Going Against the Grain  

Back in 2013, Botswana was alone among African countries in its vehement rejection of the fraudulent election in Zimbabwe that kept the aging dictator Robert Mugabe in power.

An article in Bulawayo 24 [Bulawayo and Zimbabwe’s online news resource … Ed.] goes on to note that some critics in Botswana believe that the government is not entirely consistent in applying its foreign policy ideals. However, that shouldn’t detract from the fact that it very often finds itself alone in Africa when it is voicing its disapproval of injustice elsewhere on the continent.

 

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The Okavango Delta

Photo credit: Ross Serven

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Lent

The season of fasting is upon us. No more high living. It’s time to cinch up our belts … to put on a gaunt face and a smug look. Alone among friends and associates, we will keep Lent.

So neglected is Lent that even Google has forgotten about it. When we did a search it proposed “lentil soup.” Lent is meant to rehearse the 40 days and nights that Jesus spent fasting in the desert before going public.

We remember the lean days with prayer, meditation and self-denial. No alcohol will cross our lips from Ash Wednesday till Easter Sunday. (Except on Sundays. And saints’ days. And national holidays. And days that begin with the letter “T” or that have a date that is a prime number.)

Yes, dear reader, we will be true to the church calendar, with a few emendations of our own.

 

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Photo credit: Tao Zhyn

 

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Boom-Bust Mechanics

We want to focus on a specific aspect of the current money supply expansion in this part. The topics of “price inflation”, as well as investment and production will be discussed in a follow-up post shortly.

Let us consider the mechanics of past boom-bust cycles in the US. In “normal” booms, banks expand credit to companies and households, with the former employing the funds mainly for investment and the latter for consumption. Banks that don’t have sufficient reserves will borrow them in the interbank market (Federal Funds market), where the Fed stands ready to satisfy any excess demand for reserves that threatens to push the overnight Federal Funds rate above its administered target rate. In short, monetary inflation is driven by bank credit expansion and accommodated by the central bank. To the extent that the Fed-administered target rate manipulates market interest rates below the natural rate dictated by society-wide time preferences, this seemingly “harmonious” inflationary process will promote ever more malinvestment of scarce capital as well as overconsumption. Eventually the central bank becomes worried that the credit expansion may push consumer prices above its arbitrary target for CPI and begins to hike rates – then the artificial boom falters with a lag and a bust ensues. The central bank thereupon lowers rates again. Lather, rinse, repeat.

 economyImage credit: mevans

 

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Victim of Good Fortune

The following is a two-part series. The views expressed may or may not coincide with those of Bonner & Partners. They may not even coincide with those of their author.

Sometimes right, sometimes wrong, always in doubt – we try on ideas like a grown man trying on a pair of shorts. We want to see how they look before we buy them. We leave it to you to decide for yourself which of the following ideas look most ridiculous.

 

Old_San_Juan_aerial_view

Photo credit: U.S. National Park Service

 

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Money Supply Growth Surges Across the World

Michael Pollaro has recently updated his global TMS data up to the end of December 2014 (more up-to-date figures aren’t available yet). He delves into far more details than we usually do, and there are a number of things worth mentioning about the most recent data.

First of all, it is worth noting that in the final three months of 2014, and especially in December, money supply growth rates have accelerated sharply on an annualized basis in all three major currency areas (US, euro area, Japan). Here is a summary of the main data points (note, this is monthly growth annualized, quarterly growth annualized and y/y growth):

 

US: TMS-1: 1 month: 62.1%,   3 month: 21.9%, year-on-year: 8.8%

TMS-2: 1 month: 21.8%,   3 month: 13.8%, year-on-year: 7.8%

 

Euro Area: TMS: 1 month: 28%,  3 month: 19.6%, year-on-year: 9.3%

M3: 1 month: 15%,  3 month: 9.8%,   year-on-year: 4.7%

ECB credit was rising at a 73% annualized rate in December 2014 – a result of the CBPP3 (covered bond) and ABS purchasing programs and TLTROs, but not yet including the new sovereign QE program

 

Japan:   TMS: 1 month: 29.1%,  3 month: 13.7%, year-on-year: 4.5%

M3: 1 month: 12.2%, 3 month: 8.0%, year-on-year: 2.8%

 

As can be seen above, year-on-year growth rates are quite high in the US and the euro area, but not at an exceptional level (yet) compared to previous peaks. It could be that the acceleration in annualized growth rates in the fourth quarter and the month of December has partly to do with seasonal effects, but it seems actually more likely that there is more to it than that.

 全球货币Image credit: Matt Collins

 

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The Concept of Money

I wrote what I thought was a fairly simple article for Forbes on Tuesday. I noticed that some people really got it, and they were very excited. However, others were skeptical or asking questions that went into the weeds. The former tells me that I said something important, but the latter says that I said it in a way that not everyone could relate to.

I started with the observation that many people argue (vehemently) that money should be defined as the medium of exchange. In the US, the dollar is used to purchase everything. Therefore the dollar circulates as the medium of exchange. Therefore the dollar is money. Q.E.D. The catch is that the dollar only circulates because the government forces it to circulate, and forces gold not to. This means that the very concept of money is under the control of the government.

Ayn Rand noted that force is not essentially about a physical push, or a bullet hitting flesh. She said, “Force and mind are opposites…” She added, “To force a man to drop his own mind and to accept your will as a substitute, with a gun in place of a syllogism, with terror in place of proof, and death as the final argument—is to attempt to exist in defiance of reality.”

 

aynrandAyn Rand: no friend of government coercion

Photo credit: Henry Talbot

 

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Squirrelly and Subtle

Yes, we were in London, taking care of business. Now, we’re back in Buenos Aires. We’ve tried medication. We’ve tried prayer. We’ve tried heavy drinking – all in an effort to understand how our crazy money system works. And where it leads.

You’d think it would be easy. It’s just Central Banking 101, no? Well, no. It is squirrelly… and diabolically subtle. We doubt anyone understands it – especially those who are supposed to control it.

The basic unit for the system is a kind of money the world has never had before: the post-1971 fiat dollar. It’s paper money – worth as much as people think it is worth … and managed by people who think it should be worth less as time goes by.

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Photo via Pixabay

 

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Interview with Václav Klaus

 

“The best environment for man is the environment of liberty.”

Václav Klaus

 

VACLAV KLAUS PRESS CLUB

Former president of the Czech Republic and strong defender of the ideas of classical liberalism, Professor Václav Klaus

Photo via collective-evolution.com

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Corporate Leverage Gets Corzined …

A friend pointed us to a post by Macroman that discusses revisions to the flow of funds data published by the Fed that have apparently already been made a few months ago. Nothing about them seems remarkable, until one gets to corporate non-financial debt. Apparently, all that debt that has been taken on by companies in recent years has suddenly disappeared, as if by magic.

 

e-magician

Photo credit: ThinkStock

 

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Receding Tide

Please remember this warning when you go to the ATM to get cash… and there is none! While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates. Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared. The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

 

atm

The same thing could happen to the money supply: Cash could evaporate suddenly and disastrously – just before we drown in it.

Photo via toastmagazine.net

 

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Greek Government Seemingly Blinks

Alexis Tsipras has tried his best to sell the outcome of Greece’s negotiations with the EU to his voters over the weekend. As far as we can tell, the Greek government hasn’t achieved even a single one of its aims so far. The bailout was extended by four months, but in spite of a few cosmetic changes to the wording accompanying it (e.g. the “troika” has been renamed “the institutions”), it is still precisely the same bailout agreement as before.

 

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Yanis Varoufakis and Alexis Tsipras. What’s the plan?

Photo credit: Alkis Konstantinidis / Reuters

 

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The Fed’s Role is Diminishing

The modern era of mortgage finance began in 2008.  In September, the FHFA placed Freddie and Fannie under the conservatorship of the Treasury.  In November, the Federal Reserve launched QE1 with the initial purchase of $600 billion of agency mortgage backed securities.

Let us look at what the Fed has been up to lately.  The latest round of QE is supposedly being faded out.  In the course of QE3 it has purchased a total of $1.499 trillion of MBS from the start in September 2012 to date.  Janet Yellen may have publicly announced tapering, but in reality the Fed has purchased $41.6 billion of MBS year to date.

 

2015-housing-market

Image via askhomesale.com

 

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Overwhelmed Episcopalian

Today … why some of the smartest guys in finance are total morons. But first a report from the Rio Carnaval, where we spent last weekend.

A plumber would probably like it. A psychiatrist might say it is normal. And maybe a Roman Catholic could handle it. But there were too many quivering buttocks for an Episcopalian.

There must have been 10,000 of them – sweating … shaking … twerking … and vibrating – in the Sambadrome on Saturday night.

The costumes were as unrestrained, immodest and over-the-top as you might imagine. The idea seemed to be to attach as many sequins and feathers as possible. And almost everywhere, amid the gaud and glitz of the getup, were the shimmering cheeks.

 

Gavi+Áes_da_Fiel

Photo via unlike.net

 

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Introducing Money

Imagine three men living on a small island. Toni is mining the local salt mine, and apart from him there are Pete the fisherman and Tom the apple grower and their families. They have a barter trading system set up: Toni exchanges his salt for Pete’s fishes and Tom’s apples, who in turn exchange fishes and apples between each other.

One day Pete says: “I have an idea. Instead of fish, I will from now on give you pieces of papyrus with numbers marked on them”. Papyrus grows in great quantities nearby, but has so far not been of practical use to any of the islanders. Pete continues: “One papyrus mark will represent 1 fish or 5 apples or 2 bags of salt (equivalent to current barter exchange rates). This will make it easier for us to trade among ourselves. We won’t have to lug fishes, apples and salt around all the time. Instead, we can simply present the pieces of papyrus to each other for exchange on demand.”

 

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John Law at a young age – the world’s first Keynesian economist

Painting by Casimir Balthazar

 

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Admirable Concern

We are in Buenos Aires, enjoying a rainy afternoon on Calle Gurruchaga in the Palermo Soho neighborhood. It is calm. It is pleasant. The food is good. The wine is strong. The women are good-looking. And the US government has our back!

 

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Image credit: Sony Online Entertainment

 

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