Einhorn on Truth

Greenlight Capital's David Einhorn (DE) has an interesting 27 May 2010 post at the NYT:

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html. DE asks, "how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms. And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts--that is, by the printing of money? ... Despite the promises by the [Fed] chairman, Ben Bernanke, not to print money or 'monetize' the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics. ... " DE raises other issues I have. My bottom line: eventually all will see the emperor is naked.

Three-Card Monte Central Bankers

"After all the massive bailouts, the federal debt is exploding. ... The US now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname 'the PIIGS.' ... Yes, in recent months, there's been a lot of bullish talk about how the American balance sheet has been cleaned up. ... And banks and other financial institutions owe $1.4 trillion less than they did in late 2008. Those debts haven't disappeared. They have merely been shifted onto the books of the federal government--in what may be the highest-stakes shell game ever. ... There's no sign of a slowdown in debt growth. 'These processes are not linear,' warns [Carmen] Reinhart. 'You can increase debt for a while and nothing happens. Then you hit the wall, and--bang!--what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.' ... 'If you flood the markets with more and more debt, its value is going to go down. We are silly to fool ourselves into believing otherwise.' ... In 1989, the great investor Sir John Templeton told me something that has rung in my ears ever since, this week more than ever: Those who spend too much will eventually be owned by those who are thrify.' ... But in my view, the obvious tools--gold and other commodities, emerging-markets stocks, inflation-protected bonds--are already so popular that they are likely overpriced", my emphasis, Jason Zweig at the WSJ, 8 May 2010, link: http://online.wsj.com/article/SB10001424052748704292004575230601932486166.html.

I disagree with Templeton, remembering something Brazil's finance minster said about 25 years ago, "If I owe the bank a million dollars and I can't pay, I'm in trouble. If I owe the bank a billion dollars and I can't pay, the bank is in trouble". Who is in trouble if Uncle Sam owes trillions? I think $1,225 gold is cheap.

Mark Faber's Positions

"Central banks will never tighten monetary policy again, merely, print, print, print. ... Americans must re-think what constitutes a safe asset. ... '[T]he Federal Reserve will keep interest rates at 0 precisely 0. ... in real terms.' ... Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money. ... Eventually there will be war and one will want physical commodities 'not paper from UBS or JP Morgan.' ... 'Mugabe is the economic mentor of Ben Bernanke.' ... Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money. ... If deficits didn't matter as many like the Economist James Galbraith argue today, why should citizens even pay taxes?," my emphasis, Andrew Mellon at Big Government, 23 May 2010, link:

http://biggovernment.com/amellon/2010/05/23/faber-nations-will-print-money-go-bust-go-to-war-we-are-doomed/

I agree with Faber. Apparently the notion that he's Zimbabwe Ben is getting around. Why pay taxes indeed?

Henny Youngman, Central Banker

"The principle of central-bank independence, a mainstay of economic orthodoxy for two decades, has taken a battering over the past week. Investors should be on their guard. ... Allowing central banks freedom to set interest rates without political interference is the best way to anchor inflation expectations, reducing borrowing costs and deliver faster growth. ... But independence also allows central banks huge power with limited accountabilty. ... The ECB's decision to start buying goverment debt is even more troubling. it says it is responding to dysfunctional' bond markets. How does it know high goverment borrowing costs reflect liquidity problems rather than legitimate solvency fears that will expose the central bank to losses? ... Might its decision to buy bonds increase moral hazard, removing the incentive for governments to tackle their deficits?," my emphasis, Simon Nixon at the WSJ, 14 May 2010, link:

http://online.wsj.com/article/SB10001424052748704635204575242400983963766.html.

Of course that's the intent: to enable deficit spending! What principle? Independent of who? I have another way to "anchor inflation expectations": gold. My more basic question: "high borrowing costs", as Henny Youngman would ask, "compared to who"?

That Four-Letter Word Again

"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. ... But there is an alternative. The US could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons. ... The value of a gold standard was proven in the 19th century. ... Countries that adopted to international gold standard prospered. This remarkably successful monetary system only blew apart with the outbreak of World War I in 1914. The reason it came apart then--and not at other times when countries abandoned the gold standard to finance wars with deficit spending--was that World War I was the first conflict to affect every major economically advanced country in the world. ... This might not have mattered, and the major economic powers might have re-established a monetary system similar to what existed before the war if not for the central reason why political elites dislike the gold standard: It leaves them little room to run the economy and claim credit for its successes. ... But their deeper reason is that they prefer to retain power over the economy that they would not have under a gold standard. ... But foreign central banks don't stack their greenbacks in vaults. They maintain monetary reserves mainly as interest-bearing US government-backed debt securities--in effect, as unsolicited loans to the US government. ... That increase in borrowing capacity creates liquidity that is unrelated to any need of Americans involved in economic transactions. ... The government of Charles DeGaulle, president of France from 1958 to 1969 and a supporter of returning to the gold standard, once assailed this American liquidity advantage as as 'exorbitant privilege.' ... Now Ben Bernanke's Fed is repeating recent patterns of keeping interest rates too low for too long, creating new bubbles and risking a whack-a-mole encore: 1970s-style stagflation. ... The first step in cutting off the addictive flow of foreign central-bank capital to Washington is an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace their dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard. ... Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the [US]", my emphasis, Sean Fieler and Jeffrey Bell (F&B) at the WSJ, 7 May 2010, link:

http://online.wsj.com/article/SB10001424052702303695604575181693906532202.html.

Absent repealing the Federal Reserve Act any US gold remonitization will be another scam to be reversed at Uncle Sam's whim. F&B work at the American Principles Project. See my 8 January 2009 post:

http://skepticaltexascpa.blogspot.com/2009/01/galbraiths-dialectic.html.

Unleash the Logan Act

"The [Fed] sought to pre-empt criticism of its decision to reopen a controversial lending pprogram, in which it funnels US dollars to the European Central Bank and other central banks overseas, by arguing that the move was necessary to prevent Europe's crisis from reaching US shores. ... Some Republicans immediately assailed any US involvement in Europe's big bailout. ... Fed officials say the US faces little financial risk in the program because central banks are on the hook to repay, not commercial banks. ... 'Our view from here is that we don't want the financial spillover effects of what's going on in Europe to put at risk our incipient recovery here in the [US],' Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview. ... In addition to accusing the Fed of bailing out foreigners, some congressional critics say the Fed is too tight with details about its rescue programs, a concern that is prompting lawmakers to demand more Fed disclosures", my emphasis, Jon Hilsenrath & Corey Boles at the WSJ, 11 May 2010: http://online.wsj.com/article/SB10001424052748703880304575236290266862342.html.

This is preposterous. Instead of letting Greece stew in its own juices, the Fed prints up tons of US dollars then claims it wants to "prevent Europe's crisis from reaching US shores". Nuts. What is it the foreign central banks will repay with? Wampum? Eric Holder, attorney general, here's an idea: indict some Fed Heads for a Logan Act violation. Come on. You're creative. Squeeze it in!

EU in Wonderland

"The bailout package for eurozone governments facing debt troubles has created another urgent challenge for European policy makers: how to keep free spending governments in line. ... Because there was no currency risk, banks, insurance companies and pension funds in every euro-zone economy became the biggest investors in the bonds issued by governments of other countries using the euro. .... Although the budget policies of euro-zone members were tied together in this way, without people really noticing, there were no mechanisms to prevent governments from overspending. ... But, in practice, the pact had no bite. ... These packages circumvented rules that many had assumed prohibited bailouts within the euro zone. They also weakened market incentives for governments to get their houses in order. ... 'Profligate countries now can count on the ECB to alleviate market pressure that could provide the only disciplining device before a crisis situation is reached,' Mr. [Marco] Annuziata says. ... As a step toward improving it, Olli Rehn, the EU economic commissioner, is set Wednesday to propose rules, with clear enforcement mechanisms, both to prevent excessive government debts and deficits, and to act more decisively in a debt crisis", my emphasis, Stephen Fidler at the WSJ, 11 May 2010, link: http://online.wsj.com/article/SB10001424052748704879704575236572824559304.html.

This is laughable. There no "rules" for governments, unless you have your own army to enforce them. Unless the EU has its own army and will use it to "enslave" millions of Greeks, Greece's debt will be repudiated. One way or another. What part of this don't you understand? Sovereign debts are usually repudiated. Openly. Or by inflation. Government bonds are a sell. Treasuries, Bunds, Gilts, etc. They all stink. You want to restrain government spending? Have your government go back to the gold standard. "[T]here were no mechanisms to prevent governments from overspending". Of course. As Yves Smith asks, "feature or bug"? What "circumvented rules"? What "clear enforcement mechanisms" short of an army? Will the EU hire the Crips or Bloods to collect from Greece? For a small "emolument", they could likely be enticed into collecting. How small? Say 10% of whatever they collect. Hell, for 10% of say $150 billion, you might be able to get the Zetas to collect for you.

Ticking Debt Bombs

"My first lesson in the power of contagion happened in 1997, when I was based on Seoul. ... Why would a problem in Thailand extend to wealthier South Korea? ... On the surface, contagion makes no sense. Just because country A falls into a debt crisis doesn't mean countries, B, C or G should as well. But that's not how investors think in times of uncertainty. Instead, they look for other potential trouble spots, then try to get out of them. ... Europe may be facing a similar contagion effect today. Worries that overindebted Greece could default sent investors scouring for the next ticking debt bomb. ... Not even the unprecedented $145 billion European Union-IMF bailout for Greece announced in early May is guaranteed to stop things from getting worse. In South Korea in 1997, the IMF rescue failed to restore shattered investor confidence. ... Athens must still prove it can implement the brutal tax hikes, public-sector salary cuts and other budget-reduction measures it promised in return for the aid. ... And why stop in Europe? Much of the indistrialized world is emerging from the Great Recession buried in debt, the result of historical profligacy mixed with the costs of stimulus packaages and bank bailouts initiated during the recession. ... No investor should equate Greece's problems with those of the US. But we're not in normal times. .... What makes contagion so scary is that investors respond in a completely rational fashion: they panic. .... Now, with the Greek rescue, Europe has finally shown the backbone to take on contagion. But it needs to do more. This is no longer a Greek crisis; it's a eurozone crisis", my emphasis, Michael Schuman (MS) at Time, 17 May 2010, link:

http://www.time.com/time/magazine/article/0,9171,1987598,00.html.

MS produced a descriptive piece devoid of economic analysis. Contagion means and explains nothing. MS, do you know what a balance sheet is? You are right about this: "it's a eurozone crisis". Instead of confining the cancer to Greece, Germany injected itself with it. Got euros? Poor dear. I'm sure MS will happily take them off your hands. This kind of piece Yves Smith would decry for its dismissive tone, "You sans culottes. Fear nothing. Super ECB-IMF is here. Buy Greek bonds". Why should Greece's $145 billion bailout do any more than spread the problem to Germany and France? MS, how dare you tell me what not to do? I "equate Greece's problems with those of the US". All times are those of "uncertainty". So? What made investors to look less positively on Greece's debt?

What 13th Amemdment?

"In October 2008, polls showed that the majority of the American people, 56 percent, were opposed to the $700 billion TARP bill that funded the bank bailouts at the cost of $2,334 to each and every 300 million of them. ... Unlike the unfortunate Americans, the people of Iceland were given the chance to exert their will directly on a similar banking bailout in the form of a referendum. As the US Congress had done before them, the politicians in the Icelandic parliament approved legislation covering the losses of a private Icelandic bank, a bill that would have cost every Icelander $16,400. But thanks to the brave resistance of their president, the Icelandic people took full advantage of their more democratic system to vote down the Icesave bailout on March. A full 93 percent of them voted against handing over $5.3 billion, nearly half their annual GDP, to repay the Dutch and British governments ... President Grimsson is the first true hero of the current financial crisis, which is far from over regardless of how many economic green shoots are spotted by keen-eyed central bankers or created by governement statisticians. In direct contrast to John McCain and Barack Obama, who didn't hesitate to throw over the American people on behalf of the bankers, President Grimsson personally intervened in the political process and, by forcing the referendum, gave the Icelandic people the opportunity to make a genuinely democratic decision on their financial future. ... It should be clear that what is much more dangerous to the economy of Iceland and every other country in the world is a political system that permits politicians such as Haarde, Sigurdardottir, Sigfusson, Brown, Bush, McCain and Obama to turn entire nations into unwilling serfs of a small number of short-sighted and woefully incompetent bankers. There is no one road to serfdom, and given their woeful performance over the last five decades, it would appear that the banking oligarchy would make for a de facto ruling class that is even less effective than the communist apparachiks, fascist bureaucrats, inbred aristocrats and clueless kings who preceded them", Vox Day at World Net Daily, 8 March 2010, link: http://www.worldnetdaily.com/index.php?pageId=127206.

Well said Day. Eventually we will have an American president who is not owned by the banksters. When he is elected, woe to them.

Whose Reserves?

"Argentine President Cristina Kirchner on Monday sidestepped stiff Congressional resistance to spending foreign reserves for debt payments, issuing a pair of decrees shifting about $6.6 billion from the central bank to the Treasury. ... The first decree allocates $2.2 billion in foreign reserves to pay international organizations, while a second orders the central bank to hand over $4.2 billion for other public-debt payments. The moves will help Argentina make the estimated $13 billion due in debt payments this year", Shame Romig at the WSJ, 2 March 2010, link:

http://online.wsj.com/article/SB10001424052748704358004575096010595724960.html.

There is no law anywhere when it comes to governments. Governments are the worst of all debtors to collect from. To do so, you need your own army.

Greece Now, California Next?

"While I have long predicted the collapse of the euro and eventually the European Union, I have to admit that Greece was not even on the periphery of my radar as a potential economic flashpoint. ... The response of the European Commission and the European Central Bank has been to take a page from Henry Paulson, former secretary of the Treasury in the Bush administration, and attempt to bluff the markets. ... State bankruptcies and monetary exits from the euro may not have been envisaged, but both are going to happen anyway. ... And it should be kept in mind that this is not an abstract exercise in American schadenfreude, as the more serious question is if the [US] financial system is itself strong enough to survive further economic pressure, since a number of US states, including Illinois and California, are now facing situations very similar to Greece. There is no known mechanism for a sovereign American state to declare bankruptcy", Vox Day at WorldNetDaily, 14 February 2010, link:

http://www.worldnetdaily.com/index.php?pageId=125098.

So the states won't file bankruptcy. They just won't pay their bonds.

Argentina Shows America How-2

"Argentina is enduring its biggest inflation surge to start the year in two decades, posing a challenge for the government's newly named central bank president who is viewed skeptically by financial markets. ... Economists blame the price spiral on chronic overspending by the government of President Cristina Kirchner, as well as interventionist policies such as price and export controls on beef, which they say have discouraged investment and reduced the supply of cattle. ... In her comments about inflation prior to taking office, Ms. Marco del Pont often placed emphasis not on monetary policy, but on monopolistic business practices, which she said gave a few Argentine companies excessive pricing power. ... Economists are concerned that gaining access to the reserves would encourage Mrs. Kirchner to maintain aggressive public spending, which has been growing at a rate of around 30% the past year, and has helped to propel inflation. Ms. Marco del Pont's positions suggest 'she views the priority of the central bank isn't defending the value of the peso, but helping to finance the government,' says Aldo Abram, an economist at the Higher School of Economics and Business Administration in Buenos Aires. ... For her part, Mrs. Kirchner blames rising meat prices on Argentine ranchers, who she says aren't bringing enough cattle to market. ... Agrarian economists say government meddling has been so disruptive that many ranchers have liquidated herds and turned to farming. A drought last year also hurt ranchers. ... Private economists also say the government has been trying to sweep inflation under the rug by manipulating official inflation statistics, keeping them at one-half to one-third the true level", my emphasis, Matthew Moffett at the WSJ, 20 February 2010, link:

http://online.wsj.com/article/SB10001424052748704511304575075960541144400.html.

President Obama, are you listening? Price controls? What say you ghost of Richard Nixon? I'll never forget George Stigler's Industrial Organization class at Chicago. "Stiggie" told of an encounter with Harvard's Alvin Hansen. They discussed monopolistic business practices as a source of "inflation". Stiggie said the thought was nonsense. Hansen disagreed. Stiggie said assume "monopolists" exist on day one. What lets them raise prices on day two? Why didn't they already extract all their monopoly profits on day one? What changed from day one to day two to let the "monopolists" raise prices? Hansen had no response. Go Stiggie.

China's a Bubble!

"China reported a surge in bank lending and sharply rising property prices last month, figures that reinforced growing worries that the world's fastest-growing major economy risks inflating a new bubble. ... The central bank also reported Thursday that the M1 measure of money supply surged 39% in January, its fastest increase in at least a decade. Economists say that shows households moving money out of long-term deposits in preparation for spending it, a signal of future inflation", Andrew Batson & Dinnt McMahon at the WSJ, 12 February 2010, link:

http://online.wsj.com/article/SB10001424052748704140104575058121514846134.html.

39%! Wow. China's real estate market looks like a bubble from here.

The Coming Currency Firestorm

"Already, the euro is counted as the dollar's dominant challenger, while China's central bank governor, among others, has suggested establishing an alternative (some might say, rival) 'super-sovereign reserve currency.' ... Will we witness a rapid coup (in currency time) occurring over the next ten years, as some commentators believe (see Chin and Frankel, 2008)? Or will we see a much more gradual process owing to the built-in inertia of the dollar's prominent role? ... We report new cross-country evidence of the determinants of substitution to dollar banknotes and find that in developing countries substitution hinges more on historical than an recent experience. ... While there is considerable interest in the determinants of currency substitution--defined as the use of multiple currencies in a given country--there are few established empirical results. The primary reason is that the amount of hard cash in circulation is often unkown. ... Our data come from the [Fed's] international cash distribution operations and include all wholesale shipments of dollars to and from the US between 1990 and 2007. ... We find that the demand for dollars is, above all, about memory. The highest inflation rate recorded over the past 30 years has significant explanatory power in our model--the demand for dollar banknotes goes up for a generation after an inflation shock--while the recent inflation rate has none. ... Assessing the country-level determinants of the use of dollar banknotes may also have important implications for the [Fed's] balance sheet going forward, as the seignorage it earns from currency in circulation is a major source of its revenue", my emphasis, Rebecca Hellerstein (RH) at Voxeu, 6 February 2010, link: http://voxeu.org/index.php?q=node/4565.

RH, Fed economist, welcome aboard. About 1830 Lord Overstone said it takes about two generations for all traces of financial folly to be wiped from the market's memory. That's about 50 years. Keep looking. RH's seignorage comment is a fancy way of saying the Fed's cost of capital is zero, my 31 January 2010 post:

http://skepticaltexascpa.blogspot.com/2010/01/junior-on-fed-profit.html. As long as the dollar is seen to hold its value better than other paper currencies, it will continue in use. When it and all other paper currencies are seen as no better than Venezuela's bolivar, worldwide hyperinflation will result. RH, we salute your exposing the source of Fed "profit". The coming inflationary storm will sweep away the euro too. The Fed has an opportunity here, i.e., to encourage other countries to increase their inflation rates, so more people overseas will hold "wealth" in the form of dollars.

Bust 'em UP!

"But this year's bonus season has morphed into days of whine and poses. The Street, tin-eared, in whining about the people who are enraged by multibillion-dollar bonus pools are a time of 10% unemployment and public angst. It's trying to solve its problem by posing as a public-spirited operation (rather than Greedhead Central) by showing off charitable contributions and small-business-loan programs. That maneuver can't possibly work. ... Had the [Fed] and other central bankers not flooded the world with cheap cash, Goldman's and Morgan's counterparties--the ones on the other side of their market bets--would have failed. ... In an ideal world, this year the Street would acknowledge the public largesse by having the sense not to pay bonuses of more than six digits--hey, its worker bees need money in order to survive in the high-cost New York City area--and would like to make a nice voluntary contribution to the government that saved it. ... Washington ... whines about Wall Street and adopts symbolic poses--denunciations of 'obscene' bonuses and 'fat-cat bankers' by President Obama, for example--but doesn't do the substantive thing: breaking up those institutions so that they're not too big to be allowed to fail", Allan Sloan (AS) at Fortune, 8 February 2010.

I agree with AS and have advocated breaking up the TBTFs for years.