The fundamental question is whether a central bank can manage the supply of money and
credit better than the free market otherwise would. We shouldn't kid ourselves about the true nature of the Fed,
which is inherently incompatible with real free market capitalism. Centralized planning of the money supply is a form
of economic control that significantly affects prices, wages, and production levels. Remember how market economists once criticized
central planning of prices, wages, and production levels in the former Soviet Union?
Touting Central America as the "new Asia," pro-business and investment organizations across
the region are all talking about the benefits of "nearsourcing." It's the same thing as outsourcing - that is, sending jobs
to lower cost locations outside the US - but closer to home: It's South rather than East, near rather than far. And it's increasingly
attractive to US firms.
It turns out, however, that the information in today's order flow will still be percolating
through the market weeks afterwards. It takes time for a marketmaker to make sense of his orders, to distinguish signal from
noise, plot from happenstance. It takes more time still for that insight to spread to the market as a whole, as dealers reveal
what they know through their quotes and trades with each other. This hiatus creates an opportunity for forecasters. Messrs
Lyons and Evans reckon that Citibank's order flow can predict almost 16% of the dollar's bobbing and weaving four weeks hence.
That may not sound like a lot. But the macroeconomists cannot even explain what is going on today, let alone 16% of what will
happen a month from now.
The past week has brought signals of a shift in monetary policy from both the European
and American central banks, sending the euro up against the dollar as traders anticipate higher rates in the euro area and
a levelling-off across the Atlantic. The rich world’s monetary guardians are struggling to read the outlook for inflation.
I believe that the anti-deflation wing headed by Bernanke is telling part of the truth,
but with an element of misdirection. Yes, they are worried about deflation, but relevant comparison is to Argentina, not Japan.
Yes, they must stand ready to monetize anything and everything, but they are far more worried about collapsing asset bubbles
than slowly falling goods and services prices. There has already been speculation that anomalously large bond purchases from
Caribbean sources that have shown up in this year’s flow of funds data from the Fed are a cover for Fed purchases of treasury
The purpose of reconciliation is to identify suitable targets for budget reductions in
order to reduce spending. Therefore, it is quite odd that the Financial Services Committee would use reconciliation as a vehicle
to consider the Federal Deposit Insurance Reform Act, as this act could increase the possibility of future bank failures,
and thus increase federal expenditures. The bill does this by expanding the federal government's unconstitutional control
over the financial services industry. This bill also raises taxes on all financial institutions. Therefore, I must oppose
FOR years General Motors (GM) was the undisputed titan of the world’s car industry, effortlessly
dominating everything. Now, to suppliers, employees and pensioners it must seem less like a titan and more like the Titanic,
holed below the water-line, sinking slowly by the bow to the sound of loud shocks and bangs as bulkheads give way, one after
the other. The chief executive on the bridge, Rick Wagoner, can rush around and bark orders, but to little effect.
Unfortunately real estate is no longer the stuff dreams are made off; instead it is
the main ingredient of nightmares. Prices have shot to such levels that most people who go out and buy a house right now with
all these creative financing options should seriously consider checking themselves into ward 12. Some of these creative financing
programs are extremely risky and carry almost the same risk if not more then playing with options or futures.
We think that silver is a once in a lifetime opportunity to participate in the meteoric
rise of a dramatically undervalued commodity. The real story on silver is the massive inventory depletion that has taken place
over the last decade as depicted in the graph below. Since 1991, the above ground silver supply has declined from about 1.4
billion ounces to an estimated 600 million ounces (130 million of which legendary investor Warren Buffett may or may not still
own from his 1998 purchase). Silver deficits now run between 50-100 million ounces per annum. 130 million ounces and possibly
much more of the roughly 500-600 million above ground ounces are owned by investors like Buffett, who have no intention to
sell anytime soon. In all likelihood, less than 350 million ounces are available to fill supply deficits at anywhere near
That is, the low volatility was achieved by increasing the indebtedness of the U.S. economy, especially
the household sector, to record levels. And increasingly, the debt is owed to foreign entities, not ourselves. The final chapter
on Greenspan's legacy will not be written until we see how this indebtedness issue is resolved.
MANY American politicians and pundits explain their country's enormous current-account
deficit by pointing at the surpluses of Asian economies, especially China. Undervalued currencies and unfairly cheap labour,
they complain, have undermined America's competitiveness. In fact, looking at the world as a whole, the group of countries
with the biggest current-account surpluses is no longer Asia but oil exporters, on which high prices have bestowed a gigantic
Yesterday came news that the U.S. trade deficit reached a new high of $66.1 billion, or
an annual rate of nearly $800 billion. Exports dropped the most in four years. In the curious way the world's financial plumbing
is put together, the money flushed out of American consumers' pockets and ran into the cisterns and cesspools of Asia, whence
it was purified, recycled and pumped back into U.S. financial assets – notably interest-bearing ones. Everyone seems to come
out ahead. Savings rates were negative again in the United States, for the fourth month in a row. There is no need to save,
not when so much of someone else's savings is so readily available. And while credit floods the United States, rather than
allow it to raise consumer prices, it is happily drained off to Asia. Then – hallelujah – it cometh back in a more appealing
form...boosting asset prices and the dollar.
Since Alan Greenspan took over at the Fed, levels of debt throughout the entire financial
system have increased greatly. Over the past decade, adds Dr. Kurt Richebächer, "consumer debts are up 121%, to $10.7 trillion,"
while real consumer income was either stagnant or falling. More alarming, but also more puzzling, is the increase in derivatives.
The ISDA reports that international interest rate and currency derivatives outstanding shot from $865 billion in 1987 to $201.413
trillion in 2005.
Of course, forecasting PPI inflation is no easy matter. But the chart does tell us emphatically
that when we see growing forces for inflation -- rapid expansion in the money supply engineered by the Federal Reserve, artificially
low interest rates, growing government deficits, unsustainable trade imbalances and currency competition -- we should expect
rising gold prices.
The present situation of American deficits and foreign credits may continue as far as
the eye can see. After all, an old monetary order which had been created at the 1944 Bretton Woods Conference withstood much
international disorder for more than thirty years. Some economists and their friends in government like to note the similarities
of that order with the new. But this economist does not see the semblance. With his eyes on huge trade deficits and foreign
debts and on grave international conflict and strife he braces for more commotion and crises to come.
The recent collapse of Refco, a large US-based broker in the commodities and derivatives
market, has several interesting features. (Incidentally, Refco has a subsidiary in India as part of its operations in 14 different
For one, the sheer speed with which developments took place. The second is the involvement
of a hitherto obscure Austrian bank. The third, and the most puzzling to my mind, is the questions the case raises for students
of behavioural finance.
Japan is a mature manufacturing economy. Their patience with the American debt-for-consumption
model may be wearing thin. China on the other hand, may provide the US with a longer leash, as it is still in the process
of using the "resilient" economic system to its advantage in building infrastructure, technological bases, natural resource
bases and trade networks. Maybe we have an indefinite amount of time left to keep our debt model running. Certainly some perma-bears
must now be coming to believe it will never end. Or maybe the US is becoming increasingly isolated on the global stage and
the ascendant powers of Japan (mature, sophisticated economy), China (manufacturing giant) and India (technology center) will
increasingly set the terms of global trade.
The Principles are also consistent with a fairly new development in the market: bonds
that include collective action clauses that allow for amending payment terms if a supermajority of creditors agree--in contrast
to the totality that traditionally was required. Since Mexico issued the first bond of this kind under New York law in March
2003, $70 billion worth have been issued by more than 20 countries.
And it will get worse and worse because there is no upper bound on inflation, since, as
William Grigg, of the New American Magazine, so accurately points out, "We will never run out of zeroes." Hahahaha! Exactly!
The attitude of the Congress and the despicable Federal Reserve is "$1 today, $100 tomorrow, $1,000 next week! Who cares?
This money leaves the US, and is then lent back by foreigners to cover the government
shortfall. The US will have to pay interest on this borrowed money as well as somehow claw back over the coming years the
significant sum of $75,000 from each of 100 million US families. This is the unprecedented extent of the US public debt.
What can Congress do to provide Americans with some relief at the pump? First it can suspend
federal gas taxes, which would save consumers nearly 20 cents per gallon. In the long term, Congress must pass legislation
like HR 4004, which I introduced earlier this month. HR 4004 takes a comprehensive approach by allowing offshore drilling,
eliminating regulations that restrict refining, and suspending harmful tax rules that discourage domestic oil production.
If we hope to have a stable, affordable supply of gas, we must allow the free market to operate.
If an exchange between two parties
is voluntary, it will not take place unless
both believe they will benefit from it. Most
economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.
If you ask me to name the proudest distinction
of Americans, I would choose- because it contains all the others . . . the fact that they were the people who created
the phrase "to make money." No other language or nation had ever used these words before; men had always thought of
wealth as a static quantity . . . to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were
the first to understand that wealth has to be created.