Thoughts from the Frontline: The Last Argument of Central Banks

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Posted on 11th November 2014 by Administrator in Economy |Politics |Social Issues

Thoughts from the Frontline: The Last Argument of Central Banks

By John Mauldin

 

For a central banker, deflation is one of the Four Horsemen of the Apocalypse: Death, Famine, Disease, and Deflation. (We will address later in this letter why War, in the form of a currency war, is not in a central banker’s Apocalypse mix.) It is helpful to understand that, before a person is allowed to join the staff or board of a central bank, he or she is taken into a back room and given DNA replacement therapy, inserting a gene that is viscerally opposed to deflation. Of course, in fairness, it must be noted that central bankers don’t like high inflation, either (although, looking around the world, we see that the definition of high inflation can vary). In the developed world, 2% inflation seems to be the common goal. You wouldn’t think that 2% a year is a significant change in the overall price structure, but the panic among economists that would ensue with a 2% price deflation would border on hysteria.

Inflation and deflation are often topics of discussions as I travel, but I find that there is general confusion about what inflation and deflation actually are. This is understandable, since many economists don’t agree on the definitions, so they are often talking about totally different phenomena. In this week’s letter I have for you a brief essay on the topic of deflation. Depending on your view, you might find some of my thoughts controversial, but I will try to make my case clear, at least. Please note this is the 30,000-foot view and is nowhere close to definitive. If you want great detail, I suggest you get my good friend Gary Shilling’s latest book on deflation (of four that I know of), called The Age of Deleveraging. (It’s only $11.49 on Kindle.)

Definitions of Inflation and Deflation

Generally speaking, there are two schools of thought about inflation. The Austrian school of economic theory, founded by Ludwig von Mises, sees inflation as an increase in the money supply and deflation as a contraction in the money supply. Somewhat similarly (but not entirely!), the monetarist school of economic theory tends to see money supply as the chief determinant of GDP in the short run and of the price level over the long run.

Mainstream economics (generally Keynesian) tend to refer to rising or falling prices as inflation or deflation. They tend to see deflation as a general price decline, often brought about by reductions in available credit, money, or reserves or by the government’s restraint of spending programs.

So when we talk about inflation/deflation, it is important to know whether we’re talking about monetary inflation or price inflation. As we have seen recently, a rising money supply is not necessarily accompanied by rising prices (although there is a certain long-term rhythm to the two different measures).

When I talk to the general public about deflation being something to be avoided, I get confused looks. Don’t we like it when the price of something goes down? Who doesn’t love a sale on something they want to buy? Since the beginning of the First Industrial Revolution, the general tendency for the prices of manufactured goods (in real inflation-adjusted terms) has been to go down as productivity has gone up. This is what Gary Shilling and others refer to as “good deflation.”

You can actually have solid productivity, GDP growth, wealth creation, a general increase in the standard of living, and a buoyant economy during a period of overall price deflation such as we had in the late 1800s – if it is the good kind of deflation.

What is the difference between good deflation and bad deflation? Good deflation is the general fall in prices that comes from an excess supply of goods due to increased productivity and product improvement. From 1870 to 1897 wheat prices fell from $1.06 to 63¢ a bushel, corn from 43¢ to 30¢ a bushel, and cotton from 15¢ to 6¢ a pound. Most of the time farmers received even less for their crops.

While farmers blamed all sorts of people for their falling prices, the primary cause of their problem was overproduction resulting from increases in the acreage of farms and increased yields per acre due to improved farming methods, as well as the advent of railroads that made it easy to get produce to Eastern markets. A farmer had to produce more just to stay even. It didn’t help that global competition from Argentina, Russia, and Canada was added into the mix, as increasingly large oceangoing steamboats made international transportation cheaper and ended an era of American agricultural export advantages.

This period of time saw one-third of farmers move to the cities for other work as they lost their employment on small family farms. That trend in falling farm employment continued until recent years, and farming has seen even greater increases in productivity (yield per acre) in recent decades. Farm and ranch families are just 2% of the US population today. Only 15% of the US workforce produces, processes, and sells the nation food and fiber. Today’s farmers produce almost three times more food with 2% lower inputs than farmers did 60 years ago. A third of American agriculture is strictly for exports.

The late 1800s was a particularly contentious period of history in the United States as farmers blamed railroads, bankers, and industrialists for their problems – a situation not unlike the income inequality debate we have today. And while falling prices weren’t fun for the farmers, the general public enjoyed lower food costs and higher-quality food.

The easiest way to illustrate this trend in the modern area is by looking at the cost of a gigabyte of storage. You can see an interactive version of this chart here. Prices for a gigabyte of storage dropped from $500-700,000 in the early 1980s (depending on what you were buying) to about $0.03 today. Put another way, a gigabyte cost about 2 million times more 35 years ago than it does today. And it has fallen by 50% every few years. The good deflationary fall in prices for data storage has enabled all sorts of industries and products, creating millions of jobs. And we could find dozens of other, similar products whose prices have been falling dramatically.

Measuring Inflation/Deflation

Each month we are greeted by the announcement of the Consumer Price Index (CPI), telling us what the level of general price inflation has been for the previous month and year. I’ve written about CPI extensively in past letters, but basically we need to understand that the CPI is an artificial amalgamation of the prices of various products and services. The composition of the CPI has changed significantly over the last 40 years. As John Williams at Shadow Stats demonstrates, if we used the same measurement methodology that was in force during the Reagan years or the early Clinton years, inflation would be almost 4 percentage points higher now than it is currently calculated to be.

Contrary to some commentators, I do not see this is a conspiracy to mislead investors or consumers, or to slow down the rise in Social Security payments. We should all be grateful that there is a small band of economists who are consumed by the details of what inflation actually is. They go to conferences and vehemently argue with each other (well, vehemently for academic economists) over arcane topics that would bore 99%-plus of the population. They are passionate about trying to find the proper measure of inflation.

My personal feeling is that the adjustments that have been made in the calculation of inflation are generally quite reasonable, if somewhat controversial. With the prices of electronics and many other manufactured goods falling over the decades, how do you measure inflation in those items? Or rather deflation? I still spend about the same amount for a new phone today as I did 10 years ago, but my new iPhone 6+ is a major improvement over the Motorola flip phone I had 10 years ago, by any standard you want to apply. Both could make phone calls, but that is about where the similarity ends. Am I getting better value for my money? More bang for the buck? Absolutely.

Currently, the economists who determine inflation see that increase in value as an actual drop in inflation, and they use a somewhat controversial methodology called hedonics to adjust the prices of a myriad of products for quality. If anti-lock brake systems are now standard whereas before they were optional, then by this doctrine the price of your car went down. (Those who are interested can google hedonics and get a wealth of information on the definition and the controversy.)

Housing is a big component of our spending. Should we use actual housing prices or what the inflation economists call “owner’s equivalent rent prices” as our measure of housing cost increases? If we had used actual housing prices during the 2000s, the inflation figures would have gone through the roof, suggesting to the Federal Reserve that they should be raising interest rates rather than lowering them or keeping them too low. And again, if we had been using actual house prices to calculate inflation during the Great Recession, the economy would have been seen as being swamped by serious deflation. There would’ve been even more weeping and wailing and gnashing of teeth.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

Important Disclosures

Is Democracy Dead In The West?

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Posted on 30th January 2015 by Administrator in Economy |Politics |Social Issues

Guest Post by Paul Craig Roberts

We will find out the answer to the question posed in the title in the outcome of the contest between the new Greek government, formed by the political party Syriza, and the ECB and the private banks, with whose interests the EU and Washington align against Greece.

The Spartans, whose red cloaks and military prowess struck fear into the hearts of both foreign invaders and Greek opponents in the city-states, are no more. Athens itself is a ruin of its historical self. The Greeks, who were once to be contended with, who were able with 300 Spartans, supplemented with a few thousand Corinthians, Thebans, and other warriors, to stop a one hundred thousand man Persian army at Thermopylae, with the final outcome being the defeat of the Persian fleet in the Battle of Salamis and the defeat of the Persian army in the Battle of Plataea, are no more.

The Greeks of history have become a people of legend. Not even the Romans were able to conquer Persia, but little more than a handful of Greeks stopped the attempted Persian conquest of Greece.

But the Greeks, despite their glorious history, could not stop their conquest by the EU and a handful of German and Dutch banks. If the Greece of history still existed, the EU and the private banks would be cowering in fear, because the EU and the private banks have ruthlessly exploited the Greek people and represent the same threat to Greek sovereignty as Persia did.

Greece, stripped of its independence by its EU membership and acceptance of the euro as its currency, has lost is sovereignty. Without control over its own money, Greece cannot finance itself. Greece must rely on private banks from other countries. In the 21st century European private banks are not allowed to lose money simply because they are incompetent and over-lent to EU member countries. This is not considered to be the fault of the banks, but of the borrower governments and populations.

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IF WE JUST GIVE THE NWS ANOTHER BILLION, THEY WON’T BE INCOMPETENT

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Posted on 28th January 2015 by Administrator in Economy |Politics |Social Issues

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Don’t mess with the National Weather Service.

It only took a few hours before the mainstream media faux journalists began to peddle the statist excuses for the National Weather Service epic failure. In a shocking development, the government loving Keynesian control freaks blame lack of funding for the complete and utter failure of a government agency to correctly predict the weather three hours in advance. Marketwatch printed this drivel by Tuesday afternoon:

The search is on for scapegoats after a missed weather forecast turned the City That Never Sleeps into a ghost town on Monday night. One prime suspect: budget woes at the National Weather Service.

The weather agency’s budget has hardly risen over the past five years, topping slightly over $1 billion for the current fiscal year. In the past decade, its budget has increased much slower than overall federal spending. The NWS was also was hurt by the so-called budget sequester in 2013 that required most federal agencies to cut spending and impose a hiring freeze.

The article blamed the awful austerity imposed on the NWS as the reason their computer models weren’t able to predict what would happen in the next six hours. Of course, their own words undercut their argument. The NWS uses multiple computer models to verify their forecast. They use the European model, along with their own models. Of course, all the models were wrong.

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ADMIN MUST BE SO PROUD OF US MENTALLY ILL SIMIANS

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Posted on 22nd January 2015 by T4C in Economy |Social Issues

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All I gotta say is, “Thank God my insanity is keeping me sane.”

 

It’s Official: If You Question Authority, You Are Mentally Ill

January 19, 2015 | Author Pater Tenebrarum

sheeple

 

Only the Sheeple Are Sane

This post is about an issue that is by now a bit dated (though the topic as such certainly isn’t), but we have only just become aware of it and it seemed to us worth rescuing it from the memory hole. In late 2013, the then newest issue of the American Diagnostic and Statistical Manual of Mental Disorders (DSM for short) defined a new mental illness, the so-called “oppositional defiant disorder” or ODD.

As TheMindUnleashed.org informs us, the definition of this new mental illness essentially amounts to declaring any non-conformity and questioning of authority as a form of insanity. According to the manual, ODD is defined as:

[…] an “ongoing pattern of disobedient, hostile and defiant behavior,” symptoms include questioning authority, negativity, defiance, argumentativeness, and being easily annoyed.

In short, as Natural News put it: According to US psychiatrists, only the sheeple are sane.

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JOURNEY TO THE GOY-ZONE

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Posted on 21st January 2015 by T4C in Economy |Politics |Social Issues

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Gilad is also a writer for Veterans Today. I like him.

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A Personal Note On Jewish Statistics
January 19, 2015 / Gilad Atzmon

 

The British political establishment is in a state of panic. A poll revealed last week that “a quarter of Jews in Britain have considered leaving the country in the last two years and well over half (58%) feel they have no long term future in Europe.” This could be a potential disaster for British political parties. Eighty per cent of the Tories are members of the pro Israeli lobby, The Conservative Friends Of Israel (CFI), and a similar percentage of Labour and Libdem MPs have vowed their allegiance to Israel through their respective Jewish Lobby groups. The Jews are clearly a vital source of funding for British politicians. In fact, it has become hard to imagine what British politics would look like without Jewish Lobby’s money. Though the vast majority of British MPs are friends of Tel Aviv and Jerusalem, it has not been established how many of our MPs are friendly with Manchester and Hartlepool.

Apparently a recent poll found that anti-Semitic beliefs are widely prevalent among the British public with 45 percent of Britons agreeing with at least one of these ‘anti-Semitic’ sentiments: a quarter of Britons believed “Jews chase money more than other British people,” one in six agreed that “Jews think they are better than other people” and “Jews have too much power in the media.”

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The FBI’s Most Pathetic Sting Yet: Snares “Mommy’s Boy” With Cat

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Posted on 19th January 2015 by Administrator in Economy |Politics |Social Issues

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By Glenn Greenwald and Andrew Fishman

The Justice Department on Wednesday issued a press release trumpeting its latest success in disrupting a domestic terrorism plot, announcing that “the Joint Terrorism Task Force has arrested a Cincinnati-area man for a plot to attack the U.S. Capitol and kill government officials.” The alleged would-be terrorist is 20-year-old Christopher Cornell (above), who is unemployed, lives at home, spends most of his time playing video games in his bedroom, still addresses his mother as “Mommy” and regards his cat as his best friend; he was described as “a typical student” and “quiet but not overly reserved” by the principal of the local high school he graduated in 2012.

The affidavit filed by an FBI investigative agent alleges Cornell had “posted comments and information supportive of [ISIS] through Twitter accounts.” The FBI learned about Cornell from an unnamed informant who, as the FBI put it, “began cooperating with the FBI in order to obtain favorable treatment with respect to his criminal exposure on an unrelated case.” Acting under the FBI’s direction, the informant arranged two in-person meetings with Cornell where they allegedly discussed an attack on the Capitol, and the FBI says it arrested Cornell to prevent him from carrying out the attack.

Family members say Cornell converted to Islam just six months ago and claimed he began attending a small local mosque. Yet The Cincinnati Enquirer could not find a single person at that mosque who had ever seen him before, and noted that a young, white, recent convert would have been quite conspicuous at a mosque largely populated by “immigrants from West Africa,” many of whom “speak little or no English.”

The DOJ’s press release predictably generated an avalanche of scary media headlines hailing the FBI. CNN: “FBI says plot to attack U.S. Capitol was ready to go.” MSNBC: “US terror plot foiled by FBI arrest of Ohio man.” Wall St. Journal: “Ohio Man Charged With Plotting ISIS-Inspired Attack on U.S. Capitol.”

Just as predictably, political officials instantly exploited the news to justify their powers of domestic surveillance. House Speaker John Boehner claimed yesterday that “the National Security Agency’s snooping powers helped stop a plot to attack the Capitol and that his colleagues need to keep that in mind as they debate whether to renew the law that allows the government to collect bulk information from its citizens.” He warned: “We live in a dangerous country, and we get reminded every week of the dangers that are out there.”

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QE and the ECB: “Authorize” is a Slippery Word

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Posted on 18th January 2015 by Administrator in Economy |Politics |Social Issues

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Everyone knows the ECB will be announcing their own QE plan to save Europe. I guess they’ve seen how fantastic QE has done in reviving the Japanese and U.S. economies. One problem. The ECB doesn’t have the ability to execute their QE plan without the central banks of the various European countries doing the actual buying of debt. As John Hussman points out, the announcement will be met with great fanfare and the usual reaction of a stock market surge (because that is the only real purpose of QE). But Germany is the only party that matters. Their debt currently carries a negative yield out through 5 years. Buying that debt will guarantee massive future losses. Therefore, they will not buy it. The European QE is the last dying gasp. When Greece exits the EU, humungous losses will be experienced by banks across the world. The end is in sight.

Last week, the Swiss National Bank abandoned its attempt to tie the Swiss franc to the euro. For the past three years, the SNB has been trying to keep the franc from appreciating relative to the rest of Europe by accumulating euros and issuing francs. As the size of Switzerland’s foreign exchange holdings began to spiral out of control, Switzerland finally pulled the plug. The Swiss franc immediately soared by 49% (from 0.83 euros/franc to 1.24 euros/franc), but later stabilized to about 1 euro/franc. While numerous motives have been attributed to the Swiss National Bank, the SNB made its reasons clear: “The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.” In effect, the SNB simply did what the German Bundesbank wishes it could do: abandon the policies of European Central Bank president Mario Draghi, and the euro printing inclinations he embraces.

A quick update on what we call our “joint parity” estimates of currency valuation (see our recent discussion of the Japanese Yen in Iceberg at the Starboard Bow). Considering long-term purchasing power parity (which certainly does not hold in the short-run) jointly with interest rate parity (see Valuing Foreign Currencies), we presently estimate reasonable valuations of about $1.35 for the euro, and about $1.13 for the Swiss Franc – so after the wild currency moves of last week, we suddenly view the Swissie to be almost precisely where we think it should be relative to the dollar. At least one hedge fund and a number of FX brokerages were wiped out last week as their customers were caught with leveraged short positions against the franc. Data from the CME shows asset managers and leveraged money heavily short the euro (with commercial dealers on the other side), and by our estimates, the decline in the euro is overextended. That’s a high-risk combination for euro shorts.

The chart below may offer some insight into what the SNB was thinking last week, from the perspective of our own joint-parity estimates of currency valuation. The chart reflects data just before the SNB abandoned its peg to the euro (data for the euro reflects the German DM prior to 1999, appropriately scaled). Back in August 2011, the Swiss franc surged to significant overvaluation relative to the euro. That’s when the SNB instituted the peg, attempting to hold the exchange rate at 1.20 francs per euro (just under 0.84 euros per franc). Prior to last week’s move, the overvaluation of the franc – relative to the euro – was no longer evident, and the franc had become substantially undervalued relative to the dollar. Having abandoned that peg, the franc has surged to what we view as fair value relative to the U.S. dollar.

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QUOTES OF THE DAY

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Posted on 18th January 2015 by Administrator in Economy |Politics |Social Issues

“It is true that the virtues which are less esteemed and practiced now–independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors–are essentially those on which the of an individualist society rests. Collectivism has nothing to put in their place, and in so far as it already has destroyed then it has left a void filled by nothing but the demand for obedience and the compulsion of the individual to what is collectively decided to be good.”

Friedrich Hayek, The Road to Serfdom

“Probably it is true enough that the great majority are rarely capable of thinking independently, that on most questions they accept views which they find ready-made, and that they will be equally content if born or coaxed into one set of beliefs or another. In any society freedom of thought will probably be of direct significance only for a small minority. But this does not mean that anyone is competent, or ought to have power, to select those to whom this freedom is to be reserved. It certainly does not justify the presumption of any group of people to claim the right to determine what people ought to think or believe.”

Friedrich Hayek, The Road to Serfdom

“From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time”

Friedrich Hayek, The Constitution Of Liberty

“The argument for liberty is not an argument against organization, which is one of the most powerful tools human reason can employ, but an argument against all exclusive, privileged, monopolistic organization, against the use of coercion to prevent others from doing better.”

Friedrich Hayek

“It is one of the saddest spectacles of our time to see a great democratic movement support a policy which must lead to the destruction of democracy and which meanwhile can benefit only a minority of the masses who support it. Yet it is this support from the Left of the tendencies toward monopoly which make them so irresistible and the prospects of the future so dark.”

Friedrich Hayek, The Road to Serfdom

AMERICAN SNIPER IN PERSPECTIVE

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Posted on 17th January 2015 by T4C in Politics |Social Issues

Saw that American Sniper blew the top off at the box-office. Wonder how many who saw it read the following. Those that did would have watched the movie with a far more jaundiced eye than those who did not. Those that have not, but perchance do read the article after watching the movie, will have their own tops blown off, if not for only realizing they wasted their money on believing in a “Hero” who profited from lying. Same as it ever was.

 

TRUTH, JUSTICE AND THE CURIOUS CASE OF CHRIS KYLE

August 03, 2014

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A few weeks ago I was reading online about the defamation lawsuit filed by Jesse Ventura against former Navy SEAL, Chris Kyle. The case sounded pretty interesting, so, I borrowed from a friend a copy of American Sniper, the autobiography of Chris Kyle, and read it. It was a very compelling read.

Here is a little background on Chris Kyle and his story: Kyle was a Navy SEAL sniper from Texas. He claims to be the deadliest sniper in American history with over 160 ‘confirmed’ kills. Confirmed kills are defined as kills with at least one other witness besides the shooter. Kyle served four tours of duty in Iraq and was awarded two Silver Stars and five Bronze Stars for Valor for his actions during the war. Upon returning to Texas after his tours of duty were over, he settled down with his wife and two kids, started a security firm and wrote a book about his experiences as a sniper. The book, American Sniper, became an instant success and propelled Chris Kyle into a sort of celebrity status. Kyle also worked helping other war veterans deal with PTSD when they returned from the war. On February 2, 2013, Chris brought a vet suffering from PTSD to a shooting range where the vet shot and killed both Chris Kyle and a friend.

The Court Case

In the lead up to the defamation case going to trial, all of the legal experts on television and in print said that it was highly unlikely that Jesse Ventura could win the case because the bar was set very high in defamation cases concerning celebrities. According to these various experts, in order for Ventura to win he would need to prove that not only did Chris Kyle lie about him, but also prove that he did so maliciously and that he prospered from it.

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Despite the very high burden of proof, on July 19, 2014, Jesse Ventura, former Governor of Minnesota, WWF wrestler, TV show host and Former Navy SEAL (technically he was in the pre-cursor to SEALs, the UDT) won a defamation lawsuit against deceased former Navy SEAL Chris Kyle, author of American Sniper to the tune of $1.8 million. In the book, Chris Kyle, claimed to have punched ‘Scruff-face’, later identified by Kyle on both the The O’Reilly Factor on the Fox News Channel and The Opie and Anthony radio show as Jesse Ventura, in a SEAL bar in California after Ventura said some nasty things. Here is the passage in question from the book:

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