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Friday, December 28, 2012

"fraud. why the great recession" (official documentary)

Free markets are not to be blamed for the Great Recession. On the contrary, its origins rest upon the deep government and central bank intervention in the economy. Through fraudulent mechanisms, this causes recurrent boom and bust cycles: bad policies create phases of irrational exuberance, which are then followed by economic recessions, a result that every citizen ends up suffering from.

The Fiscal Cliff Is a Diversion: The Derivatives Tsunami and the Dollar Bubble

The “fiscal cliff” is another hoax designed to shift the attention of policymakers, the media, and the attentive public, if any, from huge problems to small ones.
The fiscal cliff is automatic spending cuts and tax increases in order to reduce the deficit by an insignificant amount over ten years if Congress takes no action itself to cut spending and to raise taxes. In other words, the “fiscal cliff” is going to happen either way.
The problem from the standpoint of conventional economics with the fiscal cliff is that it amounts to a double-barrel dose of austerity delivered to a faltering and recessionary economy. Ever since John Maynard Keynes, most economists have understood that austerity is not the answer to recession or depression.
Regardless, the fiscal cliff is about small numbers compared to the Derivatives Tsunami or to bond market and dollar market bubbles.
The fiscal cliff requires that the federal government cut spending by $1.3 trillion over ten years. The Guardian reports that means the federal deficit has to be reduced about $109 billion per year or 3 percent of the current budget.

Why are (Smart) Investors Buying 50 Times More Physical Silver than Gold?

By: Eric Sprott

As long-time students of precious metals investing, there are certain things we understand. One is that, historically, the availability ratio of silver to gold has had a direct influence on the price of the metals. The current availability ratio of physical silver to gold for investment purposes is approximately 3:1. So, why is it that investors are allocating their dollars to silver at a much higher ratio? What is it that these “smart” investors understand? Let’s have a look at the numbers and see if it’s time for investors to do as a wise man once said and “follow the money.”
Average annual gold mine production is approximately 80 million ounces, which together with an estimated average 50 million ounces of annual recycled gold, totals around 130 million ounces available per year. In comparison, annual mined silver production has averaged around 750 million ounces, while recycled silver is estimated at 250 million ounces per year, which adds up to approximately 1 billion ounces. Using this data, there is roughly 8 times more silver available to buy than there is gold. However, not all gold and silver is available for investment purposes, due to their use in industrial applications. It is estimated that for investment purposes (jewelry, bars and coins), the annual availability of gold is roughly 120 million ounces, and of silver it is 350 million ounces. Therefore, the ratio of physical silver availability to gold availability is 350/120, or ~3:1.1

The Fed Doubles The Dosage

On December 12th, the Federal Reserve announced the most aggressive program of monetary stimulus ever undertaken in peacetime. Beginning in January, the Fed will more than double the amount of fiat money it creates each month from $40 billion to $85 billion. On an annualized basis that amounts to more than $1 trillion a year. This week we will consider 1) What they did; 2) Why they did it; and, 3) What impact it will have on asset prices over the short-term.
What They Did:
In a nutshell, the Fed announced it will more than double the amount of fiat money it creates each month and that it will use that money to buy government bonds and mortgage-backed securities until the unemployment rate drops substantially or until the inflation rate accelerates. The press release stated:
 “…the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities … initially at a pace of $45 billion per month.”

The Historic Inversion In Shadow Banking Is Now Complete

Back in June, we wrote an article titled "On The Verge Of A Historic Inversion In Shadow Banking" in which we showed that for the first time since December 1995, the total "shadow liabilities" in the United States - the deposit-free funding instruments that serve as credit to those unregulated institutions that are financial banks in all but name (i.e., they perform maturity, credit and liquidity transformations) - were on the verge of being once more eclipsed by traditional bank funding liabilities. As of Thursday, this inversion is now a fact, with Shadow Bank liabilities representing less in notional than traditional liabilities.
In other words, in Q3 total shadow liabilities, using the Zoltan Poszar definition, and excluding hedge fund repo-funded, collateral-chain explicit leverage, declined to $14.8 trillion, a drop of $104 billion in the quarter. When one considers that this is a decline of $6.2 trillion since the all time peak of $21 trillion in Q1 2008, it becomes immediately obvious what the true source of deleveraging in the modern financial system is, and why the Fed continues to have no choice but to offset the shadow deleveraging by injecting new Flow via traditional pathways, i.e. engaging in virtually endless QE.
What is more important, the ongoing deleveraging in shadow banking, now in its 18th consecutive quarter, dwarfs any deleveraging that may have happened in the financial non-corporate sector, or even in the household sector (credit cards, net of the surge in student and car loans of course) and is the biggest flow drain in the fungible credit market system in which the only real source of new credit continues to be either the Fed (via QE following repo transformations courtesy of the custodial banks), or the Treasury of course,via direct government-guaranteed loans.

Saturday, December 22, 2012

What is wrong about the euro, and what is not

Every Monday morning the readers of the UK’s Daily Telegraph are treated to a sermon on the benefits of Keynesian stimulus economics, the dangers of belt-tightening and the unnecessary cruelty of ‘austerity’ imposed on Europe by the evil Hun. To this effect, the newspaper gives a whole page in its ‘Business’ section to Roger Bootle and Ambrose Evans-Pritchard, who explain that growth comes from government deficits and from the central bank printing money, and why can’t those stupid Europeans get it? The reader is left with the impression that, if only the European states could each have their little currencies back and merrily devalue and run some proper deficits again, Greece could be the economic powerhouse it was before the Germans took over.
Ambrose Evans-Pritchard (AEP) increasingly faces the risk of running out of hyperbolic war-analogies sooner than the euro collapses. For months he has been numbing his readership with references to the Second World War or the First World War, or to ‘1930s-style policies’ so that not even the most casual reader on his way to the sports pages can be left in any doubt as to how bad this whole thing in Europe is, and how bad it will get, and importantly, who is responsible. From declining car sales in France to high youth-unemployment in Spain, everything is, according to AEP, the fault of Germany, a ‘foolish’ Germany. Apparently these nations had previously well-managed and dynamic economies but have now sadly fallen under the spell of Angela Merkel’s Thatcherite belief in balancing the books and her particularly Teutonic brand of fiscal sadism.

Thursday, December 20, 2012

No Way Out


By upping the ante once again in its gamble to revive the lethargic economy through monetary action, the Federal Reserve's Open Market Committee is now compelling the rest of us to buy into a game that we may not be able to afford. At his press conference this week, Fed Chairman Bernanke explained how the easiest policy stance in Fed history has just gotten that much easier. First it gave us zero interest rates, then QEs I and II, Operation Twist, and finally "unlimited" QE3.

Now that those moves have failed to deliver economic health, the Fed has doubled the size of its open-ended money printing and has announced a program of data flexibility that virtually insures that they will never bump into limitations, until it's too late. Although their new policies will create numerous long-term challenges for the economy, the biggest near-term challenge for the Fed will be how to keep the momentum going by upping the ante even higher their next meeting.

QE 4: Folks, This Ain't Normal

by Chris Martenson

Okay, the Fed's recent decision to boost its monetary stimulus (a.k.a. "money printing," "quantitative easing," or simply "QE") by another $45 billion a month to a combined $85 billion per month demonstrates an almost complete departure from what a normal person might consider sensible.
To borrow a phrase from Joel Salatin: Folks, this ain't normal. To this I will add ...and it will end badly.
If you had stopped me on the street a few years ago and asked me what I thought would have happened in the stock, bond, foreign currency, and commodity markets on the day the Fed announced an $85 billion per month thin-air money printing program directed at government bonds, I never would have predicted what has actually come to pass.
I would have predicted soaring stock prices on the expectation that all this money would have to end up in the stock market eventually. I would have predicted the dollar to fall because who in their right mind would want to hold the currency of a country that is borrowing 46 cents (!) out of every dollar that it is spending while its central bank monetizes 100% of that craziness?
Further, I would have expected additional strength in the government bond market, because $85 billion pretty much covers all of the expected new issuance going forward, plus many entities still need to buy U.S. bonds for a variety of fiduciary reasons. With little product for sale and lots of bids by various players, one of which – the Fed – has a magic printing press and is not just price insensitive but actually seeking to drive prices higher (and yields lower), that's a recipe for rising prices.

Paul Krugman's Dangerous Misconceptions


How to Deal with Economic History


In a recent article at the NYT entitled 'Incredible Credibility', Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government's debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs.

Among the evidence he ignores we find e.g. the 'stagflation' of the 1970's, or the inability of Japan to revive its economy in spite of having embarked on the biggest government deficit spending spree ever in a modern industrialized economy. Evidence he likes to frequently disparage is the evident success of austerity policies in the Baltic nations (evident to all but Krugman, one might say).

As readers of this blog know, we are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ. This is why we listed the evidence he ignores or disparages: the fact that there exists both plenty of evidence that contradicts his views and a much smaller body of evidence that seems to support them at an unreflected first glance, already shows that the positivist approach to economic theory must be flawed.

An economist must in fact approach things exactly the other way around, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (examples for this would be the idea that one can consume oneself to economic wealth instead of saving and investing toward that goal, or that employment creates growth; it is exactly the other way around in both cases).

Friday, December 14, 2012

How the Rich Rule

By Sheldon Richman

ERNEST HEMINGWAY: I am getting to know the rich.
MARY COLUM: I think you’ll find the only difference between the rich and other people is that the rich have more money.
Irish literary critic Mary Colum was mistaken. Greater net worth is not the only way the rich differ from the rest of us—at least not in a corporatist economy. More important is influence and access to power, the ability to subordinate regular people to larger-than-human-scale organizations, political and corporate, beyond their control.
To be sure, money can buy that access, but only in certain institutional settings. In a society where state and economy were separate (assuming that’s even conceptually possible), or better yet in a stateless society, wealth would not pose the sort of threat it poses in our corporatist (as opposed to a decentralized free-market) system.
Adam Smith famously wrote in The Wealth of Nations that “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Much less famously, he continued: “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”
The fact is, in the corporate state government indeed facilitates “conspiracies” against the public that could not otherwise take place. What’s more, because of this facilitation, it is reasonable to think the disparity in incomes that naturally arises by virtue of differences among human beings is dramatically exaggerated. We can identify several sources of this unnatural wealth accumulation.
A primary source is America’s financial system, which since 1914 has revolved around the government-sponsored central banking cartel, the Federal Reserve. To understand this, it must first be noted that in an advanced market economy with a well-developed division of labor, the capital market becomes the “locus for entrepreneurial decision-making,” as Walter E. Grinder and John Hagel III, writing within the perspective of the Austrian school of economics, put it in their 1977 paper, “Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure.”

Anatomy of the End Game


About a month ago, in the third-quarter report of a Canadian global macro fund, its strategist made the interesting observation that “…Four ideas in particular have caught the fancy of economic policy makers and have been successfully sold to the public…” One of these ideas “…that has taken root, at least among the political and intellectual classes, is that one need not fear fiscal deficits and debt provided one has monetary sovereignty…”. This idea is currently growing, particularly after Obama’s re-election. But it was only after writing our last letter, on the revival of the Chicago Plan (as proposed in an IMF’ working paper), that we realized that the idea is morphing into another one among Keynesians: That because there cannot be a gold-to-US dollar arbitrage like in 1933, governments do indeed have the monetary sovereignty.
Is this true? Today’s letter will seek to show why it is not, and in the process, it will also describe the endgame for the current crisis. Without further ado…
After the fall of the KreditAnstalt in 1931, with the world living under the gold-exchange standard, depositors first in central Europe, and later in France and England, began to withdraw their deposits and buy gold, challenging the reserves of their respective central banks. The leverage that linked the balance sheet of each central bank had been provided by currency swaps, a novelty at the time, which had openly been denounced by Jacques Rueff. One by one, central banks were forced to leave the gold standard (i.e. devalue) until in 1933, it was the Fed’s turn. The story is well known and the reason this process was called an “arbitrage” is simply that there can never be one asset with two prices. In this case, gold had an “official”, government guaranteed price and a market price, in terms of fiat money (i.e. schillings, pounds, francs, US dollars). The consolidated balance sheets of the central bank, financial institutions and non-financial sector looked like this before the run:

Tuesday, December 11, 2012

Relevance of the Austrian School of Economics in the 21st Century

The Austrian School of Economics has prevailed through time given the relevance it has gained in understanding the way markets really work. Peter Boettke has a conversation with Luis Figueroa regarding the importance of the philosophy of economics and explains the value of its premises. They discuss the process of thinking and understanding life through an economics point of view, as a result of dynamic laws present in everyday situations. Finally, Boettke comments on the role of ethics in the Austrian School of Economics and portrays common misconceptions about these sciences.

Peter Boettke professor of economics at George Mason University, where he also serves as vice president for research, BB&T Professor for the Study of Capitalism, and research director for the Global Prosperity Initiative at the Mercatus Center. Furthermore, he is deputy director of the James M. Buchanan Center for Political Economy. He is author and coauthor of various books on economics and politics, such as: Challenging Institutional Analysis and Development: The Bloomington School, The Economic Way of Thinking, The Political Economy of Soviet Socialism: The Formative Years, among others. Boettke received his BA in economics from Grove City College, MA and PhD in economics from George Mason University.

original video source:

Where to from here?

By Gerardo Coco

We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Without understanding their dynamic relationship and their implications is difficult to predict how things might unfold. The economic future depends on the interplay of both these forces. From the point of view of their final effects, inflation and deflation are, respectively, the devaluation and revaluation of the currency unit. The quantity theory of money developed in 1912 by the American economist Irving Fisher asserts that an increase in the money supply, all other things been equal, results in a proportional increase in the price level [1]. If the circulation of money signifies the aggregate amount of its transfers against goods, its increase must result in a price increase of all the goods. The theory must be viewed through the lens of the law of supply and demand: if money is abundant and goods are scarce, their prices increase and currency depreciates. Inflation rises when the monetary aggregate expands faster than goods. Conversely, if money is scarce, prices fall and the opposite, deflation, occurs. In this case the monetary aggregate shrinks faster than goods and as prices decrease money appreciates.