Wednesday, January 21, 2015

Why Gold Is Still Attractive As A Hedge

If you'd like to read a Gadfly's opinion about holding gold-related investments, please read this article at Seeking Alpha.  Thanks.

[Image from Wikipedia]


Tuesday, January 20, 2015

I have just finished one of the best books I've read in a very long time.  It is this:

Investing Freedom: How the English Speaking Peoples Made the Modern World by Daniel Hannan
Click on the line above to get it from Amazon.  Excellent read.

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A Talk on C..S. Lewis

David Theroux of the Independent Institute asks me to post to his keynote talk at a conference in San Antonio, TX, on August 2, 2014.  I'm happy to oblige.  The title is:

"C.S. Lewis on Mere Liberty and the Evils of Statism"


Click Here

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Tuesday, December 30, 2014

The Fed's Game of Monetary Inflating and How to Put an End to It

[Thanks to for the image.]

History has shown unequivocally that you don't want to monkey with money and credit.

This is the cogent warning recently issued by Doug Noland at Prudent Bear. He is referring to the monetary shenanigans of the central banks around the world, the most egregious of which is our very own central bank, the Federal Reserve.

After more than 15 years of almost continuous and increasingly profligate money-credit creation, the Fed is now approaching the moment of truth. In the next few months it will have to put its actions where its mouth is regarding the interest rates under its control.

Up to now, Fed Chairman Janet Yellen has been very good at what we could call the Open-Market Charade. While sounding profoundly straightforward and direct, she actually has bested Alan Greenspan at the art of Fedspeak: talking in soothingly erudite phrases, all the while saying nothing in particular.

But no matter what she says now, the Fed's predicament is clear: It must soon choose between allowing the target rate to climb, which will squeeze the necks of already precarious emerging markets, or keeping the rate low and in the process risking re-devaluation of the dollar and/or blowing even more bubbles in stocks, junk bonds, global derivatives, emerging market currencies, and selected real estate.

The inflated bubbles are right in front of our noses. For example, some condos in the West Los Angeles area have now re-attained their all time highs of 2007, and bankrupt ski resort developments have pulled the shovels out of the trash heap and are at it again. And by the way, that price inflation you're looking for? It's already in the high cost of meat, sugar, poultry and eggs, which have climbed 8.3 percent this year, and in dairy that has climbed 5.6 percent. [Source] Butter has doubled since mid-2013. [Source]

The moment the Fed governors choose the former, i.e. increasing the rates, the music will stop and everyone will head for a chair. Usually in this game there is only one empty chair and hence only one loser, but this time there are far fewer chairs and far too many players. If the music stops watch carefully what will happen to countries like Argentina and Russia. Then watch what will happen to the derivatives and other more speculative markets as investors scramble for seats.

For more on the possibilities under this scenario, see this article about the carry trade, also heavily involved in the derivatives market; see also this David Wessel article about a possible global financial crisis due to a rising dollar.

On the other hand, if the Fed chooses the latter route and delays rate normalization, it may succeed in holding off the moment of truth for a few more months while the music continues and stock market speculators continue their merry dance. At the same time, America's fixed-income recipients will have no choice but to reach for their handkerchiefs again to mourn a further loss of purchasing power. (Already in 2012, the reported that seniors have lost 34 percent of their purchasing power since 2000.)

The old and the weak are always the first losers during the exaggerated business cycles caused by fiat-money monetary interference, and Oh My, what enormous and distorted cycles they have become. (See this study from the American Institute for Economic Research on the changing nature of business cycles.) Who are the winners? Debtors, and speculators most of whom are debtors. The biggest debtors of all are governments and financial institutions-who just happen to be co-appointers of their accomplice Fed governors.

What artifice makes this game possible? It is the fiat nature of global currencies. (Read Steve Forbes's latest book for more on this.) What is the solution? We must elect politicians who will free gold from its tax shackles. What shackles?

An act of Congress in 1974 and a legal decision in 1977 already permit the holding of and transacting in gold. (See the text of the 1974 law here and a discussion of the court case permitting gold clauses in contracts.) The only thing preventing gold from playing its traditional role as money is the fact that all gold transactions are taxed, whether it be through sales taxes or capital gains taxes.

Why are they taxed? Because back in the 1970's Congress classified gold as a commodity, kind of like copper or wheat. Why did Congress do this? Because the crafty politicians knew that by doing so the commodity-taxation protocol would immediately take the gold-as-money option off the table. This is what forces us all to accept unsafe fiat "money" instead of the real thing.

Without that handicap, we would not accept it unilaterally. Remove the taxation and gold would become money again. It would find its true exchange rate relative to all currencies (which today would probably be higher than its current $1,200 an ounce). Soon enough, someone would set up a system of international exchange based on gold. The metal would find itself at the center of a new worldwide system of exchange and value storage. Such a system would be much more solid and much more widely accepted than Bitcoin or other alternatives. Call it Bitgold, maybe? And by the way, reinstatement of a proper gold standard is probably not even necessary. Let the markets work out the particulars.

This is not just fanciful thinking. States such as Arizona, Texas, and Utah are discussing the use of gold as legal tender. Highly stable gold would eventually replace highly unstable fiat money, and trillions of dollars and yen and euros, currently wasted on chasing a quick profit and fulfilling the dreams of politicians (and causing worldwide recessions), would be turned back to their rightful purposes: fomenting enterprise, creating jobs, and raising standards of living across the globe. And most important, this new gold-based monetary system would deprive our central money manipulators of the world's most corrupting, devastating, unconstitutional, and destructive monopoly power.

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Tuesday, May 27, 2014

Time to Put the QE Genie Back In Its Bottle

Price inflation seems to be right around the corner, if it isn't already here, which means that the Federal Reserve may soon have to put their QE genie back in its bottle.  At least that's my hope, for the sake of our children's future.

[Thanks to for the image.]

The only problem is:  The economy isn't cooperating.  Employment figures, never mind the full-time work force, are stubbornly refusing to increase.  Jobs are not appearing as hoped.  And GDP is not up to expectations.

Hence, the Fed will be faced with a quandary.  And I can't wait to see what happens.  Please click on this link for some further thoughts on the subject.

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Tuesday, April 22, 2014

The Cacophony That Is Europe

I'm sitting behind my computer with an amazing view out my window. Europe (for me, France in particular) is beautiful this time of year.

View from my window above the Rhone River.

The serenity of the vista contrasts with the malaise I note on the television, originating for the most part from France's budgetary restraints, which in turn are imposed by its membership in the European Union.

The EU is a heroic effort that unites 28 very different peoples and cultures under one flag, while at the same time retaining each's individuality. This sounds ideal and seems to function well on the trade level. But in everyday-life reality, it can be quite cumbersome. For example:

My husband bought an electric lawnmower the other day. He handed me the user's manual. Here's the front page:

Looks normal. But take a closer look at the lower portion:

(Click on the image for an even larger version.)

This is a list of 27 languages presumably spoken in the European Union. (There are 28 countries, but I know that Germans and Austrians speak the same language; however, according to this website, there are only 23 official languages in the EU.) This means that in order to take advantage of the 28-country commercial market, Bosch, a German company, had to hire people to translate the owner's manual into the other 23-26 languages.

Each language section is four pages long. The whole document is 118 pages long. Think of the translation cost, the cost of the effort to limit translation cost by making the instructions as short and sweet as possible, and finally the printing cost. And now remember that this applies to every product sold in the EU. The overall expense must be staggering, probably enough to bail out Greece and maybe Cyprus.

I have bought items that need to be assembled (Ikea desk, for example) whose manufacturers have solved the language problem by issuing user's manuals that only have pictures. That's right, no words, only pictures. I know it sounds impossible to make complicated instructions so simple that no words are necessary, and–well, in fact it is. I had to spend triple the usual time trying to figure out what the pictures actually mean, and I'm still not sure the drawers are in the proper order. And when I say "usual time," as you know that's a lot of time. (Obviously the customer's time-opportunity-cost was not a priority here.)

Then there's the compliance cost that manufacturers must pay to satisfy 28 different sets of government regulations–most of which, of course, have been centralized in Brussels by now, with all of the "misfitting" on the local level that this implies.

Now try to conceive of the same problem spread among the thousands (if not tens of thousands) of matters that must be handled on the top government level. Is Europe even a rational possibility?

In Brussels, the hub of the EU, they seem to have solved the language problem during government sessions by making English the most commonly used language, even though Ireland is the only English-speaking country that is part of the fiscal union. (The UK and Ireland are the only English-speaking countries in the EU, but the UK and a few others have their own currency.)

I'm not sure what conclusion to draw from all of this, but so far the Union has held together in spite of the language barriers, the monstrous fiscal problems, and the incredible governance headaches described above. Skeptics such as Anna Schwartz don't believe the EU can possibly survive without a more integrated fiscal union. The powers that be seem to be driving in that direction, in spite of local resistance.

However, attempts to solve the very serious fiscal problems are causing political tensions to grow all over Europe. For example, France's President Hollande's popularity rating is down to 19 percent. Extreme-right and extreme-left parties in a number of countries are making hay with their ruling party's current predicament caused by the fiscal discipline imposed by Brussels. One of the platform planks of most of these extreme parties is an exit from the Union.

We'll just have to wait and see, won't we, as we try to make sense out of this 27-language and 28-culture European cacophony.

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Saturday, March 15, 2014

Update on Price Inflation - What Was That CPI Figure?

The penny has officially become worthless.  I finally had to admit this the other day when I found a pile of them in a parking lot, just as if they had been smelly old cigarette butts dumped out of a car ashtray by someone in a hurry.

A few months ago in an earlier post, I whined about the price of M&Ms, or more accurately about the dollar's decline.  I noted therein that my favorite little candies had gone from 5 cents when I was a girl in the 1950s, through 55 cents when I had my own little store in the 1990s, to 99 cents at my local supermarket in 2011.   So today, I was not particularly surprised to see that my little packet of goodies is now $1.19 in the same supermarket.

But when I did the calculations, I realized that's a 20 percent increase in three years.  That's almost 24 times the 5 cents I paid in the early 1950s....

What??  That may be par for the course, but let's ask the obvious question:  What was that CPI figure again??

Thanks to Wikipedia and Scott Ehardt for this image.

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Wednesday, February 12, 2014

Argentina: A Deadly Mix of Totalitarian Thuggery and Business Cowardice

This weekend's Wall Street Journal published an article by Taos Turner on price inflation in Argentina. What I take away is that the country is in a state of internal warfare.

The Pertinent Fact:

According to the article, Argentina's public is now confronted with 30 percent annual price inflation.

The Cause and Cure, according to Argentina's Ruling Class of Thugs:

Friends of Cristina Kirchner have created propaganda posters accusing CEOs of large retailers of gouging the public. The gaudy creations now paper the walls of large cities. The caption reads: "THESE ARE THE PEOPLE WHO ARE ROBBING YOUR SALARY." Below an unflattering photo and the CEO's name and company is written: "They are increasing the price of everything to take your money." (The modern equivalent of Wanted-Dead-or-Alive posters?)

Elsewhere, individual consumers are encouraged to report any "unfair pricing" through an 800 number or via a government-provided app on smartphones. (Sounds powerful and scary, but I am curious to know who will do what with the information.)

Kirchner's cabinet chief, Jorge Capitanich, denies that macroeconomics have anything to do with Argentina's price inflation. He states that all the economists blaming the government's economic policies are prejudiced. He is sure of this, he declares, because he knows all of them and "[t]hey are all undercover agents." (For whom, he doesn't say.)

The Asininely Feeble Response of Retailers:

"In January, retailers agreed to freeze prices on about 200 products ranging from detergent to condoms."

[Audible gasp.]

That's it? No riposte? No counterargument? Not even the slightest attempt at self defense? Just a whimper and capitulation? I can here them now in their boardrooms: "Let's give them cheap condoms, that should do it."

No wonder totalitarians win. Their enemies are weak and short-sighted, and they cave in at the first boo.

[Thanks to for the image.]

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Monday, February 10, 2014

The Law of Unintended Consequences

I always read John Mauldin's weekly newsletter, and in one was a quoted passage that made me gasp in disbelief:

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

"Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."

– From an essay by Frédéric Bastiat in 1850, "That Which Is Seen and That Which Is Unseen"

I gasped, because I had two simultaneous thoughts:

1)  What a simple, commonsensical, yet ingenious remark.

2)  How can it be that Bastiat wrote this in 1850, and we still don't get it?

Good grief.

[Thanks to Impactedbygrace for this image.]

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Monday, January 27, 2014

Why We Are Not Seeing Price Inflation

The Keynesians are saying that price inflation is not a problem and probably won't arrive. The Austrians and others are saying that price inflation must come at some point, given all the monetary stimulus introduced by the Fed. But could they both be wrong?

I hypothesize that price inflation is already here. Please read my argument at this Seeking Alpha article.

Now you see it, now you don't.

Screen shot of the French movie "The Magician"
by George Melies, 1898, from Wikipedia Commons

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