Diana Choyleva warns of market turmoil, too

Diana Choyleva of Lombard Street Research is reported today warning of inflation and castigating the Bank of England for failing to raise interest rates earlier and faster. Well, actually she has been saying this for a while now, and some of our bears have been warning us for much longer. And this is still news-at-the-back, as though there is anyone in this country that does not stand to be affected!

Mark Skousen warns of market turmoil

I have just received an email from Investment U, featuring an article by Mark Skousen, who says that he recently attended a pre-book launch talk by Alan Greenspan. The Federal Reserve's ex-Chairman's memoir "The Age of Turbulence: Adventures in a New World" is due out in September.

Reportedly, Greenspan spoke of the scary periods in 1987 and 2001, and his surprise at the resilience of the US economy. Skousen notes two important points from the talk: Greenspan's enthusiasm for the future of the European Union under its more conservative economic leadership, and surprise at the low global interest rates that have helped to drive up the markets. Skousen suggests that interest rates may be on the rise, and the recently increased yield on the 10-year US Treasury bond seems to bear the same interpretation.

For investors, Skousen suggests using stop-loss triggers on share holdings (in a real emergency, will they work as intended?), gold and silver coin to pay your way if the worst comes, and a large amount of cash. Definitely a bear, and with a reputation for prescience: if you look at his website, you'll see that Skousen advised his readers to get out of stocks 6 weeks before the crash of October 1987 - "one of the few advisors to anticipate the crash".

I have to say that I expected it too, but I wasn't an adviser at the time; and I also anticipated the Far East slide of 1997 and the falls post-2000. Not because I'm a genius, nor on account of insider whispers: being naturally wary, I looked and listened for warnings from experts. And so, if I may suggest, should you.

Is modernisation good for India?

I am grateful to a respondent to my earlier post, "Have we overlooked India?" and I think the exchange is relevant to India's future generally. The visitor says:

I am wondering where we are heading in so called modern era. Example in textile machinery, one airjet can replace 100 handlooms, this means 100 peolple are displaced by a single machine. I am from Handloom city of Panipat (India). Earlier a person with 20 handlooms was happy and feeded his family well. Now even 50 looms are not enough because of the increased cost of living in so called modern era and people are getting trapped in vicious cycle of high cost, loans and increasing capacity.

My reply:

Yes, I am sure that this is extremely difficult and in fact English weavers suffered the same way nearly 200 years ago, which is why some of them turned to wrecking the machines that were harming their trade. But it didn't succeed in halting the changes. On the other hand, people in Britain are now materially much better off, so in the long run industrialisation is to everyone's advantage.

I suppose that the best thing that can be done is for government to support people who have been affected by modernisation, and help them to re-train in new areas of work. If you look at the post after the one you commented on, I give a link to Cafe Hayek. That writer points out that if saris can be made more cheaply, then sari-buyers will have more money left over to buy other things, so there will be demand for items that they could not have afforded before.

I think you cannot stop change happening, but governments can help manage the transition and far-sighted individuals can take advantage of new business opportunities.

Michael Panzner on bond yields

Michael Panzner commented in Monday's Seeking Alpha on the increased yield of the US Treasury 10-year bond. He sees it as another straw in the wind - "goodbye to the good old days". Ironically, in the ad box next to his article, a message flashed up, promising to double investors' money in the China boom. Fear meets greed.

Naturally, each day that disaster doesn't strike is taken as further confirmation that Panzner is wrong. I shouldn't count on that: exact timing isn't possible, but I haven't seen a refutation of his threat analysis, or a relatively painless solution.

The banks cause market bubbles, too

I plan to review Richard Duncan's book "The Dollar Crisis" soon - it's not just time constraints that are the problem, but trying to condense his arguments.

Essentially, Duncan sees the unlimited creation of credit as the mischief-maker in economics. Since the dollar is not restricted by valuation against gold, the government can print as much money as it wants.

But even when there was a gold standard, credit could still be multiplied, because banks lend out many times more cash than they've been given to look after. Banks only retain whatever fraction they (and the regulators) feel is essential to deal with likely withdrawals by depositors.

Then when bad times come, they multiply the problems by cutting back on credit - remember the old saying, "Banks lend you an umbrella when the sun shines and want it back when it starts raining"? I recall hearing (in the recession of the early 90s) of a businessman with a big turnover and a £3.25 million overdraft facility, who received a payment from a customer for £3 million. Acting on head office orders, the bank manager promptly reduced the overdraft to £250,000 and hurriedly left for the day, while the now-ruined businessman grabbed a shotgun and went looking for him at his office.

Have a look at this article by Wladimir Kraus in the archive of the Luwig von Mises Institute, criticising "fractional reserve banking".

Should India move away from hand-made goods?

Speaking of the potential benefits of industrial capital, I note an article today in Cafe Hayek about machine-made saris, balancing the loss to the traditional weaver with the gain to many buyers.

Have we overlooked India?

Indian respondents to Mr Venkatesh's article worry about the movement of the dollar relative to the rupee. But just as America's problem is not the dollar but its national economic fundamentals, so perhaps India should raise her eyes to a more distant prospect. The country has a well-established democracy and an independent judiciary; respect for law, family and property rights; many millions of fluent English speakers (don't worry, the call centres will eventually overcome problems of Western vernacular); and a famously entrepreneurial culture.

India may not be sitting on a vast coalmine, like China, but natural resources aren't everything. It's not natural resources (other than mountain ranges) that preserved Swiss independence, but the history and character of the Swiss. As to commerce, I forget which mega-businessman said he could lose all he had, but so long as he kept his staff he'd get it all back again.

If India avoids over-reliance on its low wage advantage and continues towards more intensively capitalised production, then it too can be a powerhouse in the new world economy. Remember that recently, the British Swan Hunter shipyard has itself been shipped to India.