No Country Can be Made Great by Devaluation

John Connally, President Nixon’s Secretary of the Treasury, once remarked to the consternation of Europe’s financial elites over America’s inflationary monetary policy, that the dollar “is our currency, but your problem.”  Times have certainly changed and it now appears that the dollar has become an American problem.

 

Richard Nixon and his treasury secretary John Connally. The latter is today mainly remembered for his remark on the dollar, which presumably gave European finance ministers a few nightmares at the time. Nixon defaulted on the gold exchange standard in 1971, which effectively ended the Bretton Woods agreement and led to the whole world adopting a fiat money standard. Nixon’s announcement of the default stands to this day as a textbook example of government lies and hypocrisy, garnished with a more than generous helping of economic illiteracy. It seems unlikely that he realized that his actions on that day would give birth to the greatest credit bubble in history, but they did.

Photo via twitter.com

 

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Government Sachs

BALTIMORE – Two things. One we understand. The other we don’t. First, you gotta hand it to Wall Street. The financial elite were 1,000% behind Hillary. Then, when Donald Trump won the White House, within minutes, they were in his cabinet.

 

And then they saw the sign, and it looked like a winner’s sign. And so they embraced the orange interloper without further ado…

 

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A Shift in Expectations

When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump’s election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election result has strongly boosted certain market expectations.

 

 

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Rising Scarcity and a Nascent Change in Trend

Last month, we noted that there could be a trend change in progress. Not only are the prices of the metals rising (which is just a mirror-image of the dollar falling, from 27.6 milligrams of gold just before Christmas to currently under 26mg). But the scarcity of gold as we measure it, using the spread between the price of gold in the spot and futures markets, has been rising.

 

All the gold in the world (excluding Ben Bernanke’s grillz collection). The estimate appears a bit dated, but even if we e.g. assume that there are  about 180,000 tons of mined gold in the world, the cube would only be slightly larger (approx. 20.5 by 20.5 meters, or 67.25 by 67.25 feet).  There is actually considerable uncertainty regarding the total amount of gold mined in the course of history, but the fact remains that it is quite rare. At the same time, its existing stock is very large compared to the flow of new gold supplied by mines every year. The large stock and only slowly growing stock is one of several reasons why the market has chosen gold as money. [PT]

 

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Red Flags Over Goldman Sachs

Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.

 

The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese’s movie “The Wolf of Wall Street”, in which Leonardo di Caprio plays a major boiler room operator/ hustler who makes a fortune by defrauding his clients. When the WSJ contacted the people involved in 1MDB, all of them strenuously denied wrongdoing, with the exception of the only currently imprisoned one, who “declined to comment”. The money is gone, but it seems nobody took it. It is so to speak a Malaysian luxury miracle, proudly aided and abetted by those doing God’s work on the other side of the Pacific pond – click to enlarge.

 

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Rags to Riches

Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.

 

Jack Ma, founder and CEO of Alibaba, China’s largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and shakers was more his speed. Today he is one of the world’s small number of genuine self-made multi-billionaires.

Photo credit: DFIC

 

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Blind to Crony Socialism

Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed” bit).

 

People are usually struck by the seeming injustice of CEOs running companies into the ground and then getting paid obscene amounts in the form of “golden parachute” type good-bye presents. Often there is no other way to get rid of a bad CEO though –  if his or her employment contract guarantees a large termination benefit, the company may have little choice in the matter. As a rule, private shareholders are bearing the cost of such transactions, and they are in this position voluntarily (after all, they could sell their shares or vote against generous CEO payment packages at shareholder meetings). We realize of course that in the age of crony socialism, one usually has to judge such things carefully on a case by case basis. Still, it is a far cry from the misuse of taxpayer funds, which are appropriated by coercion and offer those bearing the costs no opportunity to “opt out”.

 

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A Soaring Market

On January 20 2017 Donald Trump will be sworn in as the new president of the United States. On the stock market his victory has triggered a lot of advance cheer already: the Dow Jones Industrial Average rose by a sizable 7.80 percent between the election and the turn of the year.

 

Two big winners: the DJIA and Donald Trump – click to enlarge.

 

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“Trade Cheaters”

It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute –  Larry Summers is wrong about almost everything. Could he be right about this?

 

Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed. Believe it or not though, in very rare instances Larry is actually right about something. For example, the politically incorrect comments that got him fired from his post as Harvard president definitely shouldn’t have been dismissed out of hand. Is it possible that he is actually right about something again?

Photo credit: Chip Somodevilla

 

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A Difference of Opinions

In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:

 

I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud from any source a 100 percent gold standard. This is the only system compatible with the fullest preservation of the rights of property. It is the only system that assures the end of inflation and, with it, of the business cycle. (1)

 

Murray Rothbard was convinced that we should return to a sound monetary system based on the market-chosen money commodity gold. Note that the use of gold as money as such cannot keep banks from issuing fiduciary media (a.k.a. uncovered money substitutes). The important thing is therefore that the monetary and banking system are free. A free banking system will develop along sound lines of its own accord, not least because banks have to continually clear transactions between each other and will tend to shun overextended lenders. A free market monetary/ banking system would likely be different from today’s system in numerous aspects, but it would be just as sophisticated and efficient. Most importantly, it would be economically sound and the likelihood that severe business cycles emerge would be vastly lower.

Photo via mises.org

 

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Neo-Marxist Pope Francis Argues for Global Central Bank

As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.

 

Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis’ storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and “Papal Eco-Hysteria”, we have contrasted Francis and John Paul II and quoted from the latter’s seminal encyclical “Centesimus Annus”, which probably contains the most clear-headed thinking on human liberty and economics that has ever emerged from the Vatican. Francis strikes us as a throwback to a completely discredited and dangerous ideology by comparison. Lately he is even calling for the establishment of a global central bank!

 

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Supply-Demand Fundamentals Improve Noticeably

Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.

 

Photo via thedailycoin.org

 

The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.

 

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