accounts;
WHEREAS, natural money — precious metal coin — by virtue of its inherent qualities of recognizability, measurability, uniformity, divisibility, durability, portability and scarcity has reliably retained its purchasing power, notwithstanding periodic fluctuations, over the centuries and millennia of human history, serving as an effective medium of exchange and store of value often without any governmental declaration to require, legitimize or perpetuate its adoption and operation as such;
WHEREAS, sound money, by retaining stable purchasing power over time, best serves societal needs by substantially reducing the uncertainty of inflation risk for creditors and deflation risk for debtors as well as encouraging saving and investment among the general populace and benefiting the economic zone in which it circulates by stimulating the economy and by attracting foreign capital and commerce to the region;
WHEREAS, history attests that monopolistic monetary systems frequently engender currency debasement, resulting in serious consequences such as lost purchasing power, inequitable wealth redistributions, misallocation of productive resources, and chronic unemployment, and that, as the cornerstone of a free market and society, the right to choose, whether between suppliers of goods and services, political parties and candidates, or between alternative media of exchange, effectively promotes the general welfare;
WHEREAS, for the equal protection of all people, rich and poor, the open circulation of complementary and competing currencies should be fostered and promoted by every sovereign state, including those of The United States of America pursuant to their monetary powers (expressly reserved in article 1, § 10 and in the 10th amendment of the United States Constitution) to monetize gold and silver coin as an alternative, voluntary medium of exchange, and as an effective check and balance against debasement of the national currency by the national government which is constitutionally precluded from demonetizing state legal tender, through disparate tax treatment, discriminatory regulation, the threat of suppression and seizure, or otherwise;
NOW THEREFORE, we the undersigned hereby declare and affirm that:
1. As an essential element of true liberty and of the pursuit of happiness in a free society, all people enjoy the inherent and unalienable right to lawfully acquire, hold and use as a medium of exchange whatever form or forms of money they may prefer, including especially gold and silver coin.
2. All free and sovereign states bear the moral, political and legal obligation not only to refrain from debasing their own currencies (except under the most exigent circumstances) and from erecting barriers to the unfettered circulation of monies issued under the authority of their sovereign trading partners, but also to affirmatively defend and protect against fraud, counterfeiting, uttering, passing off, embezzlement, theft or neglect by requiring full transparency and accountability of all state chartered financial institutions.
3. No tax liability nor any regulatory scheme promoting one form of money over another should apply to: (a) the holding of any form of money, in a financial institution or otherwise; (b) the exchange of one form of money for any other; or (c) the actual or imputed increase in the purchasing power of one form of money as compared to another.
4. Except in the case of governmentally assessed taxes, fees, duties, imposts, excises, dues, fines or penalties, the authority of government should never be used to compel payment of any obligation, contract or private debt in any specific form of money inconsistent with the parties’ written, verbal or implied agreement, or to frustrate the intent of contracting parties or impair contractual obligations by invalidating the application of a discount or surcharge agreed to be dependent upon the particular medium of exchange or method of payment employed.
5. The extent and composition of a person’s monetary holdings, including those on deposit with any financial institution, should not be subject to disclosure, search or seizure except upon adherence to due process safeguards such as requiring an adequate showing of probable cause to support the issuance by a court of competent jurisdiction of a lawful warrant or writ executed by legally authorized law enforcement officers.
We hereby urge business leaders, educators, members of the media, legislators, government officials as well as judicial and law enforcement officers to use their best combined efforts to reinstate and promote the legal and commercial framework necessary to establishing and maintaining well-functioning, sound monetary systems based on choice in currency.
The signatories hereto concur in the general principles expressed in the foregoing declaration notwithstanding specific reservations some may have as to how such principles should be interpreted and applied in practice...
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We’d like to hear your thoughts on the above text. Email them to the address below. We’ll feature a selection of your responses in future reckonings.
Have a think about it and, in the meantime, enjoy your weekend.
Cheers,
Joel Bowman
Managing Editor
The Daily Reckoning
Saturday, 1 October 2011
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