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Showing posts from November, 2009

It shouldn't be this way

The central bank-managed, fiat paper money systems that rule the world's economies should be abolished. The free market can meet our monetary needs just as it does other consumer demands - and it can do so without currency devaluation or the boom-bust cycle. The classical gold standard "failed" because government wanted money it could inflate at will. Bankers wanted a monopoly cartel that would protect them from the fraud of fractional reserve banking. Thus, Americans were handed the Federal Reserve System in 1913. War, inflation, and depressions have been with us ever since.

It shouldn't be this way.

P/E ratio of S&P 500 Missing

Following the P/E ratio of the S&P 500 can help investors determine if stock prices are inflated, depressed, or realistic. If a P/E ratio, also called a multiplier, continues reaching record highs for the S&P 500, it suggests the index for the 500 biggest companies may be too high with respect to reported earnings and earnings growth.

The P/E ratio for the S&P 500 hit 140.76 on September 30, 2009. Here are some recent historical values:
12-31-2007 22.19
12-31-2008 60.70
03-31-2009 116.31In Gary North's Specific Answers of November 17, he notes that Standard & Poor's no longer makes the S&P 500 P/E ratio available to the public. According to an email he received from their webmaster, you must register with their website first, then log in to see it. Why is S&P doing this? Here's North's interpretation:
This is a polite way of saying, "This site is not for the sake of the general public. It is for the sake of the retail brokerage indu…

What is "good" inflation?

Any price inflation that is an outcome of consumer preferences should be construed as good. According to economist Joseph Salerno, there are two kinds of benign inflation:

1. Innovations that permit people to economize on the amount of money they hold in their cash balances brings about a decrease in the demand for money, which in turn tends to raise prices, all other things being equal. Credit cards, for example, enable people to make purchases without drawing down their cash balances. By increasing the demand for goods without a corresponding increase in the money supply, price inflation results.
. . . cash-economizing inflation is benign precisely because it is an outcome of individuals striving to optimize their property holdings through the voluntary exchange process. It is also noteworthy that this kind of inflation involves a one-shot increase in prices: once the new payment method or invention becomes broadly adopted, the decline in the demand for money ceases and prices st…

Gary North, What is Money? Parts 1-17

Gary North concluded his outstanding series of articles today on What is Money? The links to all seventeen essays are posted below as well as on BRC. I encourage you to read them again and again until their messages are firmly understood and remembered.

Part 1: Introduction
“If you don't know what money is, how will you obtain more of it?”

Part 2: Precious Metal Coinage
“Counterfeiting is universally condemned by civil governments . . . because they are all counterfeiters, and they deeply resent an invasion of their turf.”

Part 3: Schizophrenic Economists
Economic textbooks don’t treat central banking as a cartel, yet it unquestionably is.

Part 4: Bait and Switch
Through fractional reserve banking, “bankers knowingly promise more than they can deliver to every depositor.”

Part 5: Fractional Reserve Banking
“Banks are government-licensed institutions that issue bogus IOUs. Because these IOUs function as money, they are counterfeit money.”

Part 6: What Makes Money Different?
Unlike the supply…

What would happen if China dropped its peg?

Many analysts and politicians see China's peg to the American dollar as a weapon it uses for grabbing market share and stealing jobs from U.S. manufacturers. But the reality is quite different, argues Peter Schiff, who says that "de-pegging would cause the economic equivalent of cardiac arrest." Yet this "tough love" from China and other countries would be much-needed medicine.
Our economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China's purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables our politicians and citizens to continue spending more than they have and avoiding the hard choices necessary to restore our long-term economic health.

Contrary to the conventional wisdom, when China drops the peg, the imm…

Bastiat on money

From Frédéric Bastiat's essay, What is Money?:

For riches, don’t you see, are not a little more or a little less money. They are bread for the hungry, clothes for the naked, fuel to warm you, oil to lengthen the day, a career open to your son, a certain portion for your daughter, a day of rest after fatigue, a cordial for the faint, a little assistance slipped into the hand of a poor man, a shelter from the storm, a diversion for a brain worn by thought, the incomparable pleasure of making those happy who are dear to us. . . .

If . . . you look upon an abundance of useful things, fit for satisfying our wants and our tastes, as true riches, you will see that simultaneous prosperity is possible. Money serves only to facilitate the transmission of these useful things from one to another, which may be done equally well with an ounce of rare metal like gold, with a pound of more abundant material as silver, or with a hundredweight of still more abundant metal, as copper. According to tha…

Is the Fed "independent"?

This is a fiction, as Congressman Ron Paul and Senator Jim DeMint explain.

It's always dangerous to fight government problems with government solutions, even when the solution - in this case, Fed transparency - attempts to curb the power of the state. But Paul has made it clear over the decades that his ultimate goal is to abolish the Fed and return monetary sovereignty to the market. His efforts at making the Fed more transparent keeps the Creature in the spotlight where it can more easily be slain.

Gary North on Money, Part 15: Hoarding, Old and New

Someday, perhaps, central banks will stop subsidizing their respective Treasury Departments. On that glorious day, governments will move rapidly toward bankruptcy, interest rates on government debt will rise, the markets will begin to crash, consumer prices will begin to fall, and the mother of all bank runs will begin. Get there early.

Read the full article. Read the full collection of articles on What is Money? by Gary North on BRC.

Zimbabwe gets new life

In Zimbabwe, central banking has burned itself out, and the people are starting to recover.
[Zimbabwe] is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.

Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products.

Are you buying gold?

Or are you counting on the government to save the dollar? Doug Casey predicts "a mania in gold."
because the gold and especially silver markets are so tiny, the rush into them will be like trying to push the contents of Hoover Dam through a garden hose. Our positions will go absolutely ballistic.” –Doug Casey, September 2009Casey says the total vale of all the gold ever mined equals $5 trillion in today's prices. Yet U.S. government debt is over twice that amount so far this year. Total global government bailouts are conservatively over four times that amount.

The dollar, like all paper currencies, are exchange instruments managed by governments and big bankers for the benefit of governments and big bankers; in spite of their legal tender status they will eventually become waste material when they're inflated to the point where no one wants them. Then the world will rush into gold, silver and other precious metals. But those are in very limited supply, and their pr…

Inflation is worse than you thought

Do you refer to the government's CPI as an indicator of price inflation? Michael Rozeff doesn't.
I prefer to use the growth rate in the monetary base, also known as M0. By this measure, price inflation is much worse than you thought if you use some version of the CPI.

I use the growth rate of the monetary base for three main reasons. First, it is a very accurate measure of the inflation in bank notes of the Federal Reserve (FED). Second, the FED’s bank note inflation is a major cause of changes in prices in the economy. Third, the CPI has major flaws and difficulties.

The inflation measurement problem is something like measuring the changes in average weight of all the fish in the ocean. The FED’s note inflation is like fish food. As it is dropped by helicopters into the ocean, I assume it produces weight gain that otherwise would not have occurred. Measuring the CPI is like measuring how much weight the fish in the ocean have gained. Measuring the change in the monetary base is…

The Origins of the Federal Reserve

Murray Rothbard's classic has been republished on Mises.org today.
The national-banking system [established during the Civil War] provided only a halfway house between free banking and government central banking, and by the end of the 19th century, the Wall Street banks were becoming increasingly unhappy with the status quo.

How long will banks sit on the bomb?

Analyst Steve Saville points out that the Fed has increased bank reserves 100-fold over the last 14 months - "from around $10B in August of 2008 to around $1000B ($1T) today." These reserves don't constitute an increase in the money supply because they are not available to be spent.

Fortunately, bank lending has declined on a year-over-year basis, so the potential destruction of the fractional reserve system amplifying those reserves 10-fold in the economy has yet to happen.
Even with the decline in bank lending and the general de-leveraging that has occurred within the private sector, the government-Fed tag team has managed to increase the US money supply by around 14% over the past year. If the private banks were to join the inflation party then the risk of hyperinflation would greatly increase, and hyperinflation -- leading to what Mises called a "crack-up boom" -- would be the worst of all possible outcomes.Banks make their money on loans. How long can they…

Does the U.S. "export inflation"?

Yes, but not in the way you might think, says Gary North.

When physical money is sent out of the country, it shrinks the supply of digital money in fractional-reserve American banks, making prices cheaper. Inflation is exported mainly by illegal immigrants.

On the other hand,
Bank-created inflation is not exported. It stays in the trade zone of the nation that creates the money. In today's floating exchange rate system, price inflation in the United States does not affect the price level (a statistical index) in any other country for very long or for very much. Bank-created inflation is not exported. It is merely copied. When foreign prices rise alongside America's rising prices, this is because foreign central banks are matching the monetary policies of the Federal Reserve. Domestic digital inflation is always a domestic bank–inflicted wound. Central banks compete with each other to debauch their domestic currencies. This is not free market competition. It is competitive plunder…

Lies, Damned Lies, and the CPI

While the Federal Reserve is a big supplier of stolen goods to the government, it is by no means the only supplier. As Ron Paul points out, simple adjustments in calculations will accomplish the transfer when the machinery of theft is already in place.

According to the government's current version of the Consumer Price Index, life has gotten cheaper for the first time in decades, which means there's no reason for increasing payouts to Social Security recipients. The CPI is the average price for a "fixed" basket of goods and is supposed to help us gauge how much more (or less) it costs us to live.

But "economist John Williams of Shadow Government Statistics has estimated that if the original methodology of CPI had not changed, Social Security checks would be nearly double what they are today," Paul writes. Substituting hamburger for steak is one way officials arrived at the CPI they needed. Meat is meat according to the government, so the basket of goods re…

Ron Paul's Audit the Fed Bill Gutted

And the agent who did it is Mel Watt, a representative from North Carolina. According to Bloomberg, "Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender." By "agent" I refer to Watt's obvious ties to the banking cartel, rather than the people who elected him.
Why does anyone have the unilateral power to change a bill -- any bill -- much less one that has 308 co-sponsors?
Paul says he intends to introduce an amendment when the bill comes to the House floor for a vote, restoring the bill's original language.

Why does the Fed fear deflation?

The U.S. Consumer Price Index fell by 1.5% in August, marking the sixth consecutive monthly decline, writes economist Frank Shostak. Most experts believe that falling prices signals problems for the economy because consumers will postpone buying goods, expecting prices to fall even lower.
Many economists define deflation as a fall in prices, rather than a fall in the money supply. Deflation, therefore, becomes the enemy against which an inflationary monetary policy is directed. With a sufficient increase in the supply of money, prices will rise and people will be more inclined to buy now rather than later when prices will be even higher.
But is this reasoning realistic? Why should falling prices discourage consumption? People must support their lives in the present and so will buy in the present. Even in our inflationary world some prices have fallen deeply while consumers have been buying. As Shostak notes: From December 1997 to August 2009, the prices of personal computers hav…