2010-12-31

Australian housing bubble

Australia's housing bubble is approaching the end, given the behavior of the banking sector. Here's Steve Keen on the subject:

Loan standards drop to keep the bubble afloat

I’ve just been alerted by Banking Day (a subscriber-only service) that Westpac–via its subsidiary St George–is now allowing potential borrowers to treat their rental payments as “evidence of genuine savings” when applying for a home loan.

Food costs, protectionism and deflation

Warning on China, U.S. Feed Spat
The council is an influential lobby for the U.S. farm industry, and the statement was its first riposte to Beijing since China opened the antidumping probe into a rising tide of Chinese imports of U.S. distiller's dried grains, a byproduct of corn-ethanol production that is used for animal feed.

"China's unusual market and supply volatility over the last two years has resulted in new global trade flows," council president Thomas Dorr said. "As trade flows change, it should perhaps not be surprising there would be an adjustment period in response to unprecedented demand."

China's imports of DDG from the U.S. rose more than five times this year, reflecting a price advantage the U.S. exporters enjoyed around mid-year and sharply higher Chinese feedmeal demand.
China cannot feed itself, but it is taking action on agricultural products as food costs rise. Protectionist sentiment is alive and well, this is an area of U.S. strength being targeted.

India Food Prices Still Rising
The increase was mainly caused by a spike in vegetable prices, especially onions, after long rains in the western state of Maharashtra damaged crops, crimping supplies. The sky-rocketing prices of onion, an essential ingredient in Indian cuisine, prompted the government on Dec. 22 to impose an indefinite ban on exports of the vegetable and scrap a 7% import tax.

In the week that ended Dec. 18, vegetable prices rose about 5% from the previous week and about 30% year-on-year, with onion prices up about 3.5% on the week and 40% higher than a year earlier.

Finance Minister Pranab Mukherjee said inflation could reach 6.5% by the end of March, higher than the earlier 6% estimate.

"This [high food inflation] is an area of concern, no doubt," Mr. Mukherjee told reporters. "It is not merely the base effect. There has been a real increase in the prices of certain food items," Mr. Mukherjee added.
India is thinking of raising interest rates to fight food costs, my hunch is that this is an isolated trend in costs. Although it means relatively poorer Indians spend a large portion of their income on food and thus it translates into a high increase in the cost of living, in the end it is one sector of the economy. The overall effect of the rate hikes will be deflationary.

A picture is worth a thousand words


One of the bloggers at Caing, Barrons, posted a chart of housing prices in China, U.S. and Japan. The peaks of the U.S. and Japan are aligned, such that N-7 (years) has a value of 100.
一图抵千言

2010-12-29

China rare earth quotas

2011年稀土出口企业名单及第一批配额安排表
序号 公司名称 配额数量(吨)
1 中国中钢集团公司 584
2 五矿有色金属股份有限公司 747
3 中国有色金属进出口江苏公司 493
4 广东广晟有色金属进出口有限公司 431
5 常熟市盛昌稀土冶炼厂 196
6 江苏卓群纳米稀土股份有限公司 251
7 江西金世纪新材料股份有限公司 432
8 内蒙古和发稀土科技开发股份有限公司 750
9 江西南方稀土高技术股份有限公司 401
10 赣州晨光稀土新材料股份有限公司 374
11 赣州虔东稀土集团股份有限公司 329
12 有研稀土新材料股份有限公司 333
13 益阳鸿源稀土有限责任公司 594
14 包头华美稀土高科有限公司 954
15 内蒙古包钢稀土(集团)高科技股份有限公司 740
16 甘肃稀土新材料股份有限公司 689
17 乐山盛和稀土科技有限公司 750
18 阜宁稀土实业有限公司 327
19 山东鹏宇实业股份有限公司 709
20 赣县红金稀土有限公司 102
21 徐州金石彭源稀土材料厂 410
22 广东珠江稀土有限公司 166
23 江阴加华新材料资源有限公司 481
24 溧阳罗地亚稀土新材料有限公司 324
25 宜兴新威利成稀土有限公司 440
26 包头天骄清美稀土抛光粉有限公司 251
27 包头罗地亚稀土有限公司 867
28 呼和浩特融信新金属冶炼有限公司 296
29 包头华信冶炼有限公司 93
30 包头三德电池材料有限公司 127
31 淄博加华新材料资源有限公司 805



应得配额=此次下达配额量×〔0.85×(A1+A2)+0.15×A3〕
A1=(各企业近三年出口数量÷全国出口总量)×0.9权重
A2=(各企业近三年出口金额÷全国出口金额)×0.1权重
A3=生产企业2009年出口供货量÷各生产企业出口供货总量

The table lists the new export quotas in tons. Below the table are the formulas. One is based on the past three years exports in quantity, another past three years monetary value, and the third 2009 exports.

Here's a link to the Google translation of the above.

Stocks didn't always react based on the news. Baosteel Baotuo Rare Earth (600111.SS) was up less than 2% on the news (number 15 on the list, with possible additional subsidiaries listed), while China Rare Earth (0769.HK) (subsidiary is listed at 25), gained 16%. Shares of rare earth miners listed in Australia also bounced on the news. MCP and REMX have solid gains in early U.S. trading following the news.

In other news...China likely to set up rare earth trade body
China is considering establishing an industry association and a government unit for the rare earths industry to gain more control over the precious metals, senior officials said Tuesday.

The rare earths industry association is likely to be launched in May and will assist companies in exports and international cooperation, Wang Caifeng, a former official of the Ministry of Industry and Information Technology (MIIT), who is setting up the group, said at a forum.

"We will be on the frontlines leading price talks with foreign buyers. Our role will be similar to that of the China Iron and Steel Association (CISA)," she said.
The article goes on to discuss the development of taxes, quotas and consolidation in the industry:
Since 2006, the country has imposed temporary taxes on rare earths exports and set limits on quotas. In 2010, China reduced export quotas to 60 percent, causing alarm among importing countries such as Japan.

The Ministry of Finance said on its website last week that China will raise the export taxes for some rare earth minerals to 25 percent in 2011.

The country is speeding up the pace of mergers and acquisitions in the rare earths sector and is encouraging consolidation among State-owned enterprises. China plans to cut the number of rare earths companies from the current 90 to 20 by 2015.

2010-12-28

Even science fails

God and the economy
Writing "The Irrational Atheist" was an interesting exercise in swimming through a sea of unsupported assumptions and incompetent arguments. But one thing I noticed is that beneath the vast compendium of logical blunders and factual errors, there was a single false belief that serves as a flawed foundation for the entire New Atheist attack on Christianity. That is the idea that reason is capable of dictating individual belief.

This atheist paradigm is almost invariably entwined with left-liberal politics as well as a science fetish because it depends upon a progressive narrative. This is due to the 18th century propaganda of the Enlightenment, which is looking increasingly outdated and irrelevant. The progressive narrative is primarily dependent upon three factors, technological advancement, wealth and peace, which it credits to the increased secularism of Western society.

The inherent problem is that these three factors can also be attributed to economic growth, which has accompanied the increase in technology, wealth and peace. Some secularists have gone so far as to claim that secularism is actually the cause of economic growth, but this is clearly incorrect since historical economic growth in more religious periods has exceeded the growth that took place during the 20th century. It is, in fact, an egregious error, since there is a growing body of evidence that it is secularism itself that is the product of economic growth.

Since I pay fairly close attention to various markets, it did not escape my attention that the New Atheists hit the best-seller lists very close to the time that the socionomists at Elliott Wave International were forecasting a Grand Supercycle peak. Sam Harris' "The End of Faith" was published in August 2004, with the Dow at 10,600. Richard Dawkins published "The God Delusion" in September 2006, when the Dow struck 11,508. And Christopher Hitchens appears to have marked the peak of both the New Atheism and the Dow when he published "god is Not Great" with the Dow at 13,188 in May 2007.
I think there's clear evidence to make a case that an over-reliance on reason accompanied the peak in social mood. Non-mainstream writers such as Vox Day have attacked the secular over-reliance on reason for years, but with the turn in social mood, this is turning into a mainstream position. As with other social mood shifts, however, we are still in the early stages. First, reason will be exposed as not having all the answers and we'll slowly drift back towards the equilibrium position.
Faith and reason are like two wings on which the human spirit rises to the contemplation of truth; and God has placed in the human heart a desire to know the truth—in a word, to know himself—so that, by knowing and loving God, men and women may also come to the fullness of truth about themselves.
For now, the attacks on science begin in earnest with,THE TRUTH WEARS OFF: Is there something wrong with the scientific method?

The article is long and contains several examples, but the conclusion provides a nice summary.
This suggests that the decline effect is actually a decline of illusion. While Karl Popper imagined falsification occurring with a single, definitive experiment—Galileo refuted Aristotelian mechanics in an afternoon—the process turns out to be much messier than that. Many scientific theories continue to be considered true even after failing numerous experimental tests. Verbal overshadowing might exhibit the decline effect, but it remains extensively relied upon within the field. The same holds for any number of phenomena, from the disappearing benefits of second-generation antipsychotics to the weak coupling ratio exhibited by decaying neutrons, which appears to have fallen by more than ten standard deviations between 1969 and 2001. Even the law of gravity hasn’t always been perfect at predicting real-world phenomena. (In one test, physicists measuring gravity by means of deep boreholes in the Nevada desert found a two-and-a-half-per-cent discrepancy between the theoretical predictions and the actual data.) Despite these findings, second-generation antipsychotics are still widely prescribed, and our model of the neutron hasn’t changed. The law of gravity remains the same.

Such anomalies demonstrate the slipperiness of empiricism. Although many scientific ideas generate conflicting results and suffer from falling effect sizes, they continue to get cited in the textbooks and drive standard medical practice. Why? Because these ideas seem true. Because they make sense. Because we can’t bear to let them go. And this is why the decline effect is so troubling. Not because it reveals the human fallibility of science, in which data are tweaked and beliefs shape perceptions. (Such shortcomings aren’t surprising, at least for scientists.) And not because it reveals that many of our most exciting theories are fleeting fads and will soon be rejected. (That idea has been around since Thomas Kuhn.) The decline effect is troubling because it reminds us how difficult it is to prove anything. We like to pretend that our experiments define the truth for us. But that’s often not the case. Just because an idea is true doesn’t mean it can be proved. And just because an idea can be proved doesn’t mean it’s true. When the experiments are done, we still have to choose what to believe.
And this will muddy the waters, especially in highly politicized issues such as global warming. Look for global warming skepticism to become cool, so cool that even the NYTimes will join in.

Andy Xie looks to 2011

Good Tidings in 2011
The most likely candidates to trigger the next global crisis are the U.S.'s sovereign debt or China's inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the U.S. will again be the cause for the next global crisis. China will suffer from declining exports but benefit from lower oil prices.

On the other hand, if China has a hard landing, the U.S.'s trade deficit can drop dramatically, maybe by 50 percent, due to lower import prices. It would boost the dollar's value and bring down the U.S.'s treasury yield. The U.S. can have lower financing costs and lower expenditures. The combination allows the U.S. to enjoy a period of good growth.

One could describe the global economy as a race between the U.S. and China, to see who goes down first.
This coming year is China's opportunity.

2010-12-27

Silver maintains holding pattern



The big divergence between speculators and silver prices has moved sideways for another week, ending December 21, but given the action in the market since then, it's probably true through today as well. Meanwhile, the euro is also hanging tough, although speculative shorts increased their positions.

2010-12-26

Economics and National Security

Jim Rickards presentation, Rethinking the Future International Security Environment The Johns Hopkins University -- Applied Physics Laboratory
Economics and National Security
James G. Rickards Senior Managing Director, Omnis, Inc., McLean, VA Tuesday, December 7, 2010







2010-12-23

Deflation in 2011

The U.S. Congress is talking the talk right now, in about two weeks we'll see whether they can walk the walk. These are most certainly deflationary in impact:

GOP unveils strict House rules
On the spending front, Republicans plan to implement a series of rules called CUT/GO — a conservative answer to the PAY/GO rules instituted by Democrats. Under CUT/GO, increases in mandatory spending would have to be offset by spending cuts in other programs. Mandatory spending refers to the autopilot portion of the budget covering Social Security, Medicare and other programs designed to make payouts based on eligibility criteria rather than a set dollar figure each year.

Under CUT/GO, offsets could not be achieved by raising taxes, according to the summary.

In addition, GOP leaders will eliminate the so-called Gephardt Rule, which has long allowed House members to avoid a direct vote on raising the nation's debt ceiling. The rule provided that a bill increasing the debt limit was automatically generated when the House adopted a conference report on the annual budget resolution.
If enacted and followed, CUT/GO would eventually eliminate the entire federal budget except for Medicare and Social Security—which is why reform of those programs is critical. Interestingly, if the GOP sticks to its guns, this would force the issue to the table.

Yuan takes a big step forward in 2011

Cheung Kong to launch HK's first yuan IPO
It is believed Cheung Kong may include its 33.4 per cent-owned Oriental Plaza in Beijing in the yuan reit. The 800,000 square metre development comprises eight grade-A offices, two luxury serviced apartment buildings, the five-star Grand Hyatt Beijing and a shopping mall.

Phillip Capital Management fund manager Li Kwok-suen said Cheung Kong's yuan reit should be well received.

"In view of the excess liquidity, investors are hungry for investment products that can hedge against inflation. Reits or bonds would be a good bet as they provide a regular income to investors."

But Wong said yuan products, including stocks, faced challenges because of the limited access to the currency. Currency exchanges in Hong Kong are limited to a maximum 20,000 yuan a day.

The yuan deposit base in the city increased to about 217 billion yuan as of October but still only accounts for about 3 per cent of all its deposits.

Tony Tong, market strategist at China Everbright (SEHK: 0165) Research, said it was too early to assess the market response to the IPO.

"Most Hong Kong investors tend to chase short-term gains instead of stable dividend income," he said.
It's good news for the internationalization of the yuan, but does it say anything that the first overseas yuan IPO is a property REIT?

2010-12-21

China to mark 100th anniversary of 1911 revolution

A lot of attention will be paid to the 1911 revolution, when thousands of years of imperial succession gave way to the modern form of government.
The Revolution of 1911
Popular blogger and amateur historian Xiong Feijun, coining newfangled terms like "Princeling Cabinet" (taizidang neige) with relish, concluded that the revolution started as a mass incident (qunti shijian) – another resonant word in the 21st century – which had gotten out of control and then snowballed into something too big to be contained.
Other historians have found a striking parallel between the move by the Qing court to nationalize the railways and the recent trend of "state advancing, private sector retreating," in which state-owned enterprises redoubled their dominance in the economy through easy access to credit and favorable government policies. The private sector, struggling to stay afloat in the financial crisis, was no match with the state behemoth.

Other than a vague idea of republicanism, the revolutionaries were disorganized and lacked mobilization skills. Ten attempts at revolution had failed and many believed that the Manchu dynasty could easily last for another 50 years. Then one day, they woke up and found the empire was no more.

Victory as something that fell unexpectedly on the laps of the revolutionaries and the defenders of the old order retreated from the stage in haste. A political science professor commented wryly that despite loud proclamations of loyalty to the emperor, martyrs were hard to find after the fall of the Qing dynasty. For many people in the countryside, China without an emperor had been unthinkable. But after 1911, life went on. The sky did not fall.

As then, a large part of the elite now realize the system is ineffective. Finding disturbing parallels 100 years ago only deepens their anxiety. History is not a feel-good business.

Social mood and free trade

It's important that the phenomena associated with rising or falling social mood be viewed objectively. A good approach is to think of social mood in terms of "too much of a good thing," rather than rising social mood good, falling social mood bad. The negative period of social mood is a chance to clear the decks, of bad debts and bad ideas. We focus on causes when a leader such as Hitler rises to power, but during a decline in social mood, sometimes this element is missing. We have economists critical of the public's newfound frugality, for instance, when this is a reaction to the spendthrift years that preceded it. I would argue that much of the Western world is not close to a rational level of xenophobia, given the extreme levels of immigration over the past few decades, but just as I expect the public to be irrationally frugal even when the economy has long since bottomed, similar to the people who lived during the Depression, so I anticipate that the public will become excessively xenophobic.

Excess becomes necessary though, when ideas are firmly rooted. The vast majority of the economic profession is in favor of free trade, while the general public is generally favorable towards it. Socionomics predicts a rise in protectionism during a decline in social mood and no doubt this will be portrayed negatively by the intellectual classes. Therefore, as with immigration, the Federal Reserve, and financial bailouts, excessive levels of general public anger are required to simply make a dent in the Ivory Tower.

Another factor to consider is mindless versus intentioned. The public can become thoughtfully frugal, or they can become paralyzed with fear and hoard cash. They can mindlessly attack foreigners on the street, or they can reform their immigration policies. And they can mindlessly throw up trade barriers in a fit of blame the foreigner, or they can examine their trade and economic policies. The negative social mood will be most effective when there are constructive outlets for public anger. A society without answers, or even able to ask the right questions, will have a recipe for instability and stagnation.

This is the roundabout introduction to what may be an important intellectual work during this period of declining social mood, Ian Fletcher's Free Trade Doesn't Work: What Should Replace it and Why. I have not read the book, having just come across it, but I have been reading a paper by the author which attacks the assumptions of Ricardian free trade.
Dubious assumptions of the theory of comparative advantage

Free trade squeezes the wages of ordinary Americans largely because it expands the world’s effective supply of labor, which can move from rice paddy to factory overnight, faster than its supply of capital, which takes decades to accumulate at prevailing savings rates. As a result, free trade strengthens the bargaining position of capital relative to labor. This is especially true when combined with growing global capital mobility and the entry into capitalism of large formerly socialist nations such as India and China. As a result, people who draw most of their income from returns on capital (the rich) gain, while people who get most of their income from labor (the rest) lose.
Capital is scare and takes a very long time to build up. Countries such as Korea and Japan were able to catch up very rapidly due to high savings rates and the built up experience and knowledge from developed economies. These countries began their improvements internally, however, and benefited from favorable bilateral trade deals with the West as part of Cold War economic policy. Opening the world to trade in the WTO era is slightly different, since it is much easier to participate and brings so many participants to the market at once. A country with no capital accumulation and no plan for capital accumulation can open up the domestic labor supply to foreign business and obtain an economic benefit (however short lived if there's no policy in place to take advantage of the benefits).

This ends up being very beneficial to capital immediately, since it can now seek the highest possible return anywhere on the globe. In contrast, low skilled workers are abundant, therefore wages should head towards a global wage rate—bad news for unskilled workers in the developed world. However, since many unskilled jobs require a physical presence, what ends up happening is that these jobs go to where ever returns to capital are the highest. If the economy that lost the jobs has a use for these workers, that is very good news, since they can possibly be employed in more productive lines of work. Here's the rub: increased labor productivity comes from employing capital. Capital just exited the country along with the jobs and the assumption is that capital will now come back in an even larger quantity to rehire these workers. Is this what we observe? Or do we observe global capital flows continuing in the same direction?

There's also the case of secondary and tertiary industries. This is probably one of the strongest cases against free trade that I've come across, something that Eamonn Fingleton argued in In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the key to Future Prosperity. Here's Fletcher:
Ricardo’s own favorite example, the trade in English textiles for Portuguese wine, is very revealing here, though not in a way he would have liked. In Ricardo’s day, textiles were produced in England with then-state-of-the-art technology like steam engines. The textile industry thus nurtured a sophisticated machine tool industry to make the parts for these engines, which drove forward the general technological capabilities of the British economy and helped it break into related industries like locomotives and steamships.24

Wine, on the other hand, was made by methods that had not changed in centuries (and have only begun to change since about 1960, by the way). So for hundreds of years, wine production contributed no technological advances to the Portuguese economy, no drivers of growth, no opportunities to raise economy-wide productivity. And its own productivity remained static: it did the same thing over and over again, year after year, decade after decade, century after century, because this was where Portugal’s immediate comparative advantage lay. It may have been Portugal’s best move in the short run, but it was a dead end in the long run.
A modern agricultural example completely within one country's borders is U.S. farming. See, Guest worker Programs: A Threat to American Agriculture. In the short-run, it is cheaper to allow low wage illegal aliens to pick produce by hand, but engineers are working on mechanized solutions. If the U.S. restricted the supply of labor to domestic sources, this would lead to investments in capital goods (I'm assuming that U.S. support for farmers would forestall outsourcing this sector of the economy) and eventually, an entire new industry to support the farm industry. The result would be high wage farming jobs, supported by high levels of capital investment. Instead, the country will rely on cheap labor.

In the case of manufactured goods, factories are supported by research & development and suppliers. Sometimes a plant will move overseas and only make use of low wages, but other times the research jobs and suppliers move as well, to be closer to the final production point. Therefore, in trying to gain a small advantage in the short-run, a country may be giving up much more in the long-run. On a larger scale, what happens to an area when the major employers leave is that much of the local economy eventually follows.

We've seen Austrian economics and heterodox economic theories attract greater attention in the wake of the financial collapse, since in many cases they focused on the debt problem and accurately predicted the crisis. Free trade is a far more hardened intellectual position, with more agreement than disagreement across the disciplines. The challenge to this orthodoxy arrived on schedule, aided by the decline in social mood. Declining social mood will increase the desire for protectionism and it will either be an organized examination and then reform of trade policy, or a slapdash trade war that would sour international relations. A couple years ago, Ron Paul was laughed at for questioning the Federal Reserve. Today, free trade remains a relatively unchallenged orthodoxy. I expect that we'll see a similar shift in opinion. Whether this ends up being a fig leaf for politicians to erect trade barriers or leads to genuine economic reform, is another matter.

2010-12-18

What are savings?

FOFOA has taken some flak for this comment in the post Focal Point: Gold
Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.
Critics point out that gold extinguishes debt. However, unless the end user wants to make jewelry out of the gold, it represents a claim on production and/or assets in the economy. In a purely fiat currency system, where sea shells or paper dollars are money, but the system has no debt, you can't loan paper dollars or sea shells, you can only swap them for goods and services. In this system, if you sell a chicken for sea shells or dollars, what do you have? You have a claim on your neighbors production or assets to be used at some time in the future.

On his blog, FOFOA argues that people do not want to hold paper dollars for very long because the supply increases over time. Therefore, we can split the function of medium of exchange and wealth preservation. You will hold paper dollars when you want to transact, but you will shift your savings into something that does not have a rapidly increasing supply—gold. In a sense, this gold represents the world's debt to the holder. The holder of gold has foregone consumption of goods and services today and taken gold to preserve the value of their foregone consumption.

Here's an article by Frank Shostak which explains savings and its role in the economy.

Only savings can create wealth
The more sophisticated and productive a particular economy is, the more stages of production it will have. Conversely, the fewer stages of production an economy embraces the less wealth it can produce. For instance, with bare hands an individual who is alone on an island could pick up 25 apples per hour from an apple tree.

By means of a special stick his hourly output could be raised to 50 apples. If the stick would have been readily available our individual could have raised the output of apples immediately.1 If, however, the stick is not available, it must be made. The making of the stick takes however time. Implying that while previously (i.e. without the stick) apples could be picked up immediately, now it takes time before apples could be picked up. Since now, he first have to make the stick before it can be employed in picking apples.

With a more sophisticated equipment it would be possible to raise the hourly output of apples further. However, this will require to invest much more time in making this equipment. In other words, although a more sophisticated production structure will enable a greater output, the waiting time will increase. Adding new production stages lengthens the production structure i.e. the time elapse between the beginning of the production process and its turning out a product ready for consumption increases.

What makes it possible to add new stages of production is the fact that various individuals who are engaged in the making of the stages are supplied with goods and services necessary to sustain their lives and well being. In other words during the period of building new stages those individuals must be sustained-they require means of sustenance and thus access to the pool of means of sustenance or the pool of funding.( In the case of our individual on the island, the pool of funding will consist of saved apple that will sustain this individual while he is engaged in making the stick). Without the pool of means of sustenance or the pool of funding, no economic activity can emerge. On this Menger wrote:

"Needs arise from our drives and the drives are imbedded in our nature. An imperfect satisfaction of needs leads to the stunting of our nature. Failure to satisfy them brings about our destruction. But to satisfy our needs is to live and prosper. Thus the attempt to provide for the satisfaction of our needs is synonymous with the attempt to provide for our lives and well-being. It is the most important endeavours, since it is prerequisite and foundation of all others".2

The size of the pool of funding determines whether a more sophisticated equipment could be introduced 3. For instance to build sophisticated equipment to pick up apples requires one year of an individual work.

However, if the pool of funding is the only means of sustenance to sustain this individual for one month, obviously it will not be possible to build this sophisticated equipment. Implying that it will not be possible to increase the output of apples. The pool of funding therefore, sets a brake on the use of the more productive but longer stages of production.

Individual's time preferences, as manifested by the pure rate of interest, determines how much of a given flow of real wealth is allocated towards consumption and how much towards savings, and hence towards the pool of funding. Lowering of time preferences i.e. lowering of the pure rate of interest, implies that people are now willing to wait for any given amount of future output.4 Implying that they are ready to allocate proportionately more of the means of sustenance towards longer stages of production. A rise in the time preferences and in the pure rate of interest means that people are less willing to wait.

This means that they will allocate proportionately more of the means of sustenance towards the immediate production of consumer goods and less towards the longer production stages. The pure rate of interest fulfills the crucial role of coordinating between the length of the production structure and the pool of funding.

The introduction of money will not alter the essence of the analysis we have presented so far. Money now, will offer not only the services of the medium of the exchange but also the means of savings. In a world without money individuals would encounter difficulties in saving perishable goods. The introduction of money resolves these difficulties. Instead of saving i.e storing perishable goods, now people can save money.

However, to fulfill the role of the medium of the exchange and the means of savings, the money stock must remain unchanged. This will guarantee that production will precede consumption. It will also guarantee that money is fully backed up by the means of sustenance. Thus, whenever a producer exchanges his goods and services for money he acquires a permit to access the pool of funding whenever he requires it.

By exchanging his goods for money he enables the buyer of his goods to engage in production, thereby allowing the overall production flow to stay intact. It is this uninterrupted flow of produced goods that provides the full backup to money. This means that whenever a producer decides to realize his money i.e. to exchange them for goods and services he will be able to find these goods.

What, however, enables this uninterrupted production is the continuous flow of saved goods i.e it is the saved means of sustenance that permits the ongoing expansion in production of wealth. Note, that while the pool of funding consists of real goods and services i.e. means of sustenance, it is expressed or denoted in terms of money. The existence of money, so to speak, enables us to grasp the existence of the pool of funding.

Money, however, does not create this pool. Nevertheless, one could argue that money supplies services like any other good and therefore it must be part of the pool of funding. Contrary to other goods the increase in money cannot improve on the services it provides. On the contrary it will only dilute its purchasing power and cause wealth destruction. With regard to the increase in the quantity of other goods this will raise benefits to humans. Consequently we can conclude that money is not part of the pool of funding. (An increase in the money stock will not enlarge the pool of funding).

Trouble erupts whenever the banking system expands the money stock i.e. creates money out of "thin air". For this increase in the money stock gives rise to the consumption of goods which is not preceded by production. It generates exactly the same results as the counterfeit money. For under these conditions the buyer of goods does not use them to support his own production. In fact he consumes and produces nothing. Consequently the buyer of the money/or seller of goods can never realize his money, for the means of sustenance to support these newly created money was never produced. Any attempt then, to lengthen the production structure by means of an expansion in the money stock must always fail.

In other words the expansion in production of goods and services requires an expanding pool of means of sustenance. Printing money which boosts consumption, doesn't cause more, but rather less means of sustenance. If the increase in money would permit to lengthen the production structure, then it would imply that money can be a substitute to the non existent means of sustenance.

It is accepted by some economists that although loose monetary policy impairs wealth formation, it nonetheless can lift the total level of economic activity. However, every activity regardless of its nature i.e. whether it is a wealth or a non wealth generating activity, must be funded. In other words people who are engaged in these activities must have access to a means of sustenance.

Without a means of sustenance no activity can emerge. A given pool of funding can only sustain a given level of activity. Now, if a larger percentage of funding is diverted, as a result of a loose monetary policy, towards non-wealth generating activities, less funding will be left for wealth-generating activities, overall activity however will remain unchanged. In order to raise overall activity i.e. to lift production of goods and services, it will be necessary to make the production structure more productive.

This however, will require a lengthening of the average time between the beginning of the production process and its turning out a product ready for consumption. This, however, will require more means of sustenance. Since money cannot be a substitute for the means of sustenance it therefore cannot make the production structure more productive and thus raise the level of economic activity.

A view that a loose monetary policy could lift the level of total activity presupposes that monetary pumping somehow creates funding. If this were the case then loose monetary policies around the world would have eradicated poverty a long time ago. Now, as long as the pool of funding continues to expand, government loose monetary policies give the impression that they can lift the total economic activity. That this is not so becomes apparent once the pool of funding is stagnating or shrinking.

Most mainstream economists who advocate monetary pumping and the artificial lowering of interest rates in order to counter recessions, totally misconceive that the interest rate is just an indicator. It is just a manifestation of the demand versus the supply of savings. Being a manifestation it cannot substitute the non existent means of sustenance and grow the economy as suggested by mainstream economists. Again what is needed for economic growth is an expanding pool of funding.

1. Murray N. Rothbard, Man, Economy, and State (Los Angeles:Nash) vol. 1 p 42.

2. Carl Menger, Principle of Economics, New York University Press, p77-78.

3. Richard von Strigl, Capital and Production, translated by Margaret R. Hoppe and Hans H. Hoppe Ludwig von Mises Institute p 8.

4. Murray N. Rothbard Man, Economy, and State (Los Angeles: Nash), vol. 2, p488.

Immigration policy turns the corner

Requiem for a DREAM
As Katrina notes below, the DREAM Act has finally been put out of our misery (here’s how everyone voted). But it’s bigger than that. The vote was the capstone of 10 straight years of successful defense against amnesties, following the passage of seven amnesties from 1986 to 2000. Only twice in the past decade did amnesties even get the approval of one chamber — the overall amnesty passed by the Senate in 2006 and the DREAM amnesty by the House earlier this month — but neither time did the amnesty reach the president’s desk.

This decade-long perfect record of stopping amnesty came despite the fact that the pro-amnesty side has held all the commanding heights of the economy and society: Big Business, Big Labor, Big Religion, Big Academia, Big Media, Big Philanthropy, and of course, Big Government. The open-borders side is backed by billionaires like George Soros, Rupert Murdoch, and Michael Bloomberg, plus scores of millions from mammoth foundations like Ford, Carnegie, and MacArthur, plus 98 percent of groups lobbying Congress on the issue.

But we had the public.

Now, the next phase of the immigration struggle begins. Next month, the new Congress will be a very different animal. Fifty-three members of the House of Representatives who voted for the DREAM amnesty will not be returning in January. And it will finally be time to go on the offense.
That's Mark Kirkorian writing at The Corner, the group blog of the National Review. While he's not using a socionomic perspective, socionomics confirms his expectation that politics will now shift from blocking the most extreme pro-immigration policies (stasis) to pushing immigration policy in the direction of greater restriction. See this chart of the Dow/Gold ratio below:
Robert Prechter predicted immigration restrictions during this decline in social mood. Bush the Younger pushed hard for amnesty and he had the chance with a Democrat Congress after 2006, but they could not overcome the decline in social mood and the shift in the public's priorities. Illegal immigration was never popular, with two-thirds or more of the public against it, but during rising social mood, the public felt more inclusive and had other concerns. I believe immigration also fits into Prechter's opinion that the peak in 2000 was of a much greater degree. On the scale of all immigration policies, from completely closed borders to completely open borders, amnesty for tens of millions of illegal immigrants is very close to an open border policy, an extremely pro-immigration policy. It took a full decade of declining social mood just to stop this policy, let alone achieve any reversal in policy...but consider that this mirrors the credit markets quite well.

Just as the United States is starting to with the buildup of excess credit during the period of rising social mood, it will also begin to deal with excess immigration. Peak social mood saw both open credit and open borders. Want a loan? Come and get one! Want to live in America? Come on in! This week, the Federal Reserve moved to limit debit card fees charged by banks, possibly costing them $13 billion in revenue, and Congress killed amnesty.

For a look at excess immigration, see Victor Davis Hanson's Two Californias:
In fact, trash piles are commonplace out here — composed of everything from half-empty paint cans and children’s plastic toys to diapers and moldy food. I have never seen a rural sheriff cite a litterer, or witnessed state EPA workers cleaning up these unauthorized wastelands. So I would suggest to Bay Area scientists that the environment is taking a much harder beating down here in central California than it is in the Delta. Perhaps before we cut off more irrigation water to the west side of the valley, we might invest some green dollars into cleaning up the unsightly and sometimes dangerous garbage that now litters the outskirts of our rural communities.

We hear about the tough small-business regulations that have driven residents out of the state, at the rate of 2,000 to 3,000 a week. But from my unscientific observations these past weeks, it seems rather easy to open a small business in California without any oversight at all, or at least what I might call a “counter business.” I counted eleven mobile hot-kitchen trucks that simply park by the side of the road, spread about some plastic chairs, pull down a tarp canopy, and, presto, become mini-restaurants. There are no “facilities” such as toilets or washrooms. But I do frequently see lard trails on the isolated roads I bike on, where trucks apparently have simply opened their draining tanks and sped on, leaving a slick of cooking fats and oils. Crows and ground squirrels love them; they can be seen from a distance mysteriously occupied in the middle of the road.

At crossroads, peddlers in a counter-California economy sell almost anything. Here is what I noticed at an intersection on the west side last week: shovels, rakes, hoes, gas pumps, lawnmowers, edgers, blowers, jackets, gloves, and caps. The merchandise was all new. I doubt whether in high-tax California sales taxes or income taxes were paid on any of these stop-and-go transactions.
This is literally Third World, it is what takes place in countries where the government is not strong enough to enforce basic laws.
Do diversity concerns, as in lack of diversity, work both ways? Over a hundred-mile stretch, when I stopped in San Joaquin for a bottled water, or drove through Orange Cove, or got gas in Parlier, or went to a corner market in southwestern Selma, my home town, I was the only non-Hispanic — there were no Asians, no blacks, no other whites. We may speak of the richness of “diversity,” but those who cherish that ideal simply have no idea that there are now countless inland communities that have become near-apartheid societies, where Spanish is the first language, the schools are not at all diverse, and the federal and state governments are either the main employers or at least the chief sources of income — whether through emergency rooms, rural health clinics, public schools, or social-service offices. An observer from Mars might conclude that our elites and masses have given up on the ideal of integration and assimilation, perhaps in the wake of the arrival of 11 to 15 million illegal aliens.

2010-12-17

Euro speculators continue pause; silver diverges


A look at the Federal Reserve's timing on card fees

New Debit-Card Fee Rules Hit Hard
The new restrictions, most of which won't be made final until April 21, aim to cap the amount of money that debit-card issuers can charge merchants for so-called swipe fees. Banks would face a seven-to-12-cent-per-transaction cap on the interchange fees under either of the two proposals unveiled Thursday. That represents as much as an 84% drop from the current average of 44 cents. Analysts had been expecting a drop of up to 60%.

"Nobody expected it to be this draconian," said David Robertson, publisher of credit-card industry newsletter the Nilson Report. One bank executive said the cut was larger than the company's worst-case scenario. Banks, he said, will "push back."
The credit card companies don't keep the fees, but the higher fees make the cards attractive for banks, which is why Visa (V) and Mastercard (MA) got clobbered yesterday on the news.

This policy change comes as part of the Dodd-Frank financial "reform" package; it is a regulatory power newly granted to the Federal Reserve by Congress (wink wink, nudge nudge).

Now to the graphs. These graphs go back to 1980 to capture the big increase in credit, but data going back to 1968 shows that there were no year-over-year declines before 2008.

2010-12-16

Current state of Europe and the euro

There are lots of social mood indicators in the Guardian's excellent article, Year of bullying, bluff and bailouts leaves euro fighting for its life:
The mark was born behind barbed wire in total secrecy in this barracks in 1948 in what became known as the "conclave of Rothwesten". The currency met an early death at the age of 50 in 1998 (though notes and coins were in circulation until 2001). But as the German opinion polls show every week at the moment, 30%-40% are hoping for a resurrection.
The mark is freely exchangeable into euros in perpetuity, which has resulted in a significant, albeit small relative to money supply, hoard of marks in private hands.
"There is no appetite anywhere for another Franco-German plan to save the euro," said an east European government minister.

Jean Asselborn, the foreign minister of Luxembourg, went further: "I can only warn Germany and France against a claim to power that shows a certain overbearingness and arrogance."

A prime minister of a small EU state was more damning still. "Merkel and Sarkozy think they are the most pro-European leaders ever. But there is no Franco-German leadership. It's all domestic politics," he told the Guardian.
It's all domestic politics because during periods of negative social mood the public focuses inward on domestic issues. Those unable to face those difficulties often turn to foreigners as scapegoats, rather than partners.
"It has always been very difficult to take decisions in the EU against German thinking. But that's not new," said the prime minister. "The new phenomenon is that the Germans are talking, but they're not listening. For the first time on a serious issue, I'm upset by the German behaviour."

Jean-Claude Trichet, president of the ECB, José Manuel Barroso, president of the EC, and Jean-Claude Juncker, chairman of the Eurogroup countries and prime minister of Luxembourg, have all separately attacked Merkel in recent months, calling her "naive" and "simple". In the WikiLeaks cables, the US ambassador in Berlin characterised the chancellor as "risk-averse and seldom creative".

In a paper in July, Jean Pisani-Ferry, director of the Bruegel thinktank in Brussels, noted: "In Angela Merkel, the EU has a de facto leader, but one who was not prepared for leadership."
Normally, comments like this would make Merkel popular at home, except that social mood is too negative. Her party has also failed to deliver on the tax cut promises that were made to its coalition parter, the FDP, causing voters abandon them. The ruling government is looking weaker politically and the result is that Merkel doesn't want to cave to the EU now.
The Slovaks, however, who only joined the euro club last year, appear already to be kicking themselves. "We were guided by promises of a stable currency and solid rules,' the parliament speaker in Bratislava, Richard Sulík, complained this week. "We need to stop believing blindly in the governors of the eurozone and start preparing plan B, a return to the Slovak crown."

The Slovaks feel betrayed by what has happened to their money, like the many Germans who are bristling with indignation in part because they were never keen on the currency in the first place.

Last week Helmut Schmidt, the former chancellor and German elder statesman, said Merkel did not understand modern economics. He also attacked the central bank in Frankfurt, the Bundesbank. "In their innermost heart they are reactionaries. They are against European integration." His successor, Helmut Kohl, admitted he had to force the euro on his country. "I knew I could never win a vote in Germany. We would have lost a referendum on introducing the euro. That's absolutely clear," he told the author of a new book on the currency.
Democracy almost always gets in the way of European integration.
Another new book, meanwhile, is heading up the Christmas bestseller lists in Germany. Save Our Money, an anti-euro broadside by Hans-Olaf Henkel, the former boss of the German equivalent of the CBI, argues for splitting the currency north and south, strong and weak.

Unthinkable, failure is not an option, they insist in EU capitals. "It would be like an asteroid hitting the planet," said the east European minister.
I'll take those odds.

Global rate hikes

Yesterday I wondered if the rising Treasury interest rates were a response to QE2 or the return of bond vigilantes. There's another explanation, which is that there's a global move out of sovereign debt. From John Mauldin's weekly letter, this week titled "Unintended Consequences."
"In meetings today we speculated that the sell-off is not a US-only phenomenon. We speculated that it is more than a reaction to Bernanke's QE2. If all benchmark 10-year debt is selling off by about the same amount in price change, could it be that this selling is the reallocation of globally indexed funds away from sovereign debt and into something else?

"Think of yourself as a Persian Gulf fund. You usually hold foreign sovereign debt in proportion to an index or benchmark. Now you want to reduce your exposure to some of the countries in the index. You either have to sell proportionately from all of the countries in the index or you will face a concentration that violates your index or benchmark. Worldwide sell-off in benchmark sovereign debt suggests this reallocation is underway. Otherwise, how can you account for the Japanese government bond, the German Bund, and the US Treasury note all moving in a correlated way?"

I think that is part of it. I also think that investors and non-core central banks (those in the emerging world especially) are asking themselves about the wisdom of holding sovereign debt in currencies that are either in trouble (the euro) or have central banks that are printing money (the US, UK, and Japan). Couple that with the US having just done a tax compromise that is one huge stimulus bill, on top of extending the tax cuts, and it is enough to make investors consider the wisdom of holding longer-term debt at low rates.
Unless the price of gold and silver begin to surge higher, this is not a sign of inflation, but deflation. Higher rates mean governments will hit their maximum debt levels much sooner...

2010-12-15

Who is selling Treasuries?

Treasury Debt Trap
I suspect the problem will rear its ugly head well before this 30% number is hit, as markets start discounting the trajectory by hiking interest rates because of poor credit quality and/or inflation (or more accurately stranguflation). Naturally that question should be asked in terms of the recent and sudden uptick in Treasury note and bond rates that appeared strongly correlated to the latest round of tax “stimulus” and handouts, and the “unexpected” reaction to QE2. The latter is nothing more than a brazen, dangerous gamble to monetize the debt. Sure the BS crowd is claiming economic growth is the causa proxima, but that feels like utter nonsense. Could it be that the markets at long last are anticipating a very bad result from QE2 and even more Gumnut largess?
Are the bond vigilantes back? These investors and traders took interest rates to nose bleed levels in the early 1980s when inflation was running high. Reading the above article brought China to mind as a possible vigilante, they certainly made their opposition to QE2 known. A lot of ink and pixels have been spilled writing about how the Chinese will one day dump their Treasury holdings. I'm actually slightly surprised to see that no one has blamed the Chinese for the rapid increase in interest rates in November and into December.

More of the same for social mood; Federal Reserve in deep trouble

The U.S. dollar and euro are back to 50 on the 14-day RSI. (Here's a chart for the U.S. Dollar Index.) I'm looking for a stronger U.S. dollar in the first half of 2011, but a stronger euro now would make next year's move even bigger. In any event, I expect the euro to pick a direction before the end of the year and continue in that direction for the better part of January.

Other than that, there's not a lot of news. There's plenty of articles about the problems in Europe, but its nothing I haven't mentioned before.

Riot breaks out on streets of Rome as scandal-hit Silvio Berlusconi survives as Italian premier by just THREE votes

Slovak politician suggests dropping euro, latest eurozone breakup speculation

Mish has a nice roundup of Spanish debt problems.


My pick for the next high profile DOJ anti-trust case is Google.

Rivals Say Google Plays Favorites

I've been thinking about buying a place in Florida. But is this the sentiment of a bottom?
Foreigners flock to Florida real estate bargains
"I'd rather put my money in real estate than leave it in the bank. In a few years I'll make a nice bundle because the prices are going to go up, no question," she told AFP.

The latest on Chinese inflaiton.

Inflation a threat as growth to slow
The mainland's consumer price index - a key gauge of inflation - rose 5.1 per cent year on year last month, the most in 28 months and well above the full-year target of 3 per cent.

The slightly higher threshold for inflation in 2011 was consistent with another official media report yesterday that the mainland aimed to cap new loans at about 7.5 trillion yuan (HK$8.76 trillion) next year.

The China Securities Journal also reported that the growth in money supply would be below 16 per cent, slightly lower than this year's 17 per cent. "In all likelihood, the priority of monetary policy next year will still be protecting growth," the newspaper said in a front-page report.

Air Force surpasses Chinese level of Internet filtering.

U.S. Air Force blocks NYT, Guardian over WikiLeaks

Sword of Damacles soon to be affixed above the Federal Reserve.

Audit the Fed in 2011

Robert Prechter predicted the discrediting and abolition of the Federal Reserve back in 2003. There are many arguments for why deflation will rule, but now social mood and politics may be in the drivers seat. As I've written before, social mood only creates possibility, it is the facts on the ground that determine the who, what, when and where. The public is angry at the Federal Reserve (a majority currently favor reigning in the Fed or abolishing it) and we are not even in a crisis, but this is just a poll number. Without political will, we can see this as a reflection of the social mood, but nothing would come of it. As I wrote in Socionomics—Audit the Fed to Financial Reform, the movement to audit the Fed fizzled and in 2009, legislation was passed giving the Fed even more power.

In 2011, however, Ron Paul will be in a position to take advantage of a sharp drop in social mood and he already has legislation prepared, as he's tried for years to bring this issue to the attention of Congress. Next time there is a crisis, look for Congress to unleash the anti-bailout with legislation targeting the Federal Reserve.

Finally, please watch this video.

I've previously written on the topic of devolving power in Let A Thousand Nations Bloom and Secession talk in Alabama and San Francisco. There's also the well-known comments from the Texas governor Rick Perry. Until now, this sentiment hadn't expressed itself outside of rhetoric, but now there's a judicial victory in favor of state's rights. The U.S. can move very far in the direction of "secession" without doing anything remotely secessionist because of the fluidity of the political structure. In the wake of the Obamacare victory, I expect the states will look for more ways to increase their power relative to the federal government.

2010-12-10

20-something Chinese show off their wealth



Before 2008, it was popular for young Chinese to show their wealth on the web, usually consisting of cash, credit cards, gold watches, etc. Now, a slightly younger crowd is getting into the act. China's stock market is near it's lowest levels of the past five years compared to gold, but real estate prices continue to increase and Chinese invest far more in real estate than stocks.

Link to the album.
90后富二代的另类荒唐炫富

2010-12-09

‘F*%k the President’

The frustration with President Barack Obama over his tax cut compromise was palpable and even profane at Thursday’s House Democratic Caucus meeting.

One unidentified lawmaker went so far as to mutter “f— the president” while Rep. Shelley Berkley was defending the package the president negotiated with Republicans. Berkley confirmed the incident, although she declined to name the specific lawmaker.

“It wasn’t loud,” the Nevada Democrat said. “It was just expressing frustration from a very frustrated Member.”

Dems Gone Wild: ‘F*%k the President’

Democrats still control the Senate and the White House, but they are turning on their own. If Obama can survive one term, he will have to find a new base of support.

Will China pop the luxury bubble?

Inflation may be near 5% in China already and the government is moving slowly to contain prices. This could spell bad news for the luxury market once the government decides to slam the brakes. Andy Xie covers the topic and turns back to wine in his latest article:

Bottoms Up for China's Lafite Wine Bubble
Yet the Lafite craze is at risk for a deeper reason: China's new fight against inflation. The government is currently blaming speculation for climbing consumer prices, although the real cause is a five-fold increase in China's M2 supply over the past decade.

To tackle these rising prices, China must raise interest rates. As long as real interest rates are in the negative zone, any sort of crackdown on speculation is unlikely to work. Even if the government locks up all the speculators in Wenzhou, they'll still have to contend with their counterparts in Quanzhou, Chaozhou and a thousand other cities.

Interest rates should be hiked by three percentage points right now. Of course, the government will only raise rates gradually. But when they do go up, the shine will come off all that Lafite in the cellar.

The world's fine wine market is closely tied to the U.S. Treasury market, but Lafite is especially sensitive to China factors, including tighter monetary policy. In addition, the Lafite market cannot be separated from political risk. For example, just as the government banned officials from playing golf a few years ago, officialdom's restrictions could spread to Lafite-sipping. That kind of a ban would be hard to enforce, but at some point it could become politically hazardous to drink Lafite.

2010-12-07

Larry Meyer echoes Liu Junluo

Liu Junluo claimed that the U.S. would use monetary policy to create bubbles in Asia. Larry Meyer says, indirectly, that may be the case, when he states:
"Commodity prices will go up but it's driven because Asia and China have adopted US monetary policy which is crazy for them. Absolutely crazy. And we can't do anything about that. That's no reason why we should keep interest rates higher, to benefit China and Asia, and prevent bubbles there, they have to do it themselves. Look in the mirror if you want to know whose problem this is."
Video is here:Watch As David Einhorn Makes A Mockery Of One-Man Fed "Expert Network" Larry Meyer

A fact of a currency peg is that the nation on the peg is importing the monetary policy of a foreign country. Most countries are small and the United States will feel little affect from their policies. However, almost much of Asia is using a peg or dirty float of their currency. The United States cannot control their monetary policy politically, i.e. the U.S. can only ask them to change policy. However, if the U.S. wants to run an insane monetary policy, it can engage in a game of chicken with countries importing the policy.

Where I disagree with ZeroHedge and other American critics of the Federal Reserve's policy, and where I line up with the foreign position, is that this policy won't hurt the U.S. as much as it will hurt foreign countries, and most of the critics are wrong when thinking that inflation, rather than deflation, is the threat.

The U.S. is unable to generate domestic inflation because money/credit created in the United States is going into Asia and other emerging markets. Federal Reserve easing in 2009 and 2010 has helped lift commodity and asset prices, but there's very little increase in other prices, especially wages. However, even the rise in commodities and U.S. assets is very small compared to the booms seen in emerging markets such as Indonesia, Thailand, Turkey, China and Malaysia (not all of these countries have currency pegs, but they are all benefiting from the trend). The Federal Reserve cannot generate inflation at home until foreign governments allow their currencies to appreciate and cause U.S. dollars to return home or never leave in the first place.

Here's the issue. For many countries, it may be too late, particularly in the case of China. They should have started moving away from exports years ago and let their currency appreciate more rapidly, and now they are caught in a bind. If they do not allow the currency to appreciate, inflation may quickly surge into the double digits. Once that happens, they must take drastic action, but even if they act to stop the inflation, it may be too late to prevent a deflationary bust in the real estate market (especially in China) or other asset markets.

Federal Reserve policy is likely to create a crack-up inflationary boom that leads to another Asian Crisis and the actions taken by Asian governments and central banks will also lead to deflation. (The exception will be if the U.S. manages to create hyperinflation, in which case probably every currency in the world will collapse, along with the global economy, but I don't think this is probable.) While the Federal Reserve is the latest actor, this is not a solo dance. Central banks around the world have made years upon years of policy errors. (Remember that if the Fed fails to get the U.S. economy moving, the Asian exporting nations will also be in deep trouble. What we are witnessing is a breakdown in cooperation due to differences of opinion.) The crisis in 2008 was the system releasing pressure, but politicians and bankers swiftly moved to shut the valve and restore pressure to the system. The Federal Reserve is now jacking up the pressure and when the valve blows this time, it may not be able to be shut. And the steam is going to scorch Europe and Asia.

From a political angle, the Federal Reserve policy also serves to accelerate the move away from the U.S. dollar as reserve currency, to the extent that it conducts monetary policy with a greater focus on the domestic economy.

The countries of the world need to find a way to cooperate and share the pain of global re-balancing, but every country is choosing the policy that serves its own needs, which is the path a follower of socionomics and the social mood would expect them to take.

Finally, here's the second part of the most recent Jim Rickards interview on King World News. He discusses gold and the current Fed policy as a means to shaking off the Chinese peg.