Bank of America gets Wiki-whacked


Dear reader, this week’s weekly update only features four days worth of analysis and snide commentary. So if Europe dissolves on Friday, or China dumps treasuries on Thursday night, you won’t discover that below…

Build America Balance Sheet Bonds

On Monday, Dan wrote about the disappointing lack of government debt in Australia…

By that he meant that there isn’t enough outstanding government issued bonds to go around that fulfill the new Basel requirements. Think about that for a moment. You’ll have a situation where capital requirement laws institutionalise the ownership of government debt on bank balance sheets. During a sovereign debt crisis! Imposed by politicians who brought on the sovereign debt crisis!

It sounds too outrageous to be true. But it makes perfect sense. Politicians want their colleagues to have a secured source of funding. Just force banks to buy their bonds. But will you buy it?

As a Daily Reckoning reader, you’d hope not. But maybe you like funding murderous insulation schemes and foreign wars?

Bank of America gets Wiki-whacked

Yes, Wikileaks is hinting at Bank of America’s instability. In a pair of Tweets, Wikileaks front man Julian Assange suggested avoiding the bank, telling readers to go someplace “safer”. Of course, BofA has suspended payments to Wikileaks, so it’s possibly just a spat.

But then again, if Wikileaks did have a juicy database full of revelations about the nefarious ways in which BofA runs its business, what would be the effect of publishing them?

It’s not like banks have nothing to hide. And in the marketplace, people can choose to move their money elsewhere (although you should check your own bank agreement to see what the rules are on actually withdrawing your money from the bank when you want it… it may not be as easy as you think). And capital controls by the government are another way of restricting your ability to move your money as you choose.

For BofA, business will move elsewhere as negative revelations emerge. (Or loan fraudsters will know where to go for their liars loans.) Of course, the entire banking industry isn’t likely to differ much from BofA. But there are other alternatives for Americans to park their money. Think outside the box. What asset can you hold as an alternative to cash, which will hold its purchasing power? Hint: What do you get at the Olympics, when you come in first place?

Lying the truth

A Freudian slip has occurred over at Reuters news service. Columnist James Saft may feel the following quote misrepresents him and is taken out of context. But it’s a real beut:

You can lie to your creditors or you can lie to your taxpayers.” Ermmm… No!

It gets better: “Private money is quite happy to keep funding a bankrupt entity but only so long as the moral hazard play, the implied guarantee from on high, is still in force.

Hahaha. Yes, and this is argued to be a free market. Of course, all these quotes are funny because they are true. And over in the US, we see what happens when the lying is uncovered. Dan Heinz, Comptroller of the State of Illinois, features in a mini documentary on the state of State finances in America.

Here are some excerpts as best as we could transcribe them: “… hundreds of thousands [of people] waiting to be paid by the state… They borrow in order to get by until the state pays them… Pretty much anybody who has any interaction with state government, we owe money to.

There are also stories of police having been turned away from gas stations because the state doesn’t pay its bill on time… if it does at all. (Next time you try to outrun the Sherriff, keep that one in mind.)

America is losing it. That’s the point the documentary makes, with star analyst Meredith Whitney at the forefront. She sees some massive defaults in municipal bonds within 12 months. Whether the businesses and employees who are already owed billions will get paid is a frightening question.

Lowering the bar draws fewer fans

The problem with low interest rates is that they can easily double. And that means mortgage payments can double. Debt that needs to be rolled over can quickly incur a substantially higher rate. Debt funded consumption can suddenly become unaffordable at the higher interest rate.

All this is why low interest rates can do a lot of damage to investment, instead of stimulating it. If you’re a bank or a lender, you don’t know how reliant your counterparty is on the low rates, so you don’t lend them money. Instead of being a benefit, the lower rate you earn makes lending money to potentially risky borrowers less worthwhile anyway.

Sound abstract? As you will have read, banks aren’t lending in countries with low interest rates. The new central bank money used to depress interest rates never makes it into the real economy. Instead, banks just deposit it right back with the central bank as reserves…or they invest it in the stock market.

And voila! There’s one explanation for why stocks rally when the underlying earnings picture for companies in the economy isn’t improving.

We’re on the road to … Texas

Aside from skewing employment data, the US census has provided an enlightening twist. Apparently more and more Americans are following their lucky stars to Texas (where the stars at night, are big and bright, clap clap clap clap, deep in the heart of Texas). And the people going to Texas are leaving the very states which carried Barack Obama to his Presidential election victory in 2008.

Now among progressives, Texas isn’t supposed to be quite as delightful as model city program idol Detroit. But apparently its comparative economic outperformance is quite a draw. The point worth noting is that Americans are voting with their feet – literally. Electoral boundaries will have to be redrawn, supposedly to the benefit of Republicans.

Roast Pork

The press is giving some of the PIIGS a hard time at the moment. Bond fund giant PIMCO reckons the Eurozone will crack and splinter unless the debt troubled nations take leave from the Euro. Portugal Ireland and Greece were singled out in particular. The European Commission is threatening the same nations with fines for exceeding government deficit-to-GDP caps.

But why is Europe in such a mess? Is it the Euro’s fault? Are the deficits just too big? Is the debt too big? Is the welfare state too expensive? Are taxes too high? Are the unemployed too cosy?

Daily Reckoning veterans will recognise the answer. Hint: What do all the questions above have in common? Government. At least the solution is clear then. Less government. Of course, the chances of getting a majority of politicians to reduce their own power is pretty slim. The other way it could happen is if you get an outright revolution. As the French will tell you, that could also reduce government by a couple of hundred heads.

With the UK’s new record borrowing coming in under a supposedly austere government, one gets the impression that things are changing awfully slowly in Europe. That means bond markets remain the place to watch for any trouble.

Economic facts and fallaciousness

  • The bank failure count for the year has hit 157 in the US. More may be occurring to cap off the year as you read this. It’s the smaller regional ones for now. But next year, it could be the bigger ones.
  • Here’s an economic problem you don’t want to face: “A lack of toilets costs India more than $50 billion a year.” We’re not sure if Bloomberg intended it to be toilet humour, but the fact is certainly a serious one.
  • The National Inflation Association reports: “We are now at a point where if the U.S. government taxed Americans 100% of their income, the tax receipts generated would not be enough to balance the budget.
  • According to the UK-based Centre for Economic Performance, “in richer countries, an increase in government consumption of 1pc of GDP on average produces only a 0.4pc of GDP in the short term.” So spending money might prevent a technical recession, but it appears to destroy growth. Got that you Keynesians?

From cold to freezing to ice age

Melbourne’s summer weather features a temperature less than half of what a Queenslander is used to. So, in the spirit of things, it’s time to giggle at the global warming enthusiasts – always a heart warming activity.

As your editor heads towards Heathrow on the day you receive this, you will be relieved to know that “Snowfalls are now just a thing of the past” for Britain. That’s because “Global warming, the heating of the atmosphere by increased amounts of industrial gases, is now accepted as a reality by the international community.” Dr David Viner, from the climatic research unit (CRU) of the University of East Anglia reckoned that “Children just aren’t going to know what snow is.

That was the consensus in 2000. Since then…

2001 – “An unusually heavy snowfall occurred last week over London as well as over much of the United Kingdom and Ireland.

2002 – “Winter snow scene

2003 – “In January 2003 we were treated to a rare sight in London: worthwhile amounts of snow!

2004 – “Yes, it really did snow in London! And it was bloody cold.

2005 – “It’s amazing. This morning, there was still snow in Central London. In March. Not since 1960 or 1961 has it snowed so many days in a row in London, they say. It’s freezing, of course, but beautiful. So much for global warming…

2006 – “Snow squall in London

2007 – “Lots of luvverly snow in London today!

April 2008 – “Snow in London

October 2008 – “London – Snow

2009 – “The heaviest snow since 1991 transforms the capital. Snow in London is a rare occasion, to be greeted with wonderment and awe, even when we’re talking about less than 1cm of the white stuff sprinkling the ground for a few hours.

Wonderment and awe will not be your editor’s reaction to a flight that gets cancelled. But maybe we will have to get used to it. A mini ice age is the prediction of one weather forecaster with a track record to be reckoned with. Even the mayor of London is giving him a mention.

Of course, the EU has responded to the crisis with a constructive suggestion: “EU threatens snowbound airports with regulation.” Yes, that’s what you get for disagreeing with Government weather forecasts. More laws!

According to this article, weather could be the least of our worries. Apparently, forgetful people have been boarding flights with 6-inch hunting knives and .40 caliber guns. Yes, with a rumored “failure rate of up to 70 percent in identifying banned items“, airport security has us worried for the first time.

Then again, maybe those people boarded on the day when airport security was off work. You haven’t heard of that day? U.S. Homeland Security Secretary Janet Napolitano explains: “What I say to the American people is that . . . thousands of people are working 24/7, 364 days a year to keep the American people safe.

Anyway, we will report back on our experiences of austerity in Europe in mid January. Until then, Merry Christmas and a happy new year enjoy your festive season.

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.


  1. The sooner the collapse the better…

    Let the banks die and become a flaming tomb for the banksters who created this mess…

  2. If you really want to know whats going on with Northern hemisphere climate then you should check the report card.

    If we were going to have an ice-age then you think it would start in the arctic. But those regions are warmer then ever. You are cherry picking your data here. It’s called Global Warming, not just “London Warming” or “North East Europe” warming. And the fact is that the globe is warming. You need to get your facts straight.

  3. The National Inflation Association reports: “We are now at a point where if the U.S. government taxed Americans 100% of their income, the tax receipts generated would not be enough to balance the budget.”

    But if the US runs a current account deficit then the budget shouldn’t be ‘balanced’ anyway, or you’d be squeezing the private sector (i.e. the other side of the government balance sheet).

    Also, the NIA website says: “We are now at a point where our national debt is impossible to pay off” – that it utter rubbish, as long as that national debt is in dollars (and the vast majority would be). Who are these jokers?

  4. And yer Civil Liberties ain’t civil, anymore:

  5. VP: Also, the NIA website says: “We are now at a point where our national debt is impossible to pay off” – that it utter rubbish, as long as that national debt is in dollars (and the vast majority would be). Who are these jokers?”

    True, but as the USD and the Yuan/Renminbi continue on their merry little way to parity over the next decade or four, lots of Americans will find they aren’t enjoying living on about a quarter of their current real income.

  6. If you look at the figures you will see that the US is basically insolvent. Why don’t you take a look at the recent budget figures. They are running a deficit of 1.3T on top of their 2T budget and are managing to just keep the economy afloat. If they stopped spending that extra 1.3T then their economy would contract by another 10-20% at a guess and their budget deficit would blow out even further. They also have a significant liability for future pensions and the like which some say adds a huge amount to the current 13T debt they are carrying. Many of the state budgets are in complete disarray. So given these facts how can you be so disbelieving that the US economy is screwed.
    Sure they can keep borrowing money off the Fed which is OK but are they ever going to pay this money back? At what point will there be a complete loss of confidence in the US. I don’t think too many people are buying US bonds now apart from the Fed.

  7. Nes S: I agree, but I was just pointing out that what they have written is a lie, and is just scare-mongering.

    Anthony: the US government is the only entity which can create net financial assets in USD, and so can never be insolvent. I’m not saying that what they’ve done is OK (by any means!) but using terms like saying the the US in bankrupt or insolvent is meaningless.

    It’s also meaningless to say that the government has to ‘save’ USD to pay for future pensions; as sole creator of the USD, ‘saving’ in USD is completely illogical. It can always pay for resources, goods and services in USD whenever it likes, including in the future. It could easily face a shortfall in any of these, and easily cause inflation if it bought any of these which was in short supply, but could never be short of USD, and can always pay off its debts in USD.

    I’m not saying the economy isn’t screwed either, by the way, far from it! QE is disastrous, and probably deflationary; swapping an interest-bearing piece of paper for a non-interest-bearing one, with no-one to lend to… lunacy!

  8. “I’m not saying the economy isn’t screwed either, by the way, far from it! QE is disastrous, and probably deflationary; swapping an interest-bearing piece of paper for a non-interest-bearing one, with no-one to lend to… lunacy!”

    A dinkum question for you VP if your still around. What do you personally see as a better course of action to take rather than QE etc?

  9. As an innocent bystander ;) I’m intrigued by two opposing VP predictions, which I’ve CAPITALISED, simply for emphasis:

    …”and easily cause INFLATION if it bought any of these which was in short supply, but could never be short of USD, and can always pay off its debts in USD….. I’m not saying the economy isn’t screwed either, by the way, far from it! QE is disastrous, and probably DEFLATIONARY…”

    It’s a two-bob-each-way position. Easy to see why, but inconsistent, (perhaps). The Old McDonald’s Farm view is that it will be first one, then the other. Maybe… .

    Logic indicates that a falling US buck means hyperinflation. The typical goldbug view supports that prediction: the greenback steadily declines in value…

    Ned’s view: “….over the next decade or four, lots of Americans will find they aren’t enjoying living on about a quarter of their current real income…” is probably right. An article in the Toronto Globe & Mail (1995)
    long ago predicted this scenario, noting that Americans may finally embrace this new austerity as an improvement on rampant consumerism… .

  10. Comment by Anthony on 27 December 2010:

    “Sure they can keep borrowing money off the Fed which is OK but are they ever going to pay this money back?”

    It’s called slavery.

    Your childrens childrens children………………..

  11. I’m tipping that the value of commodities like oil and gold are going to keep rising(in US dollars) having an inflationary effect on the US economy. The Fed will have the choice of either lifting interest rates or dealing with stagflation for a long time. Other countries will either have to let their currencies rise against the greenback or suffer inflation as well. China may have to reconsider their peg against the greenback or suffer a similar inflationary fate. The US dollar is surely doomed to capitulation.

  12. According to Gary Shilling, consumer spending in the US has decreased by more than double the increase in government spending. As such, the US is currently has deflationary pressures and the devaluation of the USD and increases in commodity prices, etc, are purely speculative.

  13. Commodities are going ballistic.


    “according to the experts, retailers are unlikely to discern any great improvements soon.

    James Stewart, retail expert for corporate doctor Ferrier Hodgson, compares retail conditions to the early 1990s, when Australia was mired in recession.

    Except this time it’s happening in an economy that everyone from the Treasurer to the Reserve Bank of Australia to the International Monetary Fund insists is one of the best anywhere in the developed world”

    Consumer spending is on the wane here in Australia too.. Rate rises (still more to come) Large increases in utilities charges are biting the household budget, discretionary income is somewhat diminished.. technical recession is a distinct possibility late 2011 early 2012.

    Small business employs the greater number of people, this continued lull in consumer spending is most likely going to lead to a higher unemployment rate next year.. regardless of China recently raising the interest rates there..

    Wonder how much government intervention in the economy we will see this time around, seeing how the last lot has not worked and only made things worse (more people in greater debt). How much further can the can be kicked down the road.

    December 28, 2010
  15. Shoes: “How much further can the can be kicked down the road.” (?)

    Maybe shoppers are getting _cannier_… . Couldn’t find a parking place anywhere near the major retailers this morning. All the parking areas are full. L-o-n-g lines to registers.

    At last we’re seeing some major reductions in large flatscreens, too.
    Is it the Ozbuck finally kicking in, or is it the long-overdue era of the
    patient, savvy shopper?

    Tens of thousands appear to be doing their family Christmas shopping, for large items, right now… . :D

  16. At last we’re seeing some major reductions in large flatscreens, too.
    Is it the Ozbuck finally kicking in, or is it the long-overdue era of the
    patient, savvy shopper?

    Neither.. it is the last desperate attempts of concerned retailers to maintain sales and cash flow, even at the expense of profits.

    December 28, 2010
  17. Gidday Shoes
    “technical recession is a distinct possibility late 2011 early 2012.”
    The failed wheat crops would cause that (tech.rec.) next year, according to Queensland Country Life when I read it about three weeks ago. And that was before the last 500mm of rain. It rains and rains… and rains some more. Very widespread too. Flooding again here now actually.
    Hate to think what wheat prices are going to do just on supply and demand with US crops etc hit by drought and East Aus crops by floods. And Russia etc ..

    As for risk, AUD, markets etc I’m sticking with a pop higher before a pullback and sticking with a continuation of trend. Based on interventions though rather than economic recovery. I think we will have a flash type crash/shakeout after the pop but within trend (up). I believe in Ben ya know ;)
    I really have no decent clue about China but generally I’m skeptical about a near term crash of a size that will kill the commod exports from Oz.

    Anyhow that’s my pointless crystal ball update mate :) ….
    ah its all fun.

  18. @Lachlan

    Just going to keep trading the market sentiment…

    Increasing holdings of a couple of stocks that I expect bigger things from first 6 months of 2011.. Selling a couple I have less expectations for.

    Going to be in the Northern Hemisphere July through to September.

    December 28, 2010
  19. “…ah its all fun…”

    Yep. Just bought us a great big Sony flatscreen with all the you-beaut-gee-whizz bitz. Gawd, I _love_ this recession we’re having.*

    * Means I can finally join the ranks of the blatantly rampant consumers!~ ;)

  20. Lachlan: Better than QE? Either something that either puts people to work (e.g. infrastructure projects) which would mean a shallower but longer recession, or just leave the whole thing alone, and have a deeeep, nasty recession/depression but which would work it out of the system quicker (but would also entail the long-term social consequences of mass unemployment). Neither option, of course, allowing the bail-out of the corrupt financial institutions which caused the crisis in the first place.

  21. Biker Pete: I don’t think they’re contradictory. The governemnt doesn’t buy anything ‘real’ (e.g. resources, goods, services) with QE, but just swaps one piece of electronic paper for another. If the government did buy ‘real’ stuff with its money then it could cause demand-driven inflation in those areas.

  22. Lachlan: “…a deeeep, nasty recession/depression…”

    Ah, but the comfortable would get more ‘comfortabler’… and the less comfortable would get most uncomfortable.

    As the New Year rolls towards us, let’s be careful what we wish for… . ;)

    “Neither option, of course, allowing the bail-out of the corrupt financial institutions which caused the crisis in the first place.”

    Now THAT’S wishful thinking, Lachlan! :D

  23. “The governemnt doesn’t buy anything ‘real'”

    Hospitals? Medical equipment? Roads? Railways? Bridges? Dams? Buses? Trains? etc, etc.

    If you contend that we’re likely to see a mix of inflation and deflation (and here I use the layman’s definition of inflation / deflation) you may be right… . I just paid about a thousand bucks less for our new flatscreen than I might have three months ago. But the critical items will rise: utilities, accommodation, food, etc. Inflation is always going to be the elephant in the fridge… . ;)

  24. @ Stephen “If we were going to have an ice-age then you think it would start in the arctic. But those regions are warmer then ever. You are cherry picking your data here. It’s called Global Warming, not just “London Warming” or “North East Europe” warming. And the fact is that the globe is warming. You need to get your facts straight.”

    You just cherry picked your facts. There’s no rationale why “global warming” would start in the arctic and could just as well start in the antarctic, the equator, greenland or a number of regions. Climate is complex so it’s best not to be simple and pretend that’s an answer. Lots of locations are cooling and this is consistent with “climate change” which is the much more apt title. You should try understand why what you said is it’s own logical fallacy.

  25. Can you go bankrupt if you have the ability to print your own never ending supply of new cashola?

  26. Biker Pete: That was my point, the government *could* by real stuff (Hospitals, Medical equipment, Roads, Railways, Bridges, Dams, Buses, Trains, etc, etc.) any time it wanted, and could cause inflation if the required resources were in short supply, but that’s not what happens with QE; they just swap bonds for cash (i.e. they don;t buy that ‘real’ stuff).

  27. If you are running a $1.3T budget deficit and have interest rates pretty much at zero and still struggling to grow your economy you are in trouble. QE will keep continuing for years because without it the US economy will go into depression.

  28. “…they just swap bonds for cash (i.e. they don;t buy that ‘real’ stuff)…”

    So the six solar electricity systems we’ve installed so far, using very generous government grants aren’t really there? They’re illusory?

    Weird!~ They look just like the real thing, y’know*…? ;)

    * Fooled the power companies, too!

  29. Marc Faber on QE.

    “The best way to visualize this process is to think of a huge money-printing machine in the US that produces an unlimited quantity of dollars. Most of these dollars flow to the corporate sector, financial institutions, and wealthy individuals. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, and boosts economic activity and increases wealth in emerging economies relative to the US.”

    “Some of these dollars then find their way back to the US and support Treasury bond prices. But since fewer dollars find their way back to the US than exit the country, the dollar has a weakening tendency against emerging market currencies and, especially, against hard assets whose supply is extremely limited compared to the money that the money machine keeps spitting out.”

    It would be good to hear contrary views if any.
    I don’t know whether true but I thought maybe banks like JP could speculate with the money and return some profits back to USTs. Sounds like a plan Stan…if thats what your in need of. And a degree of inflation or reflation would result.

  30. Billy Blog on QE:
    “Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts. The aim is to create excess reserves which will then be loaned to chase a positive rate of return. So the central bank exchanges non- or low interest-bearing assets (which we might simply think of as reserve balances in the commercial banks) for higher yielding and longer term assets (securities).

    So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell.

    Proponents of quantitative easing claim it adds liquidity to a system where lending by commercial banks is seemingly frozen because of a lack of reserves in the banking system overall. It is commonly claimed that it involves “printing money” to ease a “cash-starved” system. That is an unfortunate and misleading representation.

    Invoking the “evil-sounding” printing money terminology to describe this practice is thus very misleading – and probably deliberately so. All transactions between the Government sector (Treasury and Central Bank) and the non-government sector involve the creation and destruction of net financial assets denominated in the currency of issue. Typically, when the Government buys something from the Non-government sector they just credit a bank account somewhere – that is, numbers denoting the size of the transaction appear electronically in the banking system.

    It is inappropriate to call this process – “printing money”. Commentators who use this nomenclature do so because they know it sounds bad! The orthodox (neo-liberal) economics approach uses the “printing money” term as equivalent to “inflationary expansion”. If they understood how the modern monetary system actually worked they would never be so crass.”

    My understanding is that there are a limited number of commercial banks (JP, GS etc.) who are used for these transactions. I wonder what happens to all these excess (non-interest-bearing) reserves afterwards? They probably just go and buy bonds and other assets with it. Nice scam if you’re one of the lucky few banks.

  31. Hi gang,

    Arrived back from good old USA on 23rd.
    One observation whilst travelling around was how cheap things were.
    Particularly fast food, taxis, public transport, souvenirs (t-shirts and the like) compared to Brisbane. Last time I was in the states was 4 years ago and I don’t recall it being that cheap then.
    High octane unleaded was around 90c a litre.
    Only paid around $10/$12 for a cocktail at the Waldorf Astoria in NYC.

    In Miami Beach, the local restaurant scene is obviously suffering, with several we noticed having signs outside advising customers that they had dropped their prices 20 to 25% to help their valued customers during the downturn.

    Main courses were generally $20 to $25, which I’d say is probably $10 cheaper than here.

    Restaurants in DC were always well patronised, so the Fed dollars are at work there.

    I didn’t get a lot of time to check out the real estate market, but grabbed a book when we were in Orlando, which provided advertised sale prices for condos in a gated community called Vista Cay, which is where we stayed, on Universal Boulevarde, about 10 minutes drive to Universal Studios.

    We had booked and paid $863 AUD for 6 nights in a 2 bed, 2 bathroom 1200 sq ft condo in this complex which is probably 5 years old. We were upgraded to a 3 bed, 3.5 bathroom, 3 level town home, which was 1800 sq ft in size.

    Plenty of room for the 3 of us!

    In this complex, they have some of the 2 bed townhouses for sale for $110,000 and a 3 bed will set you back $160,000.
    Check it out on google earth as it’s a nice complex looking over Lake Cay.

    I’m sure there is plenty of problems in being an absent owner, but if an Aussie was looking for a cheap place to retire to, Florida looks pretty good. No state income tax in Florida, which is why the sports stars and other rich people live there.

    As to climate change, Florida was recording record low temps whilst we were there, with minimum temperatures in Orlando around -2C.

    It really came across to me that it’s more than ever a society of the haves and the have nots with the middle class in trouble, particularly in Florida.


  32. Thanks for the great post vp. Debt based money sure does complicate things. I don’t have time to keep posting now so will have to retire for a little. Cheers but.

  33. But before I do I’ll just give one example of something that gets me. Lets say a bank loans a government some money. They have have to pay it back with interest which is going to cause deflation when the principle is repayed with interest on top. But is it net deflationary? Because the gov will then pay gov employees or whoever else with that money and then that cash(not debt) is still left in the system after the gov has paid back the loan.

    Also the cash may be then used by the gov employee or whoever else as a deposit etc to obtain a loan and then more debt/money is created which at least at the outset is inflationary… maybe not so longer term as principle plus interest is destroyed.

    Better go this time or I’ll burn dinner.

  34. Lachlan: the whole thing about banks loaning money to a government is a sham; the government has a bottomless pit of valueless ‘money’, so doesn’t *need* (logically anyway, legally it does) to borrow from anyone, so when they borrow from banks and repay interest it gives the banks a profit for something the government could get for free… oh, to be a bank – sounds like easy money!

    The transactions between the Treasury and reserve is also a sham as it’s just the ‘government sector’ and adds nothing to the private sector. It’s only when the government sector credits commercial bank reserves, or pays employees or gives benefits, that it directly adds money to the private sector (the other side of the balance sheet; i.e. government deficit = private surplus).

    They pay government employees with their out-of-thin-air money, and this gets propagated through the economy, as you said, but this is also true of private sector debt money. This ‘economic multiplier’ effect is determined by the amount of tax levied by the governemnt, but ultimately all government expenditure, excluding private saving and leakages to foreigners, is returned to government via taxes and is then destroyed. Either type of money (government or debt) would be inflationary if it tried to purchase something which was scarce.


    Sister paper to the here in Melbourne. (where I first read the article) First link I found to it was this and that will do..

    “NEW Year’s Eve revellers are forgoing fancy restaurants in favour of quiet get-togethers as soaring expenses bite.

    Just two days from the biggest party of the year, bookings at top Melbourne restaurants such as Maze, Maha and PM24 are languishing at the 50 per cent mark.

    As mortgage repayments rise, utility bills jump and petrol prices head north, more Australians are choosing to ring in 2011 from the comfort of their armchairs.”

    With interest rates still set to rise more, I still think consumer wallets (and purses) are going to be held shut a lot more than opened this coming year, that can only be bad for retailers, and hence employees of retailers. Utility costs set to increase more as well.. 2011 is shaping up to be a far worse year for us than the years 07 to 10 have been.

    December 29, 2010
  36. wrong thread by I don’t care…

    I have a friend that lives in Phoenix Arizona and I spoke with him last year about
    buying investment properties in Arizona (no winter worries for piping etc)
    He told me straight up not too… One of the many reasons he gave was so many empty houses because of multi generations living in one house, an issue that will not fix itself for some time…
    If you are considering buying US property for investment purposes then go over there and see for yourself.. It is not a road paved with gold for untold riches to be pocketed with mega yeilds and strong capital growth….

    December 29, 2010
  37. “So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell.”

    I see it differently. The fed is depositing invented money at the PD’s. The PD’s then buy treasuries. Hence, the net effect is twofold:

    First, the PD’s Goldman, JP, etc are putting AAA assets on their books. This adds to their reserves, allowing them to use greater leverage. In a 10:1 system, each billion of bonds bought, gives them 10 billion of play money so they can play more games at the casino. If they provision loans and securities debt, the ratio is much higher.

    Second, now treasury, as bonds are paid for, can use that money in the government sphere, like paying for US citizen entitlements, buying tanks from defence contractors.

    They only reason the fed doesn’t just invent some more money and just let the US gov spend whatever they want is that they are specifically prevented from doing so in legislation, hence the PD middle man to wash before spend. If it was just an ‘asset transfer’ then I’d like to transfer something useless to the fed as well and receive some real $’s in return. How about I trade an 82 ford falcon for current new purchase price? No new money is printed?

    In both of these cases, money entering commodity\equity markets or entering the defence companies is money that previously didn’t exist. Inflationary as more $ units exist and more physical objects do not.

    What about TARP? Lets the FED purchase ‘assets’ that the troubled companies don’t want on their balance sheets as impairments. So they mark it to some imaginary value and ‘sell’ it to the Fed. Now the Fed owns something that is worthless (and worth less than marked) and has placed real liquid cash on their balance sheets. Writing off impairments used to be part of the business cycle, a part of the creation and destruction of money. With TARP, things are lopsided towards monetary creation.

    The list goes on.

    If we are not getting inflation from QE, TARP and friends, then where is all this liquidity coming from? Equities up, PM’s up, commodities up, aud up! Meanwhile consumers are delevering and buying less. That ‘should’ be deflationary, but the ongoing deflation is being overwhelmed by these constant cash injections.

    The US is losing trillions in housing. All those losses should naturally destroy the cash that created the bubble as the losses are written off. Trouble is, the losses are not being realised. So what happens if you can make profits, but someone else takes your ‘losses’ and freezes them in a vault?

    Debts that are never repaid are inflationary right? Why is it that POMO day has a very high correlation with ‘real’ money (PM) gains? Because the increase in moving units of $ based money is diluting their buying power. Inflationary.

  38. “But before I do I’ll just give one example of something that gets me. Lets say a bank loans a government some money. They have have to pay it back with interest which is going to cause deflation when the principle is repayed with interest on top.”

    I don’t follow?

    The bank had say 1billion to start with. It ‘lent’ the money to the government as say 5%, lets say for 12 months (to make the math easy). In 12 months interest and principal are repaid. Now the bank has 0.05b (50 mil) extra on it’s balance sheet (principal is destroyed).

    The money the government paid came from the taxpayer. It ‘could’ have been destroyed, but it instead re-entered the private sector. On nett an extra 50mil is now in circulation.

    In an environment where interest is paid or charged, the nett effect is inflationary.

    As a happy side note, every inflationary monetary system in history is now dead, and I have read that none of them lasted more than 100 years. The USD has lost 97% of it’s purchasing power… only 3% to go! ;)

  39. “2011 is shaping up to be a far worse year for us than the years 07 to 10 have been.”

    I think we’ll be lucky to leave 2012 with both the EU and USA intact. The EU has decide to FORCE deflation. That can only spell disaster for a financial system that simply cannot handle continual deflation. I suspect that riots in the EU will get far worse.

    The USA is looking like its setting up for hyperinflation. As a side not, an interesting fact I read recently was that during ‘hunting season’ a combination of 5 states had more ‘armed’ individuals that any standing army on the planet. One state alone had 700,000 hunters in the field. That country is a tinderbox. Keeping the plebs asleep with TV and in a state of ‘continual war on…’ helps keep their thoughts off what is occurring at home. Their once great country is bleeding to death. When the plebs wake up they probably have another revolution on their hands. I cannot imagine EU styled riots and protests not turning in to bloodbaths. If someone in the military has the balls a coup would be the cleanest way to reset their country. A government vs ‘the people’ battle in the US will have a body count higher than WWII.

  40. Thanks Chris. Great posts.
    Your thoughts on civil violence in the US are shared here no doubt as I’ve said a few times here already.

    Just on gold. I hold it not because I’m tending towards an inflationary view. The inflation/deflation debate is a great one and I really want to keep learning. I’m glad we have a good thread here.
    Gold to me is a vehicle toward increasing my worth in terms of property. And I have a bias toward tangible assets. I buy shares etc because I love the adrenalin that comes with volatility and its an interest I can share with others around me. Hopeless eh ;) Anyhow I’m going ok there but we’ll see longer term. I limit risk by keeping my positions small amongst other.
    But just on gold yes I hold it because in the following period I expect/ed it to increase in value in terms of how much land it is worth. And it already has. Silver too. Some people like Bill Bonner are saying only buy gold if you believe in inflation. I’m not thinking that way. I’m only interested in a ratio. Nominal values don’t worry me. I’m interested in what bankers have done to asset prices in the past and are likely to do in the future.

    I am not concerned with the future of the money system except for academic interest. I’m not trying to save the world. Like vp I think there is no need for debt based money..unless your a bank. Where gold is concerned it would only be helpful for the masses imo, if they decided to keep PMs as money for direct use (not gold standard) and never let anybody else control their money. Which I really doubt they will. They will not do anything until they are miserable beyond belief. And once they are comfortable again they will give their power away to someone else. I can’t change that.

    Maybe one day the banks will lose their debt based money and we will have gov issued fiat again, and small government. That will be good time for people to be alive. But they will eventually grow large and rob people through excessive inflation. Or they will give their power to banks. Human nature …hard to beat.

  41. Comment by Lachlan on 30 December 2010:
    Just on gold.

    Bought more Focus yesterday.

    December 30, 2010
  42. I’m confident in them Shoes.
    SAR hitting 85c today but probably soon to retrace.
    Any thoughts on QMN?

  43. Comment by Lachlan on 30 December 2010:

    Any thoughts on QMN?

    Is early days with results.. look promising though. More drilling in the first quarter 2011 could be beneficial to the share price with continued good results..

    Not for me but show potential. Will put them on my watch list and keep an eye on them.

    December 30, 2010
  44. My father bought them around 9c Shoes where I feel he’s safe for ride higher below some good support. I like them too but don’t chase things. I have a formula I follow as you do. I think there are a wide variety of formulas that can work. In fact QMN and PIO will go higher I believe. But the only thing preventing me from succeeding is my discipline to stay with my plan. A global/China collapse could spoil the fun but then everyone will be up the creek. Cheers mate.

  45. Chris: This is a useful site for visualising the macroeconomic balance sheet. Select Quantitative Easing from the drop-down and run the operation.

    As for the 10:1 ‘money multiplier’/’loanable funds’ idea, you should read Steve Keen’s ‘Roving Cavaliers of Credit’ paper where it explains that the reverse is true; banks create loans & deposits and then sort out the 10:1 reserve ratio afterwards in the interbank market.

    This is why QE doesn’t work as expected, with the government expecting 10x the money in the economy, but because everyone’s deleveraging there’s no-one to lend to. So the banks end up with excess reserves which they then buy more bonds with, thus depressing the bond yields and so encouraging investment in other assets such as shares, causing increased prices there.

  46. Shoes, I missed the details of the reconstruction of IMP How is your equity fairing?

  47. @ Ross
    Still holding IMP. They made a $60m+ acquisition recently.
    Still hold good hopes for them, either a buyout or they continue to take over other NG land holdings that are financially struggling.
    They are still a little fish in a big pond but their debt/equity ratio is very good, finances are in a much better position than many bigger NG companies in the same area. NG prices are still down, I see that as more a limit on the share price growth than other factors at the moment, decent price increases should reflect IMPs value.
    Still a hold for me…No reason to sell them, not enough incentive to buy more either tho.
    Gold/Silver/Copper is my focus till around April 2011. Then will review.
    Energy will be my next portfolio addition, when I see some confirmed figures of economic growth in the Northern Hemisphere.

    December 31, 2010
  48. I checked out the calculator, however as a coder for 30 years I tend not to trust programs to explain logic, as they only display what they are programmed to display. IF the economy really was that easy to predict, then that website should be all the world need to use to predict future movements. What if I wrote the code on that website? It would only be as good as my understanting, i.e., it is limited in the same ways that I am.

    “so encouraging investment in other assets such as shares, causing increased prices there.”

    …or other risk assets like commodities. Rising commodity rates induces push side inflation, i.e. supply side increases. This type of inflation is not going to affect the world in the same way as excessive demand, as excessive demand based inflation will discover true price after a blowoff.

    Push inflation is what we are getting used to here in aus in rising living expenses. Just imagine how a few simple costs feed in to living expanses. Lets say coking coal and steel. They affect the cost of expansion and to an extend the of of production \ repair. When you think about it, that would possibly take years to filter through naturally. Inventories need to be cleared, business competition would eat some of the expense for a while, but sure as the sun rises, it’ll all flow on in to prices. Now, look at crude, wheat, rice, cotton… eeck!

    I’m not suggesting that QE is the equivalent to putting money in a bank account, then withdrawing it and buying houses and food. But, the effect in the longer term is the same. If you have 100 money value units sloshing around, and then increase the amount to 105 you may well say that ‘only’ 5% has increased. However, I believe that the amount of money units tied up in simple repeatable transactions and economic loops means that monetary velocity remains relatively low for the broad cross section of money. However, inflation is caused by the money that DOES actually move and even slightly increases of what is known as ‘hot’ money creates dramatic price swings.

    If we consider one braindead example of a ‘typical guy’, who has a 600k house, 400k equity, 100k super untampered with, so its in ‘balanced stocks’ and has 1k a month to play with after monthly expenses. That’s a LOT of static wealth compared to his personal HOT money. The PD’s also are quite tied up in loans, long term investments, etc. But sudden influxes for them not only creates opportunities to vig the bond purchases but to leverage out other wacky things.

    I enjoy this conversations btw…

    Chris in IT
    January 1, 2011
  49. Chris this is a difficult subject for me and I can only chew on it in small pieces. Ross and vp now too give me plenty to think about.
    Anyhow I read Keens article, The Roving Cavaliers of Credit, and I’ve saved it to re-read later because I found it very interesting.
    I suppose whether you think it’s a hyperinflation in the future or a deflation or maybe both at some point, we may all be able to see that the Fed and Co. are successfully pumping emerging markets and the commods right now. Actually for my own reasons I hope it goes a good distance. Few years minimum please. When it ends (possibly a credit crunch in China) we Aussies will likely join the USA, Britain and Europe in the hell-hole.

    vp are you following Modern Monetary Theory… a chartalist perhaps? I’ve caught on to a few concepts of money etc in the last couple years but I’m not up on the economics jargon.
    Or are you just schooled in the vp school of economics? ;)

  50. Traditionally, as I understand it, a recession leads to a decrease in monetary velocity in consumerland. As such, a period of deflation is generally expected. To avoid this central monetary policy usually injects money in to the system to heat things up and increase the economic activity.

    This means that as the recession leads in, deflation is seen, as money stops chasing assets. Think house prices going down, because nobody is bidding over the last guy. Deflation is a real risk for banks as it wipes capital reserves of their balance sheets. This also puts them at real risk of bank runs when they can least handle it.

    As the loose money from the central bank propagates back in to the market place the vision is that the added money entices fresh buyers across the board and stabilises prices. Of course this can have a inflationary effect if too much money is added due to continued lack of confidence. N particular this is a problem if as we see in QE*, where the money does not make its way to where it was intended.

    So yeah, I rekon deflation first, then inflation. The average Chris is going to get smashed, as ‘assets’ deflate, whilst at the same time, their salary buys them less. ;)

    Chris in IT
    January 1, 2011

    Link for Keens cavaliers if anyone interested.

    Also there are a lot of opinions on the possibility of a run on USTs. Is it really inevitable in the near term? And if that happens what the outcome would be?

    Then from a price action view point. Gold is bullish with no signs of a major top. But then this does not necessarily point to inflation at present since gold is bought in uncertain times. Commodities though appear to be joining it which is price inflation. AUD in same vein is strong with Benny’s dollars coming over. The US dollar index doesn’t seem to give any clues as to it’s intentions for now.
    Locally it seems credit and money are tight. Christmas sales were very disappointing and worse than last year according to shop owners I know.

    2011 should be fun.

  52. Comment by Lachlan on 1 January 2011:

    2011 should be fun.

    Not for a lot of people I am afraid……..

    January 1, 2011
  53. “So yeah, I rekon deflation first, then inflation”

    My thought as shared here before was that the situation in the US is so dire that a collapse of government is imminent. Think increasing debt repayments. Assuming the gov will be in full self survival mode it will have to fund itself mostly through QE. The money will find its way into the economy and cause inflation in a climate of declining GDP.
    GS, JP etc will keep speculating and blowing bubbles in places where credit is not frozen.
    But Chris I dont disagree with our deflation friends on frozen credit hence my loan repayment equals deflation point. At least in the real economy with a credit freeze. People on the street will feel less money is around.
    Anyhow in Aus we have the luxury of hot money so far. I think the money flows might step up going forward and create a commods and related equities/emerging markets bubble but I don’t see that as something that is here now ready to burst. I think QE is going to continue.
    I suppose though that the problem with this here in Aus is that we have one economy based on commodities which is going well and the rest going nowhere. So property where supported by mining I guess will be ok for a while based on my logic but elswhere problems could arise at any time. If credit was not frozen here (in places) then that would not be the case but I believe it will increasingly dry up away from the the money flows (mining).

    So I guess my flation outlook is messy. High or hyper inflation evolving in the US but before massive price deflation is entrenched. In Aus a mixture of stagnation, increases in living costs and developing credit squeeze in parts with growth plus inflation in other parts closer to commodity projects. The eventual result will be a termination of the commodity run and a total credit failure but I’m not seeing that as imminent.

    After the USD has been abandoned I think PM’s will play some type of a role in the new currency system. Designed by and to benefit those at the top of course. Common man…no.
    Lets face it. Who has the gold?

  54. Not for a lot of people I am afraid……..
    Agreed Shoes, but what can ya do. Nobody will help themselves until they are miserable. I’ve tried to help everyone around me. They only see blue sky one day and the next they concede the problems coming but say they are helpless to act.
    Oh well, nothing new under…..

  55. Petrol prices, Food prices up, Utility prices are all set to rise, Interest rate rises of up to 100 basis points are expected (banks may put even more than this with feared funding issues) Inflationary pressure will be the instigator of deflationary result.

    January 2, 2011
  56. Since only China\Russia are currently decoupling from the USD (probably so China can ‘secure’ oil supplies). Apart from that everyone is still trading USD backed commodities and goods by way of using the reserve currency. If the US moves towards hyperinflation there will not be enough time to set up a new world reserve. We could of course consider just holding foreign currencies, but that has similar dangers.

    A freegold solution would work, and of course benefits the existing gold owners (Plus makes anyone owning physical right now very wealthy, which is why I don’t have my hopes up.). It really makes you wonder though… all this PM manipulation over the past few decades. Is it a setup for something? The Chinese are buying craploads, but they also have the smallest reserves (per capita) backing their currency in the world (source:wikipedia). Do they know something? (Other than the USD they are holding being worth less and less at an increasing rate).

    Sure, we could play the RE game, and try to frontrun the market in mining towns, but an old analogy comes to mind. ‘Running in front of a steamroller picking up pennies.’. Hummm ;) How long will the commodity boom go on for if the US melts down? How much of the worlds savings will evaporate if that occurs? Will our boom survive?

    LOL, Is now a good time to enter a 30 mortgage? If not, how will that affect RE investing and negative gearing returns? What money is MORE dead to you a few hundred per month, or quarter to half a million loss on a 30 year mortgage.

    The ONLY thing keeping this whole ship afloat is the mainstream ignorance… I don’t begrudge this at all… many things will change later, for the worse. Until then, keep preparing and enjoy the way the world is now.

    Chris in IT
    January 2, 2011
  57. I’m not alive to fight my neighbour over money Chris but the guys at the top will have to deal with each other peacefully to keep their mission intact.
    The gold?
    Bought with debt money and on the cheap ta boot. The wealth and power of nation states reduced.
    Money and power becoming centralised.
    At present its more or less one world under QE though and the crisis you have when your not having a crisis. At least my guess.
    I won’t let this stuff ruin my picnic but Chris. The world has always fought over wealth and power.
    I’m off to the hills now for a few days….if a broken bridge does not stop me somewhere. Few of those around here. We’ve just had so much rain. Many roads broken and farm/forest areas have been inundated. Get ready for food price hikes I guess. Cheers.

  58. “Get ready for food price hikes I guess.”

    Just have to eat what’s available and in season, I guess, Lachlan.
    Mulberries and chopped apricots with my muesli this morning, washed down with a litre of fresh orange juice; baked figs in port, honey, walnuts and butter for dessert this evening.

    Nothing like a little land when food prices are rising. Seven different fruit ripe at present, not counting the berries. Could use some of that excess rainfall, though… !~ ;)

    Biker Pete
    January 2, 2011
  59. It is with regret that I take the Global Warming bait.
    It’s well accepted amongst climate scientists that there is a risk of the north atlantic conveyor current shutting down “plunging average temperatures in western Europe”. This would be triggered by large scale melting of ice in the Artic and Greenland, such as what happened last year.
    I’m surprised that Dr Viner overlooked this.
    I won’t include a link to a website, because as far as global warming is concerned, you can find a web page supporting any argument. However if you are curious, I found the information in the NASA website.

  60. Themes to all your articles;

    DEBT = BAD

    Do you have any new views to express? It’s like you guys write the same articles again each day! High in sarcasm and low in new content.

  61. Most critical issues are addressed by more debt creation.

    and…”If the market doesn’t shake you out it will wear you out.”

    I’m getting bored too. Cant we have a real disaster like the sort you cant spend your way out of. But then it’s rained here forty days straight and I’ve been too lazy to build a boat for myself and two of each animal. I think I’m expecting my infationista mate Ben to by me one :)

  62. @Lachlan Those Fletcher Christians’ are on a US investment magazines radar.. they are putting a value at 41 cents a share after discounting…

    Would be nice if they are right, makes my 300% claim conservative, maybe, maybe.. 500% ;)

    January 6, 2011
  63. Hi Shoes. They’re an exciting company with some great resources inc that small easy surface patch at WW which should help financially. The bigger larger Cu/Au at Def… will need some dough for the new mill but they got the goodies there plus plenty prospecting potential. I’d be comfortable purchasing some shares on a pullback from resistance here but I would not be surprised if they push higher next week.
    Unfortunately I’m trying to conserve my own dough at present because the rain has totally upset my work plans. I have a heap of stuff I’d like to purchase otherwise. Doesn’t hurt to keep up though because fortunes change suddenly in my line.
    More rain today. WA is looking good….as in dry. Might pack my detector and jump on a plane :)

  64. Ha ha’s a wild little show Shoes. BSR
    First ingot looks like they dropped the pour onto the ground. Locals look pleased with their muddy little jig set up. $33M in gold goes a long way when you live in a grass hut.


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