On Economy



When we left you yesterday, we were trying to connect the bloated, cankerous ankles of the US economy to the sugar rush of its post-1971 credit-based money system.

Today, we look at the face of our government. It is older… with more worry lines and wrinkles. But whence cometh that pale and stupid look?

That is also the result of the same advanced diabetic epizootic that has infected American society.


sheriff-and-stills-1200Moonshine production facility in the 1920s …

Photo credit: University of Washington Library Digital Collections


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A Currency Disappears Into the Memory Hole

After the excitement caused by the collapsing Russian ruble last December, the ruble has seemingly been forgotten. The financial media have certainly fallen silent on the topic. Luckily, we haven’t forgotten about it. We first mentioned the the fact that the ruble might potentially represent an opportunity on the very day it made what has (so far) been its low, and posted a brief update three days later (see “The Russian Rubble”[sic] and “The Ruble Rebounds” for details). Although there were and still are obvious risks due to oil price weakness, geopolitical concerns and general emerging market worries, panic-like declines in currencies very often price in future risks as well. As we noted in these previous missives:



It ain’t worth much, but it’s worth more than at the end of last year …


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Shabby Immensity

Today, we continue mouth wide open … staggered by the shabby immensity of it … a tear forming in the corner of our eye.

Yes, we are looking at how the US economy, money and government have changed since President Nixon ended the gold-backed monetary system in 1971. It is not pretty.

We already know about the money. Since 1971, it’s been a credit-based, not a gold-based, system. The pre-1971 economy had three key characteristics:

1) It was healthy – Industry made things and sold them at a profit

2) It was fair – Financial progress was fairly evenly distributed.

3) It was solvent – The US was a creditor, not a debtor, nation.



Cartoon by David Horsey


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Risks and Opportunities

Investors started off 2015 with a slow global economy, low oil prices, a strong Dollar, and a deflationary Europe with great uncertainties on the progress of the US economy and the recent launch of Europe’s quantitative easing. The question is, what opportunities lie ahead? This article highlights the main topics covered in an interview between Mr. Frank Suess, CEO and Chairman of BFI Capital Group, with the globally renowned Swiss fund manager, Mr. Felix Zulauf. Mr. Zulauf currently heads Zulauf Asset Management, a Switzerland-based hedge fund and has forty years of experience with global financial markets and asset management. He has been a member of the Barron’s Roundtable for over twenty years.


Zulauf-S-640x360Felix Zulauf, Swiss fund manager and long-standing member of the Barron’s roundtable

Photo credit:


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Lying About Health Risks

For decades tobacco companies have denied that there was any connection between smoking cigarettes and certain rather life-threatening illnesses, such as lung cancer. Mind, we are certainly not among those who believe that smoking should be restricted by government coercion just because it is unhealthy. We also have a lot of reservations about the fines tobacco manufacturers were forced to pay to government, which struck us as nothing but an old-fashioned shake-down.


reaganchesterfieldsRonald Reagan in his younger years, promising to poison all his friends for Christmas


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Policy Adjectives

The big news this week was that the Fed dropped its pledge to be “patient” in raising interest rates. The Fed wants to get the market used to the idea of higher rates sometime in the not so distant future.

But just so you are clear on how valuable this “forward guidance” is, Fed chief Janet Yellen later told reporters, “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.”

Patient and impatient are not the only possibilities. In between is a vast space in which one can get things done, but without being in a hurry about it. Besides, we can think of many other adjectives that far better describe Yellen’s position – fearful, ignorant, conceited, arrogant, trapped …


BN-GB582_yellen_G_20141217162234The markets in thrall to Ms. Yellen’s language games

Photo credit: Bloomberg


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Thank God It’s the “Lucky Country”, and Good Thing it’s not a Bubble …

We have previously written about the many extant housing bubbles in the world, which are a result of the incessant monetary pumping by central banks (see: “A Tale of Two Bubbles” for details). Recently Australia’s big banks published a study in which they strenuously deny that one of the biggest housing bubbles the world has ever seen is actually a bubble. This is no surprise, because when – not if – this bubble implodes, Australia’s financial system will be in major trouble and the “big four” Australian banks are going to have a front-row seat. As “The Australian” reports, the “banks are dispelling housing bubble fears”. Not surprisingly, their arguments sound eerily similar to those of the NRA in the US shortly before the demise of the significantly less enormous US housing bubble.


“Amid fears that record low rates are laying the ground for problems, the Australian Bankers’ Association will today release a ­report arguing there is “insufficient evidence” of a speculative bubble, adding that the banks have not added to the price surge by relaxing lending standards.

After assessing the past 25 years, the paper, “Key truths on housing in Australia”, finds that the biggest driver of prices is mortgage rates falling below 5 per cent, and plays down the impact of foreign buyers. It also backs a Reserve Bank study this week that shows the highest debt loads are held by wealthy, less risky borrowers.

But the ABA does concede that houses are expensive relative to rents and “current rates of return may be economically viable only if expectations of further price gains are fulfilled”.

Also, prices have become more expensive relative to purchasing capacity and buyers should view “with a critical eye” claims that the structural housing shortage is massively driving the market. The major banks have repeatedly dismissed a bubble in their most lucrative asset class, and the ABA says it is important to “get the facts on the table” and not just focus on the recent bull market, particularly in Sydney.

“House prices in Australia are currently in a period of strong growth. (But) there is insufficient evidence to conclude that house prices are unsustainably overvalued or that Australia is currently experiencing a speculative ‘bubble’,” the report says.


Since the market stirred to life in mid-2012, Sydney is up 35 per cent — far outpacing the 23 per cent increase in the patchy broader market, including capital cities like Perth that have begun going backwards, according to CoreLogic RP Data.”



sidney shack
Anecdotal proof that there is “insufficient evidence of a bubble” in Australia’s housing market: this shack on Edith Street in Sidney sold for $980,000 in May of 2014. The cottage has been uninhabited for 20 years. The walls that have not disintegrated are covered in graffiti and the house is littered with rubbish. The backyard features the remnants of an outdoor toilet, with rubbish strewn about amid patches of weed, which are the only vegetation. Size of the property: 278 sqm. (~2,992 sqft.)

Photo credit: Attila Szivasi


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“Oh”, or Aiming for a Career on Wall Street

Fátima, our new 10-year-old English-language student, is a stranger to modern economics… as well as to vernacular English.

“What do you think of central bank policies?” we asked.

“What’s a central bank?”

“It’s the bank that provides money to the other banks.”

“Where do they get the money?”

“They create it out of nothing.”


“Would you like some money from the central bank?”

“I guess so.”

Fátima must be aiming for a career on Wall Street.


yellen teaching draghi how to print money funny photoRecent developments indicate he’s got it …

Cartoon via tradingblog.nl


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Putting the Hurt on Labor

Interest rates have been falling for over three decades. Conventional economics has two things to say about this. One, inflation expectations are falling. Monetarists believe that the interest rate is set based on bond traders’ predictions of future price increases. Two, if employment and GDP are weak, then the central bank should increase the money supply. By increasing the money supply, it will cause rising prices, and somehow that causes workers to get hired. Federal Reserve Chair Janet Yellen wrote a paper defending this absurd claim (which I criticized).




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Eager to Wreak Havoc

Life on the ranch: Fatima, a girl of 10, has asked to learn English. She wants to be able to talk to an aunt who lives in New York. What an unexpected pleasure – for us, not for her – it is to give her lessons. We’ll let you know how it goes. Now, back on our financial beat …

Wow! We never thought we’d have so much help from central bankers. At the start of 2010, for example, we announced our new “Trade of the Decade.” The idea: Sell short Japanese government bonds, which are doomed, and buy Japanese stocks, which are likely to catch a break after decades in the doghouse.

In the event, the break the Japanese stock market caught came to it from the Bank of Japan – more eager than ever to wreak havoc on the economy and its financial markets.


NikkeiThe Nikkei has been on a tear for the past three years – click to enlarge.


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Bear Markets Do Happen

Today… the second of the speech about the end of the world we recently gave at Doug Casey’s La Estancia de Cafayate. (You can catch up on the first part here.) As Yogi Berra would say, America is going to come to a fork in the road… and it’s going to take it.

Right now, the Fed isn’t as aggressive as the European Central Bank (which is set to pump €1.2 trillion into the financial markets by way of its QE program) or as innovative as the Bank of Japan (which is buying stock market funds as well as bonds by way of its QE).



Vladimir Ilyich Ulyanov, a.k.a. Lenin, addresses a crowd in St. Petersburg in April 1917

Photo via Wikimedia Commons


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All Good Things Must End

Today, I’m going to tell you about the end of the world. Not the end of the world exactly. But the end of the fiat money system President Nixon gave birth to in 1971… when he cut the dollar loose from gold.

And it may feel like the end of the world, because of the social chaos it will provoke. What follows is taken from a speech I gave at Doug Casey’s La Estancia de Cafayate …


rorschach (1)

Meet Rorschach, from Alan Moore’s “Watchmen”


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The Führer Had a Four Year Plan Too …

Our recent article on the “EU’s Stalinesque 4 Year Plan” has been picked up by a number of other websites, and on one of them (David Stockman’s Contra Corner), a reader by the name of Mauro Cella wrote a comment adding some additional color regarding the history of government-directed central economic planning. We found his remarks quite interesting and asked him if we could re-publish his comment here. Here it is:



Reprinted from ‘The Vampire Economy: Doing Business Under Fascism’, Vanguard Press, 1939.


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A Vast Pool of Greater Fools

One of the undeclared (or only occasionally admitted) goals of the enormous monetary pumping by central banks in recent years was to drive investors toward buying riskier assets. After all, if one gets virtually no interest on savings deposits and so-called “high quality debt” – which these days comprises mainly the debt of de facto bankrupt governments – is trading at yields to maturity somewhere between absurdly low and negative, what is one going to do with the flood of money pouring forth from the central planners?



A picture from the future: Risk is rediscovered at the worst possible moment.

Photo via instagram, author unknown


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Rushing to Take out Cash

US stocks went up big-time on Thursday. Why? We don’t know. But sooner or later, we know they will go down. And the Fed will print money to buy stocks. Sound crazy? Tune in tomorrow…

In the meantime, more about what will happen when a real crash comes. In a real financial crisis, people reach for something real to hold on to. Following the Crash of 1929, for instance, Americans ran to their banks and took out so much cash that 10,000 banks closed. They were out of money.

In the crisis of 2008, people were confused. In an era of credit money, what is real? In the event, they too rushed to take out cash. According to former congressman Paul Kanjorski, a member of the House Banking Committee, depositors took out $550 billion in less than two hours.

Had the authorities not stepped in with a massive cash injection … this would have bankrupted every bank in the nation in less than 24 hours.


Credit-Cards_MerithewPhoto credit: Jim Merithew / WIRED


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