Posts Tagged economic news

Three disastrously false but enduring premises about gold


gold1Commentary about gold suffers from a few disastrously false but enduring premises.

One, perpetrated famously two years ago by Federal Reserve Chairman Ben Bernanke, is that central banks hold gold not because it’s money but because it is just an “asset” and “tradition”:

Bernanke must dearly wish that it were so. But the Bank for International Settlements confirms otherwise, that gold is “a financial instrument”:

Another disastrously false premise is that gold doesn’t pay interest. But gold pays interest just as money does — when it is lent:

In commentary posted today at Resource Investor, the financial letter writer Przemyslaw Radomski repeats another disastrously false premise — that “gold cannot be printed or manufactured.”

In fact, of course, gold can be printed to infinity thanks to “paper gold,” the issuance of claims to gold that doesn’t exist, claims against bullion banks that are never exercised and probably cannot be honored without supportive dishoarding and leasing from central bank gold reserves:

Working from this false premise, Radomski proceeds to try to answer the question “Have gold and silver stopped responding to the dollar’s price action?” without ever considering the likely price-suppressive effect of “paper gold”:…?

Indeed, this is the longstanding disparagement about gold in recent years — that even with its great appreciation over the last decade, the gold price has not kept pace with inflation, even as other tangibles have kept pace and even as there has been no substantial increase in gold mine production.

But somehow Radomski has managed to write a long commentary about the prospects for gold, complete with charts, without ever mentioning the involvement of the gold market’s largest participants, central banks, and their agent, the Bank for International Settlements, which appears to be trading gold, gold options, and gold derivatives on their behalf every day —

— and which even advertises secret gold market interventions as being among its services to its members:

Given such surreptitious trading and intervention, if gold, as Radomski wonders, has stopped responding to variations in the value of the U.S. dollar, the explanation is not likely to be found in his or anyone’s price charts, which are mere holograms being projected onto what only used to be markets, interpreted by what only used to be financial journalists, writers whose first principle seems to have become: Never put a critical question to the primary source.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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How to get the US economy going again

By Hugo Salinas Price

ProsperityI am reading a great deal of alarming information regarding impending economic collapse in the US.

I feel sure that most of the predictions I read are based on facts, and ought to scare the living daylights out of all readers.

What I fail to see is an explanation of the causes of this terrible, atrocious situation in which the US economy finds itself.

Let me cut through all the dire warnings and offer readers a solution. However difficult it may be to get a solution in place, it is absolutely necessary to understand that there is a solution; if you want it badly enough, it is there waiting to be implemented.


In order to re-invigorate the US economy the following policy must be put in place:

The United States will only accept just as much imports from foreign countries, as foreign countries are willing to purchase from the US. (But the US will not resort to high Tariffs to restrict imports and protect local production.)

Question: Then you are saying, Mr. Salinas, that the US should not just import what it wants from foreign countries, and pay in dollars for those imports?

Answer: That is just what I am saying. Because, you see, if you pay in dollars, there is no need for local industries in the US. They are not needed – and in fact they have disappeared – because imports can be paid with dollars. What do you want: lots of Asian imports available at Walmart, but no jobs, and what jobs there are – at tattoo parlors and restaurants – paying miserable wages? Or do you want industries which will employ workers, pay higher wages and pay taxes to your government as well?

You see, what happened to your country, the USA, is that since 1971 the US has no need to pay for imports with EXPORTS – and exports require local industries to feed the export trade. Since 1971, the US has been paying for everything under the Sun, with dollars. And the result has been that US industries just dried up. They were unnecessary. The jobs disappeared. Detroit shriveled up, and the whole US is shriveling up, without industries. All this has happened because US imports can be paid with dollars, and exports are not really necessary.

This was great for China and Asia in general. It was party-time there! They sold everything they could make, and received dollars in exchange. The US had a party – for a while; until the industries died out and unemployment took over. All because dollars can pay for imports. Exports – forget it! The exports which sustained the industrial base – and the employment base – of the US are not needed anymore. And so the heart of the US has been rotting away – bringing with it unemployment and 47 millions on food stamps.

That’s where you are today.

So how do you solve the problem?

Very simple! I won’t say it won’t be painful, at first. But it’s the only solution:


The US must declare that as of now:

  1. The US will pay for all imports either with goods and services or with gold.
  2. The US will provisionally initiate the re-industrialization of the USA with a gold price of $10,000 an ounce of gold.
  3. Exporters to the US will have their choice:
    1. Take their payment in US-made goods and services, or
    2. Take their payment in gold at $10,000 dollars an ounce.
  4. The US will not attempt to reduce the flow of imports by means of Tariffs. Tariffs offer no solution; in fact, Tariffs derail the only solution.

The definitive price of gold will be determined this way:

  1. As long as gold continues to leave the country, instead of goods and services, then the gold price must be hiked further, until the outflow of gold is stemmed and no gold leaves the country (because foreigners find American products more attractive than high-priced gold).
  2. If gold pours into the country, then the price of gold in dollars is too high and American exports are too cheap. The price of gold will be trimmed down, until the movement of gold is practically nil, with exports paying for the mass of imports.

The result of this measure will be an immediate rebirth of manufacturing in the US, with a return to full employment and prosperity.

The only solution for the dire circumstances of the US is a return to gold as the international money on the part of the US.

Let me make it perfectly clear: This solution – which is the only solution – will absolutely wreck the whole financial system of the US, without a doubt.

What is more important:

The recovery of the US as a productive powerhouse, employing millions of Americans in reborn industries?

Or keeping alive a rotten, insolvent, bankrupt and corrupt financial system?

Do you want an America that is alive, working and prospering at work?

Or do you want to continue in the present situation of decay and eventual collapse, which is inevitable if the solution is not applied?

Yes, the financial system has to go down the tubes. The National Debt and its 16.8 Trillions will be cut to about 1/7 of its present weight.

In exchange, Americans get life and opportunity; a way out of this miserable situation, which will become impossible sooner or later anyway.

This is the meaning of gold at $10,000 dollars per ounce for the average American:

A reborn US, bursting with opportunity and jobs for everyone.

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How to Invest in a New Real Estate Market

by Leon Yang on BiggerPockets

CityStreetA friend of mine recently asked me about how he should start going about when finding a market to invest in. As I answered him on how to approach the market, I noticed his eyes started wandering when I continued to spew information out like a loose fire hydrant for the next fifteen minutes. My diplomatic friend suggested that I should write all my thoughts down instead. So here I am.

How Healthy is the City?

As I stressed in my podcast before, I’d look at where I invest based on how healthy the city is. I do not feel comfortable investing in a city with a declining population such as Detroit. A real estate investment can sometimes take as little as a year or as long as decades before you realize your profit. You never want to be investing in a city where you have no idea where it is going to go in the short to medium term.

Thus, when you pinpoint a market to invest in, make sure you drive around the entire city. Every city has its good neighborhoods and its bad ones. Even within the city there are areas where people are leaving and where people are clamoring for. One of the ways to look for a growing area is to see how the infrastructure is. Is there a Wholefoods? Are there parks? What about the library? Where is Target setting up shop? The more developed an area is, the more likely that the neighborhood will be staying for a long time. Obviously, do check out the houses as well. Good curb appeal typically means that the neighborhood has good homeownership pride. I tend to peek at what cars people are driving as well.

Know the Home Prices in Every Neighborhood

I would then go to Redfin or Trulia and start looking at the price ranges of the homes. For the most part, prices will be higher in premium neighborhoods. But having done the drive, you might start noticing certain neighborhoods which are good neighborhoods but prices haven’t caught up yet. Sometimes you can find bargains there. In any case, after all this you’d have a pretty good idea of whether the city would be worth investing and where you would want to invest in at.

Side note, certain investors enjoy chasing higher rental yields by investing in lower quality neighborhoods. This is a personal choice. I cannot say which one is better. Personally, I prefer to get a lower yield by investing in better neighborhoods. I do not have the time nor the patience to deal with lower quality tenants who tend to reside in those neighborhoods.  Time is valuable to me and I believe in investing in good neighborhoods to avoid headaches.

Find the Right People

Then I would visit several property managers and explain to them that I am planning to invest in the city and is potentially looking for someone to work with. Again, depending on where you are and what you do, you may not need a property manager. Nevertheless, they are a good source of information as to which neighborhoods tend to have better tenants. This process is just sort of reaffirming what you have discovered so far.

Lastly, I will now find a real estate agent. I’d want a real estate agent who is willing to hustle and has an investor mindset. An easy question to ask is whether he or she invests in real estate. A real estate agent who does not invest in real estate is not one that you would want to have. Obviously, this depends on the market. But if the market is good, why isn’t the real estate agent investing? Since you will be working with the agent most of the time, you have to test the agent to see if he or she knows as much as you. On the flip side, you have to show the agent that you are a serious investor. If the agent senses that you are just here to play around, the agent is not going to spend a lot of time on you. You, too, have to impress the agent with your knowledge of the market. But do not be afraid to try sending out a bad offer and see if the agent is there to look out for your interest. If you try to “overpay” for a property and your agent is not there to stop you, it is time to look for a new agent.

With that being said, good luck in investigating your next market!

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Why You Must Get Out of Your Adjustable Mortgage Today

I don’t have a crystal ball but I follow the fundamentals and the market is screaming to get out of your adjustable mortgage if you have one as soon as possible. Here is why.

The federal funds rate is the interest rate at which banks lend their excess reserves to other banks which don’t meet the minimum reserve requirement established by the Fed.  Currently the banks park their excess reserves with the Fed for which they are paid 25 basis points.  Even though it’s known that the Fed controls this rate (by selling and buying securities to banks via the Open Market Operations) today we’re living in a climate of banks controlling such rate.  Their excess reserves which exceed $1.6 Trillion create a liquidity trap that keeps rates below what the market would otherwise dictate.  Take a look at the St. Louis Fed chart and ask yourself how much higher can these excess reserves go.

From 2009 until now the banks’ excess reserves grew exponentially. Such event occurred because the banks were selling securities (in many cases the toxic assets of the foreclosed real estate they held) to the Fed in exchange for dollars. In addition, they get paid a .25% to keep their reserves at the Fed.  This is the reason for which you see on this chart why their excess reserves spiked in a little more than two years.

For the federal funds rate to go up one of at least two events must happen.  The Fed sells securities back to banks thus reducing the banks’ excess reserves and contracting the money supply.  This scenario is not much likely to happen because Mr. Bernanke is a deflationist and he fears deflation.  Politically speaking he couldn’t do that even if he wanted to.  Why?  Because money deflation leads to Wall Street deflation and the artificially inflated stock market bubble would burst.  Such event cannot happen especially during an election year.

The next and a more plausible event to occur would be when banks will start lending again.  Banks are in the business of lending money therefore the question is how long will it be until banks start lending again?  Obviously it can’t go on indefinitely.

Of course, other events could happen which could trigger the rise in the rate. The collapse of the dollar, China decoupling its economy from ours, the dollar’s status of the world reserve currency replaced with another stronger currency, or a devastating inflation.

Without confusing the matter too much, when the federal funds rate is low generally your adjustable mortgage will be low.  When that goes up you can most certainly expect your ARM to go up, as well.  And it really doesn’t matter much to which index your mortgage is tide to.

I’ve been told over and over by hesitant property owners that if the rates go up they’ll sell the property.  If they can’t sell they will refinance.  Here is the problem.  For the past four years the real estate activity was sustained by sales of – what many would call – below market value properties.  Of course, that’s debatable because the real value is based on what the market dictates (based on supply and demand) and not on what the current owner thinks his property value is nor on what the outstanding balance on the underlying mortgage is.

For he who believes he can sell his property when rates go up I wonder what makes him think that in a higher rate environment his property would sell for the price he’d want to sell it for?  If his property doesn’t sell today when rates are low why would it sell later when rates go up?

The second option is to refinance when rates go up.  If you study the chart above you’ll notice that during the late 1970′s the rate went up abruptly.  It wasn’t a slow and gradual increase, it was fast and furious. That increase was the result of the Fed’s contraction of money supply.

When today’s refinance loans take a minimum of two to three months, if not longer, it’ll take even longer time to close on a loan when rates start spiking.  Why?  Because everyone else who’s in that position will be standing in line to refinance (before the rate goes higher).  Not to forget that tomorrow’s fixed rates will be way higher than today’s.  And folks, you must understand that the rates cannot go any lower.  The chart above says it all.  The federal funds rate is close to zero now.

Getting a low fixed rate for as long of a term as possible is the solution to a not so distant problem.  It applies not only to those who have ARMs but also to those who have loans due to mature in the next few years.  If your loan has a prepayment penalty it should not deter you from being proactive.  The cost of waiting could be steep.  In the long run saving today by avoiding the penalty may end up costing way more in form of a high interest rate on your mortgage.


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New Fed stimulus: the eve of decision day

Author: Chris Marcus

As Austrian economist Ludwig von Mises pointed out decades ago, the deeper the central bank gets into the inflationary cycle, the more the law of diminishing returns applies. We have reached this point as even the unprecedented accommodative conditions put in place by the Fed over the past few years are creating less and less artificial growth each time. This is why the Fed is likely thinking at this point that if they really want to stimulate the economy, it is going to take something stronger. The market has been following closely and is waiting for them to deliver.

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The Gold Standard Gets Another Look

Tuesday, August 28, 2012

As Republicans convene in Tampa to nominate Mitt Romney and hammer out their party platform, one of the planks that could attract the most attention is the Party’s official position on the gold standard. As it is now being considered, the platform stops short of recommending a return to the gold standard, but does advocate a commission to consider the possibility. However, judging by the reaction with which many Republicans have greeted the idea, one would think that the platform might as well have called for the return of slavery.

The fact that so many supposed conservatives liken a belief in a gold standard as the monetary equivalent of membership in the Flat Earth Society shows just how far the American public has come from a true understanding of how money works within an economy. But, if there were a parallel to be made between gold enthusiasts and flat earthers, then it should strike many as curious that the world’s top central bankers, who can be seen as the equivalent to the most advanced astronomers, continue to hold so much gold in their vaults. If gold were so obsolete, why would these bankers hedge their positions?

The general idea among most economists is that gold would be a step backward for our modern monetary system — the equivalent of trading in an automobile for a horse and buggy. However, paper money is not new. It’s been around for centuries, and has been tried many times, on many continents. But every time it has been used, it has led ultimately to economic disaster.

At the time of America’s founding, the uses and abuses of paper money were well understood. The Founding Fathers could have empowered the Federal Government to print paper money, a power enjoyed by the Continental Congress under the Articles of Confederation. However, the Constitution represented an improvement on that system. The framers, having just experienced the horrors of the Continental currency (which had been used to finance the War of Independence) opted to limit Federal monetary powers to coining money, which for legal tender purposes they defined as gold and silver.

As a result of that wise choice, our national economy thrived, and eventually became the richest on earth. In contrast, since the time that the standard was abandoned in 1971, America has become the world’s largest debtor nation and is now teetering on the brink of financial ruin. It’s ironic that gold standard critics look back to Nixon’s decision to close the gold window as proof that the standard does not work. In reality, it was precisely because the gold standard was working so well that Nixon felt he had no choice but to abandon it.

In 1971, adherence to the gold standard meant the Nixon administration faced a politically difficult decision. Big increases in government spending associated with the Great Society programs, the war on poverty, the Vietnam War, and the Space Race, resulted in large deficits (by 1971 standards of course). This led the government to print lots of money, thereby hitting Americans with large doses of inflation. As a result, general prices had by then tripled from the levels seen in 1932. But the price of gold had been held at 35 dollars per ounce. This led America’s foreign creditors to exchange their paper dollars for gold (It was illegal for American citizens to do likewise). This created a drain on our gold reserves, and if something were not done, it was likely that the U.S. would lose all of its reserves.

Staying on the gold standard left the government with only two options. One was to devalue the dollar and raise the price of gold consistent with the increase in the CPI. That would have required a gold price of over 100 dollars per ounce. Alternatively, the government could have removed the excess dollars from circulation, bringing consumer prices back in line with 35 dollar gold. In other words, the choice was devaluation or deflation. Neither was politically appealing, and both would have brought deficit spending to a halt.

The gold standard forced the government to responsibly confront irresponsible fiscal policy. At first Nixon tried devaluation, but the amounts were far too small to stop the gold drain. As an escape hatch, he instead abandoned the gold standard (although he said that the move was temporary). Without this “relic”, government could continue to finance its spending with ever larger deficits without losing any more gold. So instead of devaluation or deflation, we chose inflation instead. Many consider the impossibility of running perpetual deficits under the gold standard as proof of its unsuitability to the modern economy. As I see it, this is precisely why the gold standard is so desirable and so badly needed today.

Proponents of the centrally planned pump-priming, deficit-spending welfare state see the gold standard as the enemy of a healthy economy. However, if you believe in individual liberty and limited government, then the gold standard is your best ally. Had Nixon made a more responsible decision, the initial pain might have been worse, but we would have ended the decade in much better shape. And had we stayed that course, our nation would be far wealthier today as a result. We would not have been enabled to bleed away our wealth through two generations of deficit spending.

Many people also look badly on the gold standard because it prevents central banks from using monetary policy to manage the economy. This, of course, may be its greatest attribute. Under a gold standard, the free market determines money supply and interest rates. Under our current system of paper money a few politically connected bankers make those determinations. The results have been disastrous, with the recent housing bubble and financial crisis being just the latest iterations.

In a market economy, prices must be discovered by supply and demand. Interest rates, which can be described as the price of money, are arguably the most important prices of all. The only way to get it right is to let the market do its work. Empowering politically motivated central bankers to fix the price instead is a recipe for disaster. Unfortunately, we have now all had a good taste, and a return to the gold standard is the only way to refresh the palate. I hope the Republicans have the stomach to see it through.

Peter Schiff’s new book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country is now available. Order your copy today.

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What Economic Recovery?

If one was to pay more attention to the mainstream media reports he’d be left confused with such conflicting reporting.  On one side, the economic recovery is just around the corner – and it has been for the past four years – and on the other side the unemployment is still high, consumer price index (CPI) is on the rise, more people on government support, and more bailouts from the Fed to stimulate the economy.  No wonder we keep on electing the same kind of politician; the one with little or no background in macro economics and monetary policy. That is because we really know little, if anything, about economics.

Truth is, with the continued implementation of the current Keynesian economic system a recovery is out of sight.  At the same time it could be very close, so close that within a year or two we could be out of the depression or recession…done, over, kaput.  But the only way to accomplish such a goal is to allow the free market to work, without the Keynesian interventionist approach.

To determine the events in a free market economic system we first need to establish the empirical fact that unregulated markets are not equivalent to chaos.  For example, jungles which are perceived as savage and chaotic environments, do in fact have a universal order.  Nature and animals have found a way to co-exist in a better system than most humans.  When man tries to disrupt the natural flow of life in the jungle through its interventions problems do arise and chaos does set in.  Similar effects are seen in the market economies where man causes economic bubbles through government and central bank imposed interventions.  Then government and central bank try to solve the initially caused problems through more intervention thus causing market dislocations.  Problem is not solved, it is only deferred.  And so we’re faced with a boom/bust business cycle that has been an “accepted evil” for at least a century in the Western world.

What is the Free Market?

In simple terms, the free market is one that is not tampered with, one that is allowed to flow according to the natural law of supply and demand.  The free market is not restricted by burdening laws, rules, regulations, taxation, and tariffs.  It does not entail favoritism to special interest groups.  It does not involve public subsidies, social or corporate welfare.  The free market does not and cannot survive without a sound monetary policy, one in which money is real – not debt as it is now, – and is backed by specie (such as gold).  A sound monetary policy also involves banks lending money they have on deposit without the ability to create credit – which later converts to money – out of thin air.  This is known as a full reserve banking system.

So now that we have defined the basics of a free economy it should be easier to understand what it takes for a real recovery.  But first, let me say that just by adding jobs paid for with public funds is not equivalent to a recovery.  Jobs must derive from a need of real production with the outcome of real production.  For example, a bureaucrat on the government payroll does not translate into productivity.  The bureaucrat’s salary is actually a public debt, one paid for with newly created money that ends up being owed by future generations.  It creates nothing of value but more regulations and intervention in the American business.  There is no shortage of bureaucrats today.  Productivity means creating real goods and services that people and businesses have a need for.  Yes, like what the Chinese and other Asian countries are producing…and like what America was engaged in back during the 1980’s.

The not so known Depression of 1920

Most Americans are familiar with the economic destruction of the 1930’s, the depression that lasted more than a decade.  After the 1929 stock market collapse the two presidents in charge, Hoover and FDR, did everything to save the economy by means of intervention.  The Federal Reserve, which served – and still serves – as the USA’s central bank, used stimulus after stimulus, while debasing the dollar, to get the country out of depression with less than positive results.  No one at the the time, except for Austrian economists, focused on a similar previous stock market crash back in 1920, when Warren Harding did nothing except cut the federal budget.  There were no government stimulation and no Federal Reserve bailouts.  The result was a full recovery in one year.  Failing businesses were allowed to go bankrupt and start fresh in the sectors driven by demand.   The world and the banking system survived despite the deflation that was the needed economic antidote.  Today, we could and should use the example of the economic recovery from the 1920 Depression.  After all, isn’t history the one we’re supposed to learn from?

Finally, if everything else appears too confusing or overwhelming, it’s worth knowing at least some simple basics.

The return to sound money under a gold standard is a necessary instrument of a sound economy.  Fiat money leads to its destruction.

Credit creation out of thin air leads to expansion of money supply.  Such credit ends up in newly created money.  Inflation of the money supply leads to debasement of the dollar.  The currency’s debasement leads to a reduction in the purchasing power of the average man.  The reduction of the purchasing power is equivalent to a lower standard of living.

Booms and busts are the result of the inflationary money policy.  Newly created money induces artificial price increase in various economic sectors.  Without the expansion of bank credit the booms would not reach such high devastating levels.  The correction of a Boom – also known as recession, depression, or downturn – is necessary whether man likes it or not.  The more intervention is applied by the state the bigger the market distortion and the harder the recovery becomes.

Our Western society has been led to believe that man is smarter than nature, that we can create our own rules by overruling and interfering with those of the universe.  The question remains how long and what will it take for us to discover that the market cannot be cheated?

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