Checking in from Cartagena, Colombia...
by Joel Bowman
Look out Greece! Here comes the IMF!
Newly appointed chief of the International Monetary Fund, Christine Lagarde, today urged Greece's political parties to unite behind the proposed, so-called "austerity" measures currently under debate in the nation's parliament in order to right the struggling nation's financial trajectory.
"If there is one message I have to send tonight," said Lagarde in an interview on French television channel TF1 minutes after her formal appointment, "it is to say the Greek opposition must join a national 'entente' with the party that is in power."
The chief's comments come just days after an assortment of financial ministers and policy wonks convened in Brussels to discuss a second bailout for Europe's problem child #1. Careful to play both sides of the coin, Lagarde went on to note that, "All lenders must come to Greece's bedside, but Greece must also be responsible and keep a close eye on its public finances, and those who are the most vulnerable."
Your editor has nothing against the recently promoted Frenchwoman, per se. She dresses with style. She'd probably make for nice dinner company. And we like it when stately ladies keep from dying their pretty grey hair blue. For these things, we're a fan. But we're not a fan of busybodying. Of politicking. Of sticking one's nose in others' business, financial or otherwise. And, since that's the IMF's primary task, we must take issue with Mme. Lagarde.
But there will be plenty of time for that as the euro-tragedy unfolds over the coming months...
Today, we're in quite a different part of the world. We write to you this afternoon from the old fort city of Cartagena de Indias, Colombia. Situated on the Caribbean Coast, to the east of Panama, Cartagena is home to just shy of a million souls. It's surrounding walls and barricades, first erected to ward off advances from pirates and French corsairs, are today thronged with lazily traipsing tourists and sunset-gazing locals, who walk arm in arm as the long afternoons fade behind the early evening storm clouds. The scene is peaceful to the extent that it's near impossible to imagine the place under siege, as it so frequently was during the Colonial and Viceregal eras. But then, it's difficult to imagine much about Colombia's past, both distant and recent, in the light of today.
For many people, Colombia is all about FARC rebels, warring guerilla groups and cocaine kings, like the infamous Pablo Escobar. But there is another, far more interesting story developing here. Colombia is a nation rich in natural resources - its main exports include petroleum, coal, coffee and other agricultural produce, as well as gold. It is also the world leader in emerald exports. Although still considered a "poor" country - adjusted for purchasing power parity, GDP per capita came in at slightly less than $8,000 last year, placing Colombia 82nd in the world – its trajectory is encouraging.
In stark contrast to much of Europe and the United States, Colombia is, if anything, having trouble keeping it's economy from growing too fast. (All governments, by their very nature, are forever having trouble with something...but that's a story for another day.) Colombia's officials had originally forecast a 4.5% growth rate this year, (following 2010's 4.3% figure) though central bank president, Jose Dario Uribe, recently hinted the economy may expand as much as 5.5% in 2011.
Unsurprisingly, therefore, investors have been keen to reward Colombia. Exports have more than doubled during the past five years, accounting for around one third of total GDP, and foreign direct investment has mushroomed in step. Even the ratings agencies - notoriously late on the scene, as we never tire of reminding readers – saw fit to upgrade Colombia's credit rating last month. (Standard & Poor's restored its BBB- rating, restoring the investment grade status lost in September 1999.)
The nation is also surprisingly stable, having never defaulted on its debt and never experienced hyperinflation...quite a remarkable feat for a South American country. According to Merrill Lynch, during times of crisis, Colombia has the fourth lowest risk of any country...not just in Latin America, but the world. And while, during the first few years of the new century, developed world countries were busy piling on ever more debt, Colombia's general government debt level actually fell 10 percentage points of GDP from 2003 to 2007.
In many ways, Colombia's story is the economic inverse of "developed" nations the world over. In the past, investors might have taken that to be a bad thing. Today, as they watch Europe coming apart at the seams, and the United States likely to soon follow, the Colombian image is beginning to look pretty darned good.
El Conquistqdor Francisco de Orellana
The Conquistador who put the Amazaon baisn "on the map"....Francisco Orellana
Wednesday, June 29, 2011
Tuesday, June 21, 2011
Heinrich Pesch and the Germanic-Catholic Tradition of Economics
From Durendal by Dr. E. Michael Jones
Dr. Jones opened his second talk discussing the discontinuity we’ve inherited. Going from the movements described in Lt. Cmdr. Sharpe’s preceding conference to things like the Acton Institute. The valuation of labour has been lost, and we’re left to dig among the ruins and try to rebuild from that.
He proposed to start with a contemporary phenomenon and work back to it’s source: the “Arab Spring”. The picture of the Arab Spring is of a man standing in Tahrir Square holding up a sign which says “Egypt Supports Wisconsin: One World One Pain” (cf. the protests again the Wisconsin governor). The one thing that Egypt and Wisconsin have in common is capitalism.
The world we’ve lived in has been the “triumph of capitalism over communism”. What we see in the Arab Spring is people realising that this is not the case. Egypt was the quintissential neo-liberal state (a theory human well-being can be advanced by liberating man through free market, free trade). This neo-liberalism was introduced by Mubarak’s regime. But the people are not accepting it -- everywhere neo-liberalism has been tried it has failed. In America, especially in Wisconsin where the manufacturing has been looted by outsourcing and the people become poorer and poorer and the looters richer. When the Tea Party Republicans came into power in Wisconsin, their first action was union-busting and more looting (of pension funds, which is stealing deferred wages).
This was all predictable because capitalism as we know it (beginning in England at the time of Protestant Revolt) began as a form of looting. The chief object of the “English Reformation” was the plunder of Church property: “the nobility had their teeth in the carcass and would not be whipped off by a sermon”
In the light of what’s happened in the last three years, we need a new definition of capitalism that more accurately describes it. Economics has to be brought back into the “matrix” of morality. One of the crucial issue is wages (cf. denying a just wage being a sin that cries to heaven for vengeance) because it involves a major power imbalance. The capitalist position on wage is that the just wage is whatever a worker agrees to -- their agreement to work for a certain wage is what makes it just. Likewise, a loan is deemed just, ipso facto, by the fact that someone agrees to its terms. The Church teachings is, of course, that usury is wrong.
In dealing with usury, the Church has traditionally spoken of “mixed will”: it is not that an individual desires to pay 500% interest on a payday loan, it is that he doesn’t want his family to starve. But the understanding of usury has disappeared from Catholic discourse today.
He noted the Benedictine motto “ora et labora” as an example of the medieval economy that replaced the economy of antiquity. In the Renaissance, the ancient economics were resurrected by usurers and the Protestant Revolt was used as an engine to bring this about. He discussed the role of the Medicis’ role (with Cosomo Medici as the prime personality responsible) in this which was covered briefly and packed with more detail than I could record. In the end he took the position that Savanarola (who essentially took over Florence after the fall of the Medicis) came very close to reaching a resolution to the question of capitalism while it was still very young but his murder at the order of Pope Alexander VI. He also noted how the robbing of workers of their wages in Florence destroyed it.
The real definition of capitalism according to Dr. Jones: usury at the expense of labour.
This brought us to the 20th century and the great rise of German political thinking. Pesch defined capitalism as “a system of freedom to exact usury with the sanction of the state”. According to Bruland capitalism means the domination over the economy by the inquisitive interest of those who own capital. Contractual appropriations of surplus value was put forward as an aspect of usury. According to Pesch Capitalism represents an inversion of the true economic order.
Dr. Jones’ proposal: economics as if God matters. Modern economics is greed and competition as the regulating factors of the economy. All the money in the world cannot make this economic model work. We have to order the economy, rather, according to reason and morality. The crucial test therefore becomes whether a given economy values labour over usury, or usury over labour. Economics as if God matters recognizes that freedom only has meaning if it conforms to the moral law.
Money cannot produce wealth, whereas labour can. Therefore human labour is the basis for the economy.
Heinrich Pesch called the pre-Protestant Revolt economy the Germanic-Christian tradition of economics (basing the Germano-”centric” aspect on the Holy Roman Empire as the civil arm of the Church). One of the great accomplishment of this economy was the exclusion of the liberty to get in debt.
According to Pesch wages cannot be regarded as costs from the point of view of the national economy. Cutting wages is cutting one’s own throat. This perpetuates the problems of an economy as things begin to spiral (more debt). A populace which lives in poverty and misery will find even cheap goods too expensive.
Dr. Jones opened his second talk discussing the discontinuity we’ve inherited. Going from the movements described in Lt. Cmdr. Sharpe’s preceding conference to things like the Acton Institute. The valuation of labour has been lost, and we’re left to dig among the ruins and try to rebuild from that.
He proposed to start with a contemporary phenomenon and work back to it’s source: the “Arab Spring”. The picture of the Arab Spring is of a man standing in Tahrir Square holding up a sign which says “Egypt Supports Wisconsin: One World One Pain” (cf. the protests again the Wisconsin governor). The one thing that Egypt and Wisconsin have in common is capitalism.
The world we’ve lived in has been the “triumph of capitalism over communism”. What we see in the Arab Spring is people realising that this is not the case. Egypt was the quintissential neo-liberal state (a theory human well-being can be advanced by liberating man through free market, free trade). This neo-liberalism was introduced by Mubarak’s regime. But the people are not accepting it -- everywhere neo-liberalism has been tried it has failed. In America, especially in Wisconsin where the manufacturing has been looted by outsourcing and the people become poorer and poorer and the looters richer. When the Tea Party Republicans came into power in Wisconsin, their first action was union-busting and more looting (of pension funds, which is stealing deferred wages).
This was all predictable because capitalism as we know it (beginning in England at the time of Protestant Revolt) began as a form of looting. The chief object of the “English Reformation” was the plunder of Church property: “the nobility had their teeth in the carcass and would not be whipped off by a sermon”
In the light of what’s happened in the last three years, we need a new definition of capitalism that more accurately describes it. Economics has to be brought back into the “matrix” of morality. One of the crucial issue is wages (cf. denying a just wage being a sin that cries to heaven for vengeance) because it involves a major power imbalance. The capitalist position on wage is that the just wage is whatever a worker agrees to -- their agreement to work for a certain wage is what makes it just. Likewise, a loan is deemed just, ipso facto, by the fact that someone agrees to its terms. The Church teachings is, of course, that usury is wrong.
In dealing with usury, the Church has traditionally spoken of “mixed will”: it is not that an individual desires to pay 500% interest on a payday loan, it is that he doesn’t want his family to starve. But the understanding of usury has disappeared from Catholic discourse today.
He noted the Benedictine motto “ora et labora” as an example of the medieval economy that replaced the economy of antiquity. In the Renaissance, the ancient economics were resurrected by usurers and the Protestant Revolt was used as an engine to bring this about. He discussed the role of the Medicis’ role (with Cosomo Medici as the prime personality responsible) in this which was covered briefly and packed with more detail than I could record. In the end he took the position that Savanarola (who essentially took over Florence after the fall of the Medicis) came very close to reaching a resolution to the question of capitalism while it was still very young but his murder at the order of Pope Alexander VI. He also noted how the robbing of workers of their wages in Florence destroyed it.
The real definition of capitalism according to Dr. Jones: usury at the expense of labour.
This brought us to the 20th century and the great rise of German political thinking. Pesch defined capitalism as “a system of freedom to exact usury with the sanction of the state”. According to Bruland capitalism means the domination over the economy by the inquisitive interest of those who own capital. Contractual appropriations of surplus value was put forward as an aspect of usury. According to Pesch Capitalism represents an inversion of the true economic order.
Dr. Jones’ proposal: economics as if God matters. Modern economics is greed and competition as the regulating factors of the economy. All the money in the world cannot make this economic model work. We have to order the economy, rather, according to reason and morality. The crucial test therefore becomes whether a given economy values labour over usury, or usury over labour. Economics as if God matters recognizes that freedom only has meaning if it conforms to the moral law.
Money cannot produce wealth, whereas labour can. Therefore human labour is the basis for the economy.
Heinrich Pesch called the pre-Protestant Revolt economy the Germanic-Christian tradition of economics (basing the Germano-”centric” aspect on the Holy Roman Empire as the civil arm of the Church). One of the great accomplishment of this economy was the exclusion of the liberty to get in debt.
According to Pesch wages cannot be regarded as costs from the point of view of the national economy. Cutting wages is cutting one’s own throat. This perpetuates the problems of an economy as things begin to spiral (more debt). A populace which lives in poverty and misery will find even cheap goods too expensive.
California: The Greece of the US Financial Crisis
Reckoning from Baltimore, Maryland...
America's Greece may be California.
"California nearing fiscal crisis," reports The Financial Times. Governor Jerry Brown vetoed a budget plan. He said it wouldn't do the job. We didn't see the plan, but our guess is that Brown is right. But this leaves the Golden State in a fix. It needs money. And like Greece, it can't print its own.
So the fingers are pointing. And the hands are wringing. And everyone is worried...except us.
Here at The Daily Reckoning, we've learned to make catastrophe our friend. We open the door and look for it. We invite it over for drinks. If we knew how to send Twitter messages we'd send it one or two. Maybe with photos attached.
'But if California can't pass a budget the police won't get paid...' say the worriers.
So what? Private citizens have plenty of guns in California. The crime rate will probably go down.
'But what about the teachers?' Don't make us laugh. Besides it's summer. Time for a vacation.
'What about people on welfare?' Don't expect us to cry for the zombies.
'There must be something that the state does that is essential!'
Name one thing! Ha ha...
Actually, we don't know what the state does that is helpful and what it does that is hurtful. All we know that it spends a lot of money. So, cut the money off...and we'll see what we really miss.
*** Back to the national stage...the scene is set for another recession. Here's The New York Times:
For those fretting that a string of disappointing US economic data presage a double dip in the recession, there is good news and bad news.
The good news: It would probably take a significant shock to knock the economy off course, even in its weakened state. The bad news: In the current environment there are plenty of potential shocks to worry about.
Yes, such as Greece. California. China. Housing. Inflation.
And those are just the shocks we know about.
The fact is, when Humpty Dumpty is sitting on a wall, there's always someone around to give him a push.
*** Let's define our terms. A 'zombie' is someone who lives on the flesh of living human beings. Like a senator. Or a conniving military contractor. Or a welfare chiseler. Or a bailed-out banker.
A consumer who has no money is hardly a 'zombie.' He's only a zombie if he gets his money dishonestly - that is, through theft, fraud, or government.
Even gypsy beggars are not zombies. They provide a useful service; allowing people to feel better about themselves for tossing them a buck or two.
But Roach is right. The immediate problem in America is consumer debt. It went up since the end of WWII to 2007. Since then, it's gone down. This is a big change. And it puts a strain on the whole consumer economy.
The US economy - as well as many foreign economies - is set up to anticipate more and more consumer spending. But US households haven't been able to deliver.
"Growth in consumption has averaged 0.5% annualized," write Roach. "Never before in the post WWII period has consumption growth been this weak for this long."
Well, Stephen, it's a Great Correction. What do you expect? Consumers are correcting 60 years of credit expansion.
In many ways, this is a worse problem than Europe's sovereign debt crisis. In Europe, the problem could be solved by letting a few banks and speculators go broke. It would teach the rest of them a lesson. Most likely, Europe could get back to work soon after.
But America's consumer debt problem will take many years to solve. Household debt is down to 115% of disposable income - down from 130% in 2007. But it averaged only about 75% from 1970 to 2000. Roach thinks it will take three to five years more to bring consumer debt down to more comfortable levels.
Regards,
Bill Bonner
for The Daily Reckoning
America's Greece may be California.
"California nearing fiscal crisis," reports The Financial Times. Governor Jerry Brown vetoed a budget plan. He said it wouldn't do the job. We didn't see the plan, but our guess is that Brown is right. But this leaves the Golden State in a fix. It needs money. And like Greece, it can't print its own.
So the fingers are pointing. And the hands are wringing. And everyone is worried...except us.
Here at The Daily Reckoning, we've learned to make catastrophe our friend. We open the door and look for it. We invite it over for drinks. If we knew how to send Twitter messages we'd send it one or two. Maybe with photos attached.
'But if California can't pass a budget the police won't get paid...' say the worriers.
So what? Private citizens have plenty of guns in California. The crime rate will probably go down.
'But what about the teachers?' Don't make us laugh. Besides it's summer. Time for a vacation.
'What about people on welfare?' Don't expect us to cry for the zombies.
'There must be something that the state does that is essential!'
Name one thing! Ha ha...
Actually, we don't know what the state does that is helpful and what it does that is hurtful. All we know that it spends a lot of money. So, cut the money off...and we'll see what we really miss.
*** Back to the national stage...the scene is set for another recession. Here's The New York Times:
For those fretting that a string of disappointing US economic data presage a double dip in the recession, there is good news and bad news.
The good news: It would probably take a significant shock to knock the economy off course, even in its weakened state. The bad news: In the current environment there are plenty of potential shocks to worry about.
Yes, such as Greece. California. China. Housing. Inflation.
And those are just the shocks we know about.
The fact is, when Humpty Dumpty is sitting on a wall, there's always someone around to give him a push.
*** Let's define our terms. A 'zombie' is someone who lives on the flesh of living human beings. Like a senator. Or a conniving military contractor. Or a welfare chiseler. Or a bailed-out banker.
A consumer who has no money is hardly a 'zombie.' He's only a zombie if he gets his money dishonestly - that is, through theft, fraud, or government.
Even gypsy beggars are not zombies. They provide a useful service; allowing people to feel better about themselves for tossing them a buck or two.
But Roach is right. The immediate problem in America is consumer debt. It went up since the end of WWII to 2007. Since then, it's gone down. This is a big change. And it puts a strain on the whole consumer economy.
The US economy - as well as many foreign economies - is set up to anticipate more and more consumer spending. But US households haven't been able to deliver.
"Growth in consumption has averaged 0.5% annualized," write Roach. "Never before in the post WWII period has consumption growth been this weak for this long."
Well, Stephen, it's a Great Correction. What do you expect? Consumers are correcting 60 years of credit expansion.
In many ways, this is a worse problem than Europe's sovereign debt crisis. In Europe, the problem could be solved by letting a few banks and speculators go broke. It would teach the rest of them a lesson. Most likely, Europe could get back to work soon after.
But America's consumer debt problem will take many years to solve. Household debt is down to 115% of disposable income - down from 130% in 2007. But it averaged only about 75% from 1970 to 2000. Roach thinks it will take three to five years more to bring consumer debt down to more comfortable levels.
Regards,
Bill Bonner
for The Daily Reckoning
Holding Gold in Times of Crisis
From Buenos Aires, Argentina...
by Joel Bowman
We begin this week's reckonings where we left off the weekender...with some thoughts from our Fellow Reckoners. One email, in particular, garnered a slew of responses after we aired it in Saturday's issue. The topic - what to do with one's gold - is a simple though, judging by the amount of responses we received to the email in question, common enough quandary.
We'll get to your responses below, but first, in case you missed it, here's the question, from Reckoner Anthony:
"A question many people must be puzzling over.
"To buy gold seems logical; paper money has become a big con. So you exchange it for something that has stood the test of time, like gold. But then what? Say it goes to $10,000 an ounce. Or even $100,000. Do you turn it back into paper money? Don't think so.
"Do you use it to buy, say, land? If so, surely that would cost a huge amount as well. In the early 1930s, distressed land in England went for next to nothing. But we had returned to a gold standard then, so the same number of gold sovereigns now wouldn't make it a good deal; you might as well use paper money at paper prices.
"Or do we just wait for the return of a gold standard (official or de facto) and hope that it's going to create some bargains?
"I'm just throwing out some questions/ideas to see what others might think. Using the land analogy, is land massively over-priced or gold massively under-priced? I'm not inclined to sell any gold, or silver, for that matter; at least they've kept their purchasing power, plus a bit, for most things."
Replies one Reckoner, who goes by the curious name "Peter Rabbit (I love karats)"...
"Regarding Anthony's question of what to do with silver and gold in order to capitalize on having the foresight to get out of 'paper money'...
"He answered his own question by stating that 'at least his gold and silver has retained its purchasing power for most "things".'
"I say spend your 'paper' to whatever extent you need to for everyday living and when you come up short...convert a few ounces to fill the void.
"No matter what degree of dilution the fiat currencies dwindle to...your precious metals will always more than make up the difference.
"Remember, gold hasn't budged...it's still the same in every way. It is how gold is VALUED that has changed and will continue to change as long as most governments, (central banks) continue to generate 'money' out of thin air!"
And if gold reaches $10,000 per ounce, or even $100,000, as the question anticipates, how might we metal heads conduct smaller, everyday transactions?
Perhaps that's where gold's perennial bridesmaid comes in, as Reckoner RLB explains.
"That is why you buy junk silver coins, preferably dimes; pre 1965 of course.
"Silver won't be as expensive as gold when the brown stuff hits the fan, and can be used to purchase things. Ten gallons of gas for one silver dime, for instance."
Chimes Reckoner on the exchange value of smaller denominations...
"Why is it so difficult for those of the 'You can't eat gold' group to understand simple transactions with PMs? If gold is $10,000 per ounce, I'd take a tenth-ounce coin and exchange it for $1,000 in fiat currency to spend in a store which only takes fiat currency. When that $1,000 is gone, I'd repeat the process. This can be done with one-ounce gold coins, but the small coins are better if consumer price inflation is ongoing.
"The same style of dealing holds for US junk silver, of course.
"Many seem not to understand that if gold is $10,000, silver is likely to be at around $200 or more - but a loaf of bread might cost $20 or even $50."
Here's Reckoner GB, chiming in from the Lone Star State...
"One does not buy gold to get rich. One buys gold to avoid getting poor. If you are looking for a way to get rich, you will probably have to look outside the United States. Generators of wealth in the US have a big bulls eye on them inviting looting by lawyers or politicians.
"Eventually, things will become more hospitable to generating wealth. At that time, you turn your gold into wealth generation. If you can generate wealth by better managing a parcel of land, then buy land. If you can generate wealth by starting a business on land you already own, start a business."
And to that last thought, Reckoner BD adds...
"First, using gold to buy land is only half the picture. The land (or any other asset) must be productive, i.e., it must produce, or contribute to the production of, a commodity other people want or need - such as food. Thus the land becomes an ongoing source of wealth at a time when need is acute. In his essay 'Abundance and Scarcity' the French political economist Frederic Bastiat (1801-1850) said 'Wealth consists in an abundance of commodities.' He was absolutely right. Note that he did not say 'Wealth consists in an abundance of gold' even though gold is a commodity.
"In other words gold is simply a means to an end, it is not an end in itself. When we buy gold, we are simply storing the value of human energy we invest in producing a commodity which is exchanged for gold. We exchange it for gold because gold does not rot, rust, or otherwise deteriorate like other commodities. Its physical attributes make it an almost ideal store of value - it remains the same for thousands of years. We save it for future use, either by ourselves or our children. We do not buy it just to sit and look pretty."
Thanks to all our Fellow Reckoners who wrote in with thoughts on this obviously popular subject. Though we couldn't possibly publish them all, we hope those that did make it into virtual print, above, were of some help.
For those readers interested in getting their hands on some coins of their own, our friends at First Federal have made available to us a limited quantity of flawless 2011 Gold Eagle First Strikes AND a batch of 2011 Tenth-Ounce Gold Pandas. Be sure to check them both out before deciding which option best suits your investment needs. And, by way of full disclosure, please know that we are able to secure these deals for you because of an ongoing business relationship we have with First Federal, whereby we may be compensated for coins sold.
Also, if you're looking for more information on the nature of money, the future of gold or other such related topics, here are a couple of books you might wish to check out:
Nathan Lewis's Gold: The Once and Future Money, to which The Daily Reckoning's Addison Wiggin provides a neat introduction, and...
Ron Paul's excellent The Case For Gold, the first official US government investigation into the feasibility of a gold standard in more than 100 years. As a matter of fact, Addison has been trying to get a copy of Ron Paul's book in as many hands as possible recently, even going so far as to give them away.
by Joel Bowman
We begin this week's reckonings where we left off the weekender...with some thoughts from our Fellow Reckoners. One email, in particular, garnered a slew of responses after we aired it in Saturday's issue. The topic - what to do with one's gold - is a simple though, judging by the amount of responses we received to the email in question, common enough quandary.
We'll get to your responses below, but first, in case you missed it, here's the question, from Reckoner Anthony:
"A question many people must be puzzling over.
"To buy gold seems logical; paper money has become a big con. So you exchange it for something that has stood the test of time, like gold. But then what? Say it goes to $10,000 an ounce. Or even $100,000. Do you turn it back into paper money? Don't think so.
"Do you use it to buy, say, land? If so, surely that would cost a huge amount as well. In the early 1930s, distressed land in England went for next to nothing. But we had returned to a gold standard then, so the same number of gold sovereigns now wouldn't make it a good deal; you might as well use paper money at paper prices.
"Or do we just wait for the return of a gold standard (official or de facto) and hope that it's going to create some bargains?
"I'm just throwing out some questions/ideas to see what others might think. Using the land analogy, is land massively over-priced or gold massively under-priced? I'm not inclined to sell any gold, or silver, for that matter; at least they've kept their purchasing power, plus a bit, for most things."
Replies one Reckoner, who goes by the curious name "Peter Rabbit (I love karats)"...
"Regarding Anthony's question of what to do with silver and gold in order to capitalize on having the foresight to get out of 'paper money'...
"He answered his own question by stating that 'at least his gold and silver has retained its purchasing power for most "things".'
"I say spend your 'paper' to whatever extent you need to for everyday living and when you come up short...convert a few ounces to fill the void.
"No matter what degree of dilution the fiat currencies dwindle to...your precious metals will always more than make up the difference.
"Remember, gold hasn't budged...it's still the same in every way. It is how gold is VALUED that has changed and will continue to change as long as most governments, (central banks) continue to generate 'money' out of thin air!"
And if gold reaches $10,000 per ounce, or even $100,000, as the question anticipates, how might we metal heads conduct smaller, everyday transactions?
Perhaps that's where gold's perennial bridesmaid comes in, as Reckoner RLB explains.
"That is why you buy junk silver coins, preferably dimes; pre 1965 of course.
"Silver won't be as expensive as gold when the brown stuff hits the fan, and can be used to purchase things. Ten gallons of gas for one silver dime, for instance."
Chimes Reckoner on the exchange value of smaller denominations...
"Why is it so difficult for those of the 'You can't eat gold' group to understand simple transactions with PMs? If gold is $10,000 per ounce, I'd take a tenth-ounce coin and exchange it for $1,000 in fiat currency to spend in a store which only takes fiat currency. When that $1,000 is gone, I'd repeat the process. This can be done with one-ounce gold coins, but the small coins are better if consumer price inflation is ongoing.
"The same style of dealing holds for US junk silver, of course.
"Many seem not to understand that if gold is $10,000, silver is likely to be at around $200 or more - but a loaf of bread might cost $20 or even $50."
Here's Reckoner GB, chiming in from the Lone Star State...
"One does not buy gold to get rich. One buys gold to avoid getting poor. If you are looking for a way to get rich, you will probably have to look outside the United States. Generators of wealth in the US have a big bulls eye on them inviting looting by lawyers or politicians.
"Eventually, things will become more hospitable to generating wealth. At that time, you turn your gold into wealth generation. If you can generate wealth by better managing a parcel of land, then buy land. If you can generate wealth by starting a business on land you already own, start a business."
And to that last thought, Reckoner BD adds...
"First, using gold to buy land is only half the picture. The land (or any other asset) must be productive, i.e., it must produce, or contribute to the production of, a commodity other people want or need - such as food. Thus the land becomes an ongoing source of wealth at a time when need is acute. In his essay 'Abundance and Scarcity' the French political economist Frederic Bastiat (1801-1850) said 'Wealth consists in an abundance of commodities.' He was absolutely right. Note that he did not say 'Wealth consists in an abundance of gold' even though gold is a commodity.
"In other words gold is simply a means to an end, it is not an end in itself. When we buy gold, we are simply storing the value of human energy we invest in producing a commodity which is exchanged for gold. We exchange it for gold because gold does not rot, rust, or otherwise deteriorate like other commodities. Its physical attributes make it an almost ideal store of value - it remains the same for thousands of years. We save it for future use, either by ourselves or our children. We do not buy it just to sit and look pretty."
Thanks to all our Fellow Reckoners who wrote in with thoughts on this obviously popular subject. Though we couldn't possibly publish them all, we hope those that did make it into virtual print, above, were of some help.
For those readers interested in getting their hands on some coins of their own, our friends at First Federal have made available to us a limited quantity of flawless 2011 Gold Eagle First Strikes AND a batch of 2011 Tenth-Ounce Gold Pandas. Be sure to check them both out before deciding which option best suits your investment needs. And, by way of full disclosure, please know that we are able to secure these deals for you because of an ongoing business relationship we have with First Federal, whereby we may be compensated for coins sold.
Also, if you're looking for more information on the nature of money, the future of gold or other such related topics, here are a couple of books you might wish to check out:
Nathan Lewis's Gold: The Once and Future Money, to which The Daily Reckoning's Addison Wiggin provides a neat introduction, and...
Ron Paul's excellent The Case For Gold, the first official US government investigation into the feasibility of a gold standard in more than 100 years. As a matter of fact, Addison has been trying to get a copy of Ron Paul's book in as many hands as possible recently, even going so far as to give them away.
Thursday, June 16, 2011
The Likelihood of a US Default by Bill Bonner
Reckoning from Baltimore, Maryland...
After 6 straight weeks of losses, it looks like the US stock market is ready for a winning week. The Dow rose 123 points. Oil stayed below $100. But the yield on the 10-year T-note rose above 300 basis points.
And here's the latest from The Financial Times:
"S&P cuts Greece's rating one step closer to default."
Want to earn a nice yield on your money? Buy a Greek 10-year bond. It will pay you 17% interest. For a while.
But wait. You say you can't trust the Greeks? You say they're not good for the money?
"The Greek political landscape is ingrained with vested interests, endemic kleptocracy and bribery," writes John Sfakianakis, chief economist of Banque Saudi Fransi.
Unemployment is around 20%. People dodge taxes. Government workers don't show up for work. Households spend too much. And the government is going into debt so deeply and so rapidly it can't possibly get out.
Hey... It's just like the US! No, the US is worse, says Bill Gross. CNBC:
When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco's Bill Gross told CNBC Monday. Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.
The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.
Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.
"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."
How do you like that? He didn't even mention the fact that Americans can't sell their houses to Germans or turn their country into a retirement home for sun-deprived Scandinavians.
But wait, if the US debt situation is as bad or worse than Greece's, how come the yield on US 10-year notes isn't 17% too?
Therein may lay an even bigger opportunity. What if Mr. Market were making a mistake?
Everybody knows that Greece always defaults on its debt. It's been in default, one way or another, for about half of its life - ever since it gained independence in 1828.
But the USA? If you can't trust the US to pay up, who can you trust?
So, investors may feel secure lending money to the US...even though the fundamentals are little different from those of Greece. They may think: "the US never defaults."
And yet, if there's one thing we can learn from financial history it is that nobody is immune from financial errors. Everyone gets greedy and stupid from time to time. And no paper currency lives forever.
Right now, you can earn 17% on Greek debt or 3% or US debt. We'll make a prediction that you can take to the bank: that spread will narrow.
The inflation rate in America is a matter of debate. But even the US government's own number crunchers put it at about 5% for the first quarter of this year. That makes the real return on US 10-year notes a MINUS 2%.
How long will investors content themselves with a negative return? Maybe for a while. But not forever. They usually want a real return of about 3%, with no threat of default. A safe return, in other words.
And when they realize that the inflation rate in the US is really 5%...and that the return on US debt is NOT safe...they're going to want a higher interest yield.
Say 5%. Or 7%. Or 10%.
Then, all hell is going to break loose.
After 6 straight weeks of losses, it looks like the US stock market is ready for a winning week. The Dow rose 123 points. Oil stayed below $100. But the yield on the 10-year T-note rose above 300 basis points.
And here's the latest from The Financial Times:
"S&P cuts Greece's rating one step closer to default."
Want to earn a nice yield on your money? Buy a Greek 10-year bond. It will pay you 17% interest. For a while.
But wait. You say you can't trust the Greeks? You say they're not good for the money?
"The Greek political landscape is ingrained with vested interests, endemic kleptocracy and bribery," writes John Sfakianakis, chief economist of Banque Saudi Fransi.
Unemployment is around 20%. People dodge taxes. Government workers don't show up for work. Households spend too much. And the government is going into debt so deeply and so rapidly it can't possibly get out.
Hey... It's just like the US! No, the US is worse, says Bill Gross. CNBC:
When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco's Bill Gross told CNBC Monday. Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.
The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.
Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.
"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."
How do you like that? He didn't even mention the fact that Americans can't sell their houses to Germans or turn their country into a retirement home for sun-deprived Scandinavians.
But wait, if the US debt situation is as bad or worse than Greece's, how come the yield on US 10-year notes isn't 17% too?
Therein may lay an even bigger opportunity. What if Mr. Market were making a mistake?
Everybody knows that Greece always defaults on its debt. It's been in default, one way or another, for about half of its life - ever since it gained independence in 1828.
But the USA? If you can't trust the US to pay up, who can you trust?
So, investors may feel secure lending money to the US...even though the fundamentals are little different from those of Greece. They may think: "the US never defaults."
And yet, if there's one thing we can learn from financial history it is that nobody is immune from financial errors. Everyone gets greedy and stupid from time to time. And no paper currency lives forever.
Right now, you can earn 17% on Greek debt or 3% or US debt. We'll make a prediction that you can take to the bank: that spread will narrow.
The inflation rate in America is a matter of debate. But even the US government's own number crunchers put it at about 5% for the first quarter of this year. That makes the real return on US 10-year notes a MINUS 2%.
How long will investors content themselves with a negative return? Maybe for a while. But not forever. They usually want a real return of about 3%, with no threat of default. A safe return, in other words.
And when they realize that the inflation rate in the US is really 5%...and that the return on US debt is NOT safe...they're going to want a higher interest yield.
Say 5%. Or 7%. Or 10%.
Then, all hell is going to break loose.
Tuesday, June 14, 2011
The Daily Reckoning Presents
Buy Gold...or Farmland
Chris Mayer
My friend Brad Farquhar is the co-founder of Assiniboia Capital in Saskatchewan, which invests in farmland there, among other things. He sends the following note:
"Farm Credit Canada, the biggest ag lender in Canada, publishes a province-by-province report on movements in farmland prices in Canada every six months.
"Of course, we track this and are interested in what they have to say. No great surprises in their new data, but we also played around with it to see what else might pop out at us. "Sometimes in my presentations I show a chart that demonstrates the correlation (within a range) of the price of gold, oil and farmland in Saskatchewan. The correlation is pretty good. Farmland tends to lag a bit because it is a less-liquid asset class and not quoted daily. Also, one acre of farmland is not necessarily substitutable for the next acre the way ounces of gold and barrels of oil are.
"These things tend to correct themselves, and would do so either by the price of gold coming down or the price of farmland going up. Given the various forces at work in the financial world, I don't see the price of gold coming down. Which leaves farmland to go up (particularly here in Saskatchewan, where it is still undervalued relative to its productivity).
"With gold held at $1,500, the price of Sask farmland would need to move to $865 per acre just to get back within the normal historical range. The current price is $526 per acre, representing upside of 65%. Of course, we expect gold to move higher too, dragging all other real assets along with it."
Brad's firm has been in Saskatchewan farmland since 2005. It's turned out to be a good call. I have written about Saskatchewan farmland many times in the past...and I have been a longtime advocate of buying farmland. That's why I'm planning to visit Brad in Regina next month and have a look around. I'll have more to share with you on all of this soon, as well as ways you can participate.
There are many opportunities in Saskatchewan, which is an agricultural powerhouse. Saskatchewan exports a large percentage of the world's goods:
67% of world's lentil
56% of world's peas
25% of world's mustard
40% of world's flaxseed
18% of world's canola
33% of world's durum
53% of world's potash
I remain a big believer in agriculture-focused investments as one of the very best "hard asset" allocations for the decade ahead. Ag investments not only provide a hedge against dollar weakness, they also stand to benefit from extremely favorable supply-demand trends worldwide.
The world needs more food. It won't be easy to supply it. That's the kind of trend all investors should crave.
While it's true that you can't transport an acre of farmland or spend it as easily as a Krugerrand, neither can you grow lentils on a gold bar. If you have a hard time choosing between the two, buy both.
Regards,
Chris Mayer
for The Daily Reckoning
Chris Mayer
My friend Brad Farquhar is the co-founder of Assiniboia Capital in Saskatchewan, which invests in farmland there, among other things. He sends the following note:
"Farm Credit Canada, the biggest ag lender in Canada, publishes a province-by-province report on movements in farmland prices in Canada every six months.
"Of course, we track this and are interested in what they have to say. No great surprises in their new data, but we also played around with it to see what else might pop out at us. "Sometimes in my presentations I show a chart that demonstrates the correlation (within a range) of the price of gold, oil and farmland in Saskatchewan. The correlation is pretty good. Farmland tends to lag a bit because it is a less-liquid asset class and not quoted daily. Also, one acre of farmland is not necessarily substitutable for the next acre the way ounces of gold and barrels of oil are.
"These things tend to correct themselves, and would do so either by the price of gold coming down or the price of farmland going up. Given the various forces at work in the financial world, I don't see the price of gold coming down. Which leaves farmland to go up (particularly here in Saskatchewan, where it is still undervalued relative to its productivity).
"With gold held at $1,500, the price of Sask farmland would need to move to $865 per acre just to get back within the normal historical range. The current price is $526 per acre, representing upside of 65%. Of course, we expect gold to move higher too, dragging all other real assets along with it."
Brad's firm has been in Saskatchewan farmland since 2005. It's turned out to be a good call. I have written about Saskatchewan farmland many times in the past...and I have been a longtime advocate of buying farmland. That's why I'm planning to visit Brad in Regina next month and have a look around. I'll have more to share with you on all of this soon, as well as ways you can participate.
There are many opportunities in Saskatchewan, which is an agricultural powerhouse. Saskatchewan exports a large percentage of the world's goods:
67% of world's lentil
56% of world's peas
25% of world's mustard
40% of world's flaxseed
18% of world's canola
33% of world's durum
53% of world's potash
I remain a big believer in agriculture-focused investments as one of the very best "hard asset" allocations for the decade ahead. Ag investments not only provide a hedge against dollar weakness, they also stand to benefit from extremely favorable supply-demand trends worldwide.
The world needs more food. It won't be easy to supply it. That's the kind of trend all investors should crave.
While it's true that you can't transport an acre of farmland or spend it as easily as a Krugerrand, neither can you grow lentils on a gold bar. If you have a hard time choosing between the two, buy both.
Regards,
Chris Mayer
for The Daily Reckoning
Wednesday, June 8, 2011
No Saying “No” to the American Middle Class
Reckoning from Farmington, Pennsylvania...
Stocks struggled yesterday to reverse a long series of losses. For a while, it looked like they would succeed. But by the time the bell rang, the Dow was down again - 19 points.
Oil held steady at $99. Gold closed down $4, with the euro edging up towards the $1.50 mark.
Are stocks headed down, while the major market trend remains fundamentally bullish?
Or are they headed down, resuming a major bearish trend that began in January, 2000?
We don't know. But we heard from a technical analyst today with a system he calls "The Grail." The system just gave a sell signal for stocks.
Meanwhile, the headline on yesterday's USA Today told the tale:
"US owes $62 trillion."
Beneath the headline was a photo of Congressman Anthony Weiner sobbing.
Poor man, we thought, he's taking this too personally. It's not his fault the US is so deeply in debt.
But Mr. Weiner doesn't give a damn about the US going broke. He wasn't weeping about the fate of the nation, but about his own fate, his own pathetic career. Now that voters know what a silly creep he is, he's afraid he could be kicked out of the House. As for his campaign to replace Michael Bloomberg as mayor of New York City, it will have to wait until voters forget!
There you have the whole story, dear reader. America is going broke. Congress is worried about getting re-elected. Do you need to know more?
USA Today goes on to report that the total of America's debts and unfunded obligations - which the newspaper computes following generally accepted accounting principles - increased by $5.3 trillion last year and now comes to $534,000 per household.
Okay, so let's do the math. The average household has about $45,000 in income...and about $30,000 in 'disposable,' after-tax income. If the $534,000 were looked at as an additional mortgage, at say 5%, it would cost about $2,200 a month...or about $26,000 per year.
So, let's not bother with any more math. The feds have loaded the average household with so much debt that there is no way it can keep up. It would require almost all its disposable cash to do so - leaving almost nothing for food, transportation, housing, and everything else.
In short...forget it. This debt is not going to be paid.
Well, then, what will happen to it? Easy answer: it will disappear. Retirees will not get what they hope for. Bondholders won't earn the kind of returns they hope for either.
That's just the way it is.
'Okay, Bill, you say retirees won't get what they expect...'
That's right, but they'll get what they deserve!
'Ha, ha...you're so funny... But let's get serious. Did you bother to look over at the editorial page of USA Today? If you had, you'd see that the retirees aren't going to give up without a fight.
'There are letters there from military retirees. To make a long story short, they claim they deserve every penny. And how can you deny them? They say they've paid for their benefits in "blood and sacrifice."'
Yeah...yeah...nobody ever wants to give up nuthin'. Especially when they didn't earn it. And military retirees are the worst. They pretend that if it weren't for them our wives would all be speaking Vietnamese.
But what's so bad about speaking Vietnamese?
Seriously, the military has contributed mightily to the bankruptcy of the nation. They fight phony 'wars' at great expense...and then we pay the residual costs for many decades. And who wants to say 'no' to an old soldier with a missing leg? Or an old teacher with a facial tic? Or an old firefighter with a drinking problem?
Not us. And not Congressmen either. Remember, they want to be re- elected. And you don't get re-elected by saying 'no.'
And now, we have a whole new class of people nobody is going to want to say 'no' to - America's middle class.
Guess which houses have lost the most value? Low-priced, middle and lower class, houses. The homes of the rich have lost much less as a percentage of their pre-crisis values.
Guess who have lost most jobs and income? Again, the middle and lower middle classes. There are now 25 million people in the US who lack full time jobs; very few of them are bankers, lobbyists or lawyers.
Guess who has the hardest time paying higher gasoline and food prices? You guessed it!
And guess what consumers this headline refers to:
"Economic Perfect Storm Halts Consumer Spending."
Not shoppers at Neiman Marcus, Saks, or Tiffany's. We're talking about people living paycheck to paycheck, struggling to keep up with rising living expenses.
Yes, dear reader...the middle and lower-middle classes are taking a beating.
Yes, the US is going broke, too. But that is far in the future. We need to help these people now! That's what Barack Obama says. More below...
And more thoughts...
Poor Barack Obama. He seems like such a nice guy. He's probably even a distant relative. He's Irish too, you know.
But what's a nice guy like Barack doing in a place like this?
"I am concerned about the fact that the recovery that we're on is not producing jobs as quickly as I want it to happen. Obviously we're experiencing some headwinds."
The president faces a re-election campaign in the midst of a Great Correction. The wind is in his face, not at his back.
Of course, he seems to have no idea which way the wind is blowing. Yesterday, he told the nation that it did not face a 'double dip' recession. How did he know that? Of course, he has no idea.
And when the double dip comes...and the triple dip...and the quadruple dip...
..and when the election approaches...
..do you think President Obama and Congress will say 'no' to America's middle class voters?
*** Mr. Market is wily, cunning and cruel. He always tries to disappoint the greatest number of investors. So what will he do now?
What do most investors expect?
Many think the economy will recover slowly...with slowly rising stock prices.
Many others think inflation will pick up...with falling bond prices.
What if neither of those things happens?
More to come...
Regards,
Bill Bonner
for The Daily Reckoning
Stocks struggled yesterday to reverse a long series of losses. For a while, it looked like they would succeed. But by the time the bell rang, the Dow was down again - 19 points.
Oil held steady at $99. Gold closed down $4, with the euro edging up towards the $1.50 mark.
Are stocks headed down, while the major market trend remains fundamentally bullish?
Or are they headed down, resuming a major bearish trend that began in January, 2000?
We don't know. But we heard from a technical analyst today with a system he calls "The Grail." The system just gave a sell signal for stocks.
Meanwhile, the headline on yesterday's USA Today told the tale:
"US owes $62 trillion."
Beneath the headline was a photo of Congressman Anthony Weiner sobbing.
Poor man, we thought, he's taking this too personally. It's not his fault the US is so deeply in debt.
But Mr. Weiner doesn't give a damn about the US going broke. He wasn't weeping about the fate of the nation, but about his own fate, his own pathetic career. Now that voters know what a silly creep he is, he's afraid he could be kicked out of the House. As for his campaign to replace Michael Bloomberg as mayor of New York City, it will have to wait until voters forget!
There you have the whole story, dear reader. America is going broke. Congress is worried about getting re-elected. Do you need to know more?
USA Today goes on to report that the total of America's debts and unfunded obligations - which the newspaper computes following generally accepted accounting principles - increased by $5.3 trillion last year and now comes to $534,000 per household.
Okay, so let's do the math. The average household has about $45,000 in income...and about $30,000 in 'disposable,' after-tax income. If the $534,000 were looked at as an additional mortgage, at say 5%, it would cost about $2,200 a month...or about $26,000 per year.
So, let's not bother with any more math. The feds have loaded the average household with so much debt that there is no way it can keep up. It would require almost all its disposable cash to do so - leaving almost nothing for food, transportation, housing, and everything else.
In short...forget it. This debt is not going to be paid.
Well, then, what will happen to it? Easy answer: it will disappear. Retirees will not get what they hope for. Bondholders won't earn the kind of returns they hope for either.
That's just the way it is.
'Okay, Bill, you say retirees won't get what they expect...'
That's right, but they'll get what they deserve!
'Ha, ha...you're so funny... But let's get serious. Did you bother to look over at the editorial page of USA Today? If you had, you'd see that the retirees aren't going to give up without a fight.
'There are letters there from military retirees. To make a long story short, they claim they deserve every penny. And how can you deny them? They say they've paid for their benefits in "blood and sacrifice."'
Yeah...yeah...nobody ever wants to give up nuthin'. Especially when they didn't earn it. And military retirees are the worst. They pretend that if it weren't for them our wives would all be speaking Vietnamese.
But what's so bad about speaking Vietnamese?
Seriously, the military has contributed mightily to the bankruptcy of the nation. They fight phony 'wars' at great expense...and then we pay the residual costs for many decades. And who wants to say 'no' to an old soldier with a missing leg? Or an old teacher with a facial tic? Or an old firefighter with a drinking problem?
Not us. And not Congressmen either. Remember, they want to be re- elected. And you don't get re-elected by saying 'no.'
And now, we have a whole new class of people nobody is going to want to say 'no' to - America's middle class.
Guess which houses have lost the most value? Low-priced, middle and lower class, houses. The homes of the rich have lost much less as a percentage of their pre-crisis values.
Guess who have lost most jobs and income? Again, the middle and lower middle classes. There are now 25 million people in the US who lack full time jobs; very few of them are bankers, lobbyists or lawyers.
Guess who has the hardest time paying higher gasoline and food prices? You guessed it!
And guess what consumers this headline refers to:
"Economic Perfect Storm Halts Consumer Spending."
Not shoppers at Neiman Marcus, Saks, or Tiffany's. We're talking about people living paycheck to paycheck, struggling to keep up with rising living expenses.
Yes, dear reader...the middle and lower-middle classes are taking a beating.
Yes, the US is going broke, too. But that is far in the future. We need to help these people now! That's what Barack Obama says. More below...
And more thoughts...
Poor Barack Obama. He seems like such a nice guy. He's probably even a distant relative. He's Irish too, you know.
But what's a nice guy like Barack doing in a place like this?
"I am concerned about the fact that the recovery that we're on is not producing jobs as quickly as I want it to happen. Obviously we're experiencing some headwinds."
The president faces a re-election campaign in the midst of a Great Correction. The wind is in his face, not at his back.
Of course, he seems to have no idea which way the wind is blowing. Yesterday, he told the nation that it did not face a 'double dip' recession. How did he know that? Of course, he has no idea.
And when the double dip comes...and the triple dip...and the quadruple dip...
..and when the election approaches...
..do you think President Obama and Congress will say 'no' to America's middle class voters?
*** Mr. Market is wily, cunning and cruel. He always tries to disappoint the greatest number of investors. So what will he do now?
What do most investors expect?
Many think the economy will recover slowly...with slowly rising stock prices.
Many others think inflation will pick up...with falling bond prices.
What if neither of those things happens?
More to come...
Regards,
Bill Bonner
for The Daily Reckoning
China warns U.S. debt-default idea is "playing with fire"
By Emily Kaiser Emily Kaiser – 6 mins ago
SINGAPORE (Reuters) – Republican lawmakers are "playing with fire" by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China's central bank said on Wednesday.
The idea of a technical default -- essentially delaying interest payments for a few days -- has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending, Reuters reported on Tuesday.
But any form of default could destabilize the global economy and sour already tense relations with big U.S. creditors such as China, government officials and investors warn.
Li Daokui, an adviser to the People's Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.
"I think there is a risk that the U.S. debt default may happen," Li told reporters on the sidelines of a forum in Beijing. "The result will be very serious and I really hope that they would stop playing with fire."
China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, U.S. data shows, so its concerns carry considerable weight in Washington.
"I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value," Li said.
Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year. The U.S. Treasury Department has said it will run out of borrowing room by August 2.
If the United States cannot make interest payments on its debt, the Obama administration has warned of "catastrophic" consequences that could push the still-fragile economy back into recession.
"It has dire implications for the economy at a time when the macro data is softening," said Ben Westmore, a commodities economist at National Australia Bank.
"It's just a horrible idea," he said.
Financial markets are following the U.S. debate but see little risk of a default.
U.S. Treasury prices were firm in Europe on Wednesday, supported by a flight to their perceived safety on the back of the Greek debt crisis and worries about a slowdown in U.S. economic growth.
Marc Ostwald, a strategist with Monument Securities in London, said markets were working on the assumption that the U.S. debt story "will go away." But nervousness would grow if a resolution was not reached in the next five to six weeks.
'WOULDN'T HAPPEN'
The Republicans' theory is that bondholders would accept a brief delay in interest payments if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations later on.
But interviews with government officials and investors show they consider a default such a grim -- and remote -- possibility that it was nearly impossible to imagine.
"How can the U.S. be allowed to default?" said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally."
Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world's safest and most liquid investments. It held $39.8 billion in U.S. Treasuries as of March, U.S. data shows.
The officials declined to be identified because they are not authorized to speak to the media.
Oman is concerned about the impact of a default on the currency reserves of the sultanate and its Gulf neighbors.
"Our economies are substantially tied up with the U.S. financial developments," said a senior central bank official, who spoke on condition of anonymity.
"It just wouldn't happen," said Barry Evans, who oversees $83 billion in fixed income assets at Manulife Asset Management. "They would pay their Treasury bills first instead of other bills. It's as simple as that."
Monument's Ostwald called the default scenario "frightening" and said bondholders' patience would wear thin if lawmakers persisted in pitching this strategy in the coming weeks.
"This isn't a debate, this is like a Mexican standoff and that is where the problem lies," he said.
Yuan Gangming, a researcher with the Chinese Academy of Social Sciences, a government think tank, smelled some political wrangling behind the U.S. debt debate as the 2012 presidential election draws nearer and said Republicans "want to make things difficult for Obama."
But with time running short before the U.S. Treasury exhausts its borrowing room, Yuan said default was a real risk.
"The possibility is quite high to see a default of the U.S. debt, which would harm many countries in the world, and China in particular," he said.
SINGAPORE (Reuters) – Republican lawmakers are "playing with fire" by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China's central bank said on Wednesday.
The idea of a technical default -- essentially delaying interest payments for a few days -- has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending, Reuters reported on Tuesday.
But any form of default could destabilize the global economy and sour already tense relations with big U.S. creditors such as China, government officials and investors warn.
Li Daokui, an adviser to the People's Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.
"I think there is a risk that the U.S. debt default may happen," Li told reporters on the sidelines of a forum in Beijing. "The result will be very serious and I really hope that they would stop playing with fire."
China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, U.S. data shows, so its concerns carry considerable weight in Washington.
"I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value," Li said.
Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year. The U.S. Treasury Department has said it will run out of borrowing room by August 2.
If the United States cannot make interest payments on its debt, the Obama administration has warned of "catastrophic" consequences that could push the still-fragile economy back into recession.
"It has dire implications for the economy at a time when the macro data is softening," said Ben Westmore, a commodities economist at National Australia Bank.
"It's just a horrible idea," he said.
Financial markets are following the U.S. debate but see little risk of a default.
U.S. Treasury prices were firm in Europe on Wednesday, supported by a flight to their perceived safety on the back of the Greek debt crisis and worries about a slowdown in U.S. economic growth.
Marc Ostwald, a strategist with Monument Securities in London, said markets were working on the assumption that the U.S. debt story "will go away." But nervousness would grow if a resolution was not reached in the next five to six weeks.
'WOULDN'T HAPPEN'
The Republicans' theory is that bondholders would accept a brief delay in interest payments if it meant Washington finally addressed its long-term fiscal problems, putting the country in a stronger position to meet its debt obligations later on.
But interviews with government officials and investors show they consider a default such a grim -- and remote -- possibility that it was nearly impossible to imagine.
"How can the U.S. be allowed to default?" said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally."
Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world's safest and most liquid investments. It held $39.8 billion in U.S. Treasuries as of March, U.S. data shows.
The officials declined to be identified because they are not authorized to speak to the media.
Oman is concerned about the impact of a default on the currency reserves of the sultanate and its Gulf neighbors.
"Our economies are substantially tied up with the U.S. financial developments," said a senior central bank official, who spoke on condition of anonymity.
"It just wouldn't happen," said Barry Evans, who oversees $83 billion in fixed income assets at Manulife Asset Management. "They would pay their Treasury bills first instead of other bills. It's as simple as that."
Monument's Ostwald called the default scenario "frightening" and said bondholders' patience would wear thin if lawmakers persisted in pitching this strategy in the coming weeks.
"This isn't a debate, this is like a Mexican standoff and that is where the problem lies," he said.
Yuan Gangming, a researcher with the Chinese Academy of Social Sciences, a government think tank, smelled some political wrangling behind the U.S. debt debate as the 2012 presidential election draws nearer and said Republicans "want to make things difficult for Obama."
But with time running short before the U.S. Treasury exhausts its borrowing room, Yuan said default was a real risk.
"The possibility is quite high to see a default of the U.S. debt, which would harm many countries in the world, and China in particular," he said.
Tuesday, June 7, 2011
Ecuador Replaces US Dollar
By Gary Scott
One of our Ecuador contacts… an exporter sent this note about Ecuador’s new currency and the HOY article:Gary, the government is promoting a “new currency” in rural areas in Ecuador, they call it UDIS and the exchange rate is 1:1 to the dollar. They say it is not a currency but it is only a payment method. Right?
So people in these rural areas can exchange their merchandise against this UDIS. So if you like an ice cream you can pay in UDIS and that will be OK. You can also pay in dollars too. The thing about this is that with the UDIS it seems that the government is testing if they will be able at some point in the future, to eliminate the US dollar.
This is no secret. Correa has always said that he believes that the dollar is not good for Ecuador. But he has also stated that we can’t get away from it. I believe that also. Since we don’t have our own currency we are unable to have our own fiscal policy. But history has shown that Ecuador’s fiscal policies have always created dramatic inflation. Inflation could be our worst enemy.
Basically this is a wait and see policy. We won’t know if this will work and they are saying that they will test this model for about two years. The experiment is starting in rural areas and may never be big enough to replace the dollar. If so, this won’t have the effect that Correa wants.
We will have to wait and see how this ends up. Having our own currency would not be all bad. All would depend on our monetary policies. For exporters it will be a great boost.
If you read Spanish read the Hoy opinion here.
For years our published view has been that many Ecuador politicians would prefer their own currency. Inflation is often less hard to pin on a government… for awhile at least… a currency that the government could print would make the politicians look better.
Last time this was tried, the sucre fell from 3,000 sucre per US dollar to 25,000 sucre per dollar. The countries banking system collapsed. All banks shut down. The nation ran out of gas. Since then Ecuador has defaulted on government bonds… for a second time. So a new currency that was not immediately inflated would be hard to imagine.
This half way house will actually give the government some inflationary power. This may be Correa’s attempt. He is a very bright lad and a trained economist… so he may use this to bolster his popularity which suffered a bit in the recent May 2011 Ecuador referendum.
Of one thing you can be reasonably sure. As bad as the US dollar is, it is likely to be stronger than a new Ecuador currency, so if you are living there and are paid in US dollars or if you export Ecuador products… a new Ecuador currency would in the short term at least favor you.
Gary
One of our Ecuador contacts… an exporter sent this note about Ecuador’s new currency and the HOY article:Gary, the government is promoting a “new currency” in rural areas in Ecuador, they call it UDIS and the exchange rate is 1:1 to the dollar. They say it is not a currency but it is only a payment method. Right?
So people in these rural areas can exchange their merchandise against this UDIS. So if you like an ice cream you can pay in UDIS and that will be OK. You can also pay in dollars too. The thing about this is that with the UDIS it seems that the government is testing if they will be able at some point in the future, to eliminate the US dollar.
This is no secret. Correa has always said that he believes that the dollar is not good for Ecuador. But he has also stated that we can’t get away from it. I believe that also. Since we don’t have our own currency we are unable to have our own fiscal policy. But history has shown that Ecuador’s fiscal policies have always created dramatic inflation. Inflation could be our worst enemy.
Basically this is a wait and see policy. We won’t know if this will work and they are saying that they will test this model for about two years. The experiment is starting in rural areas and may never be big enough to replace the dollar. If so, this won’t have the effect that Correa wants.
We will have to wait and see how this ends up. Having our own currency would not be all bad. All would depend on our monetary policies. For exporters it will be a great boost.
If you read Spanish read the Hoy opinion here.
For years our published view has been that many Ecuador politicians would prefer their own currency. Inflation is often less hard to pin on a government… for awhile at least… a currency that the government could print would make the politicians look better.
Last time this was tried, the sucre fell from 3,000 sucre per US dollar to 25,000 sucre per dollar. The countries banking system collapsed. All banks shut down. The nation ran out of gas. Since then Ecuador has defaulted on government bonds… for a second time. So a new currency that was not immediately inflated would be hard to imagine.
This half way house will actually give the government some inflationary power. This may be Correa’s attempt. He is a very bright lad and a trained economist… so he may use this to bolster his popularity which suffered a bit in the recent May 2011 Ecuador referendum.
Of one thing you can be reasonably sure. As bad as the US dollar is, it is likely to be stronger than a new Ecuador currency, so if you are living there and are paid in US dollars or if you export Ecuador products… a new Ecuador currency would in the short term at least favor you.
Gary
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