Poloz Prepared to “Nourish” Economy. Translation: He Will Inflate

Poloz thinks it will be necessary to “nourish” the economy.

To a Keynesian central banker from the EDC, this means “buy assets” i.e. inflate.

The boneheaded idea that this strengthens the economy is characteristic of cranks throughout history.

Currency depreciation cannot ever boost the economy. If Poloz were to announce that he will start expanding rate of growth in the money supply, the outcome on the foreign exchange market would be for other currencies to appreciate versus the loonie. Domestic producers would want to increase exports due to increased international demand, and would borrow from commercial banks to fund production at interest rates lower than otherwise. Resources would shift away from other industries into Canadian export industries. Exporters would record higher profits, but in real terms, the citizens of Canada would be getting fewer imports for each export. Basically, Canada would gain more foreign exchange, but they would get getting fewer real goods in exchange. Canadians in general would therefore become poorer.

And those higher exporter profits? As time goes by, monetary expansion would cause prices to rise and those artificial, subsidized profits would disappear. The end result is a weaker economy where resources have been misallocated due to credit expansion and interference with market exchange rates, and along the way some politically-connected export industries would make a bit of extra money.

Poloz needs to read Mises:

The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.

The Canadian dollar will surely suffer under Poloz’s governance.

Mourn for the Lost Penny

Every Canadian hated pennies. Even homeless street beggars hated getting pennies. If someone dropped a penny, they wouldn’t even bother to pick it up. Every Canadian seems happy that the penny is gone.

Sadly, Canadians do not realize how this loss is truly a tragedy, because it unequivocally shows how the government and the Bank of Canada have abused the monopoly over money. If you go to the BoC website, you can see that since 1914 the Canadian dollar has lost 95% of its value.

This is the inevitable result of the age-old credo of monetary cranks and inflationists. Mises wrote:

A very popular doctrine maintains that progressive lowering of the monetary unit’s purchasing power played a decisive role in historical evolution. It is asserted that mankind would not have reached its present state of well-being if the supply of money had not increased to a greater extent than the demand for money. The resulting fall in purchasing power, it is said, was a necessary condition of economic progress. The intensification of the division of labor and the continuous growth of capital accumulation, which have centupled the productivity of labor, could ensue only in a world of progressive price rises. Inflation creates prosperity and wealth; deflation distress and economic decay.

All this time, rather than having pennies lose value until they must be eliminated, pennies should have been increasing in value. We should have been able to buy more stuff with pennies today than 50 years ago. That is how a free economy with a stable money supply works. Money is saved and invested into more production. Workers create more goods, and so the monetary unit can purchase more stuff. Instead, the Canadian government and its central bank have distorted the economy and redistributed wealth by means of monetary policy. Monopolies are always bad, and a monopolization of money is the most dangerous of all.

The death of the penny should be a blaring wake-up call to Canadians. The Bank of Canada should be shut down, the government should abolish legal tender laws, and Canadians themselves should decide what their money should be. Otherwise, expect to someday bid farewell to nickels, dimes, and even loonies as the government continues its destruction of our currency.

— Read more at the Mises.ca

Economic Ignoramus Stephen Poloz to Replace Carney as Bank of Canada Governor

So far, we don’t know much about Mr Poloz on a philosophical level.

Based on the little we do know, I think he is a bad choice. He has a PhD in economics, so he likely knows very little about economics.

We also know he has spent most of his life as a bureaucrat. Most of his career has been “public service” (cough cough) at the BoC and Export Development Canada. I’m sure he made lots of friends in the export industry there. Friends who will really appreciate a subsidy in the form of monetary inflation.

Back in late 2008, he wrote a commentary on the financial crisis. In essence, he appeals to animal spirits, like all Keynesians who are baffled by economic law. He blames it on nothing more than a change in psychology following the 9/11 attacks. Everyone had a “live for the moment” attitude, he says, and ultimately this created the housing bubble.

The first sign of failure in economic analysis is a reliance on nonscientific pop-psychology. He completely fails to identify the source of bubbles and account for why business cycles occur. The culpability of central banks is nowhere challenged. He pleads agnostic about the ability of economists to understand the cause of bubbles at all. He does not understand the Austrian theory of the business cycle.

Based on these facts, I can safely conclude he is an Keynesian/inflationist/mercantilist. Sort of like, well, all central bankers. He may prove to be better or worse than Carney. Only time will tell.

Ultimately, it matters only a little who is the head of the Bank of Canada. The system as such is the problem, and not so much the individual people in charge.

— Read more at BoC’s website — 

Gold Delivery Denied! Paper Gold Is a House of Cards

A rich American man had gold in a segregated account in a Swiss bank. Or so he thought.

When he tried to get delivery of his gold, the bank refused. It said the central bank wouldn’t let them do it, because it was more than 200,000 euros worth of gold. So instead, the bank would settle with cash.

What’s going on here?

I don’t think it’s anti-terrorism and anti-money laundering regulations, as the bank says.

Over the years, banks have borrowed non-interest-bearing gold from gold owners, including central banks, at 1% or so, then sold it to buy higher-yielding bonds. It was a reliable trade for a long time. But as the banks have refinanced those loans, gold prices have climbed and many of those debt instruments have fallen in value. They cannot buy back the gold on the market at today’s prices, and the bonds in which they invested have suffered and cannot be sold without a loss.

The day of reckoning comes when these gold shorts cannot pay back the gold owners. This means many investors, including central banks that lent out their gold, will not get their gold back. Like our American friend who tried to take delivery from the Swiss bank.

Imagine the fallout when this spreads. The paper gold market is like a stick of dynamite. When it blows up, you don’t want to be holding it. Yet when this happens, the holders of actual physical gold will be very happy.

— Read more about this story at King World News — 

Trusting Bureaucrats and Politicians Will Cost You Money

Before the financial crisis in Cyprus, the Cypriot president assured voters that the government would never seize their bank deposits.

Then guess what happened?

On April 4, CMR asked if the Canadian government would have a Cyprus-like response to a banking crisis, as was implied by the language of pages 144-145 of the new budget.

The government is trying to assure us now that they won’t steal your deposits to prop up an insolvent bank. Yet Mark Carney himself wouldn’t rule out the possibility.

“Canadian institutions have substantial unsecured debt obligations in the wholesale market and as well as other classes of capital, and they have substantial capital as well, so once you stack all of that up, regardless of whether one would look to reach into it … it’s hard to fathom why it would be necessary,” the Bank of Canada governor said.

“Hard to fathom”? That is not exactly what I’d call “comforting language.” Especially because this is from a guy who is wrong nearly every time he opens his mouth.

He admitted the queue of capital buffers for banks would likely include some types of deposits, but did not elaborate.

Yet Carney also referred to a response from Flaherty’s office, which stated:

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime. Under a ‘bail-in’ arrangement, a failing financial institution has to tap into its own special reserves or assets (which it has been forced to put aside) to keep its operations going.”

“Nothing to do with consumer deposits.” Okay.

Remember Rockwell’s Law: always believe the opposite of what state-officials tell you. If they say you have nothing to worry about, then you should start worrying.

But let’s say for the sake of argument deposits are supposed to be excluded from any proposed “bail-in” scenario. What is the bank going to do? Canadian banks are capitalized about as well as Lehman Brothers before things went bad.

Consider TD. They have $818 billion in assets. They have $768 billion in liabilities. Very little equity is available to withstand losses in asset value or income. All the big Canadian banks are like this. A tremendous amount of special reserves need to be put aside to withstand even a 10% drop in the value of a Canadian bank’s assets.

There will be more crises. Canadian banks cannot survive a crisis without a government bailout. Don’t take any comfort in anything coming out of Ottawa and the BoC.

— Read more about this story at CBC — 

Australia to Join the World’s Orgy of Currency Debasement?

Australia’s mining boom is fading. Demand from China is slipping. The economy is going to contract. Yet their dollar is strengthening.

Central bankers are Keynesian-mercantilists that get bent out of shape when their own currencies are “too strong.” Especially when the economy is threatening to slow down. The bureaucrats at the RBA are no different.

What are they going to do? Try to hold down the price of the Australian dollar. They will join Europe, Japan, China, America, and the Swiss in the frenzy of currency debasement.

This is… a bad idea. Yet it is to be expected, as are the negative consequences it will create.

It might be best to start trading your Aussie dollars for something better. For other currencies, few good choices exist. I used to like the yen before Abenomics. Now I like the Singapore dollar.

Hardly any central bank  can resist racing to the bottom. I don’t think Australia’s can resist.

— Continue reading at Sunday Morning Herald —

Mini-Review: CBC Documentary “The Secret World of Gold”

On April 18, CBC aired a documentary called “The Secret World of Gold.” Though flawed, the program was interesting and covered many issues.

Here are some things talked about in the documentary:

  • The Bank of Canada has sold almost all our country’s gold over the last 30 years.
  • Underwater treasure hunts for gold.
  • Secret government deals to control gold.
  • Futures market manipulation (this was by far the weakest part of the show — the futures market is not explained and the case made for manipulation is very thin).
  • Buildings with gold windows.
  • Wars for gold.
  • How Chavez got all Venezuela’s gold back from the US and Europe
  • Gold shifting to the East from the West
  • Death gold from Nazi extermination camps (some of which was used to fill Hitler’s teeth — WTF).
  • Allocation of central bank gold holdings — who owns the gold? Is the gold even there?

Think about taking 45 minutes out of your weekend to check it out. You can watch it here for free, the only drawback is there are a few dumb CBC ads.

UPDATE: You no longer need to watch it at CBC. The copyright police got to “The Secret World of Gold” on YouTube, so it looks like you have to watch on CBC…

Is Now the Time to Get Out of the Stock Market?

Last week gold and silver got killed, especially after the rumor hit that Cyprus would sell gold to get a big fat bailout (honestly I doubt that will happen).

The slaughter continued today. I am writing this with gold at $1365. Margin calls are probably dropping left and right.

Other commodities have fallen, including oil. Bonds have rallied recently. The 30-year Treasury offers less than 3%, which is pretty much completely crazy. Meanwhile, Canada lost 54,000 jobs in March — the worst employment update in four years.

To me, these are pieces of data which imply an economic correction trying to work itself out, rather than a rippin’ recovery. If these developments justify concerns about a slowing economy, then you want to be careful about the mainstream coverage about this gold panic, and their general frenzy about  buying stocks.

US stocks, which are the hot ticket these days, seem to me dangerously high. Corporate earnings in the US are 70% above their historical average due to massive fiscal profligacy by government and citizenry, and aggressive cost-cutting post-2008. Periods of strong corporate profits are never permanent and eventually regress towards the mean. Therefore it should be expected that future earnings and dividends will disappoint.

The Fed is struggling to perpetuate the error cycle and keep the ‘recovery’ going.

Meanwhile, the TSX is not performing well this year, after being one of the world’s worst stock markets in 2012. And the TSX-V — which is where all the most exciting action is — is going to get smaller. The average level of cash held by TSX-V-listed stocks has fallen from $4.3 million in mid-2011 to about $2.8 million now. This might not sound too bad because it is still several times higher than pre-2008 levels, but on a per-share basis, it is terrible. TSX-V companies have only about 2.8 cents per share as of last quarter, a drop of more than 50% in two years. Remember, these companies don’t usually generate their own cash flows from any operations, and cash is frequently their only good asset. All the while, TSX-V companies have doubled their liabilities per share — so when the nearly 2.6 cents per share is paid off, they are basically broke. So while this says nothing about any individual companies, it suggests the junior resource sector is going to come up on some hard times.

I absolutely expect Canada and the US to join the other developed nations suffering from recession.

If you hold stocks at this time, you should seriously think about just selling most or all of them. Be ruthless about keeping only the absolute best ones. Keep the balance in cash and patiently await buying opportunities as prices fall.

If you are a long-term believer in gold, this is clearly a huge buying opportunity. Gold could still fall another 10-15% before hitting a bottom, and it could take a 6-12 months to recover. I would like to point out that during the previous gold market, there was a 20% price drop in late 1978.  We know how that turned out. Yet, if the fundamental argument for gold is still sound, then today’s prices are a godsend.

TSX Loses All Gains for 2013

The Canadian stock market was hit pretty hard as oil fell and gold got hammered. At the close, gold was down nearly $75 USD. The TSX lost all of its 2013 gains over the last few days.

I have predicted that North America will face recession this year, so a falling TSX is consistent with that. An economic correction is especially hard on capital goods industries and raw materials.

I also believe it is a reasonable expectation for gold to fall to $1200-$1300/oz as the economic error cycle matures. Then, when a panic hits, and Fed and other central banks will respond with further inflation, and the gold price will rise in response to that.

A commodity broker says: “the argument for gold as a safe haven or protection against inflation just isn’t there . . . It doesn’t look too good for gold.” This assumes there another crisis will not occur, and central banks will not inflate in response. At some point central banks will have to stop inflating to prevent currency collapse and preserve their nations’ banks, yes. Yet, I do not think that time is nigh because we have not yet seen massive consumer price inflation result from the monetary expansion since the ’08 financial crisis.

Read more at Financial Post.

Ron Paul in Calgary

Last Friday, I attended the Ron Paul speech at the “Making Alberta Safe for Capitalism” summit.  This was at the Westin Ballroom in downtown Calgary. I was among approximately 300 attendees, which included financial professionals, publishers, IT nerds, engineers, students, neocons, and more.

I would like to note how this attracted virtually NO media attention. I do not think there is any “conspiracy” here — rather, it is simply due to Ralph Klein’s memorial service being held at the same time. We all know how the media loves to fill its time with the glorification dead politicians whenever the opportunity presents itself. This week, they’ve got Thatcher.

Besides, Ron Paul’s ideas make Canadians uncomfortable. Most people don’t want to talk about such things.

Ron Paul’s speech was basically what you would expect if you’ve been following him for the last few years. I’ve been watching Ron Paul’s political career since 1998, so I was very familiar with all the themes: personal responsibility, free markets, small government, anti-war, and anti-central banking. Still, it was great to pay respects to someone who is more than just an honorable statesman (a contradiction in terms when applied to anyone else), but a man whose efforts have done more for the liberty movement than anyone else in the modern era.

Having retired from politics, this was Ron Paul without any filter that might have previously been imposed by the realities of being in political office. Yet since his message has always been fundamentally radical, there was no difference with post-politics Ron Paul. The message is just as unfavorable to economic, social, and imperial intervention as ever.

At various points throughout the speech, I would look around to gauge the response to certain statements. How delightful to see various attending neocons squirm uneasily when Paul declared there should be no income tax. Some folks scowled at the suggestion to replace government welfare entirely with private charity. Otherwise, the ideas of less spending, less tax, less regulation, and more civil liberties were received favorably. Paul age and manner makes is a kind, wise grandfatherly figure — part of his great success is due to his ability to convey radical arguments in favor of liberty while making them seem completely non-controversial.

The biggest opportunity that was missed in Dr Paul’s speech was HEALTHCARE. If there is a sacred cow in Canadian politics, it’s definitely government healthcare. Without a doubt, government healthcare is a disaster, and Canadians need to learn why it will always be awful regardless of the huge piles of money thrown at it. Unfortunately, healthcare was not covered at all in Dr Paul’s remarks. Too bad. Huge missed opportunity, I think.

He is a medical doctor and an economist who can speak with authority on the failings of public healthcare. He is also old enough to speak about American healthcare system before the government became heavily involved. Before Medicaid, Medicare, the HMO Act of ’73, and so on, there was relatively little government intervention with the provision of healthcare. Basic medical services were cheap and plentiful, and a greater portion of the population had health insurance compared with now. The audience would have greatly benefited from hearing his insights on this subject. He has effectively explained the necessity of free markets in medical care — it is a message Canadians desperately need to hear from somewhere. Virtually no one will touch the issue of public healthcare in this country. We will all be worse off as long as this condition persists.

I would have also liked to hear more war-related remarks. Essentially, anything that applies to the US wasting lives and money on Afghanistan applies to Canada as well. Paul spoke about Iraq more than Afghanistan — which is fine in and of itself, but Canada was not seriously involved in Iraq. Our participation in Afghanistan is another story. Sadly, Afghanistan is an issue that people barely seem to care much about. If they do, it’s because they are dumb enough to think we have Canadian forces there “fighting for our freedom.” Yuck. The lack of interest is even more critical now, because Obama has declared he is “bringing the troops home” in 2014. This is typical government strategy: declare “victory!” and suddenly no one cares anymore. Just like Iraq, where there was never any “victory”, and as I write this the country continues tearing itself apart.

Ron Paul’s speech included a few “fanservice” parts for the Calgarian audience:

He said, “Ralph Klein sounds like a guy I might have liked.” Fair enough, given the memorial was that day, and Klein actually did cut spending at one point.  So that’s cool, whether or not Klein was a principled friend of liberty.

He also gave his support to the Keystone XL — with the important qualification that one can get the permission of property owners, the government should not stand in the way of pipeline construction. This is an rather critical proviso, because in reality pipeline construction does involve government takings/expropriations. Remember: in Canada, the Crown owns all the land as a matter of law.

Anyone who attended this event specifically for Ron Paul could be described as “cutting-edge.” Canadians are not generally ready for the radical Paulian message. For many Americans, there is the emotional connection to ideas of independence, revolution and decentralization, even these are not embraced in practice. The Paulian message can get its hooks in that. For Canadians, the state is endlessly glorified in subtle and not-so-subtle ways. There is no element within our culture that reinforces skepticism about state power. The closest thing to this is Albertans’ memories of the NEP, but that is a regional sentiment and it is being gradually overwhelmed with the pleas for more government.

I hope that the mere fact that Ron Paul has visited Canada to give pro-capitalism speeches indicates that there is a growing audience for the message of liberty in this country. Just as the 20th century demonstrated communism was a lie, the 21st century will show us that democracy is a lie. Democracy’s death throes will be earth-shattering. Liberty’s natural elite must spread and shine the light through dark times, so that a better age may yet emerge.