Gold fever may return

Gold has been in the doldrums for a while, but we're now getting messages about inflation and if Fannie Mae and Freddie Mac are added to the liabilities of the US Government, we could be back in the paper-money world of pre-Revolutionary France as advised by the Scottish gambler, John Law.

The Mogambo Guru gives value, not just in comic entertainment, but also in his useful references. One of them is to Adrian Ash, who points out that gold is now worth less than 2% of world financial assets, whereas at times of "investor stress" (and as late as 1982) it has risen to 20-25%. It may be time to consider the argument for precious metals, not so much as investments as insurance against the severe loss of value of other assets.

The EU and Radavan Karadzic

ITV's News at Ten last night covered the arrest of Karadzic, making the point that his identity and whereabouts have been known to the Serbs for years.

(The archive footage included an infamously misleading shot of Bosnian Muslims behind barbed wire, hauntingly reminiscent of the Nazi concentration camps; both at the time and again now, it was not explained that it was the camera crew that was penned in. Still, dramatic truth and all that.)

Whatever the terrible crimes of this man, the decision by Serbia's new, pro-EU government to "lighten the troika" looks primarily motivated by the desire to re-establish trade and diplomatic links with "Europe." So to me, the real story is the continuing expansion of the new European Empire.

The Balkans are being knocked into shape, or so the empire-builders think. Kosova declared independence in February 2008 (in the teeth of an attempted legal challenge by Serbia) and has been recognised by the USA and many other countries. The 100,000 Serbs in Kosova make up only 5% of the new nation's population, and compared to the 10 million in Serbia itself they are, presumably, of little account politically there, also. Besides, of course, Kosovans are not wolves.

But the question remains, how much more of Europe's former battlegrounds does the EU have the wealth and power to suborn, absorb and control? What will happen when its money runs low? Can its Babel-army sustain the territorial integrity of a hastily-constructed, ramshackle and heterogeneous empire? Will its gourmet diplomats and bibbed lawyers maintain law and reason under its young, yet complex and fuzzy legal and constitutional codes?

Whose country?

"Citizenship in this nation is is not a spectator sport," says Karl Denninger, as he tries to get more people to sign his petition to stop Fannie Mae and Freddie Mac being made vast burdens of the State.

I hope that is true for the USA, and I wish it were true here. Are we deluding ourselves when we talk of "our" Government?

Worrying signs

Knowing that debt creates extra money and so boosts inflation, The Mogambo Guru notes that the Chinese now have 1.58 billion credit cards! For some reason, TMG thinks we should look at gold and silver.

Karl Denninger points out that short-selling actually acts as a kind of price support in the market, since ultimately the short seller has to buy the shares he's sold to someone else; and so the new ban on short-selling selected financials has removed the floor beneath them. Jim in San Marcos found he couldn't do any short-selling in that sector for three hours yesterday, and doesn't know whether that means we're looking at free-fall or a sudden rally. Either way, it seems to prove the point that banning short-selling increases volatility, the sensible investor's enemy and the gambler's fatal siren.

If two views make a market, does silencing one leave the other free to become a whimsical dictator?

Inequality revisited

"...both the income share earned by the top 1 percent of tax returns and the tax share paid by that top 1 percent have once again reached all-time highs," says Russell Roberts at Cafe Hayek, quoting the Tax Foundation.

As we've seen recently, there's more than one way to interpret the facts. At what point do the rich cease to inspire those beneath them, and begin to squeeze them? Doesn't it take money to make money? If so, shouldn't the lower orders be left with some after paying their bills? Is there an optimum level for the Gini Index?

UPDATE

Trevor Phillips on inequality on Britain: "People can see the economic slowdown coming. Everyone is happy to take some of the pain as long as that pain is shared fairly and what we want to do is to make sure that the burden doesn't fall unfairly on some groups rather than others."

Inequality

An anonymous spam-rant comment on one of my recent posts claimed that 1% of Americans owned 50% of the wealth, and this was destroying the system. Is it really a problem? I've had a quick trawl for information on inequality.

• Gini Index/Coefficient of inequality explained here
• Wikipedia lists countries by inequality here
• The CIA Factbook gives the Gini Index of the USA as 45 (in 2007), the UK as 34 (in 2005)
• Increase of USA's Gini coefficient since 1967 here

Here's some relevant articles and posts:

Richest 2% Own Half World Wealth; Bottom 50% Own 1% - UN Report (5 December 2006)
"the richest 1% of adults alone owned 40% of global assets in the year 2000"

The wealth gap is widening again (Daily Mail, 26 June 2008)

Why is the 'wealth gap' a bad thing? (MSNBC says it's not, what matters is opportunity)

Wealth gap widens (CNN, 29 August 2006)
"In the early 1960s, the top 1 percent of households in terms of net worth held 125 times the median wealth in the United States. Today, that gap has grown to 190 times..."

Wealth Gap Is Increasing, Study Shows (ScienceDaily, 9 August 2007)
"The poorest ten percent of families actually had a negative net worth---more liabilities than assets..."

*** Sackerson's Prophet Prize for this: ***
Globalization Has Increased the Wealth Gap (interview with Nobel prize-winning economist Joseph Stiglitz , author of "Globalization and Its Discontents", posted 15 January 2007)
"I think we are in a precarious position. We might be lucky and wander our way through this mess. There is a significant probability, however, that global interest rates could rise. If that happened, households with a large amount of debt would find it very difficult to meet their mortgage payments, and home prices would go down, which would lead to a reduction in consumption. Last year Americans consumed more than their income, something that is obviously not sustainable. The only way they could get away with it was by taking out money from their houses. But if home prices go down, they won't be able to do that any more. So there is a significant risk of a large economic slowdown. And government, by piling on so much debt and having such a large deficit, does not have much room to maneuver."

Why the wealth gap keeps growing (essay by Paul van Eeden, 17 November 2006)
"The fact is that people all over the world are getting poorer -- not because of free enterprise, open markets or globalization but because government created monetary inflation robs them of their living standards. The only ones who can immunize themselves are those with sufficient capital and that is why the rich get richer and the poor get poorer."

Market manipulation in financials?

Mish refers us to a piece in Minyanville. It suggests a recently introduced selective ban on short-selling is intended to support share prices in financials, so that more money can be drawn in by splitting shares and selling new tranches to the public.

To me, it feels like touting for sucker money. What happens later, when the short-selling ban is lifted? When the government (via regulators) begins to manipulate the market in this way, it looks like a sign that we are in trouble.