Tag: economics

DMM queries my forex views:

You wrote on Oct 19th the following: “This should also mark a surge in USD strength contra nearly everyone’s expectations.” I am curious if you still feel that there will be a strengthening of the dollar? With the latest actions of the FED many are claiming we will see a 20% loss in value. You have also stated that the debt deflation is overwhelming the attempted inflation of the dollar but does the FED’s actions yesterday make you think differently or are you still of the same opinion?

Given that the Euro has fallen from 1.39 to 1.34 against the dollar in the last month despite the brief spike courtesy of the Fed’s quantitative easing announcement, I think my contrarian position has been generally supported by events so far. I see no reason to change my opinion. I find it remarkable that so few see that the way in which these massive money pumps are not driving the dollar down anywhere near the depths it was in 2008 indicate that the USA is in a deflationary environment, not the inflationary one that almost everyone presently believes is the situation.

At $80, oil is much less expensive than it was in 2007. Housing prices continue to fall. And while the Federal Reserve is frantically pumping as much money through the US Treasury as it can, it’s going to run up against the debt limit soon and it cannot hope to create enough debt to make up for the $2.8 trillion in nonexistent assets presently held by the four largest U.S. banks alone. They have run extend-and-pretend longer than I’d imagined they could, but they’ve had to run it longer than they’d thought they’d have to and they cannot run it indefinitely. Either the economy turns around or something gives, and I see little sign of the former.

The important thing to remember is that the massive amounts of money being created by the central banks to bail out loans made to Greek and Irish debtors are only meant to replace money (debt) that has already gone up in smoke with the defaulted loans.

Okay, this made me laugh. A lot. Scooter posted this comment at National Review in response to a call on The Corner for the Wall Street Journal to feature an economics writer to counter Paul Krugman’s influence:

He’s a bit outside the mainstream for the Wall Street Journal, but Vox Day is an excellent voice for the Austrian school and regularly rebuts Krugman and Keynesian theory in general on his blog, Vox Popoli.

Spacebunny asked what I was laughing at. When I told her, she laughed and wanted to know if Vox Day appearing regularly in the Wall Street Journal was the 5th or the 6th sign that the Apocalypse was nigh.

And the much-expected monetary war begins… the Market Ticker reports that China has downgraded US debt:

Chinese rating agency Dagong Global Credit downgrades US credit rating due to QE program

– Cut long term US sovereign rating one notch to A+ from AA, with a negative outlook.

– “The serious defects in the U.S. economy will lead to long-term recession and fundamentally lower the national solvency. The credit crisis is far from over in the United States and the U.S. economy will be in a long-term recession. In essence, the U.S. government’s move to devalue the dollar indicates its solvency is on the brink of collapse”

The status of the U.S. dollar as the dominant international reserve currency determines that its depreciation gives an inevitable impact to the interests of all creditors. In addition to the shrinking of creditors’ assets, the utter chaos in the international currency system triggered by the depreciation of the U.S. dollar will definitely damage the interests of all the creditors in the world at various levels. Together with the possibility of inflation in the future, the wealth of creditors will be plundered once again by the malicious act of currency devaluation conducted by the U.S. government after it suffered the losses during the financial crisis since 2007.

The value fluctuation of the world’s major currencies caused by the continuous devaluation of the U.S. dollar will push the adjustment in world interest pattern through the value comparison of the monetary system. The essence is to transfer the interests of the creditors to the debtor free of charge, and that will fundamentally destroy the international credit system and global economic system comprised of the creditor system and debtor system, resulting in an overall crisis around the world.

Translation: you’re not going to rescue the big banks on our dime, Ben. By the way, notice that USD has been moving higher since the initial dive following the QE2 announcement. It’s not always as obvious as it looks. Anyhow, this could end up marking a historic moment in the struggle for 21st century supremacy. And if the pattern of history holds true, the real winner will be a third party that doesn’t get involved until throwing its weight in will close the deal.

In other words, bet on India.

Remember this January 1st prediction for December 2010? “The national median existing-home price will not rise 4% from $172,600 to $179,500 as predicted by NAR’s lead economist Lawrence Yun, but will fall below 165k instead.”

From yesterday’s September NAR report: “The national median existing-home price for all housing types was $171,700 in September, which is 2.4 percent below a year ago.”

Considering that the impact from the Great Mortgage Fraud hasn’t begun to appear yet in the housing statistics, I’m not the least bit concerned about this one panning out. And on that note, MSNBC’s Dylan Ratigan is doing an excellent job covering what the so-called conservative media won’t. The Bill Black segment starting at 6:20 is particularly informative, although the nurse that precedes him is fantastic in her observation that virtually none of the politicians, including the Tea Party all-stars, are talking about holding the bankers responsible for their crimes. Black draws a very clear picture pointing directly at the mortgage banks as being the sole causal factor of the fraud, with the Federal Reserve becoming subsequently complicit in the coverup through its purchase of $1.5 trillion in fraudulent loans. He also explains how the “deadbeat” borrowers cannot have been responsible for committing any fraud due to their ignorance of the loan ratios and various formulas involved in framing their “liars loans” to allow their categorization as AAA-rated loans.

Black is entirely correct to say that the Federal Reserve cannot be trusted in its belated “investigation” that Bernanke announced yesterday. And it is obvious that the Treasury cannot be trusted either.

“The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program.”

This news may help explain why the pension funds are so desperate to force the mortgage security push-backs though sooner rather than later… as if the thought of being able to legitimately reclaim billions of dollars in investment losses wasn’t enough incentive in its own right.

On Nov. 1, the Financial Accounting Standards Board (FASB) ceases to take public comment on a new rule requiring that companies more accurately report liabilities they have from participation in multiemployer pension plans. Unless FASB is persuaded otherwise, the rule takes effect Dec. 15.

There are some 1,500 multiemployer pension plans in the United States, which are unique to unions. In these plans, multiple companies pay into the pension plan, but each company assumes the total liability. Under “last man standing” accounting rules, if five companies are in a plan and four go bankrupt, the fifth company is responsible for meeting the pension obligations for the employees of the other four companies….

FASB’s new rule could effectively wipe out the paper worth of many companies, especially in the trucking and construction industries. Once banks and creditors are aware of these staggering pension liabilities, it will make it nearly impossible for union businesses to get loans, credit lines or bonding.

Now, obviously I didn’t know that the mortgage fraud would run as deep and wide as it does, nor did I know anything about the way in which this FASB rule is likely to put so much pressure on the pension plans. But I did know that the accounts of every bank, pension, and public corporation were fictitious to some level and would likely be exposed once the pressure of debt-deflation and economic contraction set in. This is why I have resolutely ignored all of the frantic cheerleading of the desperate economists and financial analysts; being cognizant of the true nature of Keynesianism, I recognized it as nothing more than a futile attempt to revive the animal spirits that they, like neolithic cavemen dancing around a bear skull, worship without comprehension.

Moreover, you can be certain there will be more unhappy revelations and “surprises to the downside” ahead.

S asks a follow-up question of his own:

Thank you for taking the time to answer my questions regarding the Ricardian doctrine of free trade from an Austrian perspective last week, and for answering EJ’s follow-up as well. I do have an additional question to ask on this subject. I agree with you about the problems with the “Ricardian Vice” of freezing all but a few variables in place and then coming to conclusions on the assumption of ceteris paribus. I agree that the doctrine of free trade does not take into account temporal limits on the acting man’s preferences. And I agree that these two problems combined reveal that the logical foundation of free trade is more than a little unstable. The question remains: what can be done about it?

I ask because on most questions about economics, applied praxeology dictates that government attempts to “manage” the economy or allocate resources will lead to inefficient outcomes. Why, then, should the same not apply to trade economics? How is the government to know exactly which industries should be slapped with tariffs and which industries should be left alone? Since Hayek proved that no single individual or government entity can ever have enough information to know everything about the economy at any given time, what then is the “correct” Austrian conclusion regarding trade tariffs?

The first thing to point out is that government-imposed trade restrictions are not synonymous with either “managing the economy” or “allocating resources. For example, a uniform 15% tariff on all imports doesn’t do anything except to provide a competitive advantage to all domestic producers. It doesn’t favor one sector over another, except to the extent that one sector is more dependent upon foreign inputs than another, and it doesn’t involve any government management or allocation of resources at all.

Applying the correct Misean-derived logic regarding the impossibility of socialist calculation, (Hayek only refined the concept first conceived by Ludwig von Mises), we can conclude that government cannot and should not be involved in making decisions regarding which domestic industries should be protected from foreign competition and which should be abandoned to it. However, it is a complete failure of logic to conclude on this basis that domestic industries should not be protected from foreign competition because the impossibility of calculation does not go so far as to preclude a government’s ability to distinguish between foreign and domestic production, let alone a foreigner and a citizen. And to deny that a national government can justly prefer the well-being of its domestic producers and citizens to that of foreign producers and non-citizens is no different than denying a national government’s right, (to say nothing of its responsibility), to defend its borders against military invasion.

It is, of course, no accident that the Ricardian supporters of free trade usually refuse to recognize either the USA’s right to defend its borders from foreign migration or the right of foreign nations to defend their borders from US military attacks. After all, what is the substantive difference between an “invasion” by a sufficient number of foreign soldiers to impose a new government by force and the “immigration” of a sufficient number of foreign civilians to impose a new government by their voting preferences? What is the logical rationale for resisting one and accepting the other?

There is strong empirical and logical support for a uniform protection of domestic industry; the fact that the Ricardian crowd has been reliably dishonest about the historical effects of the Smoot-Hawley tariff, the positive effects of tariffs during the 19th century, and the probable effects of free trade agreements like NAFTA should give serious pause to those who, like me, have tended to assume that free trade was an unmitigated societal positive without stopping to seriously consider all of the logical consequences.

If you stop and carefully think through the matter, it eventually becomes obvious that unfettered globalism is both the underlying conceptual foundation as well as the ultimate consequence of Ricardian free trade. To accept the concept of free trade and its necessary consequences such as open immigration and universal citizenship, it is therefore necessary to reject the U.S. Constitution and the idea of limited government as well as everything that history has taught us about cultural, ethnic, national, and religious differences.

Ricardianism is a doctrine no less utopian, and no less ultimately destructive to society, than Marxist scientific socialism, feminist equalitarianism, and the pseudo-scientific New Atheism. Note that its primary justification of collective enrichment at the expense of certain individuals is virtually identical to the Marxist justification of socialist distribution and is one of the many theoretical connections between Marx and Ricardo. This will be a hard lesson for many conservatives and libertarians to accept, as the idea that the doctrine of free trade is ultimately and inevitably anti-liberty is somewhat counter-intuitive. But the verdict of the logic is inescapable.