(Taipan Publishing Group) – Gold, small caps and the U.S. dollar have had a stable three-way relationship for the better part of the 2009 rally. Now the three could be parting ways.

Dr. Marc Faber is one of the few market wise men whose thoughts are worth pondering. His monthly “Gloom, Boom & Doom Report” is always a good read. He is an active, Asia-based investor with decades of experience, hundreds of millions under management, and many prescient calls under his belt.

Faber has stated firmly and clearly what he thinks of the U.S. dollar. As you might expect, his opinion is not too flattering.

In the long run, Faber assigns the buck a value of “zero.” In the manner of all fiat currencies, America’s scrip is slowly being turned into toilet paper. The present cast of clowns in Washington seems bound and determined to accelerate this process as Wall Street cheers them on.

But that’s the long term, mind you. In the shorter term – i.e. for at least the next quarter or so – Faber is bullish on the buck. So bullish, in fact, that he is now on record as a buyer of $USD.

“As of today, I will be long in dollars,” Faber told Bloomberg last week. (Perhaps he is buying from my colleague Adam Lass, who professed on Thursday his intent to remain short.)

Continue reading Justice Litle on Taipan Daily.

My little brother and his fiancée dropped into Reno/Tahoe for the weekend. They were wending their way west to go apartment hunting in San Francisco, visiting friends and family along the way.

On Saturday we took a two-hour catamaran cruise up at the lake. It was as perfect a day as I’d ever seen it. The water was so clear and blue, you could see 30 feet down through the netting of the boat. The sky was just as blue – not a cloud to be seen – and the day was just hot enough to be perfected by a crisp Tahoe breeze.

At one point in the cruise we sailed past the “Ellison project” – a stretch of lakefront put under construction by Larry Ellison, the billionaire founder of Oracle (ORCL:NASDAQ). The two adjoining $15 million mansions weren’t big enough for Larry, so he had them torn down to build something more to his liking instead.

At another, equally secluded bend in the Tahoe shoreline (the lake is 22 miles long), we passed by the Stack family estate. Robert Stack, the late actor best known for The Untouchables and Unsolved Mysteries, spent his boyhood summers there. Adjacent to this, a 5- or 6-acre parcel of waterfront land was on the market for “only” $19 million – a bargain-basement price by Tahoe standards.

As we noshed on beer and wine and cheese and fruit, I joked with my little brother that we should go in on the property together – get the ball rolling on a new patch of Litle estate.

“Not just yet, big bro,” he replied. “Unless I can make do with, say, a zero-point-five percentage ownership.”

“Couple years,” I chuckled back. We were joking, of course… $19 mil is a bit rich for a piece of undeveloped real estate… but then again, five or 10 years from now, who knows?

Perfect weekends like the one that just unfolded in Tahoe remind me of something Einstein once said – you can live your life as if everything is a miracle, or nothing is. I think that’s true. In hearing the stories of some of the families who built those lakefront estates, I was also reminded of something else I believe.

Of all the traits that separate those who live their dreams from those who don’t, courage and determination seem to be the biggest two factors by far. Smarts, connections, money, and even lucky breaks seem to pale in comparison to those first two. Luck is still an undeniable factor, of course, but in some ways luck is like an ocean wave. It’s not enough just to be standing on the beach… you have to have the gumption to get out there and surf it.

Anyhow, just some quick thoughts from an idyllic weekend…

Cliff Asness, Hero

Back to the slightly more grim (but important) matter at hand. It’s not the custom of Taipan Daily to direct readers to outside essays written by outside writers. But in this case, the piece to which I call your attention now is well worth it.

The piece is called “Health Care Mythology” by Clifford Asness. A friend forwarded it to me, but you can find it on this Web site (the WSJ has been directing readers there too).

As the founder of a multibillion-dollar quantitative strategy hedge fund, Cliff Asness makes for an unlikely hero. Your humble editor calls him a hero, in a tongue-in-cheek but not totally undeserved sense of the term, because Asness is wealthy, outspoken and exposed. The things he says – and he says them quite forcefully – could lead to trouble for his wildly successful fund management business.

In “Health Care Mythology,” Asness eloquently and brutally dismantles certain myths about the healthcare industry. Lest you think this is a boring exercise from a stuffy fund manager, consider some of these excerpts:

…Step one is understanding how and why they are wrong. Step two is kicking their asses back to Cuba where they can get in line with Michael Moore for their free gastric bypasses.

…. if one more person cites soaring health care costs as an indictment of the free market, when it is in fact a staggering achievement of the free market, I’m going to rupture their appendix and send them to a queue in the UK to get it fixed. Last we’ll see of them…

The Seven Myths, Summarized

In case you don’t have time to read Cliff’s more than 6,000-word commonsense manifesto – a good chunk of prose by even your humble editor’s standards! – the seven myths are summarized briefly here. (Keep in mind, though, that the summaries really are no substitute for reading the whole “Health Care Mythology” piece.)

Myth #1: Healthcare Costs Are Soaring

No they’re not, says Cliff Asness. They only appear to be soaring if you compare on price but forget to compare on quality. As Cliff puts it, “you cannot judge the cost of something simply by what you spend.” We may be spending a lot more dough than we did in the 1950s, but we’re also getting a lot more value for our money. As Asness puts it, “nobody in the US really wants 1950’s health care (or even 1990’s health care). They just want to pay 1950 prices for 2009 health care.”

Myth #2: The Canadian Drug Story

Those who cast a skeptical eye on healthcare reform are constantly beaten over the head with the Canadian success story. Our neighbors to the north have a far more humane and effective system, the reformers say. Cliff Asness calls B.S. on this argument by making a non-politically correct point…. the government-run Canadian system only works by leeching off the free-market U.S. one.

Asness’ case in point is the drug market. U.S.-based pharmaceutical companies have to spend ungodly sums of money on the testing, development and marketing of new drugs. Big pharma then has to charge a lot of money for their end product to recoup this massively expensive pipeline cost – otherwise the drug isn’t worth making in the first place.

But Canada, in its capacity to act as a single government-backed customer, puts big pharma over a barrel. After a drug is already developed for the U.S. market, it only makes sense to sell into Canada too, and big pharma needs all the profits it can get to fund further research.

So basically, Asness argues, many of Canada’s benefits come from piggybacking on a functional American system. Take the functioning U.S. market out of the equation and what do you get? No more cheap drugs, eh.

Myth #3: Socialized Medicine Works in Some Places

As Asness sees it, the leech argument further applies to all the government-run healthcare systems in the world that benefit from an influx of U.S.-based medical advances originally developed for a profitable market.

And so, Asness argues, if America tries to go the way of Canada or the U.K. or what have you, there will be no one for America to leech off of in terms of drug development and innovation… and the U.S. centric march of progress towards better medical technology will simply collapse.

So, please [Asness begs], stop pointing to all those “successes” that even while living off the US still kill hard-working people who could afford their own health care while they stand in line for the government’s version (people’s cancers growing while waiting ten weeks for a routine scan, which these people could often afford on their own if allowed, is a human tragedy). Even the successes you gin up for them would not be possible without the last best hope of humankind (the US) on the front lines again making the miracles for the world.

Myth #4: Socialized Medicine Is Better Because Their Cost/GDP for Healthcare Is Lower

Asness argues that this is a failing of logic rather than statistics.

While technically correct in a pure statistical sense, the fact that countries with socialized medicine spend less per capita on healthcare is misleading for a number of reasons. For one, Asness points out, many of these countries are subsidized by U.S. drug development and innovation. Second, differences in overall spending do not account for choices made in the United States that simply aren’t available elsewhere.

There are a number of other arguments Asness uses – basic point being, you can’t always trust an upfront number to tell an accurate story. As Mark Twain liked to say, “there are lies, damn lies, and statistics.”

Myth #5: A Public Option Can Co-Exist With a Private Option

This is the myth that, under the guise of national healthcare reform, those who want to keep access to a private system can do so without seeing significant degradation of their choices.

Asness argues at length that this is basically a ruse. If we go “public,” Asness asserts, we are signing up for socialized medicine whether we like it or not. There are all kinds of technicalities and wavers and ways to artfully dodge this assertion, and Asness tackles many if not most of them in his piece.

Myth #6: We Can Have Health Care Without Rationing

For this myth, Asness points to the elephant in the room, addressing an ugly word – “rationing” – that no one in Washington seems comfortable with.

It’s simple economics, Asness says. No matter how much we might wish it weren’t so, idealism won’t change the fact that a scarce good cannot be provided in unlimited, equal amounts to everyone. As Asness puts it,

If you have a material good or service, like health care, that is ever increasing in quality, and therefore cost, there is no way everyone on Earth can have the best at all times (actually the quality increases are not necessary for rationing to be needed, it just makes the example clearer). It’s going to be rationed by some means. The alternatives come down to the marketplace or the government.

Myth #7: Health Care Is a Right

“Nope, it’s not,” Asness says. “But we are at the nuclear bomb of the discussion. The one guaranteed to get me yelled at or perhaps picketed by a mob waving signs printed up with George Soros’s money.”

Asness makes the case as to why healthcare is not a “right” with a mix of insight and sarcasm. Much of his argument centers around the difference between positive and negative rights – e.g. the right to be left in peace versus the right to some form of entitlement – and also touches on the crazy idea that new technology, a driving force in medical care, should somehow be instantly appropriated for the masses. (At one point Asness asks, “Did you have a right to chemotherapy in 1600 AD?”)

Asness further goes on to point out one of the ironies of “unfair” free market healthcare versus “fair” government provided healthcare.

In an “unfair” system, the initial users of a new medical technology are willing to pay an expensive price – a price the masses could not afford. But the profits generated from this early use lead to innovation and price competition, eventually making the medical technology available to everyone.

Think of it like DVD players. These days you can buy a serviceable DVD player for a whopping 30 bucks. Considering the technology involved, that’s damn cheap… and that’s why DVD players are so popular. But DVD players started out being ridiculously expensive… too expensive for the average family to afford. It was the “early adopters” willing to pay hundreds and hundreds of dollars for experimental technology (the first DVD player prototypes) who enabled profit-driven improvements and the migration to a mass market.

So now imagine what would happen if the government had declared home entertainment equipment to be a “right” from the outset. Under this “rights” based system, the idea of a super-expensive DVD player that only some rich technophile could afford would be considered an outrage. And in the absence of expensive DVD players at the outset, the competition-driven free market would never have figured out how to serve up cheap ones.

The DVD player story is Silicon Valley in microcosm. “First expensive, then cheap” is how innovation spreads. The difference between healthcare technology and home entertainment technology is an emotional one, not a logical one… and so viewing healthcare as a “right” creates the same problems you get when the government is put in charge of most anything at all.

What do you think? Is Cliff Asness on target? Or do views such as these count more as part of the problem than the solution? Let me know: justice@taipandaily.com

Source:  The Seven Myths of U.S. Healthcare Reform

In a role that would later deem him “the man who broke the back of inflation,” Volcker took the helm of a weakened and disillusioned Fed in August 1979. Known for his no B.S. attitude and blunt, conservative style, Volcker’s appointment was only made under significant pressure on the Carter White House to lick the inflation problem.

After years of wishy-washy policy – and a widespread sense that the Fed simply didn’t have the cojonesto deal with inflation once and for all – the intense pain that Volcker was willing to inflict (via high interest rates) led to the inflation-subdued conditions from which the late, great bull market sprang in 1982.

Volcker was also in the mix on August 15, 1971, when President Nixon shut the gold window. As Tricky Dick informed the world that “We are all Keynesians now,” ushering in a decade of runaway prices and platform shoes, Volcker was dispatched on an urgent, two-year globe-trotting mission in his role as Treasury Under Secretary for Monetary Policy and International Affairs.

The goal of Volcker’s mission: To hold together the long-standing currency exchange system that Nixon had blown apart in 1971… and convince the rest of the world America had not gone mad.

No one has more claim to “been there, done that” than Volcker. Perhaps more importantly, Volcker has shown a capacity to act under pressure – and to make incredibly tough decisions when need be. In his role as Fed Chairman, taking on a dragon (inflation) that many thought unslayable at the time, Paul Volcker endured scathing criticisms and sharp reversals of fortune that would have broken lesser men.

So Where Did He Go?

All this counted as good news when, in 2008, it emerged that Volcker was advising the Obama campaign. Many who had misgivings in regard to team Obama’s unknown and untested political agenda were soothed, at least partially, by the thought of a wise and experienced hand like Volcker’s playing a role.

Alas, on examining the policy put forth by Washington thus far, the man’s fingerprints are nowhere to be found. The White House gave Volcker an impressive sounding title – head of the “Economic Recovery Advisory Board” – and then seemed to ignore him completely from that point on.

It’s true that Volcker, now in his 80s, has a heightened taste for fishing these days. But one has to wonder if there wasn’t a bit of bait and switch going on here. Use a man’s stature to lend gravitas to a fresh-faced political campaign, promise to listen closely and heed his wisdom, and then…

A Wall Street Railroad

We here at Taipan Daily have no special dispensation as to why the meatheads in Washington do what they do.

But we do have the ability to make an educated guess or two… and the guess here is that Volcker wound up getting railroaded. It’s a good bet that Volcker made the mistake (if one could call it a mistake) of being too forthright in his views – not willing enough to “play ball” as it were.

You see, the White House finance team is dominated by a Wall Street mentality. So dominated, in fact, that insider culture permeates the place like the smell of trout guts in a fish market.

One can see this (or rather smell this) in observing team Obama’s top financial pitchmen, Tim Geithner and Larry Summers. As president of the New York Fed, Geithner was a creature of Wall Street, bought, sold and paid for, from day one. Even the staid New York Times has called out Turbo Timmy, noting his exceptional “reliance on bankers, hedge fund managers and others.”

And if Obama advisor Larry Summers didn’t start out aspiring to be top shill on the hill, he certainly wound up settling in to the role quite nicely, having raked in a cool $8 million (give or take) in speaking fees and hedge fund consulting fees these past few years.

In addition to the above, add in the fact that Goldman Sachs is not just a mega-powerful investment bank these days, but a weird sort of temp agency with a quasi-official role in filling all high-level government finance posts.

The net result is a sort of noxious self-interest cocktail that proves toxic to anyone not considered a tried-and-true friend of Wall Street. And that would include Paul Volcker.

Glass-Steagall Blasphemy

In the eyes of Wall Street, Volcker’s apparent sins are twofold. First, he openly endorsed “Glass-Steagall-like” restrictions on Wall Street investment houses. Second, he showed warmth to the idea of banks as utility companies.

The Glass-Steagall Act was passed in two parts in 1932 and 1933. The second half of Glass-Steagall, also known as the Banking Act of 1933, required commercial bank activity and investment bank activity to remain separate by law.

For 66 years, Glass-Steagall was the law of the land. Under Glass-Steagall, investment banks could not take customer deposits or make commercial loans. Commercial banks, meanwhile, could not get involved in high-powered investment bank-type activities.

Glass-Steagall was repealed in 1999 (Thanks Phil Gramm!) by Republican majority vote. Thanks to this move, the blind-idiot-behemoth known as Citigroup was born. Before the repeal, Citi had to more or less stick to its boring customer deposit knitting. After the repeal, Citi was free to gorge on the high-powered stuff, with the leverage of customer bank deposits and FDIC insurance as a backstop… resulting in the quivering mass of financial wreckage now splayed out at our feet.

In suggesting that a new “Glass-Steagall-like” reform would be a good idea, Volcker declared himself an enemy of Wall Street. Through the eyes of the bankers, unfettered leverage is good – even if it blows up the entire country every once in a while – because anything that fattens the kitty at bonus time is good. To return to the days of Glass-Steagall would be a step backward in the banksters’ eyes, as would any maneuver that threatened to permanently reduce their power.

The same thought process applies to Volcker’s endorsement of the “banks as utility companies” idea. This is the notion that any business back-stopped by government should be a safe and boring business by law. The logic runs something like this: “You want to do sexy exotic stuff? You want to take big risks with your own investors’ capital? Fine. Just don’t do it with taxpayer funds, don’t do it as a government-backed entity, and don’t expect a bailout if you blow up. If you want to enjoy FDIC insurance, “too big to fail” support, or any other form of government support or largesse, then you need to take the plain-vanilla restrictions that come with that.”

Seems like a fair trade-off, no? In the eyes of Wall Street, that’s exactly the problem.

Keeping the Deal

Right now Wall Street has a very sweet deal, which some have memorably characterized as “socialism for the rich.” One can also think of it as “I take the upside, you take the downside.” As in, when a cockamamie scheme works out, the players reap tens or hundreds of millions… but when it doesn’t work out, the taxpayer gets socked with the bill.

If the White House were to embrace the idea of making banks more like utility companies, as Volcker suggests, then Wall Street’s sweet deal would disappear. The pleasingly asymmetric nature of the equation – heads Wall Street wins, tails someone else loses – would be lost.

And so, most likely, this is why Volcker has been muzzled. Geithner and Summers live in Wall Street’s back pocket. They are shills or, possibly worse still, moles… tasked with making sure the interests of the true master are served. President Obama seems either not to know or not to care. Either way the result is the same… the financial interests of the United States have more or less been hijacked by a quiet oligarchy. Worse still, when the self-interests of this oligarchy run directly counter to the economic interests of the country, it is the country that loses. Every time.

Paul Volcker, on the other hand, is not a shill. Not a mole. Or at least, he hasn’t shown any clear sign of being such. If Volcker had been “compromised,” he would be out there towing the party line – putting his credibility to work in service of the agenda, à la Colin Powell and the Iraq War.

One can only speculate as to the thoughts in Paul Volcker’s head. Your humble editor’s guess, though, is that the man feels snookered. He may well have been caught up in the bright shining spirit of the 2008 presidential campaign… the thought of a new day, a new broom sweeping clean, and helping America out of a serious jam (as he once did all those years before).

But one can only do so much, and good intentions only stretch so far. On realizing the truth, the 81-year-old Volcker may well have shrugged and gone fishing.

Source:  The Unconscionable Muzzling of Paul Volcker

The President’s man at the Treasury, Tim Geithner, is also towing the party line. On Friday Turbo Timmy spoke of “substantial improvements” in trying to beat back the “worst recession globally we’ve seen in generations.”

Why the defensive posturing? Because the White House is feeling touchy and irritable as the polling numbers sink. The rotten jobs market, it seems, has cut into Mr. Obama’s popularity. A poll of Ohio voters showed approval numbers falling from 62% to 49% in a mere two-month span.

If the stimulus is “working,” then, heaven forbid how things might look had there been no stimulus at all.

Or hold on, wait a minute. How might things have looked really and truly with no stimulus? What would have been different?

Heads I Win, Tails You Lose

This is one of the challenges in dealing with a very sick patient (i.e. the U.S. economy). Sometimes the patient gets better all by himself. Other times, the medicine that is supposed to be helping actually makes things worse. Without the proper diagnostic tools, though, there’s often no way to tell.

And not all deeply ill patients die, of course. Some really do make a self-powered comeback. Shamans and faith healers often rely on this simple binary outcome to set up a “heads I win/tails you lose” type deal for themselves.

That is to say, if the sick patient gets better, then clearly it was the shaman’s powerful medicine that made it happen.

But there are other alternatives, each tailored to the situation at hand. If the patient fails to get better but still lives, then the shaman can take credit for keeping him from death’s door. And if the patient up and dies, well… then the shaman was called in too late. Or the family members did not have enough faith. Or there was a hidden mortal sin, or some other exculpatory thing.

That’s the trouble with big decisions and messy historical turning points. There’s no way to rewind the tape, so we can’t always be sure what helped or what hurt – or even which actions were justified in the first place.

The weight of history does suggest at least one thing. When it comes to intervention, the government’s track record isn’t so hot. In fact, not to put too fine a point on it, it stinks. And when you think about it, the logic as to why is fairly straightforward.

Take the whiz-bang idea of creating jobs, for example. Creating jobs – real, sustainable productive jobs – is no easy task. Just ask any hard-working entrepreneur. So why should the government be any good at it?

And if the government possessed half a clue when it comes to creating jobs, why wouldn’t that capability be rolled out in good times as well as bad? If the jobs genie is all he’s cracked up to be, why wait for history’s darkest hour to rub the magic lamp?

Quantitative Wheezing

And then there is quantitative easing, or QE for short. What does the historical record say about quantitative easing? Basically two things. “Japan tried it… didn’t work.”

Hugh Hendry, co-founder of London-based Electica Asset Management, had this to say about QE in a recent Financial Times interview:

…There is no precedent, no precedent, that says quantitative easing succeeds. None. I’ll give you one actually, there is one, because there was some quantitative easing exercised by the Federal Reserve in 1933-34, and it did initiate a dramatic economic recovery without inflation. But I hesitate to say that was actually a success of quantitative easing, because it was preceded by a 46% collapse in nominal GDP.

So perhaps if you’re telling me that nominal GDP will collapse by 46% next year, then I would believe, and I would come back to you and I’d say then quantitative easing might have a chance in succeeding.

For the record, U.S. GDP (gross domestic product) was an estimated $14 trillion to $15 trillion in 2008. A nominal 46% collapse would nearly cut that in half, taking us back to 1996 levels. The Dow was around 5,000 back then.

So What’s Worked Before?

This leads to an important question. What can history teach us about getting out of jams? The last economic jam we faced of comparable size and scope was the Great Depression. How did we beat it once and for all?

There are many different theories as to how America finally beat the Great Depression. Some give credit for the comeback to FDR (Franklin Delano Roosevelt) and his far-reaching policies. Others say no, FDR really didn’t help much at all (or even made things worse) – it was World War II that finally pulled us out. And still others say, simply, that “time heals all wounds,” even economic ones, and we simply had to slog our way through.

History rarely obliges historians by providing neat, packaged answers. Most sea-change type events have many factors involved, not just one. But still, your humble editor suggests there is one very powerful, yet generally overlooked element that brought us out of the Great Depression. That element was consumer savings.

Here is a statistic that will make you blink. According to journalist-historian William Greider, personal savings levels hit a whopping 25 percent of income in 1943 and 1944.

World War II played a clear role. As Greider writes, “with so many millions conscripted for war, unemployment vanished and scarcity became the problem.” Those who were not drawn into the WWII effort saw their income levels rise. Women saw as much demand as men, a new development for the times. And because the country was on a war footing, a sort of forced saving effort was in place. Families had to make do on an “austerity budget,” and wound up banking much of what they earned.

This huge build-up of savings – 25 cents out of every dollar earned – set the stage for an explosion of consumption in the years to follow. After the war, an era of new products came rushing in. And consumers had both the pent-up savings and pent-up desire to spend, spend, spend.

A Long, Long Road

So what does history have to say about our current predicament? Mainly that, when it comes to getting an economy back on track, there is little that the government can do (case in point Japan).

And secondly that, short of starting a new World War and railroading the nation into a forced austerity program, the country’s best hope probably resides in the U.S. consumer getting his fiscal house in order.

As Tom Petty once sang about love, “it’s a long long road.” That lone dip on the chart above shows where consumer savings rates actually went below zero at the height of the bubble. The impressively tall bar on the far right – representing one of the fastest savings upswings in more than a decade – tops out at just 4%.

U.S. consumers will probably never again save twenty-five cents out of every earnings dollar. There is too much financial innovation and benign leverage built into the system to dial back the clock that far. (And a little bit of leverage, like the kind that lets a young couple make affordable car payments, is a good thing.)

But could the consumer once again save at double-digit savings rates, as we saw not 20 years ago? Could the savings rate more than double from here, even as a hefty chunk of income goes towards paying off a serious overhang of debt? Absolutely.

And that’s why the U.S. economy is never, ever going back to “the way it was” – if by “the way it was” one means the gross runaway excesses of the past two decades. There will be new mistakes, new insanity, new bubbles… but for now and the foreseeable future, we’ve got a hell of a lot of saving to do.

Source: Guess What Really Brought Us out of the Great Depression?

Mr. Litle,

I find your opinions on the world and U.S. economies very fascinating, to say the least. What I will like to read more of, if you can, is your opinions on some potential solution to these problems, or are you just good at highlighting problem but no solutions?

Thanks for your time in advance.

– TD Reader “Chuck”

Thanks, Chuck! (I think…)

If you want all the solutions you can stomach, here’s what I suggest. First, subscribe to Forbes and The Economist (two highly respected financial rags). Then make sure to catch Steve Forbes’ opening column in each issue of Forbes, and furthermore scan the final paragraphs in the lead article section of The Economist each week.

It’s a tongue-in-cheek suggestion (as you might have guessed). But you really will find a smorgasbord of “solutions” that way. Steve Forbes seems to have a forcefully simplistic opinion on how to fix every single economic problem on the planet. In similar vein, The Economist never tires of ending pieces with a schoolmarmish finger wag that always boils down to, “It would simply be best if world leaders did X.”

I subscribe to both of those venerable publications (plus at least a dozen others, if not more), and I take in absurd quantities of market-related information every single day. The challenge of this process requires me to read at different speeds, ranging from “leisurely” to “lightning bolt.” When it comes to the hand-waving solutions, I zip right past ‘em as if they weren’t even there. (When I come across a Thomas Friedman column, it’s like a blank page.)

The reason why is because most “solutions” of the forcefully delivered type fall into what I call the perfect world trap. The trap applies if whatever solution being offered deserves a “perfect world” qualifier. For example, “in a perfect world, Americans would have a more rational attitude towards healthcare.” Or, “in a perfect world, politicians would have a long-term rather than short-term focus.” And so on.

Many answers to the world’s problems are obvious in terms of what “should” be done. The more interesting question, in my view, is why what “should” be done in a perfect world so rarely plays out in the real one. Power corrupts. Self interest corrodes. Human nature throws a monkey wrench into the works yet again. And so it goes…

As a result of the many slips twixt cup and lip, the gap between clean theory and messy reality is more often than not Grand-Canyon sized. And thus I find myself with zero patience for goobers like Steve Forbes who, in their constant righteous claims of what “should” be done, act as if such a gap does not exist.

I wasn’t always so “anti-solution.” There was a time when I, too, thought fixing the world was merely a matter of getting the right multi-step instruction guide into the right hands. Over time, though, I soaked up more of the zen-like wisdom embedded in the old saying, “The wise man thinks what is easy is hard.”

Pragmatism and Profit

So why talk about this stuff then? Why bring up the world’s troubles in these pages, and dissect them as we do, if sweeping solutions are not the main point of interest?

I see two powerful reasons to do so – pragmatism and knowledge.

First, on the pragmatic side, let me share a crass aside with you. I intend to retire rich. Actually, I’ll probably never retire… I love what I do so much that it hardly feels like work. I can just as easily write to you, or make adjustments to my trading portfolio, from a luxury lodge in New Zealand or an old world villa in Spain as from my comfortable home office here in Reno/Tahoe.

But anyhow, point being, it is my direct and deliberate intent to accumulate a vast sum of wealth before riding off into the sunset. I don’t really give a damn about the money… but I love freedom and I love the great game that is markets. Trading is my passion.

And so, when something of import happens or some new political development bursts on the scene, the natural approach for yours truly is not, “Hmm… how can I find the ideal solution to this issue so that I can share it with the world in hopes that they will listen?”

Instead, my internal response runs more along the lines of, “Okay, what kind of curveball are these goofballs going to throw at us next… and how can we hit it out of the park?”

Or, more simply put, “How might this development impact markets, in either the short run or the long run (or both)? How can we profit from this (or just as importantly, avoid loss)?”

You see, pragmatically speaking, you and I can’t do a thing about the decisions being made in Washington, Brussels or Beijing. (They’re not listening to muckety-mucks like Steve Forbes or The Economist, so why in the world would they listen to us?)

Nor can we repeal human nature, or cure short-sightedness, or otherwise turn water into wine. But what we can do is accept the world as it is… interpret reality as it stands… and seek to create prosperity for ourselves from the swirling nexus of forces that drives current events.

One of the ironies in all this, I believe, is that the righteous souls hell-bent on saving the world often find themselves neglecting their own little corner of it. So much time and energy is spent banging on about impossibly idealistic solutions that real steps in the direction of real goals and dreams are left untaken.

That’s the general trouble, as I see it, with the popular focus on “making a difference.” All too often, the key question “Making a difference to whom?” is never properly considered.

Why the World Wags and What Wags It

“But hold on just a second,” I hear some of you say. “Taipan Daily isn’t all pragmatism, all the time, as you seem to be suggesting here. On occasion you talk about civil liberties and historic world events and other such things. And sometimes you guys take the odd turn that seems to have little to do with trading and investing at all. So what gives?”

To which I say, yep, absolutely true. It’s not all “show me the money” around here, if you’ll pardon the phrase.

And there are reasons for that too… the first one being that a real body of knowledge (as related to trading and investing) is broad and diverse and takes time to build – sometimes taking one to unexpected places. I have always seen that as a good thing, not a bad thing.

When I first got excited about markets (back in my wet-behind-the-ears college days), it was in part because trading and investing seemed such a grand excuse to learn a little bit about everything, yet still put that knowledge to work in a pragmatic way.

In other words, to be a trading and investing virtuoso requires some level of comfort and familiarity not just in the realms of finance and economics, but history, psychology, sociology, philosophy, game theory… even biology and physics to some degree… the list goes on and on. Above all, in your humble editor’s view, success in markets is tied to an intimate knowledge of the human condition (including one’s self) and the ongoing state of the world at large.

Again, what a great excuse to dig in and learn new things! There’s a lot happening on this silly old ball, as Bill Bonner sometimes likes to call it – and I, for one, often feel like a little kid turning over rocks in the woods, bursting with curiosity at the next potential find.

So in that respect, too, Taipan Daily is less focused on packaged solutions because there’s only so much time and energy to spare. Telling the world what should be done leaves less room for understanding the world as it is… and figuring out what might happen next… and learning how to profit from it.

I’ll leave you with one of my all-time favorite quotes, from T.H. White in The Once and Future King. Merlyn said it better than I ever could:

“The best thing for being sad,” replied Merlyn, “…is to learn to something. That is the only thing that never fails. You may grow old and trembling in your anatomies, you may lie awake at night listening to the disorder of your veins, you may miss your only love, you may see the world about you devastated by evil lunatics, or know your honor trampled in the sewers of baser minds. There is only one thing for it then – to learn. Learn why the world wags and what wags it. That is the only thing which the mind can never exhaust, never alienate, never be tortured by, never fear or distrust, and never dream of regretting.”

Source: Why I Don’t Care About Fixing the World (and Neither Should You)

“The Mafia isn’t part of the past, it’s part of the future.”

– Roberto Scarpinato, Sicilian prosecutor

Just how heavy is a million dollars cash?

If you’re trying to smuggle that kind of dough in old-school $100 bills, you’ll be lugging a little over 22 pounds. But if you’re rolling with banded, manicured bundles of the highest denomination euro notes (a cool €500), then the same amount only weighs you down by 3.5 pounds – and takes up a lot less space.

This is the kind of thing it’s good to know when you’re in the most profitable business in the world.

Ask a Wall Streeter to name a line of business that produces endless gushers of cash, and big oil probably comes to mind. The oil majors have certainly been known for record-busting profits these past few years. But the mafia’s profits are far bigger.

The mighty Exxon Mobil, for example, booked a profit of a little over $45 billion last year. That’s a whopping $10 billion per quarter or more. And yet, in comparison, the top three organized crime outfits in Italy – just the top three, mind you – more than doubled Exxon’s profit for the same calendar year.

And of course, where Exxon has to pay taxes, the mafia mostly avoids such hassles. So when you take the tax-free aspect into account, the mafia leaves big oil in the dust. And of course, the “big three” in Italy are just the tip of the iceberg. The powerful tentacles of organized crime extend all over the world…

Meet the Octopus

During my time at Oxford University in the mid-1990s, one of the best things about the experience was the speakers who came and talked to us. The Oxford Student Union (which has nothing to do with unions as Americans know them) would regularly bring in fascinating people to come and speak.

One of the speakers who made a real impression on me was a man named Brian Freemantle. An organized crime expert who has worked in more than 30 countries, Freemantle is the author of a book called The Octopus: Europe in the Grip of Organized Crime.

The book is nearly 15 years old now, and so many of the statistics are way out of date. But the basic outlines of the organized crime “octopus” Freemantle describes still hold true. And if Freemantle were to update his book with numbers for the new millennium, they would no doubt be mind-boggling.

As Freemantle writes in the opening pages of The Octopus,

Crime pays. It always has done. Not, of course, for the street people or the amateurs. They are swept up, like the disposable dross they are, as much victims as those upon whom they prey. The people for whom crime pays are the professionals, the men and women who operate it as a business, conducted through structures closely resembling legitimate multi-national corporations and conglomerates, their boardroom-like hierarchies serviced by accountants and financial advisors.

Freemantle then goes on to describe the eight tentacles (i.e. money-making activities) of the octopus: “the illegal arms trade, the illegal drugs trade, money-laundering, computer crime, prostitution and pornography, illegal immigration, terrorism, and fine art.”

One might think the octopus, too, has been hit hard by the global financial crisis (just like everyone else). One would be wrong though… instead, the crash of 2008 may turn out to be the biggest coup in decades for organized crime.

Cash in Hand

So why is the mafia set to wax, even as the whole world wanes? In a word, cash. We have all heard many times by now, in various guises and forms, that when times get hard, cash is king. And nobody keeps more cash on hand than the kings of crime…

Banks everywhere are afraid to lend their precious reserves. Fears of a fresh downturn, combined with the heightened credit risk of battered borrowers and toxic assets still weighing down bank balance sheets, have all but turned off the credit taps.

Many businesses, including well-run, profitable businesses that simply need access to capital in the normal course of operations, are suffering. At the same time, the most sophisticated players in the criminal underworld are sitting on tens of billions – no, make that hundreds of billions – and have a pressing need to launder those funds.

One of the most important tasks for any self-respecting crime boss is white washing the ill-gotten gains… turning “dirty” money into “clean.” This money laundering process is often handled by channeling funds through legitimate businesses. (I experienced this firsthand during my time in Olomouc, a charming little town in the Czech Republic, where the puzzling proliferation of clubs, restaurants and jewelry stores served mostly as mafia fronts.)

So now, with banks more or less out of the lending picture and businesses facing a dire need, the mafia has a once-in-a-generation opportunity to go “legit” on a bigger scale than ever.

As Giorgio Napolitano, the president of Italy – not to be confused with flashy Prime Minister Silvio Berlusconi – observed in May: “There’s a risk that Mafia organizations can profit from the current crisis by buying control of struggling businesses, infiltrating all regions of the country.”

A “risk?” More like a guarantee…

“The Mafia is ramping up its investing,” prosecutor Antonino Di Matteo tells Bloomberg. “The Mafia’s financial managers are trying to invest now, while the time is right, so that they can launder their fortunes once and for all.”

The Tony Soprano Full Employment Act

It isn’t just Europe where crime pays. In the United States, scores of less than savory characters are salivating at the new opportunities created by Washington.

We already know that the alphabet soup of acronyms dreamed up by Turbo Timmy Geithner and Helicopter Ben Bernanke are borderline criminal – TARP, TALF, PPIP and so on – but I’m talking straight-up Goodfellas type stuff here. For instance…

Two weeks or so ago, I sat next to a paving contractor in a local poker tournament. (Just as in Las Vegas, in Reno/Tahoe you can find a tourney on any given weekend.)

“Business is very good,” my fellow poker player reported. “Amazingly good actually. That stimulus cash is really starting to flow.” Apparently he was doing some heavy construction work on a nearby Indian reservation. Big road upgrades, courtesy of a check from Uncle Sam – and the backlog of work was piling up.

Now, I imagine this paving contractor’s business is probably 100% aboveboard and legit (even though he wears enough heavy gold to fall somewhere between Liberace and Mr. T). But if he wanted to cut a few corners, how hard could it be?

Or, heck, maybe he’s the victim in all this. Plenty of aboveboard businessmen in the construction trade wind up greasing a palm or two on their way to a finished project… sometimes it’s just what you gotta do…

The scale of opportunity, er, corruption, is bigger than one might think.

According to fraud consultant David Williams of the Deloitte Financial Services advisory, a whopping $50 billion worth of stimulus cash could be siphoned off the top for fraud (above and beyond the legally fraudulent activities of a venal and corrupt Congress).

“The rule of thumb typically,” Williams reports, “is that of the about $500 billion worth of money that’s going to run through the procurement process, somewhere between 5% and 10% of that usually finds it way into potential problems.”

The FBI is aware of the danger. As FBI Director Robert Mueller recently warned, “These [economic stimulus] funds are inherently vulnerable to bribery, fraud, conflicts of interest, and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey.”

Of course, being aware of the danger and being able to do something about it are two different things…

Call it the Tony Soprano full employment act. With the government anxious to throw bales of taxpayer cash at “shovel ready” projects, the organized crime element will be standing by with a “shovel” too… “ready” to haul away veritable garbage trucks of loot.

Eyes Wide Open

So what can you and I do about this? Realistically, not very much. (Okay, let’s be honest… not a damn thing.)

But at the same time, I would rather go about my business with eyes wide open than eyes wide shut. The strong and growing presence of organized crime is something that ordinary citizens don’t have much day to day contact with (most of us anyway). But it is a reality we all pay for… like an extra form of goods and sales tax, paid to a de facto shadow government operating behind (and sometimes in direct cahoots with) the official one.

Think about the difference between undertaking a new business or investment venture in a low-corruption Western country, like the United States, versus a high-corruption “frontier market” country, where the rule of law is still only vaguely formed.

In the more advanced Western country, you can rest in peace knowing that the laws will be upheld and everything is completely above board. Right?

Not quite. That bit about the United States being “low-corruption” was a touch of sarcasm. As the global financial crisis continues to unfold, one of the side effects could be the gradual disappearance of the brightly drawn dividing line between high-corruption and low-corruption nation states.

This reality will make following conventional, business as usual, “eyes wide shut” investment advice all the more dangerous in the years ahead… just as it would be dangerous to open an import-export business in some far-flung outpost without having a clear handle on the risks present.

I’m curious too, given my own handful of experiences: Have you had any personal brushes with organized crime? Any local color unique to your town (or country) of origin? Better yet, any ties to “the business” yourself that you’d care to anonymously discuss? If we get some good stories, maybe we can recount them here (with names changed to protect the innocent… or the guilty): justice@taipandaily.com

Source: A Raging Bull Market in Organized Crime

Underground investor Christian DeHaemer says junior gold stocks are the ones to watch. In fact, he says this asset class will be “the number one asset class over the next two years.” This means that junior miners could make you more money than any other asset class in the near future. According to DeHaemer, there are several factors contributing to this play (most of which will be familiar to Notes readers).

For one thing, the US is creating more money than at any time in history in an effort to inflate the next bubble, save the banks, and extend the hand of government. Bloomberg has put the total bailout bill at $12.8 trillion, which is roughly this year’s annual GDP. The profligate spending by current and past administrations is well documented and ultimately must lead to inflation. What we are seeing now is the de facto definition of an inflation-generating machine. […]We have seen from the 1970s that hard assets perform better in a high inflation environment. Add to this a falling dollar, which is the other side of the same coin, and a flight away from paper currencies into gold, and you get a powerful long-term trend in real assets like oil and gold.

*** Christian says junior miners are a great way to play this scenario because they offer low risk and high reward…

Junior gold stocks didn’t fully participate in the rally that drove gold from $250 to $1,000 per ounce over the last seven years. But they absolutely got hammered in the commodity/credit bust of 2008. Many fell by 75% or more. And these are the top-tier, small companies with little or no debt and plenty of proven reserves. These are companies that were trading at market caps from $500 million to $1 billion a few years ago, that you can now buy in the $100 million range… in December I was able to pick up some of these small-cap gold companies for little more than the cash they had in the bank.

This kind of trade is for gutsy investors only. But here at Notes we reckon this could pay off big time.

P.S: James Davidson’s Crisis Strategy Alert portfolio continues to soar to new heights, without the risks of conventional investments. James has a nose for what he calls “investment outliers” — assets mispriced by crisis conditions. One “income outlier” he recently discovered allows ordinary citizens to pick up “tax rebate” (up to $781.33 a month). These monthly payouts are easy to set up. But you must act fast. The next check could arrive as soon as 4.00 EDT, Friday, June 12.

Not that it ever really left, of course. Preoccupied with a sea of financial troubles, the world had simply put it out of sight and out of mind for a while.

Now, with all the thundering force of an underground nuclear explosion, our heads are turned to the globe’s unstable flashpoints once again…

North Korea: “Look at Me”

In North Korea, the Kim Jong Il Regime has just conducted a fresh nuclear test (and fired three short-range missiles). “World leaders reacted with outrage,” according to CNN, in response to the unlawful test. The U.N. Security Council held a special emergency session to “condemn” the move.

“North Korea is directly and recklessly challenging the international community,” U.S. President Barack Obama said. The president added that “It [North Korea] will not find international acceptance unless it abandons its pursuit of weapons of mass destruction and their means of delivery.”

Therein lies the rub. In reality, North Korea doesn’t give a damn about international acceptance. What Western leaders do not say, but quietly recognize, is that all their peaceful plans and prescriptions for North Korea are viewed as poison pills by the Kim Jong Il regime.

To understand the situation, put yourself in Kim’s shoes for a moment. Were North Korea to act logically and responsibly in the eyes of the international community, gushers of aid would come flooding in. Treaties would be signed… borders would open… the country would begin to heal… and the totalitarian machine that has crushed North Korea beneath its fist for decades would be swept away in a sea of populist uprising, its leaders thrown in jail to rot for war crimes against humanity.

That is to say, thrown in jail or shot like dogs. Or perhaps hung like common thieves. North Korea’s leaders have CNN too – they saw what happened to Saddam Hussein. Does anyone imagine they really intend to let the same thing happen to them?

The Kim Jong Il regime is crazy, but not suicidal. Their tendency towards self-preservation explains why they hang on to the nuclear option with a death grip. It’s their only form of insurance against getting turfed out like Saddam. That further explains why North Korea is unlikely to actually unleash a nuclear attack on a rival power.

But North Korea is a huge headache for the rest of the world nonetheless. While the regime is unlikely to use weapons of mass destruction, it can certainly sell blueprints and materials to the highest bidder. If some aspiring terrorist leader – a sort of Bin Laden 2.0 – had the cash and contacts to make something happen, Kim Jong Il & Co. would be high on his list of folks to see.

Some hope that if we only wait long enough, North Korea will eventually collapse of its own accord. But that isn’t a very attractive option either. For one thing, a true collapse would again mean the bloody end of the regime – and there’s no telling what a nasty dictator at the end of his rope might do.

What’s more, China lives in quiet fear of a mass influx of North Korean refugees (as does South Korea). Such a flood of terrified, impoverished North Koreans could be economically and politically devastating for the border country forced to receive such an influx on short notice.

Iran: “Us Too”

Somewhat overshadowed by the North Korea news, Iran has made moves of its own that would have surely dominated headlines in any other news cycle.

Earlier this month, Iran test-fired a surface-to-surface missile with a 2,000 km (1,200 mile) range, according to Reuters – far enough to reach U.S. and Israeli military bases in the region.

In further escalation, Admiral Habibollah Sayyari announced this week that “Iran has dispatched six… warships to international waters and the Gulf of Aden region in an historically unprecedented move by the Iranian Navy.”

As you can see, North Korea isn’t the only country that wants attention…

“Iranian waters stretch along the Gulf, the Strait of Hormuz and the Sea of Oman,” Reuters goes on to add. “Iran has threatened to block the Strait of Hormuz, through which about 40 percent of the world’s oil is shipped, if it were attacked over its nuclear program.”

Once again, this isn’t a case where the West can just ask Iran to play nice. It’s a game of high stakes poker in which Iran is determined at all costs to reach its goal – full-scale nuclear capability – and is willing to openly threaten 40% of the world’s oil supply in order to achieve that goal.

Israel: “We’ll Be Ready”

And the country watching Iran with the wariest eye of all? That would be Israel.

Next week Israel will be conducting a five-day drill, dubbed “Turning Point 3″ by Home Front Command. The drill is meant to prepare Israel’s rapid-response capability in the event of simultaneous missile strikes and terrorist attacks, the Jerusalem Post reports.

On the third day of “Turning Point 3,” a siren will go off “throughout the entire country,” at which point all citizens of Israel will head to the nearest bomb shelter (or makeshift equivalent). Suggested reaction times vary by region – from less than 30 seconds in the Golan Heights to a full three minutes in Jerusalem.

“This isn’t an imaginary situation,” says Israel Deputy Defense Minister Matan Vilnai. “This isn’t detached from reality and if there is a war, it’s very likely that this is what will happen.”

According to a poll released by Tel Aviv University on Sunday, 51% of Israeli citizens back an immediate strike on Iran’s nuclear sites. The other 49% prefer awaiting the outcome of U.S. negotiations. That mix could change quickly, obviously, depending on how future events unfold.

To further ensure readiness, in the past ten days the Israeli air force has held drills simulating “all-out war.” Again according to the Jerusalem Post: “Fighter jets, cargo planes and missile defense systems of the corps took part in the drill where defense from a simultaneous attack against Israel from the south and north was simulated.”

Make no mistake – there are some real storms brewing here. And we haven’t even touched on other flashpoints like Pakistan, Venezuela and Nigeria… tomorrow we’ll take a closer look at what this all means.

Source: North Korea, Iran and Israel – The Return of Geopolitical Risk

Well, that and one other small quibble. Where are all the haters? Surely more of you must think I’m off my rocker, or otherwise dead wrong somehow. Let’s start off with a rare bit of snark just for sport…

The lessons learned from the past…8 years of taking us down…and now a dynamic leader trying to pull it together…and presenting a better picture of America to the world…now, can you or Rush Bimbo do that?

– TD reader NB

Rush who? I’m not up on the guy, as I haven’t paid attention to him since the early ’90s. I did go through a Rush Limbaugh phase my freshman year of college – but I also shaved my head on a dare and tried absinthe that year. Some things you just leave behind.

As for me, you’re right. I could never become leader of the free world because I could never in a million years get elected. I’m too outspoken, I’m downright lousy at pandering and posturing, and I would rather beat myself to death with a tire iron than be subject to the inanities and insanities of politics on a day-in, day-out basis.

Not to mention that, on a loss of dignity scale, pursuing the presidency has to rank somewhere between American Idol and the “Gimp” scene from Pulp Fiction. Is it any wonder that only megalomaniacs and puppets want the job?

Jimmy Carter was one of the most under rated presidents of this century. He changed 20% of this country’s power generation to Nuclear and opened up power markets. He never got us into a war. Two accomplishments that the last 10 presidents cannot match! Maybe he was not forceful enough but as a country, we have been total a–holes on the world stage for the last 15 years and we are about to get our up and comings! The day of America is done!

– TD Reader Richard

Well, we’re all entitled to opinions I guess… I’m more inclined to agree with this harsh assessment from The Economist, in a recent piece on the sad state of the GOP: “Jimmy Carter destroyed the Democratic Party for a generation because voters concluded that both he and his party were too incompetent to be trusted with the White House. George Bush may have done the same thing for the Republican Party.”

I think it is important to note that inflation will be caused by too much money supply, not by government spending. Political factors do create a link between them, but it is possible to have big spending and big deficits without inflation if the Federal Reserve does the right thing…

– TD reader Duane K.

I respectfully disagree. To dust off an old analogy, the Fed is like a jockey riding an elephant. Most of the time, the elephant is docile and controlled. But if something happens to make the elephant stampede, all bets are off.

What’s more, government spending is inherently inflationary (in the long run) because of the laws of supply and demand. In order to spend money that it doesn’t have, the government must first do one of two things. It can sell bonds or it can print dollars, both of which count as government assets. That’s the supply side of the equation. What happens after that depends on demand.

If there are plenty of buyers for the bonds (relative to supply), then all is well. If there aren’t enough buyers, though, then the price of bonds goes down – which in turn makes interest rates go up. If interest rates go up too much, that threatens to kill the economy… thus forcing the Fed to print dollars (with which to prop up bond prices) in order to keep rising interest rates from choking off growth.

The same supply and demand idea applies to dollars. As long as there is strong demand for dollars – the need for cash in a money market account, cash to lend or spend, liquidity in a bank vault, and so on – then the government-created supply of dollars is not a problem. But as soon as supply outpaces demand, the value of the dollar declines.

So all inflation is, really, is a mismatch between supply and demand for government assets (tilted towards the supply side). If there is a greater supply of treasuries or Federal Reserve Notes on the market than warranted by current demand, investors will seek to trade that excess for something else. Equities maybe… or some other country’s debt or notes… or real estate, or commodities, or hard assets like gold and silver. You get the idea.

The key thing to remember is that the Fed does not have control in the event of extreme scenarios – and on the demand side of the equation, the Fed has no say whatsoever. All the Fed can do is muck around on the supply side, shifting the bond-dollar mix as conditions warrant. On the demand side they are helpless.

And so, if the demand for treasuries and cash runs sky high as a result of global panic, the Fed can print up lots of emergency dollars (spike the money supply). But they can’t keep that cash from being stuffed into mattresses or bank vaults, leading to the threat of a deflationary death spiral. This is just what happened in the fall of 2008.

On the flip side, if the demand for treasuries and cash suddenly plummets, the Fed can’t reduce supply fast enough without killing the economy. In fact, once true recovery gets under way, there’s no way in heck the Fed will be able to pull the excess dollars from the system fast enough to avoid inflation. They will be too fearful of killing off a weak and tentative recovery, as FDR nearly did by advocating a premature tightening of fiscal conditions in the late 1930s.

This is why Ludwig Von Mises foresaw long ago – and quite correctly I might add – that government attempts to massage the boom-bust cycle always end in one of two ways. The powers that be wind up with a Hobson’s choice – sacrifice the currency or risk debt-laden economic collapse.

In a debt-laden democracy, the debtors have more votes than the creditors. This makes severe economic pain (with risk of collapse on top) a politically unacceptable choice. In contrast to that, inflation can generally be lived with… so we always wind up with inflation in the end.

I struggle with the inflationary call. As long as most people have variable rate loans for their homes inflation can only spell disaster. Labor is always on the tail end of inflation whereas the bank will bump that monthly payment up… depending on what the home owner signed up for causing more foreclosures and further bank problems. So in essence the variable loan is acting as a check against inflation or allowing the Feds to move rates up too quickly to counter inflation.

– TD Reader Denis T.

If you want more on this topic, I encourage you to read, “The Importance of Monetary Velocity.”

Not everyone thinks we have runaway inflation ahead. Those who doubt the return of inflation, even in the face of trillions upon trillions doled out with more to come, mainly do so because of the velocity question (see link above).

Their basic argument is that things are so tough on the economic front – in terms of lack of labor demand, lack of spending power, and general lack of credit – that there is just no way the economy can gin up enough velocity for the price of goods and services to rise.

This view further assumes that cash will continue piling up in bank vaults – and Treasury bonds in central bank coffers – as the global economy hobbles pitifully along.

My counter to this line of thinking runs as follows.

First off, for the Federal Reserve the mantra is “inflation or bust.” For the economy to truly get back in gear, we must have an extended period of inflation. The Fed hopes it will only be a little bit of inflation, and talks optimistically as if this will be the case. But the reality is that it will probably be a lot. When you’re in a deep hole and have to blast your way out, you overshoot. That’s just how it goes.

As soon as the prospect of real economic recovery is here and widely accepted, the trillions of dollars the Fed pumped into the system will rush back out into real goods and services. The demand for government assets, in other words, will rapidly fall – and the Fed will shy away from tightening for fear of killing the recovery.

Alternatively, if we don’t see a true recovery any time soon, then the powers that be have only one answer – keep stimulating. Keep printing more dollars. Keep selling more bonds. Keep propping up more failed or failing businesses.

We already know that governments can’t create prosperity. They would have already done so if they knew how. All they can do instead is keep pumping in paper, keep meddling with things. And that is exactly what they will continue to do if the recovery process stalls… up until the point where the world no longer has confidence in the “full faith and credit” of U.S. government obligations.

Remember, once again, that inflation is a supply and demand phenomenon, and that the Fed and Treasury only control the demand side. So what we are talking about here is an inevitable change on the demand side either way.

If the economy recovers, demand for government assets falls because investors are happy to sell treasuries and buy equities or land or copper or what have you.

In contrast, if things stay bad for a long enough period of time, then the stimulus-driven supply of government assets (bonds and cash) just expands and expands… until one day the bag holders swallow hard, look down at the thin air below their feet, and demand suddenly evaporates in the midst of a run-on-the-bank style panic.

And as I’ve said, my hunch is that interest rates remain capped throughout this whole ordeal no matter what, because high interest rates – be they on treasuries or home mortgages – are an economy killer. The Fed will thus be moved to “save” the economy by purchasing large quantities of bonds (or home mortgages) in order to keep interest rates low.

Indeed, the Fed has already done this. They may do more of it, lots more, and can do so by way of printing dollars with which to buy the bonds and mortgages… which brings us back around to the Von Mises call on destroying the economy versus destroying the currency. The latter always gets sacrificed to save the debt-laden former. And if the grocery store winds up selling milk for seventeen bucks a gallon in result, so be it.

All administrations seem bent on seeking the advice of people who are recommended by the Banking Cartel’s descendents that created the Federal Reserve Act. This Act was to end the types of crisis we had in 1907. Yet, we have had about a dozen recessions, 3 banking [crises], and devaluation of the dollar by 95% as a result of these people being in control of the money supply. Still, today, we are seeking the advice of them to fix what they caused…

With one in four jobs tied to government spending, we create a new recession every time we try to pull back the spending that got us out of the previous recession. So, all the jobs being created by this President are only creating another problem later and a bigger one because of our being past the point of no-return.

…As the Austrian economist, Von Mises, warned us, we either end it voluntarily with some pain or delay it until it collapses the currency and we have even more pain. This President has chosen to delay it and if he hadn’t made that choice would have committed political suicide. The nation doesn’t want any pain and thus, any attempt to end this voluntarily would be met with massive resistance because the majority of the people and those in Congress don’t believe we can’t tax or grow out of this. They still believe some miracle will bail us out without too much pain…

– TD Reader Jan Paul B.

Well said, thank you (including the parts of your reply I wasn’t able to excerpt). I’ve been pounding the table with that Von Mises prophecy for years now… ever since spring 2005, when I first put on an editor’s hat.

I admired Carter then and still do and I admire Obama for his genuine goodness as a person. But neither have the skills or the meanness to deal with the cutthroat bastards in Congress. The good-old-boy system is so firmly entrenched in Congress no one, short of throwing a grenade in the room, will move them. Congress is not interested in doing what’s best for the country or the average citizen they do what the money tells them to do.

They operate on the you scratch my back and I’ll scratch yours principle. They think there is honor in compromise, they will sell out their constituents in a heart beat to get what they are sure is best for the people. Just ask them. They know what is best for you. Doesn’t make any difference that you don’t want it you’re too stupid to know what is best for you.

– TD Reader Steve M.

All too true. I must add, though, that your note reminds me of two old quotations.

The first – attributed to Samuel Johnson or Saint Bernard of Clairvaux, depending on who you ask – is “The road to hell is paved with good intentions.” The second, from Bertrand de Jouvenal, is “A society of sheep must in time beget a government of wolves.”

I graduated from college in 1962, began Air Force service almost immediately as an Officer. I was assigned to a place lost in a remote desert out of touch with the mainstream. Then I spent a year in Viet Nam and a couple of years in south Florida before becoming a civilian. I found a job in 1973 driving an 18-wheeler, not union, and spent nearly 20 years doing that.

All of this time there was recession and high inflation in wave after wave. In the Air Force there always seemed to be an attitude problem on the part of the civilians. That was, of course, because they were coping with the hard times of the 1960s. I recall that between the Air Force and trucking there were jobs where clients and customers were hard to find and had tendencies to suddenly disappear.

As a long-haul truck driver I became very paranoid about keeping my job and worked very hard to do everything just right and very well. I did keep my job, found one that paid a lot better and kept it. My paranoia became ingrained and served me well. My nerves stayed frazzled but I made money to support my family. Pay increased dramatically every year but just kept pace with the costs of living…

– TD Reader Wayne M.

Sounds a lot like what we could be in for.

Source: Obama, Carter, Von Mises and the Dollar – Readers Respond

I read twenty or thirty books a year on average. A fascinating book I am reading now is Secrets of the Temple: How The Federal Reserve Runs the Country by William Greider. I’ve absorbed more than a few books on the inner workings of the Fed these past few years. But this is the first time I’ve gotten around to Greider’s magnum opus.

Secrets of the Temple is more than two decades old now. It was finished in 1987, before Alan Greenspan’s time (which is fine by me, as I am more than sick of that guy). Here and now in 2009, it feels like the perfect time to be reading Greider’s book. So much of what we are going through now has keen resonance with the past, the subject matter is more fresh and relevant than ever.

Greider opens the book in the summer of 1979, shortly before Jimmy Carter’s famous “malaise” speech… and just as the sweep of history is about to force the President’s hand. The Carter administration did not want to appoint Paul Volcker, a stubborn outsider with a vocal conservative bent, as Chairman of the Fed. Carter was in fact warned by his minions against doing so. But by the time the decision came, Carter felt he had little choice in the matter.

In addition to a gripping narrative covering Volcker’s tenure at the Fed, Secrets of the Temple digs deep into the question of money. Greider takes you on multiple journeys as you read… back and forth through the grand sweep of history, to see how the Federal Reserve was truly formed and why, and deep into the hidden nooks and crannies of policy and politics. The author’s own biases are not concealed from the reader, but that does little to take away from the story.

An Alien World

It really is eye-opening how swiftly times can change. Just a few years ago, the trials and tribulations of the 1970s seemed like ancient history – forever sealed in the vault of the past. The very mindset of the 1970s seemed unfathomable. A period of aggressive and relentless inflation that lasted for years on end? An entrenched conviction that inflation was here to stay, never to depart? Relative to the last quarter-century, it almost sounds like an alien world.

And in many ways the economic climate of the 1970s really was an alien world, at least in comparison to what most of us know. There are two terms that help describe why that inflationary past feels so inaccessible to us – chronological snobbery and recency bias.

“Chronological snobbery,” a phrase attributed to C.S. Lewis and Owen Barfield, refers to mankind’s general habit of seeing the present as superior to the past. To imagine the people and problems of twenty, fifty or a hundred years ago, say, is to imagine a world of folks less enlightened than we are… and thus, to put it bluntly, to see the mistakes of the past as “dumb” errors we are too smart to commit ourselves.

“Recency bias,” a more common term, refers to the human habit of placing too much psychological weight on familiar events. If conditions persist for a certain amount of time, it is natural for people to assume those conditions will last forever. This isn’t a conscious bias so much as a subconscious one. People don’t realize it when they shift from “it’s always been this way” to “this is how it will always be.” But that is exactly what people do – especially when entire careers have played out under one general set of conditions, as is the case with the current crop of Wall Street money managers who, prior to 2008, knew nothing but low inflation and equity bull markets.

The Turning of the Wheel…

The best antidote to recency bias – and to chronological snobbery for that matter – can be found in the study of market history.

It is easier to stay detached, and to see all the various possibilities in the turning of the wheel, if one is familiar with the major cycles that have come and gone. Someone who spends little or no time thinking about market history will likewise have little or no reason to question his or her own bias towards the present day. Someone who grasps the idea of multi-decade-cycles, however, will be more open to the possibility of breathtaking change.

As we head into ever more turbulent times, your humble editor is more convinced than ever that getting the big picture right will be vitally important. What type of world will we be living in? What mental models will prove most useful…. what lessons learned from the past most worthy of dusting off?

As I read Greider’s book, my conviction is strengthened that the 1970s could be a powerful historical analog. And I am openly beginning to wonder… could Barack Obama turn out to be the next Jimmy Carter?

…and a Familiar Rhyme

The parallels here are deeper than just the men. They also relate to the deeper philosophies that the Carter and Obama administrations bring to the table, and the type of problems both administrations were forced (or will be forced) to deal with.

It is perhaps a further irony that, at exactly the same time America is faced with the twilight of fiscal hegemony in the eyes of the world, the country now seems poised and determined to heap even more spending on the pile than has ever been witnessed before.

This is not an endorsement of President Obama’s Republican opposition (or of any political party anywhere). It is merely a reflection on what may be coming next. What’s more, this observation is not just political in nature – or political for its own sake – but could have a very powerful effect on what happens to your money. Because if the 1970s rhyme holds true, we are going to enter an era in which fiscal policy is weak, debt burdens are high, and growth is lax for years and years to come. And that means serious inflation.

We obviously have no clear bead on what 2012 will look like. But I suspect the brainy, idealistic and breathtakingly accommodative (dare I say Carteresque?) policies of the Obama administration will eventually lead to a loss of fiscal control… in turn leading to a backlash so strong that Obama could be forced to find his own Volcker. (Assuming the genuine article isn’t up for a rematch.)

Tomorrow we’ll dig deeper into the Obama/Carter parallels, and make a more detailed case for the similarities between then (the 1970s) and now. And then, as always, I’ll ask you what you think…

Source: Is Barack Obama the Next Jimmy Carter? (Part One)