Round and round

"from the Chrysopoeia ('Gold Making') of Cleopatra during the Alexandrian Period in Egypt. The enclosed words mean 'The All is One.'"

Here's a piece by Brian Pretti yesterday, on the Federal Reserve and its attempts to shore up the system with interest rate cuts.

His prose is a little sparky and luxuriant, but his point is that even though the official interest rate may drop, the lending market has become more bearish and there may be higher rates (or more stringent terms) for riskier loans. He feels that lending has not previously enjoyed the discipline of a proper open market, which is why pension funds ended up buying pigs in pokes (subprime packages dressed up as a form of reasonably secure bond).

But why is so much wealth tied up in housing, anyway? I've previously suggested that lenders like to put money into houses because they rise in value, yet that rise is mainly the result of increased lending. It's what looks like an infinite loop, but there are other factors involved, that will lead to braking and possible breakdown.

Over a long period, house prices have increased:

a) because wages tend to increase faster than RPI; but in a global economy, Western wages are stalling; and in an ageing population, social costs (and therefore taxes) are rising.

b) because, sometime after WWII, we moved from a pattern of one significant income earner per couple, to two, who could bid more as DINKYs (dual income, no kids yet); but unless we learn to live as threesomes (TRINKYs) or in larger communes (FAMILIES), this driver has gone as far as it can.

c) because interest rates fell a long way, so people could service much larger mortgages; but now interest rates can't go up much, without widespread repossessions and bankruptcies - of registered voters. And whenever things get difficult, the temptation will be to drop rates further, which expands the lending and ultimately tightens the noose.

d) because lenders got rich and reckless in the boom; they might have offloaded the loans, but they may still have to pay a price for their deceits.

Meanwhile, we have diverted money into real estate that should have been powering business: R&D, startups, expanding small firms. Instead, large concerns are wiping out their potential successors: shopkeepers' children are stacking shelves for hypermarkets.

Democracy is rooted in a degree of economic independence and social equality. In effect, by permitting excessive concentration of capital, we are in danger of enslaving the next generation: the first of the "mind-forged manacles" is the limiting of their aspirations.

That sinking feeling

It is now 100 days since July 6, our starting point for measuring the Dow's fall. Against gold, the decline is substantial.

What about currency risk? According to O&A historical figures (using interbank rates), the US dollar has declined against the British pound by only 0.8%; and against the Chinese yuan, only 1.2%. But in the same period, the dollar has lost over 4% against the Euro, and 4.3% against the Japanese yen. Annualised, that's a drop of about 15% per year in yen terms. (Which currency has Warren Buffett bought this year?)

Gold? Acording to the World Gold Council (WGC), in the twelve months to 26 September, the Eurozone has sold 475.75 tonnes. (This zone includes Sweden and Switzerland; the latter has disposed of 113 tonnes out of that total, or nearly 9% of its stock. How strong is the Swiss franc? Is sound money a bad idea?)

The WGC September account reports that the US still holds 8,133.5 tonnes of gold, exactly the same amount as reported for Q1 2005, two and a half years ago. Allegedly: never forget that "credit" is Latin for "he believes it."

But maybe that's so; maybe Uncle Sam has, er, requested that other countries reduce their bullion stock in order to, um, maintain price stability. After all, the dollar has fallen 13.4% against gold already.

The competitive struggle to lose currency value continues.

Peter Schiff grows

A short, cogent, scholarly essay by Peter Schiff in Financial Sense today, explaining why a falling dollar isn't a quick exit from America's economic problems.

As well a well-wrought urn becomes
The greatest ashes, as half-acre tombs.

How would money buy this?

http://janestreetclayworks.com/2011/02/15/preview-the-history-of-bricks/1925-drawing-to-raleigh/

Many a truth is spoken in jest: at his request, Herriman's ashes were scattered in Monument Valley, Utah. Here is his love, expressed in a backhanded way that reveals more than it conceals.

This week, again, I spent time with clients talking not about money and how to invest it, but about what they wanted from life. It's so easy to let your mind become trapped in attempts to beat the top score on the pinball machine.

The hard stuff

Richard Greene in Financial Sense on Wednesday paints a very worrying, but credible picture of accelerating financial instability and official attempts to disguise the crisis. He looks at the worst case, and says that nothing beats holding the bullion yourself:

In this scenario you don’t accept futures, you don’t accept ETFs, you don’t accept any paper promises; you only accept the real physical gold and silver in your possession. It may take more time for this to occur in the US, but overseas this IS occurring right now, particularly in the Far East and the Middle East. This is exactly what has been necessary to break the fraud and suppression of the gold and silver price that has kept them from reaching a fair free market value. It is happening as we speak...

...if defaults and bankruptcies became prevalent the banks could easily cancel your credit cards, not have any of your cash on hand, and deny you access to your own assets. We don’t expect this worst case scenario to play out soon but then again we find it incredible how few are prepared; and it is a substantial risk. So again to play it safe: have some of that green funny money on hand, definitely have some gold and silver, and have a nice stockpile of canned foods on hand to deal with unexpected emergencies. Do it now! If these things come to pass don’t be surprised to see gold moving up hundreds of dollars per day.

The red highlight is mine - I've suspected for some time that the gold price is being held down by undisclosed releases of bullion onto the market, by central banks.

Meanwhile, I'm interested to test sentiment about the markets - please see the poll on the sidebar and have a go.

Inflation, here we come

Jordan Roy-Byrne's article featured in Financial Sense last week examines various types of inflation and gives graphs, facts and his thoughts on future trends. He concludes:

It is my belief that the Fed's recent cut is the wake up call that will finally stimulate rising inflation expectations. Moreover, the public awakening towards inflation is coming at a time when monetary inflation, commodity inflation, currency inflation and wage inflation, already at significant highs, are set to rise even further.

He predicts a sharp acceleration when gold breaches $1,020 per ounce - itself a price level about 38% higher than today.

Although his remarks have most relevance for an American audience, it is worth remembering the recent Telegraph article (5th October) that forecast sterling dropping even faster than the dollar. Our determination to be as financially reckless as our Transatlantic cousins may result in our facing similar problems.

The good news? Our enormous holding of US Treasury stock may turn out to have been a reasonable investment, in sterling terms. The bad news? Perhaps we should have put that money into bonds denominated in a stronger currency. The Euro, maybe?

UK Inheritance Tax threshold unchanged

The Inheritance Tax announcement yesterday by "Chancellor" Darling is misleading. It has the flavour of a Gordon Brown dodge - hence my inverted commas.

The threshold per person remains at £300,000, as this article by Labour Home itself explains. What has changed is that the allowance is transferable on death, if you are married or in a civil partnership.

A similar effect would previously have been achieved by any competent solicitor, will writer or estate planner, by including a Nil Rate Band Will Trust in your Will. Similar, but not quite the same: the Nil Rate Band trust means giving assets away to a third party (not to one's partner) after the first death. Making the allowance transferable lets the surviving partner enjoy the use of assets worth up to £600,000, without the threat of estate tax afterwards.

This will reduce the amount of tax raised from IHT, since it helps those who a) haven't written the right kind of will/trust arrangement or b) couldn't do so because of the continuing needs of the surviving partner (who might, for example, be disabled or in a privately-paid nursing home).

But it's certainly not what it sounded like, which was an IHT allowance of £600,000 per person, or £1.2 million altogether.

Thanks to Dizzy Thinks and The Spectator Coffee House blog for the alerts.