Ben Bernanke: 100% Wrong.

December 6, 2010 Leave a comment

Bernanke made an appearance on “60 Minutes” the other night (Part 1, Part 2). This is a soft interview for Bernanke. There are no tough questions because the interviewer does not understand economic science or finance.

First, I would like to remark on what is apparently Bernanke’s profound nervousness — at least that is how I interpret his trembling voice and his quivering lips. I’ve seen a lot of Bernanke footage, albeit not often so close up on his bearded mug. He often sounds shaky, even back in 2006-2007 when his forecasts were all rosy, but not this shaky. This is not the look of a man who is 100% sure of his actions. But enough of my pop psychology, and on to a few matters of substance.

“This fear of inflation is overstated,” he says. Is it really? It looks like Bernanke did create lots of money, but has not yet translated into a rise in M1 — instead, it is stockpiled as excess reserves of commercial banks. The monetary base has been basically flat the last several months.

Yet, when the banks do start to lend and the magic of fractional reserve banking kicks in, prices will be bid up to epic proportions. Export economies such as Canada will in turn have to inflate so they can push up the US dollar and push down their own currencies. That is why QE2 is a big concern to many people. What Bernanke says in defense of QE2 is important:

“We are not printing money,”

This comment drew a few snickers from my peers, but I think this might be a rare case of Bernanke speaking the truth. The “QE2” announcement did not actually mention quantitative easing at all, it merely said the Fed would buy long-term Treasuries. Since then, it has increased its holdings of Treasuries but sold other assets. Net effect – no real change in the base. I suspect this will continue into the near future.

The purpose of the Fed is to protect the big banks. Bernanke can handle 10% unemployment so long as the big banks are happy. When the banks get in trouble, then he will be forced expand. I think this arises from his complete failure to understand the business cycle. His ideas about the Great Depression are not reassuring.

The mainstream likes to make Bernanke out to be a great sage on the subject of the Great Depression, and that is the case here. I guess the logic is something along the lines of: if Bernanke believes something about the Great Depression, it must be true. It’s Bernanke, he’s smart and he studied the Great Depression, how could he be wrong? (hmm…) Well, I have a big chip on my shoulder about this. This is one of the most baleful ideas in the realm of economic inquiry. Bernanke is totally wrong on this issue.

Bernanke’s thesis is that the Great Depression was caused by the Fed’s contraction of the money supply and the failure to inflate. The Fed did not reduce the monetary base after the crash. After a period of keeping it flat, they expanded the monetary base slightly in 1932 then dramatically from 1933 onward.

The money supply did collapse, but only because so many banks went bankrupt. This came to an end in 1934 when the FDIC was created. From here on the money supply rose. The Great Depression did not end until after World War II. Bernanke’s theory is not supported by evidence.

(This chart was taken from here.)

With Bernanke running things, we are probably doomed. I believe his policies will eventually cause mass inflation, and nations where the economy is structured towards servicing American consumption will be forced to inflate as well. Canada sells the Americans $350 billion dollars worth of goods each year. Mark Carney thinks a strong Canadian dollar is bad for Canada’s economy.

Filed under Banking and Finance, CMR, Economics, Intervention Tagged with ,

Canadian banks, bailed out by the Fed.

December 1, 2010 Leave a comment

Documents released by the Federal Reserve show that Canadian banks used the Fed’s special loan programs to strengthen themselves when the economy started to go sour.

I find this very enlightening. First of all, there is stubborn myth that circulates our country, averring that Canadian institutions did not need a bailout. This is simply untrue. Canada’s bank bailout was a little more sophisticated, a little less blatant, than, say, the US bank bailouts, but it amounted to a bailout nonetheless. The Canadian government buffered its big financial institutions with a whopping $75 billion dollars used to buy bad assets.

Second, the Fed’s loan programs are bailouts too.

Canadian banks said the moves to seek loans from the Fed were dictated by strategy and not by necessity.

RBC accessed funding from the Fed “purely for business reasons – better pricing and collateral rules – and because they were the best deal for our shareholders at the time,” said Gillian McArdle, a bank spokesperson. “Our access to funding remained very strong through the entire crisis.”

This is an interesting thing to say. Let us think about this a bit.

Remember that the Federal Reserve has a monopoly on the creation of US dollars. It can buy any asset it wants with digital dollars created out of nothing. Other institutions cannot do anything like this.

If an institution like Royal Bank cannot raise capital on the market and turns to a central bank for help, this is a bailout. This allows it to strengthen its balance sheet in a way that would not be possible without the central bank’s intervention. Saying this does not amount to a bailout is incoherent.

Central banks exist to bail out big financial institutions and governments when markets go bad. In 2008, the Fed bought a trillion dollars or so in garbage assets that the market would not touch at face value. The Bank of Canada helped bailout banks too.

So in addition to getting bailed out by the the BoC and the Canadian government, Canadian banks were bailed out by the Federal Reserve as well!

Why is this important? In the business cycle, when the boom period reaches its apex and market forces begin initiating vengeful corrections, bad debts must be liquidated for the economy to become rebalanced. This is value of the recession — it restores soundness to the economic system by clearing out the malinvestments perpetuated by expansionary monetary policies that create the bubble. Of course, in 2008 governments and central bankers around the world stepped in to ensure that would not happen.

The fact that Canadian institutions availed themselves of the Fed’s interventionary loan programs (to say nothing of the $75 billion bailout from Canada) reveals that Canadian banks are not as strong as people claim. Like all commercial banks operating on fractional reserve banking systems, Canadian banks are inherently on the verge of bankruptcy at all times. Our system ought not be the envy of the world — instead, it is just another facet of the nightmarish system that Bank of England Governor Mervyn King candidly called “the worst banking system conceivable.”

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China’s real estate bubble.

November 30, 2010 Leave a comment

I am predicting that Asia will enter a recession in 2011.

Recessions are the necessary outcome of loose monetary policies that create bubbles. China has been inflating its economy at a rate of 20% or more per year for several years now.

Clear evidence of this is found in China’s real estate market. To really grasp the magnitude of this, I have embedded the video below. This is not a new video, but it is very worth watching. Sometimes seeing is believing.

The one thing you CAN say about China’s waste though… at least they are building STUFF. Whereas when you think about the pure waste created by America’s military which exists to blow things up and kill people, it doesn’t seem like such a bad misallocation in the end…

Filed under CMR, Economics, Foreign Affairs Tagged with ,

Jim Rogers, Andrew Schiff, and some economic ignoramus named Doug Henwood talk about TBTF and taxes.

November 30, 2010 4 Comments

Listening to this Doug Henwood fellow on taxes is truly unbearable. Have fun.

This is an entertaining discussion but it is pretty boisterous and a lot of cogent points get lost. The group talks about the Too Big To Fail policy as “socialism for the rich,” which is a legitimate given the policy of bailing out big, insolvent financial institutions. There is no dispute with any of this.

Socialism for the rich should be rejected, but Schiff makes a valid point that, insofar as bailing out financial institutions was intended to keep credit flowing liberally to borrowers whose credit-worthiness was otherwise inadequate, the TBTF policy was “socialism for the poor” as well. American consumers are addicted to debt and low interest rates.

Rogers and Schiff are apparently opposed to socialism in principle, but Henwood is only against “socialism for the rich.” He likes other forms of economic interference, such as that which distorts interest rates, or that which taxes the rich.

Henwood thinks it is perfectly justified to say that higher taxes can possibly help economic growth. This is untrue, and the economic case against it is probably irrefutable. I will summarize:

If economic actors exchange property voluntarily, then it is implied that both actors are better off than they would be in absence of this trade. If both did not expect to benefit from the trade, they would not take part. The matter is quite different in the case of taxation. With taxation, the producer’s supply of goods is reduced against his will to a level below what it would be absent the taxation. In addition to this reduction of present goods, the supply of future goods is reduced as well. For taxation is not unsystematic and random, but systematic and expected to continue in one form or another. Therefore, it implies a reduced rate of return on investment and produces an added incentive to engage in fewer acts of production in the future than one otherwise would. Overall incentive to be a taxpayer decreases, and incentive to become a tax-consumer increases.

This is always true. But Mr. Henwood would disregard economic science and make his inferences based on a shallow analysis of empirical data. Of the US, he says the Clinton years saw a period of great economic growth, and tax rates were higher than they are now. So, he infers, higher tax rates contribute to economic growth.

This doesn’t make any sense. If Henwood were an economist, I would call him a crank. But he is not an economist, he is an English major. He does not have a background in economics, but he likes to write about it. There is no evidence that he is capable of applying formal theory to reality and interpreting it.

In addition to being completely fallacious, the above argument for higher taxes is only credible on the most superficial analysis. If Austrian business cycle theory is correct, then one could easily argue that the much-heralded ‘growth’ of the Clinton years was just phony wealth created by economic bubbles brought about by artificially low interest rates.

When Reagan was elected in 1980, short-term rates were 11.4 percent. When Bush I lost to Clinton in 1992, the rate was 3.4 percent. Rates moves upwards over the course of the Clinton years, and in 2000 the average Treasury bill rate was 5.8. The manipulation of interest rates created economic dislocations — the dot-com bubble, among other things — and the inevitable crash.

Doug Henwood doesn’t know what he is talking about.

Filed under Banking and Finance, CMR, Economics, Intervention Tagged with , , , , , , , , , , ,

Gold and silver versus paper promises.

November 30, 2010 Leave a comment

Head on over to this site and take a look at the tables presented. The data speaks for itself.

Filed under CMR, Gold, Precious Metals Tagged with , , , , ,

What will happen to commodities in 2011?

November 30, 2010 Leave a comment

First, consider the following:

Commodities are up across the board, in some cases quite dramatically. This boom is international — manufacturers are bidding up prices and there are strains on available supplies.

Yet consumer prices are not rising significantly. Canada currently has a higher official inflation rate than the US, but not much more. Commodity prices have been bid up in anticipation of rising consumer demand, a prediction which is not panning out.

Remember the insight of Austrian economics — consumers set final prices, not producers. Consumer spending is weak. Unemployment remains high. Without a surge in consumer spending, these prices are unsustainable. If there is a recession in Asia, and I think there will be (probably next year), then these prices are likely to tank.

Western banks are stockpiling excess reserves. If this money does not get lent out, unemployment will remain high and consumer spending will continue to suffer. There are no signs that bankers will suddenly become optimistic. China is slowing down. Same with South Korea and Japan.

What about gold? Gold follows a different set of rules. Central banks buy and sell gold. It is a hedge against the currency crises and mass inflation, rather than recession, where currency appreciates. China is encouraging its citizens to buy gold. When Austrian business cycle theory bites back at China’s bubble, there may be less drive to build shopping malls where no one buys or sells anything, but people will still yearn to preserve their savings with the precious metal as their government devalues money like its going out of style.

Filed under CMR, Commodities, Energy, Oil, Precious Metals Tagged with , , , , , , , ,

Bank of America: WikiLeaks next target?

November 30, 2010 Leave a comment

While the US government does damage control on recently leaked State Department cables, rumors are flying that Wikileaks next target is Bank of America. Wikileaks’ founder, Julian Assange, recently told Forbes that their next target is “a major American bank.”

In 2009, Assange told Computer World:

At the moment, for example, we are sitting on 5GB from Bank of America, one of the executive’s hard drives,” he said. “Now how do we present that? It’s a difficult problem. We could just dump it all into one giant Zip file, but we know for a fact that has limited impact. To have impact, it needs to be easy for people to dive in and search it and get something out of it.”

I am pleading with Assange to release this information ASAP, before the US assassinates him. Do it in a big cumbersome Zip file, if you must. The impact will not be limited, I promise!

Filed under Banking and Finance, CMR Tagged with ,

Is Bank of America: confusing and confused.

November 30, 2010 Leave a comment

Bank of America is suffering bad publicity over bad foreclosures and bad finances over bad mortgages.

In a confusing PR move, they send their “Senior Economist” over to Bloomberg to discuss the economy. This video is a few weeks old now, but you should take a look. The videos from Bloomberg cannot be embedded, so you will have to visit their site.

This Senior Economist looks like she is 16 years old. Eighteen, tops. She does not speak with confidence and gives mostly what sounds like canned, rudimentary answers. She does not instill confidence that her analysis is cogent.

Consider for a moment Bloomberg’s main audience: Middle-aged men with money. I imagine such people look at this young woman like their old buddy’s daughter who has just come back from first year at university with an A+ in Economics 101, and now has the the pretense to offer genuine insight.

If I were BoA, I would have sent an old man to Bloomberg who exuded reams of wisdom with something interesting to say. BoA is the biggest bank in the United States and this makes them look silly.

Filed under Banking and Finance, CMR, Mainstream Media Tagged with , , , ,

Committed to Canadian capitalism.

November 30, 2010 Leave a comment

Here at Canadian Market Review, we believe the world changed in 2008. Now, the global economy is in the midst of a crisis that has see century-old financial firms and sovereign nations alike go bankrupt. Our position is that this crisis is really only beginning to unfold. We want to better understand the implications for Canada as this happens.

Canadian Market Review is meant to be an information service only, not an investment advisor. You will lose all your money making investment decisions based on something you read on some website. Instead, read Canadian Market Review to get a Canadian, “hardcore” free-market capitalist perspective on the complex world of economics and finance.

When we say hardcore, we mean it. On economics, our closest alignment would be the Misesian–Rothbardian branch of the Austrian school of economics. On politics, we are Hoppean. We support capitalism — private ownership of the means of production. But we take this position to its logical conclusion. We do not accept the myth of Canada and other western democracies that private ownership and markets are fine for some things, but not “really important” things like healthcare or schools. Instead, capitalism — like truth — is best when pure. Capitalism, a social order based on private property and markets, is the harmony of people working together, communicating and exchanging. It is natural, efficient, and just.

Government interference with markets, i.e. socialism, is unnecessary and destructive to wealth, without exception. The market allocates resources to serve consumers. When there is government intervention, resources are allocated based on political decision-making. These are distortions in the market that do not serve consumers. There is taxation, regulation, and inflation. There are boom-and-bust cycles and wars.

These positions might be deemed “extreme right-wing” in regular Canadian political parlance. Canadian Market Review rejects this distinction as shallow and pedantic. For principled commitment to capitalism must reject any government interventions favored by the “right” as much as it does those on the “left.”

Many Canadians are absolutely convinced that government intervention is fundamentally good. We are not writing for these sorts of people. But for those who see something wrong with this position, Canadian Market Review will provide a valuable alternative view.

 

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