We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.
Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
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The coming wave? There could be an interesting storm brewing when you see things like this…
Gold has raced to a 16-month high of $700 an ounce as investors seek to shelter their cash after stock markets ended the week sharply lower. The yellow metal has clawed back around $30 this week, raising hopes it could revisit last year’s highs of around $730 an ounce. Although gold is traditionally strong at this time of year, the rout in credit markets is fuelling further appetite for the safest investments.
and this…
A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.
I am trying to join the dots but instead of a bull or a bear, the outline looks a bit like a hippopotamus. Not sure what to make of that.
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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Sounds like a good time to start investing in the grocery market and double check the stored ammo.
No no. This cannot be right!
A mere hiccup I tell you!
Did not our new great leader, (when he was our hidden Illuminatus great leader) sell half our gold reserves at the bottom of the market (around $ 450 an ounce, if I remember correctly) for a fistful of that much sturdier commodity, the Euro?
Safe pair of hands? Fiscal prudence? My ass!
Who’s heading for the airport first?
I sure hope everyone has been keeping up with what has been happening in Zimbabwe for the past few years. It has been a great opportunity for the average person to study up on what really occurs when a modern economy takes a very sudden turn for the worse.
Can someone please explain that?
If the Chinese are selling US Treasuries (as they are certainly entitled to do), then someone else has to be buying them. If the buyers are in (say) Zimbabwe, there would be no drop in “overseas holdings”. Only if the buyers are Americans would “overseas holdings” drop. If Americans would rather hold US Treasuries than other investments (such as gold or German stocks), is this a bad thing? It would imply that US investors don’t see much chance of dollar devaluation or US inflation.
China doesn’t even need to sell them on the street. All they need to do is let the ones they have expire. If China stops replacing maturing a/o buying additional treasurys, what do they do with their dollars no longer in treasurys? They buy stuff with them. They spend money that would otherwise be out of circulation, returning it to the pool of circulating cash.
Two consequences: one, the rates on treasurys have to go up to find replacement buyers (inflation) and two, the amount of cash in circulation goes up (inflation), both of these things combined in the absence of other mitigating factors* equals inflation. (*like the government paying down the debt by an equivalent amount, which would have the same effect as buying treasurys for cash)
Even if the rates on treasurys are raised enough to attract other replacement buyers, long term mortgages are approximately tied to long term treasury rates, so it would also mean long term fixed mortgage rates will go sharply up. Read down at How Treasury securities work. Rising mortgage rates would be still more bad news for the housing market hanging by its fingernails from all of those variable rate mortgages.
More here, and here. We live in interesting times.
It means buy sub-Saharan swampland. Duh.
A supply glut from all of those folks trying to get out from under ill-thought-out investment properties is bad for the supply side. For folks who want to buy, about the only downside is that they’ll pay 7-9% in interest where they previously paid 5-6%. (Or possibly more, depending on how doomsday you see this as getting.) Not to make light of a (probably not forever) end to cheap financing, but there are worse things that could happen.
I grew up in the 1980’s raised by hippies who couldn’t shut up about how “Ronnie Ray Gun is gonna kill us all!” Somehow, 1989 happened and I failed to die when the commies nuked Kansas City in retaliation for the Strategic DEFENSE initiative. And I did not live in an abandoned Connex eating Purina Puppy Chow when the S&L’s failed. I’ve started looking at doomsday scenarios in those lights.[1]
What happened was, in the 1940’s we got injured. We started running deficit spending, which is an economic version of oxycodone or fentanyl: Sometimes a reasonable approach to a problem, but the package insert will say “may be habit forming.” We finished WWII, finished the Marshall Plan, recovered from the injury, and OOPS! It turns out that we somehow got addicted to a highly-addictive economic pain medicine.
And you or Paul will probably correctly point out that the analogy breaks down quickly. Indeed it does: there is no financial methadone clinic. Sending our Congress and President to the economic Narcotics Anonymous would be a good idea, but first the addict has to actually want to get better. And they don’t.
(To say nothing of the people who receive the money that the government spends, both that which is taken through taxes and that which is found under a giant magic toadstool. Nobody wants to give up free money.)
Perry, by the way, gold has been a good hedge against inflation and also bought in times of geo-political strife, but it is not all that negatively correlated with stocks, at least not in the short run. When equities were dumped this July/August, gold was also sold by hedge funds and other speculators who needed to make cash to cover their trading losses. So gold is useful, but not a bomb-proof safe-haven asset.
That said, there’s no doubt that the rise in the value of gold these past few years is fuelled by the huge increase in the global money supply – the dubious legacy of Alan Greenspan and Co – as well as surging demand for the metal from China and India. I am not a gold-bug – there are problems with the old gold standard – but I cannot help wondering whether our financial system would be advised to tie major currencies to gold or some other basket of commodities in some way.
Here’s an article(Link) which people might find interesting.
Not really. We only decided to deliberately run a deficit balance and not pay it down beginning with Reagan.
The other point is the cascade effect. Our economy has grown reliant on consumer home loans. This will kill those to a strong degree, but worse, credit card rates will float upwards just as it finally and belatedly dawns on consumers that they shouldn’t be carrying a balance and should pay them off. In order to make the interest payments and maybe a wee little bit of principle, they will have to stop spending, which is kind of rough on employment.
That depends entirely on the budget deficit. If you are confident the government can pay down debt as fast as treasury holders dump it, then there will be no problem at all. The extremeness of the case is entirely a matter of the government being able to stop running up new debt and paying off past debt as fast as it is non-renewed. What’s your prediction in that department? 8-
Johnathan,
Holy [expletive deleted], Batman!
Not being in the industry, I retain some ability to be surprised. That article surprised me. I knew about the packaging and reselling of debt, I just didn’t realize how they where playing off long term rates against short term rates. How stupid is that? (In the long term, of course.)
Come to think of it, I’m not yet as cynical as I need to be. I’ll try to do better. (Note to self, take lessons from Paul.)
Not being snippy here — I am genuinely perplexed. Help please!
The issue about money that many financial commentators seem to ignore is — Money Circulates!
If Sally Silly gets religion and decides to pay off her credit card debt, she will certainly have to stop buying shoes — bad for shoe-making employment. But the money that Sally pays back to the credit card company ends up with Paul Prudent, who goes out & buys a boat — good for boat-making employment.
The economy is dynamic & continually changing, for sure. Changes in the money economy affect today’s winners & losers in the real economy. That’s life — not the end of the world.
Alice,
The problem is that T-bills are not cash. The way they work is you pay a lot of cash for a T-bill, and the gov pays you interest on that cash. When the treasury expires, they return your cash which, added to interest they payed you is why you gave them your money in the first place.
What does the gov do with that cash it borrowed from you? They loan it to banks who (with a lot of variations and complications) loan it to consumers.
What happens when buyers (like China) stop buying treasurys? (Surrendering cash for an IOU w/interest) The gov (I’m saying gov for simplicity, there is division of labor in fiat banking as well), the gov has to pay people more money (interest) to get them to buy treasurys. If they don’t, then they don’t have the cash to lend to banks to loan to consumers. (And spend) At that point, many governments in the past have ‘monitized’, printed paper money to lend to banks etc. Think Wiemar.
The problem viewed from the big picture, is that when China dumps dollars (sells treasurys) they don’t hold the cash, they spend it. This means that money is entering circulation except, it is not entering circulation through the usual Tbills-for-cash=>gov=>banks=>consumer-loans path. It goes straight into buying things in the market place. This denies the government it’s chance to loan it to banks and then to consumers.
The problems do not come from consumers paying off debt, the problems come from treasurys being turned into cash and spent. The other problems that happen all derive from the problem with investors dumping treasurys.
I’ll be out for a while, but I’ll check in again or maybe somebody who really knows what they’re talking about can explain it better and correct my mistakes.
.
Thanks for the explanation — and my apologies for being a slow student. It still seems that we are looking at only part of the system, not the whole thing.
Famous example was the Arab Oil Embargo of the 1970s, where the Arabs decided to punish the US for its support of UN-created Israel. OPEC stopped selling oil to the US, which drove up the price of oil for everybody, and meant more income for the Arabs. The Arabs then spent the extra money on Boeings & Cadillacs — in effect, they pumped cash out of Europe and into the US. Their embargo did more harm to the European economy than to the US. Money Circulates!
If the Chinese choose to stop rolling over T-Bonds, that is bad news for the US government. US Govt has less money to spend. But unless the Chinese decide to put their money under the matress, they have to do something else with their cash. If they invest it elsewhere or spend it, then the recipients of the cash have additional revenues. Money circulates!
A quick look at T-bond & T-bill rates — interest rates on 10-year & 3-month certificates have not been going up. Suggests that the Fed is seeing no significant change in the supply/demand balance for their paper. Dollar exchange rates have not been declining precipitously, suggesting no major crank-up in printed paper. So what is really going on?
Like giving it is transfer payments to their people. So cash gets transferred from the US to China. Before, Chines gov money bought US treasurys, ending up with US consumers, now they give the money to Chinese consumers. It ends up with consumers, but which consumers matters too.
I was a pessimist all the time and expected an economic downturn ever since the price of oil went from $20 to $70. I was wrong for 2 years, but maybe the long overdue downturn is coming now. There is no such thing as a recess-less economy. It’s about time for some correction.
The basic problems are of course very big; endless deficits in the US and EU, caused by excessive welfare payments. Nonperforming sectors in the Chinese economy (gov. enterprises and banking). We should expect some big, catastrophic events. When ? I don’t know.
Alice, it is true that money circulates. One reason it circulates is that planned inflation keeps people from holding cash (as in dollar bills and coins). In order to maintain value, it must not be ‘put in a jar’.
The problem that is caused here is that the US gov pre-monitized the dollar… They issued more than they should have. The important thing to remember here is that the purpose of Tbills is to keep cash out of circulation. By taking the Tbill owner’s cash out of circulation, the gov can turn around and either spend that cash, or loan it to somebody else (the banking system). It was the reputation of the US gov that gave people confidence to loan money to the US gov. (By purchasing Tbills) This means that it is now possible for China (which holds 44% of US gov debt) to compel us to pay back what they have loaned the US gov. (By paying off their Tbills)
Without Tbills, the system breaks down. Tbills are what allows the money supply to be bigger than the cash supply. When those Tbills are traded in for cash, that cash has to come from somewhere.
Imagine it like this. I am the government. I borrow 10M dollars by ‘selling’ IOUs for 10M dollars and paying people interest on them. (These are the Tbills) Now, I have 10M dollars. I spend a few million as I see fit, and I loan the rest to people like you. But what if suddenly, for whatever reason, everyone stops ‘buying’ my IOUs (loaning me money)? Now I have to get the money both to cover my personal bills and to cover the cash that I loaned to you out of what I borrowed with the IOUs. There are three things that will all work towards this end. One, I can stop spending more than I take in and start paying off my personal debt (remember, I’m the government in this story so that would mean paying down the gov debt), two, I can make it painful enough for people like you to borrow money from me that you return it (raising interest rates, prime rate etc) that way I can return to the IOU holders what you return to me, and three, if neither of those are enough, I can print more cash to pay back the people who loaned me (the gov) money by ‘purchasing’ Tbills. (after all, I the gov own the printing presses!)
Please realize there are a whole lot of added steps that I glossed over to try to show just the fundamentals of how deficit spending, consumer product index standardized, fiat money works. If anybody out there wants to correct me, please do. Or if anyone else wants to have a go a trying to make it understandable.
I am trying to join the dots but instead of a bull or a bear, the outline looks a bit like a hippopotamus. Not sure what to make of that.
Might it be a rhinoceros? That is a more traditionally surreal beast.
If you want something that’s really going to be worth its weight in gold, then it had best be either a hippo, a very large African elephant or a blue whale.
Jacob,
For many reasons, it seems likely to me that when things go south, it will happen very fast. All of the people who hold dollars are like people playing musical chairs. As soon as somebody thinks the music is stopping, everyone will try to sit down at once. Whoever dumps dollars first loses the least, whoever dumps dollars last is SOL.
It will be interesting to see how it plays out. I think the world has been looking for an alternative reserve currency for a while and there just aren’t any out there. It is possible that China is making a play to become the new reserve currency. Putin wants it to be the ruble but I think he is hallucinating.
Probably these possibilities are the strongest reason (and the last chance) to get the bloated government to change its way. As so many individuals are learning right now, you can only live on debt if somebody will loan you the money.
There is that old saying — owe your banker $1,000 & he owns you; owe him $1,000,000 & you own him. I appreciate that we are all oversimplifying things here, but the main loser from a declining dollar these days would be the Chinese government.
Anyway, China can’t “compel” the US to pay back money invested in T-bonds, not prematurely. When each bond matures — 1 year, 10 years, 30 years — China can certainly take its cash and get out of dollars. But until then, the only thing that China can do is to sell its bonds to someone else, which has limited effects on the US govt.
Fiat money and all these issues are complicated. I have found most economic textbooks to be not very useful; they seem to get so hung up on their complex economic models that they miss the obvious.
There is a real economy — the ability to produce goods & services: grow food, mine resources, manufacture things. We live so much better than our grandparents because the real economy has grown, mainly because of investment in knowledge & equipment.
Then there is the money economy, which is mainly about how to share the benefits produced by the real economy. The big issue that many leftists seem to ignore is that manipulating the money economy (taxes, subsidies) can have negative effects on the real economy. But what do I know?
Anyone got any advice for somebody sitting on a large pile of dollars right now? Buying property is not a practical option.
Alice,
That saying assumes that your creditor shares your values. In reality it all depends on what exactly your creditor wants. Considering China’s huge real, hold it in your hand, production capacity, the dollars are quite likely expendable to them. China has a ‘real economy’. They don’t ‘need’ ours, it is merely a useful source of dollars for trade. But they have more of those than they need. To China, it’s just monopoly money to be used to win the game. They make ‘real’ stuff that they can exchange throughout the world for things besides dollars.
Also, keep in mind that China and Russia have far and away the most capacity to deliberately inflict pain on their own populations for ‘the greater good’ (or national pride). They would not be truly harmed in the slightest if they lost the entire value of the dollars they are holding. Seriously, what are they getting with it? A little (very little) bit of interest.
As for compelling us to pay them back, at 1.3? trillion dollars, non renewal is a pretty big bite. Furthermore, if they had nefarious intent (love that word) they could dump Tbills at a loss making it very hard for the US to sell anymore without paying painful (and economically destructive) interest rates.
We, the US and UK, have exported most of our real goods production capacity and sold most of the rest to foreign investors. It’s a bit late in the game for us to do anything about that now. I think the globalists will be very disappointed when nobody wants to play with us on our terms anymore.
A whole lot, I say. And maybe this is a good time for me to say that I really appreciate your contribution to the comments threads.
Tim, (I’m trying to keep in mind where you live) look at history. The perfect cache would be in something portable and an essential necessity for life. Barring that, one or the other. Food and energy are essential, precious metals and jewels are portable.
My aunts concealed Chinese refugees during the communist coup attempt in Indonesia. (The anti communists attempted to kill all Chinese on the assumption that they were with the communists.) They found out after the fact that one elderly lady they hid had the entire extended family’s wealth converted into gold and in a jar in her bedding.
Precious metals and jewels assume there will still be a market for them when and where you need it. Food and energy assumes you can store, defend and if necessary transport it. Paper certificates (including stocks, futures and forex) assumes whatever institution you’re dealing with will remain solvent, open for business and your assets won’t be nationalized (like FDR did with gold). If you trust the UK gov not to do something similar, and the institutions integrity and competence, you could try egold. Last I heard it was all kept as bullion in London vaults. (I understand US tax code does not handle egold well. My accountant threatened to dump me when I suggested trying it. If somebody can tell me correctly otherwise, I would appreciate an informed opinion.)
But if I recall correctly, in your field, your skills will always be your most valuable, portable and barterable asset. Keep them as up to date and cross platform (literally?:-) portable as possible.
Mrs. Rodham-Clinton would certainly appreciate your dollars. You would just have to adopt a Chinese name before giving your cash to her.
More seriously, Mid has pegged it right — invest in yourself.
If you still have dollars to invest in assets after that, you will first have to define your objectives, time frame, risk tolerance. But you knew that.
Back at the dawn of history, a guy called Howard (?)Ruff — Ruff Times — wrote some advice about investing. His big concerns were inflation & deflation — since both have happened in the not-too-distant past. He recommended keeping some of your assets in gold (in case of inflation), some in Treasuries/cash (in case of deflation), and some in diversified assets (in case of neither of the above).
Along those lines, a fun read is “The Black Swan” by N. M. Taleb — a deep-thinking derivatives trader. Taleb implies that smart folk should position themselves to profit when the unexpected happens. As it always does. Unexpectedly.
Anyone got any advice for somebody sitting on a large pile of dollars right now?
Yes buy mining stocks. China, India are becoming modern societies. Their people want refrigerators, indoor plumbing, infrastructure. Mining stocks are trading at Price Earnings of 7 or less. Mining stocks have hard assets in the ground. As the dollar goes down, the har asset value goes up.
What about real estate?
Real Estate is a classic place for an expanded money supply to go Alisa.
Sunfish – yes indeed the evil Paul could give you lots of information and arguments indicating the strong possibility that we are all DOOMED. However human beings have a nasty habit of preventing total economic and social breakdown (irritating – it is almost as if they did not want to die).
However, this time there are a few extra horrors.
For example, the Federal Reserve Board stopped even giving M3 growth numbers in the middle of last year.
They said that they did this to “save money” (and that the information was not “useful”), but the idea that part of the government (and the Fed is part of the government, just like Freddie Mac, Fannie Mae and the rest of the absurdities are) is that interested in saving money does not strike me as likely.
The “Economist” magazine (some of you know my fair and balanced view of that satanic journal) stopped giving money supply growth stats (for any country) at Christmas.
So I suspect this credit money bubble is a bit bigger than normal – so big that the powers-that-be do not want people to know just how big it is.
Still, should the worse come to the worse, back in the 1930’s academics at Auburn Alabama gave lectures to farmers (on various subjects – not just “practical” ones) in return for food.
And given the number of Austrian School people at Auburn these days I suspect they are already preparing to do that again (just in case).
Anyway remember, it is not “the crash” that does the real long lasting damage. It is the government reaction to the crash.
In 1921 there was a big crash (the credit money bubble of the First World War went pop), President Warren Harding did nothing (apart from CUTTING government spending) and the economy was in strong recovery within six months (no wonder the establishment historians, and other such, hate Harding).
In 1929 there was a similar crash (the late 1920’s credit money bubble went pop), but Herbert “The Forgotten Progressive” Hoover and then F.D.R. were around to “help” – that “help” really ****** things up.
Lastly.
If you do buy gold, make sure NO ONE KNOWS YOU HAVE GOT IT (especially the government).
Tranio:
Mining stocks also, depending on where the mine is located, are especially vulnerable to being nationalized. If Hugo Chavez decides he wants your tin mine, it’s not easy to pack it up and move the minerals beyond his reach. (Now, the intellectual capital, the skills of your engineers, etc. is very portable, but land with mineral rights and especially rights worth exercising, somewhat less so.)
Paul:
I have to disagree about real estate. In the US, that’s the sector about to be clobbered: It’s often badly-overvalued, and the greater fools can’t get financed anymore.
FWIW, you correctly note that we have this bad habit of not dying off whenever asteroids kill the dinosaurs. I don’t feel so bad about my analogy after all: forcibly withdraw someone from opiates, and he probably won’t die. He’ll just really wish he could for a while.
The goods are still good, and the services are still in service. The money is not much good even for wiping, but we’ve been here before.
Maybe I can become a ronin or something. “Will whack bad guys with sticks for food.”
I’m sure that President Bush and the Democrat Congress and the Brown government all understand the value of a hands-off approach.
The same goes for pretty much every preparation for bad times, lest the neighborhood association decide that you really meant to buy a pallet of ramen noodles for them and not yourself.
Sunfish we are not in disagreement over real estate.
I said that it is classic place where an expanded money supply tend to go.
I.E. it is a bubble.
Malinvestment can be in many things (it depends where the extra credit-money is put), but real estate is one of the old classics.
A good old style property bubble (we have had many in Britain).
Still (breakdown of civilization apart) real estate does not tend to fall to nothing in value (as shares sometimes do).
If ownership is secure (i.e. not out-of-control government or other bandits active) land and buildings on the land retain some value (although often not nearly as much as was paid for them).
Given how the Chinese government works with Chinese banks, they, like the Russians, are hallucinating.