Financial topics

[Higgenbotham]

It's not that government has lacked information needed to fix the problem. It is institutionally incapable of bringing about the desired result, since the principles of profit and loss, private property and contract, enterprise and entrepreneurship, do not exist in government. Any Government operates with an eye to its own short-term survival, and those of its connected interest groups, and nothing else.

http://howestreet.com/index.php?pl=/gol ... layer/1732

Addresses several subjects that have been discussed in this forum recently and since its inception. Although very brief, this is the first discussion that I've heard outside this forum that covers as many of our topics in similar context through the long span of history. He notes assumptions made and requirements as to what is necessary to set up the hyperinflation and subsequent phase change.

Discussion is a few minutes in, maybe the 5th question from someone in the UK.

http://mises.org/daily/3663

[Higgenbotham]

I suppose that is theoretically possible as the Fed may not recognize the process as being complete and may at the time of completion be buying government debt in exchange for newly created dollars. If that's the case, then I think you're right, as you stated, a vicious cycle leads to hyperinflation and government failure. But I think we have to take this a step at a time. The process of private market debt deflation is likely to be a very long one and during that process our institutions will undergo changes that will likely make it impossible to hyperinflate. The mechanism by which that happens, my guess anyway, is that state (as in US states such as Texas, etc.) or private forms of money will be introduced and compete side by side with Federal Reserve Notes. Another possibility, which is already happening to a limited extent through Everbank, is depositors will be able to readily switch their accounts into more stable foreign currencies should a particular central bank get out of control. A third possibility between now and then is, since many fear the outcome you are describing, there will be restrictions placed on the Fed that prevent it from hyperinflating, or the Fed may be abolished entirely.

Generally speakng, the large currency blocks such as the EU and the US are running into trouble partly because one centralized economic policy and currency cannot fit the needs of a highly diverse area. At the same time, the new technologies make it feasible to create and administer alternative currencies that meet the needs of particular geographic areas. I don't think it'll be too long before the lighbulb goes on inside some desperate state government that this is the solution to their problem. Once that happens, the floodgates will (can is probably the better word here) open and the revolution will (can) be in full swing. As long as that alternative exists, it seems to me that a coup in the traditional sense can be headed off through this means.

http://www.cbsnews.com/8301-503544_162- ... 03544.html

Somebody is beginning to think in this direction, but it doesn't seem that gold and silver coins would be the right solution. One of the Strauss and Howe scenarios was that a governor would lay claim to Federal tax monies (page 272). My guess is this is very likely, along with a plan to establish an alternative digital fiat currency that would promise to be strictly limited in terms of inflation and tailored to the needs of the particular state instead of the crooks on Wall Street.

So, you say the dollar will be replaced, but you expect it to hold and increase its value up until that day. I'm not saying that you're wrong, but I'm just not so sure things will go smoothly. Future expectation drives present value.

I do think there's a quantitative answer here somewhere that will give the best guess possible as to the bounds of rational expectation, but quite frankly I'm not smart enough to figure out all the variables. I'm somewhat convinced that Bernanke understands the full situation better than anyone else, but his job is to stabilize the banks, not to inform the people. Therefore, I implore members of this forum to think through it a bit more and break the situation down instead of holding to dogma with broad generalizations.

Thank you all for making this forum what it is. -JLak

JLak, if you're still out there, this is a piece from your post back in April that I didn't have time to respond to.

"So, you say the dollar will be replaced, but you expect it to hold and increase its value up until that day."

Not replaced near term, but the monopoly could be challenged through a threat of secession or through electronic alternatives (or through other means) if the Fed/US government don't get their act together. The rest of the world is challenging the dollar by being more fiscally responsible than Washington and refusing to go along with more stimulus. Contrary to logic, that will probably boost the value of the dollar for the rest of this year as European growth prospects dim in the near term while Europe takes the lead in getting its act together. In my view, that won't make a near term challenge to the dollar less likely, though, because everyone will still understand the longer term implications of irresponsibility. Longer term, my guess is there will be local economic zones with their own currencies, possibly regional currencies, national currencies, and a world reserve currency. I believe every local economic zone will have a balance of trade accounted for in their own currency and the currencies between local zones and on each geographic level will be electronically interchangeable. I believe Central Banking will be abolished and the parameters like interest rates, money supply, etc., will be set by the free market or by intelligent machines where there is no market. How exactly we get from the next year or two to there I don't know.

"Future expectation drives present value."

Somewhat true depending. Expectations/sentiment against the dollar have been very negative for 6 years. I don't have the figures to prove that though. Yet very little has changed pricewise in 6 years.

http://futures.tradingcharts.com/chart/US/M

In order for expectations/sentiment to influence price, more actors have to increase their negative sentiment toward the dollar and/or have the means to follow through in the marketplace. If a credible dollar alternative is introduced that people have the ability and desire to use, yes, I agree you are right that it will drop the value of the dollar. But as an alternative is adopted by a small percentage of former dollar holders, I believe the Fed/government will get scared and act responsibly to try to maintain their monopoly. In fact, I think that will happen even if there is a "credible threat" of an alternative, to borrow a phrase from Bernanke himself, which would be the antithesis of his helicopter drop threat.

Reading some of the above link at mises.org about the Third Century inflation in the Roman Empire brought up the Roman history that had formed the basis for some of my thoughts. Although the details are different, the fundamental backdrop looks similar to the era of Diocletian/Constantine, where the inflation stabilized for a few decades:

Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to a pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated — debased.

Now, in one sense, Constantine's reform began the reversal of the process: the gold coinage was sufficiently large that it began to take hold and to circulate more freely. However, the silver coinage failed and, what was worse, at no time in this period did the central government try to control the token coinage. The result was that token coinage was being minted not only by the imperial mints, but also by the mints of cities. In other words, if a city couldn't pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that.

By the late 3rd century we also begin to have the massive appearance of what numismatists call counterfeits. I would say it would be called credit money today. People need small change, and they simply go and manufacture it. All of this of course meant that the amount of token coinage in circulation was uncontrolled and increasingly massive.

The token coinage, imperial or otherwise, didn't do so well in the late 3rd century. How accessible any alternative currency is and how well it can perform will be important to any thesis that alternative currencies will force the Feds to hold the value of the dollar. I think with the advent of the new technologies, the present holds better prospects for alternative currencies.

I don't know how any of this can be quantified, but if you want to start with some basis for doing so I'll try to understand how it's possible. Generally, it could be thought of semi-quantitatively as: When an empire expands its territory or sphere of influence, there tends to be inflation. To what extent is a stabilization or contraction of an empire's territory or sphere of influence the termination or exact reverse of an expansion and, if it is, for how long can the empire maintain this lack of expansion before there is a discontinuity of some kind?

As a recent example since these original posts were made, we can look at what Europe has been willing to do to keep their marginal members in the Euro and maybe austerity comes into the picture where it wouldn't have otherwise as the lesser of evils (versus contracting the sphere of influence of the Euro). It can work the other way too:

However, the Baltic nations represent a special case – they could have dropped their pegs, but haven't done so. They would rather suffer a severe deflationary contraction than give up their link to the euro. The reason for this is found in their history.

http://www.acting-man.com/?p=2673

Maybe a little Generational Dynamics at work.

[aeden]

http://www.youtube.com/watch?v=qOP2V_np2c0

Vision and values of Marx. The basis was concluded to change the mode of thinking...

Laissez faire only means let the consumer decide. Posted was intent and no interpetation on how you will think since it will be done for you. They posit thinking and bring no value or innovation. The president did mention the money stock was only expanded to meet claims on that current debt. Debt is a claim on future labor and no more so they kicked the can down the road as we all know. Fowarded was the element of amplification of effect which given time was provided to this analysis.

http://generationaldynamics.com/forum/v ... 2750#p6332

From the Neo Keynasian camp we also provided and the net effect of there capability's.
On conveyance from the principal's we are bound to regulation which inhibitate my ability to provide. We are innovating what the market bears witness to and no more. We are asked to leave tired and provide our duty but not to dilute the presentation we are tired coming in to provide our services. To be fair to labor and management those of us in crucible of whatever change they are suggesting do not remember those who already knew the consequences we face and the roles of responsibity both party's failed to provide along the way. You cannot serve two master's and the ideological impacts to regulation twisted and abused to be utilized as carelessness who is the defintion of the destoyer in any culture. All we trend is nothing new under the Sun as we erase a class as noted who when unbraided fully we see to date leads to the obvious. My daughter conveyed what she seen to date on abuses of welfare and drug addition on a rate which is past disturbing even to her. I only conveyed stay in College and understand my only wish was to bear witness and preserve your moral compass which was handed down to Her from me, which was given to me from my Fathers to reason and not property to the State of affairs. We have only the responsibilty to give what is needed and not what is wanted in self interest to anyone. Until more stop taking what they want and only get what they need nothing will change the state of affairs. Simple yes, and may Policy present a path to the division of labor of free people to decide in which any Land healed which to many do not wish to submit to in confusion to only self worth of themselves. The consequences are very clear as all do as they please at the expense of others in any period we search. I am not even stirred by the current debate assert billion's more on top of 1.4 trillion debt of this nation since if they understand the interference with the structure if prices they fail to see the consequences. This would be chapter 30 of Human Action and the consequeces. The forums forward from many Currency and credit manipulation and the lending of money we see as velocity of money and Consumer Utility of those being exterminated and those see who are preparing for is by variances of data to the logical conclusion. Credit expansion is an exclusive prerogative of Governments no matter what you think since Home owners to not strike as the thought conveys. Credit is ancillary and concerns are just technicalities. Free trade to assist left leaning democracy's only enabled the demise of one class for another. The cost in the long run is the question the voter must acept with a compass of worth only time will decide and the implication are clear to date to seek a balance at the expense of who else? All the presentation forwarded above was the Philosophy of redistribution and the current Vote to Confiscatory Taxes. The warning to convey is the attributes of Syndicalism and Corporativism and to cleary discern its wake on free people who choose to decide by whom and how much as utility to free men and women we see today.

http://www.youtube.com/watch?v=41d-vFc7 ... re=related

[OLD1953]

End of Capitalism as we know it? Demographic shifts in a capital based economy and the subsequent effects on the overall economy are finally attracting some attention.

I've said here several times, and hundreds of times on other sites, that we are coming to a huge sea change in the way resources are allocated and production is managed and distributed. The new system won't be capitalism as we've known it, it won't be socialism (though doubtless those who default every change to "socialism" will call it that) but it will not be what we've had since WWII.

Unless, of course, some development occurs that expands the human living area ten fold while making it economically advantageous to have multiple children once again. Sans that, and there's no hint of it on the horizon, the change will take place because it MUST. There's about as much choice as an oyster has in making a pearl - make a pearl or die.


http://www.philstockworld.com/2010/07/2 ... s-to-rest/

The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do. Prior deleveraging periods such as what the U.S. and European economies experienced in the 1930s exhibited a similar demographic with the lowest levels of fertility in the 20th century and extremely low population growth. Things did not go well then. Today’s developed economies almost assuredly offer substantially less population growth than the 1.5% rate experienced over the prior 50 years. Even when viewed from a total global economy perspective, population growth over the next 10–20 years will barely exceed 1%.

The preceding analysis does not even begin to discuss the aging of this slower-growing population base itself. Japan, Germany, Italy and of course the United States, with its boomers moving toward their 60s, are getting older year after year. Even China with their previous one baby policy faces a similar demographic. And while older people spend a larger percentage of their income – that is, they save less and eventually dissave – the fact is that they spend far fewer dollars per capita than their younger counterparts. No new homes, fewer vacations, less emphasis on conspicuous consumption and no new cars every few years. Healthcare is their primary concern. These aging trends present a one-two negative punch to our New Normal thesis over the next 5–10 years: fewer new consumers in terms of total population, and a growing number of older ones who don’t spend as much money. The combined effect will slow economic growth more than otherwise.

[Higgenbotham]

My italics. Just more of what we've been saying over and over here, but now it's making its way into the mainstream press. We all know, now what?

http://www.nytimes.com/2010/08/01/opini ... ckman.html

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedman’s $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.

In fact, since chronic current-account deficits result from a nation spending more than it earns, stringent domestic belt-tightening is the only cure. When the dollar was tied to fixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves, and this would cause immediate economic pain — from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

[John]

Here's another interesting NYT story:

Economic Pessimists Gain Cachet

In many smart-money circles, listening to bears has become
fashionable, especially now that doubts remain about the
sustainability of the euro zone, concerns grow that the United States
may slip back into recession and that even the Chinese growth engine
may seize up. But to some, the popularization of extremely dire
forecasts suggests that the pendulum may have swung too far.

“Nothing is ridiculous anymore,” said Philippe Jabre, a hedge fund
executive in Geneva. “There is no doubt that these days extremely
negative research is being tolerated more.”

Mr. Jabre said that most of the research that came his way had a
distinctly negative bias and that finding actionable ideas with a
positive spin was becoming far more difficult. “These guys are
reinforcing a conviction among many who invest in hedge funds that
they should remain scared,” he said.

http://www.nytimes.com/2010/08/10/busin ... gloom.html

John

[aeden]

Tuesday August 10, 2010, 10:29 am AP

"The problem in the UK is that this new government's come in and doesn't seem to have much of a clue about economics," Blanchflower said. "It's made a set of announcements about what it was going to do but didn't really understand where the economy was."

"The BoE has an inflation target so the BoE would be within its rights if there is a case for raising rates," John Wraith, a fixed-income strategist at BofA Merrill Lynch Global Research, said. "The Fed's remit is less clear."

I am not even stirred by the current debate assert billion's more on top of 1.4 trillion debt of this nation since if they understand the interference with the structure if prices they fail to see the consequences. This would be chapter 30 of Human Action and the consequeces.

Political Economy and the subsequent rent dissipation effect to the productive capital. What I am trying to convey is what is essential and what is taken from the productive capital pool of formation. These ratio's tell the story and Washington will be late as always about the productivity gains they spin into fiscal projections to wit. Also as posted the debt aggragate means stagnation fueled with inflation given commodity prices seen to deflate to current spot ratio's. This is expected for now.

As we warned:
Tuesday August 10, 2010, 11:03 am AP
Productivity declined at an annual rate of 0.9 percent in the April-to-June quarter after posting large gains throughout 2009, the Labor Department said Tuesday. Unit labor costs edged up 0.2 percent in the second quarter, the first increase since the spring of 2009.

Thu Aug 05, 2010 9:34 pm
http://generationaldynamics.com/forum/v ... 2750#p6322

[Higgenbotham]

http://www.bea.gov/newsreleases/regiona ... pi0810.pdf

Although personal income grew in 134 MSAs, in most cases this growth represented an increase in transfer receipts (unemployment insurance benefits, for example).

Only in 57 MSAs did the net earnings of workers increase in 2009. In most of the 57 MSAs where net earnings increased, the gains were concentrated in the government sector. Military earnings growth was particularly strong in seven of the ten MSAs with the fastest personal income growth in 2009: Jacksonville and Fayetteville, North Carolina; Manhattan, Kansas; Elizabethtown, Kentucky; Lawton, Oklahoma; Clarksville, Tennessee; and Killeen, Texas.

Only in five MSAs (Kennewick, Washington; Cumberland, Maryland; Morgantown, West Virginia; Cape Girardeau, Missouri; and Ithaca, New York;) did the private sector account for most of earnings growth in 2009.

[OLD1953]

This caught my eye today, while thinking about deflation pressures:

There haven't always been cost-of-living increases. Annual cost-of-living adjustments didn't become a part of Social Security until 1975 (as a result of a 1972 law). Prior to 1975, an act of Congress was required to increase benefits to keep up with consumer prices. "Before then, benefits were protected from inflation only when Congress chose to notice it," says Berkowitz. Now increases in payments are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers. Annual increases have ranged from 1.3 percent in 1996 and 1998 to 14.3 percent in 1980. For the first time in 2010, there was no cost of living boost because the index did not increase between the third quarter of 2008 and 2009.

[jcsok]

One of the latest doom indicators for the stock market is a "Hindenburg Omen". Look it up through Wikipedia; found this in ZeroHedge.

"Easily the most feared technical pattern in all of chartism (for the bullishly inclined) is the dreaded Hindenburg Omen. Those who know what it is, tend to have an atavistic reaction to its mere mention. Those who do not, can catch up on its implications courtesy of Wikipedia, but in a nutshell: "The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration." Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: "Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days." The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches - something big is coming."



http://www.zerohedge.com/article/hindenburg-omen-here


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