"Good time to invest," say fund managers

"The markets are not about to race away but one of these days they will, so don't wait for ever. Eventually, there will be the mother of all rallies." - Mark Dampier, Head of Research, Hargreaves Lansdown

"Safe to go out at night again" - Dr Acula, Transfusion Times.

... but wear a very thick scarf, says Marc Faber.

An immodest proposal

In a forthcoming issue of 'Human Nature' is an article 'Mathematical talent is linked to autism'. It includes discussion of the Viennese pediatrician Hans Asperger, for whom the condition is named. The syndrome, to various degrees, appears to be common in those successful in art and science, including mathematics.

Given that there is a great social need for such talent, and that it appears to be strongly genetic in origin - should we start a breeding program?

When the music stops, a dollar collapse?

Brad Setser's analysis is that Americans have been repatriating their dollars even faster than foreigners have been getting rid of theirs:

"Words cannot really capture the sheer violence of the swings in private capital flows that somehow produced a a rise (net) private demand for US financial assets."

At some point, the balance of these cross-currents will change, and then? Maybe the turning point will come when Americans are forced to sell financial assets to meet living expenses and medical costs.

Meanwhile, Tim Iacono comments on a proposal to substitute the dollar as the world's reserve currency, with drawing rights from the IMF, i.e. a mixed bag of currencies. China's central bank seems terribly keen.

I have a sense of something being held up, but not for ever.

Let's move to Russia

I've said it before: you get the clearest explanations from someone who is in a hurry to move on to something else. Here is Dmitry Orlov on why Russia will survive:

It seems that the Russians are better-equipped to survive financial collapse than just about anyone else. They have formidable reserves of gold and foreign currency to soften the downward slide. They have a dwindling but still sizable endowment of things the world still wants, even if at temporarily reduced prices. They have plenty of timber and farmland and other natural resources, and can become self-sufficient and decouple themselves economically should they choose to do so. They have high-tech weaponry and a nuclear deterrent in case other nations get any crazy ideas. After all the upheavals, they have ended up with a centrally-managed, natural resource-based, geographically contiguous realm that is not overly dependent on global finance. Yes, the Russian consumer sector is crashing hard, and many Russians are in the process of losing their savings yet again, but they have managed to survive without a consumer sector before, and no doubt will again.

I'm almost tempted to live there. My grandparents' farm, overrun by the Red Army in 1945, is somewhere in that weird, tiny sliver of the Russian Federation stuck between Poland and Lithuania like a stone in your shoe. I'd need a heavily-armed gang to take the farmhouse back from whoever took it over after the hick troops stole everything in it. But maybe it's not there any more - probably it's covered with concrete now, the tyrant's material of choice. Still, life goes on; it's outlasted communism and looks set to outlast Western capitalism.

Though I should say that in the UK, the nutso socialist element must be seeing this as an opportunity to start the Millennium. I have been wondering whether it's possible to take American citzenship while continuing to live here, so that I might have some residual civil rights when my neighbours have lost theirs.

America, see the issue for what it is: not money, but democracy and freedom.

What am I missing?

I am just a mathematician, so my evaluation of economic models is restricted to the analysis of the equations. However, it seems to me that, in a perfect transaction, the selling price must be at least the value to each party.

Clearly, the value to the buyer must be greater than that to the seller. This is usually achieved by adding value. For example, a manufacturer purchases raw materials, or a wholesale merchant moves goods to where the buyers are.

That being said, I do not see where the added value is in the investment market, for a typical investor. The present value of future earnings and stock price are the same for both sellers. The only reason for the purchase is then an imagined increase in price beyond inflation, i.e. finding a bigger sucker.

Is the whole system just a house of cards?

Fractional reserve speculation

Fractional reserve lending, as "Sonus" explains so clearly here, became possible when people accepted receipts for gold as payment, instead of insisting on having the gold itself. This opened up an exciting opportunity for the guardians of gold and silver; they could issue receipts for which there was no gold or silver at all, and get other people to accept them as payment. Then we ended up with a world in which you could borrow money that didn't exist, but when the scam burst, you'd have to pay it back with the roof over your head. Now there are voices calling for the return to money actually backed by something that might limit its growth; this will pass.

In much the same way, speculation in shares has changed. Once, investor A bought a share in a company from B, held it and received dividends. But the financial market exploded when it became possible to trade in shares without actually having the certificates.

Speculator C can "short" a share - agree to sell it to A (without yet having ownership) for $1, later buy it from B at 5oc (he fervently hopes), then when settlement time comes, A ends up with the share and C pockets the profit less trading expenses. (C can also "go long": agree to buy a share from B at 50c, sell it to A for $1 later, then comes settlement time when the share ownership is officially transferred).

C can multiply his bet if he trades "on margin", in effect making only a small down payment on his share speculation. If the margin is 10%, then he can (promise to) buy or sell 10 times as many shares, and (if his judgment is right), make 10 times the profit when settlement is made.

C experiences success in conditions of a bull market and expanding money supply. C is now trading in big, big quantities, with shares he doesn't own for most of the time, and cash he mostly doesn't have. C has gone beyond mere shares, and is simply betting on movements in the market. C has become a trader in derivatives; in effect, a high-rolling gambler. What a wonderful world! So much nicer than the school he went to! C has an abundance of worldly goods, worldly girlfriends and envious colleagues who laugh at his jokes. C has taken to introducing himself on the phone as "Nick with the big swinging d*ck". C is young, and has never known things to be different. C is complacent; C has become reckless.

But oh dear, if some of his enormous bets go wrong. C has losses, multiplied by the inverse of his margin, plus his trading expenses. Maybe C doesn't have enough money in his account to cover his losses. Maybe C has been trading with another gambler, D, and now can't pay him. Suddenly D is in trouble, too. And both have also been playing around the green baize with traders E, F and G; maybe with the whole alphabet of gamblers, maybe with the Greek and Cyrillic alphabets too.

But before he busts himself (and possibly his employer into the bargain), C has influence (since it is known that he never gets it wrong - until the day he does): news of his bets affect the market, especially when the market is nervous. When C shorts a share big-time, he can start a run - even if the company was basically OK before then.

Which is why Denninger is now calling for a return to the custom of getting the stock certificate when you buy the stock.

Good luck with that; and with ending fractional reserve banking. Denninger argues against the latter here, and prefers a system of minimum cash margins; perhaps it would be more logically consistent if he advocated the same for short-selling.

Personally, I'd go for whipping the money-changers out of the temple; but they always return.

Gold: the tide is turning

Julian D. W. Phillips maintains that central banks are beginning to restock their reserves of gold.

Private hoards of the yellow metal are beginning to rival national ones: the world's largest gold ETF, SPDR, is well into the top 10 - Bloomberg reports it's now overtaken Switzerland. But there is some question of how much of SPDR's holdings are actual physical gold.

Gold doesn't earn interest, which is one reason why China hasn't yet (apparently) leapt in, though Commodity Online says that country has been considering it.

Some say that the Chinese government likes to declare policy changes via apparently unofficial sources. It's worth noting that the China Gold Association called last November for an expansion of national holdings of gold beyond its present level of 600 tonnes.

China's recent switch from Agencies (local and State bonds) to Treasuries, and from long-dated Treasuries to short-dated ones, seem to indicate contingency planning for a worst-case scenario in which the US loses control of its budget and money supply.

The motivation to plan for the worst, is high. China's official holding of US debt, large as it is, is understated, according to Brad Setser, who believes that much of the investment in US Treasuries by the UK and Hong Kong are actually on behalf of China.

In the same way, I can imagine that China might wish to hedge its bets on America by quietly boosting its gold purchases, using intermediaries to take positions in large gold investment funds. This would be a typically quiet and indirect way to improve its own security without making open moves that could panic the market. And the funding for these purchases might come from selling US/UK government bonds back to us, thanks to "quantitative easing".

What's sauce for the goose, is sauce for the gander.

Hold dollars?

Karl Denninger argues that the failed stimulus will lead to accelerating deflation in the US. His prediction is that demand for the dollar will soar and other currencies will collapse instead. He thinks this will hit US exports and the economy will be crippled, so Americans need to hold in-the-hand folding money - lots of it, maybe a year or two's basic expenses! - away from the bank.

He may be on the wrong medication - the current state of the world's finances is a great impetus towards paranoia and depression; but if he's even half right, we need to start making those quiet, regular cashpoint withdrawals and (for non-Americans) visiting the bureau de change. And not living in the city.

Where is all the money going?

I read recently that both in the US and the UK, a significant part of the "quantitative easing" is repurchasing sovereign debt from foreign holders. In other words, money is being created to buy back government bonds from overseas investors.

This says two things to me: (a) the new money thus created is not going to help kick-start our economies, and (b) foreigners are losing confidence in us and want out, before inflation and defaults shrivel the value of their investment in us. As to the latter point, I said last August that I thought the Chinese wouldn't let themselves be swindled.

So I suspect we are still headed for slump, currency devaluation and, eventually, high interest rates.

Maybe a new currency, to whitewash the mess and make further progress towards some New World Order political grouping - Oceania, Eurasia etc. Any news on the Amero?

Alle aussteigen!

As the Dow heads cheerily in the direction of 9,000, some may consider this an opportunity to get off if they missed the stop last time round.

Or have the wise actions of our leaders solved all?

Simple Science

The Laws of Thermodynamics for the layman:

First Law: You can't win.

Second Law: You can't even break even.

Translated to money terms, they are still true, but all too many didn't believe it. That's what put us in our present mess.

Once we clear up the meltdown, perhaps the sensible approach would be to base the economy officially on energy. After all, it effectively is already. For example, the price of gold merely reflects the energy expense of extracting it.

Bonner: 1966 - 1982 , and Dow 5,000

Bill Bonner, in the Daily Reckoning, confirms what I've said here many times: we need to measure investment performance in inflationary terms, and done that way, the last cycle ran from 1966 to 1982. The implication for us now?

We only bring this up to warn readers: these major cycles take time. So far, the Dow has only gotten down to the ’66 TOP. Now, it has to get to the ’82 BOTTOM…adjusted for inflation. Where would that be?

Well….as we recall, the Dow was barely at 1,000 when the bull market began. And if [we] adjust that to consumer price inflation, we come to a 2,000 – 3,000.

However, the 1982 bottom was higher than the 1932 bottom, so I'm hoping it will be no worse than 4,000. Having said that, the levels of governmental and personal debt now are quite unprecedented.

Here's the graph I did last October, again:

Good and bad borrowing

Karl Denninger covers a lot of ground - perhaps too much in one posting - in his attempt to clarify fractional reserve banking and its consequences.

What seems to me a major point in his conspectus, is the difference between borrowing for production, and borrowing for consumption. If you borrow at 5% to get a machine that makes you 10% profit, that's fine; but borrowing for a private house to live in, a car for personal use, music and TV, alcohol and weekly groceries - madness.

Quietly edging towards the exits, before the general panic

Htp: Michael Panzer, for this:

They are taking cash out of the bank in preparation for a long-haul bad time. A friend in Florida told me the local bank was out of hundred-dollar bills on Wednesday because a man had come in the day before and withdrawn $90,000. Five weeks ago, when I asked a Wall Street titan what one should do to be safe in the future, he took me aback with the concreteness of his advice, and its bottom-line nature. Everyone should try to own a house, he said, no matter how big or small, but it has to have some land, on which you should learn how to grow things. He also recommended gold coins, such as American Eagles. I went to the U.S. Mint Web site the next day, but there was a six-week wait due to high demand. (I just went on the Web site again: Production of gold Eagle coins "has been temporarily suspended because of unprecedented demand" for bullion.)

Like I said over a month ago: "this is a time for individuals to make their own quiet plans and preparations."

Did we make things worse?

I am by no means an expert on anything, except a small branch of mathematics. However, I have spent my life watching people and animals, and have come to my own conclusions.

We in the US prize the individual over society (until they do something really bad), and so are not very accepting of the fact that humans, like wolves, elephants, and most other primates, are mostly pack animals.

In a pack of wolves or wild dogs with a calm, assertive leader, there are very few fights, and co-operation is the norm. The common role for the alpha females is the nurture and protection of the young. For the alpha male, it is protection of the pack from outside threats, and control of the aggressive adolescent males.

The liberalization of divorce laws in the 1960's shifted the balance of power in middle-class homes clearly to the woman of the house. One wrong move, and the man could lose his family, home, and most of his earnings. The pop psychology of the time told us that 'fathers were not needed to raise children', partly to assuage guilt.

Is it not possible that the removal of assertive leadership over teenage males has made some of our social problems worse?

Unintended Consequences?

The launch of Sputnik in 1957 led to a major reform in US mathematics and science education. Motivated by that fear, and aided by massive immigration of well-educated people from Britain and elsewhere, we led the world in science and technology until the mid-1970's.

There has been a gradual and unremitting decline ever since. Many fixes have been proposed, and each has worked, in its own way.

Administrators and pundits said that the answer was more parental involvement. We had band and athletic boosters, the PTA, bake sales and the like. Middle-class parents did the homework for their children. In return for this work, they expected rewards, which fueled grade inflation.

Sociologists told us that teachers needed to be less authoritarian, and more nurturing. Students are now friendly with them, so much so that several hundred have been arrested in the past few years for sleeping and partying with them.

Psychologists assured us that the answer was to enhance self-esteem. In a recent study of mathematics achievement, the top 10% of Americans ranked at the 50% mark for South Koreans. However, the Americans rated their own performance as A/B, while the South Koreans rated themselves as C.

Teachers told us that increased pay was the answer. In many local districts, the pay and benefits for teachers exceeds that of college professors.

Education professors told us that the answer was to change teaching methods and curricula. Future teachers now take far more education credits than in the subjects that they will teach, and the teaching has changed so much and so often that we can't even compare student performance with a few years ago.

Politicians tell us that the answer is to reward 'good' teachers, and punish 'bad' ones. This had led to even more grade inflation, and encourages many to either cheat, or leave the profession entirely.

Dysfunctional Nation?

Of the industrialized nations, the USA has some of the worst records when it comes to divorce, teen pregnancy, std infections, drug abuse, alcoholism, literacy, incarceration, violent crime, suicide, educational achievement, child mortality and life expectancy.

Our belief in free market capitalism led us to pour money into these problems, including prisons and the 'War on Drugs (TM)'. Per capita spending on education and healthcare is close to twice that of many other countries.

This investment has given us some of the highest paid teachers and doctors in the world, a bloated and inefficient managerial class, and legions of psychologists and lawyers to take care of the unhappiness and problems that result.

These problems are not new. Mark Twain wrote about the effects of over-nurturing parents in the 1870's, and Robert Heinlein discussed teen delinquency and bad mathematics education in the 1960's.

I used to visit my grandmother in Wiesbaden in the 1960's. She lived next to a lovely park. From four stories up and 1/2-mile away, we could tell which familes were US service personnel from the airbase. The German and African-American children stayed with their parents and behaved themselves. The other American children 'expressed themselves' by running into forbidden areas and making lots of noise.

That we have these problems in the poor urban areas is no surprise. That they occur as well in the suburbs is due, in my uneducated opinion, to an excess of wealth and free time, leading to a lack of competitive drive.

Consequences

Some rules for the parasitic management class:

Rule #1: Avoid decisions whose consequences can be traced back to you.

Rule #2: If you have to violate Rule #1, try to make decisions whose outcome cannot be classified as success or failure.

Rule #3: If you have to violate Rule #2, always make the choice which has failed somewhere else. If it succeeds for you, then you are a genius; if it fails, there is no blame.

This is why:

We encourage parents to be 'friends' to their children, then wonder why so many are self-centred lazy brats.

We put more and more responsibility for our children on teachers, but remove the authority to discipline them.

We put more emphasis on how people 'feel' about things than whether they contribute to society.

Companies lay off production workers to 'save money'.

We are measured by almost anything, except real productivity.

We are more concerned about 'effort' and 'hard work' than achievement.

Group-think and disaster

I've just been watching a Horizon programme, "How to Survive a Disaster". One part is about a 1960s experiment, where people were invited into a room and given paperwork to fill in, and then the experimenters started to force smoke under the door.

If alone, 75% of the guinea pigs left soon to report a possible fire; but if surrounded by actors who pretended nothing was wrong, only 10% raised the alarm, even though the smoke eventually got so bad that they could hardly see anything.

Rings bells for me.

By the way, I won't be surprised if the Dow rises above 9,000 points at some point, before the smoke gets too thick.

I see gold's under $900...

Could the City of London be facing long-term decline?

The UK has an unfortunate reputation for clasping vipers to its bosom, from Karl Marx to modern religious terrorists. But some might say the same goes for its financial sector - the lack of transparency here, of which I've complained more than once, allows problems to develop unchecked, as Brad Setser comments:

Had there been an international “early warning” system that was on the ball – and had the UK been willing to collect the data on flows through the UK in the face of inevitable complaints that such efforts would drive business abroad – it might well have picked up on some of these flows as a sign of brewing trouble in global financial markets.

At one of my old College's Gaudies (class reunion) a few years ago, a City financier complacently and cynically remarked that the UK was always going to have a strong financial community, since it has hundreds of years of experience in "shaving" its customers in subtle ways.

I don't think the Brits have a monopoly of greed, dishonesty and duplicity, and we see now the rotten fruits of their technical expertise. The UK National Defence Association may imagine we can concentrate on financial services and turn the rest of the country into a living museum; I say that just as we need to wean ourselves off coal and oil, so we must reduce our dependence on the old swindlers; no more fossil fuels, no more fossil fools.

Marc Faber: inflation, war, gold

It's not just about money. There will, thinks Faber, be graver consequences. Here.

Also, here, from which the following extract:

The best bet for investors may be to buy a farm and escape from the cities, as a prolonged recession could lead to war, as the Great Depression did, said the Swiss national, who now lives in Thailand.

“Buy a farm and let your girlfriend work on the farm,” he said, to the applause of investors. “If the global economy doesn’t recover, usually people go to war.”

For pictures of his elegant Chiang Mai home, possibly a clue to his personality, see here - and for local Thai comment on him, see here.

Is now a good time to invest?

I've just been asked by a client whether he should switch from cash to equities. Here's my view, and it may explain why I haven't earned much from investments over the last few years:

It is not possible to predict the market with any accuracy, but I think I have done well in foretelling the current state of affairs as early as the late 1990s. The market has dropped to half its 1999 peak (again, as it did in 2003), but that is not to say we are now at the bottom. Some (and I am moderately persuaded to this view) think that there may be a "bear market rally" soon-ish - maybe a rise that recovers perhaps 50% of the losses so far - but it is perfectly possible that the underlying trend is still downwards, so there may then be a horrid lurch towards - what? Maybe, ultimately, 4,000 on the Dow and 2,000 on the FTSE.

We are in the middle of an exciting ride and I fear that entering the market at this stage may still be for the adventurous and nimble. Yes, had one invested in mid-2003 and got out, say, late 2007, it would have turned a nice profit; but much depends on the entry and exit points. So as ever, attitude to risk and corresponding watchfulness are key factors.

There is also the question of what asset class to choose. I think domestic and commercial property are still overvalued, relative to income; because of fears regarding other assets, and also because of central bank investment ("quantitative easing" etc) government bonds are very highly priced, which is why the yields are so low (and if interest rates rise, bond values could then drop sharply); equities are depressed, but as dividends decline in very testing economic conditions, they may ultimately be depressed still further. Commodities (e.g. gold, silver, oil) are the subject of some speculation, but owing to shortage of borrowed money to invest with, not quite so much institutional speculation as formerly; even so, gold (for instance) is a bit above its long-term inflation-adjusted average, as far as I can tell - though if inflation takes off, the price could indeed escalate.

And then there is the question of currencies. The pound has lost heavily against the dollar; but some say the dollar may catch us up again. The Euro may also not stay as strong as it is now - several countries within the Eurozone are suffering economic problems and are hampered by the common currency; I have even read speculation that the Euro system may fall apart within a decade, or some states may secede from it.

In short, I still urge caution, and if you do decide to get in, be prepared to move quickly if the market should turn. Meantime, there are relatively safe options such as National Savings Certificates, including the index-linked ones that will at least keep the value of your savings roughly in line with RPI...

How central market intervention increases inequality

This extract (highlight mine) from Robert P. Murphy's essay on the Mises Institute website explains some of the process whereby hard times help the rich get richer and the poor, poorer:

If the Fed doubles the money supply, in the long run, that will roughly double the prices of all goods and services. But if the Fed restricts the injection of new money into only the hands of a few privileged recipients, those people will be at a fantastic (albeit temporary) advantage relative to everyone else in the economy. They will get their hands on the billions in new dollars, while prices still reflect the old reality. The new money will then flow from sector to sector, pushing up prices as it ripples throughout the economy. But the last people in line receiving the new influx of twenty- and hundred-dollar bills will be much poorer than others, once prices settle down. Their paycheck was the last to rise, while they watched helplessly as more and more prices began doubling.

Apocalypse now - Denninger

... those indicators are painting a picture of the Apocalypse that I simply can't believe, and they're showing it as an imminent event - like perhaps today imminent...

... says Denninger, but I still don't believe it. But maybe that's just me.

Wake Up!

Jim Mellon and Al Chalabi, authors of "Wake up!" , have emailed their latest interesting and useful newsletter. It concludes:

Our strongest recommendations are as follows:

• Prepare for rising inflation – continue to buy gold;
• Sell government bonds;
• Look for cheaply valued strong stocks – BAE and BP in the UK are two examples, and in the US we like Pfizer.
• Deploy cash wisely – our current favourites are, believe it or not, the British pound; the yen is weakening, but at 100 yen to the dollar it is a buy again.
• Avoid the US dollar and the Euro.

Like that bit about the pound - I was scratching around looking for something to save what's left of the savings.

Dow 4,500 within 12 months - Cederholm

Fred Cederholm gives a Dow target close to the one I'm thinking, though I think we may have a reality-denying rally before then, so I don't necessarily agree with his timescale.

FDIC could fail - update

I've passed on the bad news about underfunding of the FDIC before - latterly here - and now it come to the fore again in a post from Karl Denninger.

UPDATE (7 March 2009): Jesse has a piece on it now, too. But "deposits would remain fully backed by the government,", says his source - not much comfort for the taxpayer, then.

Webcam: gold vault at the Federal Reserve

Live picture (updated every 30 sec)

According to GATA, they ain't got it no more, nor they don't want it back, neither. (htp: Jesse)

What happens when everyone knows?

Do buy, Dubai

P.S. Did you think I was joking about Dubai as a world leading financial centre? Where the footballers lead...

It was said years ago that 90% of £20 notes in London bore traces of cocaine - because footballers have 90% of the notes. Sadly for some footballers and Old Etonians, possession of cocaine in the UAE is punishable by death. Nevertheless, lovely weather and no crowded, litter-strewn South East England commuter trains.

Could you stand Paradise? Or are you hooked on that museum of past industrial glories, the UK?

If GE falls...

Karl Denninger notes that there is heavy betting that GE, the world's tenth largest company, will fail by summer.

Engineering Analysis

Positive feedback is a term used by scientists and engineers to describe a feedback loop process where the output of a system drives increased input to the system.

In human terms, one such example is drug addiction, where increased use leads to increased desire for the drug.

A more interesting example can be seen in the 'sudden acceleration' lawsuits against Audi some years ago. Once the cars were examined, it was determined that the drivers had been pushing on the accelerator pedal, rather than the brake. Because they were convinced that they were right, they pushed harder as they gained speed. In some cases, the drivers injured their own legs from the pressure, and bent the pedal.

The past 30 years have seen such a loop in the housing and financial sector. As house prices went up, they released fiat cash into the system, driving prices even higher. This, of course, led to the 'brilliant' idea of packaging mortgages. At some point, the profit margin became so huge that no 'real' industry could compete, which pulled even more investment capital into housing derivatives, and further crippled manufacturing.

Without a governor in place, by way of careful regulation, these crashes are inevitable. The capacity of the internet in moving money only sped things up a little.

Signs of cash hoarding?

The Mogambo Guru relays a statistic: the stock of US notes and coins has increased by $77 billion in 12 months.

Some of this may reflect a switch away from use of credit cards and accounts; but I wonder how much is disappearing into newly-bought floor safes and Heinz bean tin hideaways?

UK Government adviser loses its mind

“Only high-quality professional services, financial services and the City of London have any real value and they should be supported at all costs. The rest of the country can be turned over to tourism.”

Coming up next: new financial centre in Dubai forces closure of City of London.

This... or this?

Dow 6,000 this year, FTSE 3,000 - Nadeem Walayat

Sez he, here. I'm still guessing Dow (inflation-adjusted) 4,000 sometime in the next few years, and it seems Jim Kunstler agrees ("I myself called for Dow 4000 two years ago") In which case, maybe FTSE 2,000 at some point, too.

Harriet Harman declares the end of the rule of law in the UK

Discussing the pension rights of ex-RBS boss Sir Fred Goodwin, Harriet Harman, Leader of the House of Commons, said today:

"The Prime Minister has said it is not acceptable and therefore it will not be accepted. It might be enforceable in a court of law this contract but it's not enforceable in the court of public opinion and that's where the Government steps in."

I propose a plebiscite to dispossess Harriet Harman of all her worldly goods, and exile her permanently from this country. A "yes" vote will have no legal force, but clearly that does not matter, provided it is supported by public opinion.

Anthony Charles Lynton Blair summed up

We spend a long time gathering and shaping our impressions, constructing the two halves of the arch, then the keystone is lowered into place:

September 13, 2001

To London on the 18.47. David Miliband was on the train. He is in a similar situation to the one I was in when I was first selected - enemies occupy every office in his constituency party, although in his case it is nothing personal.

He says The Man - who was once in a similar situation in Sedgefield - advised him 'to go around smiling at everyone and get other people to shoot them'. Advice that The Man seems to have applied throughout his career.

I have often thought that if you want to judge alpha types, especially in public life, it's no use meeting them, since they have spent a lifetime perfecting their persona. You need to look at the people they choose to surround them, and then the agenda will become clear.

"Man smile; man nice man."

On the Endarkenment

Since Sackerson is contributing these very erudite pieces, I have a couple of quotes of my own. I believe that ideas herein complement those that he included from Philip Pullman.

From Carl Sagan's "Demon-Haunted World":

We've arranged a global civilization in which most crucial elements - transportation, communications, and all other industries; agriculture, medicine, education, entertainment, and protecting the environment...profoundly depend on science and technology. We have also arranged things so that no one understands science and technology. This is a prescription for disaster. We might get away with it for a while, but sooner or later this combustible mixture of ignorance and power is going to blow up in our faces.
And another:

I worry that, especially as the Millenium nears, pseudoscience and superstition will seem year by year more tempting, the siren song of unreason more sonorous and attractive. Where have we heard it before?

Whenever our ethnic or national prejudices are aroused, in times of scarcity, during challenges to national self-esteem or nerve, when we agonize about our diminished cosmic place and purpose, or when fanaticism is bubbling up around us - then, habits of thought familiar from ages past reach for the controls.

The candle flame gutters. Its little pool of light trembles. Darkness gathers. The demons begin to stir.

And now, the bad news

The top five U.K. banks have $10 trillion of assets and their GDP is only $2.13 trillion. The whole country could fall into the ocean. The top five U.S. banks represent only about 60 percent of GDP by comparison.

The One Percenters

The "real Dow", i.e. nominal value divided by the CPI inflation index, was about 14.6 in October 1928 and is now at c. 33.5.

This means that, over the past 80 years and in real terms, the Dow has grown by a tiny shade over 1% per annum, compound.

True, there have also been dividends; but the "get rich quick on the market" idea seems to be a form of riverboat gambling, winners taking from losers.

The biggest winners being the fund managers - so very few of whom even manage to beat the index, long-term, in their own sectors.

Perspective

(Values at 01 Oct 1928 = 1)

"There must be some way out of here,"
Said the joker to the thief.
"There's too much confusion here,
I can't get no relief.
Businessmen they drink my wine
Plowmen dig my earth
None of them know along the line
What any of this is worth."

"No reason to get excited,"
The thief he kindly spoke.
"There are many here among us
Who think that life is but a joke...

- Bob Dylan

Does the tree of liberty need watering?

How Britain became a police state

Here is an extract (presentation altered to make visually clearer the catalogue of the State's crimes against liberty) from Philip Pullman's recent article on freedom in the UK - strangely, suspiciously, perhaps tragically and symptomatically, censored from the Internet by The Times:

It is inconceivable to me that a waking nation in the full consciousness of its freedom would have allowed its government to pass such laws as:

the Protection from Harassment Act (1997)
the Crime and Disorder Act (1998)
the Regulation of Investigatory Powers Act (2000)
the Terrorism Act (2000)
the Criminal Justice and Police Act (2001)
the Anti-Terrorism, Crime and Security Act (2001)
the Regulation of Investigatory Powers Extension Act (2002)
the Criminal Justice Act (2003)
the Extradition Act (2003)
the Anti-Social Behaviour Act (2003)
the Domestic Violence, Crime and Victims Act (2004)
the Civil Contingencies Act (2004)
the Prevention of Terrorism Act (2005)
the Inquiries Act (2005)
the Serious Organised Crime and Police Act (2005)

... not to mention a host of pending legislation such as the Identity Cards Bill, the Coroners and Justice Bill, and the Legislative and Regulatory Reform Bill.

For the full article, saved from the memory hole by alert patriots and lovers of liberty, please see here.

By what damning irony is it, that The Times itself should have published this noble extract on June 10, 1788:

THE PROGRESS OF LIBERTY IN ENGLAND
From Mr Pratt’s Poem on Humanity

MARK by what gradual steps Britannia rose;
As the small acorn to a forest grows;
By what variety of adverse fate,
Terrors of war, and anarchies of state,
What direful griefs by foreign fury bred,
Rivers of blood, and mountains of the dead;
She passed advent’rous, e’er her wrongs were o’er,
Complete her triumphs, and confirm’d her pow’r.
When but to look, was treason to the State
And the King’s nod, like thund’ring Jove’s, was fate.
[...]
Thus, in the earliest hour of Britain’s morn,
A Briton’s hate of tyranny was born!
Abhorrence sacred, to repel the hand,
That dares to wrong the charter of the land:
Our sturdy ancestors, tho’ oft subdu’d,
But breach’d from war, and strait the charge renew’d;
Now dres’d as victims, now as pris’ners bound,
The blood of heroes deluging the ground.
In each extreme our brave fore-fathers prove,
Their native courage and their country’s love;
Fierce for hereditary claims they fight,
And ev’n till death maintain a Briton’s right.

Hence rose our liberties, a common cause
To these succeed, their best support, the laws;
Bonds, conflicts, murders, massacres ensu’d,
And many a Saxon, Danish sword embrued
In English blood, and many a Monarch’s life,
And many a Monk’s, submitted to the strife,
E’er Laws were form’d, as now sublime they stand,
The shield, the spear, and buckler of the land.

No wonder they have all but abolished the teaching of English history and literature, as we once knew it.

What are the odds?

"Bang on target!"

The Next To Go?

Consumerism, if it doesn't define the US, certainly describes it. The marketing that it spawns drives our political campaigns and pays for most sports, newspapers, magazines, radio, television and internet sites.

Advertisements try to convince us to buy products and services that we don't need, or undo brand loyalty to increase market share.

I am fairly sure that, as disposable income dries up, the dirty secret at the heart of the marketing sector will kill or cripple it.

The secret: It probably doesn't work!

I have been reading some mathematical papers on marketing. It is well-known that new marketing campaigns lead to increased sales, but only for a while. When this data is discussed, two factors are not considered:

1. The cost of the campaign itself is not factored into the increased sales.
2. There is no attempt made to check how much of the increased business is simply consumers buying earlier than they would have otherwise.

Since the manufacturers relies on marketing firms for their research, and the latter have a vested interest in the results, it is no surprise that these slip under the radar.

In other words, the sector is a huge bubble which, unlike investment or housing, has absolutely nothing backing it up!

Niall Ferguson's rivers-of-blood prophecy

Read Niall Ferguson as edited by Jesse - he talks straight.

About the only bit I don't quite agree with, is the ending - the note of hope is blasted too early in this battle. We are not going to stay in 1995, I'm quite confident about that; and one of the causes/consequences will be capital flight from/strike in America.

E.g.: "China, concerned about their U.S. reserves being devalued by U.S. monetary policy, is exchanging their holdings for long-term oil contracts from countries all over the world, locking in oil prices at exceptional levels, like the $11.40/barrel estimate for the Russian deal."

The elite, and foreign investors, will take care of what's left of their billions. Wealth will flee from inflation and taxation. Somewhere around the world will appear a new Liechtenstein.

Maybe in the calmer end of the Arab Street. Let's see American tax authorities try to lay down the law there.

Still a bear, for now

A letter to the Spectator (unpublished), posted here on 2nd November 2008. We seem to be edging towards the "unsurprising", though the market may give a leap of denial before then:

Sir:

Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.

A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.

But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.

Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.

In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.

Darwin's Bicentennial

The 'balance of Nature' is a misleading phrase. It is not a Disney-esque harmony, but the sweaty struggle of wrestlers, with efficiency of predation competing with that of procreation. A small change in environment, or the introduction of a new disease or species can lead to rapid extinction.

If an ecological niche opens, or gains resources, there is an explosion of varieties. When resources are abundant and predators scarce, even the weaker ones can thrive for a while. This explains the fat, waddling dodo.

The Industrial Revolution, and the Agricultural one that came before it, were the product of a few minds, and the sweat of many. They drove the move to more cities, which meant larger companies and bigger government. This widened the niche for a parasitic class of people who produce nothing, but are sometimes necessary. We call them consultants, middle managers, investment specialists (sorry Sackerson!), marketing gurus, guidance and life coaches, and the like.

With no predators, and a virtually infinite supply of resources (they print the money!), this class grew like a cancer. We have now reached the point that it consumes most of what we produce, and the system is shutting down. Since the typical politician or bureaucrat is of this class, the obvious answer is to give them more. Hence the Bush stimulus package.

I could be wrong, but I think that we are simply postponing the inevitable.

Dow update

Adjusted for CPI inflation, the Dow is now back to where it was in December 1995.

This is still above the peak of the previous long cycle, ending in January 1966 - and still over 4 times higher than the low of July 1982. We only think of it as catastrophic because we got used to more recent, wildly inflated valuations.

I'm still hoping that the end position will be no worse than 4,000 points - a drop of 45% from today's close.

Theft by inflation has begun already

The UK Debt Management Office website shows that a UK Treasury bond offering 5% annual interest is, because of its current traded price, actually yielding 2.522793%.

But the risk of default, almost as high as Italy's government debt and far higher than even the USA's, is (as Jesse quotes) currently priced at 1.63%. (The market currently prices the risk of USA default at 1%.)

So after insuring for risk, 5-year UK sovereign debt earns you less than 0.893%.

Inflation, as measured by the Consumer Price Index*, now runs at 3%. In other words, a "safe" government bond loses you more than 2% a year.

And that's before inflation really gets going.
_____________________________________

*The Retail Price Index is a different measure of inflation, which takes into account mortgage costs. So after recent savage cuts in the bank rate, currently RPI should be negative. But wait until the private capital credit strike leads to higher interest rates, and judge.

How long will the bear market last?

Jesse quotes this comparison of the current bear market with three previous ones, mixing stats for the Dow and the S&P 500:

But taking similar periods for the Dow only, adjusting for CPI inflation, and adding the long period from 1966 to 1982, we get this:

I'd suggest we should look at when the recent bubble really burst - end 1999, then desperately disguised by monetary inflation from 2002/03 onwards; if that's right, we have maybe another 6 years to go through.

The shapes of these two lines do sort of rhyme, don't they? And if so, looking at where the end of the red line is, maybe a bear market rally is now due, like the c. '75 - '76 mini-recovery.

End point in real terms this time, my guess, is the equivalent of 4,000 points today. However, there are features unique to the present situation, especially the size of debts, the loss of much of the West's manufacturing base, and the interconnectedness of modern world markets and economies.

Cash (equivalent) and gold - iTulip

Our primary concern at this stage is no longer our readers' portfolios but their ability to weather a US dollar crisis if one erupts. In response, we are increasing our gold allocation to 30% and moving all Treasury holdings to the very shortest maturities, to three month Treasury bills, until we see indications that conditions are stabilizing. We encourage you to engage with the community to actively discuss strategies that are appropriate for you.

The rest is here.

Good luck, right action

Reportedly, George Soros doesn't see the bottom of the market yet. We judge by recent experience and think ourselves hard done by, yet look at the following chart, which takes the Dow and adjusts it for inflation:

All that has happened is that the illusory gains of the last 12 years, more than accounted for by extra debt taken on in that time, have now unwound. Yet we're still nowhere near where we were in 1987, which (if you were around then) we thought of as an exciting time for investment. To get back to that peaklet in real terms, the Dow would have to drop below 5,000 points.

But to return to the low point of the recession that preceded it - around July 1982 - the Dow would have to break down below 1,800. Even then, that miserable score is a big advance on the low of 50 years before that (July 1932: CPI-adjusted Dow would equate to c. 833 points).

Karl Denninger has said recently that he sees 2,000 points as a possibility; I've suggested a low of c. 4,000, because in these 40-year cycles, each peak and each low has been higher than in the previous cycle.

However, seeing how unbelievably high the Dow went in recent years (way above anything that could have been extrapolated from the highs of 1929 and 1965!), maybe a correspondingly low low is not out of the question.

So why am I planning to set up a new brokerage on my own? Why don't I send a copy of this blog to all my clients, together with news of my retirement from the industry and a valedictory "Good luck, because you're going to need it"? (Actually, I have repeatedly advertised this blog to clients; I only wish the viewing stats could show me that they all read it.)

The Mogambo Guru has taken to signing off his rants with a sarcastic "Wheee! This investing stuff is easy!" - he recommends gold, silver and oil. Over on Financial Sense a couple of days ago, Martin Goldberg opines, "The important question for most investors is whether to be in cash or gold" (cash for now, he thinks). Marc Faber has long been saying that we are entering a long bull market in commodities, and has just said he thinks an ounce of gold will one day be worth more than the Dow.

What they're really talking about is inflation. Debt, which is fixed in nominal terms, becomes cruelly heavier as the assets pledged against it become worth less and less. The pain will get so bad that the government will crack, as it always does, and debauch the currency. Holding cash just now is great, for those lucky enough to have it; but if Robin Hood can't confiscate it through taxation, he'll bleed it white by printing lots more fiat currency for himself (and the people who keep voting for him), so sucking real value out of your money. If you can't face investing, be prepared to spend like a sailor on shore leave when inflation hits town.

My clients generally aren't traders. In the same interview cited above, Faber said:

Recently I bought some U.S. stocks for the first time in a long time. If you buy Intel , Cisco , Yahoo! , Oracle and Microsoft , you will do much better in the next 10 years than you would with Treasuries. These stocks will double and even triple -- before going to zero.

That's not for my clients - they like the idea of the double and triple (who doesn't?), but not enough to risk the "going to zero".

That said, investment - including in commodities - is going to be part of their fight back against the attempt to take away everything they've saved. Inflationary periods do sap the real value of shares, they hit cash even worse. Look at the position of the man who invested in the (dollar-denominated) Dow from the start of 2008 up till last Friday's seeming debacle, compared with the poor chap who "played safe" and held good old British pounds:

The picture will change when the dollar dives, of course; though maybe the pound will dive along with it. To hold what you have, you'll have to keep on your feet, balancing the relative merits of currencies and asset classes. For me and most of my clients, it won't be about getting rich; it'll be about not getting robbed.

I'd have been happier with a world where money kept its value, and I'm not alone. The blogosphere is now crowded with people who have their own schemes for a fair and just economic world. But none of these ideal arrangements will enter into reality. There's too much to be made out of destroying it, by a handful of traders, and the politicians - and the bankers who will eventually employ the politicians when they leave office. We must take, not the right action, but the appropriate action.

Good luck, because you're going to need it.

Interlude

Sackerson is on holiday; back soon.

Can we do it?

We live in an era in which every one of us needs massive amounts of technology just to survive, and lots more to stay as comfortable as we are. Yet, paradoxically, there is a great deal of denigration in the UK and US for mathematics, science and engineering and the people who have skills in those areas, which discourages many from those fields of study. It is to the point where there are sometimes two jobs per graduate.

Can we make the cultural shift to nurture and reward those people, or are we doomed to drop backwards?

Yet another conversation with a wealthy parent (she pushes papers, he is a corporate lawyer) does not give me much hope. All the ones that I have talked to assume that we need such specialists, who will be someone else's children, but their own will go to college, graduate in non-technical fields, and then have successful high-paying careers. I cannot make these parents understand that we have run out of the wealth to get the technology from elsewhere, so we have to make it here. Without a manufacturing base, those nice parasitic managerial and service jobs just won't exist.

Or perhaps I'm wrong, and should have gone into accounting, instead of mathematics teaching and engineering research.

Where is Paul Moore's bonus?

Paul Moore, former head of risk management at HBOS (which, by the way, has just cratered its new owner, Lloyds Bank), was sacked in 2005 by Sir James Crosby, allegedly for warning about the bank's excessive lending.

Whistleblowers generally suffer for speaking out. Under the Public Interest Disclosure Act 1998, there is no limit for compensation paid by industrial tribunals in whistleblower cases; but I should very much like to know what is the average paid out under such circumstances, and the most that has ever been paid.

Mr Moore has received "substantial damages" but was also gagged, so I regard whatever he was paid, as merely a recompense for his silence. I doubt whether the damages come anywhere close to the "compensation" paid to some greedy, corrupt and incompetent senior executives at top banking and financial firms; and I think it should.

The OFT has introduced a scheme to award up to £100k for cartel-breaking snitches. Big, fat, hairy deal: five bankers spent £44,000 on wine alone on a single evening in 2001.

Maybe demobureaucracy doesn't work; maybe we should go back to old-fashioned kingship. In Shakespeare's Henry V, the King goes about his camp in disguise before the crucial battle:

KING HENRY V: I myself heard the king say he would not be ransomed.

WILLIAMS: Ay, he said so, to make us fight cheerfully: but when our throats are cut, he may be ransomed, and we ne'er the wiser.

KING HENRY V: If I live to see it, I will never trust his word after.

WILLIAMS: You pay him then. That's a perilous shot out of an elder-gun, that a poor and private displeasure can do against a monarch! you may as well go about to turn the sun to ice with fanning in his face with a peacock's feather.

After the battle, the King calls a trembling Williams out of the ranks and reveals himself as the anonymous interlocutor of the night before; but instead of dealing with his frankly-spoken subject as one might expect of a ruthless Plantagenet monarch, he returns Williams' challenge-glove, filled with gold coin from the royal treasury.

And how might King Solomon have adjudicated a dispute between a CEO and his erstwhile employee? Is it not possible that, in some cases, he would have taken years of earnings from one and passed it directly to the other? Where are the mega-bonuses for those who risk their careers to defend their firm, its shareholders and the general public?

Should we leave the EU?

Is this a fair picture of our relationship with the Far East and Europe? If so, what happens if we disconnect from "ever-closer union?" Wouldn't they just throw away the straw and drink straight out of the glass?

The middle class world view

Confusion

America gets het up about a mother of 14, but feeds over 160 million cats and dogs daily. I must say, Nadya Suleman's website is a work of art, though.

Let them eat dirt

It begins, but so much sooner than I expected.

A panicky middle class moves from worrying about its bank account, to railing against those richer and stronger than itself, to turning on those poorer or weaker than itself. Then it seeks to connect the two:

"However you slice it this is ridiculous. FOURTEEN children as a single parent? Assuming she has medical "insurance" from somewhere, exactly how does a desire to have as many kids as humanly possible entitle her to this sort of abuse of that insurance? If she doesn't have insurance, who's footing the bill? And how do you possibly go out and earn a living while raising fourteen kids?

This is what the nation is up against.

This is why California is broke."

"...there are two Americas. A poor America on socialism and a wealthy America on capitalism...

A vast sea of perhaps well intentioned government programs, all initially set into motion in the 1960's, that were going to lift the nation's poor out of poverty.

A benevolent Uncle Sam welcomed mostly poor black Americans onto the government plantation. Those who accepted the invitation switched mindsets from "How do I take care of myself?" to "What do I have to do to stay on the plantation?""

"Because society no longer believes that it's appropriate to let these children die because of the gross irresponsibility of the mother, the only humane way to prevent this sort of stuff from happening again is to require sterilization of anyone who would receive food stamps or other sorts of welfare. "

Long ago, bailouts were unheard of; failure meant starvation, perhaps death. Consider the caveman: Ug's tribal chief couldn't afford to say, "It OK Ug no kill deer this week. It not Ug's fault. Tribe will bail out Ug."

If he wants his tribe to stick around, the chief must say, "Ug no kill deer: Ug family starve."

(For a moment, one has a vision: Ug family no starve; Ug family kill, eat Virginian economics professor.)

But the tendency... We must punish the wicked rich, correct the feckless poor, do something about the swelling ranks of the disabled, and then we'll all be jolly, prosperous and middle class. Without the bad, sad and mad, everyone would be happy. Patriotic citizens must form a united front... The communists are a deadly threat, and must be firmly suppressed... It's for the working man and the national good that we must for a while band together, almost as though we were socialists...



The clouds were boiling red and yellow over the Alps. Standing on the balcony of the Leader's retreat, the party gazed awestruck. A woman said to Him, "Das bedeutet blut, blut, und mehr blut." The Leader paled, trembled violently and said, "Wenn das sein musss, dann lass es sein."

So proud and lofty is some sort of sin
Which many take delight and pleasure in
Whose conversation God doth much dislike
And yet He shakes His sword before He strike

Symmetry; asymmetry

"China’s January surplus ($39.1b) is roughly the same size as the United States’ December deficit ($39.9b). It is reasonable to think it will roughly match the United States January deficit as well.

The extreme symmetry captures something real. Deficits and surpluses are shrinking globally now that the price of oil is at levels that roughly cover the oil exporters imports. Right now China’s (growing) surplus is clearly the main counterpart to the United States’ (shrinking) deficit" - Brad Setser

"I believe there is a greater than 25pc chance of a departure from the Eurozone given the social and economic behaviours of some countries within it" - John Moulton on the UK and the Euro.

Crime and punishment

Congressman Michael E. Capuano does his job today, flaying the banks (htp: Jesse). I tried to email congratulations to him, but I haven't got a Massachusetts zip code.

And Karl Denninger also:

If the law enforcement agencies in this nation do not start prosecuting the fraudsters in our banking and investment industry that caused this economic collapse (and "token prosecutions" like Madoff will not cut it), and our lawmakers (and President) do not stand up darn soon and call for this prosecutorial action in public there is a very real risk that a repeat of those sordid affairs will soon arrive...
This much is clear to me - high-dollar white-collar crimes, certainly those with an impact greater in aggregate than we currently value a single human life (which various estimates put somewhere between $5 and $50 million each) are deserving of punishment equivalent to murder, meaning either (depending on state law) life imprisonment without possibility of parole or a sentence of death.
We need to put this change into the law as a deterrent against such acts in the future.

They're coming round to my point of view, as expressed e.g. here.

Remember

It was the strength forged in fighting his personal Black Dog, that Churchill lent to us when we most needed it. And the poem he quotes in this broadcast has that mingling of suffering, determination and joyous tears. I give Clough's text in full after the link.

Churchill's War Time Speeches.

A Difficult Time.

'Westward, Look, the Land is Bright'

BBC London

27th April 1941


Say not the Struggle Naught availeth

SAY not the struggle naught availeth,
The labour and the wounds are vain,
The enemy faints not, nor faileth,
And as things have been they remain.

If hopes were dupes, fears may be liars;
It may be, in yon smoke conceal'd,
Your comrades chase e'en now the fliers,
And, but for you, possess the field.

For while the tired waves, vainly breaking,
Seem here no painful inch to gain,
Far back, through creeks and inlets making,
Comes silent, flooding in, the main.

And not by eastern windows only,
When daylight comes, comes in the light;
In front the sun climbs slow, how slowly!
But westward, look, the land is bright!

Arthur Hugh Clough

Deflation, inflation, distress

The Contrarian Investor gives a lucid explanation of the potential consequences of deflation.

In Australia (as in the UK, as I think I showed here), the nation owes more money than it has in savings, so it depends on foreign investment.

If interest rates fall, foreign capital will go away to where it can earn more. This reduces the demand for our currency and makes it cheaper. So goods we sell to foreigners get cheaper, and things they sell us get more expensive. They buy more from us, we buy less from them (or they have to cut their prices so we can afford their stuff). More money comes into our economy; all well again.

Except...

• What if , thanks to decades of spending lots without earning much (and borrowing the difference), we no longer make things foreigners want?

Then we become "distressed gentlemen". As the money runs low, we run up accounts at the tailor and the wine merchant, and write IOUs which we hope will not be presented to us soon. Maybe we begin to cut a few luxuries, but old habits die hard, not to mention ingrained addictions.

• What if they sell us things we can't do without, and won't cut their prices?

The money runs out. Unless we are Royalty, and too dangerous to dun, eventually the bailiffs must arrive. In the modern world, the sovereign wealth funds, perhaps.

What can they take? In Australia, there are mineral deposits the Chinese will want, thinks the Contrarian Investor. Here in the UK, maybe some remaining profitable businesses and valuable technical expertise, maybe patents and secret technologies. And it's not only the Chinese that have been lending us their surpluses. We have other creditors.

Then, as the laden carts depart and the keys of the mansion are handed to the new owners, the decayed gentry become vagrants and vagabonds.

Unless we are too dangerous to dun. Perhaps America is; can we be so? And what if our creditors are not certain of our might? Uncertainty can trigger inappropriate actions. There is a Chinese saying, I believe: fear a weak enemy. Catastrophe can be avoided, but unless our leaders are tough with us now, we will learn a harder way later.

But if the master has become poor, what of his servants?

What if, like me, you're not one whose power and social status protects him from the worst effects? Do you believe that democratic societies can do the right thing? If not, this is a time for individuals to make their own quiet plans and preparations.

Historic inflation in the USA and UK compared

Just for interest...

The, er, credit, er, crunch

UK M4 official data here

No wonder most of us have difficulty understanding the financial equivalent of the matter-antimatter drive powering the USS Enterprise. You'd think lending would have decreased, wouldn't you? Smoke and mirrors...

September 15, 2008: the secret bank run and corralito

According to Paul Kedrosky (htp: Tim Iacono), Hank Paulson and Ben Bernanke scared the wits out of Congress with references to a potential $5.5 trillion electronic cash withdrawal from the US banking system, which would have led immediately to economic and political Armageddon. Electronic money accounts were closed down to stop the flight and collapse.

I said a month later that Paulson looked like a bully. But when Congress threw out the first bailout plan, he had also looked scared-angry, turning his head this way and that, like a bull throwing off dogs.

Perhaps the scare story was true. Perhaps not. Shame it took the ex-head of Goldman to drive the Bill through. I assume that rescuing the banks also rescued much of his personal $500 million wealth.

It's time for us to leave off discussing the affairs of the Gods, and return to our own interests. We ordinary mortals don't have the luxury of that kind of money transaction facility. If the system had gone down, presumably it would have taken our little all with it. And is anyone so brave as to say that it's been fixed?

Be prepared; don't be panicked (as it seems Congress was), but take what sensible precautions you can.

Denninger: deflation

Belatedly, I refer you to Karl Denninger's end-year review and forecast. He sees continuing deflation, and makes a number of other plausible and worrisome predictions - scroll to the end of his post for the horrid gallery of prognostications.

In short:

...rallies are to be sold, cash is to be raised and prudence is to be practiced in your own personal financial affairs. Don't get creative in all things finance, get stingy and prudent. Your personal financial survival could well depend on it.

So instead of staring at the low interest on your cash balance, think of the real capital appreciation of your money as measured by what big-ticket items it will buy. And for once, the government can't easily tax your capital gain.

You may also want to hold more cash away from a bank ("Round #2 of severe bank instability gets served up on us in the second half of 2009").

And maybe diversify your currency holdings:

The Dollar will not collapse. This is not because we're in great shape or will truly recover, it is because the rest of the world is in worse shape than we are... The rest of the world is literally on the precipice of a full-on collapse. European banks are more-levered and less-transparent than our banks as just one example... I see the potential for the pound and euro to both reach par with the dollar.

I think Denninger on the one hand, and Faber/Janszen on the other, may both be correct. It's a matter of timing - deflation now, debasement of the currency later. Because nominal debt gets relatively bigger as assets and incomes decline in value, something will have to give.

Satire

A very clever essay from the rec.gambling.poker newsgroup:

The Amazing Stimulus Package.

Join us for an enjoyable night of illusion brought to you by Uncle Sam the Magnificent and Fed the Enabler. Sit back, relax while this magical duo performs feats of magic so astounding that they will have you reaching for your wallet, even while knowing neither of them ever left the stage.

Their world famous "Creating Money Out of Thin Air" will have you rubbing your eyes with amazement. Watch closely as they transfer that "Created Money" to the Wall Street elite, third world dictators, and ultimately out of the pockets of the audience. Try not to be caught as they captivate the audience with the hypnotizing phrase "Too large to fail". Try to follow their logic as they magically convince you and most of the rest of the audience that spending your future earnings today will turn their bumbled (or was it intentioned?) handling of the economy from crisis to stability.

Marvel as they nightly obfuscate their positions and purposes while they plunge the world economy into recession, and then depression.

You'll be astonished when they reward each and every member of the audience Gift cards, checks, or direct deposits worth many times their ticket price. You'll leave the auditorium scratching your head wondering how they can continually perform these feats of magic and financially return to continue the show night after night.

But most important be sure to buy tickets for their closing night. You won't want to miss their amazing final show as they make your money shrink and disappear right before your eyes, making even most wealthy people poor as they create a two class economic structure composed of the super rich and the poor. Watch as they finally render the U.S. Constitution a worthless piece of paper while magically converting hundreds of millions of American citizens to citizens of the WORLD with little resistance from a weakened, powerless middle class.

Robert Ladd

Blowing bubbles

Nobody has made economic depression and its consequences seem so inevitable and at the same time so colourful and even attractive, as Jim in San Marcos.

It's a shame that I was counting on my State pension to eke out retirement income. Looks like many of us will be using Hamburger Helper instead.

Denninger demystifies "the Fed"

You tend to get a clear and concise explanation from somebody, when they either blow their cool or are in a hurry to get somewhere else. Here, in a very crisp and useful post, Karl Denninger blows away the conspiracy theories surrounding the Federal Reserve.

He explain that his beef with them is that they are acting ultra vires (very damagingly), and notes that there is, unfortunately, no statutory penalty for their doing so. The caning will, he thinks, have to be administered by the bond market instead.

Some, like Eric Janszen of iTulip, would say that's exactly what the government intends.

Is it officially permissible to be a Christian? Or indeed, anything?

Here in the Daily Mail is a sample of the hoo-ha about nurse Caroline Petrie, who was suspended for offering to pray for an elderly patient. (She also used to leave a mildly evangelical Christian pamphlet.) The patient says, "I have Christian beliefs myself, but it could perhaps be upsetting for some other people if they have different beliefs or thought that she meant they looked in such a bad way that they needed praying for."

Both parties seem reasonable and decent. What's worrying is what happens when officialdom gets involved, as the rest of the story shows.

But I'd love to see a Philadelphia lawyer let loose on the "Nursing and Midwifery Council code" (full text here) which Mrs Petrie is deemed to have breached. By implication, this code regulates not merely conduct, but opinions and even religious faith.

The code commands nurses to "Be open and honest, act with integrity" and straightaway gives a very contentious clarification of the term "integrity": "You must demonstrate a personal and professional commitment to equality and diversity." The managers at the health organisation for which Mrs Petrie works clearly understand "equality and diversity" to cover religions. The logic of this is that Jews, Muslims and Christians (among others) cannot work as nurses - for note the word "personal" in that order. It may be that atheists would also be precluded.

All this results from two things: the State getting too big for its boots; and in attempting to govern every aspect of our lives has delegated insanely wide-ranging powers to quangos, who make and apply rules with a whim of iron. The professions and semi-professions - doctors, teachers, nurses and so on* - all have their own little councils to terrorise them. Such prodnosing easily magnifies a "storm in a teacup" into an issue that could affect your job, wealth, family life and physical liberty.

We need a Constitution to limit the powers of would-be tyrants, even if they are now soft-handed, well-dressed ones. Resist the Red Armani Choir.
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* ... even foster parents.