Harvard’s Carmen Reinhart: Pensions are Screwed, Higher Inflation is a Safe Bet

Harvard economist and professor Carmen Reinhart, who along with co-Harvard peer authored a book chronicling world crises in the bestseller, This Time is Different has recently been interviewed by the Der Spiegel. (bold mine, hat tip zero hedge)

On the real reason for negative interest rates and QEs… 

Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis.

Oops. Financing government deficits has indeed become the norm. This is an essential ingredient to the risks of hyperinflation

On the difference between today and World War II…

Reinhart: No, but after World War II austerity was easier to pursue, because you had a younger population and therefore less entitlements. Furthermore, military expenditure was easier to reduce. So, the build-up in debt we have seen since the crisis is very rare. Usually you get that kind of build-up when there is a war.

Why huge debt has been a burden…

Reinhart: I am not opposing this change, I am just stating it. You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt.

Why governments resort to plundering of people’s savings by financial repression…

Reinhart: The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means..

Monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments.

Financial repression policies only adds to the debt stock, real austerity is required.

Reinhart: No. Restructuring, inflation und financial repression are not substitutes for austerity. All these measures reduce your existing stock of debt. Unless you do austerity you keep adding to the debt. There is no either-or. You need a combination of both to bring down debt to a sustainable level.

Why we should expect higher inflation…

Reinhart: There are no silver bullets. If central banks try to accommodate and buy debt, there are risks associated with it. Somewhere down the road you are going to wind up with higher inflation. That is a safe bet -- even in Japan …

Again financing deficits heightens risks of hyperinflation.

Surprisingly Ms. Reinhart offers an implied Austrian school solution (except for the higher inflation advice)…

Reinhart: The best way of dealing with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically it doesn't happen -- you seldom just grow yourself out of debt. You need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation …

Why savers are screwed…

Reinhart: No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold. In France, for example, public pension funds have shifted money from shares (on the stock market) to government bonds. Not because their returns are great, but because it is more expedient for the government. Pension funds, domestic banks and insurance companies are the most captive audiences, because governments can just change the rules of the game.

The morality of financial repression…

Reinhart: Let me be a little blunter: A haircut is a transfer from the creditor to the borrower. Who would get hit by a haircut? French banks, German banks, Dutch banks -- banks from the creditor countries. So you can see why this is politically torched. This is why it is not done, it's a redistribution. But ultimately it is going to happen, because the level of debt is too high.

The US will default too but by the inflation route…

Reinhart: Yes, but who are the large holders of government bonds? Foreign central banks. You think the Bank of China is going to be repaid? The US doesn't have to default explicitly. If you have negative real interest rates, the effect on the creditors is the same. That is also a transfer from China, South Korea, Brazil and other creditors to the US.

Why the system will keep continuing until it can’t…

Reinhart: Why do we have such low interest rates? The Federal Reserve Bank is prepared to continue buying record levels of debt as long as the unemployment situation isn't satisfying. And China's central bank will also continue to buy treasuries, because they don't want the renminbi to appreciate.

Record High US Equities: The Credit Bubble in Pictures

Major US equity bellwether have reached milestone highs

the Dow Jones Industrials

the S&P 500

the Nasdaq broke above the 2007 highs but still way below the 5,000 levels in 2000

the Russell 2000 also in record levels (all charts from bigcharts.com)

All these have been going on since the US Federal Reserve’s open-ended or QEternity or QE infinity since September 2012

US stocks are being supported by an increase in the Fed’s Reserve assets. 

Last Sunday I showed this M2 chart. The current update reveals that the M2 has reaccelerated steeply and has broken beyond January highs, which proves my thesis that “any weakness may be temporary.”

M2’s rise has also been reflected on the high powered money via the monetary base which has been sky bound.

Record stocks also translates to near record margin debt (ETF Daily News)

The current economic growth which is supposed to be happening has been underpinned by credit expansions as seen Bank Loans (higher pane and commercial industrial loans (lower pane) [charts of M2, Monetary Base, and the above from St. Louis Federal Reserve]

Credit booms end up in a bust, if not a currency crisis. 

Pay heed to the warnings of the great Austrian economist Ludwig von Mises

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.

There is no such thing as free lunch even from central banks. Party times can last...until it can't 

The Philippine Casino Bubble

Those bullish with the casino industry should learn of the risks involved.

One example from the Yahoo News Singapore

High-rollers get lavish treatment and hefty credit lines at Singapore's two casinos, like any other gaming house in the world. But here, more of them skip town without paying their debt, a matter of increasing concern for investors.

Three years after Singapore allowed casinos to open, Genting Singapore PLC's Resorts World Sentosa and Las Vegas Sands Corp's Marina Bay Sands have become the world's most profitable. Chinese nationals account for around half of the VIP gaming volume at their tables.

An examination of court documents by Reuters and a series of interviews with lawyers and industry executives reveal that several of the gamblers have run up millions of dollars in debt and then scampered back to China, where they are effectively untouchable.

Resorts World sued Chinese gambler Kuok Sio Kun in Singapore last year to recover S$2.2 million (1.1 million pounds). But more than six months on, the casino has not even managed to serve court papers to the Macau-based woman.

After several letters of demand went unanswered for months, it tapped a Singapore law firm to sue the 46-year-old, court documents show.

The lesson from the above is that casinos are highly sensitive to economic performances.

To show more examples, US casinos suffered losses during the last recession.  Some continue to bleed. Indian tribes in the US recently asked for bailout after a casino they owned suffered losses. The defunct Las Vegas Sahara has been bought by foreigners and will operate under a new name.  Here is a watch ‘death’ list of Las Vegas casinos

A study showed that diminishing disposable income in the Eurozone has led to the losses of Belgian casinos.

In addition, casinos are subject to competition, both from the real estate peers and from online providers.

The Philippines has opened one major casino project (Solaire) this year, whose expansion will be financed by Php 14 billion from 3 banks. Such loans will add up to the systemic debt being rapidly incurred via yield chasing dynamics in the property sector. 

There are reportedly three more major projects slated to open in the coming years: SM’s Belle Corp and Macau’s Melco Crown Entertainment’s Belle Grande, the joint project between Japanese billionaire Kazuo Okada and the Gokongwei group on the Manila Bay Resorts ($2 billion) and also the tie up between Andrew Tan’s Alliance Global Group and Malaysia’s Genting Corp on Resorts World Bayshore ($1.1 billion).

I would venture a guess that bank loans will also be the major source of finance for the industry, again swiftly adding to the country’s debt levels.

All these have been sold to the public as entailing growth in the tourism industry, which is an illusion.

The mainstream ignores the fact that these casinos will be competing with the regional counterparts for essentially the same (regional) market. 

On the supply side, the growing numbers of casinos in the region may eventually reach saturation point (even assuming no recession).  The Philippine gaming industry has reportedly been growing at a CAGR of 28% (!!!), which is about THRICE 3x growth rate of developing Asia, the fastest in the region. (chart from ADB)

On the demand side, the fragile state of the global economy may mean that demand may evaporate when a crisis emerges. Remember Asia has a credit bubble.

And the loses suffered by Singapore casino operators from unscrupulous bettors are just signs from the periphery, particularly the vulnerable Chinese economy, of the possible things to come.

As a side note Fitch ratings just downgraded China’s local government debt. Local governments have racked up an estimated US$2.1 trillion which is equivalent of 25% of GDP.  This makes the Chinese bettor market equally fragile.

And worst, such cumulative bullishness comes in the backdrop of artificially lowered rates, which industry operators and the unwitting public presume will be everlasting.

And even with the employ of hundreds of so-called experts, hardly anyone sees the risks from the above. Rose colored glasses seems to be the general consensus, especially promoted by media, in the presumption that this time is different.

At the end of the day, basic economic logic says that all these yield chasing activities (whether the shopping mall, casino, housing and vertical projects) will end badly.

But these politically connected behemoths are most likely to be bailed out, when fortunes reverse.

Forewarned is Forearmed.

Amazing Volatility: Gold, Bitcoins and JGBs Hammered

The volatility of today’s financial markets has simply been breathtaking. 

As US stocks reached new record territory, gold prices had been slammed hard yesterday. Such irony comes in the face of the broadening confiscation of people’s savings by governments

Reports say that proposed liquidations by Cyprus and other crisis stricken euro nations in an attempt to raise funds.

From Reuters:

Gold posted its biggest one-day drop in nearly 2 months on Wednesday after Cyprus was forced to sell most of its gold reserves, but analysts said strong bullion buying by other central banks should underpin the price of the metal.

Investor fears over more gold sales by other debt-stricken euro zone members such as Portugal and Greece sent spot bullion prices down 1.7 percent on Wednesday, within striking distance of a 10-month low…

Cyprus, one of euro zone's smallest economies, has to sell excess gold reserves to raise around 400 million euros (341.2 million pounds) to help finance its part of its bailout, an assessment of Cypriot financing needs prepared by the European Commission showed.

As I have been saying all these liquidations narrative are just really part of the gold suppression scheme.

Analyst Alasdair Macleod points to studies which show that “substantial amounts of gold have been supplied into the markets by Western governments and their central banks” and on the Bank of England’s real holdings of gold as “only 60% of the gold in the Bank’s custody is actually monetary gold”

The genuine intent has been to justify more inflationism, such as the recent advice by the IMF to central bankers, in order  to preserve the untenable political status quo.

The capital flight and yield chasing phenomenon has also battered bitcoins, which has recently gone parabolic

Such selloffs from the recent frothy upswing as shown in the above chart should account for as normal profit taking—consequence from extreme yield chasing activities.

But since bitcoin is a virtual or digital currency and has been a product of decentralized spontaneous market order via technological innovations, they are likely subject to volatility from technology diffusion cycle or the S-Curve.

Unless structural deficiencies of the system will be exposed or if government successfully hacks into the system to adulterate, sabotage or control it, then diffusion cycle means that the bitcoin’s adaption will take time. The chart above demonstrates of the technology diffusion process or cycle.

So current bitcoin's volatility could be a symptom of the resistance to change from the marketplace or even attacks from mainstream, aside from of course, the outcome from intensive yield chasing brought about by distortions from financial repression.

And I would further add that so-called boom from Kuroda’s doubling of monetary base by 2014 has not been smooth sailing as seen by apologists. 

Japanese Government Bonds or JGBs have also been plagued by sharp gyrations.

JGBs have seen a sharp spike in yields over the last few days following an earlier boom. (charts from Bloomberg)

While I expect the bond boom to continue over the interim, eventually the BoJ's massive inflationism will force up interest rates that will make Japan's unwieldy debt loads susceptible to a crisis.

 

Such steep fluctuations reveal how global financial markets have been operating in a very treacherous environment.

Quote of the Day: The Myth of Public Interest

The gist of it is that public servants, so called--politicians, bureaucrats, and their colleagues--tend to promote goals of their own even as they claim to be serving the public interest.  And this is not very difficult to grasp.  

The public is, after all, a vast number of citizens whose interests vary enormously so it is a pure myth that there is a public interest that can be served by public servants.  Given this plain fact, whose interest will public servants serve?  The interest they consider important. 

In the last analysis the so called public interest is really the private interests public officials like best.  Even the democratic process cannot sort out what the public interest is. (The best approximation is put forth by Thomas Jefferson in the Declaration of Independence where he identifies securing the protection of our basic rights as the purpose for which government is established, i.e., the public interest.)

Despite the hopelessness of pursuing and serving the public interest, politicians and their cheerleaders keep pretending that they have managed to overcome the hurdles facing them and assert that they are public servants instead of folks whose objectives are determined by lobbyists who represent innumerable, often conflicting, private and special interests.

That’s from professor Tibor Machan on the much overlooked Public Choice Theory on his blog.

Indonesia’s Boom: Resource Based or Credit Bubble?

Indonesia’s economic boom has been driven by the resource industry. So declares this Bloomberg article:

The world’s fourth most-populous nation is seeing its economy reshaped as cities on islands including Sumatera and Borneo grow faster than Java, home to the nation’s capital, Jakarta. A transmigration program championed by former President Suharto in the 1980s, combined with China’s demand for palm oil, coal and iron from Indonesia’s rural provinces, helped outlying cities expand as much as 4 percentage points faster than the national average over the past decade.

As China’s expansion boosts incomes of miners and farmers in some of the sleepiest and most far-flung corners of Asia, companies from Unilever Plc (ULVR) to Toyota Motor Corp (7203). are flocking to Indonesia’s second-tier cities to tap their rising demand. At the same time, increasing urbanization raises pressure on President Susilo Bambang Yudhoyono to improve infrastructure and strains environmental resources…

The boom in second-tier cities has helped swell the middle class. Seven million Indonesians joined their ranks each year for the past seven years, according to a 2011 World Bank report. Private spending grew 5.4 percent in the fourth quarter of 2012 from a year earlier, and consumer confidence in March was 116.8, the eighth straight month the indicator exceeded 115. Pekanbaru, Pontianak, Karawang, Makassar and Balikpapan regions will lead growth, McKinsey says…

Government joins the spending boom…

As new shops and apartments spring up, the government is trying to keep up, spending more on roads and ports. President Yudhoyono plans to build 30 new industrial zones across the 17,000-island archipelago and to spend $125 billion on infrastructure by 2025, including $12 billion on 20,000 kilometers of roads, enough to go halfway round the world….

The conclusion…

The main driver behind the increasing wealth and power of the nation’s regional capitals is a decade-long boom in the nation’s resources. In the past 12 years, palm oil prices have more than tripled, even after a 34 percent drop in the past year. China-led demand has lifted coal, copper and gold as much as fourfold in a decade.

A very important lesson I’ve learned from the great proto Austrian Frederic Bastiat is to differentiate between the seen or the “immediate; it manifests itself simultaneously with its cause - it is seen” and the unseen or the “series of effects”. 

While it may be true that resources boom have on the surface contributed to the boom, what hasn’t been seen are the more important underlying factors that has led to a property boom in “second tiered cities”.

Like the Philippines the so-called boom in secondary cities are being driven by credit expansion (red arrow left pane, chart from the IMF).  

Importantly credit growth has been accelerating since 2011 (light blue ellipse) amidst the backdrop of zero bound or record low interest rates.

Indonesia’s loans to the private sector has ballooned by 50% since 2011 (tradingeconomics.com)

Such credit boom has not only been reflected on the property sector but also to Indonesia’s stock market

chart from tradingeconomics.com

Like the Phisix, the zooming JCI continues to establish fresh record highs.

Remember both property and stock markets are titles to capital goods which are main beneficiaries of typical credit bubbles

Indonesia’s money supply M2 has also swelled by 33% since 2011. (tradingeconomics). So booming credit has likewise been manifested on money supply.

Indonesia’s credit bubble has been putting pressure on producers prices. Also Indonesia’s government plans to raise minimum wages by 50% this year!

Although Indonesia has received accolades for previously imposing austerity as fiscal balance has markedly improved, the reality is that part of the improving government debt-to-gdp (23.1% in 2012) has been due to the cosmetics, or improvements on the denominator, provided by statistical growth fueled by Indonesia’s credit boom.

Indonesia’s fiscal balance remains modestly negative 

Nonetheless, credit fueled private consumption combined with government spending has now been manifesting on Indonesia’s trade and current account balance which has sharply deteriorated.

This means the Indonesian economy would have rely on foreigners to finance the boom which makes her vulnerable to "sudden stops".

So yes, while media paints Indonesia boom or may I say “illusion of success” on the resource trade, the reality is that such boom has been an embodiment of the business cycle in motion.

Yet that which is unsustainable won’t last. 

People hardly learn from history.

IMF to Central Bankers: Keep Blowing Bubbles

The IMF’s advice to central bankers is an example why we can expect central bankers to keep blowing asset bubbles. 

That’s of course until bubbles pop by their own weight, or until the stagflation menace emerges or a combo of both.

But stagflation has been absent based in the econometric papers of the IMF, that’s according to the Bloomberg:

Monetary stimulus deployed by advanced countries to spur growth is unlikely to stoke inflation as long as central banks remain free of outside influence to react to challenges, according to a study by the International Monetary Fund.

In a chapter of its World Economic Outlook released today, the Washington-based IMF said that inflation has become less responsive to swings in unemployment than in the past. Inflation expectations have also become less volatile, according to the report.

“As long as inflation expectations remain firmly anchored, fears about high inflation should not prevent monetary authorities from pursuing highly accommodative monetary policy,” IMF economists wrote in the chapter called “The dog that didn’t bark: Has inflation been muzzled or was it just sleeping?”

Considering the distinctive political-economic structure of each nations, such pursuit of bubble policies will translate to varying impacts on specific markets and economies. For instance, emerging markets are likely to be more vulnerable to price inflation.

And by simple redefinition and measurement of inflation as based on econometric models and statistics, the IMF has given the green light for central bankers do more.

This also means that the IMF has prescribed to central bankers to throw fuel on the inflation fire.

Based on mainstream’s twisted definition of inflation, such as being predicated on demand and supply “shocks”, hyperinflation ceases to exist. 

Interestingly too the IMF hardly see current policies as having “compromised” central bank independence.

Again from the same article:

The BOJ’s new policy “is something that we hope will lift inflation durably into positive territory, which would help the economy,” said Jorg Decressin, deputy director of the IMF’s research department. “We see in no way the operational independence of the BOJ compromised at all.”

This is a rather absurd claim. When central banks buy government debt, they effectively encroach into the realm of fiscal policies. 

Instead of voters determining the dimensions of fiscal policies via taxation, central bank financing of fiscal deficits motivates government profligacy that enhance systemic fragility through higher debts and the risks of price inflation (stagflation) or even hyperinflation.

As fund manager and professor John Hussman notes at HussmanFunds.com in 2010:

Historically, and across the world, the primary driver of inflation has always been expansion in unproductive government spending (think of Germany paying striking workers in the early 1920s, or the massive increase in Federal spending in the 1960s that resulted in large deficits and eventually inflation in the 1970s). But unproductive fiscal policies are long-run inflationary regardless of how they are financed, because they distort the tradeoff between growing government liabilities and scarce goods and services.

For instance, Japan’s government will increasingly become dependent on the Bank of Japan via Kuroda’s “shock and awe” Abenomics policies. This makes Japan vulnerable to a debt or a currency crisis.

And recent interventions on the fiscal space by central banks of developed economies essentially reveals of the closely intertwined relationship between governments and central banks. (charts above from Zero Hedge)

This only validates the hypothesis of the Austrian school of economics that the fundamental role played by the central banks has been to support the government (welfare-warfare state) and the cartelized crony banks, which essentially means that central bank independence is a myth.

As refresher let me quote anew the great dean of Austrian economics explained: (bold mine) [The Case against the Fed page 57]

The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit

Yet here is the IMF’s prescription for more bubble blowing, from the same article:

“The dog did not bark because the combination of anchored expectations and credible central banks has made inflation move much more slowly than caricatures from the 1970s might suggest - - inflation has been muzzled,” the IMF staff wrote. “And, provided central banks remain free to respond appropriately, the dog is likely to remain so.”

As I explained before, inflationism represents a political process employed by governments to meet political goals. Inflationism, which is an integral part of financial repression, signify the means (monetary) to an end (usually fiscal objectives). And when governments become entirely dependent on money printing from central banks, hyperinflations occur.

Just because money printing today has not posed as substantial risks to price inflation, this doesn’t mean such risks won’t ever occur.

And that the current low inflation environment basically implies "free lunch" for central banks.

Price controls, market manipulations (via central bank), the Fed’s Interest rate on reserves (IOR) and even productivity issues have also contributed significantly to subdue price inflation over interim.

And again since monetary inflation represents a process, such take time to unfold via different stages, which is why price inflation tend to occur with suddenness to become a significant threat.

IMF’s reckless advocacy of bubble policies will have nasty consequences for the world.

The IMF experts or bureaucrats, who are paid tax free and are tax consumers, hardly realize such blight will affect them too. 

The existence of the IMF depends on quotas or contributions from members which come from taxes. Such applies to other multilateral agencies such as the UN, OECD ADB or etc, which is why these institutions almost always campaign for more state interventions.

Yet should a crisis of a global dimension emerge, and where a chain of defaults by governments on their liabilities (such may include developed economies, BRICs, Asia and elsewhere), their privileges, if not their existence, will likewise be jeopardized, as governments retrench or have their respective budgets severely slashed or faced with real "austerity". 

Let me venture a guess, such scenarios haven’t been captured by the IMF's econometric models. 

When the late Margaret Thatcher warned that "the problem with socialism is that eventually you run out of other people's money [to spend]", this applies to multilateral institutions too.

Murray Rothbard on Margaret Thatcher and Thatcherism

UK’s former Prime Minister Margaret Thatcher  passed away at the age of 87, yesterday. She was known as the “Iron Lady”, which according to the Wikipedia had been due to “her uncompromising politics and leadership style”. 

Murray N. Rothbard, the great dean of the Austrian school of economics, wrote about the accomplishments or legacies of Ms Thatcher and "Thatcherism": (Chapter 63, The Exit of the Iron Lady Making Economic Sense)

Mrs. Thatcher's departure from British rule befitted her entire reign: blustering in rhetoric ("the Iron Lady will never quit") accompanied by very little concrete action (as the Iron Lady quickly departed).

Her rhetoric did bring free-market ideas back to respectability in Britain for the first time in a half-century, and it is certainly gratifying to see the estimable people at the Institute of Economic Affairs in London become Britain's most reputable think-tank. It is also largely to the credit of the Thatcher Era that the Labour Party has moved rightward, and largely abandoned its loony left-wing views, and that the British have decisively abandoned their post-Depression psychosis about unemployment rates ever being higher than 1%.

The Thatcher accomplishments, however, are a very different story, and very much of a mixed-bag. On the positive side, there was a considerable amount of denationalization and privatization, including the sale of public housing units to the tenants, thereby converting former Labour voters to staunchly Conservative property owners. Another of her successes was breaking the massive power of the British trade unions.

Unfortunately, the pluses of the Thatcher economic record are more than offset by the stark fact that the State ends the Thatcher era more of a parasitic burden on the British economy and society than it was when she took office. For example, she never dared touch the sacred cow of socialized medicine, the National Health Service. For that and many other reasons, British government spending and revenues are more generous than ever.

Furthermore, despite Mrs. Thatcher's lip-service to monetarism, her early successes against inflation have been reversed, and monetary expansion, inflation, government deficits, and accompanying unemployment are higher than ever. Mrs. Thatcher left office, after eleven years, in the midst of a disgraceful inflationary recession: with inflation at 11%, and unemployment at 9%. In short, Mrs. Thatcher's macroeconomic record was abysmal.

To top it off, her decisive blunder was the replacement of local property taxes by an equal tax per person (a "poll tax"). In England, in contrast to the United States, the central government has control over the local governments, many of which are ruled by wild-spending left Labourites. The equal tax was designed to curb the free-spending local governments.

Instead, what should have been predictable happened. The local governments generally increased their spending and taxes, the higher equal tax biting fiercely upon the poor and middle-class, and then effectively placed the blame for the higher taxes upon the Thatcher regime. Moreover, in all this maneuvering, the Thatcherites forgot that the great point about an equal tax is precisely that taxes have to be drastically lowered so that the poorest can pay them; to raise equal tax rates above the old property tax, or to allow them to be raised, is a species of economic and political insanity, and Mrs. Thatcher reaped the proper punishment for egregious error.

Read the rest here

Ms. Thatcher, R.I.P.

Parallel Universe in Gold: More US States Push for Gold as Money

Even amidst aggressive inflationism from central bankers and from predatory confiscation of people’s savings, prices of gold has staggered.

Priced in major currencies (USD, EUR, GBP) except Japan’s yen, gold has substantially softened since mid 2011 (Gold.org)

Technically speaking, languid gold prices has been mostly due to a selloff in paper gold and through short sales. (chart from Danske Research)

In an interview with the South China Post, George Soros attributes falling gold prices to deleveraging in the Eurozone:

But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else

This implies that gold has not been deflationary hedge.

Nonetheless Mr. Soros partly acknowledges of the parallel universe that exists in the pricing of gold:

Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.

Gold really has not lost its safe haven status, the role of currency safe haven may have partly been assumed by bitcoin.

But the bear raid on paper gold could have been orchestrated to influence “inflation expectations”. Gold plays a vital role in the commodity sphere, signifying a key benchmark on commodity ETFs, from the Mineweb last March:

The exodus from gold pulled down the entire commodities ETP complex, global data from BlackRock showed, as the gold segment accounts for some 70 percent of total commodity ETP investments.

Some $5.1 billion left commodities ETPs as inflows to industrial metals and broad basket commodity ETPs failed to offset the gold meltdown.

In other words, by suppressing gold prices, the general commodity sphere will likewise follow.

 

Also my personal view that gold’s has been undergoing a normal reprieve (profit taking-shake out phase) considering TWELVE consecutive years of advances.Markets hardly ever move in a straight line.

Yet aside from record central bank buying buying of physical gold as noted by Mr. Soros, gold coin sales has just been slightly off the record highs, while silver coins remains on record breaking path,

The more significant part of the growing parallel universe in gold dynamics is that about a dozen US states appear to be in the process of legislating gold as money.

From Bloomberg

Distrust of the Federal Reserve and concern that U.S. dollars may become worthless are fueling a push in more than a dozen states to recognize gold and silver coins as legal tender.

Arizona is poised to follow Utah, which authorized bullion for currency in 2011. Similar bills are advancing in Kansas, South Carolina and other states.

The measures backed by the limited-government Tea Party movement are mostly symbolic -- you still can’t pay for groceries with gold in Utah. They reflect lingering dollar concerns, amplified by the Fed’s unconventional moves in recent years to stabilize the economy, said Loren Gatch, who teaches politics at the University of Central Oklahoma.

If gold’s role as money will continue to get political recognition, then eventually this will reflect on prices, in spite of Central bank-Wall Street’s stealth suppression schemes.

ADB: Asia Faces Risk of Asset Bubbles from Capital Flows

Here is what I wrote last weekend

Unless external shocks—possibly such as the potential deterioration of geopolitical US-North Korea standoff into a full-scale military engagement—any slowdown for the Phisix will likely be limited and shallow, as the manic phase or the credit fuelled yield chasing process induced by domestic policies (artificially low interest rates and policy rates on special deposit accounts) will likely be compounded by capital flight from developed nations as Japan.

It seems that the ADB has partly picked up on my concerns.

From the Bloomberg,

Developing Asia’s growth recovery faces the risk of asset bubbles from rising capital inflows, the Asian Development Bank said…

Officials from South Korea to the Philippines have taken action, or are studying measures, to counter the inflow of capital to the region amid policy easing by some developed economies. The Bank of Japan said on April 4 it would double the monetary base by the end of 2014 in the nation’s biggest-ever round of asset purchases, joining the Federal Reserve and the European Central Bank in boosting stimulus to support growth.

“Advanced economies will likely continue their accommodative monetary stance, and authorities in developing Asia must safeguard the soundness of the finance sector to avoid the emergence of disruptive asset bubbles,” the ADB said. “Robust growth has largely eliminated slack productive capacity in many regional economies such that loose monetary policy risks reigniting inflation.”

As I pointed out, all bubbles are of domestic origin.

Capital flows or what truly has been about “capital flight” or of people’s attempt to protect their savings via foreign currency arbitrages from domestic inflationism and other financial repression measures only aggravates such conditions. They don’t cause them.

Political authorities have only made capital flows or "foreign/exogenous factors" a convenient scapegoat, or a misleading justification to the unwitting public, the expansion of government’s control or financial repression of the economy. Such will be channeled through the immoral assault on private property via capital or currency controls which is a path towards totalitarianism.

While I am pleased that the ADB has partly seen reality, they remain in steep denial over the real causes.

 

Nonetheless for as long as price inflation remains subdued, and for as long as government’s monetary policies remain tilted towards perpetuating permanent quasi booms, asset bubbles will keep inflating…until they fall under their own weight. I don’t think we have reached this critical inflection point yet.