Every picture tells a story

This is a measure of monetary inflation. Increases here will eventually work their way into prices and wages. An explanation is offered here. Note that there has been nothing close to the highlighted "spike" in the last 25 years.

"An inflationary holocaust" - Jim Rogers

TBRRob posts a very useful YouTube interview with big investor Jim Rogers (the best analyses come from people who back their own judgments with their own money).

Despite the recent strengthening of the dollar, he is buying Japanese yen and Swiss francs; and commodities (especially agriculture), because they lead the way out of recession and their fundamentals are (he says) sound.

In the interview, he is challenged on his inflationary hypothesis: surely we are seeing "deleveraging" (reduction in borrowing) and don't we need more money in the system to deal with the liquidity crisis? Rogers cites past history and sticks to his guns

I think it was Marc Faber's comments that first helped me understand why all this public-money-throwing isn't going to help. It's NOT a liquidity crisis: liquidity is what has caused the problems (and anticipating the movement of the money tides is what has helped Faber grow his funds!).

It's a SOLVENCY crisis. If all your possessions are worth less than your total debts, borrowing more money will not help. So when the government creates massive extra funds for you to use, you will not wish to use them. And if your fellows are in the same position, you certainly won't wish to lend them any money you still have.

When you are insolvent, there are two ways out. One is to declare bankruptcy, in which case the money invested in you is lost and so excess liquidity goes down the drain. Good, though it's also painful (personal fortunes lost, people laid off).

The other way is to be unbelievably lucky, and have someone else pay-off your debts. When the government chooses to do the latter for the banks, it has to get the funds from somewhere, and ultimately that is the citizen/loyal subject. In this case, the liquidity is still in the system, and there is no drain to take it away. Sooner or later, it leaks out into the general economy and prices rise, because there is more cash to bid for the usual limited amount of goods and services.

(Or the government increases taxes, and uses the extra to pay-off debt. Nice idea, but increasing taxes slows the economy and creates more benefit dependants, which requires more taxes even as less revenue is coming in because business is suffering because people now have less spending money because taxes are higher, and...)

So there are two problems created: inflation, and moral hazard - the people who have been bought out in this undeserved way have no incentive to change their habits.

You may think that it's only a temporary problem and the government will recoup its investment when things get back to normal. The trouble is, "normal" means house prices dropping to about half what they were worth last year, because they doubled for no good reason in the five-year period before that. In the long term, I understand, houses are priced at 3 times income, not 6 times as during the recent period of monetary inflation.

So either the value of the excess credit is destroyed by bankuptcy, or by inflating away the money saved by more prudent people. Either the guilty (or foolish) suffer, or the innocent.

And here's another either/or: either we go this process again and again, or banks are prevented in future from increasing the money supply in the way they just did.

And the guilty must be punished.

A message to Peter Hitchens

Peter Hitchens seems to me one of the few independently-minded journalists in the mainstream media. One of the pieces in the MoS (and his blog) today reflects on the damage caused by BBC blabbermouth financial commentator Robert Peston and whether the credit crunch could have been anticipated. Hitchens says, in passing, that although he himself had bad feelings about our Roaring-Twenties-type economy, no-one really knew what would happen.

Rarely for me, I completely disagree with him, and think that if he turned his mind to this subject he might be influential enough to help some greatly-needed changes happen. So I comment:

Re your Peston piece and "The truth is, nobody really knew":

Sadly, this state of affairs was in fact VERY well-anticipated. As an independent financial adviser, I repeatedly relayed warnings via my newsletters to clients about the increasing debt in the USA, starting a decade ago. On 20 October 1999 I attended a breakfast meeting given by an investment company to drum up business, and a rep stated that the Dow was 50% overvalued. This confirmed me in the intuitive feeling I had long had, that a collapse was imminent. I feared the consequences so much that I put my business on the back burner and returned to teaching, which is something not lightly to be done, you will understand.

The stockmarket collapse began on the first trading day in 2000. Jerkily, the FTSE went down to less that half its 1999 peak by March 2003, at which point I thought lessons might have been learned and we could start to invest with confidence; but then (and you can see the BoE statistics online) the rate of increase of the money supply was allowed to soar by an extra 5% per annum. The investment bubble had turned into a banking bubble, which led to the horrendous property price instability that now threatens the financial system itself. The government is deeply implicated, since its regulators allowed banking reserves to be pared back (this is part of how you increase the money supply) so that when a crisis occurred, the lifeboats weren't there.

I repeat, very clear warnings have been sounded for a very long time by respected investment experts, mostly from the USA as the average Brit has very little understanding of money since we are rarely allowed to make or keep much of it. So I began a blog, in May last year, to learn more myself and to sound Cassandra-type warnings to any who would listen.

Bankers, politicians and economists knew very well, or ought to have known, the consequences, and the worst result of the present debacle is that it is likely that none of them will face Enron-style prosecution and punishment. They and/or their successors will therefore do it all over again, to their enormous gain and our near-ruin, as they have done periodically for centuries. Unless the perpetrators are punished in a way that will be remembered for generations, this moral hazard will continue to be a profound threat to our financial security and social stability.

You have written an excellent book on the mutilation of the British police, and I can promise you that the basics of finance are nothing like as complex as the professional fraudsters of the investment and banking community would like you to believe. I do really wish and hope that you will turn your investigative and communication skills to an analysis of what really went wrong with our Western economies.

NEWS: Gold CAN back all the world's money

... says Mike Hewitt in this article. Looking at gold in all its forms and relating it to the world's money that actually circulates (as opposed to all the money on the account books), he arrives at an estimated price of $738 per ounce.

That's not so far off the long-term median price of gold, adjusted for inflation - see below for some attempts to describe that relationship.

Maybe it could work.

Refuge, flight, battle rejoined, victory, retribution

Brad Setser looks at a flood of demand for US Treasuries and suspects that it's central banks shifting into the securest dollar asset they can find; and away from other dollar-denominated assets.

The first comment on the same post says that the next stage is a run on the dollar.

Continuing the Tolkien fantasy theme, one recalls the flight to Helm's Deep, and the eventual breach. Ultimately, though at a cost, the good side wins, of course (Denninger explains today how we can face the mess and clean it up).

Time to revisit Michael Panzner's "Financial Armageddon" - reviewed here in May of last year.

If he's right - and he's been right so far - it's first cash, then out of cash. But there's not enough gold to act as the world's currency (unless a horrific amount of wealth is permanently destroyed), and if we start up a new fiat currency, the moral criminals of the banking class will play the game all over again.

I note that Max Hastings in the Daily Mail calls for bankers to be "named and shamed"; this is milksop stuff. Yet they're still going to get billions in bonuses this year! Why does the Proceeds of Crime Bill not apply? Heavy, heavy fines, so that generations of bankers and traders will remember and hesitate. How about the last 5 years' bonuses, as a benchmark? Punitur quia peccatum est ("punishment is to be inflicted, because a crime has been committed").

But even that's not enough. What about the political class that opened the financial sluices to alleviate the discomfort of 2002-2003? And did it several times before, too? (See Jesse today on Greenspan's bubbles.) How do we mete out condign punishment to those greedy for power, as well as those for money?

I repeat, this is a crisis of democracy.

Guessing the low points

I looked at trends in the Dow earlier this year and guessed that the Dow's low might be 7,000. Now, Mish reports that Nouriel Roubini is saying the same.

The FTSE is currently hovering around 4,000, which is lower than the line I drew in June. But then, the line passed through, not under, the lowest negative spike in 2003. I seem to recall Wolfie predicting 4,000 in one of his comments here recently; well done, old chap.

It's not about money; it's about democracy

It's the interconnectedness that's pulling us all down: the centralisation of money and power has made us vulnerable. As I said in December:

I think the themes of diversity, dispersion and disconnection will grow in importance over the coming years, in politics and economics. As with some mutually dependent Amazonian flowers and insects, efficiency and specialisation will have to be balanced against flexibility and long-term survival.

Life on Earth has survived because it is not like a clock. Mechanistic systems must fail sometime, and the larger they are, the greater the damage they will cause.

After all this is over, we will need to refresh democracy and its controls on those who seek power, in whatever form. Bertrand Russell's book "Power" suggested that it comes in three forms - political, financial and religious, if I recall - and the American Constitution was devised to bell these cats; except, it seems, insufficient attention was given to the potential of money to destroy the community.