On Economy


The Divinely Appointed and the Elected

US stocks hit new highs last week. Gold fell back below the $1,200-an-ounce mark…

… and MIT economics professor Jonathan Gruber came dangerously close to committing truth.

The ancient Egyptians believed Pharaoh was divine. They called him a god. That gave him the right to tell people what to do.

This belief persisted in ancient Rome. The Romans referred to the first Roman emperor, Augustus Caesar, as Divi Filius – “Son of the Divine.” Later, the emperor Caligula declared himself a god. (After announcing he would leave Rome to live in Alexandria to be worshiped as a god, his guardsmen assassinated him.)

And in Britain up until the Revolution of 1688, and in France up until its revolution a century later, people believed their king was divinely appointed. He wasn’t a god. But God had given him the divine right to tell others what to do.

Now people believe that God has nothing to do with it. Voters elect their leaders, who do what the public wants them to do.



Malcolm McDowell as Caligula (1979)


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Kremlin Factions and the Enemies of Socialism

Well, isn’t that a shocker. With Russia’s economy under serious threat from Western economic sanctions and falling oil prices, a major Kremlin faction has quite unexpectedly gotten some wind behind its sails.

In essence, there are two economic viewpoints that are supported in the Kremlin: one is represented by the former KGB types who have seen their political fortunes revived under Putin. Many of Russia’s so-called oligarchs have aligned themselves with this faction, which is not surprising: owners of large established businesses often tend to support statism, because it ensures the suppression of competition from upstarts. This is also the main reason why many big businesses in the West are supporting the regulatory State and the ever increasing pressure on economic and individual freedom it stands for.

We may thus call this the “statist” faction. The other faction is represent by people aligned prime minister Dimitry Medvedev – this is the pro-liberty, pro-economic liberalization faction, which has seen its fortunes alternately waxing and waning since the collapse of the Soviet Union, but which has never been fully rooted out. This is not least due to the fact that many economists in the former Eastern Bloc are acutely aware of the failure of socialism, and have eagerly studied the arguments forwarded against it. Today there are probably more economists in the former Eastern Bloc who are aware of and have understood the Misesian critique of economic calculation under socialism, than one can find in the West.



Evil Russian grand poobah goes for more economic freedom.

(Image via ilbe.com)


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Money Supply Growth Accelerates, Credit to Private Sector Still in Decline

While money supply growth is slowing down in the US, it has recently continued to accelerate somewhat in the euro area. The effects of the ECB’s “QE”-type debt monetization activities in the form of covered bond and ABS purchases have not yet impacted aggregate money supply data much as of yet, but the 12-month growth rate of the narrow money supply aggregate M1 (currency and demand deposits, essentially equivalent to money TMS-1) has nevertheless continued to increase:


1-M1, euro area,annThe 12-month growth rate of the euro area’s money supply supply has recently accelerated from an interim low of 5% to approx. 6.5% – click to enlarge.


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Negative Interest Rates and Capital Consumption

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about.

At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road.

However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action.

Mises warns however that if interest payments are abolished by decree, or even a negative interest rate is imposed by decree, owners of capital will indeed begin to consume their capital – precisely because want satisfaction in the present will continue to be preferred to want satisfaction in the future regardless of the decree. This threatens to eventually impoverish society and reduce it to a state of penury:



If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment.

Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.

The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction. Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”


(emphasis added)


Ludwig von Mises: he warned that the abolition of interest payments would induce the owners of capital to consume rather than invest it. Society would soon be impoverished as a result.

(Photo via Wikimedia Commons)


Of course today’s central bankers to a man seem to believe that what makes the economy grow is “spending” and consumption. This is putting the cart before the horse. Since the accumulation of capital threatens to go into reverse due to their policies, there may well come a time period during which reports of aggregate economic statistics appear to indicate that “economic growth has returned”, while all they reflect in reality is the fact that scarce capital is in the process of being consumed. This process is also known colloquially as “eating one’s seed corn”.


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Arrows Boomerang

Not much market action yesterday. So, let us turn to what is bound to be the funniest… and scariest… story in the financial world.

Once again, our hat is off to the stalwart, intrepid and half-mad Japanese. They are going where no respectable economist would go… no responsible public policy should go… and no one with his wits about him would want to go.

We begin with the latest news: Nippon is in a slump. The numbers from the third quarter confirm that the feared “triple-dip” recession is here.

Japanese growth fell at a 1.6% annual rate for the June-to-September quarter. The consensus forecast had been for a 2.2% rise in growth.

This is bad news for Abenomics. He lets fly his arrows. They end up sticking in his derriere. The idea (if you can call it that) was to stimulate inflation, growth and job creation. How?

Easy. You print more money!


Arrows going awry

(Image via medelle-finance.com)

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A Growing Shortfall

The Pension Benefit Guaranty Corporation is insuring the pensions of more than 40 million Americans employed in the private sector that have defined benefit pensions. We hadn’t been aware that it has run deficits for 12 years running, but it apparently has – and it is adding up. At the moment, the fund has a cumulative deficit of $62 billion. It has reportedly doubled just over the past year:


The deficit run up by the federal agency that insures pensions for about 41 million Americans has nearly doubled, to $62 billion. And the agency says that without changes, its program for pension plans covering 10 million of those workers will be insolvent within 10 to 15 years. It was the widest deficit in the 40-year history of the Pension Benefit Guaranty Corp., which has now run shortfalls for 12 straight years. The gap grew wider in recent years because the weak economy triggered more corporate bankruptcies and failed pension plans. If the trend continues, the agency could need an infusion of taxpayer funds to pay retirees, who are guaranteed their pensions by law. The PBGC said Monday that the increased deficit was due to worsening finances of some multi-employer pension plans, which are pension agreements between labor unions and a group of companies, usually in the same industry. The $62 billion deficit reported for the year ended Sept. 30 compared with $36 billion in the previous fiscal year. Labor Secretary Thomas Perez said fixing the problem is vital to the retirement security of the nation’s middle-class. Agency officials called for Congress to enact legislation submitted by President Barack Obama designed to shore up the program’s finances. The PBGC was created in 1974 as a government insurance program for traditional employer-paid pension plans, which have become much less common in recent decades as most employers turn to retirement accounts such as 401(k)s. The traditional plans are most prevalent in industries such as auto manufacturing, steel and airlines. If an employer can no longer support its pension plan, the PBGC takes over the assets and liabilities, and pays promised benefits to retirees up to certain limits. The agency didn’t name the multi-employer plans that it expects to run out of money or how many are involved. It said they represent a minority of the total 1,400 or so multi-employer pension plans, which cover about 10 million workers. “Plans covering over 1 million participants are substantially underfunded, and without legislative changes, many of these plans are likely to fail,” PBGC Acting Director Alice Maroni said in a statement. The agency said in its annual report that it has “sufficient liquidity to meet its obligations for a number of years.” The agency said the deficit in its multi-employer insurance program jumped to $42.4 billion in the budget year that ended on Sept. 30, from $8.3 billion in 2013. By contrast, the deficit in the single-employer program shrank to $19.3 billion from $27.4 billion as the economy strengthened. The PBGC reported that its pension obligations grew by $30.9 billion in fiscal 2014, to $151.5 billion. Assets used to cover those obligations increased by only $4.9 billion, to $89.8 billion. Rep. John Kline, R-Minn., chairman of the House Education and Workforce Committee, called the multi-employer insurance program “a ticking time bomb that will inflict a lot of pain on workers, employers, taxpayers and retirees if Congress fails to act.”

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Airline Fares Are Declining – Aren’t They?

A recent AP article published by ABC piqued our curiosity. It is entitled Why Airfare Keeps Rising Despite Lower Oil Prices.” Evidently, the authors felt an explanation was in order – maybe people have complained that air fares keep going up in spite of declining fuel prices? We can’t be sure what motivated them to write the article, but here are a few excerpts:


U.S. airlines are saving tens of millions of dollars every week because of lower prices for jet fuel, their largest expense. So why don’t they share some of the savings with passengers?

Simply put: Airlines have no compelling reason to offer any breaks. Planes are full. Investors want a payout. And new planes are on order.

In fact, fares are going higher. And those bag fees that airlines instituted in 2008 when fuel prices spiked aren’t going away either. In the 12 months ended in September, U.S. airlines saved $1.6 billion on jet fuel. That helped them post a 5.7 percent profit margin in the first three quarters of this year, robust for the industry but lagging behind the 10 percent average for the Standard & Poor’s 500.

In the past six years, airlines have done a great job of adjusting the number of flights to fall just short of demand. As a result, those who want to fly will pay a premium to do so. Airlines are selling a record 85.1 percent of their domestic seats. Thanks to several mega-mergers, four big airlines control the vast majority of flights, leaving very little room for another airline to undercut fares. With that in mind, here’s a closer look at what’s going on with airfare and the price of jet fuel:

— The average domestic airline ticket during the 12-month period ending in September rose 3.5 percent to $372.21, according to an Associated Press analysis of data from the Airlines Reporting Corp., which processes ticket transactions for airlines and travel agencies. That figure doesn’t include another $56 in taxes and fees that passengers pay.

— In the 12-month period ending in September, U.S. airlines burned through nearly 16.2 billion gallons of fuel. They paid an average of $2.97 a gallon — down from $3.07 the prior year, according to the Bureau of Transportation Statistics. That 10-cent drop saved the industry $1.6 billion. Fuel prices have since fallen further. United Airlines estimates it will pay $2.76 to $2.81 a gallon during the last three months of the year.

– Put another way: U.S. airlines burn through 311 million gallons of fuel in a week. Lower fuel prices are saving them $31 million a week.”


(emphasis added)

Actually, we are not really interested here in the reasons why air fares keep rising, or how airlines have managed to keep them high and have been able to avoid passing their fuel savings on to consumers. Undoubtedly that would make for an interesting topic as well.



 (Photo credit: fmh)

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Be Civilized …

Want to know the secret of success in today’s civilized world?

Be civilized. More on that in one moment …

First, we note that the Dow hit a new record high on Tuesday of 17,688, after rising 40 points. And gold was just a buck shy of the $1,200-an-ounce mark. It appears to have bottomed out. Time will tell.

Remember that gold is not an investment. It is money – the best money. You keep some on hand; you never know when you may need it.

Now, back to the secret of success …



(Via soziologie.uni-muenchen.de)


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The Press Takes Notice of a Small Problem

We have previously discussed the plans announced by EU commission president JC Juncker to “rescue” the euro area economy by means of € 300 billion of state-directed spending (see Juncker’s Solution for details). Now the mainstream press is also beginning to wonder where the money for this ambitious spending plan is supposed to be coming from.

A report by Reuters contains a few points worth commenting on:


“New European Commission President Jean-Claude Juncker is preparing a 300 billion euro ($375 billion) investment plan he will present as a cornerstone of efforts to revive an ailing economy. But history suggests the program risks becoming an exercise in financial engineering rather than a conduit for the new money the region needs to help boost output and create jobs.

A flagship project of the new European Union executive, the investment scheme is due to be unveiled before Christmas. It is still being finalized and few details have been made public. If all the money it promises is raised and spent, it could provide the 28-nation EU with roughly an additional 0.7 percent of GDP in investment per year over three years.

“It is significant,” said Carsten Brzeski, economist at ING bank in Frankfurt. “You would expect some kind of a multiplier effect from investment on jobs and purchasing power and it would increase the growth potential. The downside is that public investment can take years before it gets started.”

But even more than “when?”, the big question hanging over the plan is “how much?”. The 300 billion euros is an overall target for both the public and private money that the Commission hopes to mobilize. The Commission itself does not have any money and is funded through annual EU budgets that must be balanced. Of the region’s 28 governments, only Germany seems to have public finances strong enough to significantly increase investment. But in its drive to have a balanced budget, Berlin is not keen to spend more.

So the Commission plans to use what little public money is available to lure bigger private funds into projects that would otherwise seem too risky or with too low a rate of return.

“Our aim is to ‘crowd in’ private money for big infrastructure projects in the energy sector, transport, broadband or research and development. The private sector cannot take all the risks,” Commission Vice President Jyrki Katainen told Reuters.


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G-20: Governments are “Growth” Magicians

The G-20 met in Brisbane again this weekend for a shrimp-fest at reportedly considerable cost to tax payers (it cost more than $400 million and shut down an entire city for the best part of a week). What did the meeting achieve? According to the communique, it will achieve miracles. Not only is there going to be an intensification of the fight against the non-problem of “climate change” (as if the climate cared what we do or don’t do), but governments will “create economic growth” – allegedly $2 trillion worth of it over the next five years.

Since this figure refers to global GDP it can of course be achieved, mainly because GDP is a very poor measure of growth. All sorts of activities that really make us poorer are counted as “growth” – all that counts for the purposes of GDP calculation is “spending”, no matter what the spending entails or who actually does the spending. The Soviet Union had “growth” too – in fact it reported plenty of it. It even grew while millions died in famines during the collectivization drive. Western intellectuals were duly impressed by Stalin, who seemingly demonstrated the superiority of communism over capitalism in the 1930s. People in the Soviet Union were even paid in something that was called money, but there was very little they could actually buy with it.

Since governments want to fight “climate change” (there is no point in fighting “global warming” anymore, since it has stopped dead in its tracks more than 18 years ago), they are bound to create some of that magical growth by wasting scarce resources on alternative energy subsidies. It should be obvious that such investment is wasteful – if that were not the case, it would not need to be subsidized (Germany’s citizens have seen their electricity bills soar in the course of the rigorous implementation of the “green energy” boondoggle in that country). However, it will register as growth in the GDP accounts, just as numerous housing bubbles around the world looked like growth until they blew up in 2008.

All this government intervention-induced growth should perhaps be called “growth at a price” – it is a bit like buying $1 bills with $5 bills. According to the AP, the G-20 want to create more jobs specifically for women as well (by means of quotas? They didn’t say), but it is actually not necessary to plan specifically for that, at least not in the industrialized nations.

As the real incomes of the middle to lower strata of society in the developed world have plunged over the past few decades of ever more extensive central bank intervention in the market economy, the times when a single breadwinner could hope to shelter, feed and clothe a family are long past.

In that sense it is quite ironic that the G-20 have announced a new “war on poverty” in the same breath. The last one worked real well (announced by Lyndon B. Johnson in the US, and judging from its results, a failure so total, it could easily serve as the very definition of the term failure in dictionaries).


 war-on-povertyAs soon as the US “war on poverty” was declared, poverty rates promptly stopped falling – via cepr.org.


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Landing on a Comet

As readers probably know, ESA has sent a spacecraft to a comet from the Kuiper Belt, to take a closer look and find out what a comet is actually like. According to the latest updates, it seems possible that the comet lander has come to rest below a cliff in the shade. If so, it would be a pity, because its solar panels would only get 90 minutes of sunlight per day instead of 6 hours as planned. It recently sent back a photograph of its feet, in other words it is busy taking selfies at the moment:


1.philae-feetPhilae sent a photo of part of itself. It doesn’t seem to know where exactly it is.

(Photo credit: ESA/Rosetta/Philae/CIVA)

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The Tax Loophole “Scandal”

It seems that for once, Mr. Juncker actually did something right: during his time as the prime minister of Luxembourg, he allowed, to paraphrase Mises, “capitalism to breathe”, by making it possible for companies to save on their tax bills. These tax loopholes (which the establishment press propaganda refers to as “tax avoidance”, or even worse, “tax evasion” schemes, even though they are perfectly legal) are a subject that plays into the hands of statists like few other. Only protectionism may be a fallacy that enjoys even greater populist appeal.

It should be perfectly clear that consumers can only benefit when companies manage to escape the avarice of governments to some extent. But envy is a powerful political motivator, and the fact that the average citizen as a rule cannot arrange his affairs to enjoy the same tax advantages is cunningly employed by etatistes to create a populist outcry over the “unfairness” of it all.

Let’s be serious though. The average citizen, resp. consumer cannot expect any advantages whatsoever from an increase in corporate taxation. What it will mean to the average citizen is only this: the prices consumers pay will rise, fewer jobs will be created, and the returns of pension funds (which invest in the shares of these companies) will decline. There will be zero offsetting benefits from the fact that the State will enlarge its loot. On the contrary, that enlargement will only benefit political cronies and will lead to even greater waste of scarce capital.

Surely no-one seriously believes that everybody else’s taxes would be lowered if these tax loopholes were closed? There’s not even a sliver of a chance of that happening. One would have to be quite naïve to actually believe that. And yet, judging from the reader comment sections of articles about these loopholes in the mainstream press, there is a hue and cry as if these companies were snatching the milk from the mouths of hungry babies.


juncker_2140199bWe dislike almost everything about JC Juncker – except the stuff he is now attacked for.

(Photo via DPA)


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How to Commit Financial Suicide



Printing paper money at a printing press in Perm.

(Photo credit: Alexey Kudenko)


Stocks are trading at a new record. Works of art hit a new record too.

From Bloomberg:


“An almost 6-foot-tall Jeff Koons white plaster sculpture of a woman holding three Hermes Birkin bags sold for $4 million last night at a charity auction in New York, 60% more than similar works fetched in the past.

The sale of “Gazing Ball (Charity)” followed last week’s tally of $673 million for Impressionist and modern art sold at Manhattan auctions, setting the stage for a potential record season if high prices continue this week.

“I’m long-term bullish on the art market,” Rajiv Chaudhri, president of Sunsara Capital LLC in New York and an art collector, said at the event at the Four Seasons restaurant in New York. “Prices will keep moving up. There is still so much private wealth being created. Art is the ultimate asset.”


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Why Isn’t It Working?

Voters don’t like the Republicans any better than they like the Democrats. But last week, Obama and the Dems were held responsible for the economy. They got off easy. A hanging would have been more appropriate.

We have mentioned many times how median household income is now lower than it was when the 21st century began. The median household had $57,000 in income when the big ball came down in Times Square and closed out the 20th century. Today, it has $52,000.

Stocks are substantially higher. So are corporate profits. Why aren’t ordinary people earning more money? After all, we live in the greatest economy man has ever created. More people have more money than ever before. So there’s plenty of capital to fund new enterprises.

Also, more people have college degrees. So there’s no shortage of educated people to fill office seats. And there are more scientists and engineers busy developing new drugs, new machines and new chemicals.

The economy should be exploding with growth, jobs and higher incomes for everyone.


1-Real Median Household IncomeReal median US household income has plunged since the tech bubble peaked. Note that the “inflation adjustment” is done with the government’s phony CPI data, so the reality is likely far worse than this chart suggests – click to enlarge.


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Janet Yellen Bemoans “Lack of Fiscal Support”

Fed chair Janet Yellen studied under the Keynesian James Tobin, whose name is nowadays best known for being associated with a tax. It should therefore not come as a big surprise that she supports Keynesian dogma regarding government intervention in what is left of the market economy.

As Reuters reports:


“U.S. Federal Reserve Chair Janet Yellen on Friday called on politicians across the globe to get their fiscal houses in order during good times to prop up economies during times of turmoil.

In remarks to a symposium in Paris, Yellen blamed part of the slow global economic recovery on weak government support.

She took aim at both U.S. political gridlock after the 2007-2009 financial crisis and the austere policies across Europe as the region struggles with persistently low inflation.

The crisis led major central banks to deploy unconventional tools to spur recovery. For its part, the Fed cut interest rates to zero and more than quadrupled its balance sheet to $4.4 trillion through three rounds of bond buying, eliciting howls of protest from some politicians who feared the monetary largesse would spark an unwanted inflation. It announced an end to its latest asset purchase program just last week.

While the unconventional tools helped support domestic recovery and global economic growth, more action from fiscal authorities would have strengthened the recovery, Yellen said.

“In the United States, fiscal policy has been much less supportive relative to previous recoveries,” she said during a panel discussion at the Bank of France. Yellen cited data that compared the large increase in U.S. government payrolls after the 2001 recession to the decline of 650,000 government jobs after 2008.

AS central banks seek to promote healthy economies, she said a sharpened focus on financial stability would play a key role. Yellen did not comment on U.S. monetary policy, specifically, but said central banks globally would need to normalize policy as economic activity and inflation return to normal. The timing and speed of policy normalization will vary across countries, Yellen added, and could lead to financial volatility.”


(emphasis added)


Meeting of the Board of Governors of the Federal Reserve

(Photo credit: Jim La Scalzo—EPA/Corbis)


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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future