World War I ends tomorrow. Yes, Sunday will be the day Germany pays its final reparations for the conflict which began in 1914. Bond holders under the Treaty of Versailles will receive their final payment and it will all be over. A small milestone for the revered austerian herself, Chancellor Angela Merkel, in paying off Germany's debts.
But in a rather odd turn of events, it seems the German governing coalition is now looking to increase social welfare payments.
Lifting the carpet to see what's Downunder
After the pathetic bank stress tests in Europe, The Age reports "a key ratings agency [is] planning a stress test to assess what sort of impact a sudden collapse in property prices would have on [Australian Banks]." Which agency? Fitch – the bunch who rated subprime AAA. Oh boy...
And the good old IMF has been busy too. It advocates having "financial stability exams" for countries. Every five years! The IMF has also taken issue with the Reserve Bank of Australia's rosy economic forecasts and suggests waiting before raising rates further. No doubt the advice was the same for Greenspan after 2001. That period of holding interest rates "too low for too long" led to the biggest bubble in history being inflated with cheap money.
And just to cap off its display of politicking and not economics, "the IMF also endorses the government's timetable for reducing the deficit - now under fire from leading economists and Treasury itself."
After having ruined the rest of the world, it seems the global financial institutions are increasingly focusing on Australia. Uh oh.
Black African American Swan
Yet another economist who saw the crisis coming has spoken out against Obama's economic policies. Nassim Taleb, author of the famous crisis predicting book Black Swan, told a Montreal audience that more debt won't cure too much debt:
Obama did exactly the opposite of what should have been done... He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.
Even the man who advocated having a housing bubble to save the economy from the tech bubble agrees to some extent. Our favourite economist, Paul Krugman, comments on his blog Liberal Without a Conscience (or something like that) about the same story for the private sector:
I think it's fair to say that a majority of economists believe that excessive private debt played a key role in getting us into this economic mess, and is playing a key role in preventing us from getting out. So, how does it end? In the end, I'd argue, what must happen is an effective default on a significant part of debt, one way or another.
As the stimulus ends, so do the "community organiser" jobs and other US government contrived occupations. The NY Times reports tens of thousands are at risk, with the Huffington Post pointing to 240,000 jobs that were created by the "Welfare to Work" program. Does it seem surprising to you that a temporary stimulus ends?
But maybe the issue is a deeper one. Associated Press uncovers the surprising fact that Americans simply don't want to work. At least on farms. Leaving it to the immigrants, in a state with one in 8 out of work is apparently preferable for the locals.
Bank on Gold, not Central Banks
With Gold standing above all other asset classes, it pays to wonder what's driving it. On the demand side, Peter Schiff points out that bank deposits in much of the world are paying next to no interest, which means gold investors aren't missing out on as much. This makes gold relatively more attractive.
Signatories to the Central Bank Gold Agreement (Eurozone central banks and fence sitters Switzerland and Sweden) "sold 6.2 tons in the year to September, down 96 per cent, according to provisional data. The sales are the lowest since the agreement was signed in 1999 and well below the peak of 497 tons in 2004-05."
If it seems like we blame everything on central banks, this is not a coincidence. And Ambrose Evans Pritchard at the Telegraph has our back on this one. We discovered this apology, much to everyone's surprise:
Shut Down the Fed (Part II)
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.
My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.
We looked for a "Shut Down the Fed Part 1" and found the title was still framed as a question when Pritchard wrote it: "Time to shut down the US Federal Reserve?" And the content is almost as good as Part II. "Like a mad aunt, the Fed is slowly losing its marbles," it begins. But why? Is it because central banking is inherently inflationary? Is it because manipulating interest rates causes global financial crises? Is it because central banks are either controlled by governments who need their debt to be monetised, or by bankers who want to extend their fame and fortune? Is it because...
No, it isn't. According to Pritchard, we should consider shutting down the Fed because "Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order." And Pritchard is one of those bloggers. Your editor is probably one as well, but we like pamphleteer better.
Anyway, here are Kartik's words in their full glory: Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.
Now there are obvious issues with this. Pritchard outlines some, such as the fact that many great economists did not have PhDs. And that the PhDs led us into the mess that is the Great Correction.
But why exactly should economics be exclusively for the PhDs among us? Kartik elaborates with the following: "Economics is hard. Really hard. You just won't believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that's just peanuts to economics."
Yes, this is what central bankers are like. We'll leave it for Pritchard to sum up perfectly: "Actually, Greenspan never got a PhD. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind."
Ambrose Evans Pritchard, we welcome you to the "End the Fed" camp.
Who is going to save the savers?
Hopefully Pritchard will soon campaign for the end of his local central bank too. With interest rates at 0.5%, Charles Bean, deputy governor of the Bank of England, came up with this advice:
Savers should stop complaining about poor returns and start spending to help the economy, a senior Bank of England official warned today.... Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested... About five million retired people are thought to rely on the interest earned by their nest-eggs. But almost all savings accounts now pay less than inflation.
This caused quite a bit of outrage in the UK. Jason Riddle from Save Our Savers pointed out that "the Bank [of England] was aware that there was a lack of saving before the financial crisis, but those who were prudently saving while others spent, are being heavily punished."
Yes, instead of rewarding prudence, governments these days reward excessive risk taking and staying unemployed. But when it comes to inappropriate comments, nobody can outdo the French. Their former Justice Minister confused inflation with fellatio. Ahh, the French...
Not all central bankers are nincompoops
A while ago we wrote about the Lebanese central banker who predicted the crash of sub-prime and forced his banks to get out just in time. Although not quite as impressive, here is another central banker with a knack for spotting the uncomfortable truth. And he is from the Federal Reserve!
Commenting on recent US GDP growth, Fed Governor Kevin Warsh pointed out the obvious, which has eluded his colleagues: "The growth story I would tell you about is ... a growth story in the size of government, it's a growth in the number of government employees, it is a growth in the change in government policies."
And that growth has to end at some point because you can't borrow more and more money ad infinitum. Can you?
Well there is always Ben Bernanke. And the bond market reckons it smells a rat: "U.S. yield curve flattens on bets of Fed buying." Yes, QE II and all that. The idea here is of course a free lunch, as with all central banking ideas. With more quantitative easing, you get the government financing its debt cheaply, you get inflation decreasing that debt, you get a falling dollar to spur exports and you encourage savers to spend and people without savings to borrow. Within years, all our troubles will be inflated and consumed away.
The problem is that this has ended badly for the every country that tried it. Think Zimbabwe, Weimar Germany and Keynes' imaginary utopia.
But don't worry too much, the IMF is on the case. (This is code for "run like hell, everything is about to get worse", as many countries subject to IMF policies in the past will tell you.) IMF head Dominique Strauss-Kahn claims the currency war won't become a currency war. As each nation's central bank tries to get an edge by devaluing its currency to spur exports, the matter turns into a race for the bottom. More on that below.
So if this is going to end badly, why aren't all central bankers nincompoops? Well, we don't know for sure, but there is a chance that the central bankers know how this will end. The news that has us guessing is this: "The Fed will buy inflation-index debt tomorrow maturing from January 2011 to February 2040 as part of its program to reinvest principal payments from its mortgage holdings." That's right, they aren't just buying any old government debt to monetise. They are buying the stuff that is protected from inflation. Now why would they want to do that..?
Smoot-Hawley to Obama-Jiabao
Listening to a podcast last night, your editor rediscovered some interesting things. Firstly, the laissez faire President Hoover was in fact considered a progressive and did enact quite a bit of policy in an attempt to deal with the Great Depression. One piece of legislation he signed off on was the Smoot-Hawley Act, which began the trade war that exacerbated the depression.
In a continuation of the Great Depression parallel, it seems a similar trade war may be erupting now. The topic is a Chinese tariff on American chicken. This may all seem a bit silly, but when you have imbalances like the global economy does now, silly is a relative matter. And in the not so silly column is this trade issue: "China Is Said to Halt Trade in Rare-Earth Minerals With Japan" and "Pentagon Loses Control of Bombs to China Metal Monopoly". The trusty media discovers what your Port Phillip Publishing editors picked up on years ago.
If you don't know what rare earth metals are, you are probably looking at a whole bunch of them right now. Just about anything that blinks, beeps, drives and lights up needs rare earth metals to work. And China has an impressive strangle on global supply, which is why Bloomberg reports "Toyota Forms Task Force on Rare Earth Metals Amid China Export Ban Report". From memory, even the Pentagon is working on the issue, because high tech defence hardware needs the metals to function.
It takes two to tango and the US House of Reps just passed retaliatory legislation aimed at manipulation of the Yuan. To sum up, trade wars are just another thing to add to the list of what might kick off the next leg down. Those trade wars are in our present, not distant future. On that note, a little snippet of information you may want to know is that the US experienced a double dip recession, referred to as the "Roosevelt Recession", during the Great Depression.
Until next week,
The Daily Reckoning Week in Review
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- Typical Japanese Investor Would End Up With Less Than What He Started With
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- Have Yourself a Merry Economic Depression
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Nick Hubble is a feature Editor of The Daily Reckoning Australia. (You can subscribe to the Daily Reckoning for free here.) Nick has spent the last three years discovering lots of new, exciting and surprisingly simple ways to generate money for retirement. He’s put all these ideas into his investment publication The Money for Life Letter. If you're already a subscriber to these publications, or want to follow Nick's financial world view more closely, then we recommend you 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.