Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

Monty Pelerin's World

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Atlas Is Shrugging In The US And Flexing His Muscles Elsewhere

Ayn Rand was mostly correct when she wrote her magnum opus “Atlas Shrugged.” She was incorrect in one important area. She assumed the final option for the wealthy and entrepreneurial class was to go on “strike” and retire to Galt’s Gulch. In the modern world the movers and shakers don’t strike, they migrate.

Atlas is shrugging in the US. Capital is relocated to regions where it is treated more favorably. Within the country, we see capital and jobs leaving the overtaxed, overregulated Blue states and migrating to smaller government Red states. That provides partial relief, but onerous federal policies cannot be avoided by moving within the country.

The increasingly adverse climate at the federal level motivates moving outside the country. This motivation and the resulting movement has been

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Gold Stocks are a Bargain

An excellent analysis of gold and gold stocks:

One can purchase shares of gold mining companies at their second-cheapest level in nearly 30 years

Gold prices passed the $1,500 per ounce mark for the first time ever in mid-April of this year and have set up shop around $1,525-$1,550 an ounce aside from a couple of short pullbacks in early May. So far in 2011, it’s been relatively status quo for those investors who’ve embraced gold as a way to protect themselves from currency debasement, excessive money printing and inflation as prices have increased 7.67 percent. BofA-Merrill Lynch (BofA-ML) analysts are forecasting gold prices could fall to $1,400 an ounce during seasonal weakness in July before rebounding as high as $1,650 an ounce by early fall.

While the party continues for gold bullion prices, stocks of gold companies have been a no-show. The NYSE Arca Gold Bugs Index (HUI) has fallen more than 13 percent year-to-date and the Philadelphia Gold & Silver Index (XAU) has toppled more than 16 percent. Companies such as High River Gold Mines, Jaguar Mining and NovaGold Resources are off more than 45 percent from 2007-2008 highs.

This underperformance has been exacerbated in recent weeks making it a hot topic of discussion among investors, analysts and portfolio managers. This chart shows gold equities of all market capitalization sizes were holding up quite well until late April. That’s when global sentiment toward equities, not just goldshares, began to waver and prices dropped off a cliff.

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Currencies Lie, Gold Does Not

Fiat currencies are measured against one another to determine which are rising and which falling. This is only a relative measure of strength. In reality, they are all falling but at different rates.

As expressed by Charles Vollum at Casey Research:

Fiat currencies the world over are being manipulated by central banks, which is distorting asset and commodity prices. Successful investing requires that investors have a good idea of what things cost and what they are really worth – and using the world’s oldest and most stable form of money, gold, to compare prices is one way to get that insight.

As an example, here are four currencies and how they have performed recently versus gold:

To see how the costs of various other items have fared in terms of gold, see Mr. Vollum’s article.

Chicago vs. Austrian Economics

For free-market layman economists, the differences between the Chicago School and the Austrian School are often blurred. Both often come to the same policy conclusions, but from very different perspectives.

Robert Murphy, an Austrian, describes the differences here.

A Coming Political Collapse?

Rick Ackerman raises the issue of whether the American people have had enough and are ready to rebel:

And yet, even for those who care more about Snooki and the Weiner affair than about the state of the union, there is no ignoring the by-now overwhelming stench emanating from Washington, D.C. We have watched the most liberal president in the history of the Republic secure the fortunes of the bankers, even as the working man has seen his income erode in real terms, his debts mount to the point where tens of millions of homeowners may eventually face bankruptcy. As the economic plight of the average American has worsened, the lies we’ve been told about the economy’s supposed recovery have become increasingly brazen.  This has widened the gulf between Americans and their elected leaders.  But is the disconnect severe enough to provoke a revolution at the ballot box?

Properly, I believe, he answers this question in the negative. There can be no solution at the ballot box where the country is divided approximately 40-40-20 in terms of percentage representation of Dems, Repubs and Independents. Any third party effort virtually assures a win for the party most opposite the third party. A Tea Party candidate, for example, would guarantee a Democrat win because he would siphon votes from the Republican pool. Ross Perot is how Bill Clinton won.

Thus, change is likely to come via a collapse and Mr. Ackerman and I are in agreement here. Mr. Ackerman cites Andrei Amalrik who correctly predicted the Soviet Union revolution and now predicts a similar fate for the US:

“There is another powerful factor,” wrote Amalrik, “which works against the chance of any kind of peaceful reconstruction and which is equally negative for all levels of society: this is the extreme isolation in which the regime has placed both society and itself. This isolation has not only separated the regime from society, and all sectors of society from each other, but also put the country in extreme isolation from the rest of the world. This isolation has created for all—from the bureaucratic elite to the lowest social levels—an almost surrealistic picture of the world and of their place in it. Yet the longer this state of affairs helps to perpetuate the status quo, the more rapid and decisive will be its collapse when confrontation with reality becomes inevitable.”

There is no way to know when, what or how an event triggers what will result in a political collapse, nor what the process will look like. The distrust and unrest amongst citizens is palpable and grows by the day. Relief is impossible via the ballot box but will not be tolerated forever. Some other channel will open up. An economic event will could provide the catalyst. Whether that is some macro event like government missing payments promised payments is impossible to predict. It could be a banking system failure or rampant inflation. On the other hand, it could develop as a local event that spreads. Examples might be a public union protest turning violent or welfare recipients demanding higher payments. When you are in a tinder box, even the smallest spark can produce tragedy.

Suffice to say, we are short on time and walking through a minefield. Herb Stein’s observation that something that can’t continue won’t applies here.

Insanity or Other Motives at Work?

Albert Einstein defined insanity as doing the same thing over and over and expecting a different result. By that definition, clearly our economic policymakers in Washington belong in the little rooms with padded walls.

Karl Denninger discusses below the use of debt as a means to bolster GDP. There is not a sign of evidence to support government’s belief/actions. If that is truly government’s objective, then surely insanity is a difficult conclusion to avoid.

But there are other motives, unstated but possibly driving government behavior. My guess is that the primary purpose of government over much of the past thirty years was to grow bigger and more powerful. More recently, growing government has likely been displaced by saving government from bankruptcy. Debt is now needed to enable government to continue paying its bills. Either of these hypotheses is consistent with the data and likely more plausible than insanity. Perhaps there are other motivations that could be at work.

Denninger does not speculate regarding motives and just presents the devastating data:

You’d think that after more than fifty years people would wake the hell up and smell the coffee.

What is this chart?  Why, the history of our idiocy.  It’s quite simple; this is the multiple that each dollar of debt (anywhere in the economy) has returned in GDP looked at on a quarter-on-quarter basis, net of the debt increase itself.  That is, if the multiple is “1″ then for each dollar of debt added to the economy there was one dollar of output in the form of GDP added as well during the same period of time.  If it’s “0″ then the debt itself produced no additional output, but did fund itself.  If it’s negative, well, into the black hole you go.  Since this is a quarterly number it’s quite noisy but there’s no mistaking what it tells you.

If you pay attention you’ll note that since 1980 this has never been positive – not even for one quarter – and it was only rarely positive before that time!

Why is this important?  Because it underlies the idiocy of everything we’re attempting at the present time with our economic policy.  It underlies every claim about “getting lending going to small businesses” and “getting lending going to consumers.”

Lending – that is, the increase in debt - is not additive to GDP, it is subtractive!

This is the exact opposite of what is trumpeted on CNBS every day, it is the opposite of what our President has said, it is the opposite of what Congress has claimed is their goal in their regulatory zeal and it is the opposite of what is taught in our edifices of “higher education“.

But this – directly from The Fed’s and BEA’s own numbers – says that all of those “economic theories” are in fact crap.  They are in fact knowing lies in the face of what is nearly sixty years of unbroken statisticalfact.

Your challenge is to calibrate the policies and expected outcomes of our government’s policy, the ECB’s and EU’s policy, and other government policy and pronouncement against this statistical and irrefutable fact and then figure out the likely outcome of once again doing the same thing we’ve done over the last thirty unbroken years.

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