Willem Buiter Apparently Does Not LIke Gold, and Why Remains a Mystery

Dr. Willem Buiter of the London School of Economics, and advisor to the Bank of England, has written a somewhat astonishing broadsheet attacking of all things, gold.

I have enjoyed his writing in the past. And although he does tend to cultivate and relish the aura of eccentric maverick, it is generally appealing, and his writing has been pertinent and reasoned, if unconventional. That is what makes this latest piece so unusual. It is a diatribe, more emotional than factual, with gaping holes in theoretical underpinnings and historical example.

I suspect that commodities such as oil and gold are giving many western economists with official ties to government monetary committees a stomach ache these days. Perhaps this is just another manifestation of statists and financial engineers facing the music, as illustrated by the second piece of news from Mr. Buiter on the US dollar, from earlier this year.

Here are relevant excerpts from his essay, with my own reactions in italics.

Financial Times
Gold - a six thousand year-old bubble
By Willem Buiter
November 8, 2009 6:02pm

"Gold is unlike any other commodity. It is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store."

This is inherent to its rarity. It is desirable because it is scarce and useful, and this requires greater protection against theft or accident. Euro notes are far more costly to store than the paper and ink which is used to make them, at least for now.

"It has no remaining uses as a producer good - equivalent or superior alternatives exist for all its industrial uses."

This is an absolute howler to anyone who cares to look into industrial metallurgy. Gold is one of the most malleable and ductile of metals, with excellent conductive properties, slightly less than silver and copper, but is remarkably resistant to oxidation; that is, it does not tarnish. It is widely used in electronic and medical applications for example. What limits its use is that it is scarce, it is expensive, and that there are other competing uses, not that superior solutions have been discovered based on their fundamental merits.

"It may have some value as a consumer good - somewhat surprisingly people like to attach it to their earlobes or nostrils or to hang it around their necks. I have always considered it a rather vulgar metal, made for the Saturday Night Fever crowd, all shiny and in-your-face, as opposed to the much classier silver, but de gustibus…"

Silver is indeed an attractive metal, and had been used for jewelry and coinage throughout history for its unique characteristics. Silver was the metal of the common man, and gold was the metal of kings because of its greater beauty and scarcity.

The garishness and lower class status of gold is of course reflected throughout history, in the funereal artifacts of the Pharoahs, the Ark of the Covenant, the mask of Agamemnon and the adornments of Helen of Troy, the exquisite beauty of the Emperors of China, and the treasure of the Aztecs. Perhaps Willem is merely used to the cheap 'bling' being sold in market stalls, and should occasionally shop on High Street for better goods.

"Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity. You will be familiar with fiat currency. Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender.

It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

The “let it be done” literal meaning of the Latin ‘fiat’ should be taken in the third sense given by the Online Dictionary: 1. official sanction; authoritative permission; 2. an arbitrary order or decree; 3. Chiefly literary any command, decision, or act of will that brings something about."

This is where Willem's tortured reasoning reaches a crescendo of nonsense. Firstly, we have already shown that gold has many industrial and decorative uses contrary to his misstatements, and has been valued throughout recorded history in its own right in diverse societies and cultures.

By his definition anything that is priced by the market is fiat. It is a broadening of the definition so as to make it completely useless, or a narrowing of the definition to a few 'essentials' by some unstated arbitrary measure so again to make it useless.

The definition of fiat with regard to an instrument of the state is perfectly well known, despite his attempt to distort it. The ruling authority makes a decree, and so let it be done based on that power. Willem seems to confuse a fiat currency with barter, or some traditional custom of value. What is customary is not 'fiat' but a popular convention ordinarily for fundamental reasons.

If a valuation is highly peculiar to a region and time it might be an eccentricity, like tulipmania or ladies fashions. But calling a mania a "fiat" degrades the language in an Orwellian manner, because one comes from the people and is popular, and the other from the authorities and is often embodied in the laws.

If something has universality, the likelihood is that it is well-founded on an essential reasonableness, satisfying some basic need and utility. People desire a store of value that is stable and reliable everywhere and anytime, and not subject to the vagaries of the local ruling elite. And the judgement of the history is that nothing fulfills that desire better than gold, or gold in combination with silver.

If a price is established by law without regard to the market, it is 'fiat.' That is the difference between a decision of the marketplace and a regulation from a ruling authority. No wonder English banking is in such a mess, if this is their conception of valuation. They can no longer see any substantial difference between the will of the people and the diktat of the state.

The best way to explain this perhaps is by example. Let us imagine that tomorrow young Tim of the US Treasury announces that the US government will no accept Federal Reserve notes in payment of legal debts, public or private, and that further the US was issuing a new currency called the amero for which Federal Reserve notes would be redeemed at 100 to 1, that is 100 FRNs for one amero.

What would the market price of Federal Reserve Notes around the world do in response to this? Is this outlandish? No it is remarkably common in the history of paper currencies. I witnessed this personally while in Moscow during the collapse of the Russian rouble in the 1990s, and it made a distinct impression.

And what if young Tim decreed tomorrow that the US would no longer accept gold for taxes or provide as payment for its debts? Oops, too late. Nixon did that in 1971. And gold is now at $1,100 per ounce versus about $45 then.

A fiat currency is an instrument of debt, a bond of zero maturity, an IOU. It has a counterparty risk, and is not sufficient in itself.

That, Willem, is what is meant by fiat, the contingency of value upon some official source. If it were possible let Willem and I go back in time to ancient China, or even Victorian England, he with his pockets filled with euros, and mine with Austrian gold philharmonics, and we will see whose definition of value stands the better.

Governments can effect the price of any commodity negatively, by force of law, but its value is not contingent on government backing per se, except in instance of subsidy, but based on the utilitarian decision of the marketplace. Governments do not force people to buy gold, except indirectly through reckless management of the national economy. They do often compel a people to perform their economic transactions in the official currency however, so that it may be taxed, directly by percent, or indirectly through inflation.

Or as George Bernard Shaw put the proposition, "You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold."

I don’t want to argue with a 6000-year old bubble. It may well be good for another 6000 years. Its value may go from $1,100 per fine ounce to $1,500 or $5,000 for all I know. But I would not invest more than a sliver of my wealth into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.

It is fortunate indeed that Willem does not wish to argue this point, because his proposition on this score smacks of mere petulance. In the words of financier Bernard Baruch, "Gold has worked down from Alexander's time... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory." And he is right, unless you are looking at history with very selective contortions.

There are also historical benchmarks for the value of gold, that being one ounce of gold for a man's suit of fine clothing that holds remarkably well. How then could anyone say that gold is in 'a six thousand year bubble?'

But why such an odd, almost hysterical essay now, with such an outlandish title unsupported by any data?

It is probably simply the rankling irritation that all statists and financial engineers feel when confronted by something that resists their control and manipulation. Or it may be related to some unfortunate decisions made by the Bank of England, or the Bundesbank, to enter into trades with the people's gold on the well-intentioned advice of their economists, a decision which is now coming back to haunt them, causing them to peer into an abyss of public anger.

Who can say. But there is a time of uncertainly in stores of wealth and currency coming. Below is a news article from earlier this year about a European economist named Buiter, who is predicting that the US dollar will collapse. That is because the US dollar is contingent on the actions of the Obama Administration, the Congress, and the Federal Reserve.

And gold is not, unless the US begins to emulate Herr Hitler. "Gold is not necessary. I have no interest in gold. We will build a solid state, without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That's the bastion of money."

And Willem, if you do not understand that, the principle of the contingency of fiat money, you understand nothing of economics. But I think you do understand it. Perhaps you are merely grumpy and out of sorts today, having eaten a bad sausage, with a case of dyspepsia. It does happen, off days and intemperate remarks, but not to eminent Financial Times columnists and distinguished professors when they wish to be heard on important matters.

It seems as though Mr. Buiter just doesn't like what gold is doing right now, rising in price, and the real story may lie in why he and the brotherhood of western central bankers are so concerned about it.

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K." Eddie George, Governor Bank of England, in a conversation with CEO of Lonmin, September 1999

Financial Times
Willem Buiter warns of massive dollar collapse
By Edmund Conway
5:34PM GMT 05 Jan 2009

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

"...Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. (I think it is related to a subsidy, a kind of droit de seigneur, granted to the dollar by the central banks as their reserve currency in lieu of a gold standard. And that is the regime that is collapsing with the overhang characteristic of a Ponzi scheme. - Jesse) However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise..."

Dr.Mishkin or How I Learned to Stop Worrying and Love the Bubble

Former Fed governor Fred Mishkin distinguishes between bad bubbles, that hurt banks, and good bubbles like the tech bubble, that just hurt investors and distort the economy.

Is the Fed creating a bubble in equities now? Probably.

Do they care, are they concerned? No, not according to ex Fed governor Fred Mishkin.

We find that there is an odd framing of the question, which seems rather binary. Either there is a bubble, or no recovery, because the Fed must tighten and risk a new recession.

There are other things the Fed and the Treasury might do to ecourage banks to lend, rather than to engage in market speculation in imitation of Goldman Sachs, the trading bank with no depositors or borrowers.

Here is why Fred Mishkin has learned to stop worrying and love irrational exuberance fueled by reckless monetary expansion and financial engineering.

There is also the little detail, by the way, of the kinship between the credit bubble, created by the Fed, in response to the collapse of the tech bubble, which was also created by the Fed. Fred seems to think the credit bubble had a virgin birth.

So, preserve your precious bodily fluids while you read this, and be on the lookout for economic preverts and their quantitative preversions.

Financial Times
Not all bubbles present a risk to the economy
By Frederic Mishkin
November 9 2009 20:08

There is increasing concern that we may be experiencing another round of asset-price bubbles that could pose great danger to the economy. Does this danger provide a case for the US Federal Reserve to exit from its zero-interest-rate policy sooner rather than later, as many commentators have suggested? The answer is no.

Are potential asset-price bubbles always dangerous? Asset-price bubbles can be separated into two categories. The first and dangerous category is one I call “a credit boom bubble”, in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues.

Eventually, the bubble bursts and asset prices collapse, leading to a reversal of the feedback loop. Loans go sour, the deleveraging begins, demand for the assets declines further and prices drop even more. The resulting loan losses and declines in asset prices erode the balance sheets at financial institutions, further diminishing credit and investment across a broad range of assets. The resulting deleveraging depresses business and household spending, which weakens economic activity and increases macroeconomic risk in credit markets. Indeed, this is what the recent crisis has been all about.

The second category of bubble, what I call the “pure irrational exuberance bubble”, is far less dangerous because it does not involve the cycle of leveraging against higher asset values. Without a credit boom, the bursting of the bubble does not cause the financial system to seize up and so does much less damage. For example, the bubble in technology stocks in the late 1990s was not fuelled by a feedback loop between bank lending and rising equity values; indeed, the bursting of the tech-stock bubble was not accompanied by a marked deterioration in bank balance sheets. This is one of the key reasons that the bursting of the bubble was followed by a relatively mild recession. Similarly, the bubble that burst in the stock market in 1987 did not put the financial system under great stress and the economy fared well in its aftermath.

Because the second category of bubble does not present the same dangers to the economy as a credit boom bubble, the case for tightening monetary policy to restrain a pure irrational exuberance bubble is much weaker. Asset-price bubbles of this type are hard to identify: after the fact is easy, but beforehand is not. (If policymakers were that smart, why aren’t they rich?) Tightening monetary policy to restrain a bubble that does not materialise will lead to much weaker economic growth than is warranted. Monetary policymakers, just like doctors, need to take a Hippocratic Oath to “do no harm”.

Nonetheless, if a bubble poses a sufficient danger to the economy as credit boom bubbles do, there might be a case for monetary policy to step in. However, there are also strong arguments against doing so, which is why there are active debates in academia and central banks about whether monetary policy should be used to restrain asset-price bubbles.

But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy.

Tightening monetary policy in the US or Europe to restrain a possible bubble makes no sense at the current juncture. The Fed decision to retain the language that the funds rate will be kept “exceptionally low” for an “extended period” makes sense given the tentativeness of the recovery, the enormous slack in the economy, current low inflation rates and stable inflation expectations. At this critical juncture, the Fed must not take its eye off the ball by focusing on possible asset-price bubbles that are not of the dangerous, credit boom variety.

Peak Oil: WhistleBlower at IEA Claims Oil Production Statistics Are Manipulated

Here's one for the peak oil crowd, and those who suspect that the US and others have been manipulating certain market information for their own purposes, to promote a hidden agenda, to manage public perception.

Skeptical as always for now, but let's see what happens with this story.

Guardian UK
Key oil figures were distorted by US pressure, says whistleblower
Terry Macalister
9 November 2009 21.30 GMT

Exclusive: Watchdog's estimates of reserves inflated says top official

The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.

In particular they question the prediction in the last World Economic Outlook, believed to be repeated again this year, that oil production can be raised from its current level of 83m barrels a day to 105m barrels. External critics have frequently argued that this cannot be substantiated by firm evidence and say the world has already passed its peak in oil production.

Now the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he added.

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.

The IEA acknowledges the importance of its own figures, boasting on its website: "The IEA governments and industry from all across the globe have come to rely on the World Energy Outlook to provide a consistent basis on which they can formulate policies and design business plans."

The British government, among others, always uses the IEA statistics rather than any of its own to argue that there is little threat to long-term oil supplies...

SP Futures Daily Chart and the Triumph of the Swill

It looks like the bulls want to take this squeeze up to the 1105 trendline, with six bull days under their belt since the tag on the lower trend line last week.

This rally is being accomplished on thin volumes, thick liquidity, and weak regulations dominated by trading programs, with obviously fabricated and highly overstated fundamental underpinnings.

As Lloyd Blankfein would characterize it, the Wall Street banks are just "doing God's work," or at least the work of some power and principality with a favorable inclination to greed, pride, and deception, if these masters of the universe were to acknowledge any power greater than themselves.

No doubt there are some good intentions in the government behind a desire to manage the markets higher. After all, a rising stock market is a sign of wealth and prosperity to the superficial elite based on their own personal portfolios. Especially if one ignores all the jobless, homeless, and suffering people being victimized in their highly exclusive empire of the ego.

But who can stop a people determined to be rich without productive labor, with a self-obsession capable of subordinating even heaven to their personal greed and vanity? This will end in an ocean of tears.

The banks must be restrained, and the financial system reformed, and balance restored to the economy, before there can be any sustained recovery.

Outlook for US Natural Gas Supplies and Demand

For now natural gas supplies in the US are above average, and the Energy Information Administration is forecasting a slightly warmer winter than last year in the US Midwest, and slightly colder in the West. The Midwest is the primary consuming region for natural gas and propane, with heating oil in the northeast.

There is some speculation this week that Hurricane Ida may enter the Gulf of Mexico, the first to do so for this remarkably light storm season, and speculators have been given some cheer in the oil and nat gas markets because of this.

Oil may be justified, but barring a selectively devastating storm, natural gas looks to be well supplied. This is the time of year in which we will typically look to place bull positions in the natural gas markets. So far that does not seem to be justified, but perhaps later, just on seasonal variance.

The energy bulls should hope for an abnormally cold winter in the US midwest. Their government does not think that they will get it.

"EIA projects average household expenditures for space-heating fuels to be $960 this winter (October 1 to March 31), a decrease of $84, or 8 percent, from last winter. This forecast principally reflects lower fuel prices, although expected slightly milder weather than last winter will also contribute to lower fuel use in many areas. The largest expenditure decreases are in households using natural gas and propane, projected at 12 and 14 percent, respectively. Projected electricity and heating oil expenditures decline by 2 percent (see EIA Short Term and Winter Fuels Outlook slideshow).

According to the National Oceanic and Atmospheric Administration’s (NOAA) most recent projection of heating degree-days, the Lower-48 States are forecast to be 1 percent warmer this winter compared with last winter and 1 percent milder than the 30-year average (1971-2000). However, heating degree-day projections vary widely between regions. For example, the Midwest, a major market for propane and natural gas, is projected to be about 4 percent warmer than last winter, while the West is projected to be about 4 percent colder.

EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $70 per barrel this winter (October-March), a $19 increase over last winter. The forecast for average WTI prices rises gradually to about $75 per barrel by December 2010 as U.S. and world economic conditions improve. EIA’s forecast assumes U.S. GDP grows by 1.8 percent in 2010 and world oil-consumption-weighted GDP grows by 2.6 percent.

Energy prices remain volatile, reflecting uncertainty, or risk, in the market. To measure this uncertainty, EIA is tracking futures prices and the market’s assessment of the range in which those futures prices might trade (see STEO Supplement: Energy Price Volatility and Forecast Uncertainty). The Outlook will now report confidence intervals around the New York Mercantile Exchange (NYMEX) crude oil and natural gas futures prices using a measure of risk derived from the NYMEX options markets known as “implied volatility.”

Natural gas inventories are expected to set a new record high at the end of this year’s injection season (October 31), reaching more than 3.8 trillion cubic feet (Tcf). The projected Henry Hub annual average spot price increases from $3.85 per thousand cubic feet (Mcf) in 2009 to $5.02 in 2010."

Source: US Energy Information Administration

This chart shows the divergence between the Natural Gas ETF and the Crude Oil ETF in the US. The reason for this is founded in the fundamentals.



This is merely a linear version of the first chart shown above, the annual build and depletion of natural gas inventories over time. This tends to illustrate the big swings that are possible, and over a longer timeframe.

Krugman Declares "Mission Accomplished," Maginot Line Completed

The triumph of financial engineering based on an analysis of the past.

Conscience of a Liberal
The story so far, in one picture
By Paul Krugman
November 3, 2009

World industrial production in the Great Depression and now:

Jesse here. This chart is a bit deceptive because it compares two periods of time based on the start of the crisis. It would be interesting to compare the two crises from the start of the Fed's expansion of the monetary base. As I recall, the early 20th century Fed did not react this way until 1931 and did so in two stages. Ok, Ben was quick out of the starting gate with a massive quantitative easing. Score one for the Fed. They are quick on the draw when it comes to monetization.

And there is little hazard that Ben will tighten prematurely out of fear of inflationary forces, having learned at least that lesson from what might prove to be a simplistic historical comparison.

It would be unjust not to note that the 1930's Fed struggled a bit with the difficulties of an entirely different type of commercial banking structure and regulatory structure, and the restraints of a gold standard.

But at the heart of it, the comparison may be irrelevant. The genuine challenge in this era of fiat currency will be to avoid the 'zombification' of the economy, the appearance of vitality with none of the self-sustaining growth.

It may be discovered that the key to coming out of a crisis permanently is not how quickly and dramatically one inflates the money supply, or even how long one maintains it, and how many stimulus programs one can create, but rather how quickly and capably a country can reform, can change the underlying structures that caused the problem in the first place.

Japan has been doing it slowly because of its embedded kereitsu structure and government bureaucracy supported by a de facto one party system under the LDP. In the 1930's the impetus for reform was overturned by a strict constructionist Supreme Court and an obstructionist Republican Congress. The story of our time might be the perils of regulatory and political capture.
Before this Administration declares "Mission Accomplished" and high fives its victorious recovery, they may wish to consider that they have done the obvious quickly in one dimension, but have done very little to change the dynamics which created the crisis in the first place, choosing instead to support the status quo to a fault, partly out of ignorance and to some extent because of a pervasive and endemic corruption of the political process.

There are three traits that make a nominal bounce in production fueled by a record expansion in the monetary base a success: sustainable growth without subsidy, sustainable growth without subsidy, and sustainable growth without subsidy. And this can only be achieved by changing the game, reforming what was wrong with the system in the first place, if this is what caused the crisis.

Our forecast is that Ben and Team Obama are failing badly because they are fighting the last war, in the almost classic style of incompetent generals who lost the early stages of the Second World War because they were using the game plan from the First. And plans for a Vichy-style government establishing l'état financière seem to be well underway, in a general surrender of the goverance of the nation to the econorati.

For all its flaws, at least the Clinton Administration used to conduct polls to see which way the public was leaning, and took its cues from that. The Obama Administration blatantly ignores public outrage, and takes its calls from Wall Street, literally, and forms its policy and laws around what they want, or at most, will grudgingly accept.

A Reader Asks "How Did 558,000 People Lose Their Jobs When Only 190,000 Jobs Were Lost?"

Here is an excerpt from today's Bureau of Labor Statistics Non-farm Payrolls report.

"The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm
payroll employment continued to decline (-190,000), the U.S. Bureau of Labor
Statistics reported today. The largest job losses over the month were in con-
struction, manufacturing, and retail trade.

Household Survey Data

In October, the number of unemployed persons increased by 558,000 to 15.7
million. The unemployment rate rose by 0.4 percentage point to 10.2 percent,
the highest rate since April 1983. Since the start of the recession in
December 2007, the number of unemployed persons has risen by 8.2 million,
and the unemployment rate has grown by 5.3 percentage points...

The civilian labor force participation rate was little changed over the month
at 65.1 percent. The employment-population ratio continued to decline in
October, falling to 58.5 percent."

An astute reader noticed that the BLS press release says that 190,000 jobs were lost from payroll employment, but the number of unemployed persons increased by 558,000. What's up with that?

The BLS report consists of two independent data samples. BLS has two monthly surveys that measure employment levels and trends: the Current Population Survey (CPS), also known as the household survey, and the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey.

There is the "Establishment Survey" which is based on responses from a sample of about 400,000 business establishments, about one-third of total nonfarm payroll employment. The headline payroll number, the job loss of 190,000, is based on this data.

Then there is the "Household Survey" which is a statistical survey of more than 50,000 households with regard to the employment circumstances of their members, which is then applied to the estimates of the US population to obtain the unemployment number. This survey was started in the 1950's and is conducted by the Census Bureau with the data being provided to BLS. It is from the household survey that more detailed information is obtained about employment statistics within population groups like gender and age, wages, and hours worked. It is this study that is responsible for the unemployment rate of 10.2%.



So which survey is correct? Neither. The truth is somewhere in between.

The most obvious reason for the discrepancy is that job creation in the US seems to be centered in the smaller business and the self-employed areas in recent years. These sectors are not polled by the BLS and their impact would only be obtained by the Household Survey's interviews.

The BLS does have a way to account for this called the "Birth Death Model" which is supposed to estimate jobs created by smaller businesses. That model is a bit of a joke actually since it almost always follows the same pattern of adding jobs, with two big corrections in January and July of each year when it will do the least damage to the headline number. Any model that does not reflect the job declines that started in 2007 can most certainly be called a statistical joke. Small business is not immune to business cycles.



The payroll survey for October will be revised several times in the short term, with each release of monthly data, and even larger revisions will be done periodically, every year or so, to correct the whole series and sometimes dramatically.

The household survey is not revised per se, but the data against which it is statistically evaluated, the census data of the population, will be revised and this will change the representation of the monthly samples. Let's hope that lowering of the population is only done by revision of the numbers, and not the more draconian things practiced throughout the earlier part of the 20th century.

There was a famous joke that the Household Survey and the Establishment Survey were synchronized under George W. Bush by getting rid of people, by lowering the estimates of the population that is, which is something his pappy did when he was the president. In the states there will be a new Census conducted in 2010 as you yanks may already know, so we will have to see if the census bureau's population estimates are lowball or highball.

So what are we to conclude from this?

First, that Wall Street and the government use the monthly jobs data as tools to achieve their particular ends, to justify programs, to buy and sell, to promote certain ideas and behaviours in the public. Secondly, people will believe what they wish to believe to suit their biases if they are not fact-based in their thinking.

The truth is more clearly demonstrated in the long term trends, the averaging of the data over time. It does not seem that the long term data is as manipulated as the Consumer Price Index information which has become a statistical disgrace with its hedonic adjustments.

So what do we do, the average person with too little time and too many other priorities, at times seemingly held captive by the flows of information from the mainstream media? As always, we must sift what the government and business tell us, with a keen eye for deception which is an unfortunate part of human nature especially when things are not going well and it is easy to rationalize many things, and do what seems to be the right thing based on our own judgement and a broader analysis of all the news.

Perspective: SP 500 Rally From the First Bottom of the Financial Crisis

Here is a longer term chart of the SP 500 showing the decline with the unfolding financial crisis, and the rally from the first major market bottom in equities. The rally has been a nearly perfect 50 percent retracement.



Here is the same view of the SP 500 but deflated by the Euro. This puts the rally into a slightly different perspective, which is not nearly so dramatic, about a 38.2% retracement which is a decent bounce.



Again the same chart of the SP 500, this time deflated by gold. The rally is stripped of the monetary inflation supplied by the Fed, and appears to more accurately reflect the 'jobless recovery.'

Warren Pollock: Game Change for Zombie Banks

Gasparino on "The Sellout"

RealClearMarkets has an interesting interview with Charlie Gasparino regarding his new book "The Sellout." There seems to be a consensus forming that something has gone seriously wrong with the US republic, and that the Obama administration is failing to address it, failing badly.

One has to wonder what it will take to give Washington a wakeup call. It seems that, when confronted by white collar crime, people lose all the perspective which they have when it comes to fighting crime and injustice. "It won't work, it can't be done, they will just come back and do it again."

Well, duh. If you make it worth their while, administer wristslap justice at worst, and let all the top dogs openly flout the law, of course they will be back. What the US needs is the reincarnation of Melvin Purvis with a minor in finance. I would put Eliot Spitzer in charge of the SEC with the right resources and let him rip through Wall Street like the wrath of God, and make the bankers howl.

But that probably won't happen, because there is too much dirt, too many scandals on both sides of the aisle for this crew to administer its oath to uphold the Constitution.

Here is an excerpt from the interview:

"I don't know when it's going to happen, but if history is any guide, it has to happen again--the "it" being another financial crash. Of course, it won't happen tomorrow or next week, or maybe not even two years from now. But when the memory of 2008 wears off, and mark my words it will wear off, excessive risk taking will be back in a form that evades all these alleged regulatory controls that have been established. Regulation can never cure the disease of excessive risk.

The only thing that can cure it is tough love--allowing firms to fail. That doesn't mean I wanted the Fed and the Treasury to walk away last year. That would have meant Armageddon. But they should have walked away before that, when the systemic risk was smaller and the damage would have been limited. 1998 would have been a great place to start. Let Long Term Capital Management fail; let Lehman, and as I show in my book, possibly Merrill to fail, because the trades were the most vulnerable to LTCM's bad bond market bets.

Instead, by arranging a bailout, and by using free money to juice up the markets, policy makers emboldened Wall Street to take even more risk. That's what they did then, and that's what I fear is happening all over again...

Now I'm not in the Goldman is the center of all evil camp. But I know a lot of really smart people who believe that Goldman's bankers and traders virtually control the federal government in order to advance their own notorious agenda.

In fact, as I show in The Sellout, there were far worse players whose risk taking led to last year's meltdown, starting with Merrill Lynch and Citigroup. They were equally powerful from a policy making standpoint.

Remember, after Robert Rubin fought to end Glass-Steagall's separation of investment and commercial banking, he didn't go back to his old firm, Goldman Sachs, he went to work for the firm that benefited the most from the law's demise, Citigroup.

But Goldman in many ways crystallizes all that is wrong with the financial bailout, started by the Bush Administration, but carried on and expanded by Obama's. Goldman has been declared a bank, not much different than the old Bailey Building and Loan, and yet they don't take deposits or offer checking accounts. So what do they do? They trade, and they are trading as a federally protected bank, meaning they get to borrow at cheaper rates and they are Too Big To Fail."

Read the full interview here.

Tomorrow's Non-Farm Payrolls Consensus of -175,000 Looks "Do-able"

Tomorrow the Bureau of Labor Statistics will be reporting its October non-farm payrolls number. The consensus of economists is for a job loss of only 175,000 which is an improvement over the prior month loss, but more importantly maintains a steady uptrend as shown in the chart below.



The BLS almost always revises the prior two months, in this case August and September. They tend to 'borrow' from good results and smooth out the trend, or at least they did under the Bush Administration. We will have to wait and see what happens.

The BLS will also have their Birth-Death Model at their backs helping to lift the number with a projected 100k imaginary jobs.



The BLS number will further have the wind at its back because this is a month which the actual number traditionally comes in high, and is seasonally adjusted lower for the 'headline number.'



The good news is that the 12 month moving average of jobs is starting to show a bottoming process IF this number comes in as expected.



We can be sure that the government is looking over these results, keenly. Lyndon Johnson famously pre-approved the number before its release, often sending it back for revision when he did not care for the implied headlines.

We cannot say if that practice still exists, or is handled by lower level functionaries on the Council of Economic Advisors. Who knows, it might even be a relatively honest number by Washington standards.

Watch the Birth Death model and the revisions to September and August in particular. If they 'borrow forward' from August this will be a sign of statistical manipulation in our minds at least.

We do have an open mind, and assume that an improvement in job losses is possible, even likely perhaps. If one throws several trillion dollars at a problem in a short timeframe some result is likely to be produced for it, although in this case it will not most likely last without some fundamental reforms and restructuring.

And it goes without saying that if the number misses by noticeable degree, with all this going for it, then any talk of even a short term recovery is placed on hold.

Governments lie, and people of privilege lie and cheat readily when their results do not match their expectations, on their taxes, in their relationships, in school, at work, all most of all to themselves.

Some of them 'bend the rules' so well that they can go through months without more than one or two losing days of trading in volatile markets, in defiance of all probability and the principle of a symmetrical dissemination of information.

NAV Premiums of Certain Precious Metal Funds and ETFs

Note: the way I use this information is not so much to compare the premiums with each other, although there are some relationships there and significant deviations are of interest. Each of them is different from the others. CEF and GTU are funds holding physical gold and/or silver, and the amounts of metal they hold varies infrequently in well advertised step-wise changes.

GLD and SLV are ETFs, somewhat artificial constructs, in which the amount of metal they hold varies considerably, and intends to track the relationship with spot prices on a somewhat fixed basis.

Rather it serves to compare with data on the premiums of the same fund or ETF over time. One would do this by using the subject category at the bottom of this post, or perhaps doing it for yourself. The premiums expand and contract, excepting GLD and SLV which are control stable, being largely a discount for a management fee. A significant deviation there would be possible evidence of shorting or a paired trade.

How Can You Tell When Gold Is In a Bubble?

When the junior miners start showing these kinds of returns, you might be in a bubble.

We're nowhere near that point yet.

Foreign Holdings of US Dollar Assets

Roughly analagous to Eurodollars, although it is not clear how much if any of the central bank reserves are actually captured here in these reports by BIS reporting commercial banks, especially in China and the non-European countries. Certainly the NY Fed Custodial Accounts for Foreign Central Banks show no decline whatsoever from the long term trend of accumulation to support their mercantilism and currency pegs.



But the takeway from this chart is that a long term trend of dollar accumulation was broken, and rather painfully, in the deflating of the Wall Street financial assets fraud.

One might not expect the Europeans and Asians to accept new financial instruments in dollars quite so readily. The US seems intent on maintaining a few mega-banks to serve as "competitive" instruments of national policy on the world financial stage.

They may find that maintaining the banks and their particular weapons of financial mass destruction may be just as costly as 700 military bases in diverse locations. Such are the burdens of empire.

Long Term Weekly Gold Chart Targets 1275

Now that gold seems to have successfully broken out from its continuation pattern (ascending triangle or inverse H&S) we should be able to chart its targets more precisely than the chart from 24 September that at least successfully projected the breakout.

If there is a major liquidation event, such as an equity market dislocation, gold will likely be hit as well, but will provide an exceptional buying opportunity and would historically rebound more sharply than equities and most other investments.

As always, this is a forecast with some probablities of success, rather than a prediction.

Basically, the ascending triangle calls out 1275 and an inverse H&S targets 1300ish. A confirmed breakdown below 1000 deactivates the formations. We will know more about the first pullback when we see how far this current leg goes. It has moved much more quickly so far than most have imagined, but the short term trend is quite apparent on the chart.

US Dollar Very Long Term Chart

Here is an update of the US Dollar (DX) Very Long Term chart last shown on 3 April 2009 when the Eurodollar Squeeze was still abating.

We do not see any reason to change the longer term targets based on what appears to be a confirmation of the continuing decline.



The reasons for this decline are obvious, but so many miss this that we have to wonder what people are thinking. Despite the credit writedowns and even a potential unwinding of the dollar carry trade which we think is a bit overblown, as the demand for dollars in bank lending is slack, most analysts are missing the bigger picture of a huge overhang of eurodollars that are becoming increasingly less useful to foreign holders, especially if the power of the petrodollar declines.

There is a potential double bottom to be made at 71, with a possible target in the higher 80's based on the charts. The fundamental scenario we would see is a significant equity market dislocation and/or an exogenous geopolitical event that caused another artificial short term demand for dollars and the T bills. Currency dollars are, after all, sovereign debt of zero duration and in any panic there is a rush to the short end of the curve, to the point of accepting some negative rates of return for the safety of capital.

But after that event, the decline of the dollar will gain again in momentum lower unless there is a profound systemic reform and restructuring of the federal budget deficits. Even clever frauds can work only so many times, and there is nothing particularly clever or sophisticated about Wall Street's latest antics, excepting of course their size and their audacity which the average mind cannot well grasp.

India Puts Its Weight Behind US Dollar Alternatives

Here is an alternative index of the US dollar from the Federal Reserve that is much broader than the DX in its constituent components. It is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.

It shows the same Eurodollar squeeze and subsequent decline. As a point of order, the term eurodollar is a bit misleading from its historical roots. It basically refers to any US dollars being held in other than domestic banks, and not just in Europe. The TWEXB is not the same timeframe as the DX because it is a more recent construct.

Ladies and Gentlemen, the United States of America Is Insolvent

"In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our readers this month: the United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations. This isn’t official yet, and we don’t know when the market will react to it, but there is no longer any doubt about the extent of their trajectory. There simply isn’t enough taxing power, value creation or outside capital willing to support its egregious spending...

The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars. How on earth does anyone expect them to raise this capital? As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 - far short of what the US government required. The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61% in order to balance the 2010 fiscal budget. Given that State government income tax revenues were down 27.5% in the second quarter, the US government will be lucky just to maintain its current level of tax revenue, let alone increase it.

The bottom line is that there is serious cause for concern here – and don’t be fooled into thinking this crisis will fix itself when (and if) the economy recovers. Just how bad is it?..." Sprott Asset Management

Just a reminder, in case you had forgotten in all the excitement of a bull market rally in US equities and a reasonably good baseball World Series.

Ladies and Gentlemen, the United States Is Insolvent, 29 May 2009

The States racked up some serious debt in keeping the world safe for democracy in the Second World War. On a percentage basis, it has recently spent a significant amount keeping its financial sector safe from productive effort and honest labour. They will raid the Treasury, take their fill, and then compel the government to confiscate the savings of a generation by defaulting on its obligations, its sovereign debt.

Reserve Bank of India Buys 200 Tonnes of the IMF's Gold

An apertif for the Indian central bank, and barely a nibble for dollar heavy China.

"You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold." George Bernard Shaw

LiveMint WSJ
RBI to buy 200 tonnes of IMF gold
By Tamal Bandyopadhyay and Anup Roy
Mon, Nov 2 2009. 11:15 PM IST

Decision to strengthen its gold reserves follows similar moves by central banks of some other countries.

Mumbai: The Reserve Bank of India, or RBI, is buying 200 tonnes of gold from the International Monetary Fund (IMF), nearly half of what the fund plans to sell.

In 1991, when India faced its worst ever balance of payment crisis, the country had to pledge 67 tonnes of gold to Union Bank of Switzerland and Bank of England to raise $605 million (Rs2,843.5 crore today) to shore up its dwindling foreign exchange reserves, which were then barely enough to buy two weeks of imports. India’s foreign exchange reserves were at $1.2 billion in January 1991 and by June, they were depleted by half. Currently, the Indian central bank’s foreign exchange reserves stand at $285.5 billion.

RBI’s decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves. Among them are the central banks of China, Russia and a few countries in the European Union. (also known as 'the barbarians' - Jesse)

In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.

Compared with this, India’s central bank did not add anything to its gold reserves in the last one year, according to Bloomberg data.

In fact, the share of gold in India’s total reserves has dwindled over the decade.

In March 1994, the share of gold in the total reserves of the country was 20.86%; by the end of June 2009, gold constituted only 3.7% of the total reserves.

An IMF spokesperson in India declined to comment on this development.

RBI’s foreign currency assets consist mainly of sovereign bonds, mainly US treasurys. So, buying more gold will help the Indian central bank diversify its assets.

“Gold as a proportion of our reserves is relatively small,” said R.H. Patil, chairman of National Securities Depository Ltd and Clearing Corp. of India Ltd.

“Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings,” Patil said.

RBI’s foreign exchange reserves consist of foreign currency assets, gold, special drawing rights (SDR)—an international reserve currency floated by IMF—and RBI funds kept with IMF.

Out of RBI’s $285.5 billion foreign exchange reserves, foreign currency assets account for the most—$268.3 billion—followed by gold ($10.3 billion), SDR ($5,267 million) and reserve position in the IMF ($1,589 million).

According to RBI’s latest annual report, the foreign currency assets consisting of foreign securities declined by Rs81,010.25 crore from Rs12.98 trillion on 30 June 2008 to Rs12.17 trillion on 30 June 2009 mainly due to net sales of dollars in the domestic foreign exchange market.

At the current market value of $1,054 an ounce, or per 28.5g, RBI would need to spend about $7.4 billion to buy 200 tonnes of gold. With this, its gold reserve will rise to $17.716 billion, or roughly 6.20% of the total reserves.

IMF in September had announced that it wanted to sell 403 tonnes of its gold reserves, or one-eighth of its total holdings, to boost its finances on a long-term basis and to generate money to raise lending to needy nations. Under the concessional lending facility, IMF will lend at zero interest through end-2011 for all low-income members to help them tackle the impact of the financial crisis that rocked the world in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc.

A committee set up by a group of central banks overseeing the gold sales by the IMF has allowed the fund to sell 400 tonnes of its gold annually and 2,000 tonnes in total during the five years starting 27 September.

According to a report by the Associated Press dated 20 September, India, along with China and Russia, had evinced interest in buying IMF-held gold.

At a total holding of 103.4 million ounces, or 3,217 tonnes, IMF is the third largest official holder of gold after the US and Germany.

IMF’s total holding at historical price is valued at about $9.2 billion on its balance sheet. At market prices, as of 28 August, the fund’s total gold holdings were worth $98.8 billion.

Ten Things Not to Like About the US Government Policy Actions Known as "The Bailouts"

Thanks to Cafe patron Malcolm McMichael

1. The Treasury and the Fed rewarded some aggressive risk takers and failing business models at the expense of those who followed sound business practices. Those who followed conservative practices have been penalized twice; first on the way up and again on the way down. Those companies that did fail appear to have been 'targeted' by insiders.

2. Much of the process was done in secret with minimal transparency, debate, or disclosure by people who have obvious conflicts of interest.

3. The stated objectives of freeing up credit for the real economy and stemming foreclosures have not been achieved.

4. Trillions in taxpayer money were provided with few strings attached and at minimal stipulated rates of return. Furthermore, several of these institutions are using their taxpayer money to lobby against reform and award themselves pre-crisis salaries and record bonuses.

5. Bailout actions were arbitrary, inconsistent, ad hoc, and without an apparent guiding principles of justice.

6. The banking, rating, “insurance”, and regulatory systems have not been reformed and the perpetrators of the collapse and their enablers are remain in charge, now overseeing the “recovery.”

7. Criminal investigations are minimal; few people are facing indictments or even serious regulatory scrutiny for actions that are highly questionable. Official finds are whitewashes.

8. Regulations, regulatory structures, and other safeguards were implemented, revised or swept aside in chaotic and reckless fashion. [discount window participation and collateral, short selling rules, bank holding companies, mark-to-market]

9. The insider advantages, speculative excess, and extreme leveraging of the perpetrators has been allowed to continue; in fact, allowed to expand. There is a taint of insider trading and corruption that permeates the process.

10. Wall Street is bailed out; Main Street is not. Efforts to subsidize the incomes and balance sheets of failing firms have been massive and were implemented with minimal debate, requirements, or oversight; efforts to shore up taxpayer incomes and balance sheets have been comparatively minimal, subject to extensive debate and tinkering, highly selective, and incomplete.

Market Perspective from the Daily Charts

Even if one does not use technical analysis, it is a good idea to take a look at a chart now and then to maintain one's bearings in a market. It is a natural tendency to get caught up in the short term movements, to be affected by the hype and hysteria from the bulls and the bears, and to lose the bigger picture and the general intermediate trends.

It appears to us that we are seeing a lifting of US equities in response to a government sponsored program of reflation using monetary stimulus and creation.

The dollar is showing a commensurate decline as we might expect, since the increase in equities (and the long end of the curve) is being accomplished through dollar dilution.

Déjà vu?

They can try.

Obama's Economic Policy Has Doomed the US to Stagnation - Or Worse

This was the very moment of Obama's failure, when he allowed Summers, Geithner and Bernanke to establish the principle of "Too Big To Fail" and set up a financial oligarchy at the expense of taxpayers. We would have expected this out of the Treasury under Hank Paulson, but to see this kind of policy error favoring Wall Street over the US taxpayers from a government elected on the promise of reform is inexcusable, a disgrace.

Be Prepared For the Worst - Ron Paul

Bloomberg
Stiglitz Says U.S. Is Paying for Failure to Nationalize Banks

Nov. 2 (Bloomberg) -- Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the U.S. government’s failure to nationalize banks during the financial crisis.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

Stiglitz has stuck with his view even after the U.S. economy returned to growth in the third quarter and as banks’ share prices climbed this year.

U.S. Treasury Secretary Timothy Geithner, appearing yesterday on NBC’s “Meet the Press” program, said the country’s economic recovery hinges in part on banks taking more risk and restoring the flow of credit to businesses.

“The big risk we face now is that banks are going to overcorrect and not take enough risk,” Geithner said. “We need them to take a chance again on the American economy. That’s going to be important to recovery.”

President Barack Obama said on Oct. 24 that the nation’s lenders, supported by taxpayers in the crisis, need to “fulfill their responsibility” by lending to small businesses still struggling to get credit.

Companies such as Citigroup Inc. and Bank of America Corp. benefited from a $700 billion taxpayer-funded bailout package last year. In contrast, Obama said that too many small businesses are still short of money, adding that his administration will “take every appropriate step” to encourage banks to lend.

Bank Lending

“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse,” Stiglitz said. “What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”

While the U.S. economy grew at a 3.5 percent annual rate in the third quarter, the first expansion in more than a year, the Columbia University economist said the recession is “nowhere near” its end, citing rising unemployment and weak demand.

The U.S. government plans to alter the way that a similar rescue would be handled in the future. Draft legislation proposes that banks, hedge funds and other financial firms holding more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system. (And it is an inherently unfair plan that creates even additional moral hazard by penalizing sound banking by forcing it to pay for reckless bank management. - Jesse)

Citigroup and Bank of America shares have quadrupled from this year’s lows in March.

Nine More Banks Fail with CIT a Packaged Bankruptcy While Gold Shines in a Jobless Recovery

There was tension-driven selling in the markets today despite the 'good news' in the headline economic numbers. The markets are on edge ahead of the ADP and BLS jobs numbers next week. The much touted theory of a 'jobless recovery' is started to show some big holes in credibility, as well it should.

Jobless Recovery

A jobless recovery is nothing more than a euphemism for a monetary asset bubble presenting an ongoing systemic moral hazard.

Yes, jobs growth lags GDP in the early stages, everyone knows this. A second year econ student might cite Okun's Law, although it is better called Okun's observation, to show that lag, but it is not relevant to this topic. Beyond early stage lags in the typical postwar recession, a business cycle contraction, what is meant by the jobless recovery is the post tech bubble recovery of 2001-5 wherein jobs growth lagged economic growth in a way we have not seen after any postwar recession, with the median wage never recovering. "Jobless recovery" is a relatively recent phenomenon in the economic lexicon, much younger than 'stagflation' which was thought highly unlikely if not impossible by economists based on their theories, until it happened.

It was the housing bubble and an explosion in unproductive financial activity crafted by the Fed and the Wall Street banks that provided the appearance of economic vitality in 2001-7. It was no genuine recovery despite the nominal GDP growth. It indicates a need to deflate the growth numbers more intelligently, if not more honestly, and future economists are likely to 'discover' this, although John Williams of Shadowstats has done a good job of demonstrating the distortions that have crept into US economic statistics. The tech bubble was perhaps an unfortunate response to the Asian currency crisis and fears of Y2K. What was done to promote recovery from the tech collapse and create the housing and derivatives credit bubble was pre-meditated and criminal.

The current state of economics is most remarkable for its arrogant complacency in the face of two failed bubbles, a near systemic failure, a pseudo-scientific perversion of mathematics exposed, and an incredible capacity for spin and self-delusion. The people wish to believe, and Wall Street and the government economists are all too willing to tell them whatever they wish to hear, for a variety of motives. And there is an army of salesmen and lobbyists and econo-whores touting this fraud around the clock.



The Failure of Financial Engineering

The next bubble should provide the coup de grâce when it fails, although the fraudsters might try and spin ten years of a stagflationary economy as 'the new normal.'

There are good reasons for this failure of American "monetary capitalism," and it has to do with an oversized financial sector and a surplus of white collar crime that both distort and drain the productive economy. The current approach is to pump money into a failed system without attempting to reform it, to fix its fundamental flaws, to make an honest accounting of the results. The result are serial bubbles and the foundation for long duration zombie economy with a grinding stagflation that may morph into a currency crisis and the fall and reissuance of the dollar, as we saw with the Russian rouble. It will stretch the political fabric of the US to the breaking point. This is how oligarchies and their empires fall.

CIT Staggers Into Bankruptcy

Trader confidence was shaken by more indications that business lender CIT will declare a preplanned bankruptcy next week.

Approaching Crash in Commercial Real Estate

Also roiling the markets was a shocking warning by billionaire Wilbur Ross of an approaching meltdown in the Commercial Real Estate market which has been anticipated and warned about by non-shill market analysts.

Gold Holds Steady

Gold showed a remarkable resilience today against determined short selling in the paper Comex markets. Here is a decent summary of the case that the gold bulls have been making, in addition to the standard observations about dollar weakness. Gold Bullion Market Reaching the Breaking Point

Bank Failures Hit 115

Meanwhile, nine more commercial banks rolled over this week. Calculated Risk reports that the unofficial FDIC list of problem US banks now numbers 500.

Here is the list from FDIC of all Official US Bank Failures since 2000.

All of the nine banks were taken over by the US Bank National Association (US Bancorp), and were part of the FBOP company in Oak Park, Illinois, one of the largest privately held bank holding companies in the US. It is reported that all nine were heavily invested in real estate lending.

California National is the fourth largest bank failure this year. It lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, in addition to overwhelming losses in California real estate.

North Houston Bank, Houston, TX, with approximately $326.2 million in assets and approximately $308.0 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Madisonville State Bank, Madisonville, TX, with approximately $256.7 million in assets and approximately $225.2 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Citizens National Bank, Teague, TX, with approximately $118.2 million in assets and approximately $97.7 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Park National Bank, Chicago, IL, with approximately $4.7 billion in assets and approximately $3.7 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Pacific National Bank, San Francisco, CA, with approximately $2.3 billion in assets and approximately $1.8 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

California National Bank, Los Angeles, CA, with approximately $7.8 billion in assets and approximately $6.2 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

San Diego National Bank, San Diego, CA, with approximately $3.6 billion in assets and approximately $2.9 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Community Bank of Lemont, Lemont, IL, with approximately $81.8 million in assets and approximately $81.2 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Bank USA, National Association, Phoenix, AZ, with approximately $212.8 million in assets and approximately $117.1 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Healthcare and Financial Reform: Don't Have a Cow, Man

Change we need. But who is we?

We the people, or we the campaign contributors and corporate power brokers?

"I never thought it was humanly possible, but this both sucks and blows.”

He straddles all, so pleases none,
And spread too thin, gets nothing done.
Aye, carumba.

Congress Ignores and Then Censors Only Witness Critical of Derivatives Banking Reform