Lehrman on Gold

"The most disturbing aspect of the current financial crisis is that no U.S. official has correctly indentified its primary cause. ... Ignored is the main culprit, the dollar's role as the world's main official reserve currency. ... To understand how the dollar's reserve-currency role helped cause the recent bubbles, and the ensuing crisis in the world's financial system, we must apply the analysis of the great French economist and central banker Jacques Rueff, who was the first to explain the process. As a financial attache in London in the early 1930s, Rueff witnessed the collapse of the post-World War I monetary system. ... Many years later, in the 1960s, Rueff correctly predicted (and tried to prevent) the breakdown of the dollar-based Bretton Woods system. ... As was true in the 1920s and the 1960s, the dollar's reserve-currency role has led to the main pathologies that now plague the world economy: the speculative 'hot money' flows ... Congress's apparently incorrigible fiscal irresponsbility, and the mushrooming U.S. deficit in international trade and payments. The key difference between a reserve-currency system and the gold standard is that foreign-exchange reserves, in the form of government bonds, are not only assets of the national authority that holds them, as gold was, they are also (unlike gold) debts of the country that issues them. ... Congress has become increasingly addicted to reserve-currency finance by a kind of fiscal version of Parkinson's Law: Public spending expands to absorb all available tax revenues. Working in tandem with this is Parkinson's Debt Corollary: Public borrowing expands to absorb all available means of finance. ... How can we end the reserve-currency curse? ... [A] modernized international gold standard", Louis Lehrman (LL) and John Mueller, 4 December 2008 at http://www2.nationalreview.com/monetary.html.

LL began saying this in 1980 as did I. I disagree with LL about gold's "price" to effect such a system. LL thinks $1,000 an ounce will do. I think at least $10,000 is required. LL wants to keep the Fed, I say if the Fed stays, the gold standard can't. Paraphrasing Andrew Jackson, "The Fed and no gold, or gold and no Fed". LL's article is worth reading, if for no other reason, the history it gives and the charts it has. LL, welcome to the battle!

Looking Backward

"The Professor scanned the classroom. We didn't know his academic credentials, or even his name, but he taught the adult-education class in Detroit, se we call called him The Professor. 'And The Great Economic Meltdown beginning in 2008? Who can describe its causes?' he asked, peering pleasantly through think, round spectacles. ... 'Freedom of the press,' said an ambitious girl. 'Uncontrolled, sensationalist media panicked the bourgeois investors.' ... 'Yes, Internet,' he shivered. 'All chaos and pornography. No control in those days. ... 'Anyone want to discuss Internet? Maybe, defend uncontrolled speech?' he asked. We weren't that foolish. The line of guards watched us carefully. ... 'In 2009 America's Minister of Money, a man named Mr. Paul Sen, ran out of ideas. He borrowed until lenders called it quits. He printed billions of paper dollars and issued more and more bonds that eventually nobody wanted. His no-good money was too rough for toilet paper--that is my joke. Then he misunderstood and cut interest rates below zero. Why?' 'Stupidity,' said a red-haired boy determined not to repeat his beating of last spring. 'Correct!' said The Professor. "he had only two strategies. Either borrow and spend or spend and borrow--that's another small joke of mine but it will be on the exam. The American Green-Buck Dollar was so inflated that nobody wanted it. Then Mr. Sen actually paid them to borrow more and more. Not workers, he just paid rich people, government cronies.' 'Sen said paying people to borrow was cheaper than throwing money out of helicopter owned by Chief Mandarin of the Federal Preserves System, named Dr. Beani Burbanki. And, amazing thing, he was not joking,' the teacher added. ... 'So,' asked a young woman, 'the American bourgeoise and their government lived far beyond their means for decades, then they foolishly believed they could borrow and spend their way of it it instead of saving and creating sound money?' She was virtually guaranteed two rations that night. The teacher nodded vigorously. 'America not like China. America had no savings and rotten money. Nonsensically, government kept lowering interest rates which made savings and lending more and more unattractive. They were cuckoo.' 'But, without their stupidity,' she continued, 'we would not have had the economic meltdown that led to America's liberation by Our Chinese Family, who owned most of the debt. ... 'Yes, Hegel's dialectic works in mysterious ways,' the teacher continued. 'American-led crash toppled China's capitalist dictators, allowing the Nationalist-Communists to regain control of China, then to liberate America using own capitalist weapons'," S.J. Masty, 4 December 2008 at http://lewrockwell.com/orig9/masty5.html.

I don't think Masty is kidding.

Naive Professors?

"This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. ... Practically every day the government launches a massively expensive new initiative to solve the problems that the last day's initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public's perception of the government's competence and trustworthiness. ... The Obama administration, with its highly able team of economists, has a golden opportunity to put the country on a better path. We believe that the way forward is for the government to adopt two key principles. The first is that it should intervene only when there is a clearly identified market failure. The second is that government intervention should be carried out at a minimum cost to taxpayers. ... From this perspective, one must ask what would have been so bad about letting Bear Stearns, AIG and Citigroup (and in the future, General Motors) go into receivership or Chapter 11 bankruptcy? ... In other words, instead of bailing out AIG and its creditors, it would have been better for the government to guarantee AIG's obligations to J.P. Morgan and those who bought insurance from AIG. ... AIG may have been responsible for its financial problems, but the culpability of those who do business with AIG is less clear, and so helping them does not reward bad behavior", my emphasis, Oliver Hart & Luigi Zingales (H&Z) at the WSJ, 3 December 2008.

"Bernanke and Company, who are running the U.S. central bank, the [Fed], have been very busy in the past year or so. The size of the bank has more than doubled since August of 2007. ... The main idea behind all this lending is to prevent some large banks (and other financial insititutions) from failing, shrinking, or restructuring. Behind this is, the goal of maintining the existing structure of banking and central banking. And behind that is the goal of maintaining government power and the existing political structure intact. Preventing economic collapse and maintaining the bank lending to the public are not the central goals of those who understand these matters. These are important to the knowledgeable authorities only insofar as they support the goal of maintaning the existing power structure. There are, of course, ignorant economists who think that without government intervention, the economic and financial system cannot survive and we will all be wandering around in bearskins with spears. However, if the financial and economic system were to collapse and if the government and the Fed did not interfere, a free market revival would occur with amazing rapidity. ... From this perspective, keeping the economy going is not per se what is important to those in power, because the economy will always keep itself going without these authorities and do a better job of it at that without them. What is important to them is keeping the existing economy going in the way that it is tied in to the existing power structure. ... The Fed is thwarting the public (and any semblance of a free market) by making the loans that the public refuses to make. ... The battle here is between the public and the government. ... In 2007 and 2008, the Fed is doing what the Reichsbank did in 1931. ... The point here is not the legality of the matter, It is the action of both banks in taking large amounts of long-term illiquid paper of questionable value and providing good assets and/or central bank credits in return. The Fed's TAF ($406 billions worth and slated to rise to $900 billion) is the name for the Fed's counterpart of what the Reichsbank did. As in 1931, there is no plan in place to wind down these assets. They require 'continuous prolongation.' ... Capital that should be going to healthy enterprises is diverted to government and to zombie enterprises. ... The harmful policies and actions of the central banks and the government in response to recessions, such as occurred in the 1930s and are occurring now, are, in a deep sense, not 'policy errors' or 'policy mistakes.' That language suggests that there exists a set of correct policies under the existing political structure that will resolve economic problems. That is a misleading way to think about the issue. ... Within the current political setup, central bankers would have to stop being central bankers and legislators would have to stop being legislators in order to play a constructive role in recessions. ... But if all this is to change, it means that the basic political arangement has to change. To change matters fundamentally, various leopards have to change their spots. A revolution in ideas needs to occur", my emphasis, Michael Rozeff (MR), 8 December 2008, at http://www.lewrockwell.com/rozeff/rozeff243.html.

H&Z are Harvard and the University of Chicago professors, respectively. H&Z are naive at best; tools of the plutocracy at worst. Uncle Sam is not looking to "solve the problems" of the American economy, whatever that is. Unc wants to protect politically favored interests. I agree, Unc's recent actions call into question his integrity and competence. We follow the recent 401(k) flap with interest. Yes, Unc has a "golden opportunity" now, however, I think H&Z and I disagree as to what it is. I have no problem with AIG, Bear or Citigroup going bankrupt. H&Z are big business apologists, I hope they get fat consulting contracts from say, Goldman Sachs for writing this. Why? Joe Schmoe's culpability is even "less clear" than that of AIG's counterparties! How do H&Z identify market failures? Do they look into Ed McMahon's "hermetically sealed mayonaisse jar"?

I agree with every word MR wrote. Perhaps more than just a "revolution in ideas". I'll suggest reading Crane Brinton's, Anatomy of Revolution, 1965, again.

Was Spitzer Hit?

"Eight months after a federal investigation into a prostitution ring brought about the downfall of Gov. Eliot Spitzer, the question persists in some circles: Was the federal government out to get Mr. Spitzer? No evidence has surfaced to support such an assertion, and the prosecutor in the case has said that politics played no role in the pursuit of Mr. Spitzer, a Democrat. But that has not put to rest suspicions, expressed on left wing blogs, that Mr. Spitzer, a zealous pursuer of Wall Street wrongdoing who some thought could one day be president, had been singled out. Now, a congressional committee is pursuing what would be the first public examination of the events that prompted the intial inquiry into his bank tansactions, which showed he was sending money to a front company for Emperor's Club V.I.P. ... 'The question was: Why were they looking for this? Is this political retribution?' said Representative Michael E. Capuano, a Massachusetts Democrat and a member of the committee who has been critical of the increased scrutiny of banking transactions, which increased greatly under the passage of the Patriot Act. 'It raises questions in my mind that he may have been targeted for political purposes,' he said, adding that he had no evidence that suggested as much. ... The office of the [US] attorney for the [SDNY], Michael Garcia, declined to comment. Because Mr. Garcia said earlier this month that no charges would be pursued against Mr. Spitzer in the case, the committee's work may represent the only forum in which to untangle the mystery of how the former governor ended up in the middle of a law enforcement rarity: a federal investigation into an adult prostitution ring", my emphasis, Danny Hakin, 26 November 2008 at http://www.nytimes.com/.

Was Wall Street out to get Spitzer? You betcha. No evidence? The circumstances are enough. This is the first time I know of Skeptical CPA was called a "left wing" blog! Perhaps so. About eight weeks ago WC Varones Blog reclassified its blogroll, including Skeptical CPA with "Anarchists, Libertarians, Sound Money Advocates, and Other Threats to the Regime". Garcia declined comment. So? What's he to say, "I got my NY Big Law partnership, Spitzer is nullified, case closed"?

William Baldwin Speaks

"How on earth is the Federal government going to pay its bills? ... One method is to put a means test on every federal benefit. If you don't need Social Security or Medicare, your benefits get clipped. ... The other approach is to sandbag people. Wait until after they have made a commitment of capital and then hit them up. The government, to be sure, does not really want to punish saving. It's just what when the Treasury is hungry for funds, it makes sense to go after those citizens who are hardworking and frugal. You can't pick an empty pocket. ... Municipal bond coupons, once exempt, will be taxed. ... Retirement accounts will be looted. ... Don't count on Roth accounts, now totally tax-free to stay that way. Lastly, a proven revenue raiser, albeit one you can't find in the federal budget is inflation. ... Under the circumstances, it's a bad bet to buy long-dated bonds. Scary as it is from month to month, I think the stock market is less hazardous for someone investing for 20 or 30 years", my emphasis, William Baldwin (WB) at Forbes, 17 November 2008.

"Who's going to win the next roll of the dice--fixed income savers praying for deflation, even if it means another Great Depression, or fixed-rate mortgage borrowers praying for a weak dollar?," WB at Forbes, 8 December 2008.

WB has this knocked. See my 23 November 2008 post.

Bet on inflation.

Chris Cox Is Jealous

"Finance Ministry officials acknowledge that secret police won't save the country from economic crises. But they do believe Security Police vigilance makes the public think twice before spreading uninformed gossip about banks. ... 'We are a small country, and panic would have very grave consequences,' says Teodors Tverijons, head of the Association of Latvian Commercial Banks. Preventing uninformed gossip, he says, is a 'matter of state economic security.' ... Early last year, [Alf] Vanags held a news conference and sounded the alarm over Latvia's ballooning current-account deficit. Soon after, he says, he got a call from the Security Police. 'Within an hour they were on the phone asking to see my materials,' he recalls. Mr. Vanags says he handed over his data and never heard anything more. ... Security Police ... spokeswoman Kristine Apse-Krumina, [says] the agency has a duty to 'gather information' and take 'preventive measure ... to avoid destabilization of the financial situation.' ... In Latvia's Soviet past, officials routinely blamed their problems on saboteurs or other scapegoats. 'This is part of our political culture,' says Sergei Krucks, a media-studies lecturer. 'If the state doesn't have a solution, it has to find someone to blame'," Andrew Higgins at the WSJ, 1 December 2008.

"All governments thrive on lies. We might even say that apart from weapons and men cruel enough to wield them on behalf of the rulers, lies are a government's most essential resource. ... Recently the government of Latvia has been illustrating these truths in an especially blatant manner. Latvia's Security Police has devoted itself to snooping into all sorts of communications about impending economic difficulties, under the authority of a law that prohibits the dissemination of 'false information about the financial system orally, in writing or in any other manner.' ... If the U.S. government were to attempt such suppression of criticism, it would have a big job on its hands. In this country, criticism of the government, the economy's major financial institutions, and the present state of affairs is nearly universal, so a mass arrest might create a situation in which each guard had to oversee a million prisoners. ... So, do not think it can't happen here.' It might happen, even here", Robert Higgs, 3 December 2008 at http://www.independent.org/blog/?p=620.

After reading this, I'm sure Chis Cox (CC), the "investors' friend" will hire some Latvians to work for the SEC's "Enforcement Division". Next CC will rent some space in Mosow's Lubyanka Prison. The next time say, William Ackman says something critical about an SEC-favored financial institution, within an hour, five uniformed men will arrive at Pershing Square demanding, "your papers please", a scene from many World War II movies sited in Hitler's Germany. I wonder when Citigroup's Robert Rubin will fly Apse-Krumina to New York to lecture Citigroup staffers on how to respond to press inquiries?

Isn't the SEC's job to squelch free spech to protect Wall Street from criticism? What was the SEC's recent crusade against short sellers supposed to accomplish?

Bailouts Are US

"The nation's governors urged Congress to pass an economic-stimulus package for states, warning that their collective budget shortfall could rise to $140 billion by mid-2010. ... On Tuesday, a group of about 40 governors is scheduled to meet with President-elect Barack Obama in Philadelphia to discuss the proposal. Mr. Obama has repeatedly pledged to helpstates cope with the economic downturn. ... In California, Gov. Arnold Schwarzenegger declared a fiscal emergency Monday and called lawmakers into a special session to address a $11.2 billion shortfall. The state's revenue gap is expected to hit $28 billion over the next 19 months, and without quick action, the state said it is likely to run out of cash in Febsurary. ... The governors association package, which seeks about $60 billion to finance infrastructure projects, is designed to square with one of Mr. Obama's core campaign proposals", Christopher Cooper and Brad Haynes at the WSJ, 2 December 2008.

Municipal bonds look like they are hazardous to your financial health.

Eugene Fama's Revenge

"The stock-market downturn could force the Pennsylvania state employees' pension fund to make cash payments of $2.5 billion or more to trading partners on Wall Street. ... The blowup is yet another example of the wide-ranging damage caused by sophisticated investment strategies peddled to pension funds and other institutional investors when the stock market was soaring. ... The idea behind portable alpha is that it's easy to match the market. If you do it using derivatives like futures, you can tie up less cash and get the same return you would get using an index fund. Then you can use the rest of your cash to beat the market. ... But this year, the portable alpha portion of their portfolio, worth about $6.4 billion at the start of the year, is trailing the market by an estimated 15 percentage points, indicating that with U.S. and world markets down by 41%, they have lost more than 55% of their value. ... Portable alpha was pioneered in the mid-to-late 1980s at [PIMCO], led by the famed William Gross, and by corporate pension-fund manager Marvin Damsma at Amoco Oil Co., according to the book, 'Capital Ideas Evolving,' by Peter Bernstein", Randall Smith at the WSJ, 1 December 2008.

Did anyone ever hear of the "efficient frontier"? I long ago lost respect for Bill Gross. This is another nail in his intellectual coffin. I am amazed anyone fell for this. Shades of 1980s portfolio insurance.

Zimbabwe Ben Rests

The monetary base (MB) was $1,467,729 million on 3 December 2008 and $843,841 on 10 September, a 73.93% increase in 12 weeks, which compounds to a 1,004% annualized rate. The MB fell $8,127 million in the two weeks ended 3 December. The Fed's current dollar creation orgy may have ended.

Will on the New Deal

"The assumption is that the New Deal vanquished the Depression. Intelligent, informed people differ about why the Depression lasted so long. ... The policies included encouraging strong unions and wages higher than lagging productivity justified, on the theory that workers' spending would be stimulative. ... In a 2004 paper, Harold L. Cole of UCLA and Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. ... And FDR's hyperkinetic New Deal created uncertainties that paralyzed private-sector decision-making. Which sounds familiar. ... Writes Russell Roberts of George Mason University: 'By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everthing is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s'," George Will at the Houston Chronicle, 30 November 2008.

I do not think what FDR did in the 1930s ended the Depression. FDR's actions prolonged it in my opinion. There is much dispute as to what the Fed should or should not have done in the 1930s to end the Depression. I disagree with most people as to what caused the Depression. I think it was an inevitable result of World War I. The world could not emerge richer from WWI as opposed to poorer. I think the restrictions on consumption that were needed to pay for WWI came in the 1930s. Most economists thought we would have a depression in 1946 when WWII ended. Instead we have had perpetual inflation. An inflation with no end in sight. Got gold? Get more. Got bonds? Huh?