August 2012


An important chart.

Note the inflation in the 1860’s created by the Civil War. Then, as hard money re-established its pre-eminence, the relative stability. Money, gold money is never going to be stable, nor should it be, prices allow for change, that is their purpose and function.

Then in 1913, the creation of the Federal Reserve. Look at the fluctuations. The Federal Reserve enabled the government to inflate, which accentuated the business cycles of boom/bust based on credit expansion, while gold, acted as a limiting factor as to just how far they could inflate. Which is of course why, they tried, and eventually succeeded in getting rid of gold altogether in 1971.

You don’t think it’s possible to “inflate” on the back of gold?

Courtesy of the Federal Reserve.

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That lack of property does not only prevent the property-less‟ self-determination, but also makes him an instrument to attaining others‟ goals never enters the libertarian‟s mind. Nor does the fact that some people‟s property rights restrict others‟ freedom.

No-one is property-less. Every individual owns [property] himself. Every individual owns what they produce. Thus, it is the responsibility of each individual to raise himself to the economic, spiritual, level that he desires.

Individuals have reasoned that co-operation, with other individuals, the division of labour, is more productive than operating as a self-reliant unit. Thus, social structures are created from co-operative property. Due to an inequality of talent/luck, some individuals will surpass in the accumulation of economic wealth, other individuals. That may, or may not matter, this depends on each individuals ordinal value scale.

Freedom, as previously indicated, is an economic good. It is derived from property rights. Without property rights, you cannot have freedom – but the volume, type, and quality of that freedom can, and will, vary.

Kristin and I will be going to the judging of the Wallace Trust Art awards on Monday 3 September, where, she is a finalist in the photography category.

Art, as I surely don’t need to elaborate, is highly speculative and collectible. Art currently, once again, is a hot asset class, and the returns from art can be pretty spectacular. Kristin just recently graduated from Art College and is featured on the website. This award, is a big deal in the art world, and if she wins, her values will rise.

Now Kristin has a run of 12 photographs that predate by about 1 year the artwork that she has in the competition. She has already sold 6 of them. She will keep 1 herself, leaving 5 to be sold. If you are an art speculator, and you like her art, then at $1000.oo you may have a bargain on your hands.

Here is the artwork that you can buy: “Censored.” Simply go to my newsletter tab and use the PayPal link.

The apologists are out in full force. The “White Coat Syndrome” being utilized to the maximum.

Richard S. Grossman is a professor of economics at Wesleyan University in Middletown, Conn., and a visiting scholar at the Institute for Quantitative Social Science, Harvard University. He is the author of “Unsettled Account: The Evolution of Commercial Banking in the Industrialized World Since 1800.”

Rather than be overly impressed by all the credentials, let’s take a look at his arguments, you know, the substantive ones.

The Republican Party platform calls for the creation of a commission to look at restoring the link between the dollar and gold.

True enough.

As an academic, I am all in favor of scientific study. But in this case, a call for further study is just code for “This is a bad idea, but let’s try it anyway.”

Leaving aside the problem of the scientific method, viz. positivism, being wholly unsuited to the study of social phenomena, how did he arrive at this is “code?” I think we can dismiss this statement as nonsense.

The argument is similar to that put forward by those who want more research on the “link” between childhood vaccinations and autism. Extensive scientific investigations find absolutely no such link. Yet the die-hard believers continue to press for more wasteful spending on an idea that flies in the face of the evidence.

The scientific method, as already stated, is wholly inappropriate for the social sciences. But once again, ignoring that fact, this statement rather shifts the focus from gold and money to quite possibly a legitimate objection, and then stating they are the same. Are they really? How? This is not an argument, this is an opinion.

The gold standard’s shortcomings should be obvious by now, but apparently the Republican platform committee — seeing the gold standard as a bulwark against a nonexistent inflation problem — needs a refresher course.

The good professor hints at numerous problems, but uses “inflation” as the example. Inflation is the expansion of money and credit. Has the Federal Reserve and government expanded the money supply?

Rather, our dishonest professor implies that “inflation” is measured by a change in CPI prices, or some other metric. Inflating money and credit will distort prices, but that is only part of the answer when considering the question. Also important are the questions: what cash balances are being held by individuals, what saving/investment? Today, also, you need to ask – what is the default rate in the banking system on loans? The reason being that under fractional reserve lending, loan default is leveraged to the downside, contracting credit.

If the United States established a gold standard, the Federal Reserve would be required to exchange dollars for gold at a fixed price.

True.

But what price? During the last 10 years, gold has fluctuated between $300 and $1,900 per ounce. Set the price too low and the Fed will run out of gold in a matter of hours; set it too high and the Fed will be flooded with gold. And even if Congress could find the “correct” price for gold, given worldwide fluctuations in the demand for gold, it is unlikely that the price would remain “correct” for long

Money is a commodity. Like any commodity, money responds to the changes in the supply of, and demand for money. Price changes are how those two variables are brought into momentary equilibrium, viz. an exchange is made.

History provides ample evidence that the gold standard is a bad idea. After World War I, the major industrialized nations established the gold standard, which is widely seen as having contributed to the spread and intensification of the Great Depression. The gold standard tied the hands of monetary policymakers, forcing them to maintain high interest rates in order to maintain the price of gold, thereby making a bad economic situation even worse.

The “gold standard” was a standard that allowed governments to cheat. Money supply expansion could still take place, although not as egregiously as today. From Friedman & Schwartz, A Monetary History of the US, pg 222:

The Reserve Board was aware that Bank discount rates were below current market rates throughout 1919, that this was contributing to monetary expansion, and that monetary expansion was contributing to the inflation.

Had we been on the gold standard when the subprime crisis broke, the Federal Reserve would have had to raise interest rates instead of lowering them. Given that our economy was — and still is — struggling despite historically low interest rates, higher interest rates would have been devastating.

Really?

It rather appears that the “cure” for the recession/stagflation of the mid-seventies to the early eighties, was, high interest rates.

And if there is any doubt about the folly of tying the value of a currency to something outside a nation’s control — and the price of gold is well outside the control of any government or central bank — look to Europe

Possibly we might be provided with an argument that actually holds a drop of water now?

Instead of fixing their currencies to gold, the 17 members of the Eurozone fixed their currencies to a new currency, the euro. The euro worked well during its first decade, primarily because there were few strains on it. But starting in 2009, the stress became obvious: Greece had fiscal problems, Ireland and Spain had real-estate bubbles that burst, Portuguese consumers spent themselves into trouble, and Italy’s economic policy was a complete mess.

And why, in 2009, did the problems start?

Oh, is that, money expansion?

If these countries had not been members of the Eurozone, they could have instituted expansionary monetary policies that would have helped their economies, such as devaluing their currencies to increase exports or lowering interest rates to stimulate economic growth. Instead, countries as diverse as Greece and Germany are stuck with the same monetary policy — and it is not working well for either of them.

Surely you jest.

That is a $1.2 Trillion euro expansion.

How much lower do they actually need to be before our good professor admits that artificially controlled interest rates are detrimental, not helpful.

The Republican Party proclaims itself to be the party of conservatism. But being a conservative should not mean promoting policies that have not worked for 100 years. Reestablishing a link between the dollar and gold would be a huge mistake. Establishing a commission to “study” the idea is a waste of time and money.

I won’t even bother getting into a definition of “conservative” as it is irrelevant. So has our good professor managed to convince you of his case against gold?

Rights and freedoms are of course connected to each other. That is the reason why libertarians want to restrict the meaning of the concept of freedom to only negative freedom – the absence of coercion. Not any kind of coercion, but only when persons exercise coercion is freedom held to be restricted. If social structures and property rights deny people access to food, education and safety, no one’s freedom is said to be restricted.

Not really. Freedom requires an understanding of scarcity. Freedom is an economic good, it is scarce, it isn’t just automatically available, viz. a right. Property rights are the way that freedom can best be gained or allocated, utilizing the Rule of Law.

The highlighted conclusion refers to economic goods. Economic goods are scarce. Property rights are the best way to ensure that as many individuals as possible enjoy access to scarce economic goods, freedom, food, education and safety.

Managing money is tough because:

Not because the financial markets are global and 24/7. Not because the markets are full of extremely driven and intelligent competitors. Not because the emotional highs and lows can be soul crushing. It is because of the constant and measurable competition against passive benchmarks.

Benchmarks are the most ferocious of competitors. They show up for work everyday. They never get sick. They don’t take vacation. They are always 100% invested so their results are continuously compounding. Most importantly, they’re not aware of their own performance. The S&P 500 will never enter the 4th quarter feeling it needs to really press to have good numbers for the year. Nor will it take December off to “lock in” a good year.

Which is precisely why they can be beaten. To beat an index, you have to buy low and sell high. The selling part is how you lock in profits, that can then be recycled into increased stock holdings when you buy low. It is all about market timing. It is about absolute returns, measured against [relative] returns of the market.

This inconvenient truth is like a little voice in the head of every successful investor – “Am I really good at this or have I just been lucky?”. A voice that never goes away as it only takes a couple bad years to destroy an lifelong track record.

True. But if you truly have skill, and haven’t just been lucky, you will already know how to manage this and prevent it.

Often, a takeover deal, if taken seriously, will be greeted with a jump in the target company’s share, and a more muddled move in the acquiring company — particularly if the acquisition doesn’t seem to make obvious sense, or if there are worries about paying too much.

Lately, though, we’ve been seeing plenty of investor goodwill toward companies bold enough to try and swallow another company in the rocky environment. That suggests investors are liking the deals, and seeing plenty of value in these target companies, according to John Buckingham, chief investment officer at Al Frank Asset Management in Aliso Viejo, Calif.

Buckingham has been particularly encouraged by three recent deals. Last Monday, health-care giant Aetna shot up 5.6% after announcing it had struck a deal to buy Coventry Health Care. Aetna has since come back some, but remains higher than before the deal was announced. (Coventry, needless to say, jumped 20%.)

Merger’s can help the stock market. Essentially mergers should have the more efficient producers buying out the inefficient, and putting their capital to work more efficiently. In this way the total capacity of an industry is changed/modified for the better.

That’s only of course if the deals make sense. CEO’s have an unfortunate track record however of acquiring assets that don’t make much sense. Buffett and Berkshire are serial acquirer’s and have done very well from it. It is about cashflow.

In the above case, Insurance, the merger makes sense. Insurance is an industry that benefits from scale. Pooled risk is the name of the game, and purchasing another Insurer makes all the sense in the world as long as a few important caveats are observed.

Tail risk is the one you need to watch. Has the insurer that you have just acquired, carry long exposures into the past? The classic example was the asbestos risk that killed a number of private names in Lloyds syndicates a while back.

Mergers done well, indicate that there is value available. If there is value available, there is profit potential, which suggests careful, selective purchases in the market, will reap investment returns going forward. It also helps the bulls, especially if the spark triggers a fire.

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