The global economic “recovery” has hit an unexpected bump in the road, reports an article today from Bloomberg’s London Bureau, the result of the Japan earthquake and Middle East turmoil, writer Simon Kennedy opines.
We at WealthCycles.com have a different view of the slowing world economy—rather than blaming relatively contained, short-term crises such as natural disasters and political unrest, the fate of the world economy is instead inherent in its structure.
As Bloomberg reports, analysts have slashed their earlier predictions of global economic growth, citing a slowdown in Chinese manufacturing, a drop in U.S. orders for durable goods, a three-month dip in European consumer confidence and a 4.2 percent decline in the MSCI World Index of stocks in advanced economies.
In the United States, there are literally hundreds (see the list below) of agencies that regulate, evaluate, protect, standardize, and monitor the daily goings-on of U.S. citizens. The Federal Register is a compendium of all the rules and regulations that the alphabet soup of agencies publishes. Since 1936, when the Fed Reg was first published, it has become not merely a compendium, but a veritable library of government regulations weighing in at nearly 90,000 pages.
But as we saw during the Financial Crisis, many of these “watch-dog” agencies were either 1) not doing anything, or 2) actually helping the crooks crack open the vaults to leave the American citizen hanging high and dry.
It's always sad to see people learn lessons through the school of economic hard knocks—but as Rahm Emanuel famously said, “You never want a serious crisis to go to waste.” In the Eastern European of country of Belarus, the ugly consequences of fiat currency are beginning to take shape.
In a photoblog by MSNBC, haunting images illustrate the effects of an economy gone wrong with the effects of the Belarusian ruble. Long lines for gasoline, empty store shelves and a mad dash for currency exchanges show the nascent stages of a panic and the herding behavior that makes the death of a fiat currency such a dangerous proposition.
"This moment isn’t going to last for long. In historic time, they go by in the blink of an eye. where the safe place to be, where people run to to protect their wealth during economic crisis, gold and silver. They have been the safe haven for your finances for 5,000 years. And there’s these brief moments in history where they become the asset class that has the greatest potential gains in absolute purchasing power. And we’re in one of those right now. Every time they create new currency—and they’re doing massive currency creation now—it creates a bubble somewhere. I believe the next great asset bubble is going to be commodities and precious metals."
Last week we blogged about John Law, an infamous character that helped France find and lose illusory wealth in the span of a few short bubble years. During his infamous heyday, a new term came about—one that described the amount of wealth that was floating around.
“The combination of millions of paper notes and wildly inflated share prices gave birth to a new word that was on everybody’s lips—millionaire.”
Just as paper currency has devalued the notes that central banks print, it has devalued a word—millionaire. A millionaire used to refer to someone that was unquestionably wealthy. Today, a million dollars is hardly enough to quit your job, throw caution to the wind, and retire to a sandy beach.
The most recent Consumer Price Index report shows overall inflation up just 0.4 % in April, a report that is good news for the U.S. Federal Reserve and very bad news for consumers and taxpayers.
Good news because the 0.4% figure is in line with the Fed’s continuing insistence that inflation is under control and climbing only slowly, giving it political cover to continue its course of monetary easing and low interest rates.
Bad news because the numbers lie. As John Crudele wrote yesterday for the New York Post, the CPI figures consistently undercount energy price increases, which results in deceptively low overall inflation numbers.
In our premium article, The Terrible Durability of Bad Ideas, we compared the long line of central bankers and politicians with John Law—the infamous rake and money-conjurer who left France and greater Europe in shambles with his fiat scheme.
The International Monetary Fund is in the news again for scandals of a more personal and dubious type—the arrest of fund chief Dominique Strauss-Kahn over allegations of sexual assault. This comes at a time when the IMF can least afford to be embroiled in political scandals—the global recovery is tentative at best, and the combination of rising prices, declining credit, and falling faith in fiat currencies is becoming a cocktail for disaster. But this does give us a great opportunity to help people understand what the IMF does, who pays for it, and how it works.
What the heck is it?
Most people in the world couldn't describe what the IMF does; yet if your country is one of the 187 member countries, you have paid for it. ABC World News says this:
"The Fund has deposits from member countries – commonly called 'quotas' – totaling some $340 billion, with additional commitments for about $600 billion from member governments should the funds be needed.
One of the precious few things that politicians, historians, and economists can all agree on is that policy makers blew it in the Great Depression. During the singular moment when they should have most allowed free markets to take care of things—they compounded them with protectionism, isolationism, taxes, and tariffs.
In this video, James Grant, of Grant’s Interest Rate Observer, and Liaquat Ahamed, Pulitzer Prize winning author of Lords of Finance, discuss the legacy being left behind by the central bankers of today.
James Grant has been called a wingnut, but you can immediately sense that he has studied cycles and monetary history. Last year, in the New York Times, he wrote an article in which he criticized the Fed, and longed for the classical gold standard of yesteryear:
In this video blog of a recent Q&A session with audience members, Michael Maloney explains one of the most difficult concepts for investors to grasp—where does the wealth go following a market crash?
It is often said that wealth “evaporates” in the wake of a crash such as the real estate crisis of 2007.
“Wealth is never destroyed, it is transferred,” Mike explains. “When your house was worth a million bucks, say oil was $140 a barrel. Now the same house is worth half a million, but oil is worth 70 bucks a barrel. Your house is still worth the exact same amount measured in oil. So that’s the true wealth—if you sell your house, how much food, how much gasoline, how many shares of the Dow, how much stuff can you buy? The dollar amount doesn’t mean anything…. Even though the dollar price of them may have fallen, the real estate didn’t vanish.”
The last few days have seen many in the commodities complex unnerved. Michael Maloney, most recently on the Keiser Report, has come out and said that he doesn’t care as far as the silver selloff goes—in fact, he hopes it dips further so he can increase his positions at lower prices. But some investors are unnerved.
Reuters has written 2,000 words on the selloff—finding reasons as disparate as Osama bin Laden and algorithmic trading—one of the primary suspects of last year’s Flash Crash. In an increasingly computerized world—are computers becoming the sentient operators on the other side of our trades, and what does that mean for long-term investors like cycles investors?
In Wired’s December 2010 issue, Felix Salmon penned an article on the increasing computerization of markets.
In reading one of Doug Casey’s recent articles, he reminded us of an oft-cited, and unfortunately, oft-forgotten line from the Classic Roman poet Juvenal—quis custodiet ipsos custodes?—who watches the watchmen? The timeless line questions the ultimate control of government. Who watches the people in charge?
In theory, the United States has a separation of powers—the different branches of government watch each other. But what happens when countries cede control of their currency—the lifeblood of the economy—to a private entity with unlimited powers to manipulate and influence the economy?
The latest economic indicators are a mixed bag, as usual. A couple hundred thousand more U.S. jobs were created last month, we are told, yet the unemployment rate nudged up slightly, from 8.8% to 9%--likely due to some formerly “discouraged workers,” who aren’t counted in the official unemployment rate, deciding maybe things had picked up enough that they’d get off the couch and try looking for work again.
But even these marginally positive labor numbers are offset by rising inflation and slowed growth: The Producer Price Index—the cost of producing finished goods—was up 5.8% in a year as of March, the latest available figures, the Consumer Price Index up 2.7% in the same period. The economy slowed to 1.8% growth in first quarter 2011, down from 3.1% the previous quarter.
The path of a secular, or long-term, bull market, is never straight—and as many have found out over the past few days—it can be a stomach churning ride. But, as always happens, those with foresight and discipline to stick by their convictions will be rewarded.
Over the last couple of days, we have been deluged with messages and emails from people fretting about the fall in silver, gold, and other commodities. Understandably, they are concerned with the falling price of their investments.
Legendary investment analyst Richard Russell once said that the job of a bull market is to throw off as many people as possible along the way. The path of a long-term secular bull market is like a game with a game, or, more apropos, a cycle within a cycle. Traders often take profits at or near historical highs, which creates lines of resistance, as technical traders call them. But in a long-term secular bull market, the primary trend is up—which means that smart investors hold on for the ride. There are frequent pullbacks as traders take profits, and the bull takes a breather before continuing its climb.
The Federal Government tells those of us in the United States that our economy is steadily growing and that all of us have grown much more prosperous than our parents and grandparents were—that in fact our standard of living has improved.
The problem is, our increased relative prosperity is nothing more than illusion created by the government’s gaming of the statistics.
In this video blog, Michael Maloney takes a look at Gross Domestic Product (GDP) per capita, which is the measure of the prosperity of the United States per person, and how it has grown over the years since he was a boy, compared to the real standard of living we enjoy today.
In a span of a hundred years or so during the 1800s, human quality of life improved immensely. Indoor plumbing, electricity and indoor lighting, the telegraph, the telephone, refrigeration, radio and television were all invented within the span of a century or so. Since then a few improvements have been made—most notably computers, the Internet and cell phones. But aside from those technological improvements, our standard of living is not much better today than it was a generation ago.
The number one most used indicator for the economy is Gross Domestic Product, or GDP. GDP measures the output of all goods and services in an economy. Even if a hammer or a computer was made, but never sold and sat on a storeroom shelf, it is still included in GDP. GDP is used to determine if an economy is growing or shrinking—economies go through long cycles of expansion and recession, and the best way to tell where we have been in that cycle is with GDP.
Oftentimes it is listed as GDP per capita (output per person) or as a growth percentage. Sometimes it is listed in nominal or real (or chained) dollars. Suppose a company says it sold $11 worth of gloves, 10% more gloves than last quarters’ $10 sold. It is unclear whether they actually sold more gloves this quarter, or simply raised prices 10%. If they simply raised prices, the true volume of gloves sold is no more than last quarter, or $10. In this case, the glove factory’s nominal GDP would be $11, and its real or chained GDP would be $10, because real GDP takes out the effect of rising prices.
GDP is a backward-looking indicator because it tells us what the economy has done, but it is limited in its ability to tell us how the economy will do in the future. It is also limited because it is not very timely—GDP in the U.S. is only released on a quarterly basis, one month after the quarter has ended. After it is released, it is revised one month later, and then annually at the end of July. These revisions almost always change the first number, making GDP at best a rough gauge of how the economy is doing.
Inflation is simply an increase in the supply of currency and credit. The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling is defined by the term "price inflation." Central Banks attempt to stop deflation, a natural phenomenon which occurs in order to correct the prior inflation.
Paul Krugman, a very intelligent liberal economist and sometime Fed apologist, is advocating that the Federal Reserve not worry about rising commodity prices.
“[I]t’s an issue for the Department of Energy and such to worry about — not the Fed.”
He uses this chart to defend a thesis claiming that, since commodities play such a small role in personal consumption expenditures (PCE), inflation in commodities plays only a miniscule role in inflation. Therefore, according to Krugman, changes in commodity prices should be ignored.
How do you turn a frozen rock into a bustling financial center? The answer is quite simple: fiat currency and fractional reserve banking unfettered by rules, regulations, and market discipline. While debt and the carry trade played an important role, Iceland’s cultural psyche and history played a big role as well.
According to David Kestenbaum and their Icelandic intern, Baldur Hedinsson, Reykjavik, Iceland’s capital, looks like someone took a typical Northern European city—with coffee shops, luxury cars, and orderly streets—and placed it on the moon. The occasional polar bear finds its way to Iceland by hitching its way on a floating chunk of ice, and, during winters, Iceland only receives a few hours of sunlight.
Why and how, then, would Reykjavik need to become a bustling financial center trading the most sophisticated instruments like derivatives, options, and futures? NPRs Planet Money podcast attempts to answer how Iceland went from frozen rock to bustling financial and economic center.
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