SP 500 and NDX Futures Daily Charts - Softserve Markets, With Sprinkles

I think most of the adults had the day off today, making it a four day weekend for the senior traders and all but the most hard core of punters, whose life seems empty when the market are not open.

Stocks opened like gangbusters, reflecting the jump in the overnight futures, but fell rather sharply at 10 AM when the news came out that the ISM index missed its target badly.

Does the ISM include monopoly priced healthcare spending?

At any rate the algos that read the news reacted sharply, and the market sold off. It managed to end the day almost unchanged, and then the futures sold off a bit again after the close.

Next week the adults will be back.

Have a pleasant weekend.

 

 

 

The Great Fallacy at the Heart of Modern Monetary Theory

As with all theories that miss the mark, Modern Monetary Theory presents some insights into the matter of course, but seems to hinge on one or two key assumptions that are more matters of assertion than historical or even practical experience. It is founded not so much an economic theory, but on a belief without a firm foundation.

This paragraph taken from Yves Smith's recent article about MMT

"The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency because it is the ISSUER of the currency, not simply the USER (as a household or private business is).

This issuing capacity means that the government does not face the same kinds of constraints as a private sector user of money, which in turn exposes the fallacy of the household analogy, so beloved in popular economics discourse."

The finances of a sovereign are most assuredly NOT like those of a household. And those of a Bank are not like a household either.

In several ways they can be the inverse of a household in their motivations. For example, when household spending is slack because of an economic shock, the government may wish to engage in more spending to counteract this.  Some think it is the role of government to keep the economy out of what is called a liquidity trap or as I understand it a feedback loop of cutbacks that greatly exacerbate the problem of slack demand.

This is one of the points of having a government, that is, to do things that the individual cannot do well alone, no matter how powerful they may think that they are, and to protect the rights of the many from those who are more powerful, both foreign and domestic.

But here is the matter of disputation, emphasis in caps theirs, in italics mine. "The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency because it is the ISSUER of the currency, not simply the USER."

Do you see what is missing here, and more importantly, what is implied?

What is missing is the acknowledgement that the users of a currency, call them 'the market,' can and will and have quite often throughout history questioned the valuation of a currency, and often to the point of practical worthlessness, if certain actions are taken by the sovereign in creating their currency.

 

This speaks to a principle that I spelled out some time ago, that the practical limit on a sovereign government in printing money is the willingness of the market to accept it at a certain value. And this applies to any sovereign, more readily perhaps if they are smaller and weaker, but always given time nonetheless.

If Russia, for example, were to merely start printing more rubles and set a target valuation for them, they could enforce this internally. And in fact, many sovereigns have done so throughout history. I remember visiting Moscow shortly after the fall of the Soviet Union, and marveling at the disconnect between the official stated valuations and the actions of the ordinary people in seeking alternatives like the US Dollar, gold, diamonds, and even Western style toilet paper, a more useful sort of paper than the ruble.

Technically Russia could not become insolvent in rubles, because they could always print more of them to pay all their debts, make purchases, and salary payments. The great caveat in this is that Russia had to maintain a measure of control and enforcement to make that principle 'stick.'

And this is what probably makes MMT inadvertently statist, and dangerous. That is because this belief only works within a domain in which the state exercises complete control over valuation.

In the case of the US dollar as a global reserve currency, if this theory is applied, and one of my great fears is that it will be, then there is an inherent need for the Dollar Cartel to continuing expanding their span of control over all of the producing and purchasing world, in order to enforce this belief.

I am sorry to have to disagree with people whom I like and enjoy reading, but as you can see I think there is an important point of disagreement here. And given the number of sovereigns who have defaulted, causing significant pain in their people and in the lives of others, it is not a trivial thing.

I suppose that there are many other things in MMT that are correct, as it seems to be quite the usual thing in many ways, but there is an important exception in the assertion that the state has no limit to its power to set value, because that is exactly what is implied in the canard that a sovereign cannot default in its own currency. Technically it cannot because it can always print more than enough pay off debts and make more purchases. But it can create money in such a way as to break the confidence of the market, and call its valuation into question. And this is a de facto default.

What happens when the people refuse to accept it at their stated value?  What happens to people who do not agree that the State can do no wrong?  Because if the State can never be at fault in creating and spending money, that makes it a problem and a source of great mischief.

 

In the historical examples the government always resorts to force of some sort in varying degrees, and official exchange rates, and other actions not only on their own people but on their neighboring sovereigns who refuse to submit to the valuation of a currency by official diktat.

It is a dangerous statement that might be remedied by an acknowledgement that there are practical limitations on the power of the State in creating money, and that it is related to the willing acceptance and confidence of the people in its fairness and justice, and especially people who are not part of that same economic sphere of influence.   And if the adherents of a belief cannot agree with this, then it calls into question all the other aspects of a belief that is based on such an absurdity a priori principle. 

 

So it was with the 'efficient market hypothesis,' which believed that people acting in a group are naturally good and rational, and therefore needed little or no regulation.  It was widely accepted in economic circles, and those who did not accept it were dismissed as unsophisticated.  And it did not matter that this assumption was shown to be blatantly incorrect to anyone who is familiar with the reality of the marketplace, or has ever driven on a modern high speed motorway.

People on the whole are not naturally rational, good, and self-regulating to a degree sufficient to permit with the dispensation of the rule of law.  If only this were true!  And a persistent minority among them are so much not inclined to the good as to be sociopaths and inclined to be criminals.

And unfortunately politicians who act for the State are not angelically good and beneficent either. But this is what is implied in creating a system that allows for their acquiring and exercising almost unlimited power that is beyond question, in money or in anything else, but in particular something as important as the general means of exchange and valuation.

Gold Daily and Silver Weekly Charts - And the First Runner Up Is....

"...the burning roof and tower, and Agamemnon, dead."

There is certainly no doubt that 2014 was 'the Year of the Dollar,' as King Buck staged a rally, based on a comparison to some historically important currencies as embodied in the DX index.

I have shown this is the latest update of the US Dollar Very Long Term Chart here.

In fact, the greenback has hit levels not seen since the last financial crisis.  You know, the one in 2008 that everyone has already forgotten, and which seems just as likely to reoccur as if we had done little or nothing about what had caused it in the first place. 

 

I was amused to see a chart posted over at Zerohedge that shows that the next best performing currency in the world after the dollar was gold of all things.   That chart is shown below.  This presumes that one would count gold as a proper 'currency.' 

 

I would say not quite, since technically no sovereign will admit to it at this point.  There is a patina of official sanction about a proper money.  The central banks all hold it, and some are buying it quite vigorously especially since 2006.  So it does have the character of a natural currency and enduring store of value, despite the blatherings and propaganda campaigns of its official detractors. 

Perhaps propaganda is too strong a word for our polite society, all whitewash on the outside, with the bones of the brutally savaged carefully hidden within..  'Manufacturing consent' and 'molding perceptions' is what we call the persuasion campaigns in our genteel era.  Propaganda is an ugly word, so let's put some icing on it and call it something else.

In addition to being a 'store of value' a currency must be a 'money' and for now at least it is the ultimate foreign currency, being exchangeable around the world, but no where treated as a routine means of purchasing items directly with some sort of official nod to its role as a form of money.

 

That may change in the years ahead.  I don't wish for it too eagerly, because I would like to see gold run a bit in value, mostly making up for lost time as it were, before nations get involved and start trying to fix its prices officially.  For now they are doing it unofficially, or at least some of them are doing so, and they are probably doing a bad job of it, in the longer term scheme of things.

They'll never learn. Never.  It is in their very nature not to learn.  They are not learning people.  They are headstrong power people, always wanting to run the show according to their own fancies, and therefore consistently reaching for some combination of force and fraud to impose their wills and their ideas.  Because they know better.  They are the epitome of progress, thoroughly modern and the recipients of special knowledge that sets them above and beyond all others.

 



"Queens have died, young and fair.  Dust hath closed Helen's eye..."

 

But as we know, it's all rubbish.  They speak well, and learn to impress, but they don't know anything new.  They mostly practice the same old tricks with different names and fancier titles.  An object lesson will therefore most likely be required, to be administered by the back of the invisible hand when their schemes go off in a bad way, as they seem to do about every five or six years now.

 

Thank you for your patronage at Le Café for another year.  I am pleased to note that there have been 34,915,180 customers served since opening at this location in February, 2007.  

 

This is not bad for what is most like just a small village café, off the main roads and patronized largely by locals, travelers and the disposed.  The goal is to provide a warm and familiar refuge for those who have become weary of the often tasteless fare produced and served in volumes at the larger commercial establishments of the day.

 

And there is often entertainment, and pleasant diversions from the day!  lol

 

If you have obtained any benefits from this establishment during this year past, as always, please pay it forward.  There is a decided lack of love in the world, and unrewarded kindness often works wonders for both the recipient and the one who gives, not for advantage, but out of a recognition of our own obligations, and at its best, love.

 

Have a very Happy New Year.