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

I Heart Capitalism

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Posted on 27th February 2015 by Administrator in Economy |Politics |Social Issues

The 10th Man: I Heart Capitalism

By Jared Dillian

Let me begin by saying that if you aren’t on Twitter, you’re making a huge mistake. I was encouraged to get on Twitter years ago by a tech-savvy friend. There is a learning curve. It’s not the easiest thing to get the hang of. Used correctly, it can make you smarter. If you could take a smart pill to make you smarter, you would take it, right? Get on Twitter.

So I saw an interesting table on Twitter—someone had taken a photo of a table out of the print version of Barron’s magazine and tweeted it to their followers. I am reproducing it here:

Nasdaq, Then And Now

Below are the top 10 stocks in the Nasdaq Composite Index.

The first thing you notice is that there’s been a huge turnover. Sun Microsystems disappeared, the box business was so bad Dell took itself private, and WorldCom… well, we all know what happened to it.

But the even more obvious thing is the valuations. If I’d told you 15 years ago that big tech companies like Cisco and Intel would end up with valuations in the teens, you would have called me crazy. And even if you had believed me, you probably would have thought that the P would go down, instead of the E going up.

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Video of the Day – Watch as Florida Parents are Treated Like Children for Questioning School Curriculum

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Posted on 25th February 2015 by Administrator in Economy |Politics |Social Issues

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Screen Shot 2015-02-24 at 5.48.00 PMDavid Bolduc, a Liberty Blitzkrieg reader who is a resident of Naples, Florida recently sent me a note highlighting a video in which he, and several other concerned parents, were reprimanded and treated like little children in a School Board Workshop as a result of them expressing concerns about school curriculum.

In order to give you some background on the issue, see the Letter to the Editor he wrote to the Naples Daily News on 1/28 to say what he was prevented from saying at the 1/20 School Board Workshop. Letter reprinted below:

Patton the cause

The controversy behind the recent parents’ review of school textbooks lays squarely at the feet of Superintendent Kamela Patton.

Specifically, Collier County School Board Policy 2240 reads, “Furthermore, the Superintendent shall prepare administrative procedures detailing the manner in which students and parents will be adequately informed, each year, regarding their right to inspect instructional materials, and the procedure for completing such an inspection.”

By failing to prepare procedures to implement Board Policy 2240, Patton created the perception the textbook review was a nighttime Watergate-style break-in masterminded by conservative political operative and School Board member G. Gordon Lichter.

I examined seventh-grade “Civics in Practice” and it contained numerous factual inaccuracies. For example, on Page 100 it states, “The Constitution can be changed in two ways; formally by Amendment, and informally by Government.” This notion of dictatorship is enhanced by eighth-grade textbook “United States History,” which states on Page 185, “The President issues Executive Orders. These commands have the power of law.”

While some called us book-burning Nazis, Page 274 of “Civics in Practice” states, “Citizens must be alert to propaganda” and glittering generalities is a “type of propaganda which often uses words such as freedom and patriotism.” This world government indoctrination is augmented on Page 425, where a geographical map of North America eliminates the United States, and places our great nation in nine new “cultural nations.”

For pointing this out, one public speaker at the School Board textbook workshop called us “narrow-minded, racist Bible-thumpers.”

Thank you, Superintendent Patton.

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Edward Snowden’s Libertarian Moment: We “will remove from governments the ability to interfere with [our] rights”

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Posted on 24th February 2015 by Administrator in Economy |Politics |Social Issues

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Via Mark Sletten comes this thread from yesterday’s Ask Me Anything session at Reddit that featured Edward Snowden, Oscar-winning documentarian Laura Poitras, and journalist Glenn Greenwald.

The question posed to Snowden:

What’s the best way to make NSA spying an issue in the 2016 Presidential Election? It seems like while it was a big deal in 2013, ISIS and other events have put it on the back burner for now in the media and general public. What are your ideas for how to bring it back to the forefront?

His answer is well worth reading in full (I’ve posted it after the jump), but its essence is a full-throated defense of classical liberal and libertarian theorizing not just about the consent of the governed but the right to work around the government when it focuses on social order over legitimacy. And, as important, a recognition that this is what we at Reason and others call “the Libertarian Moment,” or a technologically empowered drive toward greater and greater control over more and more aspects of our lives. While the Libertarian Moment is enabled by technological innovations and generally increasing levels of wealth and education, it’s ultimately proceeds from a mind-set as much as anything else: We have the right to live peacefully any way we choose as long as we are not infringing on other people’s rights to do the same. Our politics and our laws should reflect this emphasis on pluralism, tolerance, and persuasion (as opposed to coercion) across social, economic, and intellectual spheres of activity.

As Snowden emphasizes, it’s not simply that governments (thankfully) fail at attempts for perfect surveillance and law enforcement. It’s that technologically empowered people are actively worked to route around government attempts to fence us in. “We the people will implement systems that provide for a means of not just enforcing our rights, but removing from governments the ability to interfere with those rights,” he writes (emphasis in original). “we can find ways to reduce or remove their powers on a new—and permanent—basis.”

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In 1967, the CIA Created the Label “Conspiracy Theorists” … to Attack Anyone Who Challenges the “Official” Narrative

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Posted on 24th February 2015 by Administrator in Economy |Politics |Social Issues

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George Washington's picture

Conspiracy Theorists USED TO Be Accepted As Normal

Democracy and free market capitalism were founded on conspiracy theories.

The Magna Carta, the Constitution and Declaration of Independence and other  founding Western documents were based on conspiracy theories. Greek democracy and free market capitalism were also based on conspiracy theories.

But those were the bad old days …Things have now changed.

The CIA Coined the Term Conspiracy Theorist In 1967

That all changed in the 1960s.

Specifically, in April 1967, the CIA wrote a dispatch which coined the term “conspiracy theories” … and recommended methods for discrediting such theories.  The dispatch was marked “psych” –  short for “psychological operations” or disinformation –  and “CS” for the CIA’s “Clandestine Services” unit.

The dispatch was produced in responses to a Freedom of Information Act request by the New York Times in 1976.

The dispatch states:

2. This trend of opinion is a matter of concern to the U.S. government, including our organization.

 

***

 

The aim of this dispatch is to provide material countering and discrediting the claims of the conspiracy theorists, so as to inhibit the circulation of such claims in other countries. Background information is supplied in a classified section and in a number of unclassified attachments.

 

3. Action. We do not recommend that discussion of the [conspiracy] question be initiated where it is not already taking place. Where discussion is active addresses are requested:

 

a. To discuss the publicity problem with and friendly elite contacts (especially politicians and editors) , pointing out that the [official investigation of the relevant event] made as thorough an investigation as humanly possible, that the charges of the critics are without serious foundation, and that further speculative discussion only plays into the hands of the opposition. Point out also that parts of the conspiracy talk appear to be deliberately generated by …  propagandists. Urge them to use their influence to discourage unfounded and irresponsible speculation.

 

b. To employ propaganda assets to and refute the attacks of the critics. Book reviews and feature articles are particularly appropriate for this purpose. The unclassified attachments to this guidance should provide useful background material for passing to assets. Our ploy should point out, as applicable, that the critics are (I) wedded to theories adopted before the evidence was in, (II) politically interested, (III) financially interested, (IV) hasty and inaccurate in their research, or (V) infatuated with their own theories.

 

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How You Spin A False Narrative

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Posted on 22nd February 2015 by Administrator in Economy |Politics |Social Issues

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 Guest Post by Karl Denninger
This “story” is one of those that discerning people should return to the Times Editorial board — wrapping the crap that their dog left while being walked.

In America’s endless debate about gun rights versus public safety, there should be no disputing the hard facts in a new report on gunshot fatalities showing that at least 722 nonself-defense deaths since 2007 were attributable to individuals with legal permits to carry concealed weapons. Concealed carry by citizens has been a soaring phenomenon as states liberalize laws in the name of lowering crime that allow more permits and easier gun access in public places, even schools, churches and restaurants.

So that’s 722 deaths in 7 years, or about 100 a year.

Sounds awful, doesn’t it?

But is it?

Before I begin I’ll “accept”, for the sake of argument, the figures cited.  Given the organization involved I have good reason to believe they’re literally making things up — but if this is the best they can do then they’re in real trouble, as the facts and figures will show.

First, of those 722 deaths 218 of them were suicides.  In other words the only person dead is the one with the gun, and he or she intentionally killed themself.

It’s fundamentally dishonest to argue that these deaths have anything to do with concealed carry permits; one can certainly shoot oneself without a CWP.  Indeed you can purchase a firearm in every state without any sort of concealed permit at all; as such these permits are in no rational way associated with suicide.

Then there’s this stunner — out of the ~700-odd “homicide incidents” that VPC tries to cite only 177 led to criminal charges, or about 24%. In other words the VPC itself admits that only one in four of their claimed “homicides” were in fact criminal acts.

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Taibbi: A Whistleblower’s Horror Story – Infàmia e Disgrazia

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

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Guest Post by Jesse

“Crush humanity out of shape once more, under similar hammers, and it will twist itself into the same tortured forms. Sow the same seed of rapacious license and oppression over again, and it will surely yield the same fruit according to its kind.”

Charles Dickens, A Tale of Two Cities

“Flagrant evils cure themselves by being flagrant.”

John Henry Newman

If a whistleblower reveals benign ‘secrets’ of government actions to a domestic reporter in the time honored tradition, they may be prosecuted as ‘enemies of the state’ under the abusive misuse of the Espionage Act.

And if they tell the truth about a massive fraud involving one of the privileged financial institutions, they may find themselves involved in a cruel farce of officially sanctioned retribution in the judicial system.

This story is almost incredible, of how an appellate judge overturned the verdict of a jury of this man’s peers, and then another Court turned this man over to officially sanctioned retribution, on an almost absurd rationale, for daring to tell truth to power about Countrywide Financial.

Deceit and theft by the privileged is excused and protected, while honesty and innocence are severely punished. And the great mass of official journalists are silent, so we hear the news about this in a rock ‘n roll magazine.

Rolling Stone
A Whistleblower’s Horror Story
By Matt Taibbi
18 February 2015

Two years ago this month, Winston was being celebrated in the news as a hero. He’d blown the whistle on Countrywide Financial, the bent mortgage lender that one could plausibly argue nearly blew up the global economy in the last decade with its reckless subprime lending practices.

He described Countrywide’s crazy plan to give anyone who could breathe a mortgage in a memorable January, 2013 episode of Frontline called “The Untouchables,” a show that caught the eyes of several influential politicians in Washington. The documentary inspired Senate hearings and even the crafting of new legislation to combat too-big-to-jail corruption in the financial world.

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Dear Harry Dent: Wanna Bet?

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

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Dear Harry Dent: Wanna Bet?

By Jeff Clark, Senior Precious Metals Analyst

Some of you may be aware that investment guru Harry Dent has publicly stated that gold will fall to $250-$400. He specifically predicted:

Around $700/ounce is a certainty in gold by 2015 to 2016, and $250 is a possibility well down the line by 2020–2023.

His forecast is largely based on his belief that deflation will prevail.

Governments are fighting deflation. If government stimulus fails, we will have deflation, not inflation.

And he claims that gold bugs are wrong about gold’s future price because they don’t understand how markets work.

Central bank stimulus has created a whole new set of financial asset bubbles that will have to burst. That is its consequences, not rising inflation that most gold bugs (who do understand the financial and debt crisis) warn about.

As a gold analyst who’s spent every day of the last seven-plus years watching this market, I can’t let this pass. I’m sure gold will not fall to $700, much less $250-$400—not in real terms (who knows if the US dollar will even exist in 2020?… Or maybe there will be new dollars with several zeros cut off).

Is this just because I’m a stubborn gold bug? No, because I agree that we’re seeing some deflation, too. But I definitely think some type of crisis is headed our way, and gold does well in crises—even deflationary ones.

Is it perhaps because I don’t like Mr. Dent? Not at all—at my suggestion, he was a speaker at one of our Summits.

Quite simply, I think Harry Dent is resoundingly wrong. And I’m so sure he’s wrong that this is a public invitation to him to enter a wager with me and put his money where his mouth is, which I’ll detail momentarily.

Why Harry Dent Is Wrong

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THE GUTTING OF THE EUROPEAN BANKING STRUCTURE

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Posted on 18th February 2015 by T4C in Economy |Politics |Social Issues

 

 

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DEVELOPMENT GOALS OF THE NEW WORLD ORDER

(Or the Rise of the Supra-Multilateral Development Bank)

February 18, 2015

For lack of a better term, the European banking structure is about to be gutted and the direct management of the system will be given to the European Stability Mechanism. This statement is not made flippantly or without regard to the facts and macroprudential policies which are being implemented globally.

As an extension of the post titled BRICS SDR to Bailout Eurozone, this installment will provide more detail on why the European Monetary Union is in the cross hairs for 2015 and how all paths towards the multilateral framework have now arrived at the systemic bottleneck called the Pillars of Hercules.

In addition, we will explore how the International Monetary Fund will move past the 2010 Quota and Governance Reforms and evolve into a Supra-Fund with the help of the BRICS Development Bank and other Multilateral Development Banks, or MDB’s. But not before discussing how American interests will be sidestepped, not just on IMF Reform, but also to ensure the Chinese yuan is included in the SDR basket by January, 2016.

While Europe will be the first mover in the transition to the multilateral financial system it will be soon followed by America in 2016. The American resistance to the 2010 Reforms which had been previously agreed upon has lead the other members of the fund and the G20 to prepare alternative measures in order to bring a more balanced structure to the international monetary architecture.

In January of 2015 the Peterson Institute for International Economics published a policy brief titled What Next for the IMF? The paper was authored by Edwin M. Truman and contains some enlightening concepts on how the quota and governance reforms could continue without the consent of the United States.

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MY ADDRESS IS: 123 Main St., Richmond, Virginia, United States of America, Earth, Solar System, Orion Spiral Arm, Milky Way Galaxy, Local Group, Virgo Supercluster, Universe

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Posted on 16th February 2015 by T4C in Technology

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I am becoming more and more convinced that I am nothing more than part of a brain. 

Which of these has to do with the Universe and which has to do with the brain?

lkj nhg

 

Our Place in the Universe: Welcome to Laniakea

By Phil Plait

 

ko

 

When I was a kid, playing with my fellow nerdlings, we used to try to come up with the most specific address we could for ourselves—including the whole Universe. It would go something like this: “Phil Plait, 123 Main St., Springfield, Virginia, United States of America, Earth, Solar System, Orion Spiral Arm, Milky Way Galaxy, Local Group, Virgo Supercluster, Universe.”

It looks like we can now add another locality, squeezed in between the last two: Laniakea (la-NEE-uh-KAY-uh I think is pretty close to how you pronounce it), a galactic supercluster. The folks involved put together a video explaining it, which may help before I launch into my own discussion of it:

(Warning: a British accent was used in the making of this video)

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