The end of usury

In the inflation/deflation debate, Karl Denninger comes down firmly - and to me, persuasively - on the latter side.

He points out - as do others, including proponents of Islamic sharia banking - that however much money is created through credit, more must be created to cover the interest charged. Usury endlessly blows up the balloon, which must eventually pop, before the cycle begins again.

Lenders do want their money back, and so generally take security for the loans they grant. At some point - and Denninger believes it's now very close - lenders will become unwilling to lend further, and/or borrowers will retrench or become unable to service their debts. In short, borrowers will have to pay up or be ruined, together with the more reckless lenders.

Can the government print extra money to solve this? Not according to Denninger, who says that the effect of bad money will be to drive out private lenders (who would demand very high interest rates for lending in an inflationary environment). Since the government itself runs partly on borrowed money, it's not an option.

Like me, Denninger thought the bust came in 2000, but the refusal to face reality means that we now face a much bigger bust.

Conclusion: cash will be king; get out of debt now.

Ted Spread

Large Ted spread = bear market?

Michael Panzner shows a couple of ominous graphs:

One is the "TED spread" - the difference between interest rates charged by banks to each other, and short-term (and safe) Treasury bonds. A wider margin indicates that the market is charging more because it considers lending to be more risky, and the current TED spread is approaching 1987 levels.

The other shows the ratio of amount loaned out, to amounts of cash on deposit. Lenders are now very stretched.

The Angriest Guy In Economics

Supposedly "the angriest guy in economics" is Richard Daughty, aka The Mogambo Guru - but he gives his rants a comedy twist.

Karl Denninger, on the other hand, is very emphatic that our economic woes are no laughing matter. Here he calls for all the "off-book" items to be included in lenders' accounts, and if that bankrupts them, so be it: a cleansing of the financial system, condign punishment for the perpetrators and a warning to others. This is similar to Marc Faber's position: he says the crisis should be allowed to "burn through and take out some of the players". Gritty.

And concrete. Denninger supplies a photo of a customer-empty store at 6 p.m. on a Sunday evening, to underscore his point.

Now that's something we can put to the test - look at the shops in your area and work out how crowded you'd normally expect them to be at the beginning of December.

Something Golden This Way Comes

Stock traders' bonuses are calculated on the basis of profits made up to... NOW. And perhaps not entirely by coincidence, the Dow has clambered back up to 13,300 and the FTSE above 6,400.

So the books close, the champagne flows and the rest of us can start doing our own accounts. Where are the customers' yachts?, as the naive investor asked.

Karl Denninger looks at E*Trade's difficulties and reckons the 70% mark-down of their home equity lending portfolio implies a loss of $1.5 trillion on HELOCs (home equity line of credit) alone. The bad news hasn't all come out yet.

Perhaps we entering the period of "dawning realisation".

"Give me Liberty or give me debt"

Bernard von Nothaus, issuer of the "Liberty Dollar" is sounding feisty. Such people are most inconvenient for the smooth running of public affairs; it's awkward cusses like him who were the grassroots of the American Revolution (though of course, the Founding Fathers faced a far more grisly legal retribution if they failed).

There is a serious point: is America prepared to refresh its commitment to the principles of the Constitution, which Ron Paul champions; or is it "the old order changeth, yielding place to new"? In which case, when was that decided, and by whom, and with what right?

It's a burning issue for us in the UK, too: here, a thousand years of organic (and often bloody) constitutional development is to be hurriedly reshaped by lawyers and bureaucrats working for the Executive, in the name of vaguely-phrased hurray-words ("justice, rights and democracy" - the last is particularly ironic, since I don't remember voting for this ramshackle assault). Has it become the people's representatives v. the people? Perhaps our "new" Labour government has ignore its Methodist roots and relaxed the laws on drinking, gambling and sexual activity so that we will be distracted from taking an interest in more serious matters.

On a lighter note, it's fun to see that, legal currency or not, such Liberty Dollars as are still out of FBI custody are currently a good investment. Maybe better than the Fed's IOUs, if you believe the bullion-hoarders.

Jacob Shallus might have thought so. The $30 he earned for engrossing the Constitution was the equivalent of 5 weeks' worth of a Philadelphia printer's wages in 1786. What does $30 get you today?

The long-term price of gold

I referred yesterday to an article by Tony Allison, which reproduced a graph of the long-term inflation-adjusted price of gold. Here is the original article from InflationData.com.

It looks to me as if the median price of gold (in 2007 dollars) runs at around $450/oz., but I'd be glad to hear from anyone who can give a better estimate.

And the Contrarian Investor's Journal argues why, even in deflationary times, gold may still be a good choice.

I beg to differ

I seem to recall it was some Supreme Court decision, where one judge said he dissented from the view of his colleagues "for the reasons which they have given". Elegant.

Tony Allison, in Financial Sense yesterday, gives the above graph and reads it as an indication that we could be heading for a gold price spike like that in 1980; whereas I look at the inflation-adjusted trend since 1914 and think that, unless my timing in and out of that market is superbly prescient, I'm better off doing what I do now, which is trying to pay down debts and save cash.

Yes, when I've done the latter, I might well make precious metals and commodities part of my portfolio.