The Unreasoning Antipathy for the Bull Market in Gold Deconstructed as Cognitive Dissonance

"Foolishness is my theme, let satire be my song." George Gordon, Lord Byron

The comments in the news today following the suggestion that the US Dollar is not eternal, and that gold might be rising in price because of increased demand and changing economic climate and taste, might be humorous, if not uproariously comical, if the underlying subject was not of such potentially serious consequence to the savings of many.

For example, a major gold bullion site, that seems to be permanently bearish on gold through its house commentator, has even added a new chart to its main site that purports to show that the rising price of gold is just a dollar doppelganger, not real, and not a bull market. Given that said analyst has been bearish on gold for the last several hundreds of dollars, one has to ask, "Is he talking someone's book, or just feeling sheepish?"

But, trying to accept that these things as genuine and sincere expressions of thoughtful analysis, in the face of overwhelming evidence to the contrary, here is some speculation on why the concept that the dollar might no longer be the focus of Creation, and could be replaced by something that includes gold, proves to be so disturbing to the point of mania in some noted and otherwise presumably public figures in the face of four years of steady price increases and an unmistakable upward trend.

We do not have an issue with someone who thinks that some future outcome might diverge from what we think might happen, since it is all about probabilites. But it is odd when people choose to continually deny what IS happening, and keep rationalizing that it is not happening, cannot be happening, and is merely some illusion because it does not fit in with their firmly held belief. That denial seems a bit irrational, coming from those we suppose are ordinarily rational and otherwise grounded in reality.

Prechter, Shilling, and the Ideologically Predisposed Deflationists

Those who have decided what *should* be happening, and are not pleased that reality is not cooperating with their ideological predispostions. "I reject your reality, and substitute my own." See 'Flat Earth Society'

"An early version of cognitive dissonance theory appeared in Leon Festinger's 1956 book, When Prophecy Fails.

This book gave an inside account of belief persistence in members of a UFO doomsday cult, and documented the increased proselytization they exhibited after the leader's "end of the world" prophecy failed to come true.

The prediction of the Earth's destruction, supposedly sent by aliens to the leader of the group, became a disconfirmed expectancy that caused dissonance between the cognitions, "the world is going to end" and "the world did not end."

Although some members abandoned the group when the prophecy failed, most of the members lessened their dissonance by accepting a new belief, that the planet was spared because of the faith of the group." Wikipedia

Market Analysts and Financial Newspeople Syndrome

Sometimes people who have chosen a particular path, profession, or investment strategy will strenuously reject anything that suggests that their choice might have been incorrect, or threatens their status quo, with sometimes humourous results. Similar to 'pampered child being denied their candy and rejecting that possibility' syndrome.

"In a different type of experiment conducted by Jack Brehm, 225 female students rated a series of common appliances and were then allowed to choose one of two appliances to take home as a gift.

A second round of ratings showed that the participants increased their ratings of the item they chose, and lowered their ratings of the rejected item. This can be explained in terms of cognitive dissonance. When making a difficult decision, there are always aspects of the rejected choice that one finds appealing and these features are dissonant with choosing something else.

In other words, the cognition, "I chose X" is dissonant with the cognition, "There are some things better about Y." More recent research has found similar results in four-year-old children (Bloomberg and CNBC news anchors and commentators) and capuchin monkeys (Several prominent metals analysts and chief market strategists)." Wikipedia

But we would have to admit that at the end of the day:

"No man really becomes a fool until he stops asking questions." Charles Steinmetz

Peak Employment

The Labor Participation Rate is the total number of people employed expressed as a percentage of the total non-institutionalized working force over the age of 16.

It is a good number to watch, because it is harder to play games with it, as the government tends to do with the unemployment rate, making people disappear when their benefits expire.

Granted, it is not perfect, because it does not account for those who are underemployed, working part time or at a minimum wage job far below their aspirations and capabilities.

Nevertheless, we are seeing a flatness in the employment figures that is pronounced.



This might not necessarily be a bad thing, if the average real wage was rising sufficiently so that one might put forward the hypothesis that people are not working because they do not need to work, and their disposable income is sufficient for their needs.

But this is not the case in the USA.

A painful adjustment to free trade and globalization? Sending your working class against nations that are executing aggressive industrial policies is like sending troops marching upright in ordered ranks into heavily entrenched machine gun fire.

Most would feel better if that pain were more equally and equitably distributed. The wealthy elite often like to use a crisis to send a nation to war at times such as these, to create work and control the population. In WWI there was also a vigorous pandemic to help cull the herd as the eugenicists used to say. Good for employment, perception control, and of course profits.

And so it is, that the generals, besotted with the favors of industrialists, and the institutionalized thinking of craven staff, are fighting the last war once again, and losing badly.

So Why Is the Stock Market Going HIgher?

Q: But Jesse, if things are so bad, why is the stock market going up?

A: There is no doubt that equity markets, when judged in nominal terms, can do amazing things when the Fed spikes the punch bowl with grain liquor. Especially when market regulation has been weakened by decades of mistaken ideology and corruption.

The German stock market during the Weimar Crack Up Boom showed some remarkable gains, and was actually a lifesaver for many investors, for a time.

Bull markets are generally corrosive of the average intellect. That is why statists with something to hide love them so much. No matter what era, people willingly surrender their common sense to the bubble, if only for pragmatic reasons.

Those actively playing the deflation trade, short stocks and commodities, are getting killed for now. They are obviously early. The real deflation in paper asset prices will eventually come as the bust follows boom, but more selectively than most imagine, except temporarily if there is a genuine crash and not a long slow decline. Some assets will soar even higher as the dollar devaluation gains momementum and not retrace significantly as the dollar collapses in slow motion.

As Ludwig von Mises noted:

"This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to their altered money relation

There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.

These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy...

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."

Until then, be aware that the paper chase is on, backed by the full faith and credit, and desperate lies, of some very frightened, but still very powerful and increasingly ruthless, men. There is a good case to be made that the financial sector, led by Wall Street, hijacked the US productive economy and bought off the politicians and has been managing it for their own benefit most notabley since. This is not the first time, and it will most likely not be the last.

Try to stay out of their way as they thrash about, looking for something to fill the hollowness of their being, more fuel for the bonfires of the profane.

Bloodbath Coming in the US Banking Sector

The stock market rallied today because of a slightly better than expected ISM Services number. Considering how much 'stimulus' the government has given to the FIRE sector it should be doing slightly better than the real economy.

Another reason the market rallied in New York today was a bullish call on the banking sector by a Goldman Sachs analyst.

Here is a somewhat different analysis of the situation by Chris Whalen of Institutional Risk Analytics. Chris believes that he sees strong evidence that "the fourth quarter in the banking industry is going to be a bloodbath."

Astounded by Goldman's Upgrade Banks Heading Into Storm Says Whalen

Even if Goldman is wrong, and lots of investors take their advice and get hurt buying into banking stocks before an approaching "bloodbath," they seem to have it covered, at least for themselves, with plenty of derivatives delivering hefty profits into their own pockets should those banks fail.

And they could be right. The government might be preparing fresh tranches of bailout money and there could be more toxic assets coming from off the banks' off-balance-sheets to yours, via the Fed.

Place your bets. Or better yet, save your money, and don't.

Yahoo Finance
The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says
by Aaron Task
Oct 05, 2009 01:49pm EDT

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.

But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally.

"Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign."

The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit."

The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn't yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)

"Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath," says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.

"When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring," Whalen says.

In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other "prophets of the apocalypse" who've once again been raising red flags in recent days.

China May Lead Coalition of Nations to Topple the US Petrodollar

It does make sense that this would happen, and many including ourselves have been forecasting this outcome as a viable trigger for a significant, but orderly, dollar devaluation.

The US has violated the premise under which the Dollar served as the world's reserve currency. As Alan Greenspan himself said, the US Dollar regime worked because it was managed as though it was still under an external monetary standard, mimicking the rigor of a hard currency while maintaining a flexibility for monetary policy adjustment. We questioned the veracity of that claim when he made it, but it was the appearance, if not the reality, of responsibility and discipline that made things work for the monetary wizards.

Ironically enough, the closet goldbug Mr. Greenspan shattered that discipline with a gearing up of financial engineering in response to economic and trading crises starting with 1987 and reaching higher notes with LTCM and the Asian currency crisis.

China devalued the yuan against the dollar, and was able to promote an aggressive program of industrialization through multinationals like Walmart who desired cheap labor. The Chinese were able to persuade Bill Clinton and then George Bush to grant them favored nation trading status, without the condition of a freely traded currency. This allowed China to import manufacturing jobs, and made the US politicians and financiers happy with their personal donations and profits.

The dogs of war were loosed by the Fed in 2002 with a remarkably reckless expansion of debt through over easy interest rates, with an explosion of fraudulently rated US dollar financial assets from an Anglo-American banking system grown utterly corrupt and in full bloom of a credit bubble.

Bernanke has taken the dollar into its endgame, while insiders grab fistfuls of dollars and quietly sell their financial assets behind the scenes during this recent market rally. Obama and his team are either corrupt or incompetent. The same can be said of his two predecessors, at least.

"The capitalists will sell us the rope with which we will hang them."
Vladimir Ilyich Lenin

However this plays out over the next nine years, it will be history in the making, and interesting to say the least. It will be neither straightforward, nor easy, nor transparent to the public. But it seems inevitable that the days of Empire based on dollars backed by oil and global military reach are over and gone-- until the next time.

The Independent UK
The demise of the dollar
By Robert Fisk
Tuesday, 6 October 2009

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar." (Look for the NWO to start making a stronger play to control the EU - Jesse)

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Let Freedom Wane: The Fed's Role as Regulator and Obama's Failure to Reform

The proposal put forward by the Obama Economic Team to expand the purview of the Federal Reserve as a regulator, perhaps even THE regulator, was always troubling for several reasons.

1. The Fed is in fact not a government institution, but owned by private and corporate banking interests. The failure of self-regulation and regulators who have been 'captured' by the corporations they regulate is one of the great lessons of this crisis.

2. The Fed is notoriously opaque, with the occasional gesture towards transparency, and is often resistant to releasing information to the public in a timely manner, claiming a sort of 'executive privilege.' The Fed is and should remain independent but accountable on review. This precludes them from acting fully and routinely as a government agency responsible to the voters for all of their actions.

3. The Federal Reserve of NY often acts as a member of the 'banking club' with very heavy ties to Wall Street. The objective of financial reform should be to insulate regulators from undue influence by the organizations which they regulate, and more influenced by the law and the public good first and foremost. This is a basic principle of the regulatory process. One cannot successfully regulate their peers when the tough decisions have to be made to uphold justice and expose corruption and conflicts of interest.

This latest incident with Goldman Sachs merely serves to illustrate the too often unilateral decision-making by the Fed in an ad hoc manner, without sufficient explanation.

What the United States needs to reform its financial system is a group of Untouchables who are not on the payroll of Wall Street, or regular participants in the revolving door between government and the industry it regulates. The failure to create this effective reform, and instead gravitate toward ineffective consolidation in one of the key actors in the failure of the system is an error that is as fundamental and basic as one can imagine. It strains credibility that this could merely the result of inexperience.

It was the appointment of Larry Summers that first put us off the Obama 'reform' message. Larry Summers is a holdover from the same team that brought us some of the worst Federal Reserve policy decisions and interference in the regulatory process ever seen.

The Administration needs to convert its vision into action, and stop playing to the Wall Street lobby which created and is still benefiting from this crisis. If that requires replacing the Chief of Staff, Rahm Emmanuel, who is a heavy recipient of Wall Street donations, then so be it.

Whoever is promoting the Fed as uber-regulator within the Obama Administration should be fired, immediately. We hear it is Larry Summers, and this sounds like the politically tone-deaf, impractical, arrogant, and conflicted solution which Larry or Rahm might promote.

Can you imagine what our crisis would have been like if Alan Greenspan had even more power, more control over the markets?

Obama, quite frankly, needs to demonstrate that he is a man of integrity and principled action, vision that is not confined to oratory. He must now demonstrate that he is his own man, and is not owned by powerful special interests that seem to be controlling the American political process in both major parties.

If even a mandate such as Obama received does not energize the Democrats, then the best hope for America is a third party, a Progressive / Libertarian party as was seen at the turn of the 19th century with the rise of Teddy Roosevelt.

Baseline Scenario
A Short Question for Senior Officials of the NY Fed
By Simon Johnson
October 3, 2009

At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China. US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.

Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?

Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.

In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?

Taylored Tales of the Monetary Bards

The title of this blog may appear a bit rude, and it is not intended to be denigrating of this particular paper from the Kansas City Fed linked below, but rather the organizational mindset that uses it to adjust anything more complex than the timing on a 1967 small-block Chevy with a straight face and a clear conscience.

Although a bit wonkish, "Was Monetary Policy Optimal During Past Deflation Scares?" does an exceptionally good job of explaining the Taylor Rule, how it has been derived and is utilized by Central Banks in evaluating and formulating monetary policy, ie., short term interest rate targets. The author gets high marks for clarity of language and a willingness to allude to some of the shortcomings of the method which is remarkable for most Fed research papers.

Financial engineering reminds one of saying we used to have in Bell Labs , when some individual or group was trying to formulate a practical response to a complex problem based on dodgy theories and elaborate field data: "Measure it with a micrometer, mark it with a grease pencil, and cut it with a hatchet."

One suspects that in this case, reducing the complexities of the economy to the output gap, real inflation gap, and the equilibrium nominal interest rate is like trying to arrive at the average depth of the ocean by using a micrometer to take a few ocean depth readings in a hurricane.

Yes each component has additional inputs, that vary widely and are difficult to measure, but to paraphrase, it does not matter if you calculation works, as long as it looks good, and darling doesn't this economy look marvelous.

It would be interesting to see the fun that Benoit Mandelbrot would have dissecting the Taylor Rule equation, derived from an 'optimal period' in US monetary policy. His book The The Misbehaviour of Markets is a must read for anyone who needs to be convinced that much of modern financial engineering and risk models are exercises in mathematical oversimplification and misdirection.

For those that are not so inclined to read this paper, let us just say that the data going in to the equation is subject to wide disagreement, adjustment, and interpretation, and the data coming out has enough spread from lack of modeling robustness to support just about anything, any outcome. Given the 'thinness' of the equation, which as the author refreshingly and freely admits, can choose from widely varying measures of 'core inflation,' while taking no account of asset prices and government industrial policy among other things.

I am sure the Board of Governors would respond that this Taylor Rule is merely one input into the collective decision-making of a group of wise men, who at the end of the day are combining their various perspectives into a judgement as to the optimal course of action, which includes their vast experience and readings of not only tools such as this, but anecdotal data from their various regions.

Too bad that our last Fed Chairman was a dissembling, blithering idiot, a standing joke in his private practice, who could not find the optimal monetary policy with both hands. But he was a masterful politician and bureacrat, surrounded by fellow sycophants, and did know how to serve the banking interests and make himself look credible, at least to outsiders. And in retrospect, this paper asserts that in fact the Committee under Chairman Greenspan did make a mistake in easing too aggressively for too long a period in the early 2000's. (well, duh).

And too bad the Fed has a significant amount of influence and power, so that even academic economists are too cowed by fear and greed to have said much while Sir Alan and His Merry Pranksters blew serial bubbles in support of the new banking economy. Because if Her Majesty the Queen wishes to be truly illuminated, that is why most economists failed to see the Crash coming: you get what you pay for.

Like Elliot Waves, this Federal Reserve process and these tools 'look good' when applied to historic examples, but one wonders who could possible use it to predict anything and take action on that with any level of success. Has the US Fed really had any unqualified successes based on their own initiatives, other than when Volcker took the economy in hand and, applying a sufficient amount of will, personal resolve, and common sense, tamed the pernicious inflation of the 1970's? They appear to have created more problems than they have solved.

So what is the answer? To do nothing and let the markets play themselves out? That is folly as well, because for better or worse markets are highly subject to manipulation from a number of sources, and the distortions caused therein are potentially devastating, when one considers the willingness for example of the Asian states to manipulate their currencies in support of a mercantilist policy of importing jobs as a means of solving domestic social problems. Or the propensity of the Anglo-American establishment to perpetuate gross fraud as a means of ravaging foreign peoples that too trustingly adopted the globalist model of deregulated banking and modern derivative financing.

The answer of course is that only a significant systemic change can take us out of this cycle. It will have to be one that recognizes that globalism is not an a priori good in a world where nations and peoples wish to settle on their own way of life, and solution set to particular problems in ways that suit them.

We are probably nearing the end of a long cycle of economic deregulation and monetary mysticism, in which old barriers and protections and particularities were struck down, often with little or no serious thought to the policy implications and long term social practices. The zenith of this trend is the consideration of the IMF or some such body as the global Central Bank, with a council of global governors setting everything from trade rules to de facto living standards. One way to make the models work and end conflict among the nations is to make everyone a slave.

When the financial and social engineers fail, their natural response is to make excuses and seek more power. If the CPI is proving to be an impediment to our calculations, let's change how we measure it. If the measurement of inflation is now adjusted, but gold keeps signaling inflation, let's manage the price of gold. And if people keep making independent choices that are not consistent with the predictions of our model, let us manage their perception, influence their judgement, override their own experience and the advice of their parents, and persuade them to take on more debt than they can possibly ever repay, and still remain free.

Hopefully this trend will fall apart before the globalists can do any more damage in the real world, but if it does not and we do get a Council of Global Governors, remember that their oracle is likely to be in dodgy, over simplistic equations such as this, which will be used to throw some clothing around what is most likely to be an exercise in influence peddling, elitism, and raw, naked power of the few over the many.

"Those in possession of absolute power can not only prophesy and make their prophecies come true, but they can also lie and make their lies come true."
Eric Hoffer

Was Monetary Policy Optimal During Past Deflation Scares?

Icelandic Police Raid KPMG and Price Waterhouse in Banking Frauds

There is serious fraud and criminal activity permeating the global banking industry. So far, few governments have taken serious action to expose the fraud and begin serious investigations, much less criminal indictments.

So far we have seen the occasional outsiders being thrown off the back of the sleigh for the wolves, but the serious insiders contine on, and in the case of the US, it's business as usual with bonuses back to record levels, and banks chasing trading profits using public monies.

Will some party, some group, rise up in the US to break the grip of the monied interests on government? It appears that it will not be coming from the Obama Administration, which is seriously compromised by conflicts of interest, and the Republicans which are the seed bed of corporate malfeasance and corruption.

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

UK Telegraph
KPMG and PwC Reykjavik offices are raided by Icelandic police
By Rowena Mason
9:30PM BST 01 Oct 2009

Police have raided the offices of KPMG and PricewaterhouseCoopers (PwC) in Reykjavik, seizing documents and computer data as part of an investigation into alleged criminal activity at three collapsed Icelandic banks.

The targets of the raids were the firms' banking clients Kaupthing, Glitnir and Landsbanki, but the move is nevertheless likely to cause embarrassment for the two companies, both among the "big four" accountancy names in the world.

The Reykjavik branches of KPMG and PwC are owned by its partners, common with most accountancy practices, but are also part of the multinational network of firms.

The office of Olafur Thor Hauksson, the Icelandic investigator charged with examining the collapse of the three banks a year ago, confirmed that 22 policemen and six foreign accountants took part in the searches yesterday.

"The purpose of the searches was to look for and secure evidence related to the investigation of several charges which have been investigated by the office," a statement said.

Among the matters being investigated are "violation of laws on accounting and annual reports, violation of laws on financial institutions and securities transactions and violations of laws on public limited companies". PwC Iceland could not be reached for comment.

Sigurdur Jonsson, the chief executive of KPMG Iceland, told The Daily Telegraph that the raids related to some of his clients and that none of his staff had been questioned. He refused to comment further on the investigation.

Mr Jonsson has already become embroiled in controversy after it emerged that KPMG Iceland had been responsible for investigating events leading up to the collapse of Glitnir, despite the fact that his son was chief executive of the bank's largest shareholder. KPMG later resigned from the case.

The UK Serious Fraud Office (SFO) agreed last month to send a team of investigators to Iceland to help "get to the bottom" of whether there were any criminal intentions in the country's collapsed banks, which had extensive links with London.

The Icelandic banks, which had large customer bases in the UK, failed last October, leaving 300,000 British savers unable to access their money and institutions nursing billions in losses. Following the crisis, the Treasury had to pay out £7.5bn to compensate UK savers, although £2.3bn of this will be repaid by Iceland over the next 15 years.

Allegations of fraud, embezzlement and market manipulation have been under investigation in Iceland since February. The SFO has separately been gathering intelligence on the Icelandic banking sector and its UK operations both involving investors and borrowers, which intensified after the leak of Kaupthing's loan book on to the internet last month.

Practical Decision-Making: A Priori versus Empirical Reasoning

"In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists." Eric Hoffer

A Priori:

from Latin, literally "from the former." Reasoning that starts from accepted first principles or facts requiring no proof or foundation, being a self-evident assumption to the true believer

Empirical:

a. Relying on or derived from observation or experiment: empirical results that supported the hypothesis. b. Verifiable or provable by means of observation or experiment: empirical laws. 2. Guided by practical experience and not theory,

A Priori reasoning is often associated with religion and other belief systems, because it is 'top down' reasoning from a given, accepted fact that is judged to be self-evident and sufficient in itself. So for example, if one believes in an all-powerful and loving God, one can start making logical deductions from that first principle.

Empirical reasoning is often associated with the 'scientific method.' This is reasoning from the "bottom up" based on data, evidence and replicable experimentation and demonstrable relationships. Empirical reasoning can only take one so far, and generally follows the pattern of hypothesis - proof - re-examination - new hypothesis based on new data or insights.

In Economics, it never ceases to amaze how quickly people gravitate towards a priori reasoning once they have become wedded to a belief in an idea, a trading system, a school of thought, or a cult of personality.

If I believe, for example, that deflation is inevitable, no matter what else, then I will selectively choose data to support this view, even if unconsciously, and evaluate all information in the light of deflation as a given outcome, accept that which supports my belief, and rejecting or diminishing in significance the contrary data.

One can make the same case, for example, for those that believe that hyperinflation is an inevitable outcome in the near term. Or those who believe in the infalliblity of a particular trading system such as Elliot Waves, or some favorite indicator.

In less lofty terms, it is what we call a prejudice, although that term has become too specifically associated with racism in the modern world. It is literally a prejudging of situations, and fitting them all into a common pattern no matter what.

Sometimes the lengths to which true believers will go to hold on to their opinions becomes almost funny, if it is not so often accompanied by ad hominem attacks and rather nasty, immature behaviour when the true believer becomes cornered by reality. Or the tragedy of genuine loss when believers are led into folly and the consequences of their errors.

How funny is it, for example, to see a noted pundit keep drawing lines in the sand for the maximum price appreciation of a commodity like gold, and having to change them every year, ignoring past failures and pretending as though they have not been wrong, not daring to acknowledge their failure and attempting to explain it, to at least integrate it into their system in some credible manner.

There is always an alternate count, always the oddly possible but highly improbable excuse or rationale for their own mistaken belief, to avoid admitting that they or their system are imperfect, that they do not know the future with any certainty.

One can believe in something that might eventually become true, but for the wrong reasons. The 'belief' part is accepting the truth before any rational evidence would lead one to accept it logically. It really depends on the odds, and whether they get 'lucky.' People are therefore fooled by chance.

This by the way is the problem I have had with some of the adherents to the Monetarist and Austrian schools of economics, among others gathered in schools. They believe something, and are inclined at times to twist the data to support their predispositions and claims, and reduce objections or alternate views to caricatures that are not correct on close examination by the unbiased mind.

A scientific approach is to assess what is, rather than what we would like things to be, and to draw conclusions carefully from it, calculating probabilities when the evidence does not support a single outcome, and a willingness to accept new data and act on it when it appears, even if it appears contrary to a current working hypothesis.

This does not mean it is wrong to carefully examine evidence that seems to be 'on the tails' of our existing body of knowledge, to see if an adaptation of the hypothesis is all that is required.

Why is this important to us here in this forum?

Because belief is in the realm of the spiritual and the philosophical. Even a statement like "it is self-evident that all men are created equal" is clearly an appeal to a philosophical stance.

Finance, business, trading are not worthy of belief excepting for the ethical implications of behaviour that is contingent on all realms of human endeavor, depending on what one believes.

So, in trading, one should try to avoid becoming a 'true believer' in one idea or person or system. They are all likely to be flawed, and will very often blind the believer to the reality of the situation, so that they can lose impressive amounts of money fruitlessly following a belief that has no validity in their particular case.

In other words, no one knows the future for certain. There are always probabilities involved in every situation, every outcome. Some are more easily discerned than others, but they tend to be in the long and short term trends.

People naturally tend to carve the 'hits' or successful predictions based on their system or belief in marble, and write the 'misses' in sand. They tend to fool themselves as a portion of the belief in what they think must be true. It is a natural, but potentially deadly, behaviour.

In religion, faith alone can lead one to do outlandish things as in the South Seas cargo cults. So there is the thought in the western tradition that one relies on faith and reason together. But of course reason can only take one so far, and then one is faced with what Kierkegaard called 'the leap of faith.'

One might be willing to 'lose money' for the sake of righteousness by refusing to engage in unethical behaviour in their business activity. But foolish is the person who loses money because they have put their faith in human error, in party politics, in groupthink, and profane beliefs.

On an almost daily basis I see otherwise intelligent people making this mistake, and Wall Street takes advantage of it, to the max. I have made this mistake in the past. Overcoming it is one of the great steps towards becoming a successful trading and maintaining a balanced life of the material and the spirit. We render unto Caesar that which is Caesar's, but what is God's is God's.

When the leap of faith is applied to the deployment of a trading account it is too often results in a leap off a cliff. When faith is misplaced in an ideology such as natually efficient, self-regulating markets, or state planned command economies, it can take whole nations into the abyss.