A trillion dollars were created this past year.

As of the beginning of October 2011, US Money Supply (M2) officially stands at $9.65 trillion dollars.

Last year M2 was measured at $8.76 trillion dollars, for a year-over-year growth in M2 of 10%.

To put this in perspective... consider the Eiffel Tower, which I am looking at right here.

This amount of printing translates into a printed stack of $100 bills the height of the Eiffel Tower ... about every 3 hours.  For an entire year.

Quantitative Easing my ass.  There's no way that we can print that much physical money.  So we just add zeroes in the servers that tally the ledgers and in bits and bytes, currency is born.

Inflation

Officially, inflation is only running at about a 3.5% annualized rate.

Now if Money Supply is growing at 10% but 'official' inflation is only 3.5%, then this would imply that somehow we are able to keep price growth of our daily necessities at just 35% of growth in paper dollars available to chase real stuff.

This doesn't make a whole lot of sense.  When the amount of fiat dollars in circulation rises, the prices of everything rise in tandem, with tangible commodities rising faster as the market recognizes their store of value to be greater than that of currency being depreciated through excessive printing.


I like coffee in the mornings.

But it's gotten a lot more expensive in the past year.  About 18% more expensive, not 3.5%.

Now coffee has some wild swings looking back over many years (many of them weather-related) so it's not all just inflation.

But the trend is consistent for a wide range of commodities... here in this link looking at fuel and non-fuel components together... shows a price increase of about 15% (not 3.5%)

Some components show flat or slight decreases, but the net effect of those up sharply means price impacts on different parts of society are severe, and uneven with specific categories.

Like food.


Inflation-driven poverty:  Minimum Wage and Food Distress

Okay so 15% may not sound like a lot in a year (it's a lot to me).

But over time the fact that prices for necessities such as food and energy rise faster than official inflation translates into real pain for millions of people, especially those linked a static wage, linked to a wage that grows only with the official rate, or who are on fixed-incomes.

Let's expand the time frame of the Food Price Index to look at 10 years, from 2001 through 2011.

Astounding.  Food prices are 114% greater today than they were in 2001.

But according to the official measure of inflation by the Bureau of Labor Services, inflation has 'only' grown a cumulative 28% during that same time frame.

Incidentally... 28% / 114% = 25%, not much lower than the (1 year) 35% figure above!!

Now the minimum wage was set in 1997 at $5.15 per hour.  It remained there for almost 10 years before a succession of hard-fought increases to its present level of $7.25 per hour.

This represents a 2001-2011 cumulative increase of 40.8%.

For shits and giggles.. a 40.8% increase in the minimum wage divided by a 114% increase in food prices equals 35.8%. 

Put another way, this means price of food is growing ~3x faster than the ability of people on minimum wage to pay for food.

Does this correspond to increasing demand for Food assistance?

I think so.  

The above link shows that as of August 2011 45.8 million people were on the Supplemental Nutritional Aid Program (SNAP), formerly, the Food Stamp program. For anyone counting, that's about 1 in 7 Americans.  1 in 7.

In 2006 there were only 26.5 million people requesting aid.

Going back 10 years to the end of the year 2001there were 18.7 million people on the program. 

The cumulative growth of people falling into food distress over 10 years is then calculated:

(45.8 million people in 2011 / 18.7 million people in 2001) - 1 = 144% cumulative growth.

Not far from cumulative food price increases of 114% shown above.


Scrooged

Those what-nots in Congress and the Federal Reserve are currently trying to figure out a way to bail out the boat they've all shot to hell.  

To summarize we have a history that looks something like this:

1. The cumulative effect of our political game over the past several decades has led to massive deficits and little in the way of tangible solutions to pay it back.  
2. They have been putting band-aids on this by printing more digital currency to pay back debts with conjured money, since our economy is not growing fast enough to provide the tax revenues to do so (and no thanks to ill-timed tax cut packages).  
3. The more money that is printed, the faster the prices of real things, such as food, energy, and necessities must rise.
4. Printing money is easier for them to do politically in the short-term, vs. raising taxes on the wealthiest.  This pattern will likely continue. 
5. The official rate of inflation is lower than the tangible rate for real things;  we saw that Food has risen at about 3x the official rate of inflation over 10 years. 
6. Wages for many people are tied to the official rate or lower, meaning their income by definition cannot keep up with the price of food.
7. This leads to greater food distress, and increases demand for Food Stamps.
8. Looking forward, more Baby Boomers are retiring every year and their future income from Social Security will be tied in some measure to the official rates of inflation.
9. We can expect increased demands from Food Stamps, Food Banks, and extended family support to grow as the gap between official rates and actual rates continues to diverge.

I don't have a great deal of faith in our elected millionaire leaders with their fluffy pension pillows to really understand what is at stake here;  based upon their actions and statements about a good half of them would seem to prefer that all these Americans just die, and reduce the surplus population.

I can't solve this and neither can you.  But understanding the roots of what is happening today and where things are trending can be used to prepare, much as one does for a winter storm.  Watch what they say, and try to develop rules of thumb that make sense to your household...

Such as...

'When they say inflation is at 3%, my wages probably won't rise beyond 3% but food may rise 3x as fast in price, or 9%, so I better adjust.'

If you crash the car... have another! On the house!

The European Union is feeling the heat now..  and is considering a one-time write down of Greek bonds on the order of 50%.

ECB to consider a 50% write-down of Greek debt

Translation:  "we can't let the speculators who made the bad bets eat their own cookin."

This is another blatant example of how the big banks and their financier speculator brethren will get bailed out by central banks and governments when they put all their chips on red and should have chosen black (leveraged 20:1, of course).

But the average person won't get the same breaks.

Consider, who out there gets an offer from their bank to forgive 50% of their mortgage if they become unemployed?  Who out there gets offers from their credit card companies to have their debt slashed if they overreach and can't make the minimum payments anymore?  And furthermore who want to keep spending on those cards?

This is the irony of central-bank bailouts;  they represent a clear class delineation between who gets 'reset' button privilege and who has to remain in indentured debt servitude.

The net impact of these bailouts is inevitable currency debasement, which leads to higher inflation and subsequent cost of living impacts on those whose payscales take much longer to adjust.  This is how the bad bets of a select few are paid back by people who had nothing to do with making them in the first place.

The folks at Fox News would have us all believing the current protests spreading through America are just a rabble.  While they were curiously calling Tea Party rioters who literally spit on members of Congress 'patriots' during the health care debate, they have turned tail and disregarded the anguish millions of people are having by derisively calling them 'mobs'.

While there are many opinions expressed at these protests (as there were diverse opinions shouted by Tea Party mobs) the theme of unfair bailouts and related economic stagnation is constant.  Most of the Tea Party candidates are silent on the theme of bank bailouts, rather, they call for yet more tax breaks that would benefit the same financier/speculator class!

Look, call me old fashioned, but if you are driving reckless and crash the car, I don't think it's the responsibility of your neighbors to pick up the tab and buy you another.  There ought to be a safety valve in free markets that says something like... you make a bad bet, you go bankrupt and let your investors eat the losses.  Without such cross-checks the notion of discipline falls by the wayside and ... with the knowledge that the Federal Reserve, the ECB, or their governments will come riding to the rescue if you are foolish... the risks compound and get bigger and bigger with each cycle.

We should have been on the cusp of emerging from this crisis by now.  The original trigger (subprime US housing debt) was supposed to be ending about now:

This chart shows the mortgage reset waves.  The first hump was subprime debt, and all the damage of 2008 was wrought by that first wave.  Then there was a breathing spell during 2008 that should have been used to clean the books, settle the bad debts and let free markets work.

If we had allowed free markets to reallocate the capital from busted bets into areas that had greater discipline, we would likely be in a state of accelerating growth now, with those titans who drove us into the ditch relegated to to the dustbins of outrageous irrelevance, such as Enron, LTCM, and so on.  Instead, the bailouts continue which prolong and compound the moral hazard of wave #1 into wave #2, which is one reason our housing markets and economy remain crimped today and for the foreseeable future. 

These twerps who wrecked the car in 2007-8 are still running the same institutions and pulling down multi-million dollar compensation packages, this time operating with the full knowledge that they will be made whole if they bet right, if they bet wrong, or if they bet sideways.  Our governments won't let them lose.

Whatever happens to the Occupy movement in the near term, people are not going to forget this anytime soon.  The awareness generated by these assemblies will hopefully have an impact on the next election cycle in a positive way.

I hope DC is not as deaf, dumb and blind as they appear.  They don't need to wait until November 2012 to act. 

C'est La Vie

Google's French beats mine.

Okay, France is banning or restricting sales of silver and gold that exceed $600 USD / $450 EUR equivalent?

(link, click me:)

Buckle up.

Paper beats Rock. No... Rock beats Paper

Child's play

At their core, kids games are fun.  They provide learning mechanisms for socializing, working together as teams, learning about elements of chance, leadership, and (though it's not always framed this way) for learning how to increase your stature and/or wealth at the expense of another.

Ever see a Monopoly game with kids *not* end in fights and tears?

In the classic game of Rock-Paper-Scissors (some evidence suggests it has it origins thousands of years in the past) two or more people make a fist and count 1-2-3, then cast a shape with their hand on the third toss that signifies they are now a "rock" (fist), "paper" (open hand) or "scissors" (forked index and middle finger).

The rules are both simple and surprisingly fair:  scissors can cut paper so wins the toss against paper.  But scissors can be crushed by rock so scissors lose if the other party makes a rock.  Rock in turn can be beaten by paper since paper can cover the rock.  People are trying to outwit each other but the results have a fair degree of chance built into the logic.  Successive rounds eventually determine the winner and everyone is happy. 


Paper Beats Rock

Gold and silver are relatively rare in the earth's crust.  These metals like others are expensive to extract from the ground and refine into pure form.  They exist in such small quantities scattered throughout vast quantities of rock that are not always easy to get to, may exist in countries or locales that have poor infrastructure or oversight, and require one hell of a lot of capital to set up, with astute management needed at every phase for project success. 

Let's compare production rates of silver with equivalent production rates of fiat currency by the Federal Reserve over the past few decades:

The above graph plots the creation of fiat money by the Federal Reserve (M2) against the total world production of silver over time.  This shows that despite all the advances in deposit detection, mining and capital formation available to support new mining ventures, the world has only managed to double the production of silver bullion since 1980.  Over that same time frame the creation of fiat money supply in the United States has risen by 6.5 times.  Fiat money has grown three times as fast as mine production.

Our ability to print new paper money far exceeds our ability to mine silver.  

Or in our kids game paper (printing) beats rock (mining).

This isn't a good investment proposition for paper.  

Pop-Quiz (unscored)

Here's a pop-quiz.  Or things to ask yourself in the mirror.  

Ask yourself whether the following statements are true from (1) your own experience, (2) based upon conversations with other people, and (3) reflections of your own actions (not opinions).   

• Almost nobody you know owns physical silver or gold.  
• Almost everyone you know works to acquire paper dollars. 
• People talk about the rise and fall of silver and gold prices in paper dollars.  
• People do not talk about the rise and fall of the dollar price, in gold or silver ounces.
• I am not worried about cost of living becoming more expensive.
• Cost of living will be the same or lower tomorrow than it is today. 
• The value of the dollar never changes, it is gold to me.

Rock (value) beats Paper (value)

Fear Factor.  People fear purchasing bullion when it is high in dollar price, when it is low in dollar price, and when prices rise or fall.  This means they have completely shut themselves out of the market.  

I am not going to say people should put all their money chips on physicals.  I don't because I don't know the future.  If I did know the future I would double-down on that one strategy.  

I do know that silver is much more rare in dollar terms that it was 10 years ago, and based upon the rate of new bailout money being printed by the Central banks (currency wars), there is going to be more fiat floating in the system later than there is today.  

But we won't be able to ramp up mine production to match the rate of fiat production.  

Not by a mile.  

A better way to manage volatility in COMEX markets

COMEX is old school.

They either are genuine and are looking to manage volatility in the precious metals market (as is publicly stated) or are pimping for the central banks and enabling reckless fiat policy.

Their volatility management strategy involves raising the margins for speculative trades in big percentage jumps, thereby causing the rapid unwinding of global trading strategies and causing the very volatility they say they are trying to manage.

Conveniently, radical COMEX changes in margin reserve requirement take the pressure off COMEX to settle in physical delivery or high cash premiums, since the prices fall in a disorderly fashion.

The COMEX just shot another rabbit these past two days, and raised the margins for trading on silver by 16%, after several successive increases in May (during the last sell off in paper price).  The fact that the unwinding and sell off came in advance of the announcement would indicate news of the margin increase leaked, but that's another story.

I believe the official rationale of the COMEX is horse crap, by the way.


If they are genuine, there is a much simpler and better way to manage volatility in the COMEX trading markets that gets no discussion. 

All the COMEX has to do is require fiat security of equivalent percentage interest in the underlying contract be held, not a fixed fiat amount.  Right now if a speculator wants to take a position on a 100 oz gold contract, they are required to put up a fixed amount of dollars, regardless in the price fluctuation of the price of gold per oz.

This is why I believe the COMEX is just blowing smoke in everyone's face when they state their goals, because there is no way that so many trade-smart people could do something so asinine and old school in a hypertrade environment.

Right now as the fiat price of gold rises, then the percentage held as security (a fixed fiat value relative to ounces bullion) of the total value shrinks.  The price of gold rises and rises until the COMEX decides to raise the margin requirement and yank the rug out from the trade assumptions, causing a catastrophic and disorderly unwinding of global positions and increasing volatility.

This generally causes prices to move in the negative direction, to the delight of central bankers who need the intrinsic value to flow back into fiat paper for their inflation games.  

In the logical scenario, security interest in the contracts would adjust automatically with the fluctuations in price.  If the price of silver in the markets rose by 10%, then 10% more security fiat would have to be posted by the speculator with the COMEX.  If it fell by 10%, then the speculator would be credited or refunded a like amount.

Given we are in an electronic world where money moves as fast as electrons allow, an electronic ledger would not be onerous to set up. No one writes checks anymore.

This would provide a better system for volatility management, since it is a natural braking system for extreme price moves in the upwards position.  Price spikes would be slowed by ever-increasing calls for collateral posting, and likewise mitigated in the downward direction, since more capital would be relinquished to the market by the COMEX for redeployment into undervalued classes.

The fact that this is not the way the system runs today tells me a great deal, that the COMEX is either:

1. Too stupid and clumsy to adjust and find a better way, or
2. Is an extension of the corrupt central bank games to continue fiat expansion at the expense of the everyman and maintain the status quo.

Whichever it may be doesn't matter for me right now.  Buying physical whatever with depreciating fiat is a winning move.  Someday I may move more seriously into the trading games, but for right now what I see from the ringside is a rigged game.  Not an impossible one... but one w/ a shark rule or two I need to learn first.

Too hot to handle. Ebay bows out.

Received via email today...

*****************************************************

eBay Bucks Update

Dear ______________:

As always, eBay is committed to bringing you amazing deals on gold and silver. However, to do so, we can no longer offer eBay Bucks for purchases from the Bullion category within Coins & Paper Money. This change will take effect October 1, 2011. To learn more about earning and redeeming eBay Bucks, visit the Frequently Asked Questions page. And remember that you can always tell whether an item qualifies for eBay Bucks by looking for the earn amount below the price on the item description page.

To review the updated eBay Bucks Terms & Conditions, please visit http://pages.ebay.com/rewards/terms.html.

We appreciate your eBay Bucks membership and hope you'll continue to enjoy the benefits provided by the eBay Bullion Center, including great savings and fast, free shipping from Featured Sellers—and eBay Buyer Protection for your purchases.

Sincerely,

The eBay Bucks team

*****************************************************
I long ago ceased buying from the bullion category on eBay, thought there were too many fakes being pumped out by China to make it worthwhile.. but is curious that they are dropping out.  With high-dollar transactions still continuing to rise I guess the Bucks program was just too hot to handle?

(:-\

Gamers Solve Decade-old AIDS Enzyme puzzle

"Online gamers have achieved a feat beyond the realm of Second Life or Dungeons and Dragons: they have deciphered the structure of an enzyme of an AIDS-like virus that had thwarted scientists for a decade.

...

Games provide a framework for bringing together the strengths of computers and humans. The results in this week's paper show that gaming, science and computation can be combined to make advances that were not possible before."


Article link:

Foldit link:

 

Pay no attention to that Fed Chairman behind the curtain!

The QE3 has set sail

The market is still in Oz.  They appear to be behaving as if the wizard is telling them the truth about his printing press behind the curtain, and reacting as if the next round of quantitative easing (QE3) has not already been initiated.

I don't put much stock in recreational news, or 'infotainment' (haven't had cable TV in years) because I just don't have time to sift through the bullshit.

In any event I believe the data from the Federal Reserve itself shows that QE3 has not only set sail, but is well out to sea.

And per usual, that data is hiding in plain sight.


Psst, hey buddy, can you spare $500 billion?

Or more.  In the past three months, from June 6, 2011 through September 5, 2011 the Fed has added $546 billion digital dollars to the money supply (M2):

I know its a lot to put into perspective, but yes, that's a lot of cheddar, even for Helicopter Ben.  Let's put $546 billion in digital dollars into context (comparative values as of September 17, 2011) just to keep things straight:

• Total cost of war spent on Afghanistan in 10 years:  $455 billion
• $546 billion... is enough to buy every share of Apple corporation ($370 billion).  And have still have enough spare change left over to buy all the shares in Google if you wanted it ($170 billion).  And Plum Creek Timber Company, the largest private landowner in the United States, with 6.8 million acres of timber, rock, soil, sand, oil and gas assets.  
• In another week you'd be able to add Lockheed Martin to your portfolio.  
• Number of ounces of silver bullion $554 billion dollars could be exchanged for:  13.4 billion troy ounces.
• Number of silver ounces produced in the US last year:  about 39 million (or 0.3% of 13.4 bn)
• Number of silver ounces produced globally last year:  about 735 million (or 5.5% of 13.4 bn)
• Total assessed value of all commercial and residential real estate in the City and County of San Francisco:  $163 billion.

And so on.  You get the idea.


Fiat Roller Coaster Rides only go one direction:  Up

Let's zoom out for perspective. That last spike on the right is the last three months of printing. 

We have already matched the rate and level of the previous money supply inflation, and people are still waiting to see what Bernanke is going to *say* about possibly initiating QE3.

In a fiat system the roller coaster ride only goes up, so it gets pretty dizzy after awhile.

Let's put the growth rate into perspective, by computing Year-over-Year changes in the SA-levels of M2.

The major spikes and peaks correspond to economic dislocation and geopolitical events, such as 9/11.

But it is clear that our present status (on far right) has matched the rate of the previous printing cycle.


Where's Toto?

Let's go back to Oz and recap.  Recall that neither the Lion, nor the Tin-Man nor the Scarecrow .. not even Dorothy herself managed to figure out that the Wizard was a sham at the end.  It was a little mutt dog that pulled the curtain back and exposed the whole scheme.

We need Toto today.  Our mainstream financial media have lost their brains and have forgotten how to do basic journalistic investigation.

Toto come home!

45 Fort Knoxes

Fort Knox is one of the official gold repositories of the United States (the other, the Federal Reserve Bank of New York).  In these two vaults lie total US reserves: 8,133 tonnes of gold.

Flat fact:  a ton of gold would make a cube about 15 inches on a side.  (The Yukon Gold Rush was kicked off by a single ton of gold arriving on a ship in San Francisco one day)

15-inches on a side.  That's it.  That's a cube & a whole ton of gold.

So 8,133 tonnes of US gold reserves would therefore make a cube about 25 feet on each side.

To put this in perspective, the US supply of gold... the largest such hoard ever amassed by one country in all of human history..  would look like this if you were to put that cube inside AT&T Park in San Francisco (click).
 

That yellow cube anchored on home plate represents the entire US Gold Reserves.  And it's the largest such concentration anywhere, anytime.  Split between Fort Knox and the US Federal Reserve.

Silver.

Silver appears to be more rare than gold, and has been trending that way for decades.

This is because most above ground silver has been apparently used for electronics, wires, medical uses, and so forth.  There is a bit of silver in every cell phone, flat-screen TV, medical devices, computer, and increasingly, solar panels.  Highly conductive, ductile, germ-killing, in many respects the perfect metal for so many applications.  And stockpiles acquired over millenia appear to have been used up in the Consumer Era of the past half century. 

There are no reported central bank vaults of silver bullion, anywhere in the world.  No IMF holdings, no World Bank stores, not even in a Swiss mountainside.  These may have gold, and even then not as much as the United States.

It's hard to know how much bullion actually exists above ground, because so much is unreported and lives in little places here and there, in jewelry, in electronics, some coins & metals, silverware.  Ubiquitous and yet nowhere.

Market Pricing suggests we have far more silver than gold.

Silver currently trades at a price 45x that of gold.  But if silver is less plentiful and available than gold, shouldn't that gap be closer?  Perhaps much closer?

Fort Knox holds about 4,500 tonnes of gold bullion.  If we assumed that silver is 45x more plentiful than gold (based upon the price differential) and this physical silver exists somewhere ... it would be the equivalent of trying to verify that 45 more storage depots the size and importance of Fort Knox exist somewhere in the United States to match this pricing expectation.

Have you ever heard of dozens upon dozens of Fort Knox-type installations that keep massive silver hoards under guard, lock and key?

We actually used to have one in the United States, just one.  Our last strategic silver depot was established by Franklin Delano Roosevelt in 1937 at West Point, site of our premier military academy for the US Army.  It was referred to at the time as the 'Fort Knox of Silver'.  Sadly, successive administrations dumped that silver onto the market, heavily in the late 1960-1970 time frame.  (Franklin Mint, anyone?)   So there goes that.

Relative to gold, silver is primarily used industrially and only lately seems to be finding its former use as a monetary metal.  The price has risen 9x in the last 10 years, reflecting increasing uncertainty about the monopoly money games being played.

I don't know what silver will do on price tomorrow or any other definitive date.  But the fundamentals indicate bullion (not this SLV junk) will continue to be rare relative to not just paper dollars, but even to gold itself.

And that discrepancy .. as with any investment opp.. is what makes this so interesting to research. 

DOW JONES 85,000

Or, the equivalent return had one bought this asset (click for link) ten years ago:

Any questions?

Creating Free Jobs without using the Bat-Phone

So the President's big job speech was tonight.  I think President Obama is barking up the wrong tree.  This is not a personal fault per se... beltway arrogance is a sand trap many politicians of both parties fall into.  Many there are prevented by their own myopia from charting a better path.   And as a lawyer who has never run a private enterprise, Mr. Obama is somewhat excused from understanding what is required to make, let alone meet, a payroll.  

Look businesses create new jobs when they think the added cost of doing so will result in higher profits relative to their investment in human resources.  They cannot create jobs when they do not have the capital to do so, be it capital they generate themselves from ordinary operations or must borrow in the form of loans that have to be paid back with interest.

Kicking the can should be a national pastime.

The President has proposed a number of gimmicks that just aren't likely to get the job done.  These consist of high-cost tinkering to the tax codes, but ultimately won't stimulate the majority of the businesses to expand in any meaningful way.

These are like saying to a cash-strapped family... "come buy a new car, free satellite radio for six months!"   A few may bite.. a few more will nibble.. but most will stand pat.

Other proposed items are variants on 'infrastructure' spending that should be rolled into normal government operations anyway, such as school maintenance, highway maintenance, and so forth.  This is the cost of keeping our nation stitched together and should be accounted for from existing revenues, not framed as some special item that requires a big recession to justify fixing.

The reality is that there is no such thing as 'shovel ready' projects and any government-funded program comes laden with so much red tape, rules and bureaucracy, not to mention usual contractor padding of expenses, that these end up creating relatively few jobs that have defined shelf-lives.  They certainly do not happen overnight and can take years to get going.

Oh, and the grand plan is to tack the half-trillion dollar price tag to a long-range debt plan that doesn't kick in until most everyone in charge of Washington today has retired. 

We have already solved the problem.

There is a better way to provide capital for businesses.  In March 2010 and August 2011 I mentioned the issue of Excess Reserves.  These are the dollars banks hold at the Federal Reserve when they do not wish to deploy them in normal bank operations, such as ... loans.

One of the bailout quirks created a disincentive for banks to loan money and instead park their cash at the Fed... they now receive interest paid on those reserves.  They get paid interest on their savings accounts while they dropped your rate to zero percent. 

Oh, and this is where a lot of the stimulus money went, by the way.  $1.6 trillion (that's $1,600 billion, or $1,600,000 million).  Give or take a Bill Gates or three. 


What Obama Should Have Done:  Proposed Bank Fees on Banks

President Obama should have called for a new law that charges an Inactivity Fee on Excess Reserves.  This would force banks to choose between paying the US taxpayers a fee for not lending stimulus money they gave to them, or making loans to businesses so they have viable options to grow.

Those sectors of the economy that sense opportunity could then take out a loan and deploy the capital to hire workers, add capacity, and grow their revenues.  Banks could either respond to that demand and supply the liquidity, or stand pat on their reserves and pay the taxpayer some predefined rate, such as the AA-rated corporate bond average as an Inactivity Fee. 

The law could have called for some easily understood parameters;  for example:

• Loan allocations are proportional to job creation.  If small businesses create 50% of the jobs, then they get 50% of the loans.  If medium sized businesses create 30% of the jobs, they get 30% of the loans.  And so forth.
• Domestic Only.  Loans made that did not result in domestic job creation would not save the banks from the Inactivity Fee.  The last thing a large multinational needs is cheap capital to close down a domestic operation and outsource.

The Invisible-Hand and the Law-of-Unintended-Consequences ... are a couple made for Jerry Springer

I fear that this new jobs proposal is going to create more capital distortions instead of a fair playing field.  For example, subsidizing workers wages with existing unemployment benefit streams creates incentives for companies to reduce their cost structure.. not prevent layoffs or add new workers.

Why hire new workers when one can reduce hours of existing employees and cover the gap with Federal subsidies (as modeled after the GeorgiaWorks program)?

In this scenario you've just made your business more profitable without any changes and put yourself at a price advantage to your competitors, who are now weakened and must match the strategy or lay people off to keep up.

I know they say there will be rules but the law will be written by lawyer-lobbyists to benefit corporate sponsors before it is kissed by Congress and put into effect by bureaucrats who won't know what they are doing.

The progression of good intentions-to-law in Washington has a lot in common with the old game of "telephone" played by kids today.  It just gets curiouser and curiouser the more they mess with it.


Creating Free Jobs without using the Bat-Phone

The bottom line is that instead of adding $450 billion to our national debt/increased taxes... we already have so much dry powder just waiting to be used.  Let's use a part of that which we have already paid for before we pick up the Bat-Phone.  We could take just a third of the Excess Reserves and create the incentives for it to be lent out.. and no new debt would have to be issued and no taxes would have to be raised.

Picture hundreds of thousands of business owners with fresh capital options, who could then make the choice to grow in meaningful leaps and bounds in a manner that makes sense for their particular business:  retail, construction, services, real estate, whatever.

With a large loan that needs to be paid back ... they would have incentives to quickly choose willing and capable workers who are more than ready to commit to the workforce.  Workers that would help them grow the business profitably and pay back the loan (which also helps make the banks profitable again). 

As these workers rejoin and become taxpaying family providers... proportional revenue flows to the Treasury increase and correspondingly reduces our need for further national debt issuance.

Capital Trumps Taxation.  "That is what creates jobs."

Richard Silverman is the CFO of TheFreshDiet.com, a Miami-based food.  On CNN he said:

"It is capital availability that matters, not the tax rate that you pay... the difference between us paying a 35% corporate tax rate and a 25% corporate tax rate is peanuts at the end of the year compared to our ability to raise a couple million dollars when we need it. That is what is important. That is what creates jobs."

I agree.

I'll vote for the free jobs option anytime over the one that adds another half-trillion to the debt.  Let's save the Bat-Phone for a real crisis.

Carry Trade killing the Economy?

The "carry-trade" refers to a way that financiers and speculators make money.  The premise is that one can borrow a currency (or asset) that is priced at or near 0% and then use that borrowed money to acquire another higher-yielding asset (such as long-dated treasury bonds) elsewhere and pocket the difference.  With use of leverage one can make fantastic amounts of money.

While this might seem logical the market may move to extend this scenario that benefit themselves but can damage the broader economy. 

The risk of damage comes when speculators who control disproportionate leverage in the system move en masse to protect their Golden Goose.. for example back-channel pressures can be put on politicians, policymakers ... and we know how easy the masses are led when the media creates a lot of buzz to scare them. 

Over the last few years many people, from workers to Presidents, have been conditioned to believe that the Fed lowering rates will carry the key to economic salvation.  Despite the fact that our economy continues to stagnate in the presence of very low short term rates, the screaming continues for yet more Quantitative Easing by the Fed. 

I think this is because those who benefit from the carry trade know that this will take the form of further acquisition of US Treasury Bonds by the Fed (or monetization of the debt), which will keep longer-term rates low.  And lower rates will permit more carry-trade bets. 

The knock-on effects of this ripple outwards:

• Distortions in the bond structure make weak economic policy look healthy instead of ill-advised, at least in the short-term.  This may solve temporary issues but enables further expansion of the debt... sort of like getting another credit card with a teaser rate that enables someone who is maxed out to transfer their balance and avoid paying the balance, for a short time.  If they are irresponsible then they will see the freed-up card as new money for further spending and feel 'wealthier' as a result. If more treasuries can be issued for low rates then the government may borrow and expand more since their models of relative cost are skewed by artificially low rate assumptions. 

• Race to devalue.  The currency tends to devalue since an explosion in money supply is required for monetization to proceed.  Competitor economies follow suit so as to prevent their currency from appearing to appreciate, even if it wasn't trying to appreciate.  This is because a currency that rises relative to others (or stays even while others fall) has their exports undermined.  If your foreign competitor is able to price their equivalent product lower than yours because their home currency weakened relative to yours, you both may have the same profit margins but not the same sales since buyers will go to your competitor first and you only as a last resort.  That can kill your business very fast, and governments know this so their central banks try to keep their devaluation rates more or less in the same ballpark as their export markets...  if they can.  If they fail, then that sector ceases to play a role as a job creator in the home market and the country becomes a net importer. 

• Inflation for real people becomes a problem.  In the presence of a flood of digital dollars that are printed to monetize the debt and keep rates low (which benefits further carry-trade activity), the price of real stuff appears to rise.  This is what we experience as inflation.  One extreme example is to imagine what would happen if you and everyone else in the world won the lottery... fantastic!  But who would staff the grocery stores?  The fuel stations?  The movie theaters?  No one.. at least, not at present wages.  The price of everything from apples to cars would go up to reflect a new wage structure to attract labor.  Shortly after 'winning' the new minimum wage would rise to thousands of dollars per hour, but people would still struggle to make ends meet since the cost of living would also be very very high.  Printing done to monetize the debt and permit the carry trade is causing the price of real stuff to rise at rates to levels not seen in many decades, if ever in this country. 

All of this is what we call digging a deeper hole for ourselves.  This adds undue risk to the economy since capital allocations may freeze up, preventing formation of new business, while players who otherwise should be liquidated are protected and receive the lionshare of rewards.


Will it end?

Of course.  No economic paradigm lasts forever and this situation will end.  Whether the end is sharp and sudden or slow and measured remains to be seen.  The price of metals is rising at a steep rate, as is most every other commodity, reflecting revaluation as dollars flood the system and find safe haven in real stuff.  I think the odds of a catastrophic end rise the faster the digital printing... and we are printing at faster and faster rates to keep ahead of a declining international bond position.  

 

What should I do?
 

It's easier to swim with the tide than against.  But if you time the turn wrong you could be swept out to sea.  Be adventurous but safe. 

 

Don't go all out.  Diversify just a part out of dollar assets and into real stuff, oil, metals, land, whatever.  I've had a fun turn playing a bit of the carry-trade too, playing currency pairs on Forex.com, but be careful there and practice with small amounts first as the leverage will wipe you out if you get greedy.  

 

Just remember the dollar is king but kings can topple, and the aftermath is often not pretty.  But for the time being figure out where the bets are and choose those that suit your risk tolerance, i.e. physical metal if conservative or highly-leveraged currency pair bets if you like to stake high. 

And for god's sake don't look to CNBC, Fox Business and the like for advice.. if anything use them for a pulse check on which cliff the herd is running off to next. 

Most money does not exist

If you were offered all the money in the world, you would still be ripped off.

What do you think of when you visualize US dollars?  When you hear of the printing press?  When people on TV talk about the money supply?

When you think of printing US dollars, do you visualize a literal printing press rolling bills off by the sheetload?

Most do.  This is what the media shows on almost every stock video.

This looks real, seems real, and is what we carry around in our wallets.  But note... 'all the money in the world' that exists in paper and coinage form is in reality just a small percent, literally a few pennies on the dollar.

Fact 1:  the total amount of US currency that exists is just around $1 trillion dollars.   Sounds like a lot.  But there are also a lot of people in the US, 307 million more or less.  Assuming that US citizens alone cash out all the dollars in existence (to the exclusion of all foreigners) then this averages just ~$3,000 real dollars per person.

That's it.  If every person in the United States got their fair share of money in paper and coin, there would only be enough for about $3,000 each with nothing left over.  Not even enough for a 'like new' teal green Honda.

And even that number ignores skew from concentration of wealth. The collective net worth of just six:  the Walton family (Wal-Mart), Bill Gates (Microsoft), Warren Buffet (Berkshire Hathaway), Larry Ellison (Oracle), Michael Bloomberg (da Mayor), and Oprah (Harpo) is around $190 billion dollars.  If these six decided to go to the bank and get all their money at one time, they would take almost 20% out of circulation, instantly, or about 1 out of 5 dollars, which means the take for all other billionaires, mere millionaires and people like you and me falls to around $2,500 apiece.  Everyone else has just lost 18% of their equal paper share because of the wealth held by just the top six. 

Now obviously cash outs on that scale just won't happen;  it is impossible.  Physical money is just one small part of the picture and no matter what your bank balance says there isn't enough to go around should everyone run to get it out.

First Class Money.  Second Class Money.  Third-Class Money... Home.  

Let's round the bases.  Not all money is created equal.  Our wise asses in government and economics have created different classes of money.  Being a baseball kind of guy I'll present them in terms of bases.

First Base:  M1

There is a larger class of money than physical money.  This is called "M1" by the Federal Reserve and associated economists.  The M1 class is basically made up of all physical money + checking and travelers checks anywhere in the world, and is larger than all physical money.  Much larger.  Nearly $2.1 trillion in fact.

This accounting is nearly twice physical coin and paper.  Congratulations!  If they split that all out we'd all now have just over $6,000 in your pocket... but remember only $3000 is physically available for withdrawal so you'd have to settle for an IOU on the rest.

Second Base:  M2
 
M1 is not all the money in the virtual pot, as it excludes other kinds of money on the books such as savings accounts, small CDs and money market accounts.  When those are added in the Federal Reserve calls this "M2" money.

And M2 is much, much larger, about  $9.5 trillion as of August 2011.

Congratulations your virtual share is now nearly $27,000! (but you'd only be able to get $3,000 of that in physical form)

Third Base:  M3

There is a third class called M3 but it was growing so fast the Federal Reserve decided to stop tracking it in late 2006 so they wouldn't scare the kids.

M3 is estimated by Shadowstats.org to be between $14-15 trillion, about 14-15x all the physical dollars in the world.

If you were offered all the physical US dollar money in the world, you'd be the sucker who left 14x as much on the table for someone else to claim.  

Home:  Nearly all money that exists, is unreal

Most US Dollars in existence today are just electronic accounting ledger balances.  Binary bits of electrons flipping "0" to "1" (and vice versa) on server farms throughout the world.

Money is a quantum touchstone...  we strive badly to acquire that which does not exist.  

The truth is we now could not cut down trees fast enough to create the paper stock cloth upon which greenbacks are printed.

If electronic versions in M1, M2, and M3 did not exist and we were forced to print our money like in the old days... you would see the dollar disappear in favor of the fiver, then the ten, then the yuppie-foodstamp (the $20), the hundred and so on as they added zeroes to the existing paper to keep pace with expansion.

This was the classical way inflation or hyperinflation was seen, the adding of zeroes to physical circulating currency.  Changes were obvious and noticeable to people and these fiat forms of paper did not long survive.

Electronic classes for the investing masses... the printing press is a relic... with a few keystrokes one person can now create more money than the entire Mint in a year... and we don't notice because we get pretty bank statements every month that tell us how much money we have in our accounts. 

This trend will continue.  Physical money will continue to decline as a proportional share of total money supply, however it is measured.

Keeping the perspective that money is just electronic, just digital dollars, may help you become a better investor because it will help you better assess exchange rates between assets denominated in dollars with those with other fundamental valuations that are not necessarily dollar-denominated, such as  bullion, commodities, land,oil, water, etc.  If you are able to mentally view tangible and intangible (dollar) assets on the same scale you will have an edge in being able to determine buy-low/sell-high situations, and trade advantageously between them for long run success.

Silver Bubble or Ground Floor? (Part III) - Mandatory Mass Hysteria

My conclusion

I do not believe silver to be in a bubble today.  It has had a good performance over the past 10 years, moving upwards by a factor of 8x, but this is not enough to judge whether or not silver is in bubble territory.

I want to share with you some of my rationale.

Consideration #1:  Bubble prices cannot form if fake supply is used to distort classical supply and demand pricing mechanisms for what is supposed to be a physical asset (e.g. silver).

In the silver market the price setting mechanism is the clearinghouse of the electronic futures markets, which as discussed is dominated by a few market speculators who are in a zero-sum game making bets with each other that have short-term expiration dates.  This is different from the stock market.  While it is called the ‘futures’ market it is in many respects one of the most short-sighted markets out there.  

Further the futures market is using Monopoly Money to set the price of real silver.  This is called paper silver (or as I call it, "digital silver").  As of March 2010, 100 ounces of digital silver trade for every ounce of physical available for delivery.  I suspect that ratio has grown by at least 2-3x since then, given the rapid draw-down in COMEX bullion coupled with increased volume.   

100 or more digital ounces for every physical ounce.  With no changes to the present price-setting mechanisms, does this mean one could acquire every physical ounce available for delivery and only influence 1% of the futures price?

This is irrational from a classic supply and demand perspective.  This kind of distortion is certainly not taught in econ 101 nor are these types of mechanisms clearly mapped out for investors by the financial media.  In fact when it comes to most investing stories, especially commodities, the media generally gets away with reporting daily quotations, and if you are lucky tosses out a few chummy soundbites on why something did this or that.  What a bone. 

No, in order to have a bubble we have to have a clear mechanism by which extremely high prices can be obtained, sustained, and launched into the stratosphere.

If digital silver significantly outweighs physical silver for setting price, then the means for a bubble in price takes one of two forms:

1. The exchange and regulators lose control of digital silver, reversing their present course of actions which involve raising margins for speculation, or
2. When existing physical supply is no longer able to meet demand for physical by industry +  investors, breaking the market-setting mechanism of digital silver.  In this scenario a secondary market for physical acquisition is created and the bullion trades at much higher prices to the digital, which either must adjust upwards or decline into irrelevance.  (picture, the official grocery stores in Soviet Russia that boasted low prices but had empty shelves because the black market  was the only place with the physical groceries).

Consideration #2:  Meaningful real accumulation of the asset is not possible

Nobody knows the percentage of households that own physical bullion.  I would suspect less than 10% have any silver whatsoever, and that in total maybe 1-5% hold more than 50 ounces of silver troy oz in any form. 

I come to this estimate in a reasoned but  circumspect manner.  I see many online reports that estimate only 1 billion oz of physical silver exist above ground in investable form.  If this is true and American households owned the entire world supply, an impossible scenario, then the maximum silver allocation on an equal basis would only be 10 troy oz per household (1 billion ounces / 100 million households = 10 troy oz / HH).... I'm rounding down on HH from 114 to 100 million for simplicity. 

Ten ounces is good but far from a meaningful amount. 

In capitalist systems wealth concentrates.  If just 1% of households owned the entire supply then this would average 1000 oz per household (1 billion / 1 million households = 1000 troy oz / HH).  This seems high but is just an estimated boundary.  If the hypothetical billion ounces is spread over 5 million households then the average would be 200 troy oz (1 billion / 5 million households = 200 troy oz / HH).  

200 oz is a more meaningful amount of silver for a household, but it would vaporize the above ground supply and leave none for the other 95%.  

There is very little physical out there for acquisition.  

If 10% of households acquired 50 ounces each that would consume half the above-ground supply.  If just one of their neighbors wanted to acquire their own 50 ounces they would consume the rest, leaving the other 80% high and dry.  

And all this assumes the price of silver continues to be attainable on a per oz basis, that early buyers stop when their ‘fair’ share has been acquired (i.e. no hoarding by those with more money to spend), that no one else in the world wants silver bullion except Americans, that industry declines to build stockpiles for manufacturing, and that this 1 billion oz above-ground supply, does in fact exist and is not appropriated by governments as supply vanishes.  

Consideration #3:  Silver is more rare than gold on an above-ground basis.

Almost all gold mined in human history has been recycled and retained, about 5 billion troy ounces.  Much of this sits in central bank vaults under careful lock and key, and will never circulate among regular people.  

In comparison, almost all the historic silver that has been mined has already been used up by industrial processes.  Given the lifespan of electronics and related consumables, a fair amount of mined silver now lay scattered in microscopic quantities throughout American landfills, in millions of discarded electronic devices.  

With 5x more above-ground gold than above-ground silver, one would expect the natural price of silver to be at least par with gold in a normal supply and demand scenario, instead of 1/43^rd its price,  Just a few years ago it was 1/75^th the price, so perhaps that correction is underway   

We shall see.

Consideration #4:  Bullion is mined from the earth.  Stocks and money can be printed at-will.

We keep forgetting that bullion is the end-product of an industrial process.  It is the result of lots of money and time invested by miners to figure out where it is concentrated in the earth, who then must get tons of rock lifted out of the ground for crushing and refining into bullion, often in remote parts of the world where basic infrastructure does not exist.  

Stocks can be diluted with a simple vote by the Board of Directors to issue more shares.  Money can be created out of thin air by the Federal Reserve.  They don’t even bother to print physical certificates or paper money anymore... that would be too expensive and slow it all down.   

• For the astute investor, when given the choice between two assets, choosing the one that is less able to be diluted has better odds of concentrating value than an asset that can be multiplied at will.

Consideration #5:  Mandatory mass hysteria...  in a bubble the prices have no rational connection to the supply of the given asset, which can take on unbacked synthetic forms, and credit mechanisms break down.

A bubble means price appreciation has become a self-sustaining cycle, a Ponzi Party of greed, fear and frenzy where the act of buying itself begets more buying.  The fans scream and pass out when the boyband-of-the-day just walks on the stage and says 'hello'.  The fundamentals of the underlying asset ... often plentiful in supply... fades into the background as greed takes center stage.  The Herd is mystified by each leap forward and rushes to acquire diminishing amounts before the next round of bids takes it higher still.  Breaks in price appreciation are few, if non-existent during full-blown mania phase.  Naysayers warning of a bubble are disregarded and ridiculed by the financial media, the thundering masses and the self-interested promoters in-kind.  Politicians may even get into the act, praising the newfound 'prosperity' and searching for ways to connect this democratization of wealth with whatever it was they did in office, no matter how flimsy. 

A bubble means everyone is scrapping in the streets to acquire the last bits of the asset.  A scrum.  A mad scramble.  A mania.  

We have nothing like this today.  In fact we have the opposite, where people are throwing away their bullion for a few paper Franklins.  

Without extreme demand by the masses, the markets will not invent absurd credit instruments for people to engage in leveraged buying to amplify their returns.  As that demand ramps up these credit instruments are invented, rationalized, and disbursed throughout the system, setting the stage for catastrophic knock-ons during the contractionary deflationary period.

When you see ads for "BUY SILVER ON CREDIT AT 0%" instead of "WE PAY CASH FOR SILVER".. then ... perhaps its time to start trading silver for something else. 

Acquiring Physical Silver establishes a foothold in traditional, long-term monetary solvency for you and your family.

We manage risk in all kinds of ways in our everyday lives.  None of us wants to be involved in a costly car accident, but if we are, we want to be insured.  We buy life insurance for much the same reason, to provide for loved ones in case of an untimely passing.  We stock up on food essentials when we can in case of a sudden storm that might prevent us from getting resupplied in a timely manner.

We make these kinds of choices not because we want them to occur, but we want to be prepared if they should happen.

I do not believe our elected leadership in Washington has either the capability or the interest in bringing together Americans, and explaining to them what shared sacrifice really means.  I do not believe they are capable of communicating that American Patriotism that built our country was not the result of a free lunch, it was full of sacrifice, shared purpose, and lots of backlash against progress that had to be fought for and overcome.  Politicians today pander to us and tell us we can have the good life without paying for it, can engage in military adventurism without shared sacrifice of taxation or military service.  Those that tell the truth are defunded in their campaigns and subsequently voted out of office.  We don't want to hear the bad news.  Fuck yeah we're America!  We're number one!

The world is coming to see Americans as obstinate, corrupt, incapable of change, and who insist upon living beyond their means.  Our leaders choose to exacerbate these tensions in a zero-sum game of their own.  The Tea Party Movement represents the latest incarnation of this stubbornness and their intransigence over the debt ceiling these past few weeks has caused damage to our international standing.  And they didn’t even gain politically for all their effort, polls show them having lost credibility for their bully tactics.  

Changes to our way of life are coming.  I believe it is more likely these changes will now be imposed upon us in a much more severe way, from market forces that destroy the purchasing power of the US Dollar.  These changes may be sudden and sharp, or continue along a more subtle route, but changes will occur and it will be more difficult.  These changes will not be easily countered or mitigated by our politicians, and part of our sovereignty will disappear when this occurs.  

I am by no means the most experienced traveler but I have seen enough countries, first through third world, US locations rich to poor, so appreciate what happens when people lose control of their economic fate and become stuck.  It is not pleasant:

Transportation becomes a luxury commodity, not an everyday convenience.  People become much more reliant upon local production without systems to move surplus from one place to scarcity elsewhere.  Corruption rises.  Job creation all but disappears and informal barter systems arise.  Depreciating currency is not wisely held for opportunistic investment;  instead it is traded as quickly as possible for tangible items before it falls in value more.  This leads to misallocation of capital and of course lending stops as banks refuse to accept the depreciation risk on their balance sheets.  Credit becomes scarce, and is shunned as a primary means for building commercial enterprise. 

I am not suggesting this is a pre-destined future for the United States.  But we are behaving as if the odds of this occurring are 0%.  

Reliance upon a depreciating fiat currency as the sole means for ones long-term welfare is a bit like buying a stock in a company that insists on selling new shares every quarter, diluting your stake and requiring you to buy more just to stay even.  Companies that do this don't last very long.

I hope silver never goes into bubble territory.  This is because it would probably be commensurate with full-blown monetary chaos as people flee the dollar.  The subsequent social disruption would be far more hassle than any benefits of treading water and your retained 'purchasing power'.   It would be like being glad you had the foresight to buy a sturdy boat... but without considering that you still have to weather the storm tossing you about.   

But investing, like life, is about preparing for as many circumstances as possible.  No one is immune from all setbacks all the time.  That is why we should diversify across as many uncorrelated asset classes as possible.  Don't look to the financial media as your only source of information for diversification, at least not any more than you would ask someone like Jim Cramer for advice on fixing a leaky roof.  Get the roofing guy to do that.

And if silver never goes into bubble territory, odds are strong it will continue to experience apparent price appreciation, if for nothing else because fiat is expanding at a much higher rate than bullion production.  

Learn as you go, no one's perfect.  Salt your portfolio with physical (not digital) metal.

Acquisition of bullion has been going on for thousands of years, well before stock markets and corporations themselves were invented.  As far as asset classes are concerned, I'd say the odds are pretty good bullion is a going to hang around for awhile.

Peace out.