Gold Daily and Silver Weekly Charts - Cap and Trade Redux - Gold Flowing From West to East

Pop higher but no breakout from the potential bull flag.

Silver lagged a bit.

Congratulations to JP Morgan and Bank of America, who both turned in 'perfect' trading records for the 1Q of this year.  It pays to have friends in high places.  And faithful retainers are even better.

The US markets are almost surreal.  The Fed and its Bankers believe that they can set the price of everything, at will, no matter what, and without consequences.   Just a push here and a pull there.

And that is a dangerous self-delusion.   But it is consistent with a school of Modern Monetary Theory that says that value is what we say it is, and we can 'adjust' the markets at will to make it so.

Well, let's see how it turns out this time.  But as I have said on several occasions, as with most Ponzi schemes, bubbles in financial paper are a matter of degree, belief, and tipping points.

This in from Harvey Organ tonight:

"Today, physical gold continues to leave London with 6.32 tonnes of gold departing the GLD for the shores of China/and or Russia. The game ends when the last physical ounce held at the GLD departs.

Over at the comex gold is departing as investors are frightened to death of a confiscation similar to what happened at MFGlobal or Refco. Tonight, the Comex registered or dealer gold rests at 1.858 million oz or 57.16 tonnes. The total of all gold at the comex rose just above 8 million oz at 8.001 million oz.

Also at the comex, we saw another customer withdrawal of gold from JPMorgan to the tune of 57,863.091 oz. They now have only 137,377.04 oz left in its customer account.

Modern Money: A Study In Confidence and Crisis

"Those who think there is little risk of a levy being imposed on other periphery members are missing the point. The seeds of doubt have been planted. As a saver facing zero yields on deposits and a potential haircut, why keep your savings in a bank? Sure it is convenient for electronic transactions, but individuals can adapt easily. As one of my more amusing colleagues put it, 'mattresses now hold a 10 per cent premium.'"

Ben Davies, Cyprus, Oh the Irony!


"Making small-scale savers pay is extremely dangerous. It will shake the trust of depositors across the Continent. Europe's citizens now have to fear for their money...

The Spaniards, Italians and Portuguese may not run to the banks today or tomorrow, but as soon as the crisis intensifies in a euro-zone country, the bank customers will remember Cyprus. They will withdraw their money and, by doing so, intensify the crisis."

Peter Bofinger, 'Europe's Citizens Now Have to Fear for Their Money,'  Der Spiegel, 18 March 2013

Modern money is a game of confidence, an arrangement based wholly on the perception of value founded in counterparty risk.

This sounds easy enough, but what is surprising is how few people really understand it. This is due to the illusion of the familiar.

We are so accustomed to using money in our daily lives that we give little thought to what it really is.  It seems solid, immutable, and lasting.  'As sound as a dollar.'

We forget that money, like much of society, is a man-made, artificial construction based on a series of agreements. Sometimes those agreements are based on implied force, such as punishment for breaking the laws. But by and large the enforcement is not equipped to deal with all but the outliers to a general compliance with the law. This is, of course, the basis of the power of civil disobedience, and why autocracies are so sensitive to any mass demonstrations of dissent.

The President of Cyprus, Nicos Anastasiades, recently elected from the conservative DISY party, blanched at the original bailout deal offered by the troika, the European Commission, the European Central Bank, and the International Monetary Fund, to assess a levy only on the non-guaranteed deposits in the troubled Greek banks, which are those deposits in excess of €100,000.

He proposed instead to limit the levy on large deposits to 9.9%, and to make up the difference by violating what had been the general guarantee in Europe by assessing a lesser amount, of about 6.7%, on the 'guaranteed deposits' of less than €100,000 by small savers.  That the troika did not blanch at the prospect of violating what had been a generally established EU policy to ensure bank stability speaks volumes about their cravenness.

The arrangement was made all the more clever by promising equity in the (worthless) banks in return for the levy, and perhaps even a guarantee of return based on 'future natural gas discoveries' which seem to be of much less value to the EU and the government.

This was one of their conditions for a €10 billion loan to the government under the European Stability Mechanism (ESM). The other involved the usual austerity measures, which are a favorite of the International Monetary Fund.

The austerity proposal had been revealed last November and include cuts in civil service salaries, social benefits, allowances and pensions and increases in VAT, tobacco, alcohol and fuel taxes, taxes on lottery winnings, property, and higher public health care charges.

The troika did not care about the details of the levy as long as the 'bail in' by depositor funds occurred. This was a sacrifice of a general European principle and was a serious policy error.

When this 'levy' on bank deposits was revealed over the weekend during a bank holiday, because it had to be submitted to a vote by the Cypriot Parliament, there was a general revulsion expressed amongst the markets and the people of Cyprus at such blatant misuse of the money power.

Monetary inflation, such as had been used in the US and UK, is more often used because so few people see their loss as blatantly as when the government simply confiscates 10 percent of their wealth on deposit. It is much easier done in smaller amounts, over longer periods of time. But one needs to have their own currency to do it.  These days monetary policy and inflation is merely the continuation of bank fraud and plunder by other means.

By the way, this is why I thought the 'platinum coin' of a notional and whimsical trillion dollars in value was such an awful, dangerously cynical idea. It exposed the farce of monetary inflation in too great an amount, in too short a period of time, in a way in which too many people would readily understand it.  And it therefore had the potential of fomenting a money panic.

Cyprus had been reasonably stable before the financial collapse, but was rocked by the Greek bond restructuring. What dealt a fatal blow was the impediment to borrowing because of a credit downgrade to BB+, which made the Cypriot bonds unacceptable as collateral to the ECB, and certainly not viable on the public markets.

And like many small, warm weather island nations, it's economy was overly dependent on tourism, retirement, and an outsized financial sector. Since Cyprus had been a British crown colony, its legal system resembles that of Britain, which still maintains significant military bases on the island, involving approximately 3,500 serving members.

Cyprus is in a bit of a box, because it really needs to leave the Eurozone and default on its obligations, and issue a currency of its own at a devaluation to the euro. But how would they recapitalize their banks, and what would the basis be for any reasonable valuation on this new currency?

If Cyprus owned gold reserves, or even forex reserves of some stable currency, they could make this the basis of their currency, while imposing capital controls. They could liquidate, nationalize if you will, the banks, and keep the depositors whole. Although the conversion to the new Cyprus currency would be a haircut of sorts, and likely impair their banking haven status.

Iceland was able to do something like this, and so was Russia for that matter, when they defaulted, devalued, and reissued the rouble back in the 1990's.

What would the Eurozone say if Cyprus forged a deal with Russia and provided them with military bases similar to the Sovereign Base Areas, currently occupied by the British, in return for a Russian bailout? Russia is a key debtholder and a major stakeholder in Cyprus. Their interests and presence must be dealt with, and carefully.

The question of Cyprus is important, not because it is a large and significant portion of the Eurozone economy. It is most certainly not, being much less than one percent of the total.

Rather, Cyprus is showing the fatal flaws in the conception of the Eurozone, and their single currency without real fiscal union, transfer payments, a common system of taxation, and a banker of last resort.

And it has also demonstrated the weakness of the guarantees by the bureaucrats, not only in Europe but elsewhere, when it comes to money. 

This is a lesson that every central banker around the world should keep in mind.  And the bureaucrats should remember that there is a step beyond which they may go, which will shatter the confidence of the people.  And once that confidence is broken, it is very hard to recover it.

There is one lesson I hope that the people of the world take away from this.  And that is to remember that a single currency is not possible without a complete union of monetary policy, and therefore a fiscal and political union that is complete and comprehensive.  Otherwise a powerful group will wield monetary policy for their own benefit, and the rest of the currency area be damned.

When the single world currency proponents come around again with their proposals, what they are really proposing is a one world government to be established in the ensuing crisis which their actions will eventually provoke.

And despite the consistent capping of the precious metal markets, it demonstrates that there is only one money of last resort, that provides for no counterparty risk.  And that is gold.  And to a lesser extent the reserve currency of the world, which for now is the dollar. 

It is confidence that sustains the integrity of a system based on counterparty risk,  and it is that confidence that supports modern money.  And where confidence declines, force is required.  And where both force and faith fail, a break in confidence happens, and hyperinflation ensues. Hyperinflation is not simply a very high level of inflation.

A hyperinflation is a break in confidence, a monetary panic.

And in what is certainly a bit of historic irony, the German people are once again flirting with bank failures and a hyperinflation.  But in this case it is because they, in their righteous indignation, are imposing the same kind of collective punishment, in terms and conditions of economic austerity and privation on others, that were imposed on them in post war reparation.  Oh the irony, indeed.

Spring is in the air.  Plus ça change, plus c'est la même chose.

Related: New Zealand Adopts 'Cyprus style' Levies to Protect Their Banks From Insolvency

Monetary Theory: Where Is the Flywheel and other Intellectual Ponderings and Squabbles

Money is power. And so like those other loci of power, politics, tribalism, and religion, the discussion can sometimes obscure rather than illuminate the facts and issues, such being the emotional state of people.

The discussion can sometimes become very heated, and very particular over the finer points, in a vacuum.   A system becomes rigorous and hardened by usage, and effete and elaborate the longer it is parked on the bench.

I am thinking of course of the recent case of Krugman v. Sachs. It tends to strike someone outside of professional economics as a nerdish slap fight.   If you are blissfully unaware of this, feel free to skim on to the next topic.

There are no quarrels so petty and yet so vicious as those in the faculty departments, precisely because there is so much and yet so little at stake.  It is where people who are essentially without the power to implement their ideas in the real world must leverage the power of their reputations.

I will not get into the specifics of this particular squabble, except to say that out of frustration Sachs was needlessly provocative in penning an op-ed in collaboration with a deficit hawk.  And Krugman has been similarly provocative, out of frustration, in answering objections to deficits by ardent austerians by saying things like 'deficits don't matter' in public forums. Yes, yes he modifies this in the footnotes. But he lowers himself to the level of economic luddites and that is a mistake.

This lowering of the discussion is an understandable outcome given the staged performances, little more than wrestling matches pitting talking head against sound bite adversary, that passes for information on the Sunday morning talking shows and the mainstream news.  It is the age of not of reason, but spectacle.

I suggest that the real reason that Krugman and Sachs are 'at each other' is because the standard bearer of the progressives is at best playing rope-a-dope, and at worst is little more than a cynical deal maker. I speak of course of Barack Obama, whose position is always hard to discern from the standpoint of principles if one watches what he does rather than what he says.  And I suggest that this is because he has few principles, rather than perhaps sentiments, that get in the way of his pursuit of the deal, and his own power. 

Now I turn to the curious situation of the Modern Monetary Theorists.

Let me state, unequivocally, that there is nothing new to be seen here. There are no new discoveries, there are no new wonderful theories that make things possible that were not possible before, in the manner of an invention like the transistor, atomic fission, or flight.

What is presented as 'new' is the notion that the state can simply print and distribute its own funds as needed, determined by it.  And in doing so there will be no serious consequences.

I am willing to suspend all other discussion and objections, and bring this down to the absolutely critical point in any monetary system. And that is, 'where is the flywheel?' Or for the less mechanically inclined, where is the constraint, the restraint, the governing factor, on expanding the money supply?

In the case of an external physical standard, like gold and silver, or a hard peg to another currency, that constraint is easily seen. The 'flywheel' that governs how fast the printing presses may go is the amount of gold and silver one can obtain, or the level of value of some other currency, that is hopefully stable but may not be.

One can expand the money supply beyond the metal supply, but only with a conscious and obvious devaluation of the units which each ounce of gold and silver represents.  Or one can cheat and lie, but that is another matter, and a facet of all human systems which lack transparency.

In the case of a debt based market system, the flywheel is the willingness of the market to take the government debt at some value which 'works' for the monetary authority's purposes.

It is undeniably true that Bernanke is gaming this mechanism in what is purported to be the short term by buying that debt, the government bonds, at non-market, artificial prices. And it shows up in the Fed's balance sheet, for all to see.

As I have pointed out at some length before, as long as the Fed has at least one Primary Dealer in on the scheme, the money machine can keep turning until the market is revulsed by the stated valuations, and the machine breaks down.

And this is by design.  It is the principle of 'lender of last resort.'  And it is supposedly what provides the Federal Reserve System more flexibility to address currency shocks than a hard external system.  That the Fed has caused those currency shocks by its own policy errors at times is another matter.

But at least I understand why the Fed and the board of governors are doing what they are doing now, and it is obvious what they are doing despite the enormous lengths to which some may go to say otherwise.  And since it requires the agreement of a number of different, somewhat independent parties, it may very well stop before it goes too far. 

So I would ask, where is the flywheel in Modern Monetary Theory, in which the government spends at much as it wishes, and simply issues the currency to 'cover' its expenditures?

And if the answer is the checks and balances of the Congressional appropriations process and the policy of the Treasury Department, you will understand if the general public runs screaming towards the exits, given our recent experience with the budgeting and spending levels.  Or if the answer is that it is 'in the cloud' and that a restraint is an old-fashioned concept that is no longer applicable, then we will know that as it stands it is another new era idea like efficient market theory.

So, with regard to Modern Monetary Theory, what acts as the restraining factor on the expansion of the money supply? Where is the flywheel?

Answer that honestly and straightforwardly in less than two paragraphs,  and it might be said that MMT at least has a system.  And if not, it is something that needs to be done to take it from sophistry, which dodges and changes as required by the turn of the debate, into the realm of a real system that can be examined and critiqued.

Fiat Monetary Theory: The Gamblers

'The Gamblers'

"The historical behavior of interest rates and growth rates in U.S. data suggests that the government can, with a high probability, run temporary budget deficits and then roll over the resulting government debt forever.

The purpose of this paper is to document this finding and to examine its implications. Using a standard overlapping-generations model of capital accumulation, we show that whenever a perpetual rollover of debt succeeds, policy can make every generation better off.

This conclusion does not imply that deficits are good policy, for an attempt to roll over debt forever might fail. But the adverse effects of deficits, rather than being inevitable, occur with only a small probability."

Ball, Elmendorf, Mankiw, The Deficit Gamble

As with most Ponzi schemes, modern fiat currencies are a matter of degree, belief, and tipping points.

There are always limitations in any system, and in paper money systems the debt must be balanced by real growth and investment, an organic growth that makes the rolling debt burden, which is really the basis of the money itself, sustainable and productive.    That growth must be broadly based in order to support consumption from within the system itself, and this implies income commensurate with increasing productivity.

The failure of every fiat currency has been tied to the abuse of power, in the non-organic use of created money not to increase the productive growth of the economy, but to establish monopolies, cartels, speculation, and of course, aggressive war, all in pursuit of the outsized enrichment of a relative few who define themselves as an elite.

And human nature being what it is, all paper money systems have failed within a few hundred years.

There is a variation of  Fiat Monetary Theory, also known as fiat money, which seeks to distinguish itself by its name in addition to its penchant for sophistry, called Modern Monetary Theory.

This variant eliminates the debt problem by switching from a debt based currency to a pure fiat currency issued directly by the government. The longer term problem of currency revulsion, or the rejection by the people of the stated value of the currency, is resolved by greater use of government force.

The resort to force is a tell tale marker of all ideological cults which are unable to achieve a natural stability and an informed, willing acceptance.  That force may include psychological persuasion including propaganda and ridicule.

We are seeing something like this today in Europe, with the compulsion to enforce austerity as the technocrats and careerists refuse to admit that, that by its very design, the Eurozone is inherently unstable. 

And the reforms required to avert disaster are unthinkable, because they will diminish their wealth and power.   And so they become increasingly desperate and self-destructive.

Since the leaders are naturally superior, it is the people that have failed them, because they did not believe enough, work hard enough, sacrifice enough. And so they must be punished.

What Time Is the Next Crisis? - An Historic Warning From John Hussman

"The enemy of the conventional wisdom is not ideas but the march of events."

John Kenneth Galbraith

This is from John Hussman's latest weekly observations which you can read here.

In every instance he cites with which I am familiar, any concerns about the gross mispricing of risk were lightly dismissed, because 'the market says that everything is all right.'   As if the financial markets were some prescient, infallible instrument, and not overtaken by the manipulation of insiders and the monied interests. 

The 'rising market' kept most criticism of the policy errors in the growth of the credit bubble cowed and quiet, until the inevitable market break and crisis. That the financiers have not yet completely destroyed the global economy is not particularly reassuring, while they are still working at inscribing their arrogance, writ large on the pages of history, chapter by dreadful chapter.

Or more cynically one can conclude that yes, things are getting out of control, but we must keep dancing while the music is playing, and say nothing while the money is flowing in order to 'save the system,' while disabling the smoke alarms and stuffing one's pockets.

As long as the Fed can keep printing money and delivering it to the Banks and the one percent, and not to the real economy, through its purchases of their (fraudulently) mispriced financial assets, this could keep going, while maximizing the damage.  While it does give the financial engineers some feeling of control, it really does nothing constructive except to delay the essential reforms.

The combination of constructively applied stimulus and sweeping financial reform was the genius of Roosevelt, and the lack of it is the failure of Obama.

And the big correction might not even show up all that readily, in nominal terms at least, in the equity markets for some time, being papered over by a blizzard of new money.  And so that implies a crash in the bond markets, as we saw a few years after the Great Crash of 1929.  But they are getting better at the cover ups, so who can say.

The tail of financialization and leverage is still 'wagging the dog' of the real economy.   After reading the current thoughts in mainstream economics, and Modern Monetary Theory, it seems quite likely that history is about to deal out another hard lesson in real wealth and value.

I am ambivalent to the exact timing since I cannot know it.    And so if another year passes and 'nothing happens' I may not be cheered by it while the fundamentals like median wage continue to deteriorate.  This is the mechanism in which bubbles develop, and we have seen more of them than most, and with increasingly intensity.

But I am more confident that the punchline to this comedy, if it continues unabated, will be the devaluation of the currency and at least a de facto default on the debt which can take several forms. And the usual yahoos will rise up and seek power, promising an hysterical people to take away their pain, while inflicting it on 'the others.'

"Present market conditions now match 6 other instances in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention). These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history:

1. S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 22.6.
2. S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.
3. Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 54.3% vs. 22.3%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.
4. Yields rising, with the 10-year Treasury yield higher than 6 months earlier.

The blue bars in the chart below identify historical points since 1970 corresponding to these conditions.

Bernanke's Hammer: When You Have a Printing Press, Everything Looks Like a Monetary Transaction

"I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."

Abraham Maslow, The Psychology of Science, 1966

Apparently while Maslow made this saying famous with a more elegant formulation, the original source of the image is from a Mr. Kaplan who wrote his 'law of the instrument' in 1964.

"I call it the law of the instrument, and it may be formulated as follows: 'Give a small boy a hammer, and he will find that everything he encounters needs pounding.'"

Speaking of boys and their toys, the word that has made its way across the trading desks is that the Fed's put is back on, or more colloquially phrased, while Bernanke keeps printing, certain favored classes of assets can keep going higher, without regard to fundamentals, except for significant event-driven incidents, that will be quickly papered over.

Otherwise, the dips will be shallow and the trend will be maintained.  For how long I do not know, but as the VIX shows, perceived risk is back down to low levels that we have not seen since the growing credit bubble of 2004-2007.

As an aside, before snarky propeller heads with little better arguments to make point out that the Fed does not literally 'print money,' we all know that. It is a degenerate profession that mixes a pretension to lofty equations and high science with the taunts and arguments of the schoolyard, when they act as the politicians' bullyboys.

The pity is that 'the printing press' is not the only instrument at the Fed's disposal.  After all, they are a significant regulator of the banks, and have gained even more power and influence since the financial crisis.  But as might be obvious to most, they are a terribly conflicted regulator, and given to remarkable lapses in judgement.

Monetary inflation without reform is the 'solution' that most favors the monied interests and the financial class given the extractive nature of the system as it is.

The second most favorable policy is 'austerity,' again without serious reform.  One can increase the value of their own pile of ill gotten gains relative to others through either policy.  It is no choice when you can pick the choices you give to the people, all of which are favorable to you.

Unfettered capitalism is remarkably inventive in its ability to transfer wealth and destroy value.  It commoditizes everything, and subordinates all to a place on its hellish balance sheet.

The meme on the financial markets is that there may be shallow pullbacks, or even a greater correction in response to a specific event, such as the 'fiscal cliff,' but the Fed's policy is to target asset inflation once again, through the Too Big To Fail Banks and hedge funds, and their buying of paper at non-market prices.

There is also a belief, whether it is right or wrong, that the regulators will turn a blind eye to the capping of certain commodities like gold and silver, in the name of managing them as rival currencies.  Even a folk hero like Paul Volcker has previously endorsed this as a policy.

This turning of things upside down is what has been called Rubinomics, the principle that by supporting the buying of certain select instruments such as SP futures ahead of a crisis, one can more efficiently avert a financial problem than by allowing the markets to reflect the fundamentals, and then to clean up the mess afterwards.   It's cheaper and easier he observed.

It is the belief that rather than an instrument of price discovery within the real economy, the financial markets ARE the economy, and will lead rather than follow.  And it has become a form of financial totalitarianism through the manipulation of policy and money.

Robert Rubin articulated this policy perspective while he was the Secretary of the Treasury, and he somehow persuaded Greenspan, then the Chairman of the Fed, to go along with it, shortly after the Maestro had made his famous 'irrational exuberance' speech.  Although it should be noted that Greenspan had already found that tool, and used it.  He merely took it to another level, not as a response to be used to a crisis as in the case of the Crash of 1987, but as a proactive tool of financial engineering.

And this was the genesis of the principles of new Modern Monetary Theory, which in fact is a concept as old as the hills, appearing over again with different names, and the source of much recent misfortune through several Presidencies.

"Notwithstanding anything said or done by the Congress this year, operating through trained surrogates such as Geithner, Summers and others, Robert Rubin is still pulling the economic and financial strings in Washington. The fact that there is a Democrat in the White House almost does not seem to matter. President Obama arguably has a subordinate position to Rubin because of considerations of money."

Chris Whalen, The World According to Robert Rubin

And this is the problem I have with this Modern Monetary Theory that would save the system by placing the ability to simply create money in the hands of the Treasury, to be wielded such titans of sound judgement as Robert Rubin, Hank Paulson, and Tim Geithner, with oversight perhaps by those incorruptibles and paragons in the Congress.

I do not like the banking system as it is, as you know if you frequent this Cafe.  The corruption of insider dealings, opaque deals, and unequal justice has displaced the discipline of well run markets.

The system as it is has all the problems, inefficiences, and injustice of a corrupt and self-serving oligarchy. This is not to say that is a grand conspiracy, but rather a series of unfortunate events and human tendencies, aiding the actions of a relative few.

The solution seems obvious, which is to reform the system, to provide for transparency and the rule of law, and a return to regulations and reforms that worked for decades.  And it is not to replace it with some gimmicky solution that has the same faults or worse, that will be used by same rotten, self-serving gang of idiots and careerists.

And this is why I do not even favor something more rigorous like a return to a gold or mixed metal standard now, because with the system as it is, it would surely be used as an instrument of control and repression.  A corrupt system can corrupt all.  Ask the Greeks how an external standard like the euro is working for them.  It has become an instrument of official plunder. 

The thought of the central government having the power to set official gold prices and control inventory, which they most surely would do, makes one shudder. At least in a nominally free market they can provide some refuge against financial engineering, given a wide enough timeframe.

So what about the markets, and such similar financial engineering notions as 'Nominal GDP Targeting."  Well, we can wonder how the Fed might want to actually achieve such a thing, short of going out and buying iPhones and foodstuffs.  Would it be to continually stuff money into the banks and their associated companies and camp followers, and wait for the trickle down effect?

We have seen the result of such an approach in the past.  The 'hot money' seeks beta, and that means financial paper, and frauds like collateralized debt obligations, tied to whatever hapless aspect of the real economy that is convenient, such as housing for example.

And the self same snarky economists will say, 'Where is the inflation?' and point to the very instruments of measurement of inflation that have been distorted and disabled so as not to show it, 'Chained CPI' being the most recent aberration.  And they know full well that in a situation in which the money supply is being expanded selectively and distributed through a relatively narrow source like the biggest banks, the inflation will show up selectively for quite some time, in inflated assets, bonuses and even industries like the tech sector if one can remember back to the 1990's.

I know how tempting it is for 'a little boy with a hammer' to go about pounding everything in sight.  But at some point, the adults have to come and take away that hammer, and restore the instrument to its proper usage in the service of real work and creative, productive activity.

Be careful in this market.  In markets where stocks trade like commodities, the technicals tend to be dominant because the market is a cynical game of supply and demand, squeezes in both directions, divorced from the underlying economic fundamentals. And it has been made worse by the light volumes, as few bystanders want to put their money down on the three card monte table, such as it is.

The pity is that it is strangling the flow of money to the real economy.

Max Keiser interviews Jesse Eisinger of ProPublica about his recent piece in Atlantic magazine, "What's Inside America's Banks?"

I would like to see Mr. Eisinger interviewed on the Bill Moyers show on PBS.

I doubt he could obtain a fair hearing on any mainstream media channel which prefers to stage manage their discussions in the manner of red versus blue.

It's Official. Krugman Does Not Understand the Value of Money

Well I did say that Mr. Krugman should proceed, and like Mitt Romney, he did, and doubled down.

I am not quite sure I have the words.  Chris Hedges was right.

Like other progressives and independents, I have been discouraged that many old school liberal economists have had so little to say about financial reform, and the frauds in the banking system, even as they blindly pressed their case for more stimulus to be distributed without repairing a broken financial system that taxes the real economy with fraud.   It is 'whatever works' as they define and measure it. Justice and equity have no part in their calculations. They learned part of the lesson from FDR, but not the part that really matters, and that made him memorable.

They make themselves and their models willfully blind to the crony capitalism that exists between the Fed and Wall Street, and the manipulation in the markets, and the lack of any credible prosecutions for some of the most egregious financial crimes since the 1920's.  How many more scandals will have to be revealed before they end their denial?

But in grabbing this whacko platinum gimmick of overt monetization which typifies almost everything that is wrong about modern economics, and in stubbornly claiming that it can do no harm, while dismissing anyone who expresses concern as some economic Luddite, Krugman and too many others have shown the purblind ignorance of the ideologue who does not understand what is wrong, and why the people are becoming restless. 

And they answer them with sophistry and derisive baby talk.  No wonder that economics is a disgraced profession. 

The greatest irony is when we become what we hate.

This is another example of the credibility trap, and a failure in leadership.  The Emperor is naked, and the people do not quite know what to do about it except to mill about in restless and embarrassed silence.

...For many people on the right, value is something handed down from on high It should be measured in terms of eternal standards, mainly gold; [Because something is not purely arbitrary does not require that it be divine - Jesse] I have, for example, often seen people claiming that stocks are actually down, not up, over the past couple of generations because the Dow hasn’t kept up with the gold price, never mind what it buys in terms of the goods and services people actually consume. 

And given that the laws of value are basically divine, not human, any human meddling in the process is not just foolish but immoral. Printing money that isn’t tied to gold is a kind of theft, not to mention blasphemy.  [Again, the intolerance of the ideologue, who is so far over on the continuum that they can only look across and see their other extreme, entirely overlooking the middle - Jesse]

For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes.  [Money is just another tool, a cool toy, to the financial engineers who govern the economy like a benevolent elite.  They do not understand value and consequences as they tinker and experiment, hoping for better luck next time.  And amongst financial engineers, Greenspan was Dr. Frankenstein. - Jesse]

It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments — and they are always up for reconsideration when circumstances change.  [The ruling übermenschen are above conventional morality in their arcane knowledge. And how does one measure 'better outcomes?' For at the end of the day, economics is no pure science, but a social science of a certain class of policies, and policy has its roots in 'justice.' This is why the financiers must operate in secret, like the great Wizard of Oz. Because they have no science, but do not wish to be encumbered by anything, and especially something as inconvenient as justice, as they conduct their experiments. - Jesse]

Now, the money morality types try to have it both ways; they want us to believe that monetary blasphemy will produce disastrous results in practical terms too. But events have proved them wrong. [Yes that's right. The credit bubble, tech bubble, and housing bubbles have been benign and not based on policy errors. All of them were facilitated by economic quackery from both sides.  But the would be elite can admit no error. - Jesse]

And I do find myself thinking a lot about Keynes’s description of the gold standard as a “barbarous relic”; it applies perfectly to this discussion. The money morality people are basically adopting a pre-Enlightenment attitude toward monetary and fiscal policy — and why not? After all, they hate the Enlightenment on all fronts.  [As he cries for more leeches to bleed the patient... - Jesse]

The bottom line is that we aren’t really having a rational argument here. Nor can we: rationality has a well-known liberal bias. [The hubris of an ideology or a professional class in failure knows no bounds. - Jesse]

Paul Krugman, Barbarous Relics

Gold Daily and Silver Weekly Charts - The ¥100 Trillion Pair of Chopsticks

Intraday commentary on The Platinum Coin Debate here.

Here is a decent summary of the Platinum Coin chronicles from The Atlantic.

I think that the fact that this nonsense is being discussed by Very Serious People demonstrates how far off the cliff of reason our financial and political systems have already gone. Let's hope China et al. are willing to view America's antics with the same jolly forbearance.

I got a kick out of this late breaking article over at ZH, and about the ¥100 Trillion Pair of Chopsticks.

It is not enough to be willing to print money, and give it to your wealthy friends for their personal enjoyment. That looks like foreign aid being given to some hard luck third world country where the money flows primarily to their warlords, and little reaches the people. You have to find the guts and the honesty to take on the hard job of reforming the corruption, imbalanced economic structures, and cronyism between the oligarchs and the government that got to where you are in the first place. And that is where the credibility trap comes in.

What concerns me a bit is not that so many otherwise intelligent people do not understand the nature of money, because so few really do. What really concerns me is that those that do understand what is going on seem to be toying with this whacko monetization scheme, which shows a certain desperation and lack of a Plan B that should make those who are holding their paper very uncomfortable.

If anything could bring a couple million people with torches and pitchforks to Washington in protest, the Platinum Coin pretension might just do the trick.

Editorial comment on the state of modern economics in the video clip below.

The twilight of ancien régimes and dying empires may embrace extravagant fashions in thought and produce eccentric, démodé behaviour, but sometimes they are set to catchy tunes.

As for the rest of the world:

“The burning question that I always have, I’m amazed at their ongoing willingness to continue to accumulate, and hold, such large amounts of US denominated bonds. It’s been my view that they are basically playing a Ponzi scheme.

I’ve had that confirmed when I’ve had long discussions with different sovereign wealth funds and different government agencies around the world. They’ve been willing to play this game, but more and more now, as their domestic economies have grown and the US portion of their exports becomes smaller, and with the amount of T-Bills that they have (already) accumulated, I believe they’ve reached the boiling point where they are really going to be unwilling to grow their reserves (of US Treasuries).

Just the process of not growing their reserves is going to be very disruptive. If they are not willing to accumulate more T-Bills, this is going to force the trade deficit closed. I think that is really going to rock the financial world at some point in the near future..."

Sprott President Kevin Bambrough in today's KWN Interview

More on the Platinum Coin? Please Proceed, Mr. Krugman...

"Well, the trillion-dollar-coin thing — deal with the debt ceiling by exploiting a legal loophole to have the Treasury mint one or more large-denomination coins, deposit them at the Fed, and use the cash in the new account to pay bills — has really taken off. Last month I spoke with a senior Fed official who had never heard of the idea; these days it’s all over. [It has been around for quite some time in monetary theory circles, where P.K. apparently does not dally - Jesse]

There seem to be two kinds of objections.

One is that it would be undignified. Here’s how to think about that: we have a situation in which a terrorist may be about to walk into a crowded room and threaten to blow up a bomb he’s holding. It turns out, however, that the Secret Service has figured out a way to disarm this maniac — a way that for some reason will require that the Secretary of the Treasury briefly wear a clown suit. (My fictional plotting skills have let me down, but there has to be some way to work this in). And the response of the nervous Nellies is, “My god, we can’t dress the secretary up as a clown!” Even when it will make him a hero who saves the day?

[Is that like 'The Committee to Save the World?' I would not call it disarming the maniac so much as shooting the hostage to nullify the maniac's leverage. And the clown suits have already seen quite a bit of wear by economic policy whizkids in the past twenty years. Have you ever heard the one about how a US housing bubble is impossible? Or that markets do not need regulation because they are naturally efficient? Or that economics is, as Jamie K. Galbraith said, a 'disgraced profession?' - Jesse]

The other objection is the apparently primordial fear that mocking the monetary gods will bring terrible retribution. [There are no methods of argument so childish and often viciously petty than those that roam the halls of university departments, or talk radio. - Jesse]

Joe Weisenthal says that the coin debate is the most important fiscal policy debate of our lifetimes; I agree, with two slight quibbles — it’s arguably more of a monetary than a fiscal debate, [I can't believe you went there to grab a cheap point but one must do what one must when they don't have anything else. - Jesse] and it’s really part of the broader debate that has been going on ever since we entered the liquidity trap. [It has been going on for time immemorial, for those that have looked at the history of money more deeply than the pages of the NY Times. - Jesse]

What the hysterics [DeLong derided them as 'puritans' when they brought up the moral hazard of TARP, and they were right - Jesse] see is a terrible, outrageous attempt to pay the government’s bills out of thin air. This is utterly wrong, and in fact is wrong on two levels.

The first level is that in practice minting the coin would be nothing but an accounting fiction, [a fiction has more weight than thin air? - Jesse] enabling the government to continue doing exactly what it would have done if the debt limit were raised."

Paul Krugman, Rage Against the Coin, 8 January 2013

No this is not correct Mr Krugman. IF the debt limit is raised, the Treasury can continue to issue more debt subject to the same constraints of the marketplace.  But once they take the step of erasing the existing debt through the ridiculous gimmick of over monetization, the process can never be the same again.

The current monetary expansion and system at least maintains a pretense of virtue, and the virtue of Caesar's wife must be above suspicion.

As an experiment I talked with a few intelligent people, mostly engineering types, who don't really have the time to follow the details of economics. I asked them about 'the platinum coin' and they mostly said, 'Oh I heard about it but don't really understand it.'

When I explained what it actually was, they all thought it was barking mad, and found it hard to believe. You see, the vast majority of people still hold to their illusions about how things are in the world.

Personally I think the whole debt limit concept and debate is ridiculous, because the spending has already passed through the appropriations process in Congress where it belongs. If they wish to change something they should do it there.

I would like to see Obama take a principled stand, as that wily politician Clinton did, and call them on their threats as he ought to have done on the fiscal cliff, but deferred out of concern for the unemployed, the middle class, and at least eight important corporate subsidies.

The 'platinum coin' permits direct monetization of debt in a non-market transaction between the Treasury and the Fed, which is something that the supposedly independent Fed does not allow.   This is the mechanism which, in Greenspan's words, emulates the rigor of the and external standard like gold in imbuing confidence to the process.

The MMTers address this risk in confidence with arguments similar to a reaction I saw recently to a comparison of such gimmicky monetization to Weimar. 'Their currency failed because the debt they had to pay was denominated in foreign currency.'

And this is correct. In an increasingly brazen monetization, political control over the users of the currency and holders of the debt becomes increasingly important. And Germany did not have the power to exert control over those countries, England and France in particular, which held their debt. That attempt at expanding their control was to come later.

When faith falters in a false proposition based on the need for ever increasing expansion, first fraud and then force must ensue, or it fails. Just ask Bernie Madoff or Jon Law.

Now I think I understand that Mr. Krugman is doing the time honored thing that many publicly important economists tend to do,  which is carrying the analytical water for his political team, which is all good and well.   I am not opposed to many of the things he recommends, if only he could bring himself to realize that reforming the system as Roosevelt did while providing stimulus is a sine qua non.

But what Mr. Krugman forgets is that when the other side makes themselves look silly and irresponsible, there is some merit in acting like an adult and taking the higher ground, refusing to stoop to the same level.  When you deal with thugs, they can drag you down to their level, and then beat you with experience.  It is no accident that the Congressional approval rating, driven largely by the House Republicans, is at all time lows. 

People may be slow to react, but they are not entirely stupid. "You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time."

And I think, or perhaps even fear, that Mr. Krugman does believe what he is saying. At first I was skeptical, but then I read back a little and found this initial flaw in his assumptions.

"...the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate."

This is correct, but one must add, subject to the valuation assigned to that money by those portions of the marketplace that the monetary authority cannot otherwise intimidate, manipulate, or control, if confidence unravels.

I am not a hard money advocate. But if Mr. Krugman wants to keep making the case for hard money, and provoke a reaction that we all may eventually regret, he should keep making the case that our current system of money is little more than 'an accounting fiction.' People are already suffering financial repression because of the Fed's misguided policies of stimulus without sufficient repair and renewal.

And the argument of 'where is the inflation' is not all that dissimilar to the arguments we heard while the credit bubble was pumped up, the financial sector expanded beyond all reasonable measure, and fraud inflated bonuses from 2003 to 2007, 'where is the financial crisis?'

I know this may sound harsh, but when one is in a very public position of power, and standing for what remains of the liberal conscience and the tattered liberal class, it does provide a very loud amplifier, and brings some additional responsibilities.  

I have little doubt that what I say will be ignored, because you still consider this some sort of policy debate, and why would call attention to the salient counter-argument?  And that is what is important, right?  Winning.  We seems to have been winning a lot as a country lately, and losing everything that really matters in the process.

I will give credit to Obama that he rarely descends to such silliness.   Although he does seem to lack the higher leadership skills and unshakable principles for which he clearly stands, in the manner of an FDR, a JFK, Jackson, or a Lincoln.   He is a Chamberlain, a cynical dealmaker, and not a Churchill.

And that is a pity, because that is what the times require.

Without substantial reform, there will be no sustainable recovery.

Why Paul Krugman Should Not Be Treasury Secretary

As you may have heard, there is a petition making the rounds to suggest to Obama that he appoint Paul Krugman to be Treasury Secretary. As if. Obama is a CEO president, and no idealistic progressive.

I wanted to memorialize this column by Paul Krugman because I have the feeling that five years from now he will have forgotten that he wrote it, or handwave it away, suggesting that it was merely a sarcastic fancy or some clever political ploy.

To me this speaks to the silliness, careerism, and political immaturity that infests the heart of the economics profession. There are no politics so petty, and yet so vicious and yet silly, as those that often infest academic departments.

What Krugman suggests here is that in response to the Republicans taking the nation's credit rating and debt hostage, that Obama should take the nation's currency hostage and threaten to use seignorage to erase the debt and thereby render the debt ceiling moot. If this were a pickup football game, it is the equivalent of calling 'Statue of Liberty play!'

While I feel his pain and frustration at the current political climate in Washington, this is not some minor league blogger spinning their latest fantasy, but a Nobel prize winning economist writing in the NY Times who is using his bully pulpit to endorse extreme economic nonsense.

For him to say that it is 'silly but benign' to threaten to take the step of overtly monetizing the nation's debt without market involvement to evade the debt ceiling, and to institutionalize the notion that the currency is nothing more than the squeaky toy of the Treasury, is almost as incredible as it is reckless and immature.

But it does demonstrate that all too often we tend to become what we despise.

Be Ready To Mint That Coin
By Paul Krugman
January 7, 2013

Should President Obama be willing to print a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely. He will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous. The decision should be obvious.

For those new to this, here’s the story. First of all, we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit — tax and spending bills the president is legally required to implement — and then lets Congress refuse to grant the president authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default.

And Republicans are openly threatening to use that potential for catastrophe to blackmail the president into implementing policies they can’t pass through normal constitutional processes.

Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all...

Read the rest here.

Platinum Coin: Crossing the Monetary Rubicon

You may be reading more and more commentary about the platinum coin solution, and arguments why it doesn't really matter if the US does it or not.

To summarize the concept, the Treasury creates one special platinum coin, with a stated face value of $500 billion or so.

They trot down to the Fed and deposit the special coin(s), redeeming that amount of US notes and voila. It is a overt monetization, but the platinum coin adds a novel touch, and a bit of shiny misdirection.

Some mainstream economists seem to be toying with the idea of climbing aboard the train with the Modern Monetary Theorists. Enthusiasm Builds for Trillion Dollar Coin . Paul Krugman has a typically obtuse take on this in a recent column titled Monetary Rage.

I am not going to argue the pros and cons of this approach at this time. I have said quite a bit about this, and MMT, before. For me it shows that economic silliness is not the exclusive domain of the Austerians.

But I do want to firmly draw your attention as to why this particular solution and approach to the debt is important, and why it raises concern among many, even though that concern is often scorned and ridiculed by the economic savants. And by the way, this is very reminiscent of the same reactions to Alan Greenspan's policies, TARP, and the housing bubble with many of the same players in similar roles.

From a Bloomberg story entitled: Why We Must Go Off the Platinum Cliff.

"In case you're not familiar with this idea: In general, the Treasury Department is not allowed to just print money if it feels like it. It must defer to the Federal Reserve's control of the money supply. But there is an exception: Platinum coins may be struck with whatever specifications the Treasury secretary sees fit, including denomination.

This law was intended to allow the production of commemorative coins for collectors. But it can also be used to create large-denomination coins that Treasury can deposit with the Fed to finance payment of the government's bills, in lieu of issuing debt."

Currently it is against the laws of the land for the Treasury to issue debt, and for the Fed to buy it directly, as opposed to running that debt through the test and discipline of the markets. I researched this a number of years ago, and do not recall the particular law offhand, but in effect the Treasury cannot sell debt directly to the Fed. It must pass through the marketplace first to be valued.

This is all the difference between a democracy, as imperfect and occasionally corrupted as it may be, and a diktat by a central authority.

The platinum coin solution uses a statute regarding commemorative coins to evade that law of money. If the Treasury creates money out of nothing on its own volition, whether it be by assigning a purely whimsical value to a platinum coin, a wooden nickel, or a magic money wand, and deposits that symbolic object with the Fed, it is a game changer. It is purely arbitrary monetization.

And that step requires debate and a proper law, if the country chooses to accept it.

Now one might argue that this sort of overt monetization means nothing. And the MMTers have plenty of convoluted arguments why it does not matter, at least to them. And if anyone objects to their sophistry, they are ridiculed. They might say that the Fed is monetizing the debt already, and inflation has not resulted. But that is not the point. The Fed are pretending that they are NOT doing it, and are thereby maintaining appearances and some level of deniability.

But what people forget, or rather, what they would like us to forget, is that a modern fiat currency is based on the full faith and credit of the issuer, and the willingness of people in the market place to trust them, their word as contract, and the integrity of their actions.

Trust is a funny thing. One can bend it, twist it, and strain it by their actions over time. But at some point it may break, and the parties expected to maintain that trust may say, 'enough!'

And trust is gone, broken. And retracing one's steps to regain it is not a simple matter of a apologizing for and remediating their latest transgression, but a long slow climb back through what in many cases are years of continuing abuse and broken promises.

It is good to note that when dealing with people's resistance to accepting this monetization and artificiality of value, the MMTers quickly resort to arguments that involve the use of force, legal but even physical, in order to stifle dissent to an arbitrary monetary power.

That is the significance of taking the step of overt monetization at will, which is what the gimmicky platinum coin solution is all about. And those who promote it best understand that this is what they are doing, and be prepared for the consequences.

SP 500 Futures Daily Chart at Year End - Pigmen Rampant on a Field of Monetary Inflation

There is a an obvious ramping in the US equity markets into the year end that is running into fairly long term resistance.

I think 1455 is the highest this market will go without a deal on the fiscal cliff. Perhaps not even that high without an extraordinary effort.

If needed, Wall Street stands ready to pressure the Congress and the Administration in January by dumping the financial asset markets, hard, in the manner of the TARP negotiations.  We'll make them an offer they can't refuse.

Conversely, the SP 500 is in a fairly obvious inverse head and shoulders formation that has not yet activated by breaking out from its neckline, which is around 1455. If something does happen that permits such a breakout, it can run quite a bit.

There is a similar potential Inverse H&S on the NDX 100 big cap tech chart.

I suggest as always you ask the question cui bono, 'who benefits?'   Although they do happen, there are few accidents these days.

From a certain perspective the US and UK financial systems are being dominated by a set of loosely organized criminal enterprises that have captured, or at the least nullified, the regulatory functions of the markets.  This adds a significant element of uncertainty to what in theory is a discounting and price discovery mechanism.

There are rumours of a 'deal' on the fiscal cliff, in which the Republicans accept tax increases of a sort on those with incomes over $400,000 per year, and Democrats accept cuts on pensions of the elderly and veterans by using 'chained CPI' to calculate inflation rather than the current, significantly weakened, version of CPI-W.  The major feature of chained CPI is to make substitutions to cheaper products as prices increase.  As meat prices increase, for example, one can switch from beef to pork, pork to chicken, and chicken to dry cat food.

This change does so little to really 'fix' the budget problems of the next ten years, but visits such pain on the weak, that one has to wonder if there is a streak of sadism in the monied interests controlling the Beltway.   Although they will deny it, I think there is.

The plutocrats intend to resolve their debt problems generated by a corrupt financial system by inflating the currency. The benefit is that a switch to an even more distorting method of calculating price inflation will provide additional cover to their debasement of the currency.  I am not ruling out another asset bubble, this time probably in the financial asset markets.

The story for the year end seems to be inflating financial risk assets like stocks while capping precious metals and other key commodities.

As for the promised raising of taxes on the uber-wealthy, don't you believe it.  Their tax avoidance schemes are well-researched, well-funded, and intricate in ways that the average person can hardly understand.   And those educated enough to understand it won't say a word, through a mixed bag of careerism, self-interest, willful ideological blindness, and personal greed.   Its a feast of fools.

Why admit complicity in a fraud and accept the consequences when you  can double down and attempt to take it all, and write the history afterwards.

Its a win-win for the pigmen, shifting the pain to the elderly and veterans, and achieving even greater opacity to their wealth transfer schemes through monetary inflation.  If you know how to play it, asset inflation through official monetary magic, which is just another facet of that age old fraud of seigniorage,  is a wonderful way to steal from the hoi polloi without them feeling it until collapse comes, in the manner of a Ponzi scheme.

Let's see what happens.

Modern Monetary Theory And Its Toolbox

I think the essay excerpted at the bottom is a 'must read.'  If you do not have time for this intro, please read it. 

The shallow cynic will glibly say that what Modern Monetsry Theory describes is what we already have, so what is the difference. Let us just have more of it, and cut out the middlemen.  But that is not really the case. You have to see such a system of pervasive official value setting and willfulness close up to see the implications of its mindset and its full capabilities.

On the surface Modern Monetary Theory can seem to be an attractive proposition.    And it troubles me that some people whom I like and even admire seem to be favorable to it.   After a great deal of thought it appears to be the situation in which the cure is as bad as the disease, with reformers driven to pick up the tools of desperation and what looks like a quick fix.

The key objection one would naturally raise in considering Modern Monetary Theory is the protection of the value of the currency.  Domestically the use of official force is an obvious if unfortunate reach.  The real issue of acceptance of the currency at value comes down particularly in foreign trade where one cannot so easily enforce draconian rules designed to promote the value of the currency to some official prescription.

A short term solution is to maintain and expand your sphere of command and control until it overextends, fails, and collapses.   We have seen how this worked out in the former Soviet Union.

Foreign holders have the 'right of first refusal' on debt and currency. It is almost a tautology to say that most serious instance of inflation, including hyperinflation, start outside that country.

Often people are attracted to the principles of Modern Monetary Theory because it sounds 'ethical' and fair. Why pay interest on debt to evil bankers when you can merely print your own money? Never mind that most debt is held by private people as savings vehicles, in theory at least. The current balance of trade problems and surpluses held by some foreign countries are policy aberrations. Free trade is a canard that suits multinational interests, but that is another story.

As I have said before, I do not intend to justify the current financial system which is distorted and corrupt. No system is perfect and self-regulating, but some are more prone to corruption than others.

I do wish to point out that any currency system must have some balance, some limiting factor, that is difficult for people to circumvent with respect to the expansion of the currency. A commodity standard like gold is one, since gold cannot be created. A debt based central banking approach is another, because the marketplace has some immediate ability to react to expansionary policies.

A concentration of power in few hands leads invariably to corruption and abuses.

But rather than belabor this, here is an excerpt from a recent essay from 'New Economic Perspectives' on Modern Monetary Theory.  There is no need to debate this when one can merely peel back the fog of supposition and let it speak in its own words beyond the surface gloss.

The management mechanisms in the MMT toolbox are central economic planning to a far greater degree than we currently see in most developed nations, government allocation of resources, distribution of income at will, official propaganda (and presumably censorship) since the lie will tolerate none other, and foreign currency controls.

There is a juicy worm on the end of hook, but there is a hook in there nonetheless.  I have read and listened to most of their spiels, to the extent that one can work their way past the browbeating and obfuscation that true believers like to deliver to doubters.  I do not wish to be 'mean' but to me it seems to be an old fairy tale fraud in a new wrapper. 

An Alternative Meme for Money, Part 6: Alternative Framing on Inflation
By L. Randall Wray

As we have discussed, sovereign government cannot run out of the keystrokes it uses to mark-up balance sheets as it spends...Obviously, government cannot run out of these. Government can “afford” to buy what’s for sale in its own currency.

The question is not about affordability but rather concerns effects on the value of the currency and impacts on the pursuit of private interest.

a. If something is in scarce supply, more purchases of it by either government or private buyers might push up the price. A government purchase of something that is scarce can “crowd out” a private purchase. Government purchases need to be, and can be, planned to avoid undesired crowding out and price pressures.

b. ...government has at its disposal a number of options to reduce price pressure, including patriotic propaganda and rationing. It also has the big gun: taxes. An excise tax raises the cost to private buyers; an income tax reduces disposable income to free up production for the public purpose.

We never need rich folks’ money in order to provide for the poor. We can keystroke the bank accounts of the poor so that they won’t be poor. We increase taxes on the rich only when their spending threatens our currency with inflation. If there’s no inflation danger, there is no point in taxing the rich before keystroking the poor.

The rich also are much more likely to endanger the currency’s value by pulling out of the domestic currency and running to safe havens at the first sign of inflation... We need progressive taxes and inheritance taxes to protect our currency from antisocial behavior by the rich.

Most important: the goal of taxing the rich has nothing to do with raising government revenue. Taxes are used to keep the currency strong and to punish sin. An ideal sin tax raises no revenue because it eliminates sin. While we cannot achieve that ideal, we can make sin less enjoyable. It is fitting that those who already enjoy all the benefits of life at the top ought to suffer more when they are sinful...

To conclude:

1. When inflation threatens, in some circumstances it makes sense to raise taxes. Since the rich pose a greater inflation threat, put the taxes on them. Cash registers don’t discriminate, so tax those with greater purchasing power.

2. There are additional measures that can be taken when inflation pressures arise; depending on circumstances, they are probably more effective: rationing, targeted wage and price controls, patriotic saving.

3. At full employment it makes sense to tax the rich while providing income to the poor. At less than full employment, this is not necessary.

4. Government spending and taxing need not be closely linked; however, as the economy nears full employment taxes need to be raised if there are strong public purpose interests in continuing to increase government spending. The goal is not to increase government revenue, but to reduce competition for relatively scarce resources in order to direct them to the public interest.

5. Not only does the high income and thus potential spending by the rich threaten domestic value of the currency, there is a danger that the rich will speculate against the currency. This provides an additional justification for removing excessive income from them through taxes, and perhaps also for taxing their speculation. Again, the goal here is not to raise government revenue, but rather to punish the sin of anti-social excess.

6. Explaining that government cannot run out of its own keystrokes (or other records of its IOUs) does not mean that one is promoting run-away government spending. Rather, it means that one must confront the inflation danger directly, ensuring that government spending and tax policy take account of inflation pressures.

Read the entire essay here.

The Financial Crisis (With Subtitles)

This comes from a group of students at the University of Missouri at Kansas City.

There is something very wrong about hearing R. Lee Ermey speaking French. Even if the words do not match the subtitles. And would he have ever used the word 'rhetorical' in real life?

I wonder if having Darth Vader explain Modern Monetary Theory, and then arrogantly choke off any serious discussion, was intentionally satirical?   

MMT is little more than a de facto debt default through monetary inflation backed by official coercion, pure and simple. It doesn't have to be, of course, but it always turns out that way. Hyperinflation and the Pernicious Myth of Modern Monetary Theory.

There is a third alternative between modern monetary inflation and destructive austerity. Reform the financial system and make the bond holders and investors take the downsides of the risks which they have incurred, in the manner of Iceland. But there is little knowledge of this, because the monied interests are controlling the discussion.

For a related topic see The Debt Prisoner's Dilemma.

Enjoy.

Hyperinflation and the Pernicious Myth of Modern Monetary Theory: Dollar Vigilantes

"One might argue that when the government has to find a private sector buyer for its debt first, rather than selling the debt directly to the central bank, that imposes a certain degree of market discipline on fiscal policy. But it’s hard to see that there is all that much of a disciplinary bonus here.

When a central bank announces that it is prepared to buy government securities, the announcement automatically guarantees an eager private sector market for the securities – if there wasn’t one already. If dealers know that they can promptly re-sell newly purchased securities to the central bank, at some amount over the purchase price no matter how low, then they know they can make a profit from the purchase...

This is why we have no need to worry about those dreaded bond vigilantes in a country like the US that controls its own currency and monetary operations. To the extent that the Fed signals it is willing to buy US debt aggressively, the Treasury can set almost any price it wants for its debt. So it’s not just that there is no insolvency threat haunting US public debt. There is also not a bond vigilante attack threat – not unless the Fed allows that attack to occur."

New Economic Perspectives, Neoliberal Mythologies

The limit of the Fed’s ability to monetize sovereign debt is the value of the dollar and its acceptance, at value, for the exchange of goods in a non-compulsory environment.   And there is nothing neo-liberal about this. I don't like the neo-liberal approach, but this notion of pain-free monetization is nuts.

If one chooses to not worry so much about the ‘bond vigilantes,’ history suggest that they may well have a care for what I would call the ‘dollar vigilantes.’

The Fed may be hard pressed to buy dollars with — dollars.

The problem with such an approach is that one can ignore the risk for a time, trusting to probability and chance, but when the possible becomes more likely with repetition, it often results in a disaster. It is sort of like driving while texting, a tourist eating street food in Asia, or a small speculator being a non-insider customer at the Comex.

In a increasingly Machiavellian way, they could set up a reciprocity with another central bank or two, say, the BofE and BofJ, and perhaps even the ECB, and I think this has been done even if informally in the past.  

But the limitations are still there, even if hidden in a fog of financial engineering.   Such an arrangement, which I think exists somewhat informally today,  is merely kicking the can of currency failure down the road. 

"This is why we have no need to worry about those dreaded bond vigilantes in a country like the US that controls its own currency and monetary operations."

Overt monetization only works for a protracted period in a system in which one has political control over everyone who uses that currency. The logical outcome of a global dollar regime with unilateral monetization is an eventual bid for a one world government where a false vision of reality can be enforced with -- force. Force and fraud are the perennial instruments of economic tyranny. 

Hence we are in what is called 'the currency war' wherein the US dollar monetarists are attempting to increasingly impose their will on the rest of the world, and a portion of the rest of the world defers to accept that arrangement.

Blatant exposure is the most dreaded pitfall of any Ponzi scheme.  A fiat currency is based on faith and confidence, and the monetary magicians can hardly show their hand, directly monetizing debt without any independent restraint, for fear of provoking a panic, first at the fringes and then at the core of the nation, or empire.

That is the policy error that is also known as 'hyperinflation,' a break in confidence in a currency that is analogous to a 'run on the bank.'  It is the case for hyperinflation which I am watching, and still give a low probability.   I am fairly sure that even Zimbabwe Ben would not fall for such an obvious trap.  But the craven dissembling of Alan Greenspan was also hard to imagine, until it happened.

Instances of Hyperinflation from Diocletian to Bernanke

There are other ways to deal with unpayable debts than merely printing money.  A novel idea is to make the issuers and holders of the bonds bear the negative effects of their bad judgement, as in the case of Iceland.  But the Banks will always try to shift the burden, which they have created, to the financially illiterate and the weak.   

And the problem is not even so much the Fed's propensity to stimulation in the manner of Keynes.  The problem is that they are pouring the stimulus into an unreformed rathole of corruption, in the manner of sending aid to a country where it is intercepted by thieves and regional warlords, with little reaching the people.

The US does not have a spending problem so much as it has a 'corrupt financial system problem,' a 'wealth inequality problem with a stagnant wage base,' an 'unsustainable healthcare model problem,' and 'a free trade without adequate domestic policy based boundaries problem.'   It was not all that long ago that the US was holding a small annual surplus.  What changed was financial deregulation with the financialization of the economy, the easing of trade conditions, concentration of corporate power, tax cuts for the wealthiest, a corrupting political campaign bubble, and unfunded discretionary wars with their associated profiteering.

Forcing small business and workers to compete with state directed slave labor while maintaining a social system founded on private business and median worker wages is insane.  The capitalists are not yet selling them the rope, but they are certainly selling them the 97%, and with them the bulk of their customer demand over time.

Perhaps the biggest problem is, as Lord Acton observed, that when you have a concentration of power, men with the mentality of gangsters have taken control. And the US financial system and corporate structure are highly concentrated based on historical standards, resembling the worst of the gilded age of robber barons, or some third world oligarchy in which the people live in voiceless misery.

In summary, I call this 'just monetize the debt without restraint' alternative  the “pernicious myth of modern monetary theory.”   There are quite a few examples of how this sort of other worldly myth, like the efficient market hypothesis, the Black-Scholes risk model, and the benefits of unrestricted trade, have turned out in the past.  When you crush the reality out of a model with a few key assumptions that allow you to obtain a license to do what you will, you often open a Pandora's Box.

The real shame is that an economic tragedy is not outside the plans of some of the worst of the country's elite. Crisis provides opportunity if one is powerful enough, positioned for it, and egotistically twisted enough to think that they can control the madness once it is unleashed. I suggested that the Bankers would make the country another 'offer that they think it cannot refuse' as they did in the manner of TARP. The so called fiscal cliff may be the wrapping paper for it.

I am not suggesting that the current debt based currency system is optimal, not at all.  The continual theme here is that the financial system is broken, and that it is based on an unsustainable US dollar regime, and the excesses of money creation through credit expansion by private banks.  But to merely shift the corruption from the banks to their partners in the government Treasury is hardly a viable solution.

The answer, as I calculate it, is transparency and reform, and equal justice for all, with malice towards none, in the rule of law.   That is an ideal never fully achievable, but that is the benchmark, and one that is worth pursuing,  It is sustainable if held close, and continually renewed.   That is the spirit of the American experiment in equality and freedom, and is something worth fighting for.

“The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

John Kenneth Galbraith, The Age of Uncertainty


"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country.

When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin!

Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out."

Andrew Jackson,  Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels


"Do not forget that every people deserves the regime it is willing to endure!

Please make as many copies of this leaflet as you can and distribute them.

The White Rose, First Leaflet, Munich, 1942