Paul Volcker is a hero to many because he saved the US economy in late 1970s and early 1980s.
Ignoring all the voices who said it was impossible, he courageously stopped out-of-control money printing and restored sound monetary policy. The policies worked and made it possible for the Reagan economic boom to get started.
Now Bloomberg tells us that the new Prime Minister of Japan may bring that country a “Volcker” moment. How will he do this? By spinning the Japanese money printing presses even faster.
So how can this be a “Volcker” moment? It is the opposite of sound monetary policy. It is the opposite of courageous.
But we can’t express too much surprise. This is how corrupt our media and political discourse have become.
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The election is over and as the nation advances toward the “fiscal cliff” many assume that the mortgage and financial crises are over. Some review is clearly in order.
In September 2008 the federal government took over the mortgage giants Fannie Mae and Freddie Mac. During the 2012 election campaign, the U.S. Treasury Department issued a press release titled “Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac.” This document that claimed the mortgage-investment policy of these agencies would be scaled back at a rate of 15 percent per year, more than the previous claim of 10 percent.
The news prompted Forbes magazine to proclaim a “victory lap” for President Obama. Economist Vern P. McKinley, on the other hand, took the trouble to cross-check the Treasury claims against the annual and quarterly reports Fannie Mae filed with the Securities and Exchange Commission.
As McKinley noted in the Wall Street Journal, when Treasury bailed out Fannie and Freddie, part of the deal was a cap on the mortgage assets they could “own.” Fannie’s cap of $729 billion represents only a small portion of the $2.9 trillion in mortgages on Fannie’s balance sheet. And the 15 percent shrinkage remains a theory at best. Freddie Mac, meanwhile, achieved only slight reductions in its mortgage portfolio.
McKinley also cross-checked the SEC reports on claims of staff shrinkage and found that Freddie Mac dropped 90 employees. Fannie Mae, despite media claims of mass layoffs, bulked up from 5,800 employees in 2008 to 7,000 in 2012. So government conservatorship produced an increase of 1,200 employees. “These facts,” concluded McKinley, “expose the Treasury announcement as misleading at best, and confirm that the wind-down mission has not been accomplished.” The lesson should be clear.
When the government claims shrinkage, the reality is likely to be expansion. Indeed, the federal government has exploited the entire financial crisis to launch the Consumer Financial Protection Bureau, (CFPB), a new federal agency of dubious utility. That is not a new dynamic, as Robert Higgs outlined in Crisis and Leviathan. Anyone concerned about the fiscal cliff should cross-check that reference carefully.
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Obama re-election means ‘Perfect Storm’ for gold – Nichols
While Marc Faber feels that President Obama’s re-election is a disaster for business, U.S. gold analyst Jeff Nichols reckons it sets the scene for a big kick up in the gold price.
Author: Lawrence Williams
Posted: Thursday , 08 Nov 2012
LONDON (Mineweb) –
The gold price reacted sharply upwards to President Obama’s re-election, with the U.S. dollar initially falling, but then the dollar recovered as Europe’s woes continue to depress alternative currencies and gold drifted back, before moving sharply upwards again in later trading despite the dollor index remaining up a little – which many would take as a very positive sign for gold and the other precious metals which rose along with it.
The Obama factor has certainly had a positive effect on the gold price whereas a Romney victory might have driven it lower, and the gold bulls doubtless feel that this could be the trigger gold really needs to take off to new heights – although their predictions for the U.S. economy in general are dire suggesting that any signs of recovery will be shortlived.
Indeed Marc Faber of Gloom Doom and Boom newsletter fame told Bloomberg TV: "I am surprised with the re-election of Mr. Obama. The S&P is only down like 30 points. I would have thought that the market on his re-election should be down at least 50%…I think Mr. Obama is a disaster for business and a disaster for the United States. Not that Mr. Romney would be much better, but the Republicans understand the problem of excessive debt better than Mr. Obama who basically doesn’t care about piling up debt. You also have in the background Mr. Bernanke, who with artificially low interest rates enables the debt to essentially escalate endlessly."
Indeed if the U.S. does go into recession – or move into a deeper recession as some would put it – and the stock market dives, this could also impact the gold price negatively – at least initially. Remember 2008. But then gold could bounce back even stronger as it did then and in early 2009.
However some mainstream to bullish analysts feel that the Obama re-election will be long term bullish for gold – indeed strongly so. Take respected gold analyst Jeff Nichols’ post election take on the gold price as a good example. He feels that Obama’s return to the White House, but with Republicans maintaining control of the House of Representatives and the Democrats with only a weak majority in the Senate, represents the best of all possible worlds for gold investors.
Indeed looking from outside the U.S.’s borders the extreme polarisation of views between Republicans and Democrats and seemingly huge antipathy between the supporters of the two sides does not bode well for any kind of consensus government emerging. The current Obama administration policies though are likely to continue which means more of the same – with Ben Bernanke remaining in office seemingly committed to continuation of the Quantitative Easing programme already set in place, and thus no end to the ever increasing U.S. debt situation.
As Nichols puts it "With the election now behind us, the market’s short-term attention will re-focus on possible Federal Reserve policy initiatives that may be discussed or even initiated at the December 12th FOMC policy-setting meeting. There is already talk of further quantitative easing, expectations of which could soon become a strong up-side price driver. From a longer-term perspective, the Obama Administration will likely continue to endorse aggressive monetary stimulus as the only game in town to counter recessionary tendencies in the U.S. and global economy. Moreover, when Chairman Bernanke’s term expires in 2014, President Obama is likely to appoint another monetary ‘dove’ to head the Fed."
Although one would logically assume that the forthcoming ‘fiscal cliff’ which would mandate big tax increases in combination with sharp spending cuts, which comes to a head in January, should be avoided through bi-partisan agreement in Congress and the Senate, the current immediate post-election bad blood between Democrats and Republicans may not see this come to pass, thus turning another screw in the potential downward spiral for the U.S. economy. Nichols feels that some temporary accommodation may be reached, which will effectively kick the can down the road, but this cannot be certain in the current climate, but in the meantime the gold price could be extremely volatile as first one faction, and then the other, appears to be winning the battle.
All in all though, should some form of fiscal restraint eventually be put in place, this would see the U.S. following the European road – and what a disaster that is proving to be for the moment – which will exacerbate recessionary tendencies – and end up forcing the Fed not to reduce monetary stimulus, but to add further to it. This, reckons Nichols, "could form a "Perfect Storm" for gold in the closing weeks of 2012 – and, quite possibly, we could see the metal approach or even surpass its record high by year-end or early 2013."
To read Jeff Nichols’ latest views on the post election gold scenario go to www.nicholsongold.com.
iPad Version – Picture: U.S. President Obama celebrates on stage as confetti falls after his victory speech during his election rally in Chicago: REUTERS/Kevin Lamarque
Statistics: Posted by DIGGER DAN — Fri Nov 09, 2012 1:16 am
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The Poor Aren’t Making Money Off Poverty Programs So Who Is?
We have stated before that some form of societal safety net is needed. How it is administered now, via massive waste and bureaucracy is a travesty and tragic. It should be a source of shame for the nation.
But there’s a lot of money in welfare, just not for the recipients it seems. There are lots of programs deployed at relatively high cost, but solutions always seem to be in short supply. Could it be that solutions eventually reduce federal flows of cash to established bureaucracies which would like to keep the tax funded flow growing? It’s a very cynical question I understand.
(From the Weekly Standard)
“According to the Census’s American Community Survey, the number of households with incomes below the poverty line in 2011 was 16,807,795,” the Senate Budget Committee notes. “If you divide total federal and state spending by the number of households with incomes below the poverty line, the average spending per household in poverty was $61,194 in 2011.”
This dollar figure is almost three times the amount the average household on poverty lives on per year.”
(Weekly Standard, 10-26-2012)
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Just as ‘Fair Trade’ Means Protectionism for the Benefit of Special Interests, ‘Fair Tax Competition’ Means Tax Harmonization for the Benefit of Politicians
By Daniel J. Mitchell
Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?
But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.
There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.
While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.
Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”
But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.
Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.
In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.
But if the French government wants to track – and tax – that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.
Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.
Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right – at the very least – to charge you the difference between its price and the price at your new station.
Simply stated, you would not be allowed to benefit from lower prices at other gas stations.
So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.
Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.
For more information, here’s my video on tax competition.
And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.
P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.
Just as ‘Fair Trade’ Means Protectionism for the Benefit of Special Interests, ‘Fair Tax Competition’ Means Tax Harmonization for the Benefit of Politicians is a post from Cato @ Liberty – Cato Institute Blog
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Rick Rule – Greek Bailout & What it Means for Gold
February 21, 2012
On the heels of a Greek bailout, which has gold trading more than $20 higher and silver back above $34, today King World News interviewed Rick Rule, CEO of Sprott USA. Rick spoke with KWN about what has just taken place with Greece and what it means for gold. Here is what Rule had to say: “I don’t think Greece was bailed out, I think the banks that were stupid enough to lend Greece money were just bailed out. They have talked about an injection of fresh cash to maintain Greek living standards. Simultaneously, they have announced fairly aggressive cuts.”
“They are aiming at slashing the debt to 120% of GDP by 2020. This means if you believe that all of the assumptions they made are correct, then Greek debt will go from unserviceable to barely serviceable by 2020. It’s important to remember that the people who are making these assumptions are the same people who made the decision to lend money to Greece in the first place. This lending has Greece 160% in debt vs their GDP.
I suspect that ultimately we are going to see a Greek default. Right now we are buying time so that more of the private sector and private banks can unload their Greek paper on the ECB. This will socialize the losses which have occurred as a result of stupidity on the part of the banks. As I said earlier, this is a bank bailout, not a bailout of Greece.
“Further, the European community is talking about increasing its ‘firewall.’ This is the amount of euros it holds in reserves for difficult times, up to 750 billion euros. Given that none of the European countries have 750 billion euros floating around that they can move from an operating account into a rainy day account, one would have to assume this fund will be funded the same way it was in the US.
What this really means is this will be a printing facility. So 750 billion euros will be counterfeited in this scheme. We are just picking on Greece because they are in the headlines, but certainly there are difficulties in the rest of the economy. Italy, Spain, Portugal, Ireland and France all have their own problems.
Remember, Eric, that not too long ago Germany had a failed bond auction. So I don’t think we are out of the woods in Europe. In this environment the US dollar may remain strong because people are still focused on Europe. The US problems, while severe, appear to be less time critical than the European problems. Investors are looking at Europe, but there is a great deal to be concerned about on the US side as well.”
When asked how all of this will impact gold, Rule replied, “I think gold will continue to proceed higher. That doesn’t mean gold can’t have corrections, but much of that volatility is background noise. Gold competes with fiat currencies as a medium of exchange and gold competes with sovereign debt claims as a medium of storing wealth.
Given the fact that all around the world the sovereigns are busy inflating, that is counterfeiting, it would seem to me that gold faces no competition. Over time, the depreciation of the competitor has to favor gold in the two to three year time frame. You know, some value is afforded by scarcity and certainly with regards to fiat currencies there is no scarcity.”
Statistics: Posted by DIGGER DAN — Wed Feb 22, 2012 2:16 am
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Kevin Kerr: No matter where you live or travel — America, Europe, Asia, South America, China, etc. — you use fiat currency, at least in one form or another.
Paper money (whose value is dependent on governments and not tied to any fixed standard such as gold) is just a fact of life.
Our wealth and financial health are determined by the amount of money in our investments, bank accounts and other holdings. But the influence goes beyond a government’s regulations, laws or other decrees.
That is, they are subject to the daily fluctuations and whims of the currency markets. And lately, those fluctuations have been volatile … to say the least.
We’ll talk about how to best protect yourself from the unavoidable dangers of fiat money in just a moment. But first, let’s take a look at just what happens when paper money goes up in smoke (and why it happens).
Graveyard of Currencies
You might have become very nervous watching your personal holdings evaporate as the underlying fiat currency — whether it’s the euro, U.S. dollar, yen, pound, franc or most others — loses value.
Around the globe, investors are scrambling to move their hard-earned wealth into a safe harbor that will provide them with real, tangible assets. It’s a simple fact that fiat currencies have proved to be relatively short-lived, and this tends to make them a very poor investment, by historical standards.
A study you might find intriguing was done on 775 fiat currencies by DollarDaze.org. In this study, it determined that: “There is no historical precedence for a fiat currency that has succeeded in holding its value.”
The study showed that 20% failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation and approaching one of the other outcomes.
Not a pretty picture at all.
In fact, the report showed that the average life expectancy for a fiat currency is 27 years, while the shortest lifespan was about one month.
History Repeats Itself, Repeatedly
One of many historical examples we can look at is from an empire that thrived … one that grew to incredible wealth and prosperity. Then corruption, greed, arrogance and, above all, currency devaluation caused its eventual fall. (No, I’m not talking about the U.S. dollar — not yet, anyway!)
I am, of course, talking about Rome, where the denarius was the currency of choice. And while Rome didn’t actually have paper money, it’s still one of the best examples of the debasement of a currency gone awry.
The denarius was the coinage of the time (at the beginning of the first century A.D.), and it was essentially pure silver.
Around 54 A.D., Emperor Nero was in charge, and the coins were reduced to approximately 94% silver. Fast-forward to around 100 A.D., and the silver content was down to just 85%.
The devaluation pattern continued after Nero, because each emperor liked the idea of devaluing the currency in order to pay the bills and increase his own wealth. This appealed to them more than actually paying those bills.
So the ugly pattern continued and, in 244 A.D., Emperor Philip the Arab had the silver content dropped to 0.05%. Around the time of Rome’s collapse, the denarius contained only 0.02% silver. The coinage was virtually worthless and basically nobody accepted it as a store of value or trusted medium of exchange.
The story of Rome is far from unique. We have lists of fiat currencies that today are simply a bad memory. One of the most stunning examples is the German Weimar Republic mark.
Inflation got so bad during this period in Germany that citizens were using stacks of mark notes to heat their fireplaces.
The tale is in the tape if we look at the historical timeline of exchange rates for the German Weimar mark to one U.S. dollar.
April 1919: 12 marks
November 1921: 263 marks
January 1923: 17,000 marks
August 1923: 4.621 million marks
October 1923: 25.26 billion marks
December 1923: 4.2 trillion marks
Given the underwhelming track record of fiat currencies, it’s clear that, on a long-enough timeline, the survival rate of all fiat currencies drops to zero. So investors are starting to realize that the only true safe haven for their hard-earned wealth is diversification … namely into the precious metals.
In ‘Gold’ We Trust
The full faith and credit of the United States simply doesn’t give the global financial markets the warm, fuzzy feeling it used to. In addition, euro-zone investors and consumers have certainly had their faith rocked by the eroding value of the euro. And around the world, fiat currencies have been shaken to the core by devaluation, low or no interest rates, and out-of-control debt and borrowing.
Not only is it no wonder that we are seeing gold and silver rise in this environment, but it is also likely that we are only at the very beginning of this cycle. This means gold and silver have much further to go.
Plus, we are seeing more and more active buying out of China, and the Year of the Dragon will surely support even more buying than usual.
The biggest surge in buying is going to be from investors who have always shied away from precious metals and have finally realized that, in today’s world economy, it’s imperative to have some exposure to precious metals — even if it’s just as a hedge for your fiat currency holdings.
Bring Your Paper Money to Life
Whether you’re a new or experienced investor in the gold and silver arena, I suggest creating a basket of different holdings in gold and silver.
Actual physical bars and bullion are certainly an element you want to consider. I suggest avoiding coins (numismatics), as this can require special knowledge and, while it can be profitable, it also carries additional costs and risk.
Key mining stocks should also be a part of a core protective portfolio, so you should consider picking two to five major gold producers with good infrastructure, mining sites and cash flow. Stick with bigger names and buy on dips.
A few key gold and silver ETFs are worth examining and adding on pullbacks, like the SPDR Gold Trust (NYSEArca:GLD) (on which we currently hold call options on in my Master Trader service), the Market Vectors Gold Miners ETF (NYSEArca:GDX) and the iShares Silver Trust (NYSEArca:SLV).
The bottom line is that the money we have in our pocket is simply paper with ink and some pictures and promises. Having something tangible that you can hold in your hand as a real store of value can be very comforting and profitable, indeed.
The question you must to ask yourself is: Can I afford not to take action on this currency risk any longer? The time has come, and I’m sure you’d rather do it now — before the next fiat currency funeral takes place!
Statistics: Posted by yoda — Fri Feb 03, 2012 2:13 pm
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