Hilarious Spoof Hitler Videos

Hitler Long the US Dollar (hat tip Charleston Voice)

Hitler on Scott Walker's victory at the Wisconsin Recall election (thanks to Dan Mitchell)

Nassim Taleb: Worry about the US more than the EU

My favorite author iconoclast Nassim Taleb says that the US and not Europe should be the source of concern

From Bloomberg,

Nassim Taleb, author of “The Black Swan,” said he favors investing in Europe over the U.S. even with the possible breakup of the single European currency in part because of the euro area’s superior deficit situation.

Europe’s lack of a centralized government is another reason it’s preferable to invest in the region, said Taleb, a professor of risk engineering at New York University whose 2007 best- selling book argued that history is littered with rare events that can’t be predicted by trends.

A breakup of the euro “is not a big deal,” Taleb said yesterday at an event in Montreal hosted by the Alternative Investment Management Association. “When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I’m afraid of the United States.”

The budget deficit as a proportion of gross domestic product in the U.S. amounted to 8.2 percent at the end of 2011, government figures show. That’s twice the 4.1 percent ratio for euro-region countries, according to data compiled by Bloomberg.

“Of course Europe has its problems, but it’s in much better shape than the United States,” Taleb said. He voiced similar concerns about U.S. prospects at a conference in Tokyo in September…

Rising interest rates would make things worse for the U.S., said Taleb, a principal at hedge fund Universa Investments LP who also serves as an adviser to the International Monetary Fund.

“We have zero interest rates,” Taleb said. “If interest rates go up in the United States, you can imagine what the deficit would be. Europe is like someone who is ill but is conscious of it. In the United States we are ill, but we don’t know it. We don’t talk about it.”

In my view, decentralization of the EU will likely be the outcome from the collapse of the welfare states where Greece may likely to set the precedent.

And like Dr. Marc Faber and Professor Taleb, for the EU, after the storm comes the calm.

I would venture a guess that the tipping point for the US dollar as global currency reserve, is when the US economy run smack into another recession or into another financial crisis, where the knee jerk or intuitive response will likely be trillions of money printing by the US Federal Reserve. Under such condition, I think Professor Taleb’s risk scenario may unfold.

US Dollar’s Diminishing Role As Reserve Currency

The Wall Street Journal editorial highlights on the baneful effects of the Fed’s inflationist policies, which is being transmitted via the US dollar, to the world. Such paradox had partly been captured by the famous quote attributed to former US Treasury secretary John Connally “our currency, but your problem.

From the Wall Street Journal, (bold highlights mine)

The larger story is that the world is starting to protect, and perhaps ultimately free, itself from America's weak dollar standard. The European Central Bank recently raised interest rates and may do so again to prevent an inflation breakout. China is allowing more trade to be conducted in yuan, a first step toward making it a global currency. At a meeting of developing countries—the so-called BRICs—in China recently, leaders called for "a broad-based international reserve currency system providing stability and certainty." They weren't referring to the dollar.

Even in the U.S., Americans are buying commodities (oil per barrel: $111) and gold ($1,500 an ounce) as a dollar hedge, and the state of Utah recently took steps to make it easier for citizens to buy and sell gold as a de facto alternative currency. Whether or not these prove to be wise investments, they are certainly signals of mistrust in Washington's economic stewardship.

At an economic town hall this week, President Obama blamed "speculators" for rising oil prices. He should have mentioned the Fed and his own Treasury, which have encouraged the world to invest in hedges against the falling dollar. Chairman Ben Bernanke and Mr. Geithner have deliberately pursued a policy of unprecedented monetary and spending stimulus to reflate the economy and boost asset prices. The bill is coming due in a weak dollar, food and energy inflation, and the decline of U.S. economic credibility.

But inflationism eventually will be everyone’s problem.

There will be feedback mechanisms from other nations. And this process is exactly what the Wall Street Journal article has been about. Other nations have been taking defensive maneuvers from a policy of sustained inflationism adapted by the US Federal Reserve.

And one consequence is that the US dollar will shed its pre-eminence as the world’s reserve currency.

Sustained inflationism means that the US dollar will diminish her role as the world’s reserve currency. The above chart shows how this process has been taking place.

The rise of the Euro came amidst the US Technology bust in 2000. Overtime, the Euro has grabbed a larger slice of the reserve currency pie. But it is unclear if the Euro will be a worthwhile substitute as the Euro suffers from the same malaise as the US. The difference is just a matter of degree.

Nevertheless, the great Ludwig von Mises described how the inflation process negates the role of money. (bold highlights mine)

The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.

These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them.

Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It’s a process in motion.

Ron Paul: Gold Is Telling Us That The US dollar Is In Danger

Congressman Ron Paul rebuts on some objections of his Audit The Fed bill at a CNBC interview

Some notes:

Audit The Fed bill
-is not about running monetary policy
-is against secrecy...Fed Independence is secrecy. Paul wants transparency
-Gold is telling us that the US dollar is in danger
-Audit of the fed won’t save us from super regulation
-Fed will self destruct because they’re [the FED's] gonna destroy the dollar
-Fed is politicized…who appoints the chairman?
-it's the deficits that puts the pressure on the dollar

Our Version of The Risks of A US Dollar Crash

``The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system”- Ludwig von Mises Human Action p.555

The prospective shortfall from the frontloading of fiscal deficits has prompted accelerated concerns over a crash of the US dollar.

For some the definition of a US dollar crash is simply a wave of selling of US financial claims from major official creditor nations, i.e. central banks and sovereign wealth funds.

For us, the incentive to drastically and simultaneously unload US assets appears unlikely, because it won’t be to any country’s interest to foment a US dollar crash as this will be equivalent to mutually assured destruction. To quote Luo Ping, a director-general at the China Banking Regulatory Commission who spoke with levity over a recent public engagement, ``“We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.” [emphasis mine]

Moreover, many have been suggesting for the US to massively devalue by running up the printing presses, a step similarly undertaken by then US President Franklin Delano Roosevelt during the Great Depression. This should ostensibly reduce the real value of debt by reducing the currency’s purchasing power.

However, the privilege from “devaluing” translates to lost savings and a significantly lower standard of living and even more poverty. To quote money manager Axel Merk of Merkfund.com, ``Somehow policy makers have it backward. Many of us like our jobs, but not so much that we love to give up half our net worth for the opportunity to go back to work.”

Besides, the basic problem of the US dollar devaluation seems to be, “to devalue against whom or what”?

During the Great Depression, the US dollar was operating on a gold standard platform which allowed for it to devalue. Our paper money system isn’t tied to gold anymore.

I might add that to conduct an arbitrary massive devaluation can be construed also as a form of non tariff protectionism.

Therefore, it would seem rather unlikely for the US or for that matter to any major OECD country or regional economies to perhaps impose on such irresponsible protectionist stance without expecting the same punitive retaliatory measures.

This means, as we have repeatedly pointed out in the past, the likely scenario from unilateralist US dollar devaluation could be the risks of a currency war, which ultimately leads to the disintegration of the present paper money system, and possibly, a world at war.

While many countries appear to be itching towards adopting or gradually espousing non tariff populist protectionist policies such as export restrictions, import quotas, anti dumping duties, non automatic licensing, technical regulation to trade covering health and environment and subsidies to national industries, it is unlikely that governments could veer towards radicalism. Nations which depends on trade, together with the World Trade Organization and multinational companies will possibly lobby to maintain sangfroid temperaments.

Hence, an orderly coordinated devaluation may occur only if done under an international rapprochement similar to the 1985 Plaza Accord. The same multilateral approach can be undertaken when considering global debt restructuring or a reconfiguration of the monetary architecture.

Nonetheless we beg to differ from the conventional expectations of US dollar crash paradigm.

We concur with Brad Setser when he cites that the present dynamics as shifting from reduced significance of external based financing to increasing contribution from domestic savings.

Here is Mr. Setser, ``The overarching assumption behind the stimulus is that a rise in US household savings (linked to the fall in US household wealth) will create a pool of domestic savings that will flow, given the ongoing contraction in private investment, into the Treasury market. The rise in private savings and fall in private investment will allow the US government to borrow more even as the US economy as whole borrows less from the rest of the world. The key to the Treasuries rally in 2008 was the surge in private demand, not the strengthening of official demand. My guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.”

This means a US dollar crash will probably occur if private creditors alongside official creditors instigate a run on the US banking system. That will happen only if a surge in inflation or the debt burden becomes intolerable. On the other hand the other possible scenario, as mentioned above, could be a currency war. Of course there maybe other possible scenarios, which at present, escapes our thought for the moment.

Video: How Will A Dollar Crash Look Like?

A 1981 movie by Alan J. Pakula entitled Rollover depicted the fictional breakdown of the US dollar system.

Together with some great splices by George4title of the recent events which includes US Congressman Paul Kanjorski's narrative of the September 15th 2008 "electronic bank run" in C-Span, the simulated dollar crash scenario from the movie evokes an eerie and distressing vicarious sensation...

[Hat tip: Casey Research "The Room" and George4title]

Changing The Rules Of The Game By Inflation

``The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price.”-James Grant, Little logic to bond world amid current risk phobias

Inflationary or deflationary outcome will ultimately be decided politically.

If the US government decides to safeguard its currency and allow for these market adjustments to occur, then there could be a deflationary unwind. However, this isn’t going to be politically palatable.

Yet, given the extent of the recent aggressive policy maneuvers, the penchant to use up all the available arsenal by the US Federal Reserve or by the President elect Obama (e.g. to engage in the “single largest investment program”) and or their respective ideological underpinning, all these tilts the risks towards greater than expected inflation, if not hyperinflation.

For us, deflationists have been underestimating the government’s capability to destroy their currency. It doesn’t take complex mathematical equations to do so. It only takes basic universal economic laws-exponential growth of supply of money relative to goods or services.

So far, Fed Chair Ben Bernanke’s outline to deal with this ‘deflation’ problem has gradually been implemented according to his playbook. In a worst case scenario, Mr. Bernanke in his 2002 speech elaborated the nuclear option (underscore mine),

``But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation…

``Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.”

Applied today, the problem is to devalue against what?

During the great depression, the US dollar devalued against gold, but today’s monetary system which has no gold for its anchor, has nothing to devalue against.

``Unlike fiscal policy, which encourages other countries to "free ride" on any US expansion, the attraction of US monetary expansion is that it will force a global response. When the United States expands its money supply, thus putting pressure on the dollar to weaken, Asia and the United Kingdom will quickly follow suit to prevent their currencies from strengthening,” wrote Peter Boone and Simon Johnson for Peterson Institute for International Economics (emphasis mine).

In other words, once the political path has been chosen, then either a global currency war ensues, where all countries will be massively printing money in a race to the bottom or the global central banks undertake a coordinated approach – a new monetary standard that would allow for such devaluation to take place by using an anchor, possibly arising from IMF’s Special Drawing Rights SDR (as suggested per George Soros), a multilateral based currency, or partial reactivation of gold’s convertibility.

However, gold is unlikely to be a priority considering that it would seriously hamper the global political leadership’s power, as it would limit or hamper government expenditures.

Moreover, perhaps we can’t have the typically known “US dollar crisis” simply because if the central banks who are major currency reserve holders decide to head for the exit doors or liquidate all at the same time or simultaneously, there won’t be any buyers, not the private sector or not the US government itself, which makes these an unlikely event.

So the most likely path will be a change in the rules of how the games are played, and this would most likely involve a rather big dose of inflation.

CDS Market: Is the US Dollar Losing Its Safehaven Status?

In Global Markets: From “Minksy Moment” To The “Mises Moment” we pointed out that despite the massive “flight to safety” as seen by US Treasury bills which almost yielded to nothing during the recent riot in the global credit and equity markets, credit default swaps on US debt have reached record levels! 

From the Liam Halligan of Prosperity Capital published at the Telegraph “Financial crisis: Default by the US government is no longer unthinkable”

 

This is a very compelling picture which shows of the real emerging risks of a default by the US government on its snowballing debts as it is being compounded by the systemwide rescue of the financial sector.

 

Likewise it puts to question the foundations of the US Dollar as a “safehaven”.

Risk Of A US Dollar Crisis: Benign or The Austrian Endgame?

``The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the 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, Human Action, The Monetary or Circulation Credit Theory of the Trade Cycle

As a final thought, many people ignore the risks of a US dollar crisis.

Crisis happens because they are an unexpected. It is a black swan or statistical fat tail. The US housing crisis was a much anticipated outcome yet many got caught owing to the belief that they would be able to get out on time. They never expected a buyer’s boycott.

Another, the repercussions from the US housing bust was largely unforeseen. Nobody saw that the investment grade AAA papers would lose sizably in value. Nobody predicted the extent of the contagion from the mortgage bust which would lead to a seizure of global credit markets.

Today, the US dollar continues to fall. The conventional expectation is that the declining trend of the dollar will be orderly. The culmination of the US dollar crisis is presumed to be a benign “overshoot” of the currency’s valuation which would fall low enough to attract enough foreign buyers and reverse the decline. We hope this is the right scenario.

However, the Austrian school’s endgame outcome is different. The risk from a US dollar crisis probably suggests of the collapse of the global currency standard and the end of the US dollar as the world’s de facto foreign exchange reserve. It also suggests that the world may experience a bout of hyperinflation, as the entire chain structure of paper money collapses. To quote Anthony Mueller, The End of Dollar Supremacy, ``Losing trust does not mean that there must be a ready substitute. On the contrary: when distrust will emerge towards the US dollar this would affect the attitude towards all paper currencies. In the final stages of the currency crisis, the dollar will most likely devalue not so much against the euro and the yen, but all of these currencies and most of the rest will devalue drastically against gold.”

Yet the common denominator of countries that experienced hyperinflation had war related expenditures, protectionist walls and uncompromising leadership which pursued onerous welfare policies that eventually resulted to a lose of faith in the country’s currency. These ingredients have been not absent from today’s landscape. The difference is at least we remain globalized.

I came across a sober article from a blogger Steve Waldman who suggests that today’s commodity boom could be seen as “a run on central banks”.

To quote Mr. Waldman (highlight mine) ``Capital devoted to precautionary storage would be better employed building new enterprises, laying a foundation for tomorrow's prosperity. But claims on future money are only promises, easily broken or devalued. A run on central banks, a flight from financial assets to stored goods, sacrifices the hope of future abundance for certain present scarcity. Governments can shut futures exchanges, confiscate gold, ban "hoarding, profiteering, and price-gouging". People will hoard anyway if they don't believe in the paper. People are losing faith in financial assets for good reason. Rather than organizing productive economies, the machinery of finance has recently functioned as an anesthetic, masking the pain while resources were mismanaged and stolen. We need a solid financial system, but confidence cannot be imposed or legislated. It will have to be earned. There has to be a plan. Earnest promises to do better soon won't suffice. Nor will yet another drink from the punch bowl.

Since the pillar of the world’s Paper money standard depends solely on faith on the credibility of the issuer of money, all it needs to topple the entire system is to lose such binding faith. I hope we don’t lose it.