Archive for January, 2011
by Robert Kiyosaki
Online Exclusive Update – #80
January 31, 2011
My poor dad believed strongly in the idea that the government should take care of people from cradle to grave. He loved the story of Robin Hood, a man who stole from the rich and gave to the poor.
My rich dad believed we should take care of ourselves. He didn’t want a government handout. He believed there were too many government workers, public servants who were Robin Hoodlums, only serving themselves and stealing from the people.
As the ripples of this financial crisis spread, the number of public servants who are really Robin Hoodlums is revealed. It’s now dawning on us, the taxpayers, how much our public servants have been Robin Hoodlums serving themselves.
An article in The Week entitled “The Pension Time Bomb” states that the shortfall in government pensions is $3.4 trillion—more than double this year’s federal deficit. Seven states, including Illinois, Connecticut, and Louisiana, are expected to exhaust their pension fund by the end of this decade. More than half the states will be out of money by 2027.
To make matters worse, government pensions take priority over keeping state governments running. This means that pensions are protected and must be paid. Even when a municipality declares bankruptcy, pensions are paid. This means pensioners get paid even if police, firefighters, and schoolteachers don’t get paid. In other words, our retired public servants get paid even if the government goes bankrupt. This is not stealing from the rich—this is stealing from the people they’re supposed to serve.
This makes my blood boil and is a reason why I wrote Rich Dad Poor Dad in the first place. In a few years, the world will realize how greedy and self-serving so many public servants have been. Many aren’t there to serve the people—they’re there to serve themselves. They sought out government jobs not to serve the people but for job security and life-long benefits. Now as our country is going broke, they still get paid.
In Yonkers, New York, taxpayers were outraged to find out that police officers were able to retire in their forties and collect six-figure incomes. For example, former police officer Hugo Tassone retired at age 44 with a $101,333 pension. Edward A. Stolzenberg, a retired hospital administrator in Westchester, New York, collects $222,143 annually. These guys are Robin Hoodlums. They take more than they give. They steal from all of us.
As a child, it angered me to hear teachers and public servants like my poor dad criticize the rich, calling them “greedy.” I always suspected that it was the public servants in government that were the greedy ones. Now, as this crisis reveals just how much our public servants have been feathering their own pockets, I realize my suspicions were true.
The tragedy is that it’s the government workers cheating the system that continue to be protected by it. Since their retirements are protected, it means the taxpayers will continue to pay their feathered retirement nests for life while receiving reduced government services. To make matters worse, now that these excesses are being revealed, it means new government workers will be paid even less, which means lower quality government workers in the future.
There’s an old saying that goes, “Thank God we don’t receive all the government we pay for.” It seems we’ll be paying for government we didn’t receive for years, at least until this current batch of public servants pass on to the big bureaucracy in the sky.
For all supporters of COR, I suggest you learn to take care of yourself and not expect the government to take care of you. This is why in 1973, when I returned from Vietnam, I decided to listen to my rich dad and become an entrepreneur and not my poor dad who suggested I become a government employee like him.
I know we need government employees. I know government workers perform many vital services. I just didn’t want to be one of them. I didn’t want to adopt the attitude of my poor dad, a man who believed the government should take care of him for life. I couldn’t look at myself in the mirror knowing I was taking from the very people I was supposed to be serving. This is why I’m an advocate of financial education and learning to take care of yourself so that you don’t have to take from others.
Thank you for supporting COR.
Read the original article HERE.
Jan 30, 2011 9:01 PM PT
In spite of differences between Democrats and Republicans on reforming housing finance, both sides back proposals that would make mortgages more expensive and difficult to obtain.
Government officials and lawmakers want to make the market less vulnerable to another credit crisis, and all the options lead the same general direction: Borrowers will need larger down payments than in the bubble years, have higher credit scores, and pay extra fees to cover risks and premiums for federal guarantees on government-backed mortgage bonds.
While those measures would create a sounder system, they also mean that fewer borrowers will qualify for loans and the national home ownership rate — already on the decline — will continue to slide.
During the bubble, mortgages were given to people “who clearly should not have gotten them,” David Stevens, commissioner of the Federal Housing Administration, which guarantees loans to first-time and low-income home buyers, said in an interview. “It would not be productive if we had that same loan access going forward.”
Ownership rates, which rose from 63.8 percent in 1994 to 69.2 percent a decade later, have since dropped to 66.9 percent, according to the U.S. Census Bureau. Stevens said he expects the rate to fall further.
The value of mortgages outstanding has also declined. According to Federal Reserve data, the total value of home mortgages rose from $9.38 trillion in 2005 to a peak of $11.17 trillion in 2007, and then dropped to $10.6 trillion at the end of the third quarter of 2010.
John McIlwain, a senior fellow for housing policy at the Urban Land Institute in Washington, said he expects home ownership rates to eventually drop to as low as 62 percent.
The impact of the pending revamp of the housing finance system on borrowers is clearer than for lenders, whose business model will likely have to change.
According to Guy Cecala, publisher of Inside Mortgage Finance, although the volume of lending has gone down, banks have been earning somewhat higher profits from mortgage originations. That’s because so many mortgage lenders collapsed during the crisis that those who survived gained market share.
For instance, the two largest mortgage lenders, Wells Fargo & Co. and Bank of America Corp., controlled 46 percent of the market in the first three quarters of last year, Cecala said, compared with 28 percent in 2008.
Cecala said that banks used to lose, on average, as much as $2,000 per mortgage origination and earn profits from servicing them. Today, he said, because of less competition, they earn as much as $1,000 per mortgage origination.
Under some reform scenarios, the entire mortgage financing system could be privatized, which would upend banks’ business model for mortgages, with unknown impacts on their profits.
Currently, most mortgages are originated by banks then guaranteed by the Federal Housing Administration or purchased by Fannie Mae and Freddie Mac, known as government-sponsored enterprises. Fannie and Freddie then package the loans into mortgage-backed securities and sell them to investors.
Because banks don’t have to hold many loans on their books for long, securitization has greatly increased the volume of loans banks issue. It also reduced costs, because the risk of the loan was passed on to investors and the government.
Democrats generally favor retaining some form of government mortgage guarantee in a reformed system. One option along those lines is a proposal by the staff of the Federal Reserve Bank of New York under which a limited guarantee would be offered just on the securities made from mortgage pools, in return for a premium that would be passed on to borrowers. A proposal by the Republican-aligned American Enterprise Institute, drops the government guarantee. What these plans have in common is that, for non-FHA loans, they foresee stricter credit requirements, larger down payments of at least 20 percent and higher fees and interest rates.
The result is that in the future, borrowers, rather than the government, are likely to bear more of the lending risk.
“We are going to have more collapses of this market if we open home ownership up to anyone who wants a home as opposed to people who can afford a home,” said Peter Wallison, an author of the AEI report and former general counsel at the Treasury Department. “People are coming to that realization now.”
Wallison said the market could operate effectively without Fannie and Freddie or some other kind of government guarantee as long as banks followed strict underwriting standards. Mortgage insurance, paid by borrowers, could also mitigate risk, he said.
Price of Safety
“There is a price of safety but that’s the way markets work,” he said.
“You’re funding a long-term loan with short-term money,” Pigg said. “If you stick with that product there is a stronger need for government involvement.”
Laurie Goodman, senior managing director for research at Amherst Securities Group LP, said that in a privatized market, investors in mortgage-backed securities would likely demand a higher yield to compensate for the added risk. That would also translate into higher retail borrowing rates.
“Some investors might pull out of the market entirely because of that risk,” said Goodman, whose Austin, Texas-based firm is a broker-dealer for mortgage-backed securities.
Fannie Mae and Freddie Mac, now in government conservatorship, have already instituted tougher mortgage requirements and higher fees. The agencies are imposing “loan- level price adjustments” and “adverse market delivery charges” on many mortgages, which can add about 3 percentage points to the cost of a loan, said Alan Boyce, chief executive of Absalon, a joint venture with the investor George Soros to develop a new housing finance system.
The GSEs’ fees have recently gone even higher, said Brian Wickert, president of Accunet Mortgage in Butler, Wisconsin, especially for borrowers who have second mortgages and want to refinance.
For instance, a borrower with a mortgage equal to 76 percent of a home’s appraised value, and a second mortgage adding another 3 percentage points, to 79 percent — still below the 80 percent level desired by banks — and a FICO score of between 700 to 719, would have previously paid $2,000 in fees to the GSEs in a refinancing, Wickert said. Following recent increases, those fees are now around $4,000.
‘Raising the Bar’
“They keep raising the bar because they can,” Wickert said.
Amy Bonitatibus, a Fannie Mae spokeswoman, said the agency adjusts standards and fees in response to market conditions. Higher costs, she said, reflect conditions in the market rather than a desire to boost revenue.
“These changes are intended to more accurately reflect changing risks in the housing market,” Bonitatibus said.
Analysts say the higher costs of mortgages are already hampering a recovery of the housing market. Borrowers of mortgages bought by Fannie Mae in the fourth quarter of last year had an average FICO score of 765.6, compared with 737.5 in 2008, said Cecala of Inside Mortgage Finance.
“We were way too loose in the past,” said Goodman of Amherst Securities. “The question is, are we going to be too tight to solve the problem that’s been created?”
Read the entire article HERE.
Jim Grant: “The Fed Is Now In The Business Of Manipulating The Stock Market…Should Confess It Has Sinned Grievously”
Tyler Durden on 01/28/2011 16:03 -0500
Jim Grant, who will never be accused of being a fan of the Criminal Reserve, and whose views on what will happen to asset prices in a printer-happy world are gradually being validated, appeared on Bloomberg TV, telling Margaret Brennan upfront that Bernanke owes the world an apology. Alas, after various revolutions around the world have been catalyzed by Bernanke’s policies, we have a feeling that ever more oppressed people will soon see the Printer in Chief as a patron saint of violent revolution, alas against crony regimes fully supported by the US (and hopefully the US will view it the same way when its time comes). That aside, Grant’s criticism of the Fed should really start to grate on the Chaircreature: “I think what would be very good for the Fed if there would be a confession, the Fed should confess that it has sinned grievously, and is in violation of every single precept of its founders and every single convention of classical central banking. Quantitative Easing is a symptom of the difficulties that the Fed has created for itself. The Fed is running a balance sheet which if it were the balance sheet attached to a bank in the private sector would probably move the FDIC to shut it down. The New York Branch of the Fed is leveraged more than 80 to 1. Meaning, that a loss of asset value of less than 1.5% would send it into receivership if it were a different kind of institution…The Fed is now in the business of manipulating the stock market.” Jim also has some very critical discussions on how the Fed never settles up on the $3.4 trillion in custodial debt on its books. As always, we can’t get enough as more and more mainstream figures turn to bashing that biggest abortion of modern capital markets.
Read the entire article and news clip HERE.
Blankfein, 56, received 78,111 shares on Jan. 26, according to a filing yesterday with the U.S. Securities and Exchange Commission. At the closing price of $161.31 that day, the shares would be valued at $12.6 million. New York-based Goldman Sachs also raised Blankfein’s base salary to $2 million this year from $600,000, according to a separate filing.
Goldman Sachs, the fifth-largest U.S. bank by assets, reported 2010 earnings dropped 38 percent from a record in 2009 as revenue from trading stocks and bonds fell from an all-time high. The firm set aside 39 percent of revenue to pay employees in 2010, up from 36 percent in 2009, the lowest ratio ever.
Chief Financial Officer David Viniar, President Gary Cohn, and Vice Chairmen J. Michael Evans and John S. Weinberg each also received 78,111 restricted shares, according to separate filings. For 2009, Blankfein was awarded 58,381 restricted stock units, the amount given to those four deputies.
The firm also raised the base salary for those four executives to $1.85 million each, according to the filing. Each had been paid $600,000 previously.
Banks have been raising base salaries in response to increased pressure from regulators on bonuses. Regulators including the Federal Deposit Insurance Corp., the Federal Reserve and the Securities and Exchange Commission are drafting rules on pay meant to limit practices considered risky.
Citigroup Inc. boosted CEO Vikram Pandit’s base salary to $1.75 million from $1 after the bank’s first profit for a year under his watch. James Gorman, Morgan Stanley’s top executive since last January, was awarded deferred stock and options valued at about $7.4 million for his 2010 performance.
Blankfein’s latest bonus falls far short of the Wall Street record that he set with his $67.9 million bonus in 2007. The shares vest over three years and can’t be sold for five years.
Michael Sherwood, co-CEO of Goldman Sachs International in London, received 89,270 shares, worth $14.4 million. Gregory Palm and Esta Stecher, the firm’s general counsels, each received 38,684 shares, worth $6.24 million.
The filings don’t include any cash bonuses. Blankfein didn’t receive cash bonuses for 2009 and 2008, after getting about $27 million in cash bonuses for each of 2007 and 2006. Stephen Cohen, a spokesman for the firm, declined to comment.
?Read the entire article HERE.
By Simon Kennedy – Jan 27, 2011 1:13 AM PT
China Investment Corp. Vice Chairman Gao Xiqing said that central banks’ quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries.
“You know money is gradually becoming not worth the paper it’s printed on,” Gao said at an event sponsored by HSBC Holdings Plc at the World Economic Forum in Davos, Switzerland today. Recent gains in commodity and food prices reflect the “long-term view” of investors that prices will accelerate, he said.
The Fed and the European Central Bank have kept their benchmark interest rates at record lows to spur their economic recoveries, triggering concern in emerging markets that the resulting flood of capital will undermine currencies such as the dollar and spark inflation.
“We’ve started collecting Zimbabwe notes,” Gao said, referring to an economy whose currency was scrapped in 2009 after inflation reached 500 billion percent. He noted investors are also discussing whether central banks will pursue more rounds of quantitative easing.
The Fed yesterday reiterated its intention to keep its benchmark “exceptionally low.”
Gao, whose sovereign wealth fund manages about $300 billion, signaled that while industrial nations are now more welcoming of China’s money following the financial crisis, their past criticisms may hurt their ability to attract it.
“People have long memories,” he said. “We have this yo- yo when being treated by a few major countries.”
“In many countries we are now treated differently,” he said. “We should be the most welcome investor.”
Inflation concerns have become a new theme in the hallways of Davos’s Congress Center as emerging markets including China tighten policy and record food prices fan social unrest in North Africa. Chinese inflation ran at 9.6 percent in December.
Inflation nevertheless is not an immediate concern and prices for securities that offer protection against it are “not up there yet,” Gao said. A record $13 billion auction of 10- year Treasury Inflation Protected Securities last week attracted lower-than-average demand.
“In shorter run, you look at the numbers and fundamentals and you think there’s some inflation pressure but it’s not something we have to worry about,” Gao said.
Read the entire article HERE.
Jan 20th 2011 | from PRINT EDITION
“YOU can do nothing against a conspiracy theory,” sighs Etienne Davignon. He sits in a lofty office with a stupendous view over Brussels, puffing his pipe. He is an aristocrat, a former vice-president of the European Commission and a man who has sat on several corporate boards, but that is not why some people consider him too powerful. He presides over the Bilderberg group, an evil conspiracy bent on world domination. At least, that is what numerous websites allege; also that it has ties to al-Qaeda, is hiding the cure for cancer and wishes to merge the United States with Mexico.
In reality, Bilderberg is an annual conference for a few dozen of the world’s most influential people. Last year Bill Gates and Larry Summers hobnobbed with the chairman of Deutsche Bank, the boss of Shell, the head of the World Food Programme and the prime minister of Spain. One or two journalists are invited each year, on condition that they abstain from writing about it. (Full disclosure: the editor of The Economist sometimes attends.)
Because the meetings are off the record, they are catnip to conspiracy theorists. But the attraction for participants is obvious. They can speak candidly, says Mr Davignon, without worrying how their words might play in tomorrow’s headlines. So they find out what other influential people really think. Big ideas are debated frankly. Mr Davignon credits the meetings for helping to lay the groundwork for creating the euro. He recalls strong disagreement over Iraq: some participants favoured the invasion in 2003, some opposed it and some wanted it done differently. Last year the debate was about Europe’s fiscal problems, and whether the euro would survive.
The world is a complicated place, with oceans of new information sloshing around. To run a multinational organisation, it helps if you have a rough idea of what is going on. It also helps to be on first-name terms with other globocrats. So the cosmopolitan elite—international financiers, bureaucrats, charity bosses and thinkers—constantly meet and talk. They flock to elite gatherings such as the World Economic Forum at Davos, the Trilateral Commission and the Boao meeting in China. They form clubs. Ethnic Indian entrepreneurs around the world join TiE (The Indus Enterprise). Movers and shakers in New York and Washington join the Council on Foreign Relations, where they can listen to the president of Turkey one week and the chief executive of Intel the next. The world’s richest man, Carlos Slim, a Mexican telecoms tycoon, hosts an annual gathering of Latin American billionaires who cultivate each other while ostensibly discussing regional poverty.
Davos is perhaps the glitziest of these globocratic gatherings. Hundreds of big wheels descend on the Swiss ski resort each year. The lectures are interesting, but the big draw is the chance to talk to other powerful people in the corridors. Such chats sometimes yield results. In 1988 the prime ministers of Turkey and Greece met at Davos and signed a declaration that may have averted a war. In 1994 Shimon Peres, then Israel’s foreign minister, and Yasser Arafat struck a deal over Gaza and Jericho. In 2003 Jack Straw, Britain’s foreign secretary, had an informal meeting in his hotel suite with the president of Iran, a country with which Britain had no diplomatic ties. But Davos is hardly a secretive institution: it is crawling with journalists. The other globocratic shindigs are opening up, too. Even Bilderberg has recently started publishing lists of participants on its website.
Some American organisations, such as foreign-policy think-tanks, are also well placed to exert global influence. The Carnegie Endowment for International Peace, for example, has established itself as one of the most globally trusted talking-shops, with offices in Beijing, Beirut, Brussels and Moscow, as well as Washington—though it has yet to fulfil the vision of its founder, Andrew Carnegie, who wanted it to abolish war. The key to wielding influence, says Jessica Mathews, Carnegie’s president, is “very simple. You hire the best people.”
In countries where think-tanks are subservient to the state, such as China and Russia, foreign outfits such as Carnegie enjoy a reputation for independence. If they can back this up with useful knowledge, they can sway policy. For example, Carnegie scholars advised the authors of Russia’s post-Soviet constitution. And when relations between American and Russia grew frosty under President George W. Bush, Carnegie’s Moscow office helped keep a line of communication open between the two governments.
Such meetings are “an important part of the story of the superclass”, says Mr Rothkopf, the author of the eponymous book. What they offer is access to “some of the world’s most sequestered and elusive leaders”. As such, they are one of “the informal mechanisms of [global] power”.
Some globocrats think the importance of forums like Davos is overstated. Howard Stringer, the boss of Sony, is the kind of person you would expect to relish such gatherings. Welsh by birth, American by citizenship, he took over Japan’s most admired company in 2005, when it was in serious trouble, and turned it around in the face of immense cultural obstacles. He says he has enjoyed trips to Davos in the past but will not attend this year. He can learn more, he says, by listening to his 167,000 employees.
On the face of it there seems much to be said for the world’s shakers and movers meeting and talking frequently. Yet for all their tireless information-swapping, globocrats were caught napping by the financial crisis. Their networks of contacts did throw up a few warnings, but not enough to prompt timely action.
The limits of jaw-jaw
Jim Chanos, a hedge-fund manager who made his first fortune betting that Enron was overvalued, warned the G8 finance ministers in April 2007 that banks and insurance firms were heading for trouble. He made another fortune when bank shares crashed, but is still furious that his warnings were politely ignored. He thinks it an outrage that several senior regulators from that period are still in positions of power. And he accuses some bankers of “a wholesale looting of the system” by paying themselves bonuses based on what they must have known were phantom profits. He thinks they should be prosecuted.
Globocrats failed to avert the crisis, but they rallied once it struck. Rich-country governments acted in concert to prop up banks with taxpayers’ money. In America the response was led by a well-connected trio: Hank Paulson, George Bush junior’s treasury secretary and a former boss of Goldman Sachs; Tim Geithner, Barack Obama’s treasury secretary and a former boss of the New York Federal Reserve, as well as a veteran of the IMF, the Council on Foreign Relations and Kissinger Associates; and Ben Bernanke, of Harvard, MIT, Stanford, Princeton and the Bush White House, who is now chairman of the Federal Reserve. The bail-outs were unpopular everywhere, but may have prevented the world’s banking system from imploding.
Governments are now trying to craft rules to prevent a recurrence. Lots of people have offered advice. Among the weightier contributions was a report from the Group of Thirty (G30), an informal collection of past and present central-bank governors. The Volcker Report, advocating a central clearing mechanism for derivatives trading and curbs on proprietary trading by banks, helped shape America’s Dodd-Frank financial-reform bill. The G30 is influential because it consists of people with experience of putting policies into practice, says Stuart Mackintosh, its director. So when it makes recommendations, they can be turned into action, he adds.
Read the entire article HERE.
by Peter Schiff
Wednesday, January 19, 2011
The global economy has become so unbalanced that even government ministers who would normally have trouble explaining supply or demand clearly recognize that something has to give. To a very large extent the distortions are caused by China’s long-standing policy of pegging its currency, the yuan, to the U.S. dollar. But as China’s economy gains strength, and the American economy weakens, the cost and difficulty of maintaining the peg become ever greater, and eventually outweigh the benefits that the policy supposedly delivers to China. In the first few weeks of 2011 fresh evidence has arisen that shows just how difficult it has become for Beijing.
Twenty years ago, China’s leaders decided to ditch the disaster of economic communism in favor of privatized, export-focused, industry. The plan largely worked. Over that time, China has arguably moved more people out of poverty in the shortest amount of time in the history of the planet. But somewhere along the way, China’s leaders became addicted to a game plan that outlived its usefulness.
In order to maintain the peg, China must continually buy dollars on the open market. But the weaker the dollar gets, the more dollars China must buy. And with the U.S. Federal Reserve pulling out all the stops to create inflation and push down the dollar, Beijing’s task becomes nearly impossible. Last week, it was announced that China’s foreign exchange reserves, the amount of foreign currency held at its central bank (mostly in U.S. dollars), increased by a record $199 billion in 4th quarter 2010, to reach $2.85 trillion. These reserves currently account for a staggering 49% of China’s annual GDP (if the same proportional amount were held by the U.S., our measly $46 billion in reserves would have to increase 163 times to $7.5 trillion).
In order to buy these dollars, the Chinese central bank must print its own currency. In essence, China is adopting the Fed’s expansionary monetary policy. In the U.S. the inflationary impact of such a strategy is mitigated by our ability to export paper dollars in exchange for inexpensive Chinese imports. Although prices are rising here, they are not rising nearly as much as they would if we had to spend all this newly printed money on domestically produced goods. The big problem for China is that, unlike the U.S., the newly printed yuan are not exported, but remain in China bidding up consumer prices. As a result, inflation is becoming China’s dominant political issue.
It was recently announced that in November China’s consumer price index rose 5.1% from the same time a year earlier, with food prices rising more than 10%. As unrest builds, the Chinese government has unleashed a series of policies to address the symptoms.
Read the entire article HERE.
by Richard Duncan
January 13, 2011
There are many areas where my views differ from those of Ben Bernanke. Here is the first.
Fed Chairman Bernanke believes in the Monetary Theory of the Great Depression, which holds that the Federal Reserve could have prevented the Great Depression by stopping the US money supply from contracting during the early 1930s. This is important because the Fed’s policy response to the current economic crisis – printing money and using it to buy financial asset from banks – was adopted because of Bernanke’s faith in this idea. The Monetary Theory of the Great Depression is incorrect, however. Consequently, the Fed’s Quantitative Easing policy is more likely to exacerbate than resolve the global crisis.
The Great Depression was caused by the inability of the private sector to repay the debt it incurred during the Roaring Twenties, just as the economic crisis that began in 2008 was caused by the inability of the private sector to repay the debt it incurred between 1995 and 2008. Printing money and preventing a contraction of the money supply does not change the fact that the private sector cannot repay its debts.
All business cycles follow the same pattern. At the start of the cycle, bank lending begins to pick up, causing an improvement in economic activity. As credit expands, businesses invest more and hire more workers. Asset prices rise. As profits grow, bank deposits grow. This results in still more credit growth since deposits provide the funds that banks extend as credit. All of these positive factors reinforce one another for a number of years and the economy enjoys a boom. Eventually, however, excessive investment leads to gluts and falling product prices, while overly inflated asset prices become unaffordable and begin to fall. Falling product prices and falling asset prices lead to business distress and insolvencies; and business failures lead to bank failures and, hence, to the destruction of deposits. Credit contracts and the economy enters recession.
Money has traditionally been defined as coins and paper money in circulation plus demand deposits held at banks. When it is understood that bank loans and bank deposits are very nearly the same pool of funds, it becomes clear that in order for the Fed to prevent the money supply from contracting during an economic downturn (or depression), it must prevent credit (bank loans) form contracting. Otherwise, deposits and, therefore, the money supply would also contract. To prevent credit from contracting, the Fed must implement measures that turn bad loans into good loans. So, when Bernanke and other proponents of the Monetary Theory of the Great Depression claim that economic collapse could have been prevented if the Fed had stopped the money supply from contracting, what they really mean is that the Great Depression could have been prevented if the Fed had stopped the private sector from defaulting on its debt. And that is what the Fed hopes to achieve now through Quantitative Easing.
Quantitative Easing impacts the economy by artificially pushing up stock prices and by helping to fund the government’s trillion dollar budget deficits at low interest rates. Higher stock prices create a wealth effect that funds consumption and supports aggregate demand, just as government deficit spending supports aggregate demand.
These “stimulants” only have effect so long as the printing press continues to run, however. When the Fed stops creating money and buying assets, asset prices will fall, wealth will evaporate, spending will slow and the economy will slide back into recession. It is only necessary to consider the events of 2010 to see that this is true. On March 31st, the Fed ended its first round of Quantitative Easing during which it had created and spent more than $1.7 trillion buying financial assets from banks. Less than six weeks later, the stock market “flash crash” occurred. By July, the S&P 500 Index had lost nearly 15%, destroying at least $1.5 trillion in wealth in only three months. Economic indicators took a sharp turn for the worse during the summer and concerns grew that the economy was sliding back into recession. At that point, the Fed began dropping hints about its plans for a new round of money creation, “QE 2”. The market and the economy rebound.
Part 3/3 not yet posted.
The US economy has become dependent on the stimulus provided by paper money creation. Stock prices, bond yields, retail sales and employment now all move up and down in line with the Fed’s program of liquidity injections. When governments create money, there are undesirable side effects, however. First, in addition to causing asset price inflation, printing money causes food price inflation as well, putting at risk the very lives of many of the two billion people on this planet who live on less than $2 per day. Second, it contributes to the deindustrialization of the United States as it shifts economic activity from healthy manufacturing and production to services and consumption paid for with capital gains on unsustainably inflated asset prices. Third, it rewards the banking industry for activities that fundamentally damage the health of the economy. When the Fed promises to prevent the money supply from contracting by implementing measures that prevent the private sector from defaulting on its debt, it is certain that bankers will pump more and more credit into the economy and profit handsomely from doing so. Fourth, creating dollars causes the dollar to lose value relative to other currencies and hard assets like gold and land. Finally, driving economic growth by paper money creation is not sustainable and will end very badly sooner or later – unless there is a complete policy rethink about how government spending and money creation can be used to restructure the US economy and restore its viability.
On November 8, 2002, Fed Governor Bernanke gave an address on the occasion of Milton Friedman’s 90th birthday in which he described and lent his creditability to the Monetary Theory of the Great Depression (which Friedman and Anna J. Schwartz had developed in the early 1960s). Bernanke concluded that speech with the following words, “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we (meaning the Fed) did it. We’re very sorry. But thanks to you, we won’t do it again.”
About this, Bernanke was wrong. The Fed did not cause the Great Depression. However, by accepting an incorrect explanation of the causes of the Depression, the Fed, under the leadership of Greenspan and Bernanke, has pursued a series of disastrously inappropriate policies that have brought the world to the brink of a New Great Depression.
In all fairness, however, it should not be forgotten that the Federal Reserve was created by bankers for the benefit of bankers. Judged from the perspective of the banking industry, it must be said that the Fed has been incredibly adept at fulfilling its original mission.
Economics In The Age Of Paper Money
Read the original article HERE.
By Jason Kelly
January 11, 2011
I’m concerned that inflation is taking hold in China and will accelerate into hyperinflation that sends China’s economy over the edge. The following appeared in the Want China Times last week: “China continued to be the largest money-supplying country in 2010 as its M2, a broad measure of money supply, was up 19.46 percent at the end of November from a year earlier. This compares with 3.3 percent and 2.5 percent of annual M2 growth in the US and Japan respectively over the same period.”
The article noted that China’s broad money supply is now “larger than that of the US and Japan” and that the past ten years have seen China’s M2 expand at 19 percent a year as its GDP averaged annual growth of only 11 percent and it “needs only 14.1 percent of growth in money supply to sustain its economic development.”
The article quotes Wu Xiaoling, vice chairman of the Financial and Economic Affairs Committee of China’s National People’s Congress saying that for the past three decades China has “used excessive money supply to rapidly advance our economy.”
One reason for the explosive growth in China’s money supply is its legal requirement to release a $1 equivalent amount of yuan for every $1 increase in foreign exchange reserves. The annual growth rate of China’s foreign exchange reserves hit 28 percent after it joined the World Trade Organization in 2001. That’s why by the end of last September, its foreign exchange reserves reached a level more than 18 times bigger than they were in 1998.
This ramp-up in foreign exchange reserves coupled with the matching yuan injections have created a money supply “phenomenon unprecedented in the history of the world economy.” The article concludes:
The excess money flows into the property market and any assets available for making investments, causing land, housing, and commodity prices to surge.
Since 2003, land prices in Beijing and its surrounding areas have increased nine times. Furthermore, the prices of approximately 70 percent of agricultural produce in 36 cities in China have risen since July last year.
That’s the data that most investment analysts are examining and is the reason you’re seeing red flags fly up in global finance journals. I, however, am in possession of even more convincing evidence that something unpleasant is rising from China’s out-of-control money supply growth.
I stay in touch with a network of business associates throughout Asia and have found that the best way to keep tabs on Asian economies is by talking with small to midsize Japanese manufacturers who outsource operations to the Asian mainland, primarily China. Because Japan is an island economy with almost no natural resources, its business leaders have become experts at watching global commodity price trends to carefully manage inventories. Nobody knows commodity patterns better than people who’ve made careers out of managing resource scarcity.
Last month, my accounting contact sent me a report from a Japanese client whose company outsources the manufacturing of clothing to factories in China. For the first time ever, the client said the company may need to exit China entirely due to runaway inflation. His prices are rising 35 percent per month and many of his larger competitors have already fled to factory contracts in Bangladesh, Malaysia, and Vietnam. Because his firm is smaller, it’s harder for him to relocate his overseas operations. He’s worried that he won’t be able to get out of China before “something enormous happens” in 2011.
Yes, he said, and explained that he hasn’t seen anything like the current environment since the oil shock of the 1970s. Ahead of the shock “everybody used extra money to hoard supplies they didn’t need. They adapted to make something from the supplies they’d bought, but then all the raw materials were gone in the shock.” He remembers a shortage of toilet paper because the raw materials for it disappeared into the voracious maw of a runaway money supply.
The same thing is happening now. The raw material of cloth is harder to find in China and some of the outsourcing factories are sitting idle for lack of it. The ones still operating are guarding their supply so closely that the Japanese client must pay for materials first in cash, then the factories will make the clothing to order. He calls it a dangerous situation that violates the tradition of partial payment which protects both signers of a contract from undue loss. It’s easy to see how that could unravel in a hurry if a factory is tempted to accept more cash upfront than it has cloth in storage.
I’m watching this closely and will share more as I receive it.
Read the entire blog post HERE.
by Leigh Drogen
Founder of Surfview Capital, New York
Tom Friedman is one of my favorite authors. Not for his op-ed pieces in the New York Times, although many are good reads, but for three books. The first, “From Beirut to Jerusalem”, the second, “The Lexus and the Olive Tree”, and the more widely known third, “The World is Flat”. Tom isn’t a great writer or thinker because he is the first to discover a trend, because he often isn’t. Tom is a great writer because he is able to take broad and complex ideas, and boil them down into a series of stories through which he is able to lead the reader to see the forest amongst the trees. That is a skill not many have.
Tom’s book “The World is Flat” was certainly not the first to describe how modern technology was reshaping our world by opening up a few billion people to the global markets. But he was the first to put all the pieces of the puzzle together and make a story out of it. The world today is getting flatter at an accelerating pace, and it is disrupting societal, cultural, political, and economic norms. Different people will argue about whether some of these are positive advancements or negative outcomes. At the end of the day though their opinions don’t matter, globalization and a flatter world for everyone is like a tsunami, there’s no way to stop it.
But you can hide by running away from it. As this force sweeps around the world on the back of advancements in technology there are obviously still good portions of this earth that have not been overcome by it. Eventually they will be, in time. And there will be backlashes against it as Tom writes. Radical Islamic fundamentalism is part of that backlash, against a world moving against a closed culture that refuses to adopt to openness. Religious fundamentalism in general, and if you ask me, basic religion in fact, will continue to fight against this force of openness and information. In the end it’s obvious where we are going though, pandora’s box has been opened, the clock is ticking on them.
We see backlashes every day from countries who’s economies are being disrupted by this wave. Politicians throwing up trade barriers, blaming each other for currency manipulation, actually manipulating their currencies, shenanigans of every type and size. Just as the religious zealots will do anything to keep from admitting that they don’t offer a better future, politicians will do anything to keep from admitting that they must change their policies to fit a changing world and changing economies. It’s easier to blame the other guy than realize you must change.
The clock is ticking on the financial industry as well. A tsunami of social and technology is sweeping down Wall Street. I’m excited to be part of that force reshaping the landscape instead of standing in its way.
As I see it, three main things are changing or are about to change. First, access to information is coming to the far corners of the financial world, in real time. Yup, it’s already happening, things are getting cheaper, distribution is easier. Most of us run one or two strategies, we want our information a la carte, and we want each piece from the best source, not a bundle of mediocre ones. Through the interwebs you can now find just about every piece of premium financial info you want, anyone can access anything. And price points are coming down to reasonable levels. Everything is in real time, unless you are getting insider info from your “expert network” (cough cough SAC Capital cough cough), we all have access to the same news at the same time through services like Selerity and The Fly On the Wall at reasonable prices.
Second, the analysis, on two levels. The voice of Wall Street has been ruled by the banks forever. But their sell side research units are being blown up because information isn’t worth what it used to be. What were they really selling anyway? It was access to information, not good ideas or good analysis, they were lazy and they are paying the price now. Information all around the globe is getting cheaper, so you better give it away for free and find a way to sell something else once the reader is there, or you better offer damn good info if you want to sell it. The banks aren’t, obviously, they give bullshit ratings to stocks that mean little to nothing. They do analysis based on DCF models and then tell you the stock looks cheap so you better go buy it. They have little to no skin in the game, but they were getting paid as if they were. The public woke up, realized the ratings agencies and banks were just in cahoots with the stocks and fixed income products they were rating (oh yes people have gone to jail as well). It’s just about over, the walls are coming down, if you’re going to give something a buy rating the price better go up or you better admit you were wrong (there’s nothing wrong with being wrong), there’s no more hiding behind saying that you were just going by your statistical model. Yes, your model is important as a piece of information, just as every model be it fundamental, technical, or psychological is an important data point, but at the end of the day when you slap a buy rating on something you better be doing it because you think the price will go up, not because it looks better than the rest of the group based on some DCF analysis.
But the business model of the sell side analyst being destroyed isn’t enough to kill their voice. There needs to be a final blow. It will come from social, specifically StockTwits. The main stream analysts will join the conversation in order to be heard, and at that point they will have to live up to the same judgement as everyone else. They will be asked by the community, which will vote by following them or not following them, to provide quality information. And if their information doesn’t live up to someone else’s, it will be obvious. Yes, social is in some cases a popularity contest, but not nearly as much when it comes to money. If you are trading or investing, you want the best information and you don’t care who it’s coming from. I would trust an 20 year old kid trading at college the same as I would trust a Goldman Sachs analyst if the information he was sharing was better and I was able to make money off it. The big firm analyst will have to prove he or she deserves to be heard by sharing quality information, and being right. Yea, you heard that correctly, they are going to have to live up to being right, not just giving the info. And we will work with them at StockTwits to share the right way, it is my hope that instead of fighting the openness and accountability, they embrace it. You’ve heard me bash the industry time and time again, but it’s not the people that are the problem, they are extremely talented and have so much to offer to their clients and for free. It is the firms themselves which have propagated this culture which are to blame, they have done so because like the religious zealots, they refuse to change with the times.
Read the entire article HERE.