http://dollardaze.org Investor orientated commentary on economic and monetary issues from a free market perspective. Policies discussed include sound money on a gold standard and limited role of government. Investment research focuses primarily on both precious and base metal mining companies. en-us http://dollardaze.org/blog/?post_id=00435 One problem with politicians is that when problems they create come to a head, they typically feel this irresistible urge to DO something, rather than to UN-do something, or to simply back off to avoid exacerbating the situation. Too often, that which they end up doing has very little connection to the cause of the crisis, but plays well in the press and superficially makes everyone feel better. Bills that are rushed through Congress under duress are never studied enough, providing too tempting an opportunity to quietly slip in unrelated provisions that erode freedoms in ways that would never pass as a stand-alone bill. We famously saw this with the PATRIOT Act, but Washington learned nothing from that. August 4, 2008 http://dollardaze.org/blog/?post_id=00434 Unlike old soldiers economic fallacies refuse to fade away. Nouriel Roubini, former Clinton White House economist and now a professor of economics, has been busy telling the Bloomberg business news service that the economy is heading for a severe downturn that will be worse than the 2001 recession. Like the vast majority of economists Roubini bases his analysis on Keynesian phantasmagoria. In his view "the U.S. will experience a systemic financial crisis", though he does admit that at 5 per cent of GDP a deteriorating housing market is too small to trigger a recession. Nevertheless, because consumption is more than 70 per cent of GDP a decline in consumer spending would "trigger a full-blown recession". As evidence of this view he states that the heavily indebted consumer may have reached the point where he will need to reign in his spending. August 4, 2008 http://dollardaze.org/blog/?post_id=00433 The U.S. Bubble economy has burst. I sympathize with those that would argue this is old news. But the probabilities are now high that GDP turns decisively negative during the second half - if it hasn't already. Instead of the year-long Credit crisis showing signs of improvement or even stabilization, a further tightening of Credit Availability is taking hold broadly throughout the economy. The so-called "subprime" crisis has, of late, invaded "prime" and "conventional" mortgages. This is a major additional blow for home prices and the economic support provided from built-up home equity. The securitization markets remain in shambles. Even corporate debt issuance dropped to a 5-year low in July. Meanwhile, the increasingly impaired banking system has sharply curtailed lending virtually across the board - to households; to students; and to businesses both small and large. Bank Credit is basically unchanged over the past nine weeks. And without sufficient Credit creation, the finance-driven U.S. "services" economy is an unmitigated bust. It is my view that this bust has over the past few weeks gained critical - and self-reinforcing - mass. August 2, 2008 http://dollardaze.org/blog/?post_id=00432 Many of you are probably too young to appreciate the full impact of the hyperinflation in Germany after WW1. It was devastating. This picture shows you the amount of paper that was equal to one silver dollar, or 3/4 of one troy ounce of fine silver. After seven years of constantly accelerating inflation, the mark is finally stabilized at the rate of over 4 trillion to a U.S. dollar. The black market rate, however, was an incredible 12 trillion to the dollar at this time. The pre-inflation exchange rate for the mark was by contrast a modest 4.2 to the U.S. dollar. Can anyone say Hyperinflation? July 31, 2008 http://dollardaze.org/blog/?post_id=00431 Over the past few decades, the United States has steadily evolved from a nation of 'producers' to one of 'consumers'. The change has been celebrated by politicians and economists as proof of America's arrival at the top of the global economic food chain. In reality, the development has depleted the nation of its hard-earned wealth, and has led us to the brink of ruin. But rather than encouraging a return of America's productive energy, our government is responding to the growing economic crisis by simply trying to boost consumerism at all costs. Their strategy involves socializing losses among all citizens so that the depletion can't be easily discerned. Now that the nation has chosen socialism as its economic salvation, it is worthwhile to examine some historic precedents. They are not encouraging. Europe, the former Soviet block and much of Africa and Asia, show vividly that socialism curbs individual freedom and enterprise, and leads inevitably toward economic decline. July 31, 2008 http://dollardaze.org/blog/?post_id=00430 Since when has American business worked with a net? Since now, apparently. Our entire free enterprise system, both sides of that coin, always represented the chance to succeed beyond our wildest dreams...as well as fail like never before. It's a market dynamic that's worked astonishingly well--success and failure remain extremely strong motivators. In fact, when it comes right down to it, the fear of failure in this day of unsparing media attention may actually drive a person or company the most. July 30, 2008 http://dollardaze.org/blog/?post_id=00429 As discussed in previous commentary, despite the dire realities affecting the global economy, it appears investors are not heeding the warnings. Sure, some people are paralyzed like a deer in the headlights, where you can't blame them if they are just waking up to the reality of what lies before us. However, these still appear to be the few, with most still in denial concerning future prospects for the economy and markets. This is evidenced in gold and silver's sluggish performance of late. It should be doing far better as an alternative, but again, the public does not see the need to buy it yet. Can you blame them however, with the incessant cheerleading and gaming that the media (CNBC in particular) pawns off as analysis? Exposed long enough to this kind of thing it's bound to have an effect -- that's just common sense. July 29, 2008 http://dollardaze.org/blog/?post_id=00428 NAB, National Australia Bank, was just forced to write down over ninety percent of its exposure to US mortgages via so-called SIV's or conduits last Friday, to the order of $830 million dollars. This was by no means a matter of choice for NAB. The bank had just issued and sold $850 million worth of new debt paper. Buyers of that debt are now screaming bloody murder. They are asking why this information, which surely must have been known to the bank at the time of the debt sale, was not disclosed to the market beforehand. They are now demanding their money back or some other way to back out of the deal. Yet, what happened to this single Australian bank is nothing compared to what will happen to US equity and bond markets when they wake up on Monday morning, July 28, 2008. Robert Gottliebsen of The Business Spectator, an Australian financial news and analysis portal, wrote a commentary pointing to the possible consequences of NAB's write-down. July 27, 2008 http://dollardaze.org/blog/?post_id=00427 This week benchmark Fannie Mae MBS yields jumped 31 bps, to an 11-month high 6.15%. Spreads versus treasuries widened 18 bps to the widest level (206bps) since the height of the crisis in March. Also this week, the SEC took an extraordinary step to tighten the rules for shorting the large financial stocks. These developments are not unrelated. In JPMorgan Chase's and Citigroup's earnings conference calls, both major lenders this week noted deterioration in prime mortgages. This provides additional confirmation that the mortgage crisis is now reaching the bedrock of our nation's mortgage Credit system. And particularly with the mortgage insurers, the GSEs, and the leveraged speculating community having come under varying degrees of stress, a tightening in "conventional" mortgages will now significantly exacerbate the mortgage/housing/financial/economic crisis. July 25, 2008 http://dollardaze.org/blog/?post_id=00425 With President Bush no longer threatening a veto, the subprime mortgage and Fannie and Freddie "bailout" bill is now sailing through Congress. In anticipation of its enactment, Congress had the foresight to raise the national debt limit to $10.6 trillion. Who says that politicians don't plan ahead? Once signed into law, the budget busting legislation will hand the Administration a blank check to prop up the ailing home lenders. The ultimate cost is anybody's guess. I believe that the price tag will be higher than just about anyone imagines. Paulson's Bazooka will be locked and loaded with enough fire power to blow what's left of our economy into the dustbin of history. Though the government and Wall Street assure us that these bold moves will save the housing market, and the economy as a whole, from collapse, the reality is that the solution is far worse than the problem. As painful as the failure of Freddie and Fannie would have been, bailing them out will hurt even more. In other words, it's not the disease that will kill us but the cure. July 25, 2008 http://dollardaze.org/blog/?post_id=00424 In recent months, even the most blindly optimistic forecasters have come to grips with how our banks and investment banks took wildly imprudent risks that will result in horrific losses. The resulting sell-off in financial shares has tempted many investors to scoop up these companies at apparently fire sale prices. Wise investors should resist the temptation, as the pain for financials is just getting started. Although voices of prudence were dismissed at the time, these banks' risks were leveraged largely through "off-balance sheet" mechanisms that generated massive financial rewards for the financials while keeping the losses supposedly at arm's length. The resulting windfall yielded $26 billion in bonuses for Wall Street in 2007. July 24, 2008 http://dollardaze.org/blog/?post_id=00423 The Latin term "fiat" roughly translates to "there shall be". When we refer to fiat money, we are referring to money that exists because the government declares it into existence. It is not based on production or earnings, and not backed by any commodity. It is solely based on trusting the government. Fiat money is exchanged in the economy as long as there is faith in the government that issues it. Some are blaming the recent shakeup in the markets to "whining" or financial fear-mongering, which misses the whole point. History has shown that fiat money, or "faith-based currency" always fails, because when governments claim this power, they always behave irresponsibly. July 21, 2008 http://dollardaze.org/blog/?post_id=00422 I have, for the past 35 years, expressed my grave concern for the future of America. The course we have taken over the past century has threatened our liberties, security and prosperity. In spite of these long-held concerns, I have days - growing more frequent all the time - when I'm convinced the time is now upon us that some Big Events are about to occur. These fast-approaching events will not go unnoticed. They will affect all of us. They will not be limited to just some areas of our country. The world economy and political system will share in the chaos about to be unleashed. July 21, 2008 http://dollardaze.org/blog/?post_id=00421 I would like to say that economic commentary on the present energy situation is an improvement on what has gone on before. As I said, I would like to. The media message is an old one. Whether it be America, Australia or Europe the cry from greens is that rising oil prices are good for us because they conserve oil and speed up alternative energy and transport technologies. So successful has this line of attack been that some so-called free-market commentators have mindlessly parroted it, oblivious to the fact that it flies in the face of economics. July 20, 2008 http://dollardaze.org/blog/?post_id=00420 Paper, one of the four Great Inventions by the Ancient Chinese along with printing, the compass and gun powder, was invented by Cai Lun in 105 A.D. from bark, rags, wheat stalks and other materials. The first historical use with paper money began shortly thereafter around 140 B.C., nearly 1800 years before its arrival in Europe. How this money came to an end is not known. The first well-documented use of paper money is with the "flying cash" of the Tang (618-907) dynasty used around 800 A.D. The term "flying cash" was used because of its tendency to blow away in the wind unlike metal coins, known as cash. The government issued the paper in lieu of coins to remove the burden of moving large quantities of metal over vast distances. It was not a 'legal tender' but merchants did begin using them as a convenient method of exchange. July 20, 2008 http://dollardaze.org/blog/?post_id=00419 This week, with the nation's financial infrastructure crumbling before our very eyes, the nation's top two economic policy makers made their way to the Congress for an extraordinary episode of political theater. Fannie Mae and Freddie Mac, the quasi-government entities that form the backbone of America's gargantuan mortgage market, appeared to be cracking. To the somewhat bewildered members of Congress, Ben Bernanke and Henry Paulson offered radical remedies to save the lenders. Despite the fact that the proposed policies would thoroughly redefine America's supposedly capitalistic pedigree, the moves were presented as wholly inevitable, and in the end, benevolent and costless. July 19, 2008