Farmland 1913-2012

Inflation

"What has been, what ever must be, the consequence of such a sudden and prodigious inflation of the currency? Business stimulated to the most unhealthy activity; a vast amount of over production in the mechanick arts; a vast amount of speculation in property of every kind and name, at fictitious values; and finally, a vast and terrifick crash, when the treacherous and unsubstantial basis crumbles beneath the stupendous fabrick of credit, and the structure falls to the ground, burying in its ruins thousands who exulted in the fancied security of their elevation. Men, now-a-days, go to bed deeming themselves rich, and wake in the morning to find themselves stripped of even the little they really had."
William Leggett, journalist in 1837 

I smell war is in this air

Kyle Bass, Larry Edelson, Jim Rogers and Marc Faber Predict Widespread War

Kyle Bass writes:

Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.

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Comment: Clausewitz wrote that war is politics with other means. I say that war is the quintessence of politics. All politics leads to war. War is the ultimate fulfillment of politics. In order to abolish war we must abolish politics. The question is how.

Central banking

Central Banking: What Is It Good For?

Monday, November 12th, 2012 by Antony Mueller 

While the failure of fiscal policy is widely recognized, monetary policy still enjoys credibility, not only among policy makers but also with professional economists. Yet deeper investigation shows that monetary policy is like shooting in a dark room. Disaggregating the highly aggregated variables of standard monetary economics reveals that monetary policy suffers from a profound pretense of knowledge. When central banks are not able to fulfill their claim and promote economic growth, employment and price stability, the question comes up what the real mission is that they are after. The Federal Reserve System was founded in 1913 with the intention to safeguard the big players of the financial system. After a period when central bankers claimed that they would also promote prosperity we are now back at the old paradigm...."
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Marc says it like it is

Marc Faber:
"It's difficult to tell where the market will go from here because we have so much manipulation. It's money printing versus weaker corporate earnings."
"I'm surprised. On the re-election of Mr. Obama, I would have thought the market should be down at least 50%. Mr. Obama is a disaster for business, a disaster for the United States. Not that Mr. Romney would be much better.
But I think the Republicans understand the problem of excessive debt better than Mr. Obama, who basically doesn't care about piling up debt. And in the background you have Mr. Bernanke, who, with aritificially low interest rates, enables the debt to escalate ENDLESSLY!"
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Comment: The better liar won. Who wants the truth anyway?

The Economics of the Fiscal Cliff

By Antony P Mueller

As 2013 gets closer, the calls get louder to reverse earlier decisions by the US government and Congress that would lead to public spending cuts and higher tax rates beginning next year. The United States is moving towards a “fiscal cliff” we are told which would bring down the American economy because of the massive “extraction” of funds. What is behind these claims? What are the determinants of public debt, the essentials of debt management and where is the economy headed?

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Storm Warning for your Money Wealth

By Antony P Mueller11/01/2012

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Over the past decades financial markets have been inundated by an avalanche of liquidity and the financial sector has grown into its current gigantic proportions. This growth of the financial sector has been built on the expansion of debt. Now that debt expansion has reached its limit, the boom has turned into a bust.

The Debt Trap

Debt accumulation tends to move in an exponential form. This means that the accumulation starts slowly and over a long period of time. Most of the time it seems as if the debt burden were well under control.
At the beginning of long debt cycles existing debt is small by definition while debt capacity is large. Filling this space between the current actual debt level and potential debt constitutes a temptation which is often hard to resist for potential borrowers. Yet debt accumulation implies that a rising debt level diminishes debt capacity at the same pace as debt grows. At the end of the cycle, when the debt crisis has arrived, the borrower is squeezed from both sides.
The following graph (figure 1) shows the mechanism of the debt trap

Figure 1 - The Debt Trap

While in the beginning there is space to borrow and the two curves merge only slowly, they finally snap almost abruptly at the end of debt cycle. At the beginning, at point A, debt capacity is at its maximum with actual current debt at its minimum. Even after half of the way of the debt cycle has been taken (point B), current debt is still low and debt capacity is still high. Yet ongoing debt accumulation means that an ever larger portion of the newly contracted debt will go into interest payments. Even if the borrower would stop spending at this point, debt would still rise because of the interest to pay. From point B onwards to the end point at C, the erosion of debt capacity accelerates while debt rises rapidly. Beyond the closing of the debt trap, at the right side of C, debt capacity is negative. The borrower has no longer access to new loans. Voluntary austerity is no longer an option at this point, it has become a necessity.

Government Debt

As long as debt levels are low and the perceived debt capacity of government is high, debt accumulation can run smoothly and go on without much disturbance. During the phase of the easy ride of debt expansion large parts of the population tend to perceive government expenditures as a net benefit. Government debt itself has its counterpart in the form of assets in the accounts of the financial system and as financial wealth in the balance sheet of the savers. Debt accumulation by the government feeds the expansion of the financial sector and augments the financial wealth of the private sector.
Financing government is a lucrative business. Commercial banks borrow money from their central bank at a low rate and buy government bonds with higher yields. Investment banks make money as intermediaries between private investors and governments. Additionally, the financial sector will expand with the growth of public debt by setting up investment funds for the small private investor. Investment for life insurers becomes a no-brainer as long as they can stock up on apparently save government debt. Government bonds are deemed to be the safest investment because the state is the last to go bankrupt given that the government has authority over its monetary regime.
This idyllic situation when government debt is still low does radically change when government is getting close to its debt capacity. Then expansionary fiscal policies tend to work in reverse and monetary policy reaches a dead end. The most massive stimuli only achieve that the system does not implode right away. Investors panic when they learn that government bonds are not risk-free assets.

Monetization of Debt

With the approach of the debt crisis, central banks experience their epitome as agents of safeguarding the major players of the financial system along with the government. In order to prevent default by the government and to help financial markets institutions to stay afloat, central banks will create fresh money through the purchase of assets from financial market institutions which in return will deposit this newly acquired cash with the central bank itself. This way the central bank pumps liquidity into the system.
The expansion of the central bank’s balance sheet is the mirror image of the creation of central bank money, the so-called monetary base with most of the newly created money now held by the financial sector in the form of excess reserves. Excess reserves are cash holdings that banks do not need in order to fulfill their minimum reserve requirements. Before the current financial crises commercial banks held excess reserves at their minimum at or close to zero. Now these holdings amount to $1.4 trillion (chart 1).

Chart 1 - Excess Reserves of the US Banking System

Even in the case that financial institutions and the government were actually insolvent, this policy provides them with liquidity and they can maintain their ability to pay. Commercial banks and other major financial institution can get rid of their bad assets and load them upon the central bank. While financial market players get cleansed this way, the central bank picks up the dirt. In the end it will be the tax payer who has to pay the bill. The main purpose of quantitative easing is to help that the banking sector will stay afloat and prevent government from defaulting.
As of now the unprecedented size of monetization of debt has not yet led to rates of inflation commensurate with the monetary expansion. Yet all it takes to make this bomb go off is a somewhat more pronounced price inflation rate that is high enough to trigger greater inflationary expectations. With higher inflationary expectation the financial system will get into a state of feedback that is the opposite of the present situation. While at the moment the multiplier and the velocity of money are low, these variables will rise drastically in the face of rising inflationary expectations. At this stage the debt cycle moves into its final stage as purely monetary phenomenon. When price inflation begins to pick up, the mass of base money which central banks have supplied no longer serves mainly as a cushion to safeguard the banks but turns into financial dynamite that will detonate into uncontrollable monetary expansion. The end stage of the debt cycle takes place as a socio-pathological frenzy to spend as fast and as much as anyone can. Having stacks of liquidity at their disposal mammoth proportions of lending can take place. As soon as the price inflation rate will pick up significantly, more borrowing will occur and when expectations change to anticipate higher prices in the future, a rush to borrow will happen. Once inflationary expectations take hold, it would take drastic increases of the interest rate. One may safely bet that central bankers will be too timid to raise interest rates high enough in order to curb inflation in time out of fear to push back the economy into recession again.

Conclusion

When a debt crisis occurs the financial sector comes under pressure and the national central bank will come to its rescue as it is the mission of central banking. Central banks have the ability to monetize debt by buying government bonds and other debt instruments. Banks can get rid of bad assets in return of fresh money which the central bank can create at will. In its early stage this policy of monetization of debt need not lead to price inflation. When lending is still subdued the monetary base stays with the commercial banks and does not yet enter the real economy. This will change when inflationary expectations are on the rise. The ensuing spending frenzy could only be curbed by massive increases of the interest rate. One can make a pretty sure bet that central bankers will hesitate until it is too late to bring down price inflation in time.

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About Antony P Mueller

Antony P Mueller

Economics Professor at Federal University of Sergipe
antonymueller @ yahoo.com
http://www.cashandcurrencies.blogspot.com/

Antony P Mueller Archive

10/05/2012	Quantitative Easing – Folly or Method?	story
07/06/2012	Does Europe Need a New Marshall Plan?	story
12/30/2011	What’s Behind the Euro Crisis and How Will It End?	story

Money "well" spent

#4 Over the past four years, welfare spending has increased by 32 percent. In inflation-adjusted dollars, spending on those programs has risen by 378 percent over the past 30 years. At this point, more than 100 million Americans are enrolled in at least one welfare program run by the federal government. Once again, these figures do not even include Social Security or Medicare.
#5 Over the past year, the number of Americans getting a free cell phone from the federal government has grown by 43 percent. Now more than 16 million Americans are enjoying what has come to be known as an "Obamaphone".
#6 When Barack Obama first entered the White House, about 32 million Americans were on food stamps. Now, nearly 47 million Americans are on food stamps. And this has happened during what Obama refers to as "an economic recovery".
#7 The U.S. government recently spent 27 million dollars on pottery classes in Morocco.
#8 The U.S. Department of Agriculture recently spent $300,000 to encourage Americans to eat caviar at a time when more families than ever are having a really hard time just trying to put any food on the table at all.
#9 During 2012, the National Science Foundation spent $516,000 to support the creation of a video game called "Prom Week", which apparently simulates "all the social interactions of the event."
#10 The U.S. Department of Agriculture gave the largest snack food maker in the world (PepsiCo Inc.) a total of 1.3 million dollars in corporate welfare that was used to help build "a Greek yogurt factory in New York."
#11 The National Science Foundation recently gave researchers at Purdue University $350,000. They used part of that money to help fund a study that discovered that if golfers imagine that a hole is bigger it will help them with their putting.
#12 If you can believe it, $10,000 from the federal government was actually used to purchase talking urinal cakes up in Michigan.
#13 The National Science Foundation recently gave a whopping $697,177 to a New York City-based theater company to produce a musical about climate change.
#14 The National Institutes of Health recently gave $666,905 to a group of researchers that is studying the benefits of watching reruns on television.
#15 The National Science Foundation has given 1.2 million dollars to a team of "scientists" that is spending part of that money on a study that is seeking to determine whether elderly Americans would benefit from playing World of Warcraft or not.
#16 The National Institutes of Health recently gave $548,731 to a team of researchers that concluded that those that drink heavily in their thirties also tend to feel more immature.
#17 The National Science Foundation recently spent $30,000 on a study to determine if "gaydar" actually exists. This is the conclusion that the researchers reached at the end of the study....
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Comment: Government is an evil, big government is a big evil and government debt is the greatest evil of all.

The wealth of Greece

Greece Is Not Poor - It Actually Has Massive Uptapped Reserves Of Gold, Oil And Natural Gas

It turns out that the poster child for the European debt crisis is not actually poor at all. In fact, the truth is that the nation of Greece is sitting on absolutely massive untapped reserves of gold, oil and natural gas. If the Greeks were to fully exploit the natural resources that are literally right under their feet, they would no longer have any debt problems. Fortunately, this recent economic crisis has spurred them to action and it is now being projected that Greece will be the number one gold producer in Europe by 2016. In addition, Greece is now opening up exploration of their massive oil and natural gas deposits. Reportedly, Greece is sitting on hundreds of millions of barrels of oil and gigantic natural gas deposits that are worth trillions of dollars. It is truly sad that Greece should be one of the wealthiest nations in all of Europe but instead the country is going through the worst economic depression that it has experienced in modern history. It is kind of like a homeless man that sleeps on the streets every night without realizing that a relative has left him an inheritance worth millions of dollars. Greece is not poor at all, and hopefully the people of Greece can learn the truth about all of this wealth and chart a course out of this current mess.
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Comment: What counts in the end is not what is in the ground but what kind of people are on the ground. It's time for the Greek to wake up.

At the brink

21 Signs That The Global Economic Crisis Is About To Go To A Whole New Level

The global debt crisis has reached a dangerous new phase. Unfortunately, most Americans are not taking notice of it yet because most of the action is taking place overseas, and because U.S. financial markets are riding high. But just because the global economic crisis is unfolding at the pace of a "slow-motion train wreck" right now does not mean that it isn't incredibly dangerous. As I have written about previously, the economic collapse is not going to be a single event. Yes, there will be days when the Dow drops by more than 500 points. Yes, there will be days when the reporters on CNBC appear to be hyperventilating. But mostly there will be days of quiet despair as the global economic system slides even further toward oblivion. And right now things are clearly getting worse. Things in Greece are much worse than they were six months ago. Things in Spain are much worse than they were six months ago. The same thing could be said for Italy, France, Japan, Argentina and a whole bunch of other nations. The entire global economy is slowing down, and we are entering a time period that is going to be incredibly painful for everyone. At the moment, the U.S. is still experiencing a "sugar high" from unprecedented fiscal and monetary stimulus, but when that "sugar high" wears off the hangover will be excruciating. Reckless borrowing, spending and money printing has bought us a brief period of "economic stability", but our foolish financial decisions will also make our eventual collapse far worse than it might have been. So don't think for a second that the U.S. will somehow escape the coming global economic crisis. The truth is that before this is all over we will be seen as one of the primary causes of the crisis.
The following are 21 signs that the global economic crisis is about to go to a whole new level....
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Comment:  The more bad news are out the less space is left for unpleasant surprises.

Endof the China cult

4 Reasons Why You Should Stop Believing In Chinese Leadership

 by Zarathustra of Also Sprach Analyst,

Did you know that Chinese government officials are all corrupt?
Did you know that many of Chinese statistics look either weird or totally unreliable to a point that even the Vice Premier can’t help admitting it?
People outside of China have never really trusted the Chinese Communist Party as far as politics are concerned, and probably never will. However, the seemingly unstoppable growth engine of China has produced a remarkable level of complacency among investors that China is going to do well. Indeed, our contacts in Europe even suggest that investors are looking to invest in China because China seems to be in better shape than Europe, and that seemingly depressed Chinese stocks represents a buying opportunity.
Read more: the death of China cult
While recent economic data from China are mixed at best, the market consensus is unanimously biased towards believing that the second quarter is the bottom. We acknowledge that there is a chance that the government does have enough ability to stimulate growth in the short-run, it was precisely that ability which made matters worse for the long-term. And with the current economic growth model in-place, we argued that China will be a very bad place to invest in even if growth can be artificially pumped up by massive stimulus.

By World Economic Forum from Cologny, Switzerland [CC-BY-SA-2.0], via Wikimedia Commons

We do not understand the reasons behind the faith in the Chinese leadership as far as running the economy is concerned. We do have a few reasons on why you should just stop believing in the Chinese leadership when it comes to running the economy.
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Comment: State capitalism is in deep trouble - always and everywhere, by its very nature. It's a system of permanent crisis interrupted by short periods of stability and spurts of growth. In classical capitalism it would be the other way round. Steady high growth interrupted by a crisis once in a while. Politicians love state capitalism because it gives them power and importance - that's why it is the dominant system - globally.

Higher and higher

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Financial dynamite

Corporate Cash

US corporations are sitting on more cash than at any point since World War 2.
That's without including banks. I'm only talking about nonfinancial corporations – the ones that sell goods and services and make the economy go.
Those businesses hold $1.4 trillion. In absolute terms, that's the most ever. In relative terms, it's the most since World War II...
If these businesses could conjure up even the most marginal of projects to earn a meager 1% return, they would generate $14 billion profit. Instead, they're sitting on the cash and earning near zero for a guaranteed after-inflation loss.
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See also Excess reserves of the banking system:

Messed up

IMF Sees ‘Alarmingly High’ Risk of Deeper Global Slump

By Sandrine Rastello 

The International Monetary Fund cut its global growth forecasts as the euro area’s debt crisis intensifies and warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies.
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Comment: What we see is the consequence of a silly stimulus policy. A scam, indeed.
See my article from March 2010
The Stimulus Scam

European Stability Mechanism becomes operational

Europe Launches $648 Billion Aid Fund, Rules Out Immediate Use

By James G. Neuger and Stephanie Bodoni

European governments set up a full-time 500 billion-euro ($648 billion) fund to aid debt-swamped countries and, not for the first time in the three-year crisis, expressed confidence that the financial muscle won’t be needed anytime soon.
Finance ministers from the 17 euro countries declared the European Stability Mechanism operational ...
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Comment: The next debate will be about the TARGET system and then the topic of a common fiscal policy will be brought up. You may rest assured that the eurocrats will leave no crisis pass unused to tighten their grip.