Greece Crisis: The Lehman Moment Hobgoblin

But while, as in the lynch mob, the majority can become actively tyrannical and aggressive, the normal and continuing condition of the State is oligarchic rule: rule by a coercive elite which has managed to gain control of the State machinery. There are two basic reasons for this: one is the inequality and division of labor inherent in the nature of man, which gives rise to an "Iron Law of Oligarchy" in all of man's activities; and second is the parasitic nature of the State enterprise itself. Murray N. Rothbard For a New Liberty: The Libertarian Manifesto

Some have suggested that the ongoing crisis in Greece could epitomize the counterpart to the Lehman episode, which triggered global meltdown contagion in 2008.

As Olli Rehn, European Union Economic and Monetary Affairs Commissioner said in a recent Bloomberg interview[1]

“We have always been concerned of contagion,” Rehn said. “One of the achievements over the past one-and-a-half years has been that we have been able to prevent a financial meltdown in Europe. We have been able to avoid a Lehman Brothers kind of catastrophe on the European soil. And moreover, we have been able to contain the crisis to the three countries now under the program,” he said.

This rabid fear of fractional reserve banking induced debt deflation represents as only one of the major influences guiding the current path of policymaking. It’s partly ideological.

But most importantly this signifies as the implicit desire to keep the current unholy central bank-government-banking system cartel or patronage system intact.

Proof of this is that the exigency to conduct bailouts has almost been representative of the creditor nation’s banking system exposure to crisis affected economies[2]

Any signs that would risk the survival of this tripartite global political arrangement would translate to urgent or contingent collaborative actions, despite political differences.

Faced with the risks of a Greek default, the ECB and Germany have been working on a compromise[3]. China’s recent declaration to help shore up Eurozone bonds or the bailout of Greece[4] has also demonstrated such tight kinship on a global scale.

The current framework of socio-political institutions has been built around such symbiosis. It’s a relationship based on financial repression.

And unknown to most, the political elites will fight to maintain this status quo despite the unpopularity on the constituency.

Politicians essentially know that they can manipulate voters.

Voters have mostly elected leaders for what they stand for. But once in power, people cannot or will not be able influence the politicians’ actions, which usually depart from their pre-election promises.

And this is what most experts don’t get.

So political elites will come up with usual hobgoblins as the “Lehman Moment” to ensure that accompanying policies would translate to the preservation of their political privileges.

Misdiagnosing Greeces’ Problems

It would be misplaced to argue that the survival of the Euro depends on “political and fiscal union” as celebrity guru Nouriel Roubini writes[5].

Had this been true, then the Soviet Union would have still existed. The USSR had a centralized monetary system, political and fiscal union but got dissolved.

The current problems of the Euro have not been because of the lack of centralization but because of it.

Political spending has reached levels whereby the productive sectors of the society can’t afford to pay.

As exhibited in the above charts, government spending growth[6] and a nation’s ability to pay[7] has been tightly correlated.

Thus, the political economy of institutional centralized redistribution (or free lunch policies) backfires once economic imbalances has reached the “tipping point”.

Essentially the Bismark-Keynesian concepts of welfare economics have reached a point of having to boomerang. We are at this turning point.

Thus the key to restoring competitiveness is to REVERSE the fundamental cause of such imbalance—government spending or dismantle or reduce welfarism.

The unfolding Greece crisis should be a reminder of the unviability of false promises and serves as preview of what we should expect once a major bubble bust emerges—but this time at a much larger scale.

Deflation Charade

I read of some comments that suggests of a deflation risk from Greece’s insistence to keep up with the “fiscal austerity” and that Greece would greatly benefit from exiting the Eurozone where she can devalue at will.

And that by devaluing this risk “flooding the Eurozone with ‘cheap’ goods”.

Despite the current crisis, Greece has NOT been suffering from deflation but from stagflation as shown in the charts from tradingeconomics.com[8]

Yet devaluation would not solve Greece’s economic predicament because her debt are mostly denominated in Euros.

An exodus from the Euro coupled with devaluation would only mean Greece would need more drachmas to pay for Euro based obligations unless she can convert these to drachmas ahead of devaluation.

In addition, it is such a nonsense to believe that cheap currency equals export greatness. If this snakeoil economics is to believed then Zimbabwe would have been an export titan, the Philippines would have also been one of the most prosperous.

Besides, if the riots in Greece has been about maintaining political entitlements, then this won’t lead to increased investments and expansion in productive ventures, but rather, this increases the risks of a European version of Dr. Gono's Zimbabwean policy, once Greece does exit from the Euro.

To believe that banking or fiscal austerity based deflation would cause the Euro’s demise is loopy.

Throughout history, currencies usually die from hyperinflation or from wars[9]. Reducing the prospect of war has been one of the main pillars why the Eurozone Union was put to existence[10]. This leaves hyperinflation as the biggest threat.

The Mises moment is when a critical choice will have to be made between policies that could lead to hyperinflation or mass deflation.

I don’t think that today’s condition would warrant such decisions yet as central banks still have some leeway to move about.

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[1] Bloomberg.com Rehn Sees Markets Misreading of EU Leaders’ Intentions on Greece, June 16, 2011

[2] Economist.com Piggybacking, Daily Chart, April 15, 2011

[3] Wall Street Journal Schaeuble Calls For ECB Compromise On Greece, Boosting EFSF-Spiegel, June 19, 2011

[4] See China to Assist in the Bailout of Greece, June 18, 2011

[5] Roubini Nouriel, Could the Eurozone Break Up? June 18, 2011

[6] Buttonwood’s Notebook Spending too much or taxing too little? Economist.com April 4, 2011

[7] CreditWritedowns.com Five Misconceptions Squashed, June 2011

[8] Tradingeconomics.com Greece Indicators

[9] Dollardaze.org, Demonetized Currencies

[10] See Buy The Peso And The Phisix On Prospects Of A Euro Rally, June 14, 2010

China to Assist in the Bailout of Greece

I have been saying that today’s globalization has not been limited to trade, investment and labor but also to the conduct of policies.

Recent concerns over Greece debt and entitlement Crisis has prompted China to renew her pledge of support to latest the bailout scheme still being finalized by the Eurozone as of this writing.

This report from the Reuters, [bold emphasis mine]

China's "vital" interests are at stake if Europe cannot resolve its debt crisis, the Chinese Foreign Ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner.

At a media briefing ahead of Chinese Premier Wen Jiabao's visit to Europe next week, Vice Foreign Minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade.

"Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us," Fu said.

"China has consistently been quite concerned with the state of the European economy," she said.

Wen is due to visit Hungary, Britain and Germany late next week, just months after he visited France, Portugal and Spain and offered to help Europe overcome its debt woes.

Well China’s earlier purchases had already been substantial.

From another Reuters article [bold emphasis added]

The Asian powerhouse has been steadfast in its support for the Eurozone since the onset of the crisis. It purchased a significant amount of EUR440bn EFSF rescue facility that started auctioning bonds earlier this year. Although it is difficult to clarify how large its European debt holdings actually are since this data isn’t published by China’s Sovereign Wealth Fund, it is thought to include Greek, Portuguese and Spanish bonds.

Some observations

This adds to the pile of evidence of the tightly entwined and coordinated actions of the central bank-government-banking system global cartel.

Remember, it isn’t Greece who is being bailed out but bondholders which comprise mostly foreign banks. The global political claque appears to be closing ranks.

One positive aspect is that trade fosters such collaborative action, even if trade could have possibly been just as a guise or a subordinated priority.

This should also serve as a foreign policy guide in dealing with China especially applied to the local Spratlys dispute. Elsewhere in the world, China’s foreign policy appears tilted towards cooperation than belligerency.

Finally, the money China will utilize, from her mounting over $3 trillion forex reserves, in assisting Europe would likely come at the expense of supporting US bonds. This should put more pressure on the US Federal Reserve to redeploy QE but perhaps in another name and or another form.

China has reportedly marginally increased her bond purchases from the US last April, but statistical inflation continues to ramp up (despite 4 policy rate increases). China’s bubble cycle appears to be in the maturing stage as her property sector continues to sizzle despite her government’s actions.

War on Gold and Commodities: Ban of OTC Trades and ‘Conflict Gold’

In the US, in compliance to the new law, the Dodd-Frank Act, Over The Counter (OTC) trades will be prohibited beginning next month.

Lew Rockwell quotes the Forex.com

As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

Next, an initiative to standardized screening of sourcing of gold via certification to prevent so called ‘financing of war or insurgency’ has taken shape.

Diamonds have already been subject to this measure and this has widely been known as Blood Diamond.

From Tyler Durden of Zero Hedge,

In what could be the oddest development in the precious metals market in a long time, the World Gold Council has just unveiled an initiative whose sole purpose if to combat "conflict gold." From the just released notice: "The World Gold Council today announces that, working together with its member companies and the leading gold refiners, it has produced a draft framework of standards designed to combat gold that enables, fuels or finances armed conflict. The draft standards represent a significant, industry-led response to this challenge and are designed to enable miners to produce a stream of newly-mined gold which is certified as ‘conflict free’ on a global basis."

While we are confused what exactly is being pursued with this action, aside from the creation of a black market for gold of course, it does seem that the logical end result will be a decline in the total supply of "certified" gold.

On the other hand, it will also afford the WGC or any prevailing authority the ability to brand any country it so chooses (Indonesia?) a sourcer of "conflict gold" and effectively clamp down on the production of the yellow metal. Additionally, what better way to deprive a gold sourcing country of massive export revenues than to effectively make their product unsellable in the "legitimate" market. Which then would lead to a surge in fair market value due to supply considerations.

While the pretext is to prevent financing illegitimate activities, the ulterior objective is to exert wider swath of control over the gold and commodity markets.

Apparently, all these looks like more signs of desperation as cracks on the US dollar standard widens.

US Economy: Manufacturing and Technology as Sunshine Industries?

Perhaps enrollment trends could serve as an indicator or clue on how the US economy (and perhaps the world economy) will take shape.

According to the Wall Street Journal,

Harvard Business School's incoming class will have a substantially smaller percentage of finance professionals than in previous years. Instead, a higher number of students will have manufacturing and technology backgrounds.

According to preliminary figures from Harvard's admissions department, about 25% of the 919 students in the class of 2013 are from finance industries— including private equity, banking and venture capital—compared with 32% last year.

Harvard administrators say the change reflects a greater quantity of strong applicants from nonfinance industries. The number of applicants from the finance world decreased as recession woes eased, as well.

Students with manufacturing backgrounds make up 14% of the class of 2013, up from 9% the previous year. Technology rose three percentage points to 9%.

Professor Arnold Kling calls it the Patterns of Sustainable Specialization and Trade [PSST] or the process where markets continually work to discover on where consumer demands are or the new patterns of trade.

Harvard’s incoming MBA class shows manufacturing as having the greatest growth followed by technology.

Could this signal that the new patterns of trade will become more apparent in the US manufacturing and technology industries? Will these two industries signify as the sunshine industries? (hat tip Mark Perry)

Video: Understanding Liberty and Equality

Professor James Otteson, in the video below, explains the relationship between Liberty and Equality


From LearnLiberty (bold emphasis mine)

Two central values in American political life are liberty and equality. But are these two values in tension with one another?

As philosophy Prof. James Otteson explains, it depends on how you define them. There is more than one way to think about liberty, and more than one way to think about equality. For example, when talking about equality, there are two different central conceptions. The first is formal equality, equality that comes from the form of institutions. An example of formal equality is equality before the law: all laws apply equally to everyone. Formal equality is a central tenet of the classical liberal tradition, and compatible with individual liberty.

But a second conception of equality is material, or substantive, equality. Material equality holds that people ought to be equal in material respects, such as wealth or resources.

Material equality poses real challenges to classical liberalism, and according to Otteson, also faces challenges of its own. Otteson outlines three major challenges to material equality: first, it may be impossible, both to measure, and to achieve. Second, material equality interferes with human diversity. Humans have different talents, different interests, and different values, which in a free society get reflected in a range of goods & activities that individuals acquire and pursue. To try to enforce some kind of material equality would mean interfering with this diversity.

That leads to the third problem, which is that material equality interferes with human dignity. Part of what it means to have human dignity is to have the capacity and the freedom to make choices. These choices are reflected in the way we live our lives; to respect the free choices that people make is to respect their dignity. Enforcing material equality would necessarily interfere with the free choices that people make.

Ex-US President Jimmy Carter: Call Off the Global Drug War

Former US President Jimmy Carter joins the bandwagon calling for an end to the Global War on Drugs.

Writing in the New York Times, (bold emphasis mine)

IN an extraordinary new initiative announced earlier this month, the Global Commission on Drug Policy has made some courageous and profoundly important recommendations in a report on how to bring more effective control over the illicit drug trade. The commission includes the former presidents or prime ministers of five countries, a former secretary general of the United Nations, human rights leaders, and business and government leaders, including Richard Branson, George P. Shultz and Paul A. Volcker.

The report describes the total failure of the present global antidrug effort, and in particular America’s “war on drugs,” which was declared 40 years ago today. It notes that the global consumption of opiates has increased 34.5 percent, cocaine 27 percent and cannabis 8.5 percent from 1998 to 2008. Its primary recommendations are to substitute treatment for imprisonment for people who use drugs but do no harm to others, and to concentrate more coordinated international effort on combating violent criminal organizations rather than nonviolent, low-level offenders...

Drug policies here are more punitive and counterproductive than in other democracies, and have brought about an explosion in prison populations. At the end of 1980, just before I left office, 500,000 people were incarcerated in America; at the end of 2009 the number was nearly 2.3 million. There are 743 people in prison for every 100,000 Americans, a higher portion than in any other country and seven times as great as in Europe. Some 7.2 million people are either in prison or on probation or parole — more than 3 percent of all American adults!

Some of this increase has been caused by mandatory minimum sentencing and “three strikes you’re out” laws. But about three-quarters of new admissions to state prisons are for nonviolent crimes. And the single greatest cause of prison population growth has been the war on drugs, with the number of people incarcerated for nonviolent drug offenses increasing more than twelvefold since 1980.

Not only has this excessive punishment destroyed the lives of millions of young people and their families (disproportionately minorities), but it is wreaking havoc on state and local budgets. Former California Gov. Arnold Schwarzenegger pointed out that, in 1980, 10 percent of his state’s budget went to higher education and 3 percent to prisons; in 2010, almost 11 percent went to prisons and only 7.5 percent to higher education.

There’s been a snowballing awareness that prohibition laws, particularly the war on drugs, eventually ends up with MORE accrued adverse effects than the intended benefits.

Unfortunately, events will turn for the worst before such feckless laws will get repealed.

And the sad part is that taxpayers everywhere will endure most of the burdens, aside from the extended risks of societal degeneration from the prospects of escalation of violence, rampant corruption, obstacles to medical advancement, loss of civil liberty, police brutality and many other injustices from war on drugs related regulatory abuses.

Noble intentions will not substitute for economic reality, that’s why whether prohibition is applied to drugs, illegal gambling such as jueteng (Philippines), prostitution or etc..., they are all bound for failure.

Corruption in China: $124 billion over 15 years

I recently came across an article from a China Pollyanna who claims that China’s government spending has generated “greater business efficiency”. (not Jim Rogers)

This reminds me of how bubble markets operate; euphoria tends to rationalize developments as predominantly positive.

As Japan’s bubble experience reveals, which this New York Times article narrates,

In the 1980s, Japan's growing middle class lived large, flying by the planeload on flashy shopping trips to Paris and snapping up luxury condominiums in New York and Hawaii. While today the U.S. is concerned about the challenge from China, 20 years ago it was Japan that had Americans nervous. Economists predicted that Japan would replace the U.S. as the world's largest economy by 2010.

We know where Japan’s economy stands today.

And so how efficient has China government’s spending been?

$124 billion funneled to the pockets of politicians and bureaucrats!

From the Financial Times,

Corrupt Chinese officials smuggled an estimated Rmb800bn ($123.6bn) of ill-gotten gains out of the country over a 15-year period, according to a report released by China’s central bank.

Around 17,000 Communist party cadres, police, judicial officers and state-owned enterprise executives fled the country between the mid-1990s and 2008, the 67-page report said.

For higher-ranking officials who managed to abscond with large amounts of money, the ÛS was the favourite destination, while Canada, Australia and the Netherlands were also popular. Those who could not immediately secure visas for western countries often chose to stay in small countries in eastern Europe, Latin America and Africa while they waited for a chance to move to their final intended destination.

Lower-ranking officials tended to escape to countries bordering China, the report said. The independently administered Chinese territory of Hong Kong was also a popular transit point.

The report, stamped “internal materials, store carefully” and compiled in June 2008, was published on the website of the central bank’s anti-money ­laundering bureau this week. The bureau took the report down after it generated a public outcry.

Well, many in the Chinese government have indeed been very efficient in pocketing of other people’s money.

It's no different when a recent report shows that $6 billion worth of reconstruction funds were reportedly lost by both the Iraqi and the US government.

The common denominator is that government is very efficient in wasting and or in purloining of taxpayers resources.

Political Repression: Sacrificing Lives of Constituents and Mind Control

Here is another example of the myth of good government.

When political leaders are faced with the risks of losing their power, they will abandon or put to risk the lives of their constituents.

In fearing the ripple effect from the Arab Spring (wave of recent uprisings), the North Korean government has responded by refusing to repatriate her citizens stranded in the chaotic Libya.

The Foreign Policy reports, (bold emphasis mine) [pointer to Mark Perry]

In mid-February, as Libya shook to the incipient revolt against Muammar al-Qaddafi, around 200 North Korean migrant workers found themselves stranded. Like their compatriots in other parts of the Middle East, they had been brought in to work as cut-price doctors, nurses, and construction workers. But with a popular uprising unfolding, their government now refused to repatriate them.

According to reports, Pyongyang ordered the workers to remain in Libya out of fear that what they witnessed -- a full-blown popular rebellion against Qaddafi's dictatorship -- could lead to a copycat rebellion back home. "The fear was obviously that these 200 would have a kind of a viral effect, bringing news and information about what was happening in Libya," said Tim Peters, founder of Helping Hands Korea, which aids North Korean refugees.

Mass popular uprisings, so often a contagious affliction, pose problems for any dictatorship. For North Korea, the outbreak of revolts in Egypt and Libya -- two steadfast allies of the hermit regime -- has prompted swift moves to head off a similar outbreak of democracy on its own turf.

And it’s not just that, leaders will even turn to repress on their people when their political interests are at stake such as what has been happening in Libya, Yemen, Syria or elsewhere.

In the North Korean experience above, part of the crackdown against the prospect of a People Power revolt has been to seize possession of cellphones and to clamp down on access to foreign media, because...

(from the same article; bold emphasis added)

"What the authorities fear the most is in fact information," said Hyun In-ae, vice president of NKIS, which smuggles USB sticks containing entertainment and political materials into North Korea...

In recent interviews with North Korean refugees, Noland has detected what he calls a "market syndrome," suggesting a link between participation in illicit market activities, foreign news consumption, and negative views of the regime. Black markets, he said, have the potential to turn into a "semiautonomous zone of social communication" and a possible space for political organizing. "In short," Noland said, "information and markets are linked."

That’s why governments abhor free markets, because free markets are the epicenter of information that coordinates people’s actions. And such actions may include the power to neutralize the political interests of tyrannical leaders.

But one might be tempted to object:

“but that is North Korea and should not apply to the US or the Philippines.”

As the great Friedrich von Hayek reminds us, (The Road to Serfdom) [bold emphasis mine]

Collectivism means the end of truth. To make a totalitarian system function efficiently, it is not enough that everybody should be forced to work for the ends selected by those in control; it is essential that the people should come to regard these ends as their own. This is brought about by propaganda and by complete control of all sources of information.

In short, control of information, which leads to mind control or indoctrination for political subjugation, is the essence of totalitarianism. And this has universal application.

The Myth of Good Government

One my favorite video clips is when Milton Friedman was interviewed by Phil Donahue in the 70s on the topics of greed and virtue.

In addressing Mr. Donahue’s suggestion that governments ought to “reward virtue” Mr. Friedman rebutted (bold emphasis added)

"And what does reward virtue? You think the communist commissar rewards virtue? ...Do you think American presidents reward virtue? Do they choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout? Is it really true that political self- interest is nobler somehow than economic self-interest? ...Just tell me where in the world you find these angels who are going to organize society for us?"

The illusion of “rewarding virtue” can be seen in the appointments of US President Obama,

From the Politico, (bold emphasis mine)

More than two years after Obama took office vowing to banish “special interests” from his administration, nearly 200 of his biggest donors have landed plum government jobs and advisory posts, won federal contracts worth millions of dollars for their business interests or attended numerous elite White House meetings and social events, an investigation by iWatch News has found.

These “bundlers” raised at least $50,000 — and sometimes more than $500,000 — in campaign donations for Obama’s campaign. Many of those in the “Class of 2008” are now being asked to bundle contributions for Obama’s reelection, an effort that could cost $1 billion...

More (from the same article; emphasis added)...

The iWatch News investigation found:

Overall, 184 of 556, or about one-third of Obama bundlers or their spouses joined the administration in some role. But the percentages are much higher for the big-dollar bundlers. Nearly 80 percent of those who collected more than $500,000 for Obama took “key administration posts,” as defined by the White House. More than half the 24 ambassador nominees who were bundlers raised $500,000.

The big bundlers had broad access to the White House for meetings with top administration officials and glitzy social events. In all, campaign bundlers and their family members account for more than 3,000 White House meetings and visits. Half of them raised $200,000 or more.

Some Obama bundlers have ties to companies that stand to gain financially from the president’s policy agenda, particularly in clean energy and telecommunications, and some already have done so. Level 3 Communications, for instance, snared $13.8 million in stimulus money.

And it’s not just President Obama, but also past President Bush (from the same article; emphasis added)

Public Citizen found in 2008 that President George W. Bush had appointed about 200 bundlers to administration posts over his eight years in office. That is roughly the same number Obama has appointed in a little more than two years, the iWatch News analysis showed.

Well, that’s in the US which supposedly is a country whose political institutions are far sounder than the most of the world.

Yet in the Philippines, it’s been no different.

From Sunstar.com.ph (emphasis added)

FRIENDS and allies of President Benigno Aquino III occupying government positions are not considered “untouchables” and will not be spared from corrections, the President’s spokesman said.

Presidential spokesperson Edwin Lacierda admitted that President Aquino prefers to appoint people whom he has level of comfort but it does not mean that they are not beyond criticism.

So there you have it.

Milton Friedman was correct to debunk the romanticized idea that governments’ reward the virtuous.

Instead, the main beneficiaries of the division of the spoils via political appointments (or political concessions) have been from political allies and political clients, vested ‘rent seeking’ interest groups, families and friends. And this dynamic applies to any form of government.

Realize that political leaders or bureaucrats are human beings or self-interested agents too, whom are subject to the same fragilities (biases, knowledge limitations, different interpretations based on diverse value preferences, cultural orientation, education and etc.) as everyone else.

The difference is in the incentives that governs them with those of economic agents.

Instead of profits and losses, these entities use institutional coercion or violence to redistribute resources based on political exigencies (e.g. populism) with the ultimate aim of annexation and preservation of power and of social image. Thus, the reliance on so-called ‘comfort zones’ as every society operates on diversified interests which continually competes for scarce resources.

Despite the popular notion, Government or the State will NEVER be about virtue or morality.

So for those who stubbornly insist of having “good governments”, be it known that dreams or illusions can last forever.

Ron Paul’s Portfolio: Long Gold and Commodities while Short on Stock Markets

From a recent public disclosure, Bob Wenzel of the Economic Policy Journal [EPJ] lists the current portfolio holdings of Presidential candidate Ron Paul.

From EPJ,

Here's Ron Paul's portfolio:

Agnico Eagle Mines

Allied Nevada Gold Corp.

Alumina Common

Anglo Gold Ashanti Ltd.

BrigusGold Corp. Com MPV (formerly Apollo Gold Corp)

Barrick Gold Corp.

Claude Research Inc

Coeur D'Alene Minds Corp.

Dundee Bancorp

First National Bank of Lake Jackson

Gold Corp Inc

Hecla Mining Co.

El Dorado Gold Corp.

IAM Gold Corp.

Kinross

Lexam Explorations Inc.

Mag Silver Corp.

Metalline Mining Co.

Mutual Securities Inc.

Newmont Mining Corp.

Pan American Silver

Petrol Oil and Gas

Prudent Bear Mutual Fund

Rydex Dynamic Venture

Rydex-Ursa Mutual Fund

Silver Wheaton Corp

Texas Dow Employees Credit Union

Texas Gulf Bank

Virginia Mines Inc.

Vista Gold Corp.

Viterra Inc

Wesdome Gold Mines Ltd.

Ron Paul practices what he preaches, unlike many social utopians (politicians and their zealots) who lack convictions to act on what they believe in.

Mr. Paul has been mostly long gold and other commodities while short the stock market (Prudent Bear Mutual Fund and Rydex-Ursa Mutual Fund)

Importantly Cong. Paul, according to Mr. Wenzel, has held on to this portfolio mix for a long time, which means Mr. Paul's portfolio should have pretty much an above-average return, considering how commodities have outperformed stocks and bonds over the years. (chart above from David Rosenberg but goes from August 1999-2009-the big picture)

I wonder how Mr. Paul’s portfolio would fare relative to the Sage of Omaha Mr. Warren Buffett.

Corn Prices Drifts near Record Highs Amidst Stock Market Turmoil, Signs of Stagflation?

Recently, prices of corn raced to record highs, although downside volatility has dominated the past few days. Nevertheless corn still drifts at near record levels.

Chart from Ino.com

Bloomberg’s chart of the day posits that demand has been outpacing supply as the alleged main reason.

From Bloomberg,

Corn demand is accelerating beyond farmers’ ability to boost yields, depleting stocks and adding to price gains as consumption in China and ethanol factories grows.

The CHART OF THE DAY shows gains in farm productivity have trailed demand that expanded more than fourfold since 1961, according to U.S. Department of Agriculture data. Consumption accelerated in the past decade on Chinese demand for feed and corn starch and increased use in the U.S. for ethanol output.

Corn futures climbed 86 percent in the past 12 months, more than any other grain traded in Chicago, after dry weather limited the 2010 U.S. crop and as flooding in the past two months delayed planting, threatening prospects for this year. July delivery corn rose to a record $7.9975 last week.

“It’s a huge problem,” Abdolreza Abbassian, a senior economist at the United Nations’ Food and Agriculture Organization, said from Rome. “This is primarily U.S. ethanol and starch in China, and then you have the feed where you have stronger growth, again in China, but across the world.”

Consumption demand represents an oversimplistic tale.

There are many questions to ask

To what degree of consumption has been artificially boosted easy money globally?

How much of the imbalances or diversion of resources have been due to subsidies to ethanol?

To what degree has restrictive trade policies (locally or internationally) has contributed to hampering of the supply side?

To what degree of local based regulations has contributed to boosting the demand side?

Why has there been a generalized increase in food prices if consumption has only been the major factor involved?

There are many more.

It’s easy and popular to attribute consumption growth to China, but China has been in the process of inflating her ballooning bubble economy, which means whatever growth we see, a large segment of which must be artificial.

Only when China’s bubble implodes shall we see the true extent of the consumption ‘growth’ story.

Lastly high corn prices as stock markets undergo selling pressures seem much like symptoms of stagflation.

From Tradingeconomics.com

Even in the US, statistical inflation figures has been going higher.

Yet the mainstream keeps denying them. Data from recent news, as producers and consumer prices indices, reveals that prices have risen beyond the expectations of the ‘experts’. This even comes in the face of the questionable method of computing for inflation indices.

Incidentally, denial makes up the 2nd stage of the Kubler Ross grief cycle. This denial is especially strong for those blighted with ideological (political and economic) biases.

It will take more pain for these people to finally reach the state of acceptance or reality, especially for those who insist to live in a self-designed world.

Minnesota a la Greece, Bill Gross says US Worst than Greece, PIIGS

If Greece has been one of Europe’s major headache, then the US has her counterpart, Minnesota.

From yahoo.com

Time is running out for Minnesota's parks, highway rest stops and public universities, not to mention 36,000 state employees.

If Gov. Mark Dayton and lawmakers don't agree on a budget by June 30, the state government is expected to shut down. The state moved one step closer to this outcome on Friday by sending layoff notices to much of the state workforce.

Should officials not resolve their differences in time, state parks and highway stops could be shuttered over the busy Fourth of July weekend. Forget about renewing a driver's license or taking classes at state colleges. Nonprofit agencies may have to suspend their social services if their state funding disappears.

As for the state workers, they'll have to wait to see who is deemed critical. The rest could lose their pay, and some their health benefits. The unions have already launched a campaign pressuring state officials to pass a budget.

At issue is whether to close a $3.6 billion budget shortfall by increasing taxes or making spending cuts. The decision must be made before the fiscal year ends on June 30.

I know Minnesota is small compared to Greece. But the point is both have been suffering from the same sin—profligate government spending—and now faces the consequences. Reality stares on them.

Yet seen from a relative standpoint, Pimco’s Bill Gross says that the US is in worst condition than Greece or the Eurozone.

Mr. Gross’ recent analysis or outlook squares with mine.

Incidentally Mr. Gross, formerly an apostle of Krugman, has reversed his position, since his uber-Keynesian partner Paul McCulley departed from (or kicked out of?) PIMCO in December 2010.

From CNBC, (bold emphasis mine)

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."

Politicians and their fanatic worshipers think that money printing measures will help solve such dilemma by kicking the proverbial can down the road. They’re dead wrong. [If they have strong enough convictions, they should put all their money in shorting gold]

If Mr. Gross analysis is accurate, then this only shows that socio-economic problem of the US is so remarkably huge. And that if the US obstinately pursues on the money printing path, the scale of such undertaking would equally be colossal. This brings to fore the risks of hyperinflation, which is what US presidential aspirant and candidate Ron Paul has recently warned of and which could also be read as his prediction.

This is also why I have been saying that the next crisis will be even more devastating than 2008, as both the banking system and governments have already been pushed wall. The next crisis will likely see what I call the Mises Moment: either massive defaults by governments and a possible collapse of the banking sector or the worst alternative—hyperinflation. I can't fathom yet how the technology driven globalization will be impacted.

Yet hyperinflation would likely mean the end of the de facto US dollar standard or even the closure of US Federal Reserve as Nassim Taleb predicts or even possibly the disintegration of the Euro too (if the Euro would hyperinflate along with the US).

Finally there are many speculations on the new terminology of money printing or currently known as Quantitative Easing.

Jim Rogers calls sarcastically his version as the ‘cupcake’. Bill Gross sees a price cap on 2-3 treasuries and David Rosenberg calls his the ‘Operation Twist’

At the end of the day, what faces the world is the risk of debt defaults or default by hyperinflation.

Ben Bernanke on Debt Ceiling: Only I am Allowed to Dabble with Politics!

US Federal Reserve chairman Ben Bernanke warns that the US debt ceiling should NOT be used as a bargaining chip.

Yet he goes on to talk down on the supposed nasty implications of NOT raising the debt ceiling

From the UK’s Telegraph,

Federal Reserve Chairman Ben Bernanke said the US could lose its AAA credit rating and create a new crisis in the financial markets if it does not raise the cap on government debt.

Mr Bernanke warned that if the $14,300bn (£8,784bn) debt ceiling was not lifted quickly there could be disastrous consequences.

"Even a short suspension of payments on principal or interest on the Treasury's debt obligations could cause severe disruptions in financial markets and the payments system, induce ratings downgrades of US government debt, credit fundamental doubts about the creditworthiness of the United States, and damage the special role of the dollar and Treasury securities in global markets in the longer term," he said.

American journalist and libertarian H. L. Mencken once wrote,

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

By putting pressure on the opponents to raising the debt ceiling, Mr. Ben Bernanke is essentially saying,

I am the only person entitled to do politics, because I am the expert and everybody else does not know what they are talking about.

Apparently Mr. Bernanke is using 'fear' from 'hobgoblins' as leverage to reach a political compromise.

Of course, we also know how much of an expert Mr. Bernanke is considering his highly inspirational track record.

Quantitative Easing and Shadow Banking Liabilities

I have repeatedly been arguing that the US banking system cannot last in an environment without inflationism or money printing or Quantitative Easing or “cupcakes” (as Jim Rogers would call it) unless the US government would allow for a violent deflationary unwind (yes another crisis of greater proportion compared to 2008).

The latter seem as a NO OPTION—for ideological and political reasons—or a Hobson’s choice.

Zero Hedge’s Tyler Durden points out that the collapsing liabilities of the shadow banking system have essentially been offset by the recent US Federal Reserve’s QE programs. In short, to stave off a continuing meltdown that would negatively affect the US banking system requires continued rounds of QEs.

Mr. Durden writes, (bold highlights mine)

And the most important chart: consolidated financial liabilities (total credit money) and the sequential change. Note that in Q1, courtesy of QE2, we have just experienced a jump in this series of a whopping $343 billion. Absent this jump the economy would have plunged into a deflationary collapse... And Ben Bernanke knows this...

Which leaves just one option: the Federal Reserve... Whose ongoing boost in excess reserves (its Liability) for the pendancy of any monetary easing episode, results in an increase in Reserve assets at Commercial Banks (their asset), but more importantly, a boost in Commercial bank liabilities, be they US (which is not the case) or (foreign) which we have now proven twice is what is happening. Simply said, absent the ongoing transfer of credit money liabilities, so critical to keep the economy growing, from the Fed to private institutions, there will be no marginal growth in the consolidate financial system's liabilities. Which in turn means outright deflation.

And you can bet your bottom fiat piece of linen and cotton that Ben Bernanke knows this all too well.

With QE2 ending just as Q2 ends, we are convinced that the next Z.1 report, due out in early September, will show another massive jump in liabilities... And that's it. It's all downhill from there. Unless, of course, the Fed comes up with another Fed to Commercial Bank liability transfer program, which the Fed can call it whatever it wants. The point is: it is critical for it to materialize soon or else, the economy, without a marginal source of new debt, will plunge in the deflationary abyss that the $5.1 trillion plunge in shadow liabilities would have created had it not been for Ben Bernanke.

Take away the money printing or the “cupcakes” and the entire house of cards collapses.

Ben Bernanke seems trapped from his own actions. And that’s unless one believes that a Deus ex machina (god out of the machine) would emerge to save the day.

Quote of the Day: Fatalities from Organic Farming

From a comment on an article (source: Matt Ridley)

One German organic farm has killed twice as many people as the Fukushima nuclear disaster and the Gulf Oil spill combined.

Evidence of the Distortive Effects of Government Policies on Financial Markets

Howard Simons at the Minyanville explains, (bold emphasis mine)

The Chicago Federal Reserve produces a personal consumption & housing (PCH) index dating back to March 1967; it has declined every month since January 2007. The duration and extent of this decline, 52 months and counting, is unprecedented in the series and most likely is the longest and deepest downturn since the Great Depression.

Note, however, what its relationship to the S&P 500’s year-over-year changes has been. It used to be the stock market led the PCH index by about three months. More important than the lead-time was the congruence of direction: If the stock market rose, so did the PCH and vice-versa.

What happened after QE1 began? Let’s run a simple in-sample regression model with the PCH index as a function of the S&P 500’s year-over-year changes lagged three months over the June 1967 – February 2009 period and save the coefficients. The fitted values of that model are shown in red below. If we then apply those coefficients to the March 2009-forward out-of-sample period, we see the fitted values in green. They are, starting one year after the 2009 rally began, much higher than the actual PCH index in blue. For example, the actual value of the PCH index at the end of April was -0.39; the out-of-sample fitted value was 0.04.

This is equivalent to saying the change in policy produced a change in financial markets without producing a change in the underlying real economy. There is your circus; you are on your own for the bread part of the deal.

This shows of the distortive effects of government policies on financial markets.

Also this represents additional evidence where markets today don’t accurately signal the actual balance of demand and supply.

Government policies have been major (if not the primary) factors in determining asset values.

It also shows that government can rig the game to benefit specific interests (banking sector over the real economy)

Finally, that the correlation-causation dynamics can change depending on the underlying forces, which in this case has been government interference.

So looking solely at correlation would signify as a dicey and tenuous way to analyze events unless one understands the likely (causal) drivers behind the market's actions.

Video: Jim Rogers says QE 3.0 could be Disguised

Legendary investor Jim Rogers says in this interview that the US Federal Reserve will engage in QE 3.0 when events get worst but will likely disguised it;

They may disguise it, they may call it cupcakes

Since governments are political entities, then they employ politics even in the way they communicate to the public.

A good example is the political language called doublespeak which Wikipedia defines as

language that deliberately disguises, distorts, or reverses the meaning of words. Doublespeak may take the form of euphemisms (e.g., "downsizing" for layoffs), making the truth less unpleasant, without denying its nature. It may also be deployed as intentional ambiguity, or reversal of meaning (for example, naming a state of war "peace"). In such cases, doublespeak disguises the nature of the truth, producing a communication bypass.

Quantitative Easing or credit easing policies is essentially money printing which is an example of euphemism or doublespeak.

So yes we could expect another doublespeak in terminologies applied for the next round of money printing or inflationism.

Video: Cato and Fraser Institute on the Economic Freedom of The World Report

The Fraser Institute and Cato Institutes discusses the Economic Freedom of The World Report which shows the strong relationship between economic freedom and economic development

Another Endorsement for the Prudent Investor Newsletters

On my linkedin profile page, long time reader, Wharton grad, highly successful investment banker and corporate finance advisor and currently Managing Director, Corporate Finance & Consulting at the Center for Global Best Practices, Mr. Tony Herbosa posted this recommendation...

For anyone serious about investing in the Philippines, Benson's Prudent Investor Newsletters are a must read on a continual basis. I must say that the PI newsletters have helped me anticipate major turning points in the market.

My profuse thanks, Tony.

Incidentally, I found that one of my articles had been referenced in an article by a Mises.org contributor and author published at the top libertarian website (based on Alexas), Lew Rockwell.com.

Nothing to crow about, but such surprising discovery had been a delight for me, since I frequent the site.