Why No Real Recovery Will Happen

Right now, major central banks are acting on your behalf. They are shoveling newly-created money into the coffers of their cronies at the major international banks. That money will largely go to finance governmental debt. Here is how it works.

First, a bank that has managed to get labeled 'too big to fail' approaches their former employees now running the local branch of the central bank, and says that he needs a 'loan' to survive. This loan is duly issued, as per policy. These loans come from the interbank or commercial loan operations. These operations have been established as 'lender of last resort' for some time now. When you hear the 'fed rate', this is the rate the banks will be charged. Not only is this rate well below the rate of inflation, both real and reported, it is well below the rate that the government pays for its debt.

That last bit is important, as most of this money, at last count $7.7 trillion in the US alone, is lent to governments because the bank will not hold cash. It doesn't make sense for the bank to use it to handle bad debts; they will simply swap those for US bonds from the fed anyway. This is another program the fed has. It provides swaps of government bonds to banks in exchange for the toxic assets the bank has. So, the banks can unload their toxic assets for bonds anyway, but must retain a 'reserve'. This reserve can be in any 'monetarized' asset, such as, for instance, government bonds. So, the bank tends to put its new loans from the fed into the bond market, one of the real reasons that the fed prints this money.

The bonds thus bought have a payment rate above the rate the money was borrowed at. For instance, the fed loans at, say. 1/4 % (0.25%), while federal bonds pay, say, 3%. This means that the bank is making 2.75% on borrowed money, 100% leveraged. For instance, it borrows $1 bn, buys bonds with it, pays $2.5 mn in interest to the fed (who, by the way, 'invests' that 'income' in, you guessed it, federal bonds), and sees the value of the bond increase on its way to maturity by 3% per year. That works out to $30 mn. This is $27.5 mn in profit. Remember, this is profit for no real investment.

This dodge is used primarily to provide profit for the banks, increasing bonus payouts (the money was free anyway), and provide support for US bond auctions, which might otherwise go no bid. This is very bad, as it would cause an increase in the cost of the bonds, in order to get bids, reducing the faith in the US government. As faith is what holds this system together, loss of faith can lead to the whole system falling apart.

These 'leaders' are really playing an end-game, and this end-game is known as a 'delaying tactic'. The idea is that if the thing is delayed long enough, the economy will recover, and the debts can be covered. There is one major problem with this: the delaying tactic is seriously distorting the economy.

Each time some bank pays bonuses to a banker for managing to suckle the teat of government, each time the government creates some new bureaucrat or boondoggle, each time money flows into some sort of production that nobody wants, the overall production pool of things people want shrinks.

We can use our hypothetical economy. With ten people in the economy, under normal conditions, one of them would be involved in government, say, and one in banking and financial services. When the government guy colludes with the banking guy, the government sector grows to, say, two people, and the banking sector grows to, say, two people. That's now four people. This results in a 25% reduction in the productive sector, from 8 to 6. However, as we've said before, the demand for goods remains the same. This drives the price up, as money was printed to purchase substantially less goods. The efficiency used to be 80% and is now 60%. The only way, of course, to continue keeping things as they are, is to print even more money, which leads to even greater public sector consumption, as well as more bankers with fat bonuses. As time progresses, the percentage producing drops. At the moment, some estimates put it around 50% in this country.

Ever wonder why they call it a 'gilded age'? The roaring twenties had a lot in common with this age; things are not as well built and they cost more. The only way to make a capital purchase, such as a car, is on credit because cheap credit has driven the price up by distorting the market. The only way to buy land or a house is on credit. Nobody can expect to save enough to buy anything because our real wages are continuously decreasing and available investment vehicles mostly lose money compared to inflation.

See, when the bank buys bonds with money borrowed at 1/4%, it drives the yield of the bond down. That means that someone playing with his own money will now make less. In our example above, it ends up being 3%, which is less than real inflation. Now, our investor will have to pay 40% tax on whatever he makes, so his real return is less than 2%, which means he is losing money.

One of the results of this kind of monetary shenanigans is the increasing price of insurance. When bond prices go down, insurance prices go up. This is because insurance companies are required by law to keep their money in highly liquid investments, meaning investments that can be easily and quickly traded for cash with little loss of principle. Bonds are commonly used. When bond yields go down, particularly when the bond yield is lower than the rate of inflation, the insurance company has to buy more bonds to meet his reserve obligations, meaning he has to raise rates in order to afford the bonds. This is certainly not the only reason for the rise in the cost of healthcare, but it is a major reason.

So, to recap, the average person cannot save because they lose money, cannot save anyway because their real income is falling, and thus must finance everything with cheap money, which leads to an increase in the cost of goods which drives price inflation. As a result, bankers get rich off of play money and the federal government gets to spend and spend and spend. And the best part? All of this is perfectly legal...

Maybe I Was Born Paranoid

Some people see the glass as half full; we call them optimists. Some see the glass as half empty; we call them pessimists. Some people worry that the state of the glass is not known; we call them skeptics. Some people worry we will never find water, that the glass is completely empty and that it is poison in the glass besides; we call them paranoid.

In engineering, there is a concept of 'insufficiently paranoid', a condition where someone has failed to consider all the possible ramifications. Insufficiently paranoid engineers often go on to design systems that fail spectacularly, bringing their pride down to a more appropriate level.

I guess what I am getting at is that paranoia is not a bad thing. Too much paranoia leads to inaction or to action that is not particularly helpful, such as stocking a bunker in the Nevada desert. Too little paranoia has you sitting on a beach as a hurricane bears down. The right amount of paranoia is, quixotically, referred to as 'prudence'.

So, what is a prudent man to make of the world? Russia sabre rattling at Georgia, with the US and NATO apparently unable to take steps to accept Georgia's inclusion into a group armed with nuclear missiles, pretty much the only thing that will guarantee Russia will leave Georgia alone.

Russia, however, may soon not be a problem, that is, if EU countries are willing to allow the drilling for gas in their shale gas reserves, but the truth is that the greenie is against anything that might smack of progress, as they relentlessly march us all into their cold grey future where thousands of us must die so Gaia can quit crying or whatever.

Watermelon is the term commonly used to refer to the alliance of the old red with the new green, green on the outside and red on the inside. Why must the red/green hate progress so? Is it happiness they hate? Why do normal ordinary people follow these tenets of green, such as pointless recycling and reduction of energy use?

The truth, as it stands, is that the world has never been so flush with energy. It is good news. It should be leading to cheaper energy, which normally leads to an economic boom for everyone. Instead, we have nations rationing energy, constructing bird slicers and other, even dafter ideas to harvest 'renewable' energy, such as tide power, which is an idea that literally leaves me speechless. Seriously.

Take windmills -- please, take them. Windmills cause changes in the wind pattern in the lower atmosphere leading to a reduction in the relative humidity, causing those areas downwind to dry out and see a reduction in vegetation. This is on top of their killing birds wholesale. They also require invasive modification of whatever land they are placed on, including cutting trees, leveling ground and mounting massive concrete and steel bases that will probably never be removed. All of this for very little power when the wind is blowing, which is not nearly often enough.

Take electric cars. The battery in an electric car uses toxic chemicals. The magnets in the motors use rare earths. The cars themselves are very lightly constructed, meaning they are not particularly safe. They have a low payload. They are also much more expensive to purchase. Under most conditions, they will not cost less over the lifespan of the vehicle because their purchase cost exceeds the difference in fuel cost. This includes hybrids.

There are some valid engineering reasons to build electric cars, and, when the day comes that they are cost-effective, I will gladly buy one. However, in the short term, trying to increase the uptake of hybrids and electrics through taxes is just wasting money to make people feel better, when we should be telling them the truth.

For instance, recycling is mostly a waste (haha, bad pun). The commonly recycled materials, glass, paper and aluminum, each have their problems. Of them, aluminum is easily the most useful recyclable, something that the junk man will actually pay you for because he can sell it on.

However, paper is a relatively pointless thing to recycle, if for no reason that, naively, putting the paper in the ground (landfills) sequesters CO2. Other than that, there is the question of hauling it to a recycling plant, recycling it and then selling it back into the market. All of this is generally more costly than simply using new wood, which is normally sprint-grown for this purpose. If you add up all the costs of recycling paper, you find there is a very slim reduction in energy used for certain post-consumer products, such as napkins, but that slim reduction in energy comes at a high cost.

Glass is just silly. Glass is made out of sand, and, if left alone, will become sand again. The cost of reconditioning glass is really about the same, overall, as the cost of making new, and glass in a recycling bin will be colored, which is a problem.

Saying we're running out of material so must recycle glass is admitting to not understanding anything about the production of glass. It is as laughable as those who wish to argue we're running out of water, when what they really mean to say is that we're running out of cheap water, that the budget has other concerns than fixing the leaking pipes and besides, we all need to sacrifice because it takes a village.

The water thing, in particular, annoys me. I have low flush toilets. I have a four inch main sewer pipe. I have to run water in my tub periodically to keep the pipes clean. The toilets do not produce enough flow to keep the pipes clean.

Besides, how good is a low-flush toilet if it has to be flushed multiple times?

Then there are the evil low-flow shower heads I hate so much. Why am I penalized for wanting to be clean?

Were this at all necessary, it'd be one thing, but the fact is that those toilets and that shower constitute a tiny percentage of the water used. The greenies will tell you that the percentage is large, but the percentage they use is of domestic water use, not total water use, and, almost certainly, industrial water use dwarfs domestic water use, so, even were the toilets and showers 50% of domestic use, that would run up to, say, 5% of the total use.

All those numbers are off the top of my head, and you can do your own research on the subject.

I'm just saying that we are flush with resources, and we need to push back against these greenies that seem to be grabbing power everywhere.

What is really going on...

We're going back to pretending we know what is happening. Some of the opinions in these articles are very well researched while most are just hunches. The subject of this post is the latter.

At the moment, silver has been over sold. That means that the price is lower than it ought to be due to more people than normal having sold. Why this happens in May is not really a mystery; people have to pay taxes in April so easily negotiable investments go down in May. Thus it has always been.

About the market in general, though, there is much more to say. At the moment, a silver shortage is under way, according to all sorts of semi-reputable rumor. From sources with the same level of reliability, we're hearing that the amount of refined silver available to the market is perhaps one tenth that of gold. This means there is ten times as many gold as there is silver available to sell right now.

Gold, by and large, is used little in industry, most of it being used for jewelry and other decorative purposes, and the balance used for investment. This means most of the gold mined is converted to the sorts of things people hang on to. The things made out of gold are, also, easily convertible to pure (investment grade) gold.

Silver, on the other hand, is primarily an industrial metal. Most of the silver mined is used for industrial purposes, in electronics, in health care, and in a myriad other applications. Most of the silver so used is not easily recovered, and, while the recycling of electronics is on the rise, a significant amount of silver has already been disposed of in landfills.

The much smaller percentage of silver that ends up as investment grade also is used more as a conduit for other financial purposes, rather than as a store of value. This means that silver swings wildly, one of the reasons people tend to hold gold instead. Given that it takes far less money to drive the silver market by purchasing a large order, it is easier for a hedge fund investor, for instance, to park money in silver while moving it somewhere else, making a nice profit in the process. I won't discuss how this is done right now, because I barely understand it myself, but it does happen.

All this means that gold ends up being the preferred money store. To a certain extent, this is so because it is so. In other words, while silver certainly appears to be considerably more scarce relative to gold at the moment, people still believe gold to be valued because it is scarce, which is only partly true.

It is scarce, but it is largely scarce because investors buy and hold it. This is the same situation the dollar is in, that it is held in massive amounts by foreign interests, keeping its value up. Since many investors, both public and private, buy and hold gold as a hedge against inflation, it works as a hedge against inflation. The price is kept high because people are buying and not selling.

Silver, on the other hand, has both upside and downside potential. It is known as the cheaper money metal, meaning that young and less wealthy buy it because they get more for their money, so there has always been a market for it. Also, it has been no secret that it appears more scarce than gold, so speculators have also been buying it as a long-running speculation. This author, for instance, bought silver at $7 an ounce some five years ago, with the current price around $35 or so, last I checked.

The potential upside could be a flip in the relationship of gold and silver, which happened in medieval times, when new silver mines led to silver being far less scarce and therefore worth less. Were this to happen, the amount of fiat money that could be made would be very impressive, indeed.

However, if you believe, as the Bureau unanimously does, that inflation must happen in the future, silver may be a better hedge, as it may go up against gold and oil, as well as food and property, things that you will need. Were this to happen, it would present both a profit opportunity and a hedge.

As usual, this article is not intended as investment advice. You are urged to do your own research, as it is your money you are investing, and we won't help you if you lose it.

Why We Can't Soak The Rich

There is a lot of talk amongst liberals right now about raising taxes on the rich. What makes me so very angry I can hardly see straight is the fact that they intend to soak those with high income, not those who are rich, because, of course, many of them are actually rich and do their level best to dodge taxes.

The saying is, of course, that these people are often multimillionaires who want to help the poor with someone else's money. Since they, by and large, avoid paying taxes on their actual assets, they shift the burden of payments onto the average person. In order to seem like they are paying their fair share, they raise taxes on the highest incomes, pretending that those taxes actually apply to them, when, in reality, they pay capital gains on their income without having to pay social security and the rest.

See, a person who is 'rich' has a lot of assets, and these assets, such as a paid-for mansion or paid-for cars, can be said to depreciate, hiding any income the 'rich' may have, which neen't be much. Other assets they have, generally investment vehicles, provide them with income in the form of capital gains and dividends. This income is not the same as payroll. Income from dividends, interest payments and the like end up being taxed as self-employed income, but capital gains do not. Capital gains is subject to a flat tax without any social security, medicare or medicaid tax. This is why CEOs happily take stock options in lieu of a salary. The difference between the strike price and the sales price is capital gains, not income.

A person who is rich also pays people to protect his money, and one of the entities he tries very hard to dodge is the tax man. If you look at the complexity of the tax code, you'll find an awful lot of it has to do with hiding income so that those who are rich can lose enough money to avoid taxes.

So, anyway, raising the highest tax rates will merely cause more 'creative compensation' schemes, like the above-mentioned stock options, to reduce the total tax burden on the income. It won't necessarily increase revenue from taxes.

Raising taxes is really not all that bright of any idea, anyway. The fact is that the government is seriously in debt. It needs to learn to live within its means, not continue to grow. Given the amount of money it needs to save this year to achieve solvency, some $1.6 trillion, raising taxes simply isn't going to cut it, without raising them to ruinous levels. At some point, someone is going to have to step up to the plate with a plan that cuts spending by at least $1 trillion this year and commits to significant cuts next year, at least another half trillion. With a modest raise in taxes, that would equate to a mild surplus in year three.

Or, we could just enact my particular vision, ditch the income tax, return to the excise and tariffs of yore, perhaps with a corporate income tax, and hack around $1.8 trillion or so off the budget. The immediate increase in available income would reduce the rate of foreclosures and increase discretionary spending by the American consumer, leading to economic recovery.

As for the loss of jobs from cutting government so much, the fact is that dollars spent by consumers have higher velocity than dollars spent by the government, so every dollar spent by a consumer will go through more hands, meaning more jobs. The money doesn't go away; it gets spent one way or another. If the consumer simply puts the money in the bank, he drives down the rate of interest at that bank, leading to increased borrowing, which will lead to increased spending by someone else.

This idea that liberals have that the government is somehow superior at spending is laughable, and leads to the government spending on things nobody wants or needs, like three simultaneous wars, or, indeed, the ability to prosecute three simultaneous wars. With a careful and prudent hand, it is possible to eliminate vast stretches of bureaucracy and help those trapped in government jobs to lead wonderful, productive lives enriching the human experience with real production.

So, Global Warming...

Or Anthropogenic Climate Change or killing baby seals or whatever. Can there be a more disproven hypothesis? Does it even matter? What is it about people that causes them to give up a good thing?

Bad enough that the high priests of this religion jet around the world, playing with the world leaders, movers and shakers, in other words, those who never get round to the local pub. At the local pub, they're losing the argument. Even ardent greenies of my acquaintance are not as interested in CO2 anymore.

Bad enough they insist that the rest of us suffer deprivation and even death, and certainly, unhappiness, while they jet around the world eating caviar, going from airport to hotel suite (larger than my house) in a fleet of SUV limos, which is all ok to them because they're saving the world from us, while I work on my cars trying to keep them running just one more year, when, hopefully, they'll finally be paid off.

But, the absolute worst bit is that it is all so completely unnecessary. The world hasn't been warming for three years. The sea levels are not rising. The latest data shows ice caps are not melting at an alarming rate (the rate hasn't been established, but that it is not alarming has). Evidence strongly suggests that temperature on earth correlates with solar activity, and, if so, it's going to cool for quite some time.

So, seriously, eat, drink and be merry, and try to vote the puffins out of office.

What is really going on?

The question mark indicates the sad truth, that there is now officially so much chaos in the system that nobody has any clue what is going on. At this point, the traditional indulgence in the conspiracy theory is not even a possibility because nobody could be steering this ship of state at this point.

However, the light of hope shines brightest at this point, as the forces of control fail in the face of chaos. I've heard the conspiracy theory that some dark and foreboding committee of one hundred jewish followers of the articles of zion received from the last templar under direction of the marovingian or whatever (not gonna look it up, if you want to, you can correct me in a comment that I will probably ignore), that such a group wants chaos because out of chaos it can form the kind of order it hopes to form. However, this just won't work.

In chaos, by definition, things are unpredictable. Were things at all predictable, the situation would be merely complex, not chaotic. If it were easily predictable, it would be referred to as ordered. Anyway, what we have here in the US and most of the world, is chaos.

We have chaos in the weather, with potentially serious shifts in weather patterns, leading to thousands of victims. We have chaos in world politics, with things like wikileaks, moslem extremists and tea partiers to contend with. We have idiots running countries that may or may not have nuclear weapons, some of which are verging on being officially failed states. We have the west, having run this globe for a seriously long time, verging on bankruptcy and ruin, with a ruling class that is utterly clueless.

Out of this chaos comes some encouraging news. For instance, when the Democrats compromised with the Republicans over the taxes and the continuing spending bills, the tea party threw a hissy fit and newly chastised Republicans rescinded the compromise. Obama, ever the skillful negotiator, turned turtle and let them.

The only thing the politician is really afraid of is public opinion. Such a sudden change in behavior is impressive because it arises from a sudden change in opinion. The tea party isn't that old. It has grown out of a growing dissatisfaction with governance in general, and has evolved into a much better educated electorate that is not willing to tolerate back room deals and tons of waste. This electorate is starting to make noises about things that were considered fringe only a few years ago, such as auditing the Federal Reserve Bank.

Even more interestingly, much of the rest of the world is now making noises about a gold standard, of all things. Ten years ago, gold was considered a barbaric relic of earlier times, now selling for six times the value it used to sell for at its lowest price. People are noticing.

The hedonic adjustments the bureau of statistics makes to their inflation statistics are being ignored. Everyone can see their energy, food and fuel prices rise. Even if the price of consumer goods continues to go down, most of the population of this country spends most of their money on energy, food and fuel. As has been noticed before on this blog, activity is at the margin and any increase of a major cost can lead to a reduction in other expenditures, which can add up to a major reduction in economic activity. This largely explains what is happening now.

There may be economic recovery, but it is jaded. It is not broad-based, and it is not strong. The problem with any sort of recovery that would re-establish the roaring nineties is that the average consumer has been shocked hard and will not likely engage in such ruinous economic activity again, meaning that we should see debt ratios continue to drop. This is positive for the country in the long term, but in the short term can lead to a decade or more of deflation, which, if the government works at it, can be turned into proper stagflation, a la Japan's lost decade.

So, to avoid that eventuality, we have to see the electorate make their elected officials do the wise thing and not fight deflation, as deflation is a natural remedy for all sorts of monetary evil, and, in the long run, will lead to a much leaner, much more efficient, and much stronger economy.