Wednesday, September 30, 2009

An Naksah

"I'm not afraid of the man who wants ten nuclear weapons, Colonel. I'm terrified of the man who only wants one."
--Dr Julia Kelly (The Peacemaker)

Toddo and Prof Zucchi ponder what Israel's deafening silence in the wake of Iran's activities means. We have a US president who is (in my view correctly) trying to stay away from military action.

In the past, Israel has demonstrated capacity for unilateral action.

Connecting the dots to form a plausible scenario around this situation is pretty straightforward.

Yellow Fellow

I've been in my mind
It's such a fine line
That keeps me searching for a heart of gold
And I'm getting old
--Neil Young

Gold continues to hover near all time highs. Technically, a picture perfect multiyear reverse head and shoulders pattern is evident. This is bullish.

From a macro perspective, the Fed has been jacking money supply and government stimulus programs keep piling on the debt. This inflationary activity should be bullish for gold as well.

But try as I might I'm not enthused with the price action here. It 'feels' to me that we may be headed for one of those 'down 50+' days in the near future.

I'm not playing it either way, as I sold all paper gold exposure months ago. My bullion holdings aren't tradeable, so they'll provide some comfort if I'm wrong and gold screams higher.

position in gold

Monday, September 28, 2009

Projecting Strength

"It's the old Potomac two-step, Jack."
--President Bennett (Clear and Present Danger)

Related to escalating Iran nuclear activity, I heard a conservative talking head criticize President Obama for not 'projecting strength' w.r.t. the U.S. position. The idea of projecting strength is typical hawkish rhetoric. The hawks view such an approach as necessary to US security. Such strength is commonly 'projected' by proactive US military interference into the sovereign affairs of others.

Even if we did have the financial resources to undertake such campaigns (which we don't), the entire idea of maintaining a standing army with primary operations on the soil of other sovereign nations is wrongheaded.

Assume I had someone living in my neighborhood who didn't like me and told me so. Subsequently, I learn that this individual has bought a gun and has been practicing at the target range. Thru my eyes, this person looks like a threat.

But I have no right to take the law into my own hands and pre-empt what I perceive as a hostile threat by taking that person's gun away or otherwise intervening in his/her affairs. Individuals are free to live their lives unless they violate the rights of others.

What I can do is get my own house in order. I am conscious of my surroundings, and I make sure that I can defend myself in case my rights are being violated. But I live my own life.

While this approach may be seen as 'weak' in the eyes of some, it enables living in a free manner rather than living under the influence of others.

Our nation was built on liberty. How is interfering with the sovereign rights of others consistent with that?

Sunday, September 27, 2009

IRAs in the USA

Said goodbye to their families
Said goodbye to their friends
With pipe dreams in their heads
And very little money in their hands
--John Cougar Mellencamp

As I continue to ponder the pros and cons of putting any money into retirement accounts, it dawned on me that the rise of the IRA and 401(k) beginning in the early 1980s greatly facilitated increased debt and leverage in this country.

Prior to special retirement accounts, folks saved financial resources in plain old taxable accounts. Someday those resources might come handy for retirement. In the meantime, however, those resources could be applied toward current expenses. Folks were more liquid.

They also took less risk with these resources since they knew they needed them for a 'rainy day'--whether that be tomorrow or 30 yrs from now.

Today, as people divert more of their income toward retirement accounts, individuals have less resources set aside to cope with the vagaries of life in the present. As such, they're more prone to borrow resources to fill present day demands (e.g., houses, car loans, education, medical, etc).

Ironically, people also take more risk with these retirement assets than they would if they had them in taxable accounts.

I wonder whether retirement accts can't be viewed as intervention into the mkt for savings. The oversight which governs return amounts and timing distort decisions about saving.

Somewhat paradoxically, it seems, the more we create special vehicles for retirement resources, the less people actually save for retirement.

My growing sense is that if we shut down special retirement accounts tomorrow, saving would increase and leverage would decline.

Of course, an entire financial services industry built around managing these special retirement accounts would essentially collapse.

Friday, September 25, 2009

Food for Founding Thought

"Fix reason firmly in her seat, and call to her tribunal every fact, every opinion. Question with boldness even the existence of a God; because, if there be one, he must more approve of the homage of reason, than that of blindfolded fear."
--Thomas Jefferson

Wanted to circle back once more to Rothbard's excellent work on the growth of libertarianism in Colonial America. He highlights contributions of these individuals as central to the American thought and action by the mid to late 1700s:
  1. Algernon Sidney (the duty to rebel when individual liberty is invaded)
  2. John Locke (natural rights of the individual and government's sole purpose to protect these rights)
  3. John Trenchard and Thomas Gordon a.k.a. "Cato's Letters" (government power as constant threat to liberty; tyranny of the majority)
  4. Jonathan Mayhew (government has no authority for mischief w.r.t. liberty; individual right and duty of private judgement)
  5. Francois Voltaire (religious liberty, and freedom of press and speech)

The first three were English, Mayhew was a Massachusetts minister, Voltaire was French.

It is impossible to read the key documents generated in the late 1700s that defined the United States, particularly the Declaration, and not see the thoughts of these individuals incorporated nearly verbatim into the narrative.

Locke and Load

We'll be fighting in the streets
With our children at our feet
--The Who

I want to cut and paste this passage from Rothbard's review of the origins of libertarian thought in Colonial America:

"Locke began his analysis with the "state of nature" — not as an historical hypothesis but as a logical construct — a world without government, to penetrate to the proper foundation of the state. In the state of nature, each man as a natural fact has complete ownership or property over his own person. These persons confront unused natural resources or "land," and they are able to maintain and advance themselves by "mixing their labor with the land." Through this mixing, the hitherto unowned and unused natural resources become the property of the individual mixer. The individual thereby acquires a property right not only in his own person but also in the land that he has brought into use and transformed by his labor. The individual, then, may keep this property, exchange it for the property of others, or bequeath it to his heirs. He has the "natural right" to the property and to defend it against invasion by others. The moral justification for government, to Locke, was to defend these rights of property. Should government fail to serve this function, and itself become destructive of property rights, the people then have the right to revolt against such government and to replace it with one that will defend their rights."

Locke's theory of 'natural rights' provided cornerstone impetus for the American Revolution and for our subsequent structure as a federal republic.

His key points: Individual's natural rights include life, wherewithal to produce with one's life according to one's individual wishes, and personal property.

Government's role is to defend the individual's rights. If a government fails to defend these rights, then people have the right to revolt and swap out the government with one that will defend them.

Turning to our present condition, as government failure to defend individual's individual's natural rights continues to escalate, one has to wonder whether (or when) people will exercise their right to revolution.

Thursday, September 24, 2009

Let Go My Cargo

"They got a lotta trouble on that ship."
--Admiral Bates (Under Siege)

One indicator that has failed to confirm the thesis that 'things are getting better' is the Baltic Dry Index. The BDI is an aggregate of cargo shipping rates. Because the BDI is not subject to the vagaries of government data series, it's 'purity level' as an indicator of global trade merits some respect.

After cratering during last Fall's market meltdown, the BDI found traction about 3 months ahead of global equity markets.

Now one has to wonder whether the BDI is once again in the lead. It's been falling for three months, giving back half the gain from the preceding run up.

Should stock markets follow the 3 month lag, then a prime time for a rollover in indexes like the SPX would be right around here.

position in SPX

Wednesday, September 23, 2009

Swedish Meatballs

"Just remember. License never replace eye, ear, and brain."
--Mr Miyagi (Karate Kid)

Hadn't realized that Sweden's Riksbank instituted negative interest rates on bank deposits at the central bank this past summer. The idea is to spur bank lending by providing a disincentive for banks to hoard reserves.

But what if folks don't want to borrow?

A logical follow-up step is to institute negative interest rates on individual checking, savings, and money market deposits (in fact, the Fed has written white papers on this very subject).

Yes, force people to borrow and spend--that's the certain road to prosperity.

Tuesday, September 22, 2009

Interest Only

There's too many men
Too many people
Making too many problems
And not much love to go round
Can't you see
This is a land of confusion

A TV commercial last nite claimed that 'special interest groups' were trying to pull down the administration's health care plan.

From a political perspective, a special interest group is any group that benefits at the expense of another due to gov't intervention.

Those against the plan are largely people who want to preserve their freedom and not lose wealth via confiscation by the State. These people are not a SIG.

In this case, the special interest groups are those who would benefit from the health care plan's passage. They want government to forcibly take resources from some and hand them to others.

In exchange, the SIGs promise votes and support to the politicos.

Pyramid Plan

All the old paintings on the tombs
They do the sand dance don't you know
If they move too quick
They're falling down like a domino

So the Fed prints money and gives it to the banks. Now bureaucrats are considering a proposal to have the banks 'lend' to the FDIC, the underfunded government insurance agency that's backstopping bank deposits.

This is pure Ponzi.

Hopefully this will be more apparent to US citizens than it is to the NYT.

Monday, September 21, 2009

Empty Hand

Everyone I know, everywhere I go
People need some reason to believe
--Jackson Browne

After turning bullish early in the year, the subsequent 50% runup in equities finds John Hussman back in his hedged stance.

Many folks dismiss the analog comparisons to the 1930s but I believe this period the closest historical comparison to our current situation--that being the popping of a huge debt bubble facilitated by interventionary central banking policies.

Double digit rallies (and declines) were characteristic of the deflationary 1930s. Each time the bulls jumped on board thinking the coast was clear, their heads were handed to them during a subsequent leg lower.

My sense is that we're heading thru this type of cycle again. As such, like Dr John, I wanna manage my bullish bets very carefully.

Friday, September 18, 2009

Loan Ranger

This wouldn't be the first time
Things have gone astray
Now you've thrown it all away
--Bryan Adams

Banks receiving government bailout money had an implied requirement to lend. The data suggest that this isn't happening. Loan balances have been dropping for months.

So, does the government hold a gun to the heads of bankers and force them to lend? We could always just nationalize the banks as has happened elsewhere. Take the profit motive out of the picture to get credit flowing again.

The problem with that approach is that folks have a much lower appetite for risk now. They are less willing to borrow. As such, banks could offer credit for free and they'll have few takers (see Japan in the 90s).

Pushing on a string.

Thursday, September 17, 2009

Back Taxes

If you drive a car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold I'll tax the heat
If you take a walk, I'll tax your feet
--The Beatles

While I like to focus on the damage that the Fed has done to our country over the past century, there's an excellent argument to be made for the adverse consequences to the Sixteenth Amendment as well.

This amendment, which ironically was passed the same year as the Fed's founding (1913), altered Article One, Section Nine of the Constitution which in its initial form permitted only a simple head tax by the federal government.

Achieving 'progressive' programs under President Wilson's watch required way more resources than the federal government could legally confiscate given the Article One contraints. Thus the amendment.

Government has been growing in size and scope since then. Inversely, freedom has been lost.

Wednesday, September 16, 2009

Land of Lincoln

"It's well known that the more a man speaks, the less he's understood."
--Abraham Lincoln (The Blue and the Gray)

Very interesting questions raised about the Lincoln presidency. I've peripherally encountered arguments in the past that the primary cause of the Civil War was the South's pushback against Lincoln's nationalist economic program. Southern firms were getting eviscerated by government tariffs placed on trade with others. Succession was merely Southern states' trump card.

The Lincoln administration was also a major suppressor of Constitutional liberty during wartime.
Once again, not a perspective widely disseminated in the grade school or high school yrs.

Monday, September 14, 2009

Sentinel of Liberty

"I tell you what. I'll speak slow, so those of you with Ph.D.'s in the room can understand."
--Doug Carlin (Deja Vu)

I've cracked open another book. Garet Garrett's 1955 work, The American Story. It's hard for me to close anything that I open by this author. Penetrating insight delivered in wonderful style.

I believe his work in the early-mid 20th century provides some very important work on the rise and fall of liberty in the U.S.--particularly w.r.t. to the WWI-->Roaring 20s-->Great Depression-->WWII period. His writing suggests someone on a mission to document the period from an important, but unpopular, perspective

Am only thru Chapter 1 but this 400+ page work seem sure to educate and inform.


Garrett, Garet (1955). The American story. Chicago: Henry Regnery Company.

Data Driven

"You're not the only one who does research."
--Darby Shaw (The Pelican Brief)

When Mark Twain offered that, "There are three kinds of lies: Lies, damned lies, and statistics," he probably had a political context in mind. Politicians likely manipulate data more than any other group.

Professor Scott Harrington at Wharton offers a nice example President Obama's data manipulation skills expressed during his health care speech to Congress last wk. Prof Harrington's findings suggest that data intended by the president to demonstrate the severity of dropped health care coverage, or the monopolistic tendencies of health insurers in certain locales, don't stand up to critical scrutiny.

Of course, such scrutiny is rare--and non existent by those on your side of the aisle (or issue).

When politicians serve up the data, it always pays to go the extra mile and seek the Rest of the Story.

A Universal Political Tool

Meet the new boss
Same as the old boss
--The Who

Many opponents of President Bush claimed that his administration used 'fear mongering' to get things done--particularly w.r.t. military action.

How is what President Obama and his administration doing any different? If we don't pass this $2 trillion stimulus package, the economy will collapse. If we don't pass this $9 trillion health care spending plan, the system will collapse.

Two sides of the same coin.

The only way we get off this ride? Cast off our proclivity for rigid behavior during times of threat. Stop depending on politicians and their 'experts' for assessment of severity during difficult times.

Otherwise, governments will contintue to exploit difficult situations to consolidate greater and greater power.

Economic Death Panels

And the battle's just begun
There's many lost, but tell me who has won
The trench is dug within our hearts
And mothers, children, brothers, sisters torn apart

As the health care debate has escalated, the spectre of 'death panels' has surfaced. Supporters of universial health care dismiss the notion as 'fear mongering.' President Obama has publically scoffed at the death panel notion.

While the concept may have received an unfortunate label, the notion of a central authority that must decide how to allocate scarce resources under a government run health care system is correct. Make no mistake, bureaucrats will be making life and death decisions--indeed, they already are under the Medicare, Medicaid, and other government sponsored health care programs, which in aggregate comprise nearly 50% of US health care spending.

Much more visible examples of life and death decisions made by bureaucrats can be observed in other economic spheres which have moved signicantly toward the central planning model of resource allocation over the past year or so. Bear Stearns? Death. Citigroup (C) Life. Lehman? Death. AIG? Life. Indy Mac? Death. General Motors? Life.

If economic resources were unlimited, then we wouldn't care because there would be no losses. Unfortunately, resources are scarce and they require an allocation mechanism.

When we take the resource allocation mechanism out of the hands of markets and put them into the hands of bureaucrats, then there are indeed panels of central planners making life and death decisions.

no positions

Saturday, September 12, 2009

In Search of Responsibility

Benjamin Martin: May I sit with you?
Charlotte Selton: It's a free country. Or at least it will be.
--The Patriot

Right on cue with the recent missive on the tradeoff between safety and freedom, I stumbled across this marvelous essay by William Faulkner.

Faulkner observes that we've been ceding freedom in favor of security (he emphasizes security of the economic nature) slowly since our founding. The primary mechanism, he posits, is abdication of our responsibility to live freely as our standard of living has increased over time.


Faulkner penned this piece in the early 1950s although, like many timeless works, could have been written yesterday.

He quotes Irish statesman John Curran, who noted in the mid 1700s, "God hath vouchsafed man liberty only on condition of eternal vigilance; which condition if he break it, servitude is the consequence of his crime and the punishment of his guilt."

Faulkner hopes we can reverse the trend. Me too.

Force Fed

Now that ain't workin' that's the way you do it
Lemme tell ya them guys ain't dumb
Maybe get a blister on your little finger
Maybe get a blister on your thumb
--Dire Straits

A popular view is that markets are inherently unstable and thus in need of regulation to smooth the peaks and valleys. In fact this was a primary argument for the institution of the Federal Reserve in 1913.

This line of thought is mistaken. Markets seek stability. Buyers and sellers engage in exchange until the price of marginal transaction is no longer seen as beneficial to at least one party. At that price, the market has 'cleared' and stability is achieved. Changes in the marginal utilities between buyers and sellers will drive markets to restabilize at a new price level.

It is intervention that builds instability into markets. Intervention influences prices toward higher (e.g., minimum wage) or lower (e.g., low cost of credit set by the Fed) levels than otherwise would be elected by participants engaging in free, unadulterated exchange. As the influence of manipulation wanes over time (and it always does), price have further to move in order to reach the levels sought be free trade.

Near term reduction in the variation of market prices that sometimes immediately follows intervention (e.g., stock market prices subsequent to monetary stimulus over the past few months) can provide an illusion of stability. All the while, prices are being restrained from the level that will help the market clear.

Once these restraining forces wane, then the instability of intervention will become evident. Interventionists will then, of course, want to do something new to keep market forces at bay.

At some point, however, pent up market forces may be too powerful to restrain.

Friday, September 11, 2009


Just lay your head back on the ground
And let your hair spill all around me
Offer up your best defense
But this is the end
This is the end of the innocence
--Don Henley

Standing in my living room eight years ago today and watching the Towers falling over and over again, I struggled to process what seemed then (and now) largely incomprehensible. One of the few coherent thoughts that I could muster was this:

If we wanted to be safer in the future, we would have to give up freedom to do so. There is a tradeoff between liberty and security.

While that relationship may seem 'obvious' to many, it wasn't for me until the events of that fateful day permitted me to see it.

Since then, the notion of liberty and its cost have been at the forefront of my thoughts. Daily, it seems to me, we in America are indeed foregoing freedom in efforts to become more secure. For the first few years after the attack, the emphasis was on military security. Over the past year or two, the focus has been on economic security. And now, the debate is over health-related security.

In each of these situations, we must ante up more freedom to pay for this security.

More than 200 yrs ago, we were willing to die for freedom. Today, we seem willing to kill freedom in order to be safe and secure.

This country's Founders would likely advise us that we're making an unwise trade. My sense is that those thousands who perished eight years ago would concur.

Fiat Folly

With a little push, we could set it off
We can send it rocketing skywards
--Paul McCarney & Wings

The New York Times prints more than its fare share of drivel, but this recent article by business beat writer Floyd Norris is an eyebrow raiser against even by low NYT standards.

The basic message is that we should be thankful that the government can print money at will, as it routinely bails us out of problems.

Put your critical thinking caps on to dissect this piece. A few questions to ponder:

What is the cause of the problem that money printing aims at correcting?

How exactly does the Fed 'print money' today? Can the Fed 'print' unlimited quantities via this method?

What problems does money printing create down the road?

Does the author have his facts straight w.r.t. the effects of historical bouts of fiat money creation?

What is the logical extension of the idea that money printing solves all economic problems?

Is it possible to create something from nothing?

Thursday, September 10, 2009

Economic Scarcity I

Rightful liberty is unobstructed action according to our will within limits drawn around us by the equal rights of others. I do not add 'within the limits of the law' because law is often but the tyrant's will, and always so when it violates the rights of the individual.
--Thomas Jefferson

In living their lives, individuals face a fundamental problem. Many resources required to survive, or to thrive, are available only in limited quantities. They are scarce. They are called 'economic' resources because of the need to economize, or smartly utilize them.

Another word for economizing, a word that has received ill press of late, is rationing. Were there not some mechanism for rationing economic resources, then they would disappear quickly. This is because, absent penalty or incentive to do otherwise, people are prone to elevate their standard of living (consume more) in the present. Increased consumption in the present period increases standard of living now but decreases the likelihood of maintaining this living standard in future periods--because resources consumed in the present will not be available to consume in the future.

Since the beginning of civilized history, two primary mechanisms have emerged for rationing economic resources. One is the market, or capitalistic, mechanism. The market mechanism is built on the concepts of property rights and free exchange between individuals. Individuals control the means (a.k.a. capital) to transform economic resources into consumable goods. Producers market their goods to potential buyers.

Buyers and sellers negotiate the amount of producer goods to be traded for buyer goods or resources. This exchange rate is commonly referred to as the price. Exchange ensues to the extent that both parties perceive that they will be better off by engaging in the transaction at the negotiated price.

It is commonly presumed that those individuals who control the means of production (capital) exert the dominant influence on market systems. This is mistaken, however as dominant influence in market systems rests with consumers. If producers generate output that consumers will not purchase at a price agreeable to both parties, then those enterprises will fail since there are no incoming resources to support it.

On the other hand, if producers do generate output that consumers are willing to trade for, then the exchange provides a signal to those producers (and to competitors) that those enterprises are on the right track, and that further use of scarce economic resources for this purpose is desireable. Producers with output that is in high demand may be able to raise prices, but higher prices offer further incentives for competitors to innovate in a manner that increases value for buyers.

Thru their choices to purchase goods at a particular price, consumers direct how producers should utilize scarce resources under their control. If certain producers do not heed these signals, then they will be financially unprofitable, and they will lose control of those resources to other producers.

As demand for particular goods increase, supply of associated resources declines, which ultimately raises the price to consumers. Higher price reduces demand, as fewer consumers are willing to sacrifice more resources to procure the pricier good. Fewer goods means less resources are used as inputs.

In market situations, then, rationing is achieved by the price consumers are willing to pay in order to acquire the goods configured by producers from scarce economic resources.

We'll consider the other mechanism for rationing economic resources in a future missive.

Wednesday, September 9, 2009

Unforgettable Fire

Oren Trask: You've got a real fire in your belly. Or is this just a one time stunt you've pulled?
Tess McGill: I'm not quite sure what you mean, sir. I've got something in my belly, but I think it's nervous knots.
--Working Girl

Few mainstream media pundits demonstrate solid grasp of the issues we face in the context of our founding principles. One who does is Glenn Beck.

Sure, many deride the guy as crazy, delusional, etc. Of course, a sign that you're on the right track is when your opposition comes out in droves to discredit you (a.k.a. playground behavior).

Mr Beck has done his homework better than most. His knowledge of US history, particularly of the Revolutionary and Constitutional periods shows that he has put in the time.

He has also developed a solid grasp of economics and finance. He was one of the very few in the mainstream media who demonstrated awareness of the disaster that awaited us years ahead of the crisis.

Currently, both the Left and the Right are distancing themselves from the guy. To be expected, of course, because Mr Beck demonstrates the same healthy distrust for government exhibited by the Founders.

My hope is that he does not let the personal attacks, which are certain to escalate, get to him. My sense is that he'll persist, however, as it seems that he has that fire in his belly--one that will be difficult to extinguish.

It's the fire fueled by belief in liberty.

Tuesday, September 8, 2009

Yellow Fever

"We're gonna bring this party up to a nice respectable level. Don't worry, we're not gonna hurt anyone. We're not even gonna touch 'em. We're just gonna make 'em cry a little, just by lookin' at 'em."
--Duncan (Some Kind of Wonderful)

Folks are eyeing the action in gold as it crossed $1000/oz intraday. The chart indicates a picturesque multiyear inverse head and shoulders pattern which, all else equal, is bullish. As of yet, however, the yellow metal has yet to break out when resistance is drawn w/ a crayon.

Despite the pretty technicals, it's been difficult for me to get worked into a lather on this particular move. I suppose it's because my favored scenario for the upcoming period is deflation and my view is that a general asset price decline will not spare the yellow metal this time around.

Meanwhile, the dollar looks like maybe it wants to head another leg lower altho it's pretty oversold in the near term.

Perhaps the USD has a date w/ the 2008 lows of 71ish (about 10% lower from here) before it finds significant traction.

With the TD indicators approaching trend exhaustion for both gold and the dollar on multi time frames, we may experience some nasty head fakes (read: significant trend reversals) in these two over the next coupla months.

How am I positioned? No paper gold, but a healthy chunk of physical bullion which will keep me exposed if the yellow dog rips higher. I have no desire to sell this physical position, however, as it constitutes a form of wealth to pass on to the future.

Am also building cash, with minor exposure to securities betting on a higher USD. My sense is that I'll be adding to my USD position in upcoming months.

positions in gold, USD

Parallel Form

We are matching spark and flame
Caught in endless repetition
Life for life we'll be the same
I must leave before you burn me
--The Fixx

Interesting paragraph from Phillips et al (1937) on the consequences of the Fed-induced credit expansion from 1922-1929:

"The immediate effects of this investment credit inflation were marked by important and interrelated changes in the character of bank loans and investment assets. There developed an indirectness in the processes of bank credit financing, bank credit entering into the channels of production and trade through the operations in the securities and capital markets rather than in direct loans to business men to finance short term transactions. The liquidity of banks declined in general to such an extent that they were ill-prepared to cope with the situation that arose when the stock market crashed placed an unduly severe pressure on the banking structure. As a result of the plethora of bank credit funds and the utilization by banks of their excess reserves to swell their investment accounts, the long-term interest rate declined and it became increasingly profitable and popular to float new stock and bond issues. This favorable situation in the capital funds market was translated into a constuctional boom of previously unheard-of dimensions; a real estate boom developed, first in Florida, but soon was transferred to the urban real estate market on a nation-wide scale; and, finally, the stock market became the recipient of the excessive credit expansion. These three booms--the constructional boom proper, the real estate booms, and the stock market hysteria--combined to produce structual changes in the economic system which were directly involved with the immediate origins of the depression. This trinity of booms contributed to sustain a seeming prosperity, the tragic speciousness of which was not widely apparent until after the bubble had burst. Hence the remote effect of the investment credit inflation was the depression, to be followed by the unprecedented bank failures terminating in the Banking Panic of 1933." (81-82)

Cut and paste that into 2009, and you've pretty much summed up what's occured over the past few yrs. Can't help but wonder whether a parallel banking panic still lurks in our future.

Pencil Neck

Oh the things that you say
Is it life or just a play
My worries away
You're all the things I've got to remember
--A Ha

Considering the source (a Fed bank president), this is a pretty frank assessment of where our financial system and fiscal situation stand. Nice charts indicating the degree of banking system leverage, the escalation of debt, and the destruction of the dollar.

His admission that permitting large banks to continue to operate despite poor managerial decisions, and the adverse impact this has on smaller players (and long run innovation) in the industry is correct (although notice that he does not offer that this policy should be scrapped).

A few points of contention, however (again not surprising, given the source). On p. 6 he claims that failure is 'normally' addressed in a capitalistic system thru an orderly takeover with proper oversight that protects the system's 'stability.' But unfettered markets seek stability on their own with no assistance. Intervention may provide the illusion of stability, but in the long run pent up stress and strain injected into in the system by the planners will let go, leading to much more violent correction down the road when the market's quest for stabilization can no longer be restrained.

On p. 9 he suggests that in environments where debt is large and growing, low interest rates are preferred by everyone. No. In systems where leverage is increasing, so is risk. As such, cost of borrowing should go up. Lenders can properly manage risk of their leveraged balanced sheets, and the cost of borrowed capital must rise in order to compensate lenders for any further loans they might want to extend. Can you see that forcing rates artificially low in such an environment does not lend to stability at all, but rather to excessive risk taking and more instability that at some point will have to be rectified?

From p. 12 on, he boasts that the Fed should be able to achieve its bureaucratic mandates, but then goes on to outline challenges central planners face with getting it right. Classically, on p. 13 he admits that he doesn't know what the 'proper' neutral rate is. How could he? No one knows. Only the collective wisdom of millions of independent buyers and sellers can approach the 'proper' price for anything in dynamic environments--while possessing capacity to revise the price when conditions change.

His conclusion that central planning can work 'if we're smart enough' seems quite oxymoronish.

position in USD

Recycling History

Feels like the first time
Like we've opened up the door
Feels like the first time
Like it never will again, never again

Nice recount of New Deal like policies in Old Rome. The cyclical nature of history makes one wonder how far we've advanced over the past 2000 yrs.

We're making the same mistakes they did with predictably similar consequences--although current policymakers somehow hope, also quite predictably, that this time the outcomes will be different.

An important lesson drawn from Rome is how inflation destroys individual freedom. In Rome's ultimate downfall, it appears that this loss of freedom caused citizenry to side with invaders who, through the eyes of oppressed domestics, appeared more as liberators than as threats.

One difference between now and then is our preference for inflating via debt in this phase of the cycle. My sense is that this will postpone the ultimate hyperinflationary endgame as we need to first pass thru a deflationary phase where no new debt can be created and existing debt is destroyed/retired. Once debt markets become dysfunctional for policymaker purposes, then the printing press effect kicks in big time.

The other lesson here: the importance of gold as an insurance policy against bureaucratic incompentence/greed--which history suggests may be inevitable.

position in gold

Monday, September 7, 2009

Flexible Capacity

The pressure's on the screen
To sell you things that you don't need
It's too much information for me
--Duran Duran

Recent cover stories in BW, Fortune, et al remind us of how poorly positioned the median US citizen is for retirement.

A common prescription is that people need to divert more of their incomes toward various tax favored vehicles such as 401(k)'s and IRAs. If at all possible, the Rx continues, one should 'max out' contributions to the tax exempt limit. In 2009 this maximum is $16,500, with another $5,500 of 'catch up' contributions possible for those 50 yrs or older.

I wonder, however, whether many folks are not diverting more income than they should toward retirement accounts. While their retirement accounts build, they are living 'cash poor' in the present. They live paycheck by paycheck with little cash cushion to absorb situations like unplanned car repairs or hospital bills.

My sense is that many folks would be better off contributing less to their retirement accounts and build liquidity to cope with living their lives in the present period. While income and capital gains realied would be subject to tax, so ultimately will retirements funds once they are tapped (retirement funds are treated as ordinary income).

And just precisely what those future tax rates will be are anyone's guess--although there is a reasonable case to be made that taxes in the future will be much higher than the present. (As a sidenote, it may be worth pondering how government might plunder 'tax advantaged' Roth IRAs in the future!)

A couple years back, I cut back on my 401(k) contributions to the minimum necessary to receive the employer match. For me, it was one of the better personal finance decisions I have made. I was able to pay down debt and build cash. The resources that I'm building in taxable accounts can still apply toward retirement. Indeed, I can use them whenever I want without reservation. And they are outside the retirement system and its vagaries.

My flexibility (freedom) has increased.

Friday, September 4, 2009

Body of Evidence

"She is a beautiful woman. But when this trial is over, you will see her no differently than a gun, or a knife, or any other instrument used as a weapon. She's a killer, and the worst kind. A killer who disguised herself as a loving partner."
--Robert Garrett (Body of Evidence)

I've started in on what appears to be a fantastic study of the Great Depression by Phillips, McManus, and Nelson (1937). The authors were primarily concerned with the underlying causes as they pertained to the banking system, and they're focused primarily on the Fed. The general thesis is that WWI and its financing, coupled with the advent of central banking here in the US, resulted in policies which created a massive credit bubble and its subsequent poppage.

As I chew thru this work, I plan to jot some notes for future reference. Some Chapter II notes:

-->Inflation has historically been subject to various definitions, so much so that Pigou (1917) suggested that we get rid of the term altogether :-) (13)

-->Inflation in most modern countries (US included) is primarily driven by the 'multiplicaton of bank credit by the banking machinery'. (13)

-->Lower taxes to finance WWI than previous wars. US ~ 25%, England ~17%. Compare to England's Napoleonic War tax of 60%+. Nearly all other countries printed currency to finance. US primarily expanded credit. (14)

-->Banks can inflate by making loans or by making investments. Investments were a big part of credit expansion during WWI. (16)

-->Due to initial Federal Reserve Act in 1913 and subsequent amendments in 1917, the following monetary system parameters were modified. (23-30)
a) Member bank reserve ratio requirements were cut from 20% to 10%.
b) All member banks deposited reserves with Federal Reserve banks.
c) Federal Reserve bank requirements were set at 35%.
These three things alone permitted each $1 billion in reserves to be pyramided into nearly $30 of credit (a.k.a. 'slack' in the credit system). This constituted a six fold increase over the previous system's capacity. (27-28)
d) Free gold reserves at Federal Reserve banks reduced from $1 (total backing of each paper dollar in gold) to 40% (more leverage). Gold ownership subsequently concentrated in Fed Banks as a source of reserves for more credit expansion.
e) National Bank Act sanctioned Fed member banks to pay interest on time deposits, thus competing w/ non member banks. Reserve requirements on time deposites cut to 3%.

-->For 1914-1920 period: % increase in deposits of non-member banks: 30%, % increase in deposits of member banks: 250%

-->% of all US bank deposits by Fed member banks 1914: 1/3. % of all deposits by member banks in 1920: 60%.

-->Growth in loans 1914-1920. non-members: 30%, members: 200%+. (32)

-->Price indexes from 1914 to 1920 increased 2.5x. (20)

-->'Lenin is said to have declared that the best way to destroy the Capitalist System is to debauch the currency' (Keynes, 1931: 77).

-->Inflationary debasement of the currency is "a process that engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose" (Keynes, 1931: 78).

-->Beginning in 1922, Fed policies were introduced to prop up the articially high prices stemming from the WWI inflation. Left to their own devices, these prices would have fallen as would have the excess credit. Instead, inflationary policies of 1922 on took the bubble to new levels. (36)


Keynes, J.M. (1931). Essays in pursuasion. London: Macmillan and Company.

Phillips, C.A., McManus, C.F., & Nelson, R.W. (1937). Banking and the business cycle. New York: The Macmillan Company.

A Kingdom of Conscience

"A king may move a man, a father may claim a son. But remember that, even when those who move you be kings or men of power, your soul is in your keeping alone. When you stand before God you cannot say 'but I was told by others to do thus' or that 'virtue was not convenient at the time.' This will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

With Ted Kennedy's passing about a week ago, much ink has been spilled on the late senator's persistence, particularly w.r.t. social legislation. To be sure, persistence is a worthy character trait to develop.

However, persistently focusing on the wrong thing is a ticket to ineffectiveness.

Master thieves, for example, dedicate their lives toward how to take from others. But their persistence is hardly noteworthy.

Debate about whether Ted Kennedy did the right thing is hot and heavy right now. Our judgement of another's life isn't worth a thing, of course, as that task is in hands of an entity above our pay grade.

However, the passing of an influential individual is an opportunity to carefully question the conscience. Am I living my life focused on the right thing?

Hold the Line

It's not in the way that you hold me
It's not in the way you say you care
It's not in the way you've been treating my friends
It's not in the way that you stayed till the end
It's not in the way you look or the things that you say that you'll do

This view from the governor of Indiana offers perspective on one of the next shoes to drop. Unlike the Federal government, the states can't print their own money. And declining revenues stemming from the sagging economy are revealing state spending excesses that must be dealt with.

We had an initial whiff from Cali last month.

It seems likely that the other 49 will be descending on Washington soon with hats in hand.

Thursday, September 3, 2009

Fed Up

"So, here's to the men who did what was considered wrong, in order to do what they knew was right...what they knew was right."
--Benjamin Franklin Gates (National Treasure)

An excerpt from Ron Paul's new book, End The Fed. Congressman Paul continues to impress me with his depth of understanding. It's also hard not to note his tenacity. He knows that central banking is located at ground zero of our problems and he won't be shaken out of his position.

This excerpt provides a nice overview of the history of central banking and the origins of the Fed. When reflecting on the composition of the Jeckyll Island group--those who met at JP Morgan's coastal Georgia resort in late 1910 to blueprint the Fed's structure--Paul writes:

"So we had two Rockefellers, two Morgans, one Kuhn Loeb person, and one economist. In this group, we find the essence of the Fed: powerful bankers with powerful government officials working together to have the nation's money system serve their interests, justified by economists there to provide the scientific gloss. It has been pretty much the same ever since."

I doubt truer words were ever spoken.

Tuesday, September 1, 2009

Teenage Wasteland

I don't need to fight
To prove I'm right
I don't need to be forgiven
--The Who

I've always regarded John Mauldin as a sharp cookie, but this recent missive is particularly good.

He likens our current predicament to that of teenagers who, as a general rule, are reticent to make choices that require sacrifice. We borrowed profusely from the future to live large in the present. Now, when the bills are coming due that we can't pay, we once again look for a painless way out.

This seems unlikely.

Because frugality and risk aversion are taking hold on social mood, he suggests that further borrowing and spending programs may not gain much traction. Moreover, the sheer size of our current debt obligations already seem unwieldy. Quoting page 3:

"As I’ve made very clear, deficits that are higher than nominal GDP cannot continue without dire consequences. Good friend Richard Russell writes today:

'The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let's say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof.'

"That would be at least 30% of the national budget. How would your household do, paying that much as interest? How can you operate when interest payments are 30% or more of the budget? Do you borrow to pay the interest? And the Obama administration openly admits to deficits of over a trillion a year for the next ten years, under very rosy growth assumptions. Anyone outside of Washington or who isn’t a rosy-eyed economist think we’ll grow 4% next year? I’m not seeing many hands go up."

The thesis as Mr Mauldin states it is deflationary. The consequences for risky financial assets, should this situation come to pass, seem readily apparent--and bearish.

One way or another, we teenagers are likely to grow up.

position in USD