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Monday, August 15, 2011

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Gold Against Other Currencies

Posted: 15 Aug 2011 07:02 AM PDT

By Pater Tenebrarum:

Gold mining stocks have spent the past year going nowhere in what is essentially a wide trading range that looks like a complex corrective formation. What is so surprising is that this has coincided with a big rally in gold and a shift in silver prices to a much higher trading range. To this it should be noted that many of the mid tier gold miners produce significant amounts of silver as a byproduct, while both the major gold stock indexes (HUI and XAU) contain a few component stocks of primary silver producers.

There are several reasons why the stocks of gold miners have failed to reflect higher metal prices. There two fundamental reasons include the fact that their input costs have risen in tandem with the gold price. Everything from labor to energy (the two most important input cost factors) to steel and chemicals has become far more expensive.


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Gold Exposure Through Country ETFs

Posted: 15 Aug 2011 06:55 AM PDT

By Russ Koesterich:

In recent months, gold has been one beneficiary of the global sovereign debt crisis.

Investors worried about possible government defaults have flocked to the precious metal, helping to drive up its price to record highs and some market watchers believe the rally is likely to continue. In addition, in today's environment, characterized by low real long-term interest rates, the opportunity cost of holding assets such as commodities that produce no income is low. This is another important factor supporting gold prices.

Investors interested in gaining exposure to gold, and expressing views on it, usually trade the commodity itself, or trade gold producers, which are the companies that operate gold mines. Investors, however, should be aware of less explicit gold exposures in their portfolios that come from trading funds tracking equity indices of countries that are consuming gold and of countries in which gold mines are located. Possibly due to the


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Will Gold's Strength Pull Silver Along?

Posted: 15 Aug 2011 06:15 AM PDT

By Robert Hallberg:

Silver has been in a trading range between $34 and $40 ever since its big correction in late April, while gold has broken out and made new all time highs. After the U.S. credit rating downgrade and subsequent panic in stocks, gold has been on fire. Gold has gained over $300; a 15% increase between July and August while the price of silver has been more or less flat.

Gold (GLD) has been acting as a safe-haven investment during this current panic, more so than the dollar. Large fund flows have gone into gold, sending its price surging, and forcing the shorts to cover their positions. Silver is to some extent also a safe-haven investment


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Watch Gold/Silver/Oil Price Ratios

Posted: 15 Aug 2011 06:09 AM PDT

A little more than a week ago I wrote a commentary titled "Buy A House With Silver". As I said at the time, there were two purposes in writing that commentary.

First of all, with the nominal prices of the bankers' fiat-paper increasingly meaningless, I pointed out that people needed to start valuing hard assets against each other (directly), and simply exclude our rapidly depreciating paper from these valuation comparisons. Secondly, I pointed out the enormous potential for profit if people simply remain aware of the value of various assets relative to each other. Specifically, I noted that investors had been presented with one of the "best arbitrage opportunities in history": buying grossly undervalued silver today, and then using that asset to purchase a home a few years down the road – when the prices of (overvalued) real estate will have fallen back to reality.

This is such an important topic that there is much more which can be said about it. In this piece, I will explain to people how staying on top of the price ratios between gold and oil, silver and oil, and silver and gold will allow us to make much better buying/selling decisions on the gold and silver miners, as well as making more optimal decisions in allocating our bullion dollars between gold and silver.

Let me begin with a general investing principle with these miners, for newer readers who haven't read this previously. Energy costs (in general terms represented by the price of oil) are the second largest input expense for the miners, behind only the cost of labour. Thus when the price of oil rises faster than the price of bullion the miners tend to become less profitable, and when the price of bullion rises faster than the price of oil the miners tend to become more profitable.

We see this principle directly translated into the share price of the miners again and again. In 2008, before the "crash" when commodities were reaching record-shattering prices, the price of oil was over $140/barrel, while the price of gold was below $1000/oz and the price of silver was below $20/oz. In relative terms oil was a crushing expense for the miners with these prices, and thus the share prices of the miners were sagging even before Wall Street unleashed its massive ambush.

What happened after that?

The price of oil collapsed by close to 80%. The price of silver was knocked-down nearly 60%. The price of gold was only pushed down a little over 20%. The miners became more profitable – especially the gold miners. Further, the prices of gold and silver bounced back much faster than the price of oil, improving those relative prices even further in favor of the miners (i.e. increasing their profit margins even further). Meanwhile, the share prices of the miners (which had been pushed down by 80 – 90%) then exploded upward, with the entire sector being nearly a "ten-bagger" in the following 18 months.

Flash ahead to the summer of 2011 and what do we see? Once again the share prices of the miners are very depressed in comparison to the price of bullion. More importantly, the share prices of the miners are even more depressed when we factor in the price of oil. Let's look at the individual dynamics.

The picture is very straightforward with gold. Gold has been in a steady, rising trend while the price of oil has fallen considerably from previous levels. This means that not only are the gold miners selling their metal at a significantly higher price, but they are producing it at a cheaper cost – and yet the share price of these miners falters (especially the exploration companies).

This presents a fabulous opportunity for any/every "value investor". Soaring revenues and shrinking costs are a pretty simple equation. Best of all (as has now been proven) gold will continue to prosper in any fear/recession/deflation scenario. Meanwhile, it was already well-established that gold has thrived in any high growth/high inflation scenario.

Producing gold miners have become the "blue-chip stocks" in the entire world of equities: record profits, profit margins continuing to grow, able to prosper in any/every foreseeable economic scenario. It doesn't get any better than that for investors seeking a "safe haven" – and yet their valuations flounder due to bankster manipulation.

Throughout the 10+ years bull market in precious metals we've seen how this dynamic plays out. The longer/more severely the banksters compress the valuations of these miners, the greater the "explosion" upward when their choke-hold inevitably fails. Currently we see one of the best valuation entry points for these miners in this entire bull market, and certainly the best "buying opportunity" since the beginning of 2009.

On the Death of Bretton Woods and the Resurrection of the Old Trilateral

Posted: 15 Aug 2011 06:07 AM PDT

By Marc Chandler:

Richard Nixon unilaterally closed the gold window 40 years ago today. No longer would the U.S. permit other countries to exchange their dollars for gold and by breaking that link. Nixon ended the Bretton Woods international financial regime and ushered in the floating exchange rates that characterize the modern era.

Since nearly the day it died, there have been policy makers, investors and academics who have called for a new Bretton Woods. It is perfectly understandable. The macro-economic performance under Bretton Woods was remarkable. Real per capita income growth throughout the industrialized world was higher than during any monetary regime since 1879, according to Anna Schwartz, Milton Friedman's co-author to the landmark "A Monetary History of the United States". Inflation and its variability and persistence were low. Nominal interest rates were low and stable.

Paradise Lost

Less examined is the link between Bretton Woods and the superior macro-economic performance. Surely,


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For whatever reason

Posted: 15 Aug 2011 06:06 AM PDT

Cross-posted from Credit Writedowns

Paul Krugman has another piece up on MMT. I like this piece a lot more than the last one he wrote. I suggest you read it.

Here's the one passage I do find troubling, however:

Let's have a more or less concrete example. Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities — the US government has committed itself to spending equal to 27 percent of GDP, while the tax laws only lead to 17 percent of GDP in revenues. And consider what happens in that case under two scenarios. In the first, investors believe that the government will eventually raise revenue and/or cut spending, and are willing to lend enough to cover the deficit. In the second, for whatever reason, investors refuse to buy US bonds.

It's actually just three words that bother me: "for whatever reason". i think the whole discussion hangs on those three words actually. Interest rates largely reflect the expected path of future policy rates. It does not follow logically for me that investors would refuse to buy US bonds 'for whatever reason'. Sure, currency revulsion can cause the exchange rate to collapse and inflation to go through the roof. As Dr. Krugman points out, you could even get hyperinflation under certain circumstances.

But as I pointed out earlier today:

In the end, this is about interest rates. Why is Paul Krugman worrying about the US losing access to the bond market when the term structure of the yield curve largely reflects expected future policy rates? We just saw this is true after the Fed moved to permanent zero at the last FOMC meeting. "The 0.375% US Treasury note maturing on 31 July 2013 is now yielding only 19 basis points." The Fed can do as much 'financial repression' as they want by keeping rates below the headline inflation rate since it has monopoly power in the market for base money. Inflation and currency depreciation are the issues – not a steeper yield curve.

Remember, we have just witnessed investors willing to flee to the liquidity of Treasuries even as the government threatened to default on those securities. That doesn't speak to investors refusing to buy US bonds in the least. I suppose they could do at some undetermined point in the future. However, saying 'for whatever reason' presupposes the outcome. I need to see the steps that get us from 2.25% 10-year rates to 4 or 5% without the Fed set to actively raise rates because the only way rates are going higher is because the Fed is forced by inflation to raise them.

Source: MMT, Again, Paul Krugman

America's Latest Obsession and Its Investment Consequences: Part 1 - Agency Mortgage REITs

Posted: 15 Aug 2011 05:58 AM PDT

By Philip Mause:

Last week, my wife and I were vacationing in California (another consequence of the declining dollar) and wandered into a little place for breakfast. It was kind of a "biker joint." These guys were not exactly like Marlon Brando in "The Wild Bunch;" but they were not exactly like William Macy in "Wild Hogs" either. Anyway, a heated conversion began to emerge and I couldn't (nor did I try to) avoid overhearing it. The topic, of course, was ...THE NATIONAL DEBT.

Now when bikers start arguing about the economic implications of the National Debt, it is a pretty good sign that we are moving into the "irrational obsession" phase of public policy debate with which we should now be very, very familiar. I was born in 1944 so I missed out on the "enemy aliens in our midst" panic that led to the Japanese-American internment and resulted as well in


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Both Sides Shoot The Messenger

Posted: 15 Aug 2011 04:00 AM PDT

Standard & Poor's downgrade of the U.S. confused the markets but not the pundits. From far-left to far-right, everyone with a stake in the existing order is shocked that a lowly rating agency would critique the emperor's wardrobe.

Liberal filmmaker Michael Moore, for instance, views the downgrade as a crime:

Michael Moore to Obama: 'Show some guts,' arrest S&P head
Liberal firebrand Michael Moore called on President Obama to respond to the U.S. credit downgrade by arresting the leaders of the credit-ratings agencies.

On his Twitter feed Monday, the Oscar-winning film director also blamed the 2008 economic collapse on Standard & Poor's — apparently because it and other credit-ratings agencies did not downgrade mortgage-based bonds, which encouraged the housing bubble and let it spread throughout the economy.

"Pres Obama, show some guts & arrest the CEO of Standard & Poors. These criminals brought down the economy in 2008& now they will do it again," Mr. Moore wrote.

Standard & Poor's, one of three key debt agencies, stripped the U.S. federal government of its AAA status Friday night and reduced it to AA+ for the first time in the nation's history.

Mr. Moore went on to note that the "owners of S&P are old Bush family friends," continuing a theme he has developed through several films about capitalism as essentially a crony system for the rich and Wall Street, especially the Bush family.
He went on to link approvingly to an article last week in the Guardian, a left-wing British newspaper, about a police raid in Milan against the offices of S&P and fellow ratings agency Moody's. Italian police were searching for evidence on whether the rating agencies, in the words of a local prosecutor, "respect regulations as they carry out their work".

"Here's how they roll in Italy when it comes to these bastards," Mr. Moore cheered.

Wall Street Journal columnist Holman Jenkins just thinks S&P tarnished it brand:

S&P Introduces the Edsel
Over its head in understanding American politics, a rating agency discredits itself.
The Standard & Poor's downgrade is likely to pass into business history as a failed gesture and blunder on a large scale, like "New Coke"—only worse.

The unsustainability of the U.S. government's fiscal trajectory was already known. Nothing had changed in the debt-ceiling debate except in a positive way for debt holders: In a world in which peer countries are struggling with runaway deficits, America had begun to confront its fiscal challenges legislatively (having already begun to confront them electorally in the 2010 tea party elections). What's so disheartening about that?

The angry idiocy of cable TV caters to those for whom politics is a form of entertainment, about which they can become passionate and self-righteous. Beneath the sound and fury, however, our system moves forward on broad consensus—it can do no other given the design of the Founding Fathers.

Three players—the House, Senate and White House—were required to give their consent to a debt-ceiling hike. All three, by definition, were holding the hike "hostage" to their concerns. The House tea party contingent "won" not because it was more ruthless—but because, with Venn diagram simplicity, it confined itself to a position that overlapped with the positions of the other players, who all agreed that, whatever else needs to be done, spending cuts must be part of the long-term solution.

And look at the settlement that materialized: The parties agreed to agree on spending cuts at a later date—a remarkably consensual solution that imposed immediate pain on no one in our struggling economy. Even the White House achieved its non-negotiable: The debt-limit issue will now remain buried past next year's election.

The debt-ceiling battle was the tiniest step on a long road, but it laid down a useful milestone: We're overspending. Not a bad day's work in our democracy.

Alas, committees are often wisdom-impaired, and the S&P credit committee showed as much when it based its downgrade on the discovery of conflict, brinksmanship and hyperbole in the debt-ceiling fight, as if these aren't a standard accompaniment to political progress. This was to take the angry-idiot shouting of TV, which is epiphenomenon, and make it phenomenon. It was the opposite of insight. It was also instantly refuted by the markets, which understand all the reasons U.S. debt is virtually default-proof.

A small measure of blame must also fall to the White House, with its strategy of deliberately confusing a partial government shutdown with a "default." Think about it: Congress can't take the heat from the national parks being shut down for three days. The idea that the debt-ceiling stalemate might go on and on until the only remaining possibility would be to stop payment on the national debt was absurdly misleading.

S&P could not penetrate even this little bit of political posturing by the White House. This tells you what S&P's political judgments are worth.

The consequences of its downgrade, however, will take longer to come into view. French insurance companies this week have been dumping U.S. Treasurys simply because of the downgrade. Ripples were felt in the markets for Fannie and Freddie securities. Is France a Triple A—or is the whole ratings structure now destabilized? S&P may have played a role in this week's market turmoil, but it wasn't because S&P brought any new and useful information to light.

The problem here is our system of mandatory ratings, in which certain regulated funds and depositories are required by law to sell securities when ratings are cut. This gives ratings downgrades a certain self-fulfilling potential. It puts the rating agencies in a difficult, and adult, position. It imposes on them a duty to be more than just kibitzers—to think about the consequences of their judgments and to avoid flippancy.

This is where S&P failed, and in failing has debased its own bread and butter, the Triple A rating. One hopes the parent company, McGraw-Hill, is paying attention. As Bloomberg News aptly noted on Thursday, "Credit ratings are becoming irrelevant in a bond market where investors still perceive AAA companies from Johnson & Johnson to Microsoft Corp. to be a higher risk than recently downgraded U.S. Treasuries."

S&P and its fellow raters did not acquit themselves well in the mortgage mess. Their errors then were errors of venality, opportunism and, finally, panic.

S&P's latest error is of a different magnitude, a colossal failure of judgment, at once adolescent in its grandstanding and childish in its irresponsibility. It may have been unwise even to give rating agencies their power. Since we have, they are honor-bound to use that power wisely, not destabilizingly. There's a reason we don't want our presidents wearing bow ties—and why similarly foppish gestures from S&P are not welcome on matters as grave as the U.S. cred

Some thoughts:
It's no surprise that Michael Moore is mad, since his standard response to pretty much everything financial is to demand that Wall Street and its minions be jailed. In general, he's right. Locking up the top 100 or so investment bankers and their pet politicians would be instructive for those that remain free, and fun for the rest of us.

But the Wall Street Journal's take is inexplicable. In an opinion piece reminiscent of the lamented Thomas Frank, Holman Jenkins bundles a series of economically questionable assertions into a conclusion that's even less than the sum of its parts. The misconception from which all else flows is this:

"Nothing had changed in the debt-ceiling debate except in a positive way for debt holders: In a world in which peer countries are struggling with runaway deficits, America had begun to confront its fiscal challenges legislatively (having already begun to confront them electorally in the 2010 tea party elections). What's so disheartening about that?"

What's so disheartening is that we did not begin to confront our fiscal challenges. We agreed to miniscule "cuts" and created a commission to impose a few more at a later date. If the US made ten times the proposed cuts it would still be bankrupt.

The rating agencies, despite all the heat generated by the downgrade, are irrelevant. They rated mortgage backed bonds AAA and the bonds still went to zero. They liked Greek bonds until very recently. Whether they rate the US, France, and Japan AAA or CCC, it doesn't change the reality that our debts exceed our income by an unmanageable amount. The US has downgraded itself by its actions.

So S&P isn't brave, it's not making a political point, it doesn't possess more insight than the ten thousand or so other bond analysts around the world, and it can't make the markets do anything they wouldn't eventually do on their own. A solid credit will survive no matter what it's rated, and an insolvent borrower will behave like junk even if rated investment grade. In the end, fundamentals always trump opinion.

Since Developed World fundamentals are horrendous and getting worse, future historians will have a different take on the rating agencies. Instead of asking why they chose this moment to downgrade the US, the question will be why they waited so long.

Nixon Closed the Gold Window 40 Years Ago

Posted: 15 Aug 2011 03:18 AM PDT

Louis James: Add Gold Stocks During Dip

Posted: 15 Aug 2011 03:17 AM PDT

Rickards sees gold being revalued to $7,000

Posted: 15 Aug 2011 03:08 AM PDT

Gene Arensberg: Comex swap dealers cover gold shorts like a big dog

Posted: 15 Aug 2011 03:00 AM PDT

Tanzania wants to raise royalties on Gold Miners

Posted: 15 Aug 2011 01:33 AM PDT

TINKA Resources TK.V / TKRFF Update

Posted: 15 Aug 2011 01:27 AM PDT

It's time for an update of Tinka Resources. Again, let me make myself real clear. I am in no way affiliated with Tinka. I am not a promoter of Tinka nor was I. If I was, I would have made a shit ton from .15-.73, and I would have dumped millions of shares, and you would not have heard from me again, b/c I would be on a tiny little island, being fanned down and fed grapes by 10's. I simply am offering more information to this company and its potential. If anyone thinks that Tinka is not a good company to invest in, please, state your case. Always consult a licensed broker or financial advisor before making any decisions about inventing in these companies, or anything else offered on this educational and entertainment blog. Disclaimer: I am long Tinka.
Okay, lets get to the good stuff. The great news is I have confirmed we will be getting a revised 43-101 within 100 days, so that takes us to say New Years Day give or take as my target time frame, which I have been touting as our day of celebration for both the POS, and Tinka, hopefully. Within this 43-101, they will be dropping the infill drilling of 30 g/t down to 15 g/t, automatically making it a 50 million ounce resource. This is without ANY additional holes drilled. So let me make this clear. The resource will double without turning another drill.
On to the holes now. They should be turning hole 4, if not done with it. What I would like to talk about is hole 2 and 3 in particular, b/c these might get real exciting, really soon. For instance, hole 2 noticed from 0-90 m that they are going in and out of zebra sandstone ALL THE WAY DOWN. We were told that what lies in the 90-200/300m will make or break this hole. So far so good.
Hole 3 is the most interesting hole as the rig was moved down on the fault. We are under the assumption that they have located, or are trying to locate the vent. And the whisper is that this hole was churning out 200m all the way down of copper.
Other whispers which I did not completely distinguish, was a 70% sphalerite with associations of GELENA. If you don't know what galena is and what is usually found with I'll give you a hint: A shit ton of silver.
Other Whispers include a 140m of lead, zinc, and copper drill. And something about a 20-30% zinc something. If thats vague well so be it.
All in all, I'll go ahead and say it. If you are not familiar with the Kidd Creek Mine, I suggest you start looking into it, as the word is, Tinka is starting to look like its clone.
Again this can go to Zero tomorrow, or can go to hero. Ultimately, you make your own decisions.

Right now someone wants to buy 200K @ .475 as shown below


The TA guys will tell you this is starting to wedge, and maybe at the point of the wedge we will see an NR soon and hopefully send this back into the .70's and on its way to new highs. Be patient. I am using this as potential Christmas bonus surprise time frame.

Gold in Egypt going Mad

Posted: 15 Aug 2011 01:16 AM PDT

This indicator says stocks are extremely oversold

Posted: 14 Aug 2011 11:58 PM PDT

From Pragmatic Capitalism:

The Percent Buy Index (PBI) has reached levels seen only at the bear market lows in 2002-2003 and 2009-2010, and we think it has very negative implications.

At Decision Point, we apply a medium-term timing model to all the stocks in the S&P 500 Index, and track the percentage of buy signals. The result is the PBI, a medium-term indicator that is useful for monitoring…

Read full article (with chart)…

More on sentiment:

Warning: This is a HUGE sign of a top in tech stocks

Don't bet on a crash just yet: Why the dollar's next move could be MUCH higher

Corporate insiders are dumping stocks at an astounding rate

One of the biggest drivers of higher stock prices could soon be history

Posted: 14 Aug 2011 11:56 PM PDT

From Charles Hugh Smith:

We're constantly assured stocks can't go down because corporate profits are rising. So what happens when they start falling as global recession takes hold and the U.S. dollar stops falling?

The entire "story" of the bull market in stocks rests on one reed: permanently rising corporate profits. Too bad those profits are set to fall. Like everything else about the "recovery," the "rising corporate profits" story is founded on financial flim-flam, starting with the boost provided by a sinking dollar.

A simple example reveals how a declining dollar has grossly inflated U.S. global corporate profits. Let's say Johnson & Johnson made…

Read full article…

More on stocks:

Top strategist Saut: A Dow Theory "sell signal" has been confirmed

Desperation: Europe bans short selling in attempt to stop panic

Stocks are about to form another ominous "death cross"

7K Gold – Rickards on CNBC

Posted: 14 Aug 2011 11:38 PM PDT

Highlights from the interview:

  • "The situation we're in is like 1919."
  • "The banks should be held hostage by the countries not the countries held hostage by the banks."
  • "Make this quick and fast and get this over fast."
  • "The debt cannot be repaid"
  • "Make a currency backed by gold and get on with it."
  • "Back a paper currency by gold."
  • "As the paper currencies collapse you'll have to go back to a gold standard."
  • "He who has the most gold wins."
  • "The implied price is $7K per ounce."
  • "The alternative is 20 years of no growth."

King Rick starts 3 minutes in.

~TVR

Bahrain‘s gold traders under pressure

Posted: 14 Aug 2011 11:00 PM PDT

Bahrain's gold jewellery traders face growing difficulties caused by the yellow metal's steadily rising price. A large number of domestic jewellery traders are reporting that more people ...

Asian markets regain ground; attention turning to Europe

Posted: 14 Aug 2011 09:45 PM PDT

Today marks the 40th anniversary of President Richard Nixon ending the US dollar's convertibility into gold at an official price of $35 per ounce, and investors are bracing themselves for ...

Europe Poised For A Huge Credit Crash

Posted: 14 Aug 2011 09:02 PM PDT

"The debt crisis is moving at lightning speed. Please Europe, either put-up or break-up." -Ambrose Evans-Pritchard The Telegraph

"So we wait to see whether the ECB is really willing to sit back and let the whole edifice collapse. Are the Bundesbankers really so stubborn that they would rather bring down the European financial system, tank the world economy, and cause a deep global depression, rather than enter the bond market on a sufficient scale to back-stop Italy and Spain? Tough call. 50:50, I'd say."

"The hardliners are seriously ideological people, and there seem to be some in the upper echelons of German policy-making (though obviously not the floundering bean-counter Schauble, or the battered Chancellor), who suspect that it might be better to lance the boil by forcing an immediate break-up of EMU."

"I note that Belgium's central bank governor Coene hinted that the ECB is withholding bond purchases to force Italy and Spain to push through – you guessed it – yet more growth-destroying austerity. Dangerous game. These 1930s deflationists really are a menace to society."

"In a nutshell, unless the ECB is willing to step in – I mean really step in, not pee in the wind – until such a time as the revamped EFSF bail-out is ratified by all parliaments and is ready to take the baton (say November), and unless the EFSF itself is quadrupled in size and given a €2 trillion mandate without all the German-imposed ifs and buts, then the game is up."

"If the EU authorities refuse to do this, it is best for everybody that it is recognized immediately and that arrangements are made for the orderly break-up of monetary union… not next year, or next month, but next week. There are two basic choices: 1) a spiraling crisis in the South, leading to a string of countries being blown out of EMU, causing a catastrophic financial collapse akin to 1931."

"As Citi's William Buiter told me yesterday, the issue is not how long Italy and Spain can ride out the storm in bond markets. There would be a banking and insurance crisis long before sovereign defaults came into play, simply because the fall in bond prices on the secondary market is causing carnage to bank books (among other transmission mechanisms)."

"Or 2) Germany and its satellite economies withdraw immediately from EMU (let us say the Netherlands, Austria, Finland, Flanders and Luxembourg). This allows the South to enjoy a much-needed devaluation to restore competitiveness without going through a disastrous Fisherite debt deflation. Their contracts would remain in Euros, so they would not need to default.

"Temporary capital controls and some form of financial repression would obviously been needed for a few weeks. The German bloc would have to stand ready to recapitalize its banking system with €100bn perhaps (peanuts in the bigger picture) to offset the shock effect on sudden exchange losses on Club Med debt.

"This would require French leadership. (I have almost given up on Germany.) Carried out with Napoleonic speed and determination, I think this could conceivably prove the game-changer that halted the downward global spiral.

"Markets would very quickly see that the greatest impediments to recovery had been removed. We could rejoice, and breathe a little easier again. My guess is that stock markets would surge in Milan, Madrid and Paris, as occurred in London and Milan after the ERM crisis in 1992.

"Yes, I know, EMU is not the ERM, blah, blah, sanctity of the Project, blah, blah, blah. But just how different is it really? Will this happen? I don't see much evidence that anybody is thinking along these lines. (The Buba men seem to want to expel Greece, Portugal, etc, which is not at all what I mean.)" -Ambrose Evans-Pritchard The Telegraph

"Chistine Legarde Hits A Bump In The Road: "A French court on Thursday ordered an investigation into new IMF chief Christine Lagarde's role in a $400 million arbitration deal in favor of a controversial tycoon. Investigators will open an inquiry this week into possible charges of "complicity to embezzlement of public funds" and "complicity to forgery," prosecutors said. Reader Craig: 'After the takedown of DSK, Lagarde thought she would get a pass on this probe. French courts are not giving her a "Get Out of Jail" pass as yet." (Editor: Nothing happens) http://news.yahoo.com/french-court-orders-probe-imf-chief-lagarde-115917208.html


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QE2.5 and Gold Stocks

Posted: 14 Aug 2011 09:00 PM PDT

Gold & Silver Market Morning, August 15, 2011

Posted: 14 Aug 2011 09:00 PM PDT

Joe Mazumdar: Gold Mining Companies Too Good to Pass Up

Posted: 14 Aug 2011 07:00 PM PDT

Suffocated by staggering unemployment and economic woes, many mining jurisdictions around the world are finding the nearly $1,800/ounce gold too good to pass up. Joe Mazumdar, a senior mining analyst...

Visit the aureport.com for more information and for a free newsletter

Jump in Gold Price –What Did It Really Say?

Posted: 14 Aug 2011 05:45 PM PDT

Indian gold demand soaring

Posted: 14 Aug 2011 05:41 PM PDT

Does Gold Mining Matter?

Posted: 14 Aug 2011 05:05 PM PDT

Summer rerun: Misunderstanding Modern Monetary Theory

Posted: 14 Aug 2011 04:18 PM PDT

This is a post I wrote last summer clarifying some points that I have learned about Modern Monetary Theory. The genesis of the post was a gross mischaracterization of Modern Money Theory (MMT) by Paul Krugman in a piece called "I Would Do Anything For Stimulus, But I Won't Do That (Wonkish)", which Paul Krugman had written in July of last year.

Last week Paul Krugman again attempted to take on MMT in another piece called "Franc Thoughts on Long Run Issues." in that post, Krugman makes the same bogus claims about MMT's saying deficits don't matter in a fiat currency regime.

Even non-MMT fiat currency sceptics like me have figured it out. Personally, I see something cynical about these repeated bogus claims.

For example, in March, Dr. Krugman wrote:

As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary.

Clearly he understands the MMT position. Yet last week he wrote:

MMT (modern monetary theory) types… insist that deficits are never a problem as long as you have your own currency.

See the difference?

Statement #1 is correct. Statement #2 is incorrect – and a repeat of what he said last summer. Since Krugman made statement #1 prior to statement #2, I am left guessing why he has returned to the mischaracterization which is the subject of this post.

P.S. – In the end, this is about interest rates. Why is Paul Krugman worrying about the US losing access to the bond market when the term structure of the yield curve largely reflects expected future policy rates? We just saw this is true after the Fed moved to permanent zero at the last FOMC meeting. "The 0.375% US Treasury note maturing on 31 July 2013 is now yielding only 19 basis points." The Fed can do as much 'financial repression' as they want by keeping rates below the headline inflation rate since it has monopoly power in the market for base money. Inflation and currency depreciation are the issues – not a steeper yield curve.

P.P.S – The real issues are currency sovereignty, fiscal space and malinvestment. What we should really be worried about is stopping people worried about the US becoming the next Greece turning the US into the next Japan.

Here's the original post.

Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won't Do That (Wonkish)." The gist of Krugman's post was to refute Modern Monetary Theory's view on money and deficits. Krugman writes:

Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I'm very much opposed — my view is that running deficits now is entirely appropriate.

But here's the thing: there's a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he's not alone.

Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we're talking theory, not practice. But I can't go along with his view that

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.

Krugman goes on to use a model with strongly monetarist/neoclassical embedded assumptions to make his points. Jamie Galbraith responded in the comments and I am posting his comments here.  But, first, a few words.

I agree that deficits matter. But I take a more Austrian/austerian view in general – so of course I would say that. 

However, as I understand MMT, Krugman's post mischaracterizes both MMT and Galbraith's statement. There are two separate issues here that should be disaggregated and treated in isolation. The first issue is about money and government's source of funding. A separate but related issue is deficits.

On the funding side of things, it sounds like Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world and that taxes don't fund government spending, requiring government to issue bonds for a shortfall. Remember, a fiat currency is one that is created by government. Government can satisfy any commitment in that currency if it so chooses. It could theoretically credit accounts electronically to fulfil its commitment, laws permitting – no bonds necessary.

From the government's perspective, there is no functional difference between any of its obligations like bank notes, electronic credits, or treasury bills and bonds. As the Ten pound note says, "I promise to pay the bearer on demand the sum of [fill in the blank sum][fill in the blank fiat currency]."

So, the U.S. government could legitimately stop issuing bonds altogether if it wanted to.  When people complain about the admittedly enormous government debt, they don't think of the mechanics of the issue. As I see it, in a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don't pay much if anything.

-If the U.S. stopped issuing treasuries, would it go broke? (also see On debt monetization)

This is where the austerian in me says "government could simply pay for things with money it prints electronically out of thin air." You may not like this fact but that's operationally how fiat currency works. I would argue that this eventually leads to currency revulsion (Krugman talks about using lumps of coal as money) and inflation.

[W]hile there is no operational constraint on government because of the electronic printing presses, there is an effective constraint in the form of debt and currency revulsion and price instability (large measures of deflation or inflation).  On countries like Greece or Portugal in the Eurozone, the operational constraint is a lot more real than it is on the U.K. because of currency union. The same is true for countries with a currency peg or large foreign currency debts like Latvia, Hungary or Dubai.

-On the sovereign debt crisis and the debt servicing cost mentality

So the problem for deficits is not national solvency but inflation and currency depreciation. That makes me worried about deficits. If that makes me an inflation hawk and anti-deficit, then so be it.  Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation. But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap. But you can't spend at will under MMT; eventually the output gap closes and inflation becomes a big problem.

Notice that Galbraith never specifically mentions deficits in his statement. I don't think he's talking about deficits at all. His statement goes more to how government funds itself i.e with fiat money that it creates. He also speaks to his view that U.S. banks are forced to accept the government's money because they want to do business in the only legal tender currency unit of taxation. While Galbraith may be more sanguine about the prospect of currency revulsion in the medium-term than I am, he never mentions deficits.

So Krugman clearly misunderstands MMT because it sounds to me like he's saying the same thing. Someone correct me if I'm wrong.

Here's what Galbraith said in the comments in response:

James Galbraith

Townshend VT

July 17th, 2010

4:01 pm

Paul's argument is that *infinite* inflation is a theoretical possibility. Well, yes. It happened in Germany in 1923.

There is no reason to cut Social Security benefits or Medicare now, with effect in the future, in order to avoid the theoretical possibility that some combination of policies might at some time in the future give us the economic conditions of post World War I Germany.

Those conditions were desperately resource-constrained.

In the actual world we live in, government does not have to "persuade the private sector to release real resources." In the actual world, the private sector has already released those resources by the tens of millions of people.

All the government has to do, in the actual world, is mobilize those resources, which it does by issuing checks, preferably to pay people to do useful things.

There is no reason why this should be considered "costly." Done correctly, in economic terms it amounts simply to the reduction of the waste that is associated with unemployment.

Nor is it necessary, when the government issues a check, that it issue a bond to "borrow" the money behind that check. The check creates money in the first place. (Yes, it does this from thin air, by changing numbers in bank accounts.)

Operationally, this is a free reserve in the banking system. The reason the government issues a bond later, is that the banks like to have a higher rate of interest than they can earn on reserves, and the government likes to oblige them.

This is why Treasury auctions don't fail: the government has already created the demand for the bonds, by issuing checks to the banking system.

If the government spent but declined to "borrow," what would happen? Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for dollars, unless the price level is already moving up and out of control.

It is very difficult to get other people to accept coal in place of dollars!

Paul's logical error here is that of assuming-the-consequent. He assumes the inflation which causes dumping of money. But if there is no dumping of money, the inflation will not generally occur.

Yes, again, it's technically possible that the banks and others would start dumping dollars and buying up oil, wheat, rubber, and so forth (and leasing storage facilities for the stuff) thereby driving up the price level.

I wrote — correctly and deliberately — that bankruptcy, insolvency and high real interest rates were not risks. Inflation *is* a risk.

By this, to be clear, I mean an ordinary garden-variety increase in the inflation rate is a risk — not the *infinite-inflation* scenario.

Inflation, though unattractive, is not remotely comparable to bankruptcy or insolvency, unless you get to Paul's *infinite* inflation scenario. So what about that?

In his model, it is driven by his monetarist (quantity-theory) simplification, that the increase in money flows directly into prices. But this is just a modeling error. In the real world, especially in broadly deflationary conditions, people — and banks — simply hang on to cash. There is a Paul Krugman who understands this, from close study over many years of the Japanese stagnation.

However, and again, in the present state of the world economy, and for the foreseeable future — and except for the energy sector — surely a small rise in the inflation rate is a trivial risk.

My position is that the government should focus on real problems: unemployment, care for the aging, energy, climate change, and the disaster in the Gulf of Mexico.

The so-called long-term deficit is not a real problem. And the capital markets demonstrate every day that they agree with this judgment, by buying long-term Treasury bonds for historically-low interest rates.

JG

Peak Gold !

Posted: 14 Aug 2011 04:00 PM PDT
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