"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, April 14, 2011

Jim Grant: US Fiscal Crisis To Be Resolved With US Dollar - Gold Convertibility

I have speculated many times in the past that the current debt based system that was created in 1971 with the end of Bretton Woods would ultimately end with the restoration of a gold standard.  Mind you, governments will be extremely reluctant to do this.  But in the face of a breakdown in the global financial system, there is nowhere else to go when your system is merely based on easily keystroked electronic digits.

When a virtual system, like the system we have today, expires, only a tangible system can replace it.  And by tangible, I mean real, something you can hold in your hands.  Something that has no nationality.  Something that Central Banks around the world have been increasingly hoarding and accumulating.  That something is gold.

Eric King of King World News recently interviewed Jim Grant.  Here are snippets from his blog. The audio portion of the interview will be posted shortly.
When asked about the Great Recession and how it has left its mark Grant replied, “It is notable. Not so many months passed from the depths of our sorrows in 2008 and 2009 before people seemed to be reverting to much the same kind of financial conduct that was much in evidence in 2005, 2006, 2007. The cycles are getting shorter. Then again the government is now in the business of, so it declares, of restoring financial prosperity through main force. 
So, after the Great Depression there was nothing like the policy that Ben Bernanke and company have been implementing now. I don’t think that human beings are much different than they were way back when, but certainly the government’s response to crises is vastly different.” 
When asked about gold specifically Grant stated, “To me the gold price takes the form of a very uncomplicated formula, and all you have to do is divide one by ‘n.’ And ‘n’, I’m glad you ask, ‘n’ is the world’s trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller ‘n’, the bigger the price. One divided by a receding number is the definition of a bull market.

You’ll notice that this had nothing to do with security analysis. This is conceptualizing, brainstorming, nothing to do with price/earnings ratios, other valuation methods like cash flows. It is a proposition or a hypothesis on what is driving the gold market. So the gold market is necessarily a speculative piece of business. It’s not to be confused with the kind of investment that Ben Graham wrote about. Anyway, I happen to be bullish on it, but not for reasons that I can readily defend before a member of the fraternity of chartered financial analysts.”

When asked how the United States will resolve its debt and deficit problems, Grant remarked, “Well, in my mind it will resolve them necessarily by undertaking the step of restoring the dollar to convertibility into gold.”
Jim Grant has become legendary for having one of the top financial publications in the world. This comment from the Financial Times points out one of the many reasons for Grant’s success, “If Grant could see what was happening this clearly,” wrote John Authors of the staff of the FT, “and warn of it in a well-circulated publication, how did the world’s financial regulators fail to avert the crisis before it became deadly, and how did the rest of us continue to make the irrational investing decisions that make Mr. Market behave the way he does?”


The question that comes to mind when I think of a gold standard restoration is: At What Price? I believe that the longer the current system is artificially propped up, the higher the ultimate price.

Friday, April 8, 2011

Paul Krugman On the Euro

I am not one that often agrees with New York Times columnist Paul Krugman, but recently he made some sense regarding the ECB's rate hike.  In the periphery countries of the EU, debt deflation is a serious risk.  Some would say that it is ongoing, despite the recent rise of the price of oil.

When the ECB raised its rate, it left me perplexed.  Mind you, I am not a Keynesian die hard, nor a Monetarist. But I understand those economic views, and I also believe that one should play the economic game as it is, not as you want it to be.  What I mean by that is, if the rest of the world is devaluing to make exports cheaper and debt repayments easier, why the hell would someone do the opposite?  There is no prize for being the first to crash your economy.  It's economic suicide.

Don't get me wrong, I believe the global fiat system is gradually imploding.  But why hurry things and try to protect your currency by sacrificing your economy?  Well, it looks like German fears of inflation may doom the periphery countries.

From Paul Krugman:
Why People Say “Eeh!” When They Learn About the ECB 
With all the craziness at home, I didn’t have time to comment on the European Central Bank’s decision to raise rates despite continuing very high unemployment. 
The first thing to say is that overall eurozone numbers look very much like US numbers: a blip in headline inflation due to commodity prices, but low core inflation, and no sign of a wage-price spiral. So the same arguments for continuing easy money at the Fed apply to the ECB. And the ECB is not making sense: it’s raising rates even as its official acknowledge that the rise in headline inflation is likely to be temporary.
He continues:
During the eurobubble years, there were huge capital flows to peripheral economies, leading to a sharp rise in their costs relative to Germany. Now the bubble has burst, and one way or another those relative costs need to be brought back in line. But should that take place via German inflation or Spanish deflation? 
From a pan-European view, the answer is surely some of both — and given that deflation is always and everywhere very costly, the bulk of the adjustment should in fact take the form of rising wages in Germany rather than falling wages in Spain. 
But what the ECB is in effect signaling is that no inflation in Germany will be tolerated, placing all of the burden of adjustment on deflation in the periphery. From the beginning, euroskeptics worried about one-size-fits-all monetary policy; but what we’re getting is worse: one-size-fits-one, Germany first and only. 
That’s a recipe for a prolonged, painful slump in the periphery; large defaults, almost surely; a great deal of bitterness; and a significantly increased probability of a euro crackup. 
Aside from that, it’s prudent, reasonable policy.

As I have said in my past post:  The Rise of the Fourth Reich, Germany is making decisions based around its own self interest, disregarding the long term consequences to the Euro, and the EU as a whole.  Nonetheless, I feel that it is a failed experiment anyway, that the periphery countries could never compete with Germany using the same currency.

Maybe Germany's "Germany First" policy will hasten the end of the Euro... and with it, the fiat experiment of the past 40 years.

Sunday, April 3, 2011

Once again we ask: QE, or not QE?

That is the question.  As June approaches, will the Fed end QE2 as promised?  Or will it immediately begin with the next program, to be likely dubbed QE3 by pundits?

I think a lot depends on other factors in the world.  The ECB wants to raise rates this month, just as the periphery countries, especially Greece, Portugal, and Ireland are becoming increasingly economically unstable.  Debt deflation and rising unemployment is common there, which will likely translate into political repercussions.

The US housing market is far from stabilizing, and that's one of the purported reasons for QE, right?  To stabilize the housing markets, keep interest rates low, and to push up asset values.

Oil too, is a major factor.  It has recently made a new high since the 2008 oil price spike deflated.  The Middle East situation is a major factor here, after all, an increasing price of oil is basically a tax that transfers money from industrial countries to the oil exporting countries. That's a huge drain of wealth.

Marc Faber makes some interesting points in this recent Bloomberg interview.  Others have their say in the first few minutes regarding the possibility and timing of QE3: