Blogs on How to Invest, Gold & Silver, and Economics 101

Is QE Really Over?

“As a child, I was confused by shouts of “The King is dead, long live the King!” I understood the declaration about the deceased king but didn’t understand why you would then wish long life to a dead King. Only later did I come to understand the distinction between the King who had just passed and the heir who had just ascended to the throne. Then it all made sense.
“As we approach the end of the Fed’s quantitative easing program many are prepared to shout, ‘QE is dead!’ Few realize the old royal salute is more appropriate – ‘QE is dead, long live QE!’ Because an heir to the throne is here and will be with us for a long time. QE has now become a permanent part of the financial landscape of the United States.”

—Jim Rickards (March 2011)

Quantitative easing is central banker speak for creating currency to buy debt or other assets.

The process of quantitative easing is fairly simple—it involves printing currency and buying assets from banks—but it can take many different forms. Central banks can use Q.E. to buy relatively safe treasury securities, pumping cash into their vaults to stimulate lending; or they can buy assets that have lost value (think mortgage-backed securities) in order to make banks whole and attempt to shore up their balance sheets. Central banks can also target certain maturities of the assets they purchase, to push down the cost of short-term, medium-term, or long-term borrowing. 

Ben Bernanke is current Chairman of the Federal Reserve Board. He succeeded Alan Greenspan as Chairman in 2006, following his nomination by former President George W. Bush. He is an economist and former professor at Princeton University. Nicknames include "the bernank," and "Helicopter Ben."  

Simply put, bonds are debt. Bonds basically say: "I owe you (IOU) X-amount of currency, plus X-amount of interest." —Michael Maloney, Guide to Investing In Gold & Silver. But, there is more to it than that. Bonds set the cost of borrowing, determine international currency flows, and play a huge role in determining the value of each nation’s currency. That means bonds have a direct effect on the dollars, euros, pesos or yuan in your wallet or bank account.

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To Think the Unthinkable



In a Wall Street Journal interview, U.S. Treasury Secretary Timothy Geithner discusses bipartisan negotiations now underway to raise the U.S. debt ceiling and avoid default. Geithner talks about the Obama administration’s desire for a “balanced” debt-reduction plan that would facilitate both short-term and long-run economic growth. Geithner repeatedly insists any plan must allow “room” to do “the things that only government can do.” Uh-oh… that sounds like trouble waiting to happen.

Perhaps most concerning is Geithner’s declaration that a U.S. debt default is “unthinkable.” Taken in the context of the conversation, “unthinkable” appears to mean that Geithner simply refuses to consider it—and that seems to be the party line.

The thing is that sometimes in life, the unthinkable does  happen.

Deflation is a contraction of the currency supply, which causes prices to fall and the value of currency to rise. When prices fall, a boom becomes a bust, and suddenly a recession becomes a depression.  Fed Chairman Ben Bernanke, a scholar of the Great Depression, knows the dangers that deflation poses to a debt-based economy.

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Mountains of Dollars Add Up to Senseless Waste

In government, it’s generally not useful to cry over spilled milk—a few billion here and a few hundred million there are just signs of these wasteful times. And yet most sensible people will recognize that the government pocketbook has been stretched to the limit. Government borrowing in the United States alone is a hair short of $14.5 trillion—the equivalent of $129,500 per taxpayer. 

Yet the U.S. Mint and the Federal Reserve, at the behest of Congress, continue to belch out mountains of fiat currency that not only costs taxpayer dollars to create—it also is simply laying dormant behind Federal Reserve vault walls.

In 2005, Congress decided that a new series of dollar coins should be minted to engage the public. These coins would bear the likeness of every former president, starting with George Washington. A new one would be issued every quarter. So, far, the Mint has produced the new coin series through the 18th president, Ulysses S. Grant.

A fiat currency is created by a government decree. The Latin word fiat means “let it be done.” And with the stroke of a pen, or the crank of a printing press, “money” is created. Fiat currency has no inherent value—the paper that a $100 dollar bill is printed on is surely not worth $100. It might have been worth a few cents before the government ruined its utility as scrap paper by printing green words and numbers all over it! Compare this with gold, which is a precious, rare metal that is, in many cases, the only substance on earth that can be used for certain human purposes, including science, medicine, and of course—adornment.

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Is China A Communist Country?

I'm confus[ed] about China. China is a communist country, isn't it? After I read this article, now I'm thinking China is a capitalist country. When [did] China [turn] to capitalism? I think about it because China is [an investor] and [has] investors inside it. Furthermore, China has a real estate bubble and its behaviour is similar to U.S. in the sense [of the] real estate bubble.

As the Chinese Communist Party turns 90 years old this year, it has become one of the great mysteries of the world that the largest communist government in the world has become one of the most successful capitalist countries in the world. Over the past 30 years, China has averaged 10% economic growth per year while the United States has grown at an anemic 3% annually.

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Cyber-Speculators Embrace Bitcoins As Antidote to Dropping Dollar

The latest alternative to the rapidly devaluing U.S. dollar is a computer geek’s dream, allowing consumers to make online purchases of just about anything without providing a credit card or bank account number—in other words, in complete anonymity. The question, as with any competition to the dollar, is how long will it be before the U.S. government feels compelled to stomp it out.

In article for the June 27 issue of Newsweek, Dan Lyons reports on Bitcoins, a software-based, online “cryptocurrency” that serves as a medium of exchange while cutting out the government, central bank, credit card companies and banks.

“Hundreds of merchants accept Bitcoins for things like books, computers, and professional services. The currency trades on a handful of Bitcoin exchanges, where the price of a Bitcoin fluctuates based on demand. Not long ago a single Bitcoin sold for less than a dollar, but in recent months the price climbed to $8, then to $20, then above $30, before falling back to $18, the current level.”

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The Economics of Well-Being

“Money doesn’t buy happiness”

—Old saying   

For decades, economic growth has been the holy grail of modern macroeconomics, but in the world of individuals, the most common answer for an individual’s prime directive is “to just be happy.” In the U.S., “the pursuit of happiness” is coded into our Declaration of Independence as an unalienable right.

But as far as measuring economic well-being, happiness has always been stuck in the ether—a nebulous, if not almost frivolously subjective, criterion. Some countries like France and England have sought to develop better measures of well-being; others, like Bhutan, have gone so far as to replace Gross National Product, one of the more traditional measures of economic well-being, with Gross National Happiness.

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.  

The word “cycle” comes from the Greek word kyklos, meaning cycle or circle. One common definition of cycle is “a periodically repeated sequence of events.”

The idea of a cycle is symbolized by a circle, which, because there is no beginning or end, represents recurrence. The symbolic circle is often divided into segments—often two, such as the Chinese yin and yang or day/night, but more often four segments, like the seasons.

A recognition and understanding of cycles is one way human beings are able to recognize patterns in data. As early humans learned that events in nature recur over and over again with regularity, they developed the ability to plan for the future, which ultimately led to advanced civilizations.

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New York Fed Stays Mum On Missing Iraqi Billions



The mind-boggling mystery of what happened to a $6.6 billion trove of shrink-wrapped $100 bills recently grew even more spectacular. The Iraqi Speaker of Parliament recently told Arab-language TV station Al Jazeera that the true total of missing money is closer to $18.7 billion—three times that originally reported. To make matters even worse, and fueling public cynicism and suspicion, the Federal Reserve Bank of New York refuses to tell federal investigators how much cash it shipped to Iraq.

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New Bubble, Same Old Euphoria

An old myth once told us that goldfish have no memory—which is why they could happily swim around the same bowl for years on end. Scientists have since proven that goldfish have some memory, or, at least, some sense of conditioning. Some human beings, however, show signs that they may have perilously short memories—just like our mythical goldfish—which leads them to getting burned over and over again.

These days, investors are piling into the newest red-hot social media companies—driving up the prices of shares of companies like LinkedIn and Pandora. When LinkedIn shares debuted on the New York Stock Exchange, they leaped over 170%; Pandora shares jumped 60% from an already lofty value. Social media euphoria has many observers concerned about a bubble.

But are the same investors clamoring today for the IPO of Facebook and Groupon forgetting the lessons painfully learned from the biggest stock bubble in history?

The word “cycle” comes from the Greek word kyklos, meaning cycle or circle. One common definition of cycle is “a periodically repeated sequence of events.”

The idea of a cycle is symbolized by a circle, which, because there is no beginning or end, represents recurrence. The symbolic circle is often divided into segments—often two, such as the Chinese yin and yang or day/night, but more often four segments, like the seasons.

A recognition and understanding of cycles is one way human beings are able to recognize patterns in data. As early humans learned that events in nature recur over and over again with regularity, they developed the ability to plan for the future, which ultimately led to advanced civilizations.

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The Slow Crash

How does a high-flying economy suddenly stall and begin a slow, decades-long crash? In Japan, a mammoth real estate bubble turned the sleepy island economy into a casino where no one loses. But in the last days of 1989, the Japanese stock and real estate markets began to slow their dizzying climbs.

Last August, we published a piece called Coming Soon: The U.S. Lost Decade that compared the situation of a slow decline in the U.S. with Japan’s last 20 years:

Quantitative easing is central banker speak for creating currency to buy debt or other assets.

The process of quantitative easing is fairly simple—it involves printing currency and buying assets from banks—but it can take many different forms. Central banks can use Q.E. to buy relatively safe treasury securities, pumping cash into their vaults to stimulate lending; or they can buy assets that have lost value (think mortgage-backed securities) in order to make banks whole and attempt to shore up their balance sheets. Central banks can also target certain maturities of the assets they purchase, to push down the cost of short-term, medium-term, or long-term borrowing. 

Deflation is a contraction of the currency supply, which causes prices to fall and the value of currency to rise. When prices fall, a boom becomes a bust, and suddenly a recession becomes a depression.  Fed Chairman Ben Bernanke, a scholar of the Great Depression, knows the dangers that deflation poses to a debt-based economy.

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The Monster that Ate the Economy

China’s remarkable economic growth is one of the great stories of our time, the image of a wakening dragon shaking off the scales of massive poverty and a rural, subsidence society to take its place as the world’s most powerful industrial engine and most ravenous consumer marketplace.

But China’s government, never one to lay all its cards on the table, continues to ply its ancient skills at illusion and deception. China’s infamous “ghost cities” are a perfect example. All over China, vast, modern cities are springing up—beautiful, gleaming places that would be the pride of any nation, especially at a time when in most parts of the world construction has ground to a screeching halt. But new China’s cities, so glamorous on their surface, are lacking a critical component—people.

Deflation is a contraction of the currency supply, which causes prices to fall and the value of currency to rise. When prices fall, a boom becomes a bust, and suddenly a recession becomes a depression.  Fed Chairman Ben Bernanke, a scholar of the Great Depression, knows the dangers that deflation poses to a debt-based economy.

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Top 4 Reasons To Tell Everyone You Know About the Coming Wealth Transfer

Oftentimes, we feel like we are wandering the labyrinth of life without anything really happening. Most of the big news is on the periphery of our lives, and if you don’t go out of your way to watch or read the news, it won’t really affect you. The fortunes of businesses and countries ebb and flow (especially in Financial Crises), but in our cushy, sheltered lives, there is often little reason to care.

But you should care. And so should everyone else.

The events of the past 40 years have set into motion a course of events that will cumulate in a wealth transfer unlike any the world has known.

Wealth transfers happen every day. If you buy a stock, and it falls, your purchasing power has been transferred to the guy that sold you the stock. He can buy the same stock again and still have some cash left over—his purchasing power has increased.     

The word “cycle” comes from the Greek word kyklos, meaning cycle or circle. One common definition of cycle is “a periodically repeated sequence of events.”

The idea of a cycle is symbolized by a circle, which, because there is no beginning or end, represents recurrence. The symbolic circle is often divided into segments—often two, such as the Chinese yin and yang or day/night, but more often four segments, like the seasons.

A recognition and understanding of cycles is one way human beings are able to recognize patterns in data. As early humans learned that events in nature recur over and over again with regularity, they developed the ability to plan for the future, which ultimately led to advanced civilizations.

A fiat currency is created by a government decree. The Latin word fiat means “let it be done.” And with the stroke of a pen, or the crank of a printing press, “money” is created. Fiat currency has no inherent value—the paper that a $100 dollar bill is printed on is surely not worth $100. It might have been worth a few cents before the government ruined its utility as scrap paper by printing green words and numbers all over it! Compare this with gold, which is a precious, rare metal that is, in many cases, the only substance on earth that can be used for certain human purposes, including science, medicine, and of course—adornment.

A market in which the primary price trend is upwards 

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The Monster Is Hungry



This surprisingly political take on the U.S. national debt was part of the ABC children’s television series, School House Rocks. Originally aired in 1996, with catchy tune and lyrics by Tom Yohe, performed by Bob Dorough and Bob Kaliban, this entertaining segment depicts the national debt as an enormous dinosaur that just keeps growing and growing, continually fed by U.S. tax dollars.

“There’s something huge, red, white and blue, that’s grazing in DC. It’s gobbling up the taxes that are paid by you and me.”

The tour bus guide/narrator explains how Tyrannosaurus Debt was born in 1790, “when our newborn government took over $79 million the economy spent in the Revolutionary War.” Our tour guide is full of fascinating factoids, such as “The Civil War ran up a debt of $3 billion that wasn’t paid off by World War I.” Particularly funny is the repeated animation of the dinosaur biting off Alexander Hamilton’s hand.

The point the ditty tries to make with kids is that something must be done to contain the growing debt.

Ben Bernanke is current Chairman of the Federal Reserve Board. He succeeded Alan Greenspan as Chairman in 2006, following his nomination by former President George W. Bush. He is an economist and former professor at Princeton University. Nicknames include "the bernank," and "Helicopter Ben."  

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Wishful Thinking Blurs Bulls’ View of PE

The Standard & Poors 500 is one of the most watched bellwethers for American stocks. It measures the shares of 500 of the United States’ largest companies, weighted by their individual market capitalization—and therefore, serves as a passable dipstick for the American economy.

Yesterday’s blog highlighted the fact that bubbles form when the price of assets diverges from their fundamental values. One of the favorite indicators of stock analysts is the P/E, or price/earnings ratio—it’s easy to calculate, easy to understand, and easy to interpret. 

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Does Optimism Breed Financial Crises?

In Saturday’s New York Times, Robert Shiller (of the Case-Shiller Home Price Index fame) of Yale University penned an article that laments optimism as a prime suspect for creating the worse financial crisis in human history. Wait a minute—how can you blame optimism for a financial epidemic? Professor Shiller thinks that the short-term noise played a small role, and that the bigger suspect was the bigger trend, or cycle, of long-term sociological factors.

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Bank Disclosure Rules Look Different From Other Side of Pond

The U.S. Internal Revenue Service is getting serious about its campaign to recover taxes on unreported funds held by U.S. citizens in foreign bank accounts. After all, as reported by Reuters today, the United States is projected to post a $1.4 trillion budget deficit for fiscal year 2011, which ends Sept. 30. At times like these, every buck counts for government bean-counters.

The recent push by the IRS to reap the largesse from cash stashed overseas stemmed from its successful suit against Swiss banking giant UBS, which settled for $780 million in 2009. As reported by Huffington Post today, a number of Swiss and European banks have been in secret talks expected to yield additional disclosure of the banking records of U.S. nationals. The Foreign Account Tax Compliance Act (FATCA), adopted in March, will force non-U.S. banks to provide extensive information about U.S. customers or face prosecution.

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Market Manipulation Fail

Most people have heard the term OPEC (pronounced oh-peck), the Organization of Petroleum Exporting Countries, which is a cartel of oil exporting countries. As a cartel, they manipulate supply of oil in the market, in hopes of keeping prices, and profits, high. Together, the 12 member-nations control nearly 80% of the world’s oil reserves, and 44% of the world’s daily production—a powerful force used to manipulate oil prices around the world. Together, these countries can keep oil prices high by producing less oil than the market needs—in effect, driving up prices and keeping them high. How is it possible that this cartel could fail at controlling prices?

Oil prices, on the rise since 2009, have caused widespread speculation that OPEC would raise their production quotas—thereby putting downward pressure on prices. While OPEC always wants to maximize profits for themselves, they also don’t want to kill the golden goose by driving prices so high that alternative energy exploration becomes a top priority.

But to many a gasoline-buyer’s chagrin, OPEC decided to keep production at the same level, manipulating the supply of oil lower to keep prices high.

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Order Today and Save!

In this hilarious clip from 2006, Saturday Night Live seems to portend the global financial crisis to come, aggravated in part by enormous levels of U.S. consumer debt, fed as we know all realize, by a real estate bubble that gave many homeowners a false sense of the real wealth represented by the equity in their homes.

In this faux infomercial, Steve Martin and Amy Poehler represent Mr. and Mrs. Consumer, sitting at their kitchen table, bemoaning their heavy burden of credit card debt. Suddenly, up pops pitchman Chris Parnell with a unique new program for getting out of debt: “Don’t Buy Stuff You Cannot Afford.”

But Martin and Poehler just can’t seem to wrap their heads around it. “Sounds confusing,” Martin complains.

Poehler is getting excited. “There’s a whole section here on how to buy expensive things using money you’ve saved.”

“Hmm, interesting,” Martin replies. “And where would you get this ‘saved money’?”

Still, the concept is just too strange.

“Okay, let’s see—what if I want something but I don’t have any money?” Martin asks.

“You don’t buy it.”

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The Price is Right

This week’s New Yorker Financial Page features a topic that WealthCycles.com is undoubtedly passionate about—the evolution of financial and economic data. From the dark days of the Great Depression, when a “computer” was a person whose job was to calculate statistics, to the lightning-speed computers of today, economic data has undergone a vast transformation.

James Surowiecki, in his latest Financial Page:  

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The Interest Rate Mind Trap

As confidence in the Federal Reserve falls to the lowest ebb in years, the Fed has spent time taking steps to reign in the distrust and scathing criticisms that have been launched towards America’s central bank. The first step is to reign in “Quantitative Easing,” a program in which the Federal Reserve created new currency to purchase bonds of all stripes in U.S. markets. The aim of the program was to drive interest rates down to spur lending—which, in theory, would prop up the U.S. job market.

But what worked out so neatly in the Fed’s mathematical equations didn’t work so well in the real world—unemployment stayed high while food and commodity prices shot up around the world. The second iteration of Quantitative Easing, dubbed “QE 2,” is set to end at the close of this month. With that, the Fed is hoping to quash the criticisms that have been leveled at the U.S. central bank.

With “QE2” ending, many people are speculating that interest rates will shoot up—driving up the price of borrowing and interest rates—the yields on government bonds.

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Want More Jobs? Let Free Market Go to Work!

 

The latest unemployment and jobs numbers, unemployment up to 9.1% and fewer than 54,000 non-farm jobs created in May, as reported by the Wall Street Journal this morning, have dashed analysts’ dreams for a blooming spring economic recovery, just as unseasonable rain, hail and tornadoes are dumping on the dreams of June brides in much of the United States.

Most mainstream analysts are calling the bad news a temporary phenomenon, resulting from high commodities prices (thanks largely to the U.S. Fed’s currency-inflating activities); supply-chain interruptions caused by the Japan quake; and yes, the out-of-whack spring weather. Few see, or will admit to seeing, the slow-down as anything more substantial or lasting. But a few brave voices point out that, even discounting obstacles that probably will resolve in a few months, there are significant underlying problems that will not be so quick or easy to overcome.

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While The Federal Reserve Looks Back, We Need To Look Forward

 

There is a article today by the New York Federal Reserve about the mistake of 1937.

The gist of the blog post states that when FDR took office there was a policy of reflation. The idea was to re-inflate prices to their pre-depression levels and that this reflation would help end the depression.

This policy was supported by “an aggressive increase in government spending, the maintenance of large deficits, the abandonment of the gold standard, and monetary easing.”

The blog post goes on to admit, “If we accept the account of modern macroeconomic models, this reflationary policy mix can be very expansionary once the short-term interest rate is constrained at zero (as it was at the time). Why? Because at zero interest rates, if people start expecting that prices will rise instead of continuing to fall, the real rate of interest—a critical determinant of aggregate spending—turns from positive to negative. Thus, it becomes economical to spend money rather than save it.

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Future Looks Fine From Fantasyland



Does it ever seem like economists and political leaders—say U.S. Federal Reserve Chair Ben Bernanke or Treasury Secretary Timothy Geithner, for example—are lost in “Fantasyland”?

This clip from the 1986 film comedy “Back to School” features Rodney Dangerfield in the role of rich businessman Thornton Mellon, who has enrolled in college to try to support his discouraged student son. In this scene, Mellon sits in an economics class as an ivory-tower professor lectures the class on creating a fictional business, beginning with constructing the physical plant.

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