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By John Phelan, on 18 February 11
As subprime mortgages tanked in May 2007, Ben Bernanke, Chairman of the Federal Reserve, told Congress “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”. Coming at the start of the biggest bust since the Depression he made his name studying, it might be best to take his utterances with a pinch of salt.
So it with his latest, defending the Federal Reserve from charges that its rampant money printing, academically dignified as ‘quantitative easing’, is causing the commodity price rises which, in food prices, helped trigger the unrest that is shaking the Middle East.
Last week Bernanke claimed that his injection of $600 billion dollars into the economy was not inflationary. Commenting on a rise in the United Nations Food and Agriculture Organization’s food price index to 230.7 points from 206 points in November, Bernanke said “Clearly what’s happening is not a dollar effect, it’s a growth effect”
This came soon after Bernstein, a research house whose oil price predictions proved uncannily accurate in 2010, predicted an average price of $90 per barrel over 2011. Cotton prices hit a 150 year high.
Bernanke is surely right that demand pull pressures are playing a role in this. According to the International Energy Agency global oil use is predicted to be 89 million barrels per day this year, up 17% from the 2001 figure of 76 million barrels per day. But the price, $30 per barrel in 2001, has tripled. Plainly something else is also at work.
We have been here before. The 1970’s were famously a decade of rising prices. In 1975 future Nobel Laureate Robert Mundell produced a paper titled ‘Inflation From an International Viewpoint’. He noted that the Bretton Woods arrangement of fixed but variable currencies, in which the dollar was tied to gold at $35 an ounce and other countries fixed to the dollar, had broken down due to excessive pressure on the dollar-gold link by excessive money creation by the Federal Reserve. Realising the weakness of the link holders of dollars began to cash them in for gold. It soon became apparent that there wasn’t enough gold in the US to redeem all these promises so, on August 15th 1971, President Nixon suspended dollar convertibility. Without the ‘wobbly anchor’ of the gold link the Fed’s printing presses could run free.
Almost immediately, as noted by Nathan Lewis in his book ‘Gold – The Once and Future Money’, OPEC members, who priced their oil in dollars, became understandably worried about being paid in increasingly worthless dollars. In September 1971 OPEC resolved
that Member Countries shall take necessary action and/or shall establish negotiations, individually or in groups, with the oil companies with a view to adopting ways and means to offset any adverse effects on the per barrel real income of Member Countries resulting from the international monetary developments of 15th August 1971
Mundell recorded, as quoted in the excellent new book ‘Econoclasts’ by Brian Domitrovic,
Confidence in currencies in general declined and a shift out of money and financial assets commenced. A worldwide ‘scarcity’ of land and…raw materials…emerged. [Soon] the prices of metals, foods and minerals more than doubled. Shortages of beef, sugar and grains appeared, but gold and oil led to the most dramatic ‘crises’ and received the most attention from the public
Sound familiar?
As now, the blame was placed on supply and demand factors. Rocketing oil prices were blamed on the OPEC embargo which followed the Yom Kippur war in 1973. This despite the fact that oil prices had been rising rapidly before the embargo, since, in fact, Nixon’s floating of the dollar. As Lewis notes, following Robert Bartley’s ‘The Seven Fat Years’,
Oil had traded around $2.90 per barrel, or 1/12 ounce of gold, at $35 per ounce. On the eve of the “oil shocks”, with the dollar around $100 per ounce and OPEC still accepting about $2.90 per barrel for oil, the OPEC producers were getting only 1/35 of an ounce of gold for their oil. After they pushed the price to around $10 a barrel in early 1974, with the dollar around $120 per ounce and falling, they were getting around 1/12 ounce of gold for a barrel of oil. OPEC was simply raising its prices, like every other shopkeeper, in response to currency devaluation
CRB futures
The same was true of other commodities. Wheat, corn and soybean prices began rising on the demise of Bretton Woods. As Lewis notes
[OPEC] was actually rather late to the game; prices of most other internationally traded commodities had been rising in response to the sinking dollar since the late 1960’s. There had already been a sharp rise in food prices in 1972 – 1973
This didn’t stop policymakers fishing for explanations in the now discredited ‘Population Bomb’ as they laid the blame for rising oil prices at the door of OPEC. These, Lewis says,
gave the country a popular foreign scapegoat when it’s elites weren’t quite ready to accept the fact that they had brought the disaster upon themselves
As we face similar circumstances now, just pose this simple thought exercise to people: divide the number of dollars in the world by the number of units of a given commodity to get its price. Now double the number of dollars and do the same thing. What happens?
As we’ve noted here before, Keynes once famously wrote
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
The whirring of Ben Bernanke’s printing press overturning the unpopular regimes of the Middle East. Will it stop there?
By Jamie Whyte, on 14 January 10
I once saw an advertisement for a book that would apparently reveal the secret of making a profit in the foreign exchange markets. I did not buy it. Someone who knew such a secret could use it to make billions for himself. He would not sell his secret, and thereby render it worthless (currency trading is a zero-sum game), for £9.99.
You should be sceptical of those who claim to be giving away something very valuable, including their extraordinary knowledge or skills. Yet that is precisely what our political leaders are now asking us to believe of financial regulators.
The big new idea in banking regulation is that regulators should force banks to hold more capital when their lending is causing the price of assets (such as houses) to get too high: that is, to reach levels from which they must crash. The Obama administration now has a similar idea concerning commodities, such as oil. They want regulators to intervene in commodity markets to counteract speculation that they believe is making prices too high or too low.
Let us not argue about whether it makes sense to say that a price can be too high when people are willing to pay it, nor whether any human, even computer-assisted, could possibly know that it is. Suppose that some people really do know such things. Why would they work for the government on a salary of less than £50 million?
Knowing that the market has over-priced oil, for example, is extraordinarily valuable. You could take a massive short position and make a killing when the price falls from the heights it wrongly occupies. Or, if you knew that house prices are too low, you could buy shares in real estate investment trusts and soon be rolling in money. For someone who knows whether tradable assets are over- or under-valued, massive wealth is assured.
Perhaps I underestimate the benevolence of those blessed with such amazing skills, but it is hard to believe that they would forgo great wealth for the sake of working in a government department. My guess is that the people who will end up occupying the envisaged regulatory roles will be ordinary human beings. They will know no more about the proper value of things than any other well informed market participant, such as an investment banker guided by his economic research team.
Intelligent, informed people disagree about the value of things. Market prices reflect the balance of disagreement between those willing to put their money where their mouths are. If you think a panel of government employees with no “skin in the game” can do a better job … well, I wonder if you would like to buy this sensational new book …
By Toby Baxendale, on 7 January 10
This article from Tocqueville Asset Management is a must to read for anyone interested in the role gold plays in the investment portfolio of the public and of the Contrarian. It is simply one of the best articles written on the matter:
Is gold a “bubble” because it has now become popular or is there still worthwhile upside? As a contrarian, it is more difficult to reconcile the metal’s recent popularity with the prospect of future rewards. Is the investment consensus always wrong, or can it be right for extended periods? Does the perceived flood of new investment mean the jig is up?
…
The effect of four digit gold has been magical on investment psychology. Day after day, the financial media publishes glowing reports on the metal’s prospects while never failing to trash the beleaguered U.S. greenback. Hardly a day passes when I do not receive another meticulously researched, solemn tome on the merits of gold written by a market strategist or hedge fund manager. My office has stacks of them, all basically saying the same thing: paper currencies are bad so buy gold. In the parlance of the contrarian, gold is no longer a “thin file” investment idea.
Read on by downloading the article from Tocqueville.
By Toby Baxendale, on 21 December 09
Sean Corrigan of Diapason Commodities Management packs more sound applied economics into this report than ever: Toby Baxendale provides a commentary. This is a great Christmas read for us all: download the report here.
 Bastiat's Iceberg On the Errors of GDP Accounting
- For the USA economy, Corrigan shows the utter futility of using the conventional GDP measure. The same applies for any of the OECD countries who use the same measure.
- Business spending in 2006 in the USA was $31 trillion vs a GDP of $13.4 trillion.
- Businesses were spending $4.30 for every $1 spend on personal consumption.
- Policy makers from around the world, if any of you are reading this article, please take note of the significance of this fact!
- This focuses on something that all Austrian economists know: the desire by the mainstream economists is not to double-count. In the end, they do not count much at all!
- As a catering fish monger myself, I buy fish off farms, boats and auctions around the world. I cut and prepare the fish and send it to my customers, the hotels and restaurants of the UK. Yet none of my spending exists in the GDP figures! My wealth and that of my suppliers does not exist as far as the authorities are concerned. I only wish that I could get the tax man to take this view like his economist colleagues in the Revenue Department!
- I had this discussion with a member of the MPC some months ago: how if my salmon was bought at the fish farm for £1 per kg and we put a £1 mark-up on after cutting it up and the end user put a £1 mark up on, it is double counting as far as he was concerned. He reasoned that to count all of the stages of production when it only finally gets sold for £3 would be an overstatement as the price of the inputs is in the final price of £3. They miss out the significance that I and my supplier have our profit to the spend in the wider economy after we have spent our companies’ resources on continuing investment and consumption. This is all real activity! This is the danger of having statisticians running the economy.
- All that matters, we are told, is that GDP is composed of 70% of final consumption expenditure. In reality, the final consumption element is more like a quarter of real GDP, once the production sector is included.
- As I have always said, the health of the production sector is driven by its ability to invest in replacement capital to make more efficient production techniques, to supply more goods and services to people at better prices and with better service levels. This is the essence of entrepreneurship, the essence of wealth creation and the essence of the recovery: magic tricks perpetrated by the economic witch doctors, who wish to pursue a policy of QE or similar, will only consume capital and not replace it with some better means of production.
Continue reading “Bastiat’s Iceberg: A Sean Corrigan Masterpiece for Christmas”
By Chris Neal, on 30 November 09
Via How and why China will flood the gold market:
As you read this, the Chinese government is doing an extraordinary thing… something nearly unheard of in the modern world.
It is encouraging citizens to put at least 5% of their savings into precious metals.
The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year’s meltdown in the stock market, people believe it. After all, Chinese citizens don’t receive government retirement money… and they don’t have company pension plans like people in many other countries do.
This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it’s cheaper per ounce).
By Sean Corrigan, on 5 October 09
Sean Corrigan’s Material Evidence: bond yields, new money, state borrowing and the difficulty of making sound business decisions in the present environment.
 Material Evidence 2009-09-23 Read the report here.
By Sean Corrigan, on 30 September 09
Sean Corrigan’s Material Evidence: the declaration of the end of the recession vs cries of crisis, the role of business spending, new money, the divorce of stock prices from reality and commodities.
 Material Evidence 2009 09 16 Read the report here.
By Sean Corrigan, on 28 September 09
Sean Corrigan’s Material Evidence: US unemployment, the UK’s staggering recovery to 1974 levels of manufacturing output, energy investment and the performance of gold and silver.
 Material Evidence Read the report here.
By Sean Corrigan, on 21 September 09
Sept. 17 (Bloomberg) — Private investors in China, the world’s largest metals user, have stockpiled “substantial” quantities of copper as the government ramps up stimulus spending to spur the economy, according to Sucden Financial Ltd.
Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That’s about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.
Many of us will have chuckled over the story that Chinese farmers are piling up base metals next to the barnyard muck-heap and as we do we will all be guilty of condescending to those sucked into a speculative whirl created when hot money met the Asian gambling instinct, forgetful of the fact that – though we have a penchant for intangibles rather than things you can stub your toe on – we are just as much at fault ourselves and for the very same reasons, to boot.
For, if we look behind the surface, we must see that our Oriental Farmer Giles’ actions are not exactly an irrational response to the vast monetary over-supply prevalent in a China where prospectively profitable outlets for all that ‘stimulus’ money are in decidedly short supply. The result is a ‘Flucht in die Sachwerte’ as Mises put it – a “flight to real values”.
We can already see that the brief stock market pullback which occurred when they feathered the throttle earlier this summer has completely terrified the Chinese authorities – helping them realize they have what Hayek called a ‘tiger by the tail’. By this we mean that they know no good can come of holding to their present course, but that they are also aware they will be instantly eaten alive if they dare to let go. As a result, PboC Vice Governor Su Ning was on the newswires today talking of continuing the present ‘moderately loose policy’ – i.e., naked inflationism – out into 2010. Heaven help us all!
But no illusions of Occidental superiority should be allowed to intrude, for we cannot expect our worthy central bankers to be any less pusillanimous when their turn comes to act – for all the current rumour-mongering about tough talk behind closed doors at the Fed.
As we said almost from Day One of the crisis, Bernanke’s utter misreading of the 1930s has fixed the Fed’s ‘mistake’ of 1937 just a large in his sights as that of 1930. Needless to say, while they focus on the drama of that one, blighted decade, he and his peers completely neglect the whole sad chronicle of mistakes committed during the years 1913-1929 and 1938-2009, as its flawed doctrines and political biddability have combined to gut the far more pure ‘capitalism’ which preceded the Fed’s establishment and which have promoted in its place the pandemonium of bank-led, crony corporatist welfare we practice so disastrously today.
At present, the main difficulty we face in our own work is that of not being too repetitive in laying out what he have been saying since the Crisis started (and hinting at long before then): namely, that Government activism + central bank accommodation = more money despite lowered levels of direct commercial bank lending to the private sector and that this, in turn, is enough to set the stage for an ill-founded revival in real-side activity.
This, of course, is already proving enough to bedazzle the intellectual goldfish who teem in our waters and it is certainly providing plentiful ammunition for our recently state-sponsored stock promoting class – this even though the upswing is becoming ever more dependent on a government interventionism littered with ‘broken windows’ and scarred with the smoking craters of economic collateral damage. Furthermore – and much sooner than anyone really credits it – it will also result in higher goods prices despite the presence of the so-called ‘output gaps’ (i.e., the many abandoned factories, deserted shipyards, uncompetitive vehicle assembly lines, and dust-blown construction sites) which, despite their evident disutility, are deemed to offer a safety valve, according to the tenets of Keynesian Groupthink.
As a result, it is very likely – if not quite fully guaranteed – that we have, as predicted, avoided our 1931-33 reprise. So, let’s hand it to those recidivist drunk drivers, Ben and Merv and Jean-Claude, for being canny enough to ferry some of their victims straight to the local hospital in the hope of impressing the judge at their hearing.
The sad truth is that, whether we are spared our mini-1937 moment as the stimulus is wound down (if only in real, not nominal, magnitude, and probably not in its application, per se), or whether the avid desire to avoid the stutter of a ‘double-dip’ is to forego all meaningful attempt at Cold Turkey, the central bankers’ much-acclaimed ‘success’ implies that we will fully realise our impoverishment amid a re-run of the stagflationary 1970s instead.
This will come about as a direct result of the way in which the over-extension of monetary loosening and the intensification of an already gross degree of state interference will impede the necessary healing processes of private entrepreneurialism while fostering both a divisive economic nationalism across borders and a febrile social factionalism within them.
To sum it up in a quote:-
“We are currently in a market where government bonds, corporate bonds, industrial commodities, precious metals, major and emerging market stocks are ALL rising while the volatilities and risk spreads associated with of most of the above are falling. This is not a bull market for gold and silver – it’s a bear market for paper currencies, led by the USD and driven by a deliberate, rapid inflation of the narrow money supply almost everywhere you look. Do not expect this policy to be reversed anytime soon”
By Sean Corrigan, on 17 September 09
 Superhighway to Serfdom By kind permission of Sean Corrigan, we make available the September edition of his Resource Ruminations “Superhighway to Serfdom”:
“The danger of modern liberty is that, absorbed in the enjoyment of our private independence, and in the pursuit of our particular interests, we should surrender our right to share in political power too easily. The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying! They will say to us: what, in the end, is the aim of your efforts, the motive of your labours, the object of all your hopes? Is it not happiness? Well, leave this happiness to us and we shall give it to you. No, Sirs, we must not leave it to them. No matter how touching such a tender commitment may be, let us ask the authorities to keep within their limits. Let them confine themselves to being just. We shall assume the responsibility of being happy for ourselves”
Benjamin Constant, ‘The Liberty of Ancients Compared with that of Moderns’, 1816
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Imagine, if you will, that we stand today at a cross-roads and that we see to our right a minor road which branches away to climb rapidly upward in an ultra- (even a hyper-) inflationary surge to ruin. On our left, we find a trackway which twists downward, descending rapidly into a Slough of Despond after threading its way past the rusting ironwork, boarded windows, and unfinished building work of a renewed financial crisis and after jolting its users horribly about in the ruts and potholes of further, poor political decision-making as they motor to their doom.
In all likelihood, however, our state-employed bus driver will avoid these two offshoots and will rather stick steadfastly to the busy highway along which we are currently speeding, a broad Road of Good Intentions along whose dreary verges we see an army of labourers sweating over the construction of an ever more ramshackle confusion of governmental props, buttresses, and scaffolding as they try manfully to shore up the crumbling Babel of bad debt and faltering businesses to be found there, at least beyond the next election date.
Read the full report.
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