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IMF Misleads on Interest Rates – And So Does the Media

13 Apr

Published by The Daily Bell

It is now nearly seven years since the start of the financial crisis, yet despite growing evidence in America and Britain of a return to relative normality, something remains profoundly broken at the heart of the world economy. One manifestation of this – much discussed among the officials, finance ministers and central bankers gathered in Washington this week for the spring meeting of the International Monetary Fund – is the persistence of unnaturally low interest rates. – UK Telegraph

Dominant Social Theme: The real problem is low interest rates.

Free-Market Analysis: The UK Telegraph has posted an article entitled, “The world economy may well be stuck in neutral for years.”

The article points to low interest rates as a point of concern, even though these rates are to some degree not a market phenomenon but a human (central bank) decision.

The article goes on to use the dreaded “S” word – pointing out that, “Low interest rates in the US and Greece are not a sign of recovery, but a warning of permanent stagnation.”

Here’s more:

… At the start of the crisis, abnormally low interest rates were considered a temporary, but necessary, aberration that would disappear as soon as advanced economies got back on their feet. The general assumption was that over time, both short- and long-term interest rates would drift back to pre-crisis levels. This can no longer be taken for granted.

A return to the good old days is looking ever more questionable. What economists call the natural, or “equilibrium”, rate of interest may have settled at a permanently lower level, with dramatic long-term implications for investment ?ows, savings and asset prices.

… The IMF’s latest World Economic Outlook comes to the conclusion that real long-term interest rates are never going to return to pre-crisis normality – or not within any foreseeable time horizon. They may rise a bit, but they won’t go back to the sort of levels we were used to.

If this is right, it points to a deeply depressing future for advanced economies, one of permanently low investment in productive activity and repeated bouts of financial instability.

So what’s misleading? Well … for one thing, the idea that investors are recklessly “chasing their way up the yield curve.”

The article explains that when rates are low, money looks restlessly for higher returns. This, in turn, creates “asset bubbles” and eventually irresponsible investing that forgoes normal safeguards.

But actually, the IMF – and by extension this article – is engaged in the favorite sport of the power elite, which is covering up the misdeeds of monopoly central banking.

The article and presumably the IMF never explain why rates, long and short, are low to begin with. They are low in large part because central banks want low rates.

It is true that central banks cannot shape the entire yield curve but manipulation of short-term rates can influence the larger fixed income environment.

As for “stagflation” – the article points out that low rates are warning us of the onset of this dread economic disease. But we would argue that stagflation is characterized by price inflation and a moribund economy.

Interest rates in any capacity are a secondary concern.

By focusing on interest rates, the article relays the IMF’s likely deliberate obfuscation about the root cause of the modern malaise: Command-and-control monetary facilities.

Economics is really not so difficult. Monopoly central banking fixes the rate and volume of money, and the result sooner or later severely damages economies.

If people want economies to grow again in healthy ways, this sort of price fixing must end and competition must be reintroduced into the monetary system.

Notice, please, that the IMF honchos that gathered in Washington this week surely did not discuss ridding themselves of central banks.

They worried visibly and volubly about “low interest rates.” The largest agencies charged with supervising global health and wealth cannot even bring themselves to state the problem directly, much less discuss an adequate solution.

There is little or nothing in the mainstream media that tells the truth about our economic or investment dilemmas. Modern reporting is merely a handmaiden to increased global governance.

What to do? Turn to the alternative media for insights about today’s environment in numerous arenas – and especially from a fiscal and monetary standpoint.


The alternative media isn’t perfect but right now it’s certainly a preferable alternative.

Published by The Daily Bell – – All Rights Reserved.

EU QE? … The Centre Cannot Hold

13 Apr

Published by The Daily Bell

The real reasons why Draghi flirts with QE … The fear is that money raised from quantitative easing in the eurozone will just be used to prop up banks that need to be allowed to fail The real reasons why Draghi flirts with QE Mario Draghi’s “display of QE ankle” on Thursday sent the single currency to a monthly low against the dollar … The European Central Bank took no decisive action last Thursday, neither to lower eurozone interest rates nor launch its own programme of “quantitative easing”. It was made clear, though, that the ECB may soon follow the US Federal Reserve and Bank of England by firing up Frankfurt’s virtual printing press and creating, ex nihilo, hundreds of billions of euros. The council was “unanimous”, said ECB boss Mario Draghi, a hint of steel entering his voice, in its commitment to “unconventional instruments”. – UK Telegraph

Dominant Social Theme: More stimulation, please. How else are modern economies to grow?

Free-Market Analysis: Savvy portions of the alternative ‘Net press have stated for months now that the Fed’s “tapering” was not going to make much of a difference, and this article tends to confirm it.

As explained above, top officials of the European Central Bank are seriously considering a program of monetary debasement similar to that which the UK and the US have carried out.

What has been called “quantitative easing” is simply the purchase of government debt with freshly printed money-from-nothing. This allows those running a particular nation-state the confidence to spend freely, knowing said debt is going to be purchased by the buyer of last resort – the central bank.

This kind of money printing not only supports a “maximalist” approach to government spending; it also reduces the worth of currency in circulation, thus tending, in an ephemeral way, to make products and services more attractive.

Now those at the ECB are apparently quite irritated over the results of the US quantitative easing program for just this reason. The thinking is said to be that if the UK and the US continue down this path, the EU must follow. Here’s more from the article:

In case that wasn’t crystal, [Draghi] spelt it out. “All instruments within our mandate are part of this statement,” he told the world. “There was, in fact, during the discussion we had today, a discussion of QE”. The official line is that the ECB is considering joining the mass money-printing club because of fears about deflation. In March, eurozone inflation was indeed just 0.5pc, on official measures.

The underlying motivation for euro-QE, though, is rather different. Financial markets denizens know this, but few are prepared to say it. Massive losses continue to smoulder on European bank balance sheets. It was the acute danger of clapped-out banks dragging their host governments into bankruptcy that caused systemic panic across eurozone sovereign bonds markets, threatening the entire single currency project, during the summer of both 2011 and, particularly, 2012.

Such alarm bells led to Draghi’s “whatever it takes” speech – a promise the ECB was ready to buy up eurozone government bonds under a scheme called Outright Monetary Transactions. That’s yet to happen and may even be illegal. Various European courts are still thinking about it, having issued a series of technical verdicts kicking the issue into the long grass.

… One reason the eurozone elite wants QE; so out-of-thin-air wonga can by used to buy dodgy bank loans, allowing smooth bankers to avoid the realities of their mistakes. … A dose of ECB funny-money would certainly work wonders, polishing up eurozone bank balance sheets prior to official “stress tests” scheduled for October.

Another reason the ECB wants QE is that both the US and UK have printed money like crazy and, as a result, the dollar and pound have fallen against the euro, making eurozone exports less competitive. Polite society talks about “saving Europe from deflation”, but QE is really about saving rancid banks from themselves, while trying to provoke beggar-thy-neighbour-style euro depreciation.

… Even before Draghi spoke, the US moved to maintain the upper hand in terms of keeping the dollar relatively weak. On Tuesday, Fed chair Janet Yellen signalled that America’s central bank would continue to provide “extraordinary support for some time to come”, pulling back from previous remarks that interest rates could rise once US QE “tapering” finishes towards the end of this year.

If the ECB does go for explicit money-printing, I wouldn’t be surprised if the Fed found an excuse to slow down its QE withdrawal programme, extending “extraordinary measures” further.

This last point is an especially important one. The writer says what the alternative ‘Net media has been saying for months, that the Fed’s tapering will not impede the larger process of money printing. It’s like a shell game. The peanut (inflation) is moved from one shell to another. But it doesn’t go away.

ECB officials have in the past repeated that the ECB would not engage in excessive money printing but obviously, the EU’s lack of progress when it comes to combating the Great Recession and the apparent success that the UK and the US have had with stimulative policies have changed some minds.

What’s left out of this analysis – and the article as well – is that the UK and the US have by no means achieved a lasting “recovery.” It is impossible to create an industrial boom by debasing currency. Such a remedy inflates the stock market and creates various financial bubbles. It is these bubbles that the UK and the US point to when proclaiming that various “monetary” policies have proven successful.

One could even argue that central banking places countries into a downward spiral of “bubble recoveries” that never provide real improvement. Each successive inflation distorts the economy even more than the last one. The number of ruined companies that survive due to monetary inflation grows and grows, making the problem even worse, as investors have no idea what entities are solvent and which ones are merely propped up.

Part of the reason for the ECB’s consideration of US-style monetization is that large European banks still haven’t recovered from the failures of 2008. But providing ruined banks with monetary resources only compounds the problem. For one thing, it becomes obvious that the economic system is one of crony capitalism.

For another, providing solvency via currency debasement is not a rational way of dealing with bankrupts. One ends up expanding the pool of ruin rather than expunging it.

What the ECB has in mind doing is unconstitutional. It is bound to cause a backlash in countries like Germany. Sentiment in the EU is running against both the Union and the euro. We predicted it long ago. We wrote a series of articles warning that the tribes of Europe would only acquiesce to the EU for so long as it was of benefit to them.

Political boundaries may change but culture does not. These tribes waged horrific war not very long ago – not once but twice. The comity of Europe is fragile, not robust. The credibility of the EU experiment has already been strained by the lamentable and seemingly endless Great Recession.

Europe, like the US, has been captured by Keynesianism. But we have seen in the past half-decade that Keynesianism is a kind of Fabian hoax, a hocus-pocus of phrases and analyses that have little relation to the real world. It could not be otherwise, as Keynes WAS a Fabian and created his General Theory to give governments a rationale to interfere in the economy.

The only antidote to the West’s current pitiful industrial condition is freedom. Stop imposing top-down economic solutions that rely on currency debasement. Let ruined banks disappear. Refrain from the twin abuses of crony capitalism and corporatism.

The UK and the US have done no favors to their citizens by restimulating. Yet the plan, it would seem, is to continue down the path of ruin with the goal of creating even bigger and more unstable globalist entities.

This is a cruel trick to play on the West’s increasingly miserable masses. Also, the validity of this strategy must be seen as highly questionable in the Internet era. Too many people are already aware of these manipulations and the worse things get, the more the knowledge spreads.


This is nothing but a race to the bottom for both the ruling elite and its increasingly unhappy citizens.  At some point “the centre cannot hold,” as Yeats put it in his famous poem.

Published by The Daily Bell – – All Rights Reserved.

China’s Monumental Ponzi: Here’s How It Unravels

6 Apr

China is the greatest construction boom and credit bubble in recorded history. An entire nation of 1.3 billion has gone mad building, borrowing, speculating, scheming, cheating, lying and stealing. The source of this demented outbreak is not a flaw in Chinese culture or character—nor even the kind of raw greed and gluttony that afflicts all peoples in the late stages of a financial bubble.

Instead, the cause is monetary madness with a red accent. Chairman Mao was not entirely mistaken when he proclaimed that political power flows from the end of a gun barrel-–he did subjugate a nation of one billion people based on that principle. But it was Mr. Deng’s discovery that saved Mao’s tyrannical communist party regime from the calamity of his foolish post-revolution economic experiments.

Just in the nick of time, as China reeled from the Great Leap Forward, the famine death of 40 million and the mass psychosis of the Cultural Revolution, Mr. Deng learned that power could be maintained and extended from the end of a printing press. And that’s the heart of the so-called China economic miracle. Its not about capitalism with a red accent, as the Wall Street and London gamblers have been braying for nearly two decades; its a monumental case of monetary and credit inflation that has no parallel.

At the turn of the century credit market debt outstanding in the US was about $27 trillion, and we’ve not been slouches attempting to borrow our way to prosperity. Total credit market debt is now $59 trillion—-so America has been burying itself in debt at nearly a 7% annual rate.

But move over America!  As the 21st century dawned, China had about $1 trillion of credit market debt outstanding, but after a blistering pace of “borrow and build” for 14 years it now carries nearly $25 trillion.  But here’s the thing: this stupendous 25X growth of debt occurred in the context of an economic system designed and run by elderly party apparatchiks who had learned their economics from Mao’s Little Red Book!

That means there was no legitimate banking system in China—just giant state bureaus which were run by  party operatives and a modus operandi of parceling out quotas for national credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages.  There have never been any legitimate financial prices in China—all interest rates and FX rates have been pegged and regulated to the decimal point; nor has there ever been any honest accounting either—-loans have been perpetual options to extend and pretend.

And, needless to say, there is no system of financial discipline based on contract law. China’s GDP has grown by $10 trillion dollars during this century alone—that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison.  Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies.  When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief—-a courtesy that the regime has invariably granted.

So in two short decades, China has erected a monumental Ponzi economy that is economically rotten to the core. It has 1.5 billion tons of steel capacity, but ”sell-through” demand of less than half that amount— that is, on-going demand for sheet steel to go into cars and appliances and rebar into replacement construction once the current pyramid building binge finally expires.  The same is true for its cement industry, ship-building, solar and aluminum industries—to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping mails and new cities.

In short, the flip-side of the China’s giant credit bubble is the most massive malinvesment of real economic resources—-labor, raw materials and capital goods—ever known. Effectively, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods with glass, cement and rebar erections that can’t possibly earn an economic return, but all of which has become “collateral” for even more “loans” under the Chinese Ponzi.

China has been on a wild tear heading straight for the economic edge of the planet—-that is, monetary Terra Incognito— based on the circular principle of borrowing, building and borrowing. In essence, it is a giant re-hypothecation scheme where every man’s “debt” become the next man’s “asset”.

Thus, local government’s have meager incomes, but vastly bloated debts based on stupendously over-valued inventories of land. Coal mine entrepreneurs face collapsing prices and revenues, but soaring double digit interest rates on shadow banking loans collateralized by over-valued coal reserves. Shipyards have empty order books, but vast debts collateralized by soon to be idle construction bays. Speculators have collateralized massive stock piles of copper and iron ore at prices that are already becoming ancient history.

So China is on the cusp of the greatest margin call in history. Once asset values starting falling, its pyramids of debt will stand exposed to withering performance failures and melt-downs. Undoubtedly the regime will struggle to keep its printing press prosperity alive for another month or quarter, but the fractures are now gathering everywhere because the credit rampage has been too extreme and hideous. Maybe Zhejiang Xingrun Real Estate which went belly up last week is the final catalyst, but if not there are thousands more to come. Like Mao’s gun barrel, the printing press has a “sell by” date, too

Of the more than US$562 million (RMB3.5 billion) that it owed to debtors, US$112 million was borrowed from 98 private parties with annual interest rates of up to 36%, according to recent revelations from Chinese media. Under that kind of pressure, the only surprise is that the default didn’t happen sooner. The company struggled to find capital for years; the chairman is suspected of borrowing up to US$38.6 million with “fake mortgages.”

But before Xingrun gets branded as China’s worst small, private homebuilder, it’s important to understand how it ended up in the mess in the first place, and what specific factors brought the operation down, or at least to the brink of collapse (local government officials insist it hasn’t officially defaulted yet).

Xingrun’s business in Fenghua, a county-level city that is part of Ningbo in a manufacturing belt on China’s east coast, ran into trouble through a renovation project starting in 2007, Chinese media pointed out. The company attempted, after securing government support and taking over for another distressed local property company, to build high-rise apartment blocks in a village called Changting. The project required the company to build homes for the original residents before the existing village could be torn down and the new buildings built. Construction was slated to start in the first half of 2012. Xingrun projected that it could pay off its debts within three years.

The project never got to the construction phase. In fact, the small village homes are still standing. Xingrun built the replacement homes for the villagers but there’s no sign of its main housing product, high-rises. Nothing has happened because the residents of the village have tangled the project and the company in a lawsuit that has stretched for years.

That explains why Xingrun was unable to pay back its loans. But why has it come so close to keeling over now? Its troubles with the Changting project persisted for years but the company simply rolled over loans and borrowed at high rates from private lenders.

One problem for capital-strapped developers in the Ningbo area is that private lenders no longer want to lend to highly risky companies. In fact, they are calling in their loans. This is just one of the problems afflicting Xingrun. The value of property in some areas of Fenghua is decreasing and that trend has lowered confidence in developers’ ability to pay dizzyingly high interest rates.

Banks aren’t hot on lending to this kind of developer either. In the past, a developer such as Xingrun could ask the local branch of a commercial bank for more credit. The local branch would take that risk because loan officers there knew that, somewhere much higher up the chain, officials promoted the lending.

That support exists no longer. Now, when small developers beg local banks for credit, they will likely be turned away. Local bank managers are reportedly being told that they may lend to risky borrowers if they wish, but they will be held accountable.

High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago.

headshotFenghua is a small town, and Xingrun’s reach beyond that area is limited. Analysts have come out strong in saying that such a default has little systemic risk. The bigger picture in the region, however, can’t be ignored.

Xingrun’s woes are still the woes of the local authorities. The default will add US$305 million (RMB1.9 billion) to Fenghua province’s non-performing loan portfolio, pushing up the rate of toxic assets to 5.27% and making it Zhejiang province’s most indebted government, according to calculations by The Economic Observer newspaper.

Add Fenghua’s problems to those of the greater Ningbo region. The area reportedly has at least six years of housing stock either sitting empty or under construction. The massive buildout will put small developers under great pressure to pay back loans, especially if private debtors are calling in high-interest loans. A slowdown in property prices won’t help either. Without a rescue from provincial-level banks, Fenghua won’t be the last local government stuck in a jam.

Reprinted with permission from David Stockman.



23 Mar

Posted on March 18, 2014 by Liberty Staff


Image by William Banzai

“Banking was conceived in iniquity and was born in sin. The Bankers own the Earth…If you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits (fractional reserve lending/fiat money].”

What a chilling indictment of the banking system! Quite harsh, don’t you think? Surely this kind of scurrilous accusation had to be uttered by some disgruntled socialist, or by a diehard Marxist anti-capitalist, or by an Occupy Wall Street anarchist protester. However, if you thought it was any one of these, you would be 100% dead wrong.

This little pearl of wisdom was expressed in the 1920s by none other than Sir Joseph Stamp, the second richest man in Britain and, as President of The Bank of England, the most powerful and influential banker in the world at that time.

In this stunning revelation of his own industry, Joseph Stamp dared to suggest that the world banking system of which he was such an integral part, was actually a dastardly criminal enterprise that was designed to rob the citizens of the participating nations of their hard earned wealth and security.

Thanks to the relatively new internet alternate media, the public awareness of the ongoing criminality of worldwide banking is finally creeping its way into mainstream consciousness. It is at last becoming public knowledge that nearly twenty major global banks, including Barclays, JP Morgan Chase, Deutsche Bank, Lloyd’s Banking Group, and a host of others, are being investigated for criminal conspiracy in the three most important areas of global finance – the FOREX (the $25 trillion per week foreign currency exchange), the multi-trillion dollar LIBOR interest rate market, and the international Gold Fix. Nothing serious here, just a strong assertion that the international banking cartel has been robbing us of trillions of dollars; and this didn’t just happen last week, it has been going on for a very, very long time.

The conspiracies and crimes committed by this cheery group of global elitists makes the criminal machinations of the likes of the Mafia and the Mexican drug cartels seem benevolent by comparison. And just like with the Mafia and the drug lords south of the border, there will be inevitable human sacrifice. When serious criminal money is at stake, death and destruction are not far behind. Those are only some of the nasty karmic consequences associated with a mega-trillion dollar criminal enterprise. As the saying goes, “When you lie down with pigs, expect to get dirty.” There have been a lot of dirty bankers dying here over the last several months. We referred to them in our last blog . They have been “throwing” themselves off bank towers from London to Hong Kong and getting inconveniently “suicided” by shooting themselves in the head over ten times with a nail gun (try doing that some time).

But this is not at all a new phenomenon. Key players in world banking and corporate finance have been dying untimely and exotic deaths for many decades. Some of these individuals were multi-billionaires and all of them were involved with a variety of nefarious financial activities. Listed below are our top seven banker deaths of the modern era:

1       Roberto Calvi – JUNE, 1982 Calvi, the chairman of Italy’s second largest bank, Banco Ambrosiano, which went bankrupt in 1982, was closely tied to the Pope John Paul II and the Vatican banking scandals of the 1980s. Banco Ambrosiano collapsed in the summer of 1982 with losses approaching $1.5 US billion, much of which had been siphoned off via the Vatican Bank. Calvi found hanged from scaffolding beneath Blackfriars Bridge on the edge of London’s financial district, The City. Calvi’s clothing was stuffed with bricks and he was carrying over $15,000 of cash in three different currencies. Calvi was a member of illegal Italian Masonic lodge known as Propaganda Due (P2), known as a frati neri or black friars. This led to the suggestion that Calvi was murdered as a Masonic warning because of the symbolism associated with the words black friars.

2       Michele Sindona – March, 1986 Known as “The Shark,” Sindona is alleged to have had ties with the Gambino family and had been a top tax lawyer and accountant with the top Italian real estate investment firm, Societa Generale Immobillari. Through his holding company, Fasco, he acquired controlling interest in a number of prominent Italian banks, and by 1969, had developed strong connections with the Vatican Bank and prominent Swiss banks, with which he was involved in large scale major currency speculation. The Shark was finally convicted on sixty-five counts of fraud and perjury in US courts and twenty-five years in Italian prison for conspiracy to commit murder. On March 18, 1986, he was poisoned with cyanide in his coffee at his cell in the prison, Voghera, while serving a life sentence for murder.

3       Amschel Rothschild – July, 1996 Amschel Rothschild, a direct heir to the Rothschild banking dynasty, reputed to own or secretly control a multi-trillion dollar fortune, was found hanged in his room at the Bristol Hotel in Paris. Previously, Amschel had split with his half brother, Lord Rothschild, and his cousin, Sir Evelyn Rothschild. Amschel was athletic and in excellent health, married and with a happy family that included three children. The billionaire investment banker’s death, according to well placed European sources, was not suicide as the world press reported, but rather, murder. Rothschild had been strangled with the heavy cord of his own bath robe, one end of which was attached to a towel rack, as if to suggest that his violent death was self-inflicted. After photographing the body, one of the investigators gave the towel rack a slight tug and it fell easily out of the wall. The unpublished conclusion was that Rothschild was definitely murdered.

4       Edmond J. Safra – December, 1999 Multi-billionaire banker, Edmond J. Safra, died of asphyxiation in a locked, bunker like bathroom in a fire that engulfed his magnificent penthouse apartment in Monaco, atop a building housing the Republic National of New York. Safra, the prime stockholder of the bank, had just made final arrangements to sell his interests in the bank a few days previously. Safra, whose specialty was private banking for wealthy clients, was reputed to know “all the secrets of the financial planet.” He was accused of laundering money for Panamanian dictator, Manuel Noriega, and was rumored to have had connections with the Iran Contra scandal. But Safra’s death may have been directly associated with a secretive international financial empire, active in clandestine gold trading. Safra’s banking and precious metals empire was founded and built primarily after the creation of the State of Israel, by Safra acting as a savvy money laundering expert for wealthy Sephardic Jews. Safra was allegedly an expert in gold smuggling and the use of gold in secret financing of covert operations, including assassinations, by intelligence agencies such as the CIA.

5       J. Clifford Baxter – January, 2002 A former top executive of scandal plagued Enron, Baxter was reputed to have shot himself in his Mercedes Benz, parked in a cul-de-sac near his Houston home. Baxter had already cashed in $35 million of his soon to be worthless Enron shares before the company collapsed and had received a subpoena from the Senate Government Affairs Subcommittee on Permanent Oversight and Investigation. The highest levels of the Bush administration were said to be implicated in the financial and political corruption involving Enron. If he had lived, Baxter’s testimony could have shed major light on the very top of the Enron fraud.

6       Alex Widmer – December, 2008 Widmer, a prominent Swiss private banker, at Julius Baer Holding, was reportedly found dead in Zurich. Confusingly, his death was ascribed to both illness and suicide. Widmer’s death came at a volatile time in Swiss banking. Swiss bank, UBS, had been investigated in a US tax evasion scandal and had reported $46 billion in write down losses. Baer had been accused of poaching high ranking bank officers from larger Swiss rival, UBS.

7       James McDonald – September, 2009 McDonald, prominent adviser to wealthy families and chief executive of investment management group, Rockefeller and Company, was found dead with a single gunshot wound in his car in Dartmouth, Massachusetts. Preliminary investigation indicated that it was an “apparent” suicide. McDonald was credited with helping to grow Rockefeller and Company, the New York based family business established by John D. Rockefeller in 1882, to manage that dynasty’s assets, into a much broader investment management company, with nearly $30 billion in assets.

Playing the international bankster game does indeed have serious consequences, not only for the perpetrators but for the millions of citizens who fall victim to the unscrupulous market manipulations that have been carried out by the world’s banking cartel. The boom and bust cycle of loose credit/tight credit engineered by the central banks is legendary. Add to this the massive illegal manipulations of currencies, interest rates, and precious metals markets, we find ourselves right on the verge of a world economic Armageddon. But it is not just the economy that is in danger. Lead by the IMF and World Bank, the secret banking alliance has declared war on a host of victimized nations’ economies. Widespread social disintegration in places such as Venezuela, Syria, and Libya are just the beginning. Next up on the bankers’ intervention menu is Ukraine. However, with Putin and Russia stepping forward boldly to confront the world banking cartel, this may prove to be a seminal event with a possible outcome of world war in the offing.

It is getting to the point that it very dangerous for the average citizen or investor to trust his wealth to the convoluted criminality that is international banking. Our advice is to remove as much as possible of your liquid assets from the clutches of the banksters. One of the best ways to do that, we feel, is to invest in gold and silver.

To learn more about the rewards of precious metals investing, including how to fund your existing IRA with gold or silver, call Liberty Gold and Silver seven days a week at 888.751.3330. To learn about the most generous affiliate marketing program in the precious metals industry, please visit the Liberty Gold and Silver Affiliate Marketing Program. We’re happy to spend as much time as you need to discuss the details with you.

© Copyright 2013 Liberty Gold and Silver, All rights Reserved.
Written For: Liberty Gold and Silver News Blog

Yellenomics: The Folly of Free Money

23 Mar


The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008.  Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon.

Let’s see. The Russell 2000 is trading at 85X actual earnings and that’s apparently “within normal valuation parameters.”  Likewise, the social media stocks are replicating the eyeballs and clicks based valuation madness of Greenspan’s dot-com bubble.  But there is nothing to see there, either–not even Twitter at 35X its current run-rate of sales or the $19 billion WhatsApp deal. Given the latter’s lack of revenues, patents and entry barriers to the red hot business of free texting, its key valuation metric reduces to market cap per employee–which  computes out to a cool $350 million for each of its 55 payrollers.   Never before has QuickBooks for startups listed, apparently, so many geniuses on a single page of spreadsheet.

Tesla: Valuation Lunacy Straight From the Goldman IPO Hatchery

Indeed, as during the prior two Fed-inspired bubbles of this century, the stock market is riddled with white-hot mo-mo plays which amount to lunatic speculations.  Tesla, for example, has sold exactly 27,000 cars since its 2010 birth in Goldman’s IPO hatchery and has generated $1 billion in cumulative losses over the last six years—–a flood of red ink that would actually be far greater without the book income from its huge “green” tax credits which, of course, are completely unrelated to making cars. Yet it is valued at $31 billion or more than the born-again General Motors, which sells about 27,000 autos every day counting weekends.

Even the “big cap” multiple embedded in the S&P500 is stretched to nearly 19X trailing GAAP earnings—the exact top-of-the-range where it peaked out in October 2007.  And that lofty PE isn’t about any late blooming earnings surge.  At year-end 2011, the latest twelve months (LTM) reported profit for the S&P 500 was $90 per share, and during the two years since then it has crawled ahead at a tepid 5 percent annual rate to $100.

So now the index precariously sits 20% higher than ever before. Yet embedded in that 19X multiple are composite profit margins at the tippy-top of the historical range. Moreover, the S&P 500 companies now carry an elephantine load of debt—$3.2 trillion to be exact (ex-financials). But since our monetary politburo has chosen to peg interest rates at a pittance, the reported $100 per share of net income may not be all that. We are to believe that interest rates will never normalize, of course,  but in the off-chance that 300 basis points of economic reality creeps back into the debt markets, that alone would reduce S&P profits by upwards of $10 per share.

America’s already five-year old business recovery  has also apparently discovered the fountain of youth, meaning that recessions have been abolished forever. Accordingly, the forward-year EPS hockey sticks touted by the sell-side can rise to the wild blue yonder—even beyond the $120 per share “ex-items” mark that the Street’s S&P500 forecasts briefly tagged a good while back. In fact, that was the late 2007 expectation for 2008—a year notable for its proof that the Great Moderation wasn’t all that; that recessions still do happen; and that rot builds up on business balance sheets during the Fed’s bubble phase, as attested to by that year’s massive write-offs and restructurings which caused actual earnings to come in on the short side at about $15!

In short, recent US history signifies nothing except that the sudden financial and economic paroxysm of 2008-2009 arrived, apparently, on a comet from deep space and shortly returned whence it came. Nor are there any headwinds from abroad. The eventual thundering crash of China’s debt pyramids is no sweat because the carnage will stay wholly inside the Great Wall; and even as Japan sinks into old-age bankruptcy, its demise will occur silently within the boundaries of its archipelago. No roiling waters from across the Atlantic are in store, either: Europe’s 500 million citizens will simply endure stoically and indefinitely the endless stream of phony fixes and self-serving lies emanating from their overlords in Brussels.

Meanwhile, what hasn’t been creeping along is the Fed’s balance sheet, which has exploded by $1.2 trillion or 41 percent versus two years ago and the S&P price index, which is up 47 percent in that span. Likewise, the NASDAQ index is up 60 percent compared to earnings growth that languishes in single digits.

Not Even Orange?

Still, Dr.Yellen recently told a credulous Congressman that “I can’t see threats to financial stability that have built to the point of flashing orange or red.”

Not even orange? Apparently, green is the new orange. The truth is, the monetary central planners ensconced in the Eccles Building are terrified of another Wall Street hissy-fit. So they strive by word cloud and liquidity deed to satisfy the petulant credo of the fast money gamblers—namely, that the stock indices remain planted firmly in the green on any day the market’s open.  It is not a dearth of clairvoyance, then, but a surfeit of mendacity which causes our mad money printers to ignore the multitude of bubbles in plain sight.

Actually, the Fed’s bubble blindness stems from even worse than servility. The problem is an irredeemably flawed monetary doctrine that tracks, targets and aims to goose Keynesian GDP flows using the crude tools of central banking. Yet these tools of choice— pegged interest rates and stock market puts—actually result not in jobs and income for Main Street but ZERO-COGS for Wall Street. And the latter is an incendiary, avarice-inducing financial stimulant that enables speculators to chase the price of financial assets to the mountain tops and beyond. So at the heart of our drastically over-financialized, bubble-ridden economy is this appalling truth: the speculator’s COGS—that is, his entire “cost of goods”—consists of the funding expense of carried assets, and the Fed’s prevailing doctrine is to price that at near zero for at least seven years running through 2015.

Pricing anything at zero is a recipe for trouble, but the last thing on earth that should deliberately be made free is the credit lines of gamblers and speculators. That is especially so when the free stuff—-repo, short-term unsecured paper, the embedded carry cost in options, futures and OTC derivatives—-is guaranteed to remain free through a extended time horizon by the central banking branch of the state. In that respect and even with tapering having allegedly commenced, just look at the two-year treasury benchmark. In the world of fast money speculation the latter time horizon is about as far as the eye can see, but the cost to play amounts to a paltry 37 basis points.

Even J.M. Keynes Knew Better

Once upon a time traders confronted reasonably honest two-way money markets. When they woke up in the morning in 1980-1981 they most definitely did not believe that the money market rate was pegged even for the day–let alone seven years. Instead, by allowing short rates to soar to market-clearing levels, the Volcker Fed laid low the carry trade in commodities, thereby reminding speculators that spreads can go negative suddenly, sharply and even catastrophically

Owing to the reasonably honest money markets of the Volcker era, the leading edge of inflation–soaring commodity prices—was decisively crushed and the inflationary fevers were quickly drained from the system. But more importantly, the vastly swollen level of capital pulled into the carry trades during the 1970s Great Inflation was reduced to its natural minimum—that is, to the amount needed by professional market-makers to arbitrage-out imbalances in the term structure of interest rates. Under those conditions, fund managers made a living actually investing capital, not chasing carry.

But nowadays, by contrast, the central bank’s free money guarantee nullifies all that and induces massive inflows to speculative positions in any and all financial assets that can generate either a yield or an appreciation rate slightly north of zero. To adapt Professor Keynes’ famous aphorism, the Fed’s quasi-permanent regime of ZERO-COGS  “engages all of the hidden forces of economic law on the side of [speculation], and does it in a manner that not one in [nineteen members of the Fed] is able to diagnose”.

Indeed, no less an authority on the great game of central bank front-running than Pimco’s Bill Gross trenchantly observed last week: “Our entire finance-based system….is based on carry and the ability to earn it.”

Stated differently, the preponderant effect of the Fed’s horribly misguided ZIRP has been to unleash a global horde of financial engineers, buccaneers and plain old punters who ceaselessly troll for carry. The spreads they pursue may be derived from momentum-driven stock appreciation and credit risk premiums or, as Bill Gross further observed, they may be “duration, curve, volatility or even currency related…..but it must out-carry its bogey until the system itself breaks down.”

Not surprisingly, therefore, our monetary central planners are always, well, surprised, when financial fire storms break-out. Even now, after more than a half-dozen collapses since the Greenspan era of Bubble Finance incepted in 1987, they don’t recognize that it is they who are carrying what amounts to monetary gas cans. Having no doctrine at all about ZERO-COGS, they pour on the fuel completely oblivious to its contagious, destabilizing and perilous properties. Nor is recognition likely at any time soon. After all, ZERO-COGS is an artificial step-child of central bankers’ writ; it’s what they do, not a natural condition on the free market.

The Prehistoric Era of Volcker the Great vs. Bathtub Economics

When money market yields and the term structure of interest rates are not pegged by the Fed but cleared by the market balance between the supply of economic savings and the demand for borrowed funds, the profit in the carry trades is rapidly arbitraged away—as last demonstrated during the pre-historic era of Volcker the Great. So the way back home is clear: liberate interest rates from the destructive embrace of the FOMC and presently money markets would gyrate energetically and the global horde of carry-seekers would shrink to a corporals’ guard. Pimco’s mighty balance sheet would also end-up nowhere near $2 trillion gross, if it survived at all.

By contrast, as we approach the bursting of the third central banking bubble of this century, the fates have saddled the world with the most oblivious and therefore dangerous Keynesian Fed-head yet. Not only does Yellen not have the slightest clue that ZERO-COGS is a financial time-bomb, she is actually so invested in the archaic catechism of the 1960s New Economics that she mistakes today’s screaming malinvestments and economic deformations for “recovery.”

In that regard, the ballyhooed housing recovery in the former sub-prime disaster zones is not exactly all that. Instead, the housing price indices in Phoenix, Los Vegas, Sacramento, the Inland Empire and Florida went screaming higher in 2011-2013 due to speculator carry trades.

Stated differently, the 29-year olds in $5,000 suits riding into Scottsdale AZ on the back of John Deere lawnmowers are not there owing to their acumen as landlords of single-family, detached homes, nor do they bring competitively unique skills at managing crab-grass in the lawns, insect infestations in the trees and mold in the basement. What they bring is cheap funding for the carry. They will be gone as soon as housing prices stop climbing, which in many of these precincts has already happened.

Similarly, the auto sector has rebounded smartly, but the catalyst there is not hard to spot either—namely, the re-eruption of auto debt and especially of the sub-prime kind. The latter specie of dopey credit had almost been killed off by the financial crisis—when issuance plummeted by 90%, and properly so.  After all, sub-prime “ride” loans had been mainly issued against rapidly depreciating used cars and down-market new vehicles at 115% loan-to-value ratios for seven year terms to borrowers living paycheck-to-paycheck, meaning that they had an excellent chance of defaulting if the Fed’s GDP levitation game failed and their temp jobs vanished.

All the forgoing transpired in 2008-2009, of course, but that is ancient credit market history that has now been forgiven and forgotten. Since those clarifying moments, sub-prime car loans have soared 10X—-rising from $2 billion to $22 billion last year, when issuance clocked in above the frenzied level of 2007. Sub-prime loans now fund a record 55% of used car loans and 30% of new car loans, but there’s more. The Wall Street meth labs have already produced a credit mutant called “deep sub-prime” which now account for one-in-eight car loans. Borrowers able to post a shot-gun or PlayStation as downpayment can get a loan even with credit scores below 580.

In short, even as real wage and salary incomes grew by less than 1% last year, new vehicle sales boomed by 25% during the last two years to nearly the pre-crisis level of 16 million units. The yawning disconnect between stagnant incomes and soaring car sales is readily explained, of course, by the usual suspect in our debt-besotted economy—namely, auto loans, which were up 25% since the post-crisis bottom and now at an all-time high.

This reversion to borrowing our way to prosperity also highlights the untoward pathways through which the Fed’s toxic medicine of cheap debt disperses through the body economic. Much of the dodgy auto paper now flowing out of dealer showrooms is not coming from Dodd-Frank disabled banks, but from non-banks like Exeter Finance and Santander Consumer USA that have a tell-tale capital structure. They are funded with a dollop of “private equity” from the likes of Blackstone and KKR and tons of junk bonds that have been voraciously devoured by yield hungry money managers who have been flushed out of safer fixed income investments by the monetary central planners in the Eccles building.

The Financial Crime of ZERO-COGS

At the end of the day, the financial crime of ZERO-COGS is a product of the primitive 1960s ”bathtub economics” of the New Keynesians. Not coincidentally, their leading light was professor James Tobin, who was not only the architect of the disastrous Kennedy-Johnson fiscal and financial policies that caused the breakdown of Bretton Woods and its serviceably stable global monetary order, but who was also PhD advisor to Janet Yellen. To this day Tobin’s protégé ritually incants all the Keynesian hokum about slack aggregate demand, potential GDP growth shortfalls and central bank monetary “accommodation” designed to guide GDP and jobs toward full capacity.

In more graphic terms, however, the fancy theories of Tobin-Yellen reduce to this: the $17 trillion US economy amounts to a giant bathtub that must be filled to the brim at all times in order to insure full employment and maximum societal bliss. But it is only the deft management of the fiscal and monetary dials by enlightened PhDs that can that can keep the water line snuff with the brim–otherwise known as potential GDP. Indeed, left to its own devices, market capitalism tends in the opposite direction—that is, a circling motion toward the port at the bottom.

For nigh onto fifty years, however, it has been evident that the bathtub economics of the New Keynesians was fundamentally flawed. It incorrectly  assumes the US economy is a closed system and that artificial demand induced by the fiscal or monetary authorities will cause idle domestic labor and productive assets to be mobilized. Well, we now have $8 trillion of cumulative and chronic current account deficits that prove the opposite—that is, the relevant labor supply is the 2 billion or so workers who have come out of the EM rice paddies and the relevant industrial capacity is the massive excess supply of steel mills, shipyards, bulk-carriers and iron ore mines that have been built all over the planet based on export demand originating in the borrowed  prosperity of the West and ultra-cheap capital flowing from central bank printing presses around the world.

The truth is, pumping up the American ”demand” mobilizes lower cost factors of production abroad in a great economic swapping game. Exchange rate-pegging, mercantilist-oriented central banks in the EM swap the sweat of their domestic workers and the resource endowments of their lands for the paper emissions of the US and other DM treasuries.  And the $5.7 trillion of USTs held abroad, mostly by central banks, proves that proposition, as well. In any event, it is not Uncle Sam’s fiscal rectitude that has created the EMs’ ginormous appetite for pint-sized yields on America’s swelling debts.

So through all the twists and turns of Keynesian demand management since the days when Tobin and his successors and assigns supplanted the four-square orthodoxy of President Dwight Eisenhower and Chairman William McChesney Martin, what really happened was not the triumph of modern policy science or economic enlightenment in Washington, as Kennedy’s arrogant PhD’s then averred. Instead, “policy” spent nearly a half-century using up the balance sheet of the American economy and all its components on a one-time basis.  Total credit market debt—-including business, household, financial and government–went  from its historic ratio of 1.5X GDP  to 3.5X at the crisis peak in 2007—where it remains until this day.

The $30 Trillion Rebuke To Keynesian ProfessorsHousehold Leverage Ratio - Click to enlargeThose extra two turns of aggregate debt amount to $30 trillion—a one time exploitation of American balance sheets that did seemingly accommodate Keynesian miracles of demand management. GDP was boosted by households that were enabled to spend more than they earned and a national economy that was empowered to consume more than it produced.But there was nothing enlightened about the rolling national LBO over the decades since Professor Tobin’s unfortunate arrival in Washington. It was then—and always has been—just a cheap debt trick. During each successive business cycle’s stimulus phase, debt ratios were ratcheted up to higher and higher levels. But now we have hit peak debt in both the public and private sectors, and there is no ratchet left because balance sheets have been exhausted.The household sector data tell the story of the cheap debt trick which is now over. The relevant leverage ratio here is household debt towage and salary income, because the NIPA “personal income” metric is now massively bloated by $2.5 trillion of transfer payments—-flows which come from debt and taxes, not production and supply.As shown below, the ratchet was powerful. During the 1980-1985 cycle, the household debt ratio jumped from 105% to 117% of wage and salary income; then it ratcheted from 130% to 147% during the 1990-1995 cycle; thereafter it climbed from 160% to 190% during 2000-2005; and it finally peaked out at almost 210% at the 2007 peak. 

That’s the Keynesian cheap debt trick in a nutshell: it does not describe a timeless science that can be applied over and over again, but merely a one-time party that is over. As shown below, the ratio has now retraced to the 180s, but that’s still high by historic standards, and more importantly, is the reason that Professor Larry Summers can be seen on most days sucking his thumb, looking for “escape velocity” that can’t happen.

headshotThe up-ratchet in private and public leverage ratios is over, and that means that the Keynesian monetary policy is done, too. It worked for a few decades thru the credit transmission mechanism to the household sector, but one thing is now certain: the only part of household debt that is growing is NINJA loans to students and what amounts to de facto rent-a-car deals in autos, which in due course will lead to a new pile-up of defaulted paper and acres of repossessed used cars.

Meanwhile, Yellen and her mad money printers keep “accommodating”  as they try to fill to the brim an imaginary bathtub of potential GDP. The exercise would be laughable, even stupid, if it were not for its true impact, which is ZERO-COGS. The latter, unfortunately, is fueling the mother of all bubbles here and abroad; crushing savers and fixed income retirees; showering the fast money traders and 1% with unspeakable windfalls of ill-gotten “trickle-down”; and placing control of the very warp and woof of our $17 trillion national economy in the hands of unelected, academic zealots.

The worst thing is that Yellenomics is just getting started because the whole crony capitalist dystopia that has become America can not function for more than a few days without another dose of its deadly monetary heroin.

Reprinted with permission from David Stockman.


23 Mar

Posted on March 4, 2014 by Liberty Staff

BankerExecRunningThe alternate financial media has been abuzz of late with bizarre stories of the alleged suicides of prominent members of world banking and finance. Over recent weeks, between eight and twelve (some say as many as twenty) successful traders and managers involved with FOREX trading and other derivative currency speculation, have conveniently “decided” to throw themselves from the roof tops of a variety of JP Morgan Chase banks in London, Hong Kong, and New York. Another top banking official, William Broeksmit, former executive at Deutsche Bank, was found hanged in his London home.

And others with strong connections to investment banking and the Federal Reserve itself have likewise met unusual deaths. Michael Dueker, former vice president of the St. Louis branch of the Federal Reserve, was found at the bottom of a fifty foot embankment below where he had just parked his car in Tacoma, Washington. The cause of death is still undetermined. The strangest of these deaths was Richard Talley, a former investment banker with Drexel Burnham Lambert who was alleged to have shot himself with a nail gun at least ten times in his Centennial, Colorado, home.

The keen observer will note that a great number of these deaths have occurred in tandem with the extensive multinational regulatory agency investigations of egregious fraud, price fixing, and “front run” trading in the FOREX markets and in the LIBOR index. These markets are gigantic and it is hard for the novice to comprehend the magnitude of money that is involved in daily transactions for both of these. The weekly volume on the FOREX market alone is excess of $20 trillion.

As of two weeks ago, no less than ten global banking giants including JP Morgan Chase, Royal Bank of Scotland, Deutsche Bank, Goldman Sachs, Credit Suisse, Lloyds Banking Group, and others, have found themselves the object of a litany of criminal probes that undoubtedly have created tension and fear, bordering on “flight or fight” panic within these banking conglomerates. Only the extremely naïve could find it hard to believe that the banking world, in order to cover up and protect itself from prosecution of the greatest financial crimes and frauds in history, would not resort to measures of extreme prejudice to eliminate potential material witnesses.

The key point to understand here, however, is that this is not at all a new phenomenon. The history of banking in the modern era (since the establishment of the Bank of England in the late 17th century), has been nothing but an ugly cavalcade of theft of sovereign national treasuries too vast to calculate. From the beginning, these large private central banks (the Bank of England, the Federal Reserve, the Bank of Japan, etc.), were intentionally designed to operate freely above the rule of law in their respective nations. They have been the financiers of most of the conflicts and wars in the last two centuries and are continuing to do so unabated to the present. Countless millions have died in these bankers’ wars in service to the unbridled greed of these financiers.

Through the massive inflation of each nation’s currency they dominate, the bankers have robbed the citizens of the purchasing power of their money and with it, their life savings. Since the establishment of the Federal Reserve in 1913, for example, the purchasing power of the US dollar has been eroded to nearly 1/100th of its original value. This has not been accidental. This was planned from the beginning. Private fractional reserve central banking is the greatest criminal conspiracy that continues to this day to hide in plain sight.

But please, don’t just think this is only our opinion. Fascinatingly, the bankers themselves have throughout the decades, clearly revealed their purpose and intent. At this juncture, we would like to offer some quotes for you by the highest ranking members of the banking elite, past and present.

“The bank hath benefit of interest on all moneys which it creates out of nothing.”
William Paterson, founder of the Bank of England in 1694

“Let me issue and control a nation’s money and I care not who writes the laws.”
Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

“If my sons did not want wars, there would be none.”
Gutle Schnaper, wife of Mayer Amschel Rothschild and mother of his five sons

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” 
The Rothschild brothers of London writing to associates in New York, 1863

 “Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits.”
Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain

“When you or I write a check, there must be sufficient funds in our account to cover the check; but when the Federal Reserve writes a check, there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”
From the Boston Federal Reserve Bank pamphlet, “Putting it Simply.”

“Neither paper currency nor deposits have value as commodities. Intrinsically, a ‘dollar’ bill is just a piece of paper. Deposits are merely book entries.”
“Modern Money Mechanics Workbook” – Federal Reserve of Chicago, 1975

 “I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.”
Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924

“I am just a banker doing God’s work.”
Lloyd Blankfein, CEO, Goldman Sachs, 2009

“Banks do not have an obligation to promote the public good.”
Alexander Dielius, CEO, Germany, Austrian, Eastern Europe Goldman Sachs, 2010

So there it is in their own words. The arrogance, elitism, and condescension of bankers towards the common citizen are starkly revealed. These brilliant criminals have created the Ponzi scheme of all Ponzi schemes and so far, protected it from any form of criminal prosecution. However, that might be about to change. Awareness of their criminality is growing throughout the world at a rapid pace but never doubt that this group will fight tenaciously and be willing to go to any extremes to protect their centuries’ old scam. We predict there will undoubtedly be more strange banker deaths ahead of us in the ensuing weeks, months, and years.

The next time you walk into your local bank, please ask yourself this question, “Do I really want to entrust my hard earned wages and savings to a centuries’ old criminal scheme?” If you don’t, please consider gold and silver for protection of your wealth.”

To learn more about the rewards of precious metals investing, including how to fund your existing IRA with gold or silver, call Liberty Gold and Silver seven days a week at 888.751.3330. To learn about the most generous affiliate marketing program in the precious metals industry, please visit the Liberty Gold and Silver Affiliate Marketing Program. We’re happy to spend as much time as you need to discuss the details with you.

© Copyright 2013 Liberty Gold and Silver, All rights Reserved.
Written For: Liberty Gold and Silver News Blog

The Euro Is Not Overvalued (Nor Is Any Other Currency)

23 Mar

Mises Daily: Saturday, March 22, 2014 by 

A common argument for dumping the Euro is that it is overvalued, and that the ECB (European Central Bank) is unwilling to correct this so-called “problem.” This overvaluation is regularly cited as being over 10 percent against the dollar. The Swiss central bank surrendered control of its money supply by fixing its currency at 1.2 against the Euro essentially on the notion that its currency was “overvalued.” Advocates of a Euro breakup consider that a country with its own currency can then follow an independent monetary policy ensuring a competitive exchange rate. Never mind that neither the USA nor Great Britain have improved by following aggressive monetary policies that have depreciated their currencies. Such policies have also forced other countries, such as Brazil, to retaliate. As Mises foresaw,

A general acceptance of the principles of the flexible (exchange rate) standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations’ monetary systems.

The idea that a currency can be overvalued or undervalued comes from the theoretical concept of purchasing power parity (PPP): the idea that the exchange rate should reflect the ability to purchase the same basket of goods in either currency.

For example, suppose gold is selling for $1,000 in New York and 1,000 euros in Paris, and the exchange rate is 1.3 dollars to the euro. The adherent of PPP theory would note that this situation would soon end due to the reality of arbitrage. For example, you could buy an ounce of gold in New York, bring it to Paris and sell it for 1,000 euros, then convert your euros into dollars and make a $300 profit. Arbitrage is like finding a $100 on the sidewalk. It can happen, but not often or for very long. The price of gold would rise in New York, fall in Paris, or the exchange rate would adjust. Since gold is priced in dollars worldwide and the market for foreign exchange is large, the price in Paris would normally drop to 800 euros. The exchange rate of 1.3 reflects the ratio of the price of gold in New York divided by the price of gold in Paris.

According to many economists who subscribe to the theory of purchasing power parity, if the above scenario is true for gold, the same can be true of all other goods. So, according to PPP theory, the exchange rate, between dollars and euros for example, is the ratio of all prices in the USA against prices in Europe. This is where the exchange rate should be: i.e., based on the “fundamentals.” Any deviation is seen as an overvaluation or undervaluation of the currency.

There are some major problems with this assertion. Although arbitrage can be used for gold, it cannot be used for all goods. You cannot arbitrage a hamburger or a haircut between countries. Purchasing power parity cannot be applied to non-traded goods. Yet, it also cannot be used for many traded goods. The price of a steak you eat in a Manhattan hotel overlooking the city will not be the same price, adjusted by the exchange rate, as the steak eaten at a stop-and-go restaurant on a major highway near Paris. If you consider the consumption of a good not just the product but the convenience, environment, and a multitude of other factors, only a few traded goods, such as gold or oil, fit into the arbitrage definition necessary for purchasing power parity. What exactly is the price of a loaf of bread — when the same loaf can be sold at different prices — from the supermarket to the restaurant to the gas station of the same neighborhood? They are the same product but other attributes make them different as perceived by consumers and therefore cannot be arbitraged.

The Economist magazine publishes twice yearly the Big Mac Index (video) which measures the “over- or undervaluation of a currency. Of course, the price of a hamburger has more to do with the cost of labor and rent than with the cost of the bun, meat, or pickles in a Big Mac. It is also a non-traded good, so we should not expect arbitrage to force uniformity in prices across countries or regions. The Economist is trying to sell magazines, so it is justified in being less than precise. However, professional economists should not be using this index, or any index, to identify a currency as undervalued or overvalued. In reality, such statements are total nonsense.

The value of a currency, as reflected in the exchange rate, is determined by supply and demand. The price of rice is not overvalued nor is the price of apples undervalued. Such a statement would be considered idiotic for rice or apples, but is considered justified for exchange rates. Equilibrium exists where the quantity demanded is equal to the quantity supplied. No one is overpaying or underpaying. To suggest that someone is indeed “overpaying” implies the buyer is irrational. It is sad to see economists in central banks, like the Swiss central bank, incapable of drawing obvious conclusions about exchange rates from such simple concepts as supply and demand.

Economists should banish the words overvaluation or undervaluation from their vocabularies when talking about currencies. These terms should also be stricken from international finance textbooks. The euro is not overvalued, nor should faulty logic be used as an argument to dismantle it.

Note: The views expressed in Daily Articles on are not necessarily those of the Mises Institute.

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Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See Frank Hollenbeck’s article archives.