Budget Deficits Soar Out of Control in Eurozone, Germany, US, UK, Japan; Yen’s Last Hurrah

by Michael Shedlock

Budget deficits are soaring and printing presses are running at full steam everywhere you look including Germany and the Eurozone countries. Please consider Recession Upends German Zeal for Fiscal Prudence.

It has come to this: Germany will almost certainly have a bigger budget deficit next year than Italy will. Traditionally, Germany is the Continent’s keeper of fiscal rectitude, perpetually fretting that the Italians and other free-spending Southern Europeans are about to undermine the euro and rekindle inflation by not reducing their red ink.

But in 2010, the German deficit is expected to total 6.5 percent of its gross domestic product, while the Italian gap is forecast at 6.2 percent of G.D.P., according to Deutsche Bank.

The German shift underscores just how profoundly the economic and political situation has changed in Berlin, as well as how desperate Chancellor Angela Merkel is to restore growth in Europe’s largest economy as she begins her second term.

Given the longstanding aversion to borrowing and spending that has shaped German fiscal policy since the great hyperinflation of the Weimar era during the 1920s, Mrs. Merkel and her new finance minister, Wolfgang Schäuble, have set off a fierce debate by proposing to cut taxes by 24 billion euro, or $35.9 billion, in 2010 and 2011, rather than immediately attack the country’s projected budget gap.

The terms of the treaty that created the euro currency are supposed to limit each country’s deficit to no more than 3 percent of its G.D.P. None of the 16 countries that use the euro are expected to meet that goal soon, however, with the typical budget deficit projected to reach a record 6.9 percent of G.D.P. next year, according to the European Commission.

But for all the efforts to keep everybody on board, Mrs. Merkel could be on a collision course with much of the business community, as well as Axel A. Weber, the head of the Deutsche Bundesbank, who sits on the governing council of the European Central Bank in Frankfurt.

In a speech last month, Mr. Weber set 2011 as a crucial deadline for Europe to begin digging out of the stimulus measures and deficit spending now under way.

“Given the enormous rise in public deficits and the strain this will put on future budgets, the fiscal exit strategy will have to kick in as soon as the recovery has firmed up, which means no later than 2011,” he said.

Among ordinary Germans, the desire for fiscal discipline still runs deep as well, setting the stage for further tensions down the road if the economy lags.

A poll published last month by Forsa, the independent polling institute, showed that only 22 percent wanted tax cuts if they would lead to a wider budget deficit and more public borrowing. Nearly 70 percent were against the idea.

Moreover, a new law limits federal deficits to 0.35 percent of gross domestic product from 2016 onward and no longer allows the federal states to run deficits at all from 2020 onward.

I am all in favor of cutting taxes but the problem is government spending.

Not a single country is the Eurozone is close to the 3% budget deficit pledge required to adopt the Euro. Does anyone think the Eurozone countries will adopt balanced budgets by 2020? I don’t but we can hope.

Right now, Europe, including Germany looks like a basket case except compared to the US and Japan.

US Federal Deficit As Percent Of GDP

Inquiring minds are looking at a chart of US Federal Deficit As Percent Of GDP.

The 2009 projection is a whopping 12.93% and 2010 sits at 8.54% compared to a 6.9% Eurozone projection for 2010.

Japan’s Deficits

The Wall Street Journal is asking Can DPJ Rein In Japan’s Deficits?

The DPJ campaigned on a platform of people-first social services, promising to boost domestic demand by easing the financial burden on households with a child-care allowance, health-care changes and the elimination of highway tolls.

The proposals are expected to cost some seven trillion yen, or around $75 billion, in the fiscal year starting April 2010, rising to 16.8 trillion yen in the fiscal year ending March 2014.

As it stands, next year’s initial budget is on track to require 21.9 trillion yen to finance Japan’s public debt, or about 170% of gross domestic product, the highest among industrialized nations, the Finance Ministry said Monday.

According to Stratfor’s analysis of Japans’s Budget “Further deficit spending will push Japan’s budget deficit above the 8.5 percent of GDP recorded in 2008 and the government debt of 170 percent of GDP even further into uncharted territory.”

Stratfor’s total was before the landslide victory for the DPJ in Japan.

The victors have an emotive name for it: seiken kotai, or regime change. It came in brutal fashion on Sunday August 30th when Japan, Asia’s richest democracy, dumped the party that has ruled it for almost all of the last 53 years and gave a huge win to one that until recently had little idea of how it would govern.

In a historic result, unofficial results showed that the Democratic Party of Japan (DPJ), a leftist grouping of ruling-party renegades, social democrats and socialists, was heading for a landslide.

It is led by Yukio Hatoyama, a mild-mannered career politician likely to be the next prime minister. He promises a government less beholden to the powerful civil service, wants to temper the free market and is keen to dole out cash to the disadvantaged in the economically stagnant and ageing country.

Good luck with that ideology.
Japan looks like a basket case compared to anything else, even the US.
Deficits will crush Japan far sooner than the US in my opinion.

Yen’s Last Hurrah

Please consider Rising Debt a Threat to Japanese Economy.

How much debt can an industrialized country carry before the nation’s economy and its currency bow, then break?

The question looms large in the United States, as a surging budget deficit pushes government debt to nearly 98 percent of the gross domestic product. But it looms even larger in Japan.

Here, years of stimulus spending on expensive dams and roads have inflated the country’s gross public debt to twice the size of its $5 trillion economy — by far the highest debt-to-G.D.P. ratio in recent memory.

Just paying the interest on its debt consumed a fifth of Japan’s budget for 2008, compared with debt payments that compose about a tenth of the United States budget.

Yet, the finance minister, Hirohisa Fujii, suggested Tuesday that the government would sell 50 trillion yen, about $550 billion, in new bonds — or more.

“There’s no mistaking the budget deficit stems from the past year’s global recession. Now is the time to be bold and issue more deficit bonds,” Mr. Fujii told reporters at the National Press Club in Tokyo. “Those who may call this pork-barrel spending — that’s a total lie.”

“Public sector finances are spinning out of control — fast,” said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. “We believe a fiscal crisis is imminent.”

“Japan will keep on selling more bonds this year and next, but that won’t work in three to five years,” said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. “If you ask me what Japan can resort to after that, my answer would be ‘not very much.’ ”

How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.

The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party’s generous welfare agenda — like cash support to families with children and free high schools — could ultimately enlarge budget deficits.

“It’s dangerous for the Democrats to push on with all of their policies when tax revenues are so low,” said Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan. “From a global perspective, Japan’s debt ratio is way off the charts,” he said.

In the long run, even Japan’s sizable assets could fall and eventually turn negative. Japan’s rapidly aging population means retirees are starting to dip into their nest eggs — just as government spending increases to cover their rising medical bills and pension payments.

“The yen is set to enter a long decline” in both stature and value as investors lose confidence in Japan, said Hideo Kumano, chief economist at the Dai-Ichi Life Research Institute in Tokyo.

Considering the state of Japan’s finances and economy, Mr. Kumano said, the yen’s recent strength against the dollar “isn’t an affirmation of Japan — it’s the yen’s last hurrah.”

UK Debt Also Soars Out Of Control

Inquiring minds are also interested in a UK Government Debt & Deficit Snapshot.

In the financial year 2008/09 the UK recorded a general government deficit of £101.3 billion, which was equivalent to 7.1 per cent of gross domestic product (GDP).

Bear in mind those numbers are for 2008/2009. Think they get any better? I don’t.

Now let’s consider something that has no budget deficit.

Gold Weekly

click on chart for sharper image

See any fiat currencies above that you like? Assuming you don’t, I don’t either. Moreover, I think the Yen is the worst of the lot on a relative basis. I also think the Yen is likely to have a serious currency crisis before the US.

Time will tell.

In the meantime, if you are looking for an explanation for gold’s strength that goes beyond the tired one-sided dollar bashing analysis routinely offered most everywhere you look, now you have it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post ListMike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

What’s Gold’s Next Stop?

11/11/2009

After hitting our first upside target of $1,110 two days ago, gold prices backed off but still managed to close at their best levels today for a new record high close in New York basis the spot gold.

The question now is, what’s going to happen to gold after it hit our first target level?

The main trend continues to be positive and I believe that any pullback in this market should be met with good support. It is possible that we could see a pullback of $20-$25 which would not change the overall positive trend of the market which we see continuing until the end of the year.

As readers of this blog know, we have an upside target zone of $1,250-$1,300 an ounce for gold. While that target zone is still in place, we believe that the huge “energy field” that we’ve discussed in our earlier gold videos is capable of pushing this market higher.

In this new video I explain some of the areas that I’m looking at and also some of the places where you can place tight stops to lock in profits.

Click here to watch

As always the videos are free to watch and there is no need to register. I would love to hear your views on gold in our Trader’s Blog comment section.
All the best,

Adam Hewison
President, INO.com
Co-creator, MarketClub

New Rules and More Lies Hide Cancerous Commercial Real Estate Loans

by Michael Shedlock

Commercial real estate is blowing up so what do regulators do? The answer of course is to come up with new rules and regulations that will allow banks to ignore losses.

On October 31 the Wall Street Journal reported Banks Get New Rules on Property.

Federal bank regulators issued guidelines allowing banks to keep loans on their books as “performing” even if the value of the underlying properties have fallen below the loan amount.

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are “experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.” Restructurings are often in the best interest of both lenders and borrowers, the guidelines point out.

The new guidelines are targeted primarily at the hundreds of billions of dollars worth of loans that are coming due that can’t be refinanced largely because the value of the properties have fallen below the loan amount. In many of these situations, the properties are still generating enough income to pay debt service.

Banks have generally been keeping a lid on commercial real-estate losses by extending these mortgages upon maturity. However, that practice, billed by many industry observers as “extending and pretending,” has come under criticism by some analysts and investors as it promises to put off the pains into the future.

Now federal regulators are essentially sanctioning the practice as long as banks restructure loans prudently. The federal guidelines note that banks that conduct “prudent” loan workouts after looking at the borrower’s financial condition “will not be subject to criticism (by regulators) for engaging in these efforts.” In addition, loans to creditworthy borrowers that have been restructured and are current won’t be reclassified as “high risk” by regulators solely because the collateral backing them has declined to an amount less than the loan balance, the new guidelines state.

Critics say the new rules are yet another example of a head-in-the-sand approach by regulators, pointing to the relaxed accounting standards last year that enabled banks to avoid marking the value of the loans down. This is doing long-term damage to the economy, they say, because it ties up bank capital, preventing them from resuming lending.

Rush To Lie

With new rules designed to encourage more lies firmly in place, it should be no surprise to see Banks Hasten to Adopt New Rules.

Banks are moving quickly to restructure commercial mortgages under new U.S. guidelines that are more forgiving of battered property values and can help banks avoid bigger losses.

Citigroup Inc., regional bank Whitney Holding Corp. and other lenders around the country are planning to review loans now considered nonperforming to determine if they can be reclassified under the guidelines announced Oct. 30 by bank, thrift and credit-union regulators, according to bank executives and people familiar with the matter. The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital.

“It’s a positive all the way around,” said James Smith, chief credit officer for National Bank of South Carolina, a unit of Synovus Financial Corp.

Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. The flexibility extended by regulators will apply to $110 billion to $130 billion of loans, he said.

The guidelines are controversial, with critics accusing the U.S. government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems.

Regulators respond that they are being prudent, adding that a crackdown will occur at any banks misinterpreting last month’s announcement as an opportunity for leniency.

“We will push banks to be realistic [about losses] and will drag them out of denial if that’s what we need to do,” Tim Long, senior deputy comptroller at the Office of the Comptroller of the Currency, said in an interview Tuesday.
Regional and small banks are the most likely financial institutions to benefit from the guidelines because of their exposure to commercial real estate. More than 2,600 banks and thrifts have commercial real-estate-loan portfolios that exceed 300% of total risk-based capital, according to an analysis of regulatory filings by The Wall Street Journal. Nearly all of those institutions have less than $5 billion in assets.

Regulators consider the 300% threshold a red flag, though it doesn’t necessarily mean the banks are in danger of failing. Risk-based capital is a cushion that banks use to cover losses. Commercial real-estate woes contributed to 100 of the 120 bank failures this year, according to Foresight Analytics.

2,600 banks and thrifts have commercial real-estate-loan portfolios that exceed 300% of total risk-based capital and regulators ignored it every step of the way. Now that loan losses are soaring, regulators came up with new rules so that banks can pretend the losses are not real.

These kind of reporting games do not really help anyone. All the pretending does is prolong the agony. Banks know the true score even if investors don’t. Thus, such measures to free up capital for banks to lend will not work here anymore than the same shell games encouraged lending in Japan.

The fact that regulators are resorting to such shell games is just further proof as to how weak the financial system is. This is an effort by Bair to stem the tide of bank takeovers.

However, the time to do that was before (not after) 2,600 banks accumulated commercial real-estate-loan portfolios exceeding 300% of total risk-based capital.

Lies “A Positive”

“It’s a positive all the way around,” said James Smith, chief credit officer for National Bank of South Carolina, a unit of Synovus Financial Corp.

Spoken like a bank on life support, trading at $2, with with lots of problems. My suspicions took less than 30 seconds to confirm.

Please consider Toxic Loans Topping 5% May Push 150 Banks to Point of No Return.

More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Synovus, plagued by defaulting construction loans in the Atlanta area, said nonperforming loans rose to 5.4 percent in the second quarter from 5.2 percent the previous period. Disposals of nonperforming assets reached $404 million in the quarter ended in June, the Columbus, Georgia-based company said.

Synovus is selling troubled loans and will continue its “aggressive stance on disposing of nonperforming assets” as long as the level is elevated, spokesman Greg Hudgison said in an e-mailed statement.

Thanks to “new rules” that extend and pretend, Synovus will no longer have to be so aggressive in disposing assets. It can pretend it is “well capitalized” for a while longer while regulators wink and nod and give the thumbs up sign that everything is just fine, while cancerous loans eat a Snovus’ insides.

Note how the Fed and FDIC always seek to buy time, even when buying time does nothing but make the problems worse.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

 

Peter Schiff on Gold

AUTHOR of 2007’s Crash Proof: How to Profit from the Coming Economic Collapse, Peter Schiff is an investment adviser, blogger and frequent commentator for dozens of financial print and television media outlets, reports Hard Assets Investor.

President of Euro Pacific Capital, Peter Schiff served as an economic adviser to Republican candidate Dr. Ron Paul during his 2008 presidential campaign, and he is currently running for US Senate, opposite incumbent Democrat senator Chris Dodd in Connecticut.

While at the recent Inside Commodities conference recently, Hard Assets associate editor Lara Crigger grabbed a few minutes with Peter Schiff to take his pulse on the global economic markets, including his thoughts on runaway inflation, the Dollar’s future as a reserve currency, and a possible return of the Gold Standard…

HardAssetsInvestor: Earlier today at the “Commodities 2010: The Road Ahead” panel, you said you think the US is headed for runaway inflation, rather than deflation. Why?

Peter Schiff, president, Euro Pacific Capital: We’re headed that way because we’re creating too much money. Interest rates are too low. The Federal Reserve continues to expand its balance sheet. It continues to buy up assets that it shouldn’t be buying. That is basically the poison that the government has decided to swallow.

We have a choice between allowing a deflationary bust, allowing asset prices to collapse, allowing businesses to fail and allowing the recession to worsen in the short run; or we can try and postpone some of that pain by creating inflation, and deal with the inflation pain down the line. The latter is what the government has chosen. Unfortunately, they chose wrong, from the point of view of the American consumer, the American worker, the American saver. The American economy is going to pay dearly for the price of re-electing some of these incumbent politicians.

Crigger: On that same panel, you also said you thought the Dollar would eventually lose its status as the world’s reserve currency. What do you think it will be replaced with?

Peter Schiff: I don’t know. Hopefully nothing. I don’t think we should have a reserve currency.

Crigger: Why not?

Peter Schiff: Well, it’s led to a lot of problems in the global economy. When the Dollar was backed by Gold, and was redeemable by gold, it being the reserve currency was okay. But at the moment, there are no currencies backed by gold. So I think that foreign central banks should hold gold as their key reserve, and not another currency. They can also have some foreign currencies as part of their overall reserves, but I think that gold should play a much bigger role in giving value to currency.

Remember, you can’t have a monetary system without money. And money is gold. Just printing paper – there’s nothing behind that. There’s nothing intrinsic there. It always leads to chaos. If you can just print money at will, it has no scarcity. Then you have inflation; you have these asset bubbles; and you don’t have a well-functioning global economy. Hopefully we don’t anoint another reserve currency.

Crigger: But what about a basket of currencies?

Peter Schiff: Well, foreign governments can hold baskets of currencies, but I wouldn’t want something run through the International Monetary Fund, where they’re creating baskets and so on. I don’t want to interject the IMF in there.

But certainly, the only other aspect would be how you price certain key commodities. Just because oil is priced in Dollars doesn’t mean that currency is or should be a reserve currency. It just means that’s the currency they’re looking to price in. But they can also price in Gold Bullion.

I think pricing in the Dollar is going to change, because as the Dollar becomes an increasingly weak currency, if you’re going to price things in Dollars, that means you’re going to have to constantly raise your prices in order to retain your value. It might be better for countries like the Opec oil nations to pick a currency that’s more stable, so that they have more transparency in their pricing. I think that will happen across the board for other commodities; those that are now priced in Dollars might end up being traded in other currencies with a more stable value.

Crigger: Does this mean you’re advocating a return to the Gold Standard?

Peter Schiff: Well, the gold standard works. What we have now does not. Our founding fathers put us on a gold standard for a good reason, because paper currency existed around that time. It had existed in the past. And they were familiar with how miserably it had failed. So they wanted to set us on a gold standard. And we became the world’s wealthiest nation while on the gold standard. We were on the gold standard for all of the 19th century, which was our fastest-growing century (more so than the 20th century). We had the Industrial Revolution; we built up our arsenals and our democracy – we won World War II on the gold standard. We were actually on the gold standard up until Richard Nixon ended it in 1971. So to say that the gold standard is somehow arcane, or that you can’t have economic growth on the gold standard – that’s all nonsense.

It’s the politicians who don’t like gold, because Gold imposes discipline on politicians. It keeps them honest, and politicians don’t want to be honest. They want to get elected.

Crigger: So which commodities do you think will do well in 2010?

Peter Schiff: Gold!

Crigger: Gold, of course. Anything else, though?

Peter Schiff: I like them all. Agriculture. Silver. Silver will probably do better than gold, actually.

Crigger: Because of its industrial applications?

Peter Schiff: Yeah, and I think it has some interesting factors. Usually in bull markets for precious metals, you should look at the ratio of gold to silver. At the moment, silver looks cheap to me.

Crigger: Thank you very much for your time! Enjoy the conference.

Looking to Buy Gold today? “If there’s an easier way, I’ve yet to find it,” says one BullionVault user…

Hard Assets Investor, 10 Nov ‘09

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New Labor Trend: Day Labor Work & Competing Against Immigrants

The New Career Path: Day Labor Work, Competing Against Immigrants

by Michael Shedlock

In what is described as the modern day equivalent of selling apples during the great depression, U.S. citizens are joining immigrants in store parking lots competing for a few hours of day labor at places like Home Depot.

Inquiring minds are reading about The new faces of day labor.

In the latest sign of the Las Vegas Valley’s economic free fall, U.S. citizens are starting to show up in the early mornings outside home improvement stores and plant nurseries across the Las Vegas Valley, jostling with illegal immigrants for a shot at a few hours of work.

Experts say the slow-starting but seemingly inexorable trend is occurring nationwide.

“It’s the equivalent of selling apples in the Great Depression,” said Harley Shaiken, chairman of the Center for Latin American studies at the University of California, Berkeley.

Pablo Alvarado, executive director of the Los Angeles-based National Day Laborer Organizing Network, said he has been seeing the same thing elsewhere.

“It’s happening, though still not in massive numbers,” Alvarado said. In the past six months or so, he has heard of “americanos” on the street corners and parking lots of Silver Spring, Md., Long Island, N.Y., and Southern California locations.

“It’s just beginning,” he said. “But I think it’s only going to increase.”

At Home Depot on Decatur Boulevard north of Tropicana Avenue, Jose said the same thing, adding that “it’s never more than three or four, but they’re coming out.”

Farther south, in front of Moon Valley Nursery on Eastern Avenue, Israel said a couple of “americanos” — white and black, he added — have come out for work in recent months. “But they tend to stay only a few days.”

As a salesman at Moon Valley, Mike Fugitt’s job includes making sure the laborers don’t come into the nursery’s parking lot, because their presence draws complaints from some customers. In the past three months or so, he said, more of those laborers have been telling him, “But I’m an American.” That includes some Hispanics, he added. “But I treat them all the same; they can’t be trespassing,” he said.

Workers at all the sites said the presence of the americanos hasn’t made work scarcer or produced any conflict. Some suggested that people hiring day laborers prefer Hispanics anyway, because of their reputation as hard workers.

Shaiken said shaking up the mix at day labor sites may eventually produce conflict in the greater society. “It essentially shreds the argument that Americans don’t want certain jobs,” he said.

In the current economy, he added, “we’re almost sure to see die-hard opponents of illegal immigrants seize on the fact that we have legal workers in day labor markets,” heating an already-inflamed debate.

At the same time, Shaiken said, the issue won’t become central to the debate before Congress over what is known as comprehensive reform, including a pathway for legalizing millions of workers. “The point is, do we really want a labor market with day labor work as a career path?

Antonio Bernabe, day labor organizer for the Coalition for Humane Immigrant Rights of Los Angeles, said the appearance of more and more U.S. citizens seeking day labor work on corners and in parking lots poses new challenges for organizations such as his. In recent months, he said, he has found himself explaining to a whole new group the legal rights of workers, as well as approaching local authorities to discuss the entry of new people into what he called “the world of day labor.” That group includes blacks and Asians, he said.

Another difference is that now he’s giving those explanations to laborers in English.

Sprint plans to cut up to 2,500 jobs

In other news Sprint plans to cut up to 2,500 jobs.

Sprint Nextel Corp. on Monday said it will cut 2,000 to 2,500 jobs, mostly before the end of the year, as it keeps losing subscribers.

The wireless carrier, based in Overland Park, Kan., said the goal is to cut labor costs by at least $350 million per year.

Sprint shares rose on the announcement, closing up 58 cents, or 20 percent, at $3.43.

The company started the year with about 56,000 employees. It then cut 8,000 jobs in the first half of the year. It is also transferring 6,000 employees to LM Ericsson AB, a Swedish contractor that is taking over management of Sprint’s network.

The new career path for those Sprint employees is now laid out.

More Layoff Announcements

• Electronic Arts to Cut 1,500 Jobs After Latest Loss
• Pfizer to lay off 600 in St. Louis
• Novell sacks between three and four Percent staff, cuts benefits
• Royal Dutch Shell not ruling out Canadian layoffs in 10% cut

Those are all recent announcements and I am sure there are dozens more. Note the wide variety of industries affected.

Reflections On Obama’s Job Creation Efforts

Let’s take another look at the Obama Administration’s job creation efforts.Please consider Obama creates 640,329 jobs at a cost of $323,739.83 per job

.

The US economic stimulus programme has directly created or saved 640,000 jobs so far, the White House said on Friday as it battled to find ways to show that its $787bn package was working, despite persistently high unemployment.

Math To Date

Funds paid out so far = $83.8 billion + $52.1 billion + $71.4 billion = $207.3 billion
$207,300,000,000 / 640,329 = $323,739.83 per job created

Stimulus Cost/Benefit Analysis

Several people emailed me that I was ignoring other benefits. One bright person emailed that I was ignoring hidden costs. Let’s look at both.

We did fix some roads that did not need fixing. Perhaps we even managed to fix some roads that did need fixing. One person talked of a new airstrip. OK, but was it needed? How much did it cost? Will it bring in any jobs or revenues? At what cost in jobs to the neighboring town?

Let’s ponder other unseen negatives.

Taxes are going up for small businesses. That will reduce hiring. Interest is added to the national debt. That will cost economic growth in the future. Government spending takes money away from the private sector. And topping it off, most of the so-called stimulus (if not all of it), created short-term gains at long term cost. Both cash-for-clunkers and housing tax credits are in that category.

Here is a bonus problem most have not figured out: The tax credits stimulated housing when there is an oversupply already. Some received tax credits for houses they would buy anyway, the others left rentals to buy into inflated housing prices.

As a direct consequence of the above, rental vacancies are rising, rents are falling and there is increased pressure on commercial real estate prices as a direct consequence.

Total it all up and the true cost of all the various stimulus programs is far in excess of $323,739.83 per job created. Indeed, the net effect will help solidify the new career path toward day labor rates.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post ListMike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Gold Investment for Retired People

ONE QUESTION I received recently goes to the heart of what people – a lot people but especially older, retired people – are going through, writes Chris Weber in Daily Wealth.

“My wife and I are in our mid 70s. We have about 60% of our funds in gold, silver bullion, some gold and silver stocks, and the balance in cash. We need current cash income from US Dollar with safe dividends – am I dreaming? Can you help?”

In a world of zero interest yields and stock markets paying very low dividend yields, it is now very hard to earn money on your money.

Indeed, guaranteed high yields are almost impossible to get. A while ago, I told my readers about GOV, the real-estate investment trust that rents to government agencies. That was paying 7%. The problem with all stocks, and all REITS, is that stocks can fall by much more than 7%.

So where does that leave a retired couple in their 70s, or anyone who no longer has a job and hopes to live on interest yield as they have in the past? It leaves them in bad shape. Until and unless interest rates on savings rise again, they are going to have to make some very tough choices.

The most direct thing I can recommend is quite obvious: If you can, cut your living expenses. Use whatever advantages you can. For instance, the very fact that you are retired means that you are not tied to a place for a job. You are, theoretically, free to move to a place with a lower cost of living.

In fact, I was just talking to a retired couple who have done just that, not once, but twice over the past two years. As interest rates have fallen, they moved first from one of the highest cost of living areas on the globe back to their home country, the United States. In doing so, they cut their monthly living costs roughly in half.

However, as far as the US goes, this was one of the higher cost of living places. Then, a year later, they moved again, to Florida, where the living costs have become even cheaper. In fact, they said they had cut their cost of living by half again.

Now, for various reasons you may not be able to do likewise. But take stock on what you can do. The central fact that faces many if not most people in this economy is that they have to look at ways to change their lives so that their monthly expenses fall as much as possible, while still being able to afford a decent life.

This particular couple, who had cut their expenses in half and then later cut them in half again, is now well able to live on “accounts receivable.” That is to say, on the money that they receive from their retirement programs and any other income, which, though it may be modest, is enough to cover their expenses. In the past, this was not enough without being supplemented by nice, safe interest yields. But those yields are not there anymore.

And the sooner one faces that fact, the better.

The overall thing you have to realize is that the US is quickly becoming a poorer country than it has been since the 1930s. If you are in your mid-70s that means you were born in the early 1930s, so you do not remember the really hard times your parents may have faced. Well, those times are now returning, and may even be worse.

I can’t sugarcoat my message. Everyone in this situation has to be prepared to radically change their standard of living. But as Warren Buffett has so rightly said, your standard of living and your quality of life are two different things. You can still live a very rich life while keeping your expenses down.

Of course it is easier for some people than for others. I know an 88-year-old man – my father, in fact – who, despite the fact that he was born with a silver spoon in his mouth, is now, at this time in his life, extremely happy to go to the local library every few days and get large-print books and read them. In his case, he spent his teens, 20s, and 30s living the high life. Now, in his 80s, he is very happy with a simple life.

His cost of living is almost astonishingly low, and yet he has the standard of life that he wants. Nothing bothers him, and he is an extremely happy man. So I suppose it comes down your flexibility, your outlook, and your general personality.

I think the core of everyone’s holdings, regardless of what age they are, should be a mixture of cash and gold. In your 70s, you cannot afford to take chances in a stock market that has been extremely volatile. If it came down to a choice of what to convert into cash first, I would say the silver stocks first, then the gold stocks, and then the physical silver. I think silver is dynamite, both in the positive sense when you say “That idea is dynamite,” and the negative sense where dynamite can blow up in your face.

In other words, I would get into a position as much as you can of cash and Physical Gold. Then cut your expenses as much as you can, live off the cash, and if necessary, sell a bit of gold.

Want to own physical Gold but don’t want the hassle, costs or risk of trying to keep it secure at home? Learn more about BullionVault here…

Chris Weber, 10 Nov ‘09

Starting with $650 saved from his newspaper round, Chris Weber began buying and trading gold at age 16. A millionaire by 20, he switched into foreign currencies and debt investments as the US Fed finally started to tackle inflation in the early ’80s. Now he shares his trades and insights with private investors through the Weber Global Opportunities Report.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

German Business Confidence Slides

by Chuck Butler

The non-dollar currencies didn’t move much yesterday, the euro (EUR:USD) bumped up and down against the 1.50 figure, while the Aussie dollar (AUD:USD) did the same against 93-cents, and the Swiss franc (USD:CHF) against parity… So the currencies are trading in the same clothes they went to bed in last night!

The Big Dog, euro, did attempt to move stronger into the 1.50 level, but that move was thwarted by a poor reading of German Investor Confidence this morning. German Investor Confidence – as measured by the think tank ZEW – reported that their index had fallen to 51.1 this month versus the 56 in October. Most of those Germans surveyed said that they expect the economic recovery to be slow once the government removes the stimulus in the economy. So… Previous euphoria is being replaced by realism… But that’s OK… Better to have a grip on reality than to go around thinking that everything is seashells and balloons.

But, the ZEW report hasn’t dampened the euro’s spirit too much, as the single unit has remained above 1.50 even after digesting the ZEW… But looks vulnerable.

The ZEW report gets all the ink… But on the back page we can find that German industrial production increased 2.7% in September compared with August, which saw a 1.8% rise.

Hey did you know that the US is auctioning off another $81 billion in Treasuries this week? Yes, this total is lower than the recent auctions the US has held… But still… $81 billion isn’t anything to ignore! However, with the nutcases in the world, shooting off missiles, and ramping up nuclear capabilities, there are still some people who believe that US Treasuries are a “safe haven”. Of course I’ve proven that those who believed this and bought during the financial meltdown, lost tons of money… But don’t let that get in they way of a “good story”… And so it will be, that this auction will not be the “one that fails”… But, in my opinion, we will experience that at some time in the next year, especially given the government deficit spending!

And… If an auction of US Treasuries fails… Well… Being long Treasuries isn’t going to look too much like a “safe haven” position!

I was supposed to give a presentation last week in Los Cabos on the Treasury Bubble… Of course, we all know that I was not there, so I didn’t give the presentation… UGH!

OK… There was all kinds of rumbling, stumbling, bumbling going on in the UK overnight, as the rumors were flying that the ratings agency, Fitch, said it would lower the UK’s AAA rating… Finally it was confirmed that this was stated in an interview with Reuters, and not an official communiqué by Fitch… But, dear reader, when there’s smoke like this, you can bet there’s fire! The pound sterling (GBP:USD) has taken this news like a blow to the mid-section…

In Australia overnight… Australian Business Confidence rose to near 6-year highs for the index… October’s index reading was 16, which was plus 2 from September’s index reading. The businesses surveyed strongly believe that the Reserve Bank of Australia will once again raise rates in December… I loved this quote from the Australian Trade Minister, who said, “Despite the Aussie dollar going up, manufacturing has improved, and manufacturers just have to learn to accommodate this sort of thing going forward using hedging.”

That’s right! Tell ’em! Deal with this Aussie dollar strength and quit your whining! I love it!

The Canadian dollar/loonie (USD:CAD) continues to push higher versus the green/peachback (dollar)… This is all commodity related, as the data in Canada continues to be mixed, with the Bank of Canada (BOC) keeping rates in line with the US, thus keeping the loonie from looking attractive. But, that’s OK… With gold inching higher and higher, oil hovering around $80, and other commodities moving higher in price, the loonie can get its lipstick from commodities to look attractive!

Speaking of gold… I saw this quote and thought it hit the nail on the head… “It’s not that gold has changed, but gold buyers have changed,” said Suki Cooper, a precious-metals strategist for Barclays Capital. “It’s a structural shift we’re seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins.”

That’s right! Gold hasn’t changed… It still has to be mined out of the ground, it can’t be made by any alchemist, it has to be mined… And the demand in gold has skyrocketed in the past couple of years, thus pushing people to send in their gold bracelets, necklaces, and rings to cash in the gold price surge… So… One group of people over here is selling any and all gold they can get their hands on, and one group over there is buying it for a rainy day.

Gold’s recent rise has been spectacular to say the least, moving through the $1,000 handle to $1,100 very quickly. I think there are two things in play here… 1. The demand for gold driving the price higher, and 2. The dollar’s weakness. I heard a guy say the other day that “gold hasn’t gained; the dollar has gotten weaker”… What? Nothing about the demand?

We don’t have any “real data” today to speak of in the US but we’ve got a truckload of Fed Heads out on the speaking circuit. Lockhart, Yellen, Rosengren, Tarullo, and Fisher all will be speaking about something today. Even former Fed Chairman, Big Al Greenspan is going to speak today. No telling what he might say! Of course, if the subject comes up regarding the financial meltdown, he’ll say that he had nothing to do with it! HOGWASH! And we all know it! So, it doesn’t matter how many times he tries to absolve himself from any responsibility for the financial meltdown, we all know that at the root of it all… Sits Big Al Greenspan.

And then there was this… The folks over at Barclays say that they have recalculated the dollar’s share of global currency reserves. The dollar, which once stood at 80% of global reserves, and right before the current weak dollar trend began in 2002, it stood at 73% of global reserves, has fallen to 62.8%. But… Says Barclays… This is almost entirely a result of weaker valuation rather than attempts by central banks to diversify holdings away from the dollar. Hmmmm… Now… I do agree that the euro’s gains versus the dollar in the past seven years would cause quite a bit of slippage in the dollar’s value in terms of reserves held by central banks. But “almost entirely”? I doubt it… One could point at the Reserve Bank of India’s purchase of gold last week… They bought $6.7 billion “worth” of gold… You can’t tell me that wasn’t to diversify their reserves!

OK, to recap… The non-dollar currencies are trading in the same clothes as yesterday. The ZEW German Business Confidence slipped this month, although Industrial Output rose. The US is auctioning off $81 billion worth of Treasuries this week, and the demand for gold is really pushing the envelope in terms of gold’s price!

German Business Confidence Slides originally appeared in the Daily Reckoning on 10/11/2009.

 

What Does the Future Hold For the Dow?

10/11/2009

The Dow jumped to new highs for the year, extending its gains from the lows seen in March.

What does this mean for the future?

The Dow is now within 100 points of being into thin air as it has retraced close to 50% of its down move. The NASDAQ has already done this, and the S&P 500 has come very close to achieving this goal. Clearly the trend continues to be positive for the Dow with today’s new highs. The other two indices, while closing very well and on an upbeat note, must clear their previous highs to start another push to the upside. It remains to be seen whether or not that will take place.

Clearly this is an emotional market that’s been driven more by sentiment then hard economic news.

Having said that, one must take into consideration the perception of the marketplace, and as of right now that perception continues to be friendly towards the long side of these markets.

In my new video I show you some of the key points to look at in terms of where these markets could potentially break down, and possibly reverse to the downside.

Click here to watch

All the best,

Adam Hewison
President, INO.com
Co-creator, MarketClub

The Man Who Predicted The Great Depression

Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy.

By Mark Spitznagel from the WSJ, The Man Who Predicted the Depression,

Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (“The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Government-imposed expansion of bank credit distorts our “time preferences,” or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

“Theorie des Geldes” did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming “A great crash is coming, and I don’t want my name in any way connected with it.”

We all know what happened next. Pretty much right out of Mises’s script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed. The brittle tree snapped. Following Mises’s logic, was this a failure of capitalism, or a failure of hubris?

Continue reading…

Who was Ludwig von Mises?

“Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.”

Ludwig von Mises, Human Action

 

One of the most notable economists and social philosophers of the twentieth century, Ludwig von Mises, in the course of a long and highly productive life, developed an integrated, deduct­ive science of economics based on the fundamental axiom that in­dividual human beings act purposively to achieve desired goals. Even though his economic analysis itself was “value-free” — in the sense of being irrelevant to values held by economists — Mises concluded that the only viable economic policy for the human race was a policy of unrestricted laissez-faire, of free markets and the unhampered exercise of the right of private property, with government strictly limited to the defense of person and property within its territorial area.

For Mises was able to demonstrate (a) that the expansion of free markets, the division of labor, and private capital investment is the only possible path to the prosperity and flourishing of the human race; (b) that socialism would be disastrous for a modern economy because the absence of private ownership of land and capital goods prevents any sort of rational pricing, or estimate of costs, and (c) that government intervention, in addition to hampering and crippling the market, would prove counter-productive and cumulative, leading inevitably to socialism unless the entire tissue of interventions was repealed.

Holding these views, and hewing to truth indomitably in the face of a century increasingly devoted to statism and collectivism, Mises became famous for his “intransigence” in insisting on a non-inflationary gold standard and on laissez-faire.

Effectively barred from any paid university post in Austria and later in the United States, Mises pursued his course gallantly. As the chief economic adviser to the Austrian government in the 1920s, Mises was single-handedly able to slow down Austrian inflation; and he developed his own “private seminar” which attracted the out­standing young economists, social scientists, and philosophers throughout Europe. As the founder of the “neo-Austrian School” of economics, Mises’s business cycle theory, which blamed inflation and depressions on inflationary bank credit encouraged by Central Banks, was adopted by most younger economists in England in the early 1930s as the best explanation of the Great Depression.

Having fled the Nazis to the United States, Mises did some of his most important work here. In over two decades of teaching, he inspired an emerging Austrian School in the United States. The year after Mises died in 1973, his most distinguished follower, F.A. Hayek, was awarded the Nobel Prize in economics for his work in elaborat­ing Mises’s business cycle theory during the later 1920s and 1930s.

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Mises was born on Sept 29, 1881, in the city of Lemberg (now Lvov) in Galicia, where his father, a Viennese construction engineer working for the Austrian railroads, was then stationed. Both Mises’s father and mother came from prominent Viennese families; his mother’s uncle, Dr Joachim Landau, served as deputy from the Liberal Party in the Austrian Parliament.

Entering the University of Vienna at the turn of the century as a leftist interventionist, the young Mises discovered Principles of Economics by Carl Menger, the founding work of the Austrian School of economics, and was quickly converted to the Austrian emphasis on individual action rather than unrealistic mechanistic equations as the unit of economics analysis, and to the importance of a free-market economy.

Mises became a prominent post-doctoral student in the famous University of Vienna seminar of the great Austrian economist Eugen von Bohm-Bawerk (among whose many accomplishments was the devastating refutation of the Marxian labor theory of value).

The Mises Institute’s coat of arms is that of the Mises family, awarded in 1881 when Ludwig von Mises’s great-grandfather Mayer Rachmiel Mises was ennobled by the Emperor Franz Josef I of Austria. In the upper right-hand quadrant is the staff of Mercury, god of commerce and communication (the Mises family was successful in both; they were merchants and bankers). In the lower left-hand quadrant is a representation of the Ten Commandments. Mayer Rachmiel, as well as his father, presided over various Jewish cultural organizations in Lemberg, the city where Ludwig was born. The red banner displays the Rose of Sharon, which in the litany is one of the names given to the Blessed Mother, as well as the Stars of the Royal House of David, a symbol of the Jewish people. Ludwig’s lifelong motto was from Virgil: tu ne cede malis, sed contra audentior ito. Here is a full view.

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During this period, in his first great work, The Theory of Money and Credit (1912) Mises performed what had been deemed an impossible task: to integrate the theory of money into the general theory of marginal utility and price (what would now be called integrating “macroeconomics” into “microeconomics.”) Since Bohm-Bawerk and his other Austrian colleagues did not accept Mises’s integration and remained without a monetary theory, he was therefore obliged to strike out on his own and found a “neo­-Austrian” school.

In his monetary theory, Mises revived the long forgotten British Currency School principle, prominent until the 1850s, that society does not at all benefit from any increase in the money supply, that increased money and bank credit only causes inflation and business cycles, and that therefore government policy should maintain the equivalent of a 100 percent gold standard.

Mises added to this insight the elements of his business cycle theory: that credit expansion by the banks, in addition to causing inflation, makes depressions inevitable by causing “malinvestment,” i.e. by inducing businessmen to overinvest in “higher orders” of capital goods (machine tools, construction, etc.) and to underinvest in consumer goods.

The problem is that inflationary bank credit, when loaned to business, masquerades as pseudo-savings, and makes businessmen believe that there are more savings available to invest in capital goods production than consumers are genuinely willing to save. Hence, an inflationary boom requires a recession which becomes a painful but necessary process by which the market liquidates unsound investments and reestablishes the investment and production structure that best satisfies consumer preferences and demands.

• The Mises Quotation Machine
• The Complete Mises Bibliography
• Who was Mises? by Jörg Guido Hülsmann
• Tributes to Mises by Economists, Journalists, and Others
• Books and Essays by Mises (complete text)
• Songs from the Mises-Kreis
• The Story of the Lost Papers
• Downloadable Photographs of Mises

Mises, and his follower Hayek, developed this cycle theory during the 192Os, on the basis of which Mises was able to warn an unheeding world that the widely trumpeted “New Era” of permanent prosperity of the 192Os was a sham, and that its inevitable result would be bank panic and depression. When Hayek was invited to teach at the London School of Economics in 1931 by an influential former student at Mises’s private seminar, Lionel Robbins, Hayek was able to convert most of the younger English economists to this perspective. On a collision course with John Maynard Keynes and his disciples at Cambridge, Hayek demolished Keynes’s Treatise on Money, but lost the battle and most of his followers to the tidal wave of the Keynesian Revolution that swept the economic world after the publication of Keynes’s General Theory in 1936.

The policy prescriptions for business cycles of Mises-Hayek and of Keynes were diametrically opposed. During a boom period, Mises counseled the immediate end of all bank credit and monetary expansion; and, during a recession, he advised strict laissez-faire, allowing the readjustment forces of the recession to work themselves out as rapidly as possible.

Not only that: for Mises the worst form of intervention would be to prop up prices or wage rates, causing unemployment, to increase the money supply, or to boost government spending in order to stimulate consumption. For Mises, the recession was a problem of under-saving, and over-consumption, and it was therefore important to encourage savings and thrift rather than the opposite, to cut government spending rather than increase it. It is clear that, from 1936 on Mises was totally in opposition to the worldwide fashion in macroeconomic policy.

Socialism-communism had triumphed in Russia and in much of Europe during and after World War I, and Mises was moved to publish his famous article, “Economic Calculation in the Socialist Commonwealth,” (1920) in which he demonstrated that it would be impossible for a socialist planning board to plan a modern economic system; furthermore, no attempt at artificial “markets” would work, since a genuine pricing and costing system requires an exchange of property titles, and therefore private property in the means of production.

Mises developed the article into his book Socialism(1922), a comprehensive philosophical and sociological, as well as economic critique which still stands as the most thorough and devastating demolition of socialism ever written. Mises’s Socialism converted many prominent economists and social philosophers out of socialism, including Hayek, the German Wilhelm Ropke, and the Englishman Lionel Robbins.

In the United States, the publication of the English translation of Socialism in 1936 attracted the admiration of the prominent economic journalist Henry Hazlitt, who reviewed it in the New York Times, and converted one of America’s most prominent and learned Communist fellow-travelers of the period, J.B. Matthews, to a Misesian position and to opposition to all forms of socialism.

Socialists throughout Europe and the United States worried about the problem of economic calculation under socialism for about fifteen years, finally pronouncing the problem solved with the promulgation of the “market socialism” model of the Polish economist Oskar Lange in 1936. Lange returned to Poland after World War II to help plan Polish Communism. The collapse of socialist planning, in Poland and the other Communist countries in 1989, left Establishment economists across the ideological spectrum, all of whom bought the Lange “solution”, mightily embarrassed.

Some prominent socialists, such as Robert Heilbroner, have had the grace to admit publicly that “Mises was right” all along (the phrase “Mises was Right” was the title of a panel at the annual 1990 meeting of the Southern Economic Association at New Orleans).

If socialism was an economic catastrophe, government inter­vention could not work, and would tend to lead inevitably to socialism. Mises elaborated these insights in his Critique of Interventionism (1929), and set forth his political philosophy of laissez-faire liberalism in his Liberalism (1927).

In adition to setting himself against all the political trends of the twentieth century, Mises combated with equal fervor and eloquence what he considered the disastrous dominant philosophical and methodological trends, in economics and other disciplines. These included positivism, relativism, historicism, polylogism” the idea that each race and gender has its own “logic” and there­fore cannot communicate with other groups), and all forms of irrationalism and denial of objective truth. Mises also developed what he considered to be the proper methodology of economic theory–logical deduction from evident axioms, which he labeled “praxeo­logy”, and he leveled trenchant critiques of the growing tendency in economics and other disciplines to replace praxeology and histor­ical understanding by unrealistic mathematical models and statistical manipulations.

Emigrating to the United States in 1940, Mises’s first two books in English were important and influential. His Omnipotent Government (1944) was the first book to challenge the then-standard Marxian view that fascism and Nazism were imposed upon their nations by big business and the “capitalist class.” His Bureaucracy (1944) was a still unsurpassed analysis of why government operation must necessarily be “bureaucratic” and suffer from all the ills of bureaucracy.

Mises’s most monumental achievement was his Human Action (1949), the first comprehensive treatise on economic theory written since the first World War. Here Mises took up the challenge of his own methodology and research program and elaborated an integrated and massive structure of economic theory on his own deductive, “praxeological” principles. Published in an era when economists and governments generally were totally dedicated to statism and Keynesian inflation, Human Action was unread by the economics profession. Finally, in 1957 Mises published his last major work, Theory and History, which, in addition to refutations of Marxism and historicism, set forth the basic differences and functions of theory and of history in economics as well as all the various disciplines of human action.

In the United States as in his native Austria, Mises could not find a paid post in academia. New York University, where he taught from until 1945 until his retirement at the age of 88 in 1969, would only designate him as Visiting Professor, and his salary had to be paid by the conservative-libertarian William Volker Fund until 1962, and after that by a consortium of free-market foundations and businessmen. Despite the unfavorable climate, Mises inspired a growing group of students and admirers, cheer­fully encouraged their scholarship, and himself continued his remarkable productivity.

Mises was also sustained by and worked together with free­-market and libertarian admirers. From its origin in 1946 until his death, Mises was a part-time staff member of the Foundation for Economic Education at Irvington-on-Hudson, New York; and he was in the 1950s an economic advisor to the National Association of Manufacturers (NAM) working with their laissez-faire wing which finally lost out to the tide of “enlightened” statism.

As a free trader and a classical liberal in the tradition of Cobden, Bright, and Spencer, Mises was a libertarian who champ­ioned reason and individual liberty in personal as well as eco­nomic matters. As a rationalist and an opponent of statism in all its forms, Mises would never call himself a “conservative,” but rather a liberal in the nineteenth-century sense.

Indeed, Mises was politically a laissez-faire radical, who denounced tariffs, immigration restrictions, or governmental attempts to enforce morality. On the other hand, Mises was a staunch cultural and sociological conservative, who attacked egalitarianism, strongly denounced political feminism as a facet of socialism. In contrast to many conservative critics of capitalism, Mises held that personal morality and the nuclear family were both essential to, and fostered by, a system of free-market capitalism.

Mises’s influence was remarkable, considering the unpopularity of his epistemological and political views. His students of the 1920s, even those who later became Keynesians, were permanently stamped by a visible Misesian influence. These students included, in addition to Hayek and Robbins, Fritz Machlup, Gottfried von Haberler, Oskar Morgenstern, Alfred Schutz, Hugh Gaitskell, Howard S. Ellis, John Van Sickle, and Erich Voegelin.

In France, General DeGaulle’s major economic and monetary adviser, who helped swing France away from socialism, was Jacques Rueff, an old-friend and admirer of Mises. And part of post-World War II Italy’s shift away from socialism was due to its President Luigi Einaudi, a distinguished economist and long-time friend and free-market colleague of Mises. In the United States, Mises was scarcely as influential. Under less promising academic conditions, his students and admirers included Henry Hazlitt, Lawrence Fertig, Percy Greaves, Jr., Bettina Bien Graeves, Hans F. Sennholz, William H. Peterson, Louis M. Spadaro, Israel M. Kirzner, Ralph Raico, George Reisman, and Murray N. Rothbard. But Mises was able to build a remarkably strong and loyal following among businessmen and other non-academics; his massive and complex Human Action has sold extraordinarily well ever since the year of its original publication.

Since Mises’s death in New York City on October 10, 1973 at the age of 92, Misesian doctrine and influence has experienced a ren­aissance. The following year saw not only Hayek’s Nobel Prize for Misesian cycle theory, but also the first of many Austrian School conferences in the United States. Books by Mises have been reprinted and collections of his articles translated and published. Courses and programs in Austrian Economics have been taught and established throughout the country.

Taking the lead in this revival of Mises and in the study and expansion of Misesian doctrine has been the Ludwig von Mises Institute, founded by Lle­wellyn Rockwell, Jr. in 1982 and headquartered in Auburn, Alabama. The Mises Institute publishes scholarly journals and books, and offers courses in elementary, intermediate and advanced Austrian economics, which attract in­creasing numbers of students and professors. Undoubtedly, the collapse of socialism and the increased attractiveness of the free market have greatly contributed to this upsurge of popularity.

Murray N. Rothbard (1926-1995) was dean of the Austrian School after Mises’s death.

What Is Inflation and How Do You Measure It?

What Is Inflation and How Does One Measure It?

by Michael Shedlock

To understand inflation, one must first understand what money is and how to measure it. Please read What is Money and How Does One Measure It? before attempting to understand what follows.

Unfortunately there is no general agreement as to the definition of inflation. Here are some of the widely used definitions as noted in Inflation: What the heck is it?

Commonly Used Definitions

1. Decline in purchasing power of the currency held
2. Rising prices in general (essentially the same as #1 although some might disagree)
3. Rising consumer prices (CPI)
4. Rising producer prices (PPI)
5. Rising prices due to expansion of money supply
6. Rising prices due to expansion of money supply and credit
7. Expansion of money supply
8. Expansion of money supply and credit

Four of those definitions refer to money supply. That brings up another issue. When one refers to “money supply” are they talking about M1, M2, MZM, Money AMS (Austrian Money Supply), or simply the amount of money they have in their bank account or wallet at the time of the conversation?

Definitions 5 and 6 refer to “rising prices” yet fail to distinguish between consumer prices, producer prices, or simply prices in general. It seems we could easily add a lot more definitions.

Furthermore, some people make no distinction between money and credit but others do as noted by choices 5 thru 8.

Still others insist than in the fiat world we are in, the web is so tangled between money and credit that this mess is not even worth bothering to figure out. Those folks simply hold gold and wait for “The Crash”.

However, it is simply impossible to have a debate about inflation (or anything else) unless the parties can agree on a definition.

Like it or not, we live in a fiat world. Therefore we must attempt to have sound definitions that best describe the fiat world we are in.

The definition I adhere to is: Inflation is a net expansion of money supply and credit, where credit is marked to market. Deflation is the opposite: a net contraction of money supply and credit, where credit is marked to market.

Popular View

The most common definition of inflation is rising prices.

Moreover that is the definition central bankers want you to believe. That definition allows central bankers to print money at will, generally inflating prices everywhere (until asset prices crash as they just did), all the while proclaiming they are “inflation fighters”.

Austrian economists see things differently. They understand that rising prices are a possible “result” of inflation, not a measure of it. While all Austrian economists would agree with that statement most I believe would ignore credit and simply state that inflation is an expansion of money supply (again with many different interpretations of what “money” is, even amongst Austrian economists).

Theoretical Stance Yields Poor Results

While I am sympathetic to the theoretical notion that inflation is an expansion of money supply, such a definition leads to impractical results. Take the idealized case of a country on a gold standard. The true amount of money is the measure of gold.

However, prices can soar if more credit is extended on the gold than there is physical gold. This happened in spades in the prelude to the great depression (and many other credit bubbles as well, all of which ended in deflation).

Prices can also soar or collapse for other reasons such as a change in time preference (the desire to hold money vs. spend it), shortages caused by crop failures, rising productivity, new deposits (or lack thereof) of natural resources, and what other central bankers are doing in regards to printing money.

It is complete silliness to think the Fed is in control of (or can even properly measure) prices, especially asset prices. The Fed ignored asset bubbles twice recently with disastrous consequences. Yet, there is no good way to judge why stock prices are rising. Stock prices can rise as as a result of increasing productivity, falling or rising commodity prices, or simply because of central bank printing.

Merriam Webster Definition Of Inflation

It is virtually impossible to measure why prices are what they are and the “why” is what is important. Thus a focus on prices is misguided. The 1957 Merriam Webster definition of inflation was “An Increase in money supply and credit”.

The definition now found in the Merriam Webster online dictionary puts the cart before the horse, but it at least still has the cart and the horse in the definition. Most commonly used definitions don’t.

Main Entry: in·fla·tion
Pronunciation: \in-ˈflā-shən\
Function: noun
Date: 14th century

1 : an act of inflating : a state of being inflated: as a : distension b : a hypothetical extremely brief period of very rapid expansion of the universe immediately following the big bang c : empty pretentiousness : pomposity
2 : a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

It is by design of the Fed and bankers that the definition has morphed into common usage to something that removes the Fed from its role in causing inflation.

Cause Of The Great Depression

I believe it safe to say that Austrian economists in general would agree that the cause of the great depression was the massive runup in credit that preceded it. Of course the policies of the Fed and Government in attempting to fight deflation made matters much worse.

Clearly then, credit has a role in the boom, and credit had a role in the bust, so one must take credit into consideration.

Making matters worse, in a fractional reserve system, it can be very difficult to distinguish between what is credit and what is money. The prime example of this is the debate as to whether savings accounts are a measure of credit or money.

A strong theoretical case can be made that in a credit-based fiat regime that the proper measure of money is simply base money supply and that everything else is credit.

Indeed, as I have pointed out most “money” in checking accounts is not really there at at. It has been lent out, redeposited, and lent out again. In other words it is imaginary.

Let’s take another look at three measures of money supply.

Base Money Supply

M Prime

True Money Supply

Wide Difference Of Opinion About What Money Is

The above three charts depict “money”, each with their proponents. There is also M1, M2, MZM, and M3, also with their proponents.

Those measuring money as Money AMS or M Prime would have money supply at something like $2,500 Billion. Those sticking with TMS would come up with money supply at $5,500 billion. While base money supply is $1,800 billion. That is quite a difference.

The TMS explanation on Mises says “The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange.”

The above statement is false. If everyone were to go and withdraw money tomorrow there would be a massive systemic crash and bank failures because the money simply isn’t there. The deposits are imaginary.

Please consider this Rothbard snip about savings accounts from The Inflationary Boom: 1921-1929

In recent years, more and more economists have begun to include time deposits in banks in their definition of the money supply. For a time deposit is also convertible into money at par on demand, and is therefore worthy of the status of money. Opponents argue (1) that a bank may legally require a thirty-day wait before redeeming the deposit in cash, and therefore the deposit is not strictly convertible on demand, and (2) that a time deposit is not a true means of payment, because it is not easily transferred: a check cannot be written on it, and the owner must present his passbook to make a withdrawal.

Yet, these are unimportant considerations. For, in reality, the thirty-day notice is a dead letter; it is practically never imposed, and, if it were, there would undoubtedly be a prompt and devastating run on the bank.[2]

Everyone acts as if his time deposits were redeemable on demand, and the banks pay out their deposits in the same way they redeem demand deposits.

The necessity for personal withdrawal is merely a technicality; it may take a little longer to go down to the bank and withdraw the cash than to pay by check, but the essence of the process is the same. In both cases, a deposit at the bank is the source of monetary payment.

TMS adds in savings accounts because they “act” as if the money is there available on demand, even if it is not. However Shostak does not add in savings accounts for precisely the same reason. I side with Shostak.

The irony is that most of those claiming to only count money and not credit in their definitions are doing anything but.

Moreover, even Shostak’s Money AMS or M Prime includes the results of credit transactions because money from checking accounts has been swept into savings accounts and lent out. (See the discussion of sweeps in What is Money and How Does One Measure It?).

The fact that savings deposits have no reserve requirements at all makes matters even worse.

Practically Speaking, Both Money AMS and True Money Supply Contain Credit

As long as one is embarking down a “practical path” one may as well have a completely practical model.

My practical model as defined in Fiat World Mathematical Model says that credit and credit marked to market dramatically effect the way the economy works.

In a fiat world, money is printed into existence by the central bank – in the United States the Fed. Given there is nothing backing up this money, it is inherently worthless. However, one can think of as real. It was printed (even if only electronically), therefore it exists.

In addition to the previously mentioned money supply, fractional reserve lending allows credit to be extended by banks and financial institutions on top of that inherently worthless money. Indeed, banks and financial institutions have leveraged credit to base money at ratios of 30-1, 50-1 or even higher.

It’s pretty amazing if you think about it: Credit is extended with 30-50 times leverage on inherently worthless paper.

Ponzi Financing

Borrowers have to pay interest on the amount borrowed. However, the interest and the debt cannot possibly be paid back except by an ever expanding Ponzi scheme of lending. That scheme can last only as long as everyone believes the debt can be paid back and the market value of that debt keeps rising.

It’s a faith based system in which banks extend loans and hold the credit on the books (or in many cases off the books in various structured instruments). The banks are thought of as being well capitalized as long as the value of credit on the books in relation to their reserves meets some ridiculously low minimum set by the Fed.

This is how the system works, using the term “works” loosely.

Day of Reckoning

The day of reckoning comes when asset prices start falling, defaults soar, and the value of credit on the books starts plunging. That day of reckoning has arrived.

And if leverage is high enough, as it was with Bear Stearns and Lehman, the institutions are wiped out overnight. Citigroup (C), Bank of America (BAC), Fannie Mae (FNM), Freddie Mac (FRE) and AIG are essentially in the same position of Lehman except the taxpayers via the Treasury are funding the bailouts.

Practically speaking, the process of wiping out that credit (or even marking that credit to market) has a profound affect on the way asset prices react, the way corporate bond yields react, and the way treasury yields react.

Practically speaking we are in deflation by many measures of credit, as well as symptoms such as treasury yields, falling home prices, the CPI, rents, credit card rates and usage, etc, while those looking only at Money TMS (or even money AMS) say we are not in deflation and never will be.

One can define inflation and deflation however one wants. However, a true test of the model is how well it predicts behavior of people and asset prices in comparison to stagflationary periods in the 70s as well as a universally recognized deflationary period like the Great Depression

Valid Measures Of Inflation?

Money AMS (which M Prime tries to mimic) may be a good measure of “Monetary Inflation”, with True Money Supply (TMS) is a fair second-best choice. However, neither properly accounts for the real world effect of what happens to the economy when bank lending and credit falls off the cliff.

This “recovery” we have seen is based on a mirage, that the debts on the books of banks is not as bad off as everyone thought. This is what happens when a Fed and Congress throw $trillions around in bailouts and various stimulus plans.

Did the Fed stimulus temporarily produce inflation causing marked to marked credit on lenders books rise? Yes that is possible, perhaps even likely given the reaction to the stock market.

However, given that true mark to market accounting is not taking place and banks and lenders are playing shell games with the Fed and investors, it is not possible to know.

What we do know is that banks are not lending.

Total Bank Credit

Total bank credit is in uncharted territory at -5%. The series has never gone below 0 before. We can also see excess reserves piling up at banks.

Excess Reserves At Depositary Institutions

The Fed has printed but the money is just sitting there. Is that inflation?

Please consider this audio with Austrian Economist Frank Shostak on Mises on September 30, 2008 discussing recent actions by the Fed.

Will this printing create [price] inflation? This is dependent very much on what money will do next. If banks will not lend and banks sit on that cash forever and ever like the great depression because the risk is too high and the banks do not know if the lending will end up in good assets or bad assets, and because banks are in so many bad assets now they probably will not lend at all.

That is the observation that Murray Rothbard made, that during the Great Depression that banks have chosen not to lend because the risk of accumulating bad assets was far to high. So they were sitting on massive reserves. That is what is developing right now.

A good example is what happened in Japan in 2001-2002 where the Bank of Japan pumped 300% at one stage and lending continued to collapse. I expect similar things to happen here. If lending will not increase we can conclude this will not be inflationary.

Why Aren’t Banks Lending?

Inquiring minds might be asking “Why Aren’t Banks Lending?”

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

Number three above is the most critical one. Banks need those reserves to cover future writeoffs.

Assets at Banks whose ALLL exceeds their Nonperforming Loans

ALLL stands for allowances for loan and lease losses.

Allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Because provisions for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated. That is one indication of optimistic forward earnings.

Another indication of optimistic forward earnings is that banks have not yet gone to a mark-to-market model on assets. Factor both together and financial earning estimates are wildly optimist.

Not only are forward earnings estimates ridiculous, future writeoffs are poised to soar.

Square Pegs And Round Holes

It is important to understand that all of us are attempting to model our own interpretations of how to apply an Austrian economic model in a fiat credit-based world.

Measuring inflation solely by Money AMS or True Money supply while ignoring credit even though both measures contain credit transactions is attempting to put a square peg into a round hole.

As a practical matter, I could see a deflationary credit bust coming and called for all time record low yields in treasuries on January 20, 2008 in Time To Short Treasuries?

Kass: The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras. From my perch, the only issue is the timing of this trade.

Mish: Timing is indeed everything and perhaps there is a temporary selloff. But the primary trend is for lower yields. Perhaps much lower yields. There is no bubble in bonds. Not yet.

Those who want to see how low treasury yields can get and stay there, need to look at Japan. Yields in the US are going to go far lower and stay lower longer than nearly everyone thinks.

Right near the tip top of the commodity bubble on June 26, 2008 when everyone thought yields were going to the moon and the dollar would crash I asked: Is The Inflation Scare Over Yet?

Those focused on the CPI failed to see any chance of the Fed Fund’s Rate at 2.00 again. On the other hand, those focused on the destruction of credit from an Austrian economic perspective got this correct. That is just one reason why it makes more sense to watch the credit markets than the CPI. The second is the CPI is so distorted it is useless.

In my opinion, it is very likely new all time lows in the 10-year treasury yield and 30-year long bond are coming up.

Tuesday, January 06, 2009: Reflections On 2008, Themes For 2009

It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different.

Well 2009 was different and the reason is the massive amount of stimulus. However, that stimulus has not produced any meaningful results as can be seen by jobs and by bank lending.

As a practical matter this looks like the false bounce in Spring of 1930.

Humpty Dumpty On Inflation

Assuming we can all agree that the US was in deflation in the 1930’s, then let’s discuss the conditions at the time as well as what happened to cause those conditions.

Please consider Humpty Dumpty on Inflation

Practical Definitions Of Inflation And Deflation

Most know my definitions by now but here they are again for convenience.

• Inflation is a net increase in money supply and credit.
• Deflation is a net decrease in money supply and credit.

In both cases credit must be marked to market to make any practical sense out of what is happening. Those who focus solely on money supply cannot easily explain stock markets that have fallen in half (this does not happen in disinflation), TIPs yields, a global race to ZIRP, or many other events that are happening.

Humpty Dumpty Defines Inflation

Unfortunately there are many definitions of inflation and deflation strewn about. Some play the role of Humpty Dumpty changing meanings at whim, switching from commodity prices, to consumer prices, to expansion of base money or M3 or whatever measure of money seems to be expanding at the fastest rate.

Some do the inflationista two-step to avoid admitting that we are indeed in deflation, choosing instead to call it “disinflation”

In short: “We are going to have a period of deflation that we will instead call disinflation.”

‘When I use a word,’ Humpty Dumpty said, in a rather scornful tone,’ it means just what I choose it to mean, neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

A Practical Look At “Flation”

Here is a table of conditions and whether or not one would expect to see those conditions in inflation, deflation, stagflation, hyperinflation, and disinflation. Some expectations are debatable so I left those blank.

click on chart for sharper image

That chart is from December 11, 2008 thus some may disagree with where a few of the marks are.

Still others might suggest that treasury yields are now rising and the bottom in treasury yields is in. Certainly at 0% the short end of the curve has bottomed, and perhaps the long end has too.

However, as a practical matter, the 10-year treasury yield at 3.40% as of November 2, 2009 is amazingly low, especially in light of the fact that hard-core inflationists expected yields to do be soaring to 10% based on misconceptions about the CPI and/or money supply.

Symptoms vs. Definition

Bear in mind the above table is a table of symptoms one would expect to see in deflation. A practical test of a good definition inflation and deflation is whether or not one would have predicted those symptoms based on their model of inflation and deflation.

Those following money supply or the CPI certainly could not have reasonably expected a simultaneous massacre in both the stock market and treasury yields in conjunction with rising corporate bond yields.

Those who could see and understand what a collapse in credit would do, had no such problems.

Where To Now?

Corporate bond yields have fallen since I wrote about Humpty Dumpty. And certainly the stock market has risen. However, underlying credit conditions have not improved.

Marked-To-Market valuations have likely improved, but given the underlying fundamentals have not changed, I see no reason to change my model just yet.

Credit (and credit problems) dwarf monetary concerns at the present.

Until something happens to disrupt that model (far more likely from Congress than the Fed at this point) I see little reason to change my model. In fact, it will likely not be the model that changes, but rather changing conditions will give the model a different forecast.

Right now, I still expect the US to slip in and out of deflation and recession for years to come just as happened in Japan. I also expect we will suffer through a Decade of Lost Jobs.

Those focused on money supply alone, the CPI, the stock market, so-called leading indicators, or any other factors are likely to miss the boat unless their forecast just happens to be in alignment with credit conditions.

Unfortunately, I cannot state a precise measurement of inflation or deflation given the shell games at the banks and the Fed regarding mark-to-market accounting.

However, the hard data shows banks aren’t lending, consumer credit is contracting, credit writeoffs are likely to exceed monetary printing, and symptoms like treasury yields are in generally in agreement. That to me is good enough.

Given that credit conditions and bank lending have not changed and treasury yields are still near historic lows, fears over run away prices and soaring interest rates are misplaced. You can choose to call this environment “inflation” or “stagflation” if you want. No one can stop you. However, practically speaking, there is far more “stag” than “flation” and the proper prefix is still “de”. The stage is set for another market crash.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post ListMike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.