Sound Money Gaining Important Media Mindshare

Ambrose Evans-Pritchard, the influential British financial columnist, has issued perhaps the most thorough apology anyone can write in his piece today titled Shut Down the Fed (Part II). Here are some choice excerpts:
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

NO, NO, NO, this cannot possibly be true.

Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).

Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago. . .

Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?

Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.

If I have written harsh words about these heroic resisters, I apologise for that too.

Are the Chinese right? You bet.

Here's Professor Krugman's preferred solution, in a brilliantly-titled blog yesterday, Default Is In Our Stars:

So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt . . .

While his brief blog is a bit noncommittal, it is known that he prefers the inflationary solution rather than the free-market solution of debtors actually paying lenders back their capital according to sound money principles as best as said debtors can. Some debts cannot be paid, just as some (many) equity investments in risky enterprises will fail. So be it. If a lender lends unwisely or unluckily, that's his or her business. But it should be the lender and the borrower who in general is the sympathetic figure. The lender worked, earned money and did not get to enjoy that money. Instead, he/she deferred gratification and let the borrower enjoy/make use of the capital. Why should the borrower benefit from official policy to debase the capital which the lender earned but never used personally/

More and more serious thinkers are moving away from the policies of those who claim the mantle of Keynes (in Evans-Pritchard's case, he wraps himself in something he says Keynes got right) but who are perhaps even more Keynesian than Keynes. They are moving in favor of sound money. If you are thinking gold, you have it right.

Because the Evans-Pritchard view remains an insurgent one, I thus continue to favor gold, which is really to say that I believe that the dollar will continue to lose value faster than the discounting rate, which sadly the Fed has determined is 0.44% or so yearly for 2-year money.

It is further my empirical observation over 30 years of following gold (but not owning it or gold shares till 2001 or 2002, when the Fed went all in for allegedly anti-deflationary policies) that when the discount rate is below the consumer price inflation rate, gold prices rise; otherwise they fall or hold steady.

If the general price level actually starts declining and there is a semi-credible plan for the government to actually repay its debts, then I will say, as Keynes did, that the facts have changed and I will change my investment views.

Gold looks to be on the move. One can look at that as bad, as it reflects a declining value of the dollar. I prefer to look at it as a positive, in that the desire of an increasing number of people for sound money is being voted on in an even more legitimate "poll" (the free market) than an off-year election.

Somehow the view has taken hold in many minds that owning or investing in gold is un-American. Au contraire. The Coinage Act of 1792, signed by President Washington, provided as follows:

SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

The Founders took their money seriously, it would seem.

Gradually, momentum is building for a return to financial sanity. The Krugmanites appear to have peaked. The rise of the Tea Party (Tea Parties, to be technical), which in core financial ideology appears to me to mirror the Perot movement, reflects the thinking of the center of gravity of America.

Stay tuned. Something good just may be coming. Converts such as Mr. Evans-Pritchard are valuable and do not come easily. Unfortunately Dr. Bernanke and President Obama can do lots of "stimulatory" damage before their influence wanes, but the cavalry may be out there just beyond the horizon to rescue us from the slings and arrows of their outrageous policies.

Copright (C) Long Lake LLC 2010

Small Business and Consumers Static Economically at Best; Policy and Investment Implications

Two small business June surveys are out. The Discover(R)(Rasmussen) report on small business shows some worsening vs. May; click HERE for the latest report. Here's a brief excerpt:

Small business owners' economic confidence leveled off in June to halt a two-month rise. The index dipped to 86.1 this month from 87.4 in May as rising concerns over temporary cash flow issues offset some improvement in the way small business owners see the climate for their own operations. . .

The Watch recorded a slight increase in confidence about how individual business owners were faring: 30 percent say economic conditions for their businesses are improving, up from 28 percent in May; 43 percent said conditions are getting worse in June, down from 44 percent in May; and 34 percent said things are staying the same, up from 24 percent in May.

NFIB has pre-reported its June survey; click HERE for its press release. Here's the summary:

"Overall, the job creation picture is still bleak. Weak sales and uncertainty about the future continue to hold back any commitments to growth, hiring or capital spending. Job creation plans have been running far below comparable quarters in the recovery periods following two other major recessions."

Similarly, Gallup.com's tracking of consumer spending and hiring/not hiring have shown an aborted recovery, just as has Consumer Metrics.

How will the governmental/monetary powers respond? The well-connected British journalist "AE-P" comments in With the US trapped in depression, this really is starting to feel like 1932

From the ending of his article:

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to "strict scrutiny", a comment I took as confirmation that the Fed Board is arguing internally about QE2. . .

Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

More and more, it is looking as though the authorities are readying new "stimulus". ZIRP 4EVA (zero interest-rate policy forever)?

The longer an honest accounting of the books of the banks, and the Fed, is delayed (or hidden from the public), the more confusing things get, and the more ordinary investors have no idea what's real and what's fake. If for example BofA is insolvent properly valuing its second-lien mortgages that it may be carrying at full value but that may be worthless, then shareholders can be wiped out and its bondholders can be forced, a la GM, to take a debt-for-equity switch. None of this would impinge on FDIC's guarantee. An honest resolution of these sorts of matters in a way that simplifies the entire financial structure, and shrinks finance to the fraction of the economy that it had in (say) 1955, would allow much more efficient allocation of resources than can be done now in our opaque world of financial secrecy and complexity.

More ZIRP, "stimulus" and the like, and the mislabeling of smaller but large governmental deficits as "austerity", argues in my opinion for gold as a means to attempt to preserve real purchasing power. If continued fiscal and monetary fuel is poured into the economy and the normal course of economic cyclicality occurs, at some point price inflation is likely, and in that case silver (and copper) may well have more upside than gold.

Stay tuned.

Copyright (C) Long Lake LLC 2010

"The Fed Is Slowly Losing Its Marbles"

Marvelous post out by Ambrose E-P titled Time to shut down the US Federal Reserve?.

It's a concise must-read; it begins with the title of this post.

Copyright (C) Long Lake LLC 2010

Evans-Pritchard Opines

The columnist Ambrose Evans-Pritchard banged the gong often last year about dangers to Europe from the periphery of the European Monetary Union. Rising asset prices and staving off of a reply of the rapid downward spiral seen in the early 1930's led him to look like an alarmist. The rapid downward spiral seen in Greece this year, with worsening even today, makes him look better. His latest piece is titled Maastricht madhouse fuels EMU-wide contagion from Greece

His points are several and varied. The article is bite-sized and worth a read in its entirety and thus will not be excerpted here.

Gold is well into record price territory in Euro and British pound terms. Reflexively the USD relative strength has prevented that here. And if America were pursuing sound money policies, that currency strength would be well-deserved. Yet such is not the case. Wheels are turning.

Copyright (C) Long Lake LLC 2010