http://dollardaze.org Investor orientated commentary on economic and monetary issues from a free market perspective. Policies discussed include sound money on a gold standard and limited role of government. Investment research focuses primarily on both precious and base metal mining companies. en-us http://dollardaze.org/blog/?post_id=00474 The United States prides itself on being the home of free market capitalism, governed by the rule of law. However, the rapidly developing capital market crisis demonstrates once again that, faced with a systemic crisis, rules and ideology take second place to pragmatism. A similar incident happened on 15 August 1971 when Nixon arbitrarily ditched the solemn US international pledge to honour the Bretton Woods Agreements making the dollar convertible into gold at US$35 an ounce. Cynics might say that the US lives by the Gold Rule: he who has the gold makes the rules. October 1, 2008 http://dollardaze.org/blog/?post_id=00473 This time last week, the biggest bailout in the history of the world seemed to be a fait accompli. Last weekend, the Fed Chairman and the Secretary of the Treasury had harsh words of doom and gloom for Congressional leaders, with the rest of the administration parroting along, and by last Monday it seemed both parties were about to fall in line and vote our Republic away by socializing the banking industry through this bailout. Foolish business behavior was about to be rewarded, and propped up a little longer, the bubble blown a little bigger, and our coming Depression made that much greater, but then something happened on the way to the House floor. September 30, 2008 http://dollardaze.org/blog/?post_id=00472 Many sage commenters have claimed the bailout plan is a bad idea. It's been described as "Socializing Risks while Privatizing Profits." True enough, but that description apparently doesn't carry much weight, especially since the term "socialization" doesn't bother many people these days. Other folks say that the free market has failed, and new regulations are needed - but they don't satisfactorily explain why the existing regulations weren't enough - after all, we had plenty of them. Closest to the mark are those who say the plan "threatens the dollar" but even they don't explain what that means. September 29, 2008 http://dollardaze.org/blog/?post_id=00470 No one will deny that last week was one of the most tumultuous in history. The streets red with blood... the bodies of the dead and dying strewn about where they fell. You already know the names: Lehman, Merrill, AIG. Fannie and Freddie. But none of this happened by accident. The warning signs have been all around us for years. Bud Conrad, chief economist at Casey Research, wrote about the beginnings of our current problems back in March of 2007... before most people were even aware of the storms brewing just over the horizon. September 29, 2008 http://dollardaze.org/blog/?post_id=00469 The Financial Structure that fueled myriad Credit Bubbles, asset Bubbles, economic Bubbles and overliquefied the entire world is today no longer viable. Wall Street finance is at this point an unmitigated bust, with a few of the "holdout" sectors (i.e. the Credit default market and the hedge fund community) now succumbing. The great Financial Alchemy of transforming endless risky loans into perceived safe and liquid "money"-like instruments has run its historic course. And with risky loans - household, financial sector, business, municipal and speculator - having come to play such a prominent role in the nature of spending and "output", the near elimination of risky lending will prove a momentous financial and economic development. The U.S. Bubble economy is today in dire straits. We've reached the point where it has become difficult to secure new borrowing unless one is of quite sound Credit standing. This is the case for individuals seeking to buy automobiles and homes; to afford myriad discretionary and luxury goods and services; to finance educations; or to make the types of big ticket purchases that had been bolstering our Bubble Economy. Lenders are now moving aggressively to cut home equity and Credit card lines. And, importantly, recent developments have significantly tightened Credit Availability for businesses of all sizes. Securitization markets have been largely shut down for awhile now. Now acute stress has incapacitated the money markets. September 28, 2008 http://dollardaze.org/blog/?post_id=00467 Just yesterday, Henry Paulson's "bailout" bill, with only a few anti-Wall Street, pro-Main Street fig leaves slapped on by Democrats, appeared ready to sail through Congress on a bi-partisan tide. But something funny happened on the way to the printing press. It appears as if some conservative House Republicans are reluctant to sell their souls and ditch any remaining pretense towards American-style capitalism. What's left of the Barry Goldwater wing of the Republican Party, which maintains its natural tendency to trust the markets and not government, has dug in its heels. But, Bush, Paulson and the Democrats have argued that our problems are so dire that free enterprise principles must go out the window. The struggle is historic, but the Congressmen are fighting a losing battle. Sadly, Americans now appear willing to abandon their economic heritage at the first sting of financial pain. September 26, 2008 http://dollardaze.org/blog/?post_id=00466 The financial meltdown the economists of the Austrian School predicted has arrived. We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets. Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades. September 26, 2008 http://dollardaze.org/blog/?post_id=00465 Last week, Treasury Secretary Paulson and Fed Chairman Ben Bernanke faced Congressional leaders with a reported forecast that we are "literally days away from a complete meltdown of our financial system." Apparently, the politicians were stunned into a long silence. If citizens across the country could glimpse the horror seen by the Congressmen (of which we have long warned), then widespread panic would truly be the order of the day. In particular, people will be shocked to see how Paulson's seemingly vast request to Congress for some $1 trillion is utterly dwarfed by the likely problem. Of course, Paulson does not want to scare Congress. So he has offered them his own version of a teaser mortgage rate of just $1 trillion. The true figure will only kick in later, like one of the adjustable rate mortgages that tempted millions of optimistic home buyers. Once Congress is locked in to a "blank check", the funds will keep rolling until the presses run dry! To put the problem into perspective, let's just consider some base statistics. September 24, 2008 http://dollardaze.org/blog/?post_id=00464 In 2006, the president of the Federal Reserve Bank of St. Louis noted "Everyone knows that a policy of bailouts will increase their number." This week, Congress is being asked to hastily consider a monstrous bailout plan on a scale nearly equivalent to the existing balance sheet of the Federal Reserve. As an economist and investment manager, I am concerned that the plan advocated by Treasury is essentially a plan to bail out the bondholders of financial institutions that made bad lending decisions, with little help to homeowners that are actually in financial distress. It is difficult to believe that the U.S. government is contemplating taking on the bad assets of these institutions at probable taxpayer loss and effectively immunizing the bondholders (and shareholders) of these companies. September 22, 2008 http://dollardaze.org/blog/?post_id=00463 The term 'government money' has been bandied about a lot in recent weeks. It is being portrayed as a near miraculous elixir that provides wonderful results when used for bailouts past, present and future. But government money comes with limitations. It is not a magic potion, and cannot cure all the ills of the financial system. More importantly, it is not even money at all - it's debt. Before the invention of the printing press and more recently, the computer, money was a tangible asset. In ancient times, it was something one raised, like cattle. Eventually money became something that was mined, namely gold and silver. But central banking changed the essential nature of money, or to be more precise, what we use as currency. The tangible assets, i.e., gold and silver coin, remained in the central bank's vault, and instead a piece of paper called a "banknote" circulated as currency in their place. Because of government legislation, gold and silver coin were eventually supplanted by bank paper currency and other forms of bank currency, namely, deposits that circulate by check, wire transfer and a plastic card. September 22, 2008 http://dollardaze.org/blog/?post_id=00461 Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman's demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go "all in" and bail out every institution with financial exposure to U.S. mortgages. Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another. September 20, 2008 http://dollardaze.org/blog/?post_id=00462 Sunday, Sept. 14: Secretary Paulson finally makes a brave decision; enough is enough, let Lehman go bust. After all, the federal government shouldn't be rescuing every financial institution that stumbles... or should it? September 18, 2008 http://dollardaze.org/blog/?post_id=00460 By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company's shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America's once vaunted free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire. The "line in the sand" that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic. September 17, 2008 http://dollardaze.org/blog/?post_id=00458 Last week, the U.S. government took the unprecedented step of effectively nationalizing mortgage giants Fannie Mae and Freddie Mac. Together, the two companies hold or guarantee some $5.2 trillion, or about half, of all American residential mortgages. A substantial portion of this debt is tilting toward default. Given the size of the numbers, American tax payers should be very concerned. In many ways Fannie and Freddie were flawed at birth. They were in effect the favored child, encouraged to play recklessly with their generous allowance. Endowed with an 'implied' government guarantee, they were given favored access to cheap financing. Furthermore, they were, as their massive lobbying payments confirm, 'close' to government. Some would say they were too close. September 16, 2008 http://dollardaze.org/blog/?post_id=00459 I've discussed just a few benefits of sound money in the last two weeks, and contrasted them to the perils of fiat currency. Sound money keeps government spending in check, keeps trade fair and honest, which reduces the temptations, and many underlying causes, for governments to wage wars. It also gives you the peace of mind of knowing that your savings will be able to sustain you in your retirement. So if sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver? Why are you still being paid in fiat dollars, and why can't you pay for gas in gold? The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions. September 15, 2008 http://dollardaze.org/blog/?post_id=00457 In the latest example of financial market madness, the recent government "bailout" of Freddie Mac and Fannie Mae has perversely resulted in a sharp rise in the value of the U.S. dollar. If the markets were functioning rationally, the transference of staggering new liabilities to the U.S. Treasury would have been immediately seen as catastrophic for the dollar. Instead the markets have ignored the obviously negative long-term implications and have remained fixated on the more immediate effects. However, rather than solving the problems, the government's actions merely confirm my worst fears, and increase the chances for a hyper-inflationary outcome. September 12, 2008