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TALES OF "STRONG REFORMS" IN IQALUIT - OR POSSIBLY JUST A HOAX?
"One should always keep an open mind, but not so open that one´s brain falls out."
~ Bertrand Russell
Dear Mountaineers,
The big questions being asked today are if and when governments will withdraw their stimulus efforts in light of the sluggish global economic recovery.
These questions enveloped the recent news surrounding Greek and EU sovereign credit risk. Concerns in this context have dominated financial markets and price action over the past week. The EU, led by Germany and France, has now ‘dutifully stepped up to the plate to defend and to safeguard stability´. This triggered a mild relief-rally allowing most markets to close modestly in the black last week. With just a little sign of softness and ‘government generosity´, markets are happy again.
In my opinion, if you can be certain of anything today, it is that no kind of real monetary and fiscal discipline is on the horizon anytime soon. Like a drug addict thirsting for just one more shot of relief before quitting cold turkey, financial markets are not truly ready to give up their addiction to government manna. Despite all the talk of reform, discipline and tightening, any real action is NOT to be expected, certainly not from the G-7 or G-20 members.
The latest G-7 meeting ended last week. It took place in the ‘boondocks´ of Canada, a far-off location called Iqaluit. For the first time, the meeting ended without a communique or any form of official press release. Whatever was discussed up there, from climate change to banking regulation to China´s currency, you can be assured that the number one topic was "the absolute necessity for continued public stimulus".
US Treasury Secretary Geithner told the press after the meeting: "What you saw was ... a strong commitment together to try to make sure we´re putting in place the kind of strong reforms that would prevent these kinds of crises from happening again." What strong reforms?!?!
The only mutual plan going forward is one of continuing to borrow and spend. Anyone who has observed G-7 meetings over the past few years knows that a move toward ‘strong reforms´ was the least to be expected. The discrepancy between promise and delivery of any useable results is legendary by now.
In essence, Canadian Finance Minister Jim Flaherty summarized the G-7 double-talk-and-no-logic ‘results´ from the meeting in two sentences: "The global economic situation has of course improved. We need to continue to deliver the stimulus to which we are mutually committed." Please reread that statement. It´s a beauty of complete nonsense and contradiction in its own right. UK Cancellor Alistair Darling added this: "The position for most countries is to support the economies now and get the budget deficit down as the economy recovers."
For me the big question is: HOW LONG WILL MARKETS BUY THIS KIND OF BRAINLESS DOUBLE-TALK?
The only response governments are prepared to employ is a Keynesian one. The remedy? Oh yeah...mo´ money!! The results of ‘stimulating the economy´ are well known: more inflation, more purchasing power depreciation, more public and private debt, more MIS-ALLOCATION. It´s a game of BOOM OR BUST.
As our readers already know, the subprime hiccups were merely a symptom, the spillovers of a larger culprit called EASY MONEY. We´ve repeatedly alerted our readers to the effects of the past decades of soft monetary policy.
However, in all humility, we admit that today, once again, we stand puzzled before the same question as everyone else: What´s next?
Since most people believe that we simply (as usual) need a little more liquidity to give the necessary pick-me-up to the US and global economies, it appears that the aforementioned brainless jibberish is all it takes for one more round of pain deferment.
In fact, most economists and financial experts seem convinced that the Keynesian model will get us a real recovery which will carry us forward with renewed energy. They believe it is all that we will need to get over this recession altogether.
Well, I am always open to solid theories and good ideas. However, we also like to keep with what Bertrand Russell once said: "One should always keep an open mind, but not so open that one´s brain falls out".
Sincerely,
Your "Swiss Mountain Guide"
Frank R. Suess |
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DON´T BLAME GEITHNER, BLAME KEYNES!
The problem we see, and have pointed out periodically in the past, lies in the proper use of terms and their clear definitions. Solid definitions are the backbone of knowledge - and ACCOUNTABILITY.
In the case of INFLATION, the definition of that term has been completely bent out of shape, to the point where today most people know inflation as only one thing: rising prices. That, however, is not the original definition of inflation.
It was Lord Keynes, in 1932, who opened the door for large-scale, government-orchestrated currency games and mis-information. At that time, the historical definition of inflation was shifted from an "INCREASE IN MONEY QUANTITY IN GENERAL CIRCULATION" to "RISING PRICES".
According to Keynes, if prices didn´t climb, there was no inflation. If it was seen that money prices for goods were climbing, then there was in fact inflation. This trick shifted the focus of attention from economic cause to economic effect. Attention was diverted from an increase in the quantity of money, which is always the true cause of climbing money prices, to rising prices, which can be arbitrarily adjusted and, where appropriate, blamed on ‘greedy´ elements of the economy (greedy workers, greedy oil companies, greedy - fill in the blank here).
The consumer price index in most countries is a statistic controlled by governments. Generally, in view of the fact that many government programs - public household expenses - are linked to CPI-inflation, one can safely assume that the true CPI will always be higher than that officially communicated. In the chart depicted below, Shadowstats.com provides their estimate in this regard.
Interestingly, if we shifted our attention back to the original definition of inflation, then the best indicator of inflation becomes broad money supply. In America, broad money supply is defined as M3. It includes all the savings account money, CDs, money market funds, negotiable certificates of deposit, and bank repurchase agreements of more than one day, as well as Eurodollar deposits and deposits held in foreign banks.
Unfortunately, in 2006, the US Federal Reserve ceased publishing of the M3 money aggregate because, as they said, of its unimportance. However, the Fed does still provide the individual components of M3, which allows one to reassemble the number. This is regularly done by shadowstats.com.
The following chart starkly depicts the fact that after years of accelerating money supply growth - in other words, the true and original form of inflation - we actually entered a deflationary world in 2008. The chart points out the fact that money supply is currently contracting!!! A downward slope in the M3 growth curve does not necessarily mean that the money supply is dropping. However, when the curve goes below zero, it shows that money supply contracted over a full twelve month period.
So, while true inflation for many years was understated, true inflation today is actually overstated. We are clearly into deflationary territory. And let there be no mistake that this panics governments worldwide. They will intensify their efforts to get liquidity into the streets.
For more than three generations, governments and central banks have inflated the quantity of money in circulation while at the same time engaging in futile efforts to counter the economic effects of their own inflation. They have used price controls, rationing, more regulations, higher taxes and even subsidies to bring some high prices down. When all of that has failed, they resorted to ‘cooking the books´ by ignoring any inconvenient price rises.
The only VALID definition of ‘inflation´ is an increase in the quantity of money. Deflation is a decrease in the quantity of money. It´s that simple. |
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NEWS BRIEFS
If Interest Rates Were a Measure of Investment Risk, Why are Rates so Low?!?!
You´ll find here an excellent article from the Economist that discusses the increasing discrepancy between risk and interest rates. Generally, interest rates, the price of money, are influenced by the risk profile of a project, company, economy, or financial markets in general. However, based on current interest rate levels, one could conclude that we live in riskless times. That is as far from the truth as feasibly possible.
In the Economist article titled The Gods Strike Back, linked below, Matthew Valencia asks if risk has gotten ahead of the world´s ability to manage it and whether it can be tamed again.
"The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature."
So wrote Peter Bernstein in his seminal history of risk, Against the Gods, published in 1996. And so it seemed, to all but a few Cassandras, for much of the decade that followed. Finance enjoyed a golden period, with low interest rates, low volatility and high returns. Risk seemed to have been reduced to a permanently lower level.
http://www.economist.com/displaystory.cfm?story_id=15474137&fsrc=nlw|hig|02-11-2010|editors_highlights
Return to "Debtflation"
Morgan Stanley foresees a return to debtflation: "US public debt as a share of GDP is now higher than at any other time in history except after World War 2 - and rising: our US colleagues expect public debt to GDP to increase to 87% by 2020".
"How policymakers will deal with this fact will likely be one of the main drivers across markets going forward. So what are the implications of high public sector debt for fiscal sustainability and inflation? To answer this question, we look at how the US economy escaped high debt following World War 2. We then quantify the inflation risks inherent in today´s US fiscal position by asking what would happen if policymakers were to deal with the current debt overhang in the same way."
http://www.morganstanley.com/views/gef/archive/2010/20100212-Fri.html
Governments Will "Avoid Credit Crisis" - for Now
According to Andrew Garthwaite, a global strategist at Credit Suisse, governments worldwide will be able to meet their borrowing needs for some time to come regardless of what happens to Greece´s finances.
"The time to worry about a global sovereign credit crisis is when private-sector credit growth picks up," Garthwaite wrote in one of his latest reports. He expects that to occur next year. For now, government interest payments are low enough relative to gross domestic product to minimize any risks, the report said.
Even though Ireland, Portugal and Spain are hurting financially along with Greece, which was ordered by European leaders to narrow its budget deficit, "the problem is confined," Garthwaite wrote. He continued that declines in German, U.K. and U.S. bond yields and falling gold prices point to this conclusion. Demand for credit from companies and other borrowers has to increase before there will be a "crowding-out effect," in which governments´ growing reliance on debt markets drives up yields, the report said.
China Finally Giving into Pressure to Increase the Yuan?
According to Bloomberg, Goldman Sachs Group Inc. Chief Economist Jim O´Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the world´s fastest growing major economy.
"I have a strong opinion that they´re close to moving the exchange rate," O´Neill said in a telephone interview from London after China´s central bank told lenders on February 12th to set aside larger reserves. "Something´s brewing. It could happen anytime."
Officials in Beijing have resisted allowing gains in the yuan, having controlled its value since July, 2008, after it strengthened 21 percent against the dollar in the previous three years. The status quo has drawn criticism from foreign policy makers who say keeping the currency undervalued has handed China´s exporters an advantage and inflated asset bubbles.
O´Neill, who coined the term "BRICs" in 2001, anticipating the boom in the emerging economies of Brazil, Russia, India and China, said China may allow the yuan to rise as much as 5 percent in a one-off revaluation and to then trade within a bigger band or against a larger basket of currencies. That would help counter international pressure, he said.
http://www.bloomberg.com/apps/news?pid=20601089&sid=aNpOCUK8o.O4
Morgan Stanley Revise their China Forecast - UP
While the broad-based concerns over an investment bubble have turned general expectations for the China economy negative, Morgan Stanley has just revised their forecast for 2010 upward:
"We have revised up our forecasts for China´s GDP growth and inflation in 2010 to 11% (from 10%) and 3.2% (from 2.5%), respectively, as the external outlook will likely be stronger than we previously envisaged. Despite heightened policy uncertainty weighing on market sentiment of late, recent policy action taken by the Chinese authorities should be viewed as precautionary measures to prevent a full-blown overheating and a typical boom-bust cycle."
http://www.morganstanley.com/views/gef/archive/2010/20100205-Fri.html
Obama´s Grand Vision: "Revive the Recovery" with High-speed Trains?!?!
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| © Copyright 2010, by BFI Capital Group AG, Bahnhofstrasse 29, 6300 Zug, Switzerland, website: www.bficapital.com. The MOUNTAIN VISION UPDATE is published by BFI Capital Group (‘BFI’). Quotation is allowed if credit is given. Although every care has been taken in the preparation of Mountain Vision, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. The publisher is not a registered investment advisor. Readers should not view MOUNTAIN VISION as offering personalized legal or investment advice. |
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