The wages-fuel-demand fallacy

In recent months talking heads, disappointed with the lack of economic recovery, have turned their attention to wages. If only wages could grow, they say, there would be more demand for goods and services: without wage growth, economies will continue to stagnate.
It amounts to a non-specific call to stimulate aggregate demand by continuing with or even accelerating the expansion of money supply. The thinking is the same as that behind Bernanke’s monetary distribution by helicopter. Unfortunately for these wishful-thinkers the disciplines of the markets cannot be bypassed. If you give everyone more money without a balancing increase in the supply of goods, there is no surer way of stimulating price inflation, collapsing a currency’s purchasing power and losing all control of interest rates.
The underlying error is to fail to understand that economising individuals make things in order to be able to buy things. That is the order of events, earn it first and spend it second. No amount of monetary shenanigans can change this basic fact. Instead, expanding the quantity of money will always end up devaluing the wealth and earning-power of ordinary people, the same people that are being encouraged to spend, and destroying genuine economic activity in the process.

This post was published at GoldMoney on 29 August 2014.

The Myth of the Unchanging Value of Gold

According to mainstream economics textbooks, one of the primary functions of money is to measure the value of goods and services exchanged on the market. A typical statement of this view is given by Frederic Mishkin in his textbook on money and banking. ‘[M]oney … is used to measure value in the economy,’ he claims. ‘We measure the value of goods and services in terms of money, just as we measure weight in terms of pounds and distance in terms of miles.’
When money is conceived as a measure of value, the policy implication is that one of the primary objectives of the central bank should be to maintain a stable price level. This supposedly will remove inflationary noise from the economy and ensure that any changes in money prices that do occur tend to reflect a change in the relative values of goods and services to consumers. Thus, for mainstream economists, stabilizing a price index based on a basket of arbitrarily selected and weighted consumer goods, e.g., the CPI, the core CPI, the Personal Consumption Expenditure (CPE), etc., is a prerequisite for rendering money a more or less fixed yardstick for measuring value.
This idea – that a series of acts involving interpersonal exchange of certain sums of money for quantities of various goods by diverse agents over a given period of time somehow yields a measure of value – is another ancient fallacy that can be traced back to John Law. Law repeatedly referred to money as ‘the measure by which goods are valued.’ This fallacy has been refuted elsewhere and rests on the assumption that the act of measurement involves the comparison of one thing to another thing that has an objective existence, and whose relevant physical dimensions and causal relationships with other physical phenomena are absolutely fixed and invariant to the passage of time, like a yardstick or a column of mercury.

This post was published at Ludwig von Mises Institute on Friday, August 29, 2014.

German Finance Minister Tells EU Leaders: Free Money Party’s Over

Has Germany had enough? Hot on the heels of Mario Draghi’s ‘demands’ that EU leaders undertake “structural reforms” to boost competitiveness and overcome the legacy of Europe’s debt crisis, German Finance Minister Wolfgang Schaeuble unleashed perhaps the most worrisome statement tonight for all the free-money-party-goers – the music is about to stop. In an interview with Bloomberg TV, Schaeuble blasted “Europe needs to find ways to foster growth,” adding that “the ECB has reached the limit in helping the Euro Area.” In a clear shot across the bow of his ‘core’ cohort, Schaeuble said he “understood” Hollande’s demands but shot back that “monetary policy can only buy time.”
As WSJ notes, the French are seeking aid…

This post was published at Zero Hedge on 08/28/2014.

Argentina Proclaims Peso Devaluation “Obviously Won’t Happen” – Just Like It “Vowed” In 2013

May 2013, President Kirchner: “As long as I’m president, those who want to make money through devaluations, which other people have to pay for, will have to keep waiting for another government,”
Jan 2014: Argentina Devaluation Sends Currency Tumbling Most in 12 Years
Aug 2014: Argentina’s Cabinet Chief Jorge Capitanich said today a devaluation of the peso, “obviously won’t happen.”
So what’s next?

This post was published at Zero Hedge on 08/28/2014.

“Valuation Is The Market’s Biggest Headwind”

Yesterday, as the S&P closed above 2,000 for the first time, mainstream media pundits were trotted out to proclaim that either “stocks are ‘fairly’ valued” or “stocks are cheap” and the “money on the sidelines” must come in now. Aside from the ‘idiocy’ of the last comment, we thought BMO’s Jack Ablin’s comments were of note. “Valuation is the market’s biggest headwind,’ he wrote, adding that sales ‘have to catch up’ for stocks to sustain the rally. One glimpse at the following chart and it is clear that not only are stocks “not cheap” or “not fair” they are extremely rich with the only fall-back now being that “they’re not as expensive as they were at the top of the biggest bubble in stocks ever.”

This post was published at Zero Hedge on 08/27/2014.

Will There Be a ‘New Gold Rush?’ — Ian Gordon, Longwave Analytics

Ian Gordon created Longwave Analytics, which studies the Longwave principle, by which economies obey long-term cyclical trends of expansion and contraction. Eric Sprott is an avid reader — he suggested I interview Ian Gordon for his take on the role of Kondratiev’s ‘long wave cycle’ in explaining the economic environment we are seeing today.
Ian said ‘winter’ was coming for the world economy, though it has been staved off by the flexibility provided by paper money. As a result, a depression will be very different today than in 1929 or 1873, he believes. But now, as then, we could see a massive push for new gold discoveries.
Mr. Gordon explained how he got to know Eric Sprott over 10 years ago:
‘I was writing about long-term economic cycles, referred to as ‘Kondratiev’ cycles. In 1998, I realized that we were close to the top of a bull market; we were somewhere akin to 1928 – immediately preceding the Great Depression. Eric appreciated my work, because it helped explain an imminent bull market for gold, which he saw as well.’
I asked: Do these ‘long wave’ economic patterns explain today’s bear market for gold – and the recent rally in general stocks?
‘Well, they didn’t predict this – but they can help explain why it’s happening. Over the course of one entire ‘long wave’ economic cycle, covering a full expansion and subsequent contraction, you have what I call four ‘seasons.’ Winter is the period where debt is wiped out of the economy. It happened after 1929, which caused the US banking system to collapse. During the 1920′s, there had been a big build-up in consumer and corporate debt, as well as sovereign debt.
‘During the Great Depression and the previous depression of 1873, we were on a gold standard system, so the ability to create money was limited. This time around, we are in a pure credit-based system, so the ability to create money withstands the ravages of the winter. Effectively, governments have been creating more debt. This will ultimately cause a more horrendous economic decline than in either 1929 or 1873, as debt levels are far greater today – and because the world is much more inter-connected financially.’
What about your prediction of a ‘new gold rush’ similar to the late 19th century?

This post was published at GoldSeek on 27 August 2014.

Just In: Acquittal – Real Fraudsters were the Banksters!

Real estate flippers avoided criminal conviction because they argued, and persuaded the jurors, that the REAL criminals were the banksters!! No way!!!
‘In an unprecedented trial, four people charged with mortgage fraud were acquitted Friday by a jury in Sacramento federal court after defense attorneys argued the real culprits are the so-called victim lenders.’ Let’s do a little background.
We all know of the real estate boom, and bust, particularly in California, and specifically localized in massive numbers in California’s Central Valley. Essentially, some of us have correctly pointed out that the root cause of the onset of the bubble, were criminal bankers, beginning withBlythe Masters of JPMorgan, who conjured up the scheme of securitized finance for home mortgages. The scheme was simple: the big banks would write loans, using investor money, and none of the banks’ own money. Once the loans were made, the banks would in turn package a thousand loans or so, and bundle them up, then sell them as a whole to investors, as a security. Investors getting first dibs at repayment streams [upper tranches] were paid less interest, than investors who were last to be paid [lower tranches]. The whole theory was that out of the pool of the thousand home loans, not all would default and go bad. Since in the aggregate, most of the loan payments would be paid on time, then those investors at the upper tranches were not risking non-payment as compared to the investors and the lower tranches. The interest rates were balanced against this risk, and the securities were marketed and sold off to investors.
The problem, though, crystal clear to anyone with a brain, from the inception of the whole scheme, is in the incentive structure of the whole mess.
Not a single participant in the scheme had a single incentive to scrutinize the deal. The prospective home loan applicant, wanted a home, and inflated the income and other figures on the application. None of the bankers cared about the fake applications, because the bankers were only going to bundle the loans and sell them off, having no skin in the game and having massive incentives to get more and more loans bundled regardless of the underwriting standards or risk of default.
The investors at the upper tranches cared not. They were guaranteed first payment from the income stream. Their risk of loss was near zero. The lower tranch investors cared not either, as they were getting astronomically high rates of return, and on balance, the risk to them of defaulting payment streams was outweighed by the lucrative returns, much like unsecured credit cards. They figured there would be defaults, but the high interest rates made it, on balance, perfectly acceptable.

This post was published at TF Metals Report on August 27, 2014.

China’s Housing Bubble Has Popped

Those trusting souls who arrived late to the biggest housing bubble in history have lost a lot of money. They are going to lose a lot more.
It’s here at last. Pop.
Writes MarketWatch:
In one case, scores of property owners surrounded a Shanghai sales office of Greentown China Holdings Ltd. 3900, 8.58% GTWCF, -33.19% to protest the developer’s 25% cut to prices within a five-day period, according to a report on the NetEase NTES, 0.67% news portal site 163.com.

This post was published at Tea Party Economist on August 27, 2014.

The Unprecedented Failure to Regulate Citigroup Continues

Yesterday, Wall Street’s self-regulator, the Financial Industry Regulatory Authority (FINRA), charged Citigroup with cheating its customers out of fair prices on preferred stock trades – 22,000 times. Citigroup was fined a meager $1.85 million, ordered to pay $638,000 in restitution, allowed to neither deny or admit the charges, and sent on its merry way to loot the next unwary investor.
Why do we believe there will be more charges of malfeasance in Citigroup’s future? Because it is an unrepentant recidivist. Yesterday’s FINRA fine was the 408th fine that FINRA has levied against Citigroup Global Markets or its predecessor, Smith Barney, for trading violations, market manipulations or failure to supervise its traders or brokers.
And that’s just FINRA – the light-handed disciplinarian with industry ties. Citigroup has kept other Federal regulators, including the U. S. Justice Department, very busy as well.
It is now six years since Citigroup’s serial history of rogue conduct rendered it insolvent. Under the law, the U. S. government is not allowed to prop up insolvent banks with taxpayer money. But from 2007 to 2010, in the largest bank bailout in history, over $2.3 trillion was lavished on the serial recidivist Citigroup.
Citigroup received $25 billion in Troubled Asset Relief Program (TARP) funds on October 28, 2008. Less than a month later, Citigroup had blown through those bailout funds and required another $20 billion TARP infusion. But its situation was so wobbly that the government had to simultaneously provide another $306 billion in asset guarantees.

This post was published at Wall Street On Parade on August 27, 2014.

The First Rand Gold Bond Deal Is Old Mother Hubbard’s Cupboard

It’s a gold hypothecation Ponzi Scheme of the highest order. The world’s first gold corporate bond deal – issued by South Africa’s FirstRand Bank (Rand Merchant Bank) is a scam. Investor beware.
In my curiosity to confirm my suspicion that this deal was nothing but a paper Ponzi Scheme designed to redirect investor money that otherwise might have been used to buy and take delivery of actual Krugerrand gold coins into a fiat paper fraud deal, I contacted representatives of First Rand to get a term sheet so I could see how the deal was structured. Here’s an outline of what I found and it confirms my suspicions (I’ve linked the term sheet and product pimp sheet below):
1) The investor ‘buys’ Krugerrands from First Rand (Rand Merchant Bank) – technically, First Rand does not send you any coins or transfer ownership title of the coins to you. Instead…

This post was published at Investment Research Dynamics on August 27, 2014.

All Great World Events Happen Twice, Once As Tragedy And Secondly As A Farce!

Karl Marx once said, ‘Hegel remarked somewhere that all great, world-historical facts and personages occur, as it were, twice. He forgot to add: the first time as tragedy, the second as farce!’
Georg Hegel was a German idealist and philosopher and although I do not accept Marxist ideals I recognize the truth of his statement in the reality of our world today. Will it be another war followed by depression or a depression followed by a war, another Christian Crusade to insure our public safety and solve the unemployment problem? The populace, who must be distracted, will once again be called upon to fight a war, economic in nature, brought on by greed of a few who lack principles, integrity, honesty and competence. It will be a farce!
Our dollar states, ‘In God We Trust’ yet today our government hardly espouses this belief in their actions or behavior and therefore, why should you? I am not saying to not trust in God, what I am saying is DO NOT trust in the dollar of the United States of America Corporation as a unit of wealth to store the fruits of your labor in. The dollar is but a tool of exchange to pay for goods and services of value. Tomorrow, maybe not so!
The money you have in ASSETS in your bank account is your banks liabilities which they in turn loan out. Today all asset accounts are but virtual numbers on your computer screen or paper account summary at your bank or investment firm. Actually, an imaginary digit is our monetary unit today. These cyber accounts can in essence be deleted or partially deleted at the will of our banking authorities per their FDIC regulation or publicized cyber attack.

This post was published at Gold-Eagle on August 27, 2014.

Europe: Stagnation, Default, Or Devaluation

Last week’s Jackson Hole meeting helped to highlight a simple reality: unlike other parts of the world, the eurozone remains mired in a deflationary bust six years after the 2008 financial crisis. The only official solutions to this bust seem to be a) to print more money and b) to expand government debt. Meanwhile, Europe’s already high (and rising) government debt levels and large budget deficits raise the question whether we should worry about ‘debt thresholds’, past which increasing deficits, and hence growing sovereign debt, no longer add to growth? Such a constraint could come from one of at least two sources:

This post was published at Zero Hedge on 08/26/2014.

Wall Street, ‘a Self-Licking Ice-Cream Cone’

The S&P 500 hit the milestone of 2,000 yesterday before backing off. Today, it closed at 2,000 sharp, as if by coincidence. It’s up nearly 200% since March 2009. It hasn’t seen even a run-of-the-mill nothing-to-worry-about correction of 10% in almost three years, though these corrections occur about every 12 months in normal times. ‘Buy the dips’ rules, with dips getting ever smaller and shorter as traders are motivated by the only remaining fear, the fear of being left out.
With all this enthusiasm for stocks, you’d think there’d be some volume, some serious buying, to back it up. But yesterday, the day when the S&P 500 snuggled up to 2000, it was the lightest non-holiday volume day since, gosh – someone did the math – October 2006.
This condition of mysteriously drying up volume has piqued the curiosity of Cali Money Man, a portfolio manager at a big bank and WOLF STREET contributor, who has been on the job through the last three crashes:
I asked a Street technician about the low volume advance and the pattern in recent years for the market to rise on low volume and fall on high volume. The first rule I learned about this biz in 1978 was VID: volume indicates direction. But no longer. High volume has become a ‘contrarian indicator,’ the street technician explained. It’s a ‘sign of stress or a crisis.’

This post was published at Wolf Street on August 26, 2014.

Continued EU Weakness Gives Rise to Two Inflationary Trends

German economy ‘losing steam’ as business confidence plunges again … Survey of optimism among companies adds to gloom enveloping Europe’s biggest economy … Germany’s businesses are rapidly losing confidence in the prospect of a recovery in the eurozone, in a further blow to the single currency’s biggest economy. Companies’ assessment of the business climate is now at a 13-month low, having deteriorated for four successive months, according to a survey of 7,000 firms conducted by the Munich-based IFO think tank. – UK Telegraph
Dominant Social Theme: Something must be done to save Europe and the euro.
Free-Market Analysis: What does the future hold? More and more money stimulation it would seem. China – the BRICS – and the US are printing endless gouts of money, and now it appears as if the European Union is headed in the same direction.
In fact, the EU cannot simply print, as the Germans stand in the way. But according to this article and others, the German economic situation is declining, so perhaps there will be less pushback to plans to stimulate.
Certainly, without German economic vitality, the eurozone is even worse off than it’s been in the past. Here’s more:
The study is the latest blow to Angela Merkel’s hopes of Germany leading the eurozone out of its current economic malaise. Separate data for investor confidence and inflation have also shown activity slowing down. The economy contracted in the second quarter of the year, and another quarter of decline would tip it into recession.

This post was published at The Daily Bell on August 26, 2014.

Children Are Taxed on Medals Given Their Father in War

The Telegraph has reported how the British government desperate for money, is taxing even medals given to soldiers for their bravery in war. The story in the Telegraph reports – ‘I was told to pay death duty on Dad’s medals’. There is nothing sensitive about these people in government. When I say we are in a massive collapse of socialism because these people have paid themselves lavish pensions that need funding, there is really no limit to the indignity they are imposing upon the people. At this rate, if the government wants to hand you medal, you better ask will I be taxed in the future for even having these? Just amazing.

This post was published at Armstrong Economics on August 25, 2014

Former Mafia Boss Tells CNBC: “Stocks Are In A Bubble, Buy Physical Gold”

Michael Franzese, a former mob boss for the Colombo crime family in New York (and GoodFellas character), told CNBC, “there’s a bubble there that’s going to burst at some point and when it does it’s not going to be good,” but there is another reason he says investors should avoid the U. S. stock market – “I did a lot of things at times with people on Wall Street.. a lot of guys are shady and they did shady things with me and I don’t trust them. And I don’t like other people that I don’t know really well taking care of my money.” As we noted earlier, his advice is to hold gold (in Physical bullion bars not ETFs), because “there will always be something there,” unlike stocks “where in our country, you go to sleep, everyone tells you everything is wonderful, you wake up and everything is gone.”

This post was published at Zero Hedge on 08/23/2014

The G-20′s Solution To Systemically Unstable, “Too Big To Fail” Banks: More Debt

It’s been 6 years since Lehman went bankrupt overnight, stunning bondholders who were forced to reprice Lehman bonds from 80 to 8 (see chart below) in a millisecond, and launching the world’s worst depression since the 1930s, which courtesy of some $10 trillion in central bank liquidity injections, has been split up into several more palatable for public consumptions “recessions”, of which Europe is about to succumb to the third consecutive one even if for the time being the Fed’s has succeeded in if not breaking the business cycle, then certainly delaying the inevitable onset of the next major contraction in the US economy.
Paradoxically, instead of taking advantage of this lull in volatility and relative economic calm, and making the financial system more stable, all so-called regulation has done, is paid lip service to the underlying problems, hoping that should the next crisis appear the Fed will be able to delay it yet again by throwing countless amounts of taxpayer money at the problem. In the meantime, the biggest banks have gotten so big that the failure of one JPM or Deutsche Bank, and their hundreds of trillions in gross notional derivatives, would lead to the biggest financial and economic catastrophe ever witnessed and make 2008 seem like a fond memory of economic euphoria.
So finally, with a 6 year delay, the western world’s “government leaders” have finally decided to do something about a TBTF problem that has never been more acute. According to Reuters, in November said leaders will agree “that the world’s top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue, industry and G20 officials said.” In other words, suddenly the $2.8 trillion in Fed injected excess reserves, split roughly equally between US and European banks, are no longer sufficient, and while regulators are on one hand delaying the implementation of Basel III and its tougher capital rules, on the other they are tacticly admitting that whatever “generous” capital buffer banks have on their books right now will not be sufficient when the next crisis strikes.

This post was published at Zero Hedge on 08/23/2014

How Hedge Funds Are Making Money In 2014: The Full Strategy Breakdown

As part of his latest weekly report, Goldman’s David Kostin breaks down the full array of strategy “baskets” used by hedge funds at this moment to outperform the market in 2014. In a nutshell, the best performing strats right now involve betting on a high vs low tax rate divergence (perhaps because companies facing high tax regimes are soaring on hopes they will engage in a price-boosting tax inversion deal), and shorting BRIC exposure:

This post was published at Zero Hedge on 08/24/2014

India Imports 2559 MT Silver In 5 Months

While silver has been widely used as money in history, at the beginning of the 19th century gold became the dominant metal in trade. At the end of the 19th century central banks erupted around the world and began holding gold in reserve to back their currencies, the international monetary system in this period is known as the classic gold standard. When the last remnants of the gold standard were officially left behind n 1974, and the world was on a fiat standard, central banks held on to their gold. This can only be explained as insurance in case the fiat standard wouldn’t succeed, concomitant admitting there is a reasonable chance fiat money will fail.
Nowadays central bankers sporadically tell us about the true function of gold in the international monetary system. This is only logic if one realizes they (/the US) preferred to minimize the role of gold, in the hopes the fiat standard would provide them maximum flexibility to manage the monetary system. Jelle Zijlstra, president of the central bank of the Netherlands from 1967 to 1982, wrote in his autobiography of 1992:
Gold as the monetary cosmos’ sun.
To analyze gold’s gravity in its ultimate role as the sun in our monetary system I try to be acquainted with all the planets in orbit, black holes nearby and comets crossing the solar system. For example: foreign exchange markets, inflation, quantitative easing, too big to fail banks, derivatives, oil, geo-politics, the media, technical analysis, commodities and silver. I certainly do not pretend to be an expert in all fields (the cosmos), but to make a long story short; while always attributing more importance to gold I recently decided to pay more attention to the global silver market. Few events happen in isolation these days and I did some interesting findings with regard to the silver market worth digging into. In this post we’ll be examining some data from India.
Silver Because of the pressure on the current account deficit the Central Board of Excise and Customs of the Indian Government, raised the gold import duty in January 2013 from 4% to 6 %, in June to 8 % and in August to 10 %. The silver import duty was raised in January 2012 from 1,500 Rs/Kg to 6 % of the silver price and in August 2013 to 10 %. Since the import duties, or tariffs, were raised, the price of gold in India developed a higher premium (excluding the import duty) than silver, as can be seen in the charts below.

This post was published at Bullion Star on 21-08-2014