BU2B, 2nd Edition

Introduction to the 2^nd Edition

This post was originally published in August, 2014.  With this new post I have added several items and have updated various links.

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All is for the best

Believe in what we’re told

Blind men in the market

Buying what we’re sold

-        Neil Peart, Rush

I was brought up to believe…

…history is a constant progression – onward and upward.

…the Dark Ages were…dark and technologically backward.

…the Middle Ages offered lawlessness and barbarity.

…the Catholic Church ruined western civilization.

…the Renaissance was a renaissance.

…King George was a tyrant.

…Americans fought for independence.

…Americans won their independence.

…the founding fathers were selfless.

…Robert Morris was America’s financier.

…government exists to protect my life and property.

…the time during the Articles of Confederation was chaotic.

Stephen Leeb at The Daily Bell

Forgive my lengthy post, but there was too much material here….

BM: An interesting interview; a lot of faith in the religion of “we.”

DB: From our point of view, he is taking fear-based Tavistock-elite promotions at face value and suggesting ways to ameliorate them.

BM: Yes, Dr. Leeb offers a kind of one-stop-shop for the elite-based promotions as relates to energy and centrally-planned “solutions.”

DSL: The only way to get anywhere is if you sit around and you have these intuitions about things.

BM: Intuition….

DSL: …eventually we are going to need renewable energy and we are going to need a lot of it because hydrocarbons and non-renewables are really peaking

BM: He speaks on and on about the upcoming shortage of energy, but not a single comment – either positive or negative – about the revolution in gas and oil going on in the upper Midwest of the US.  If it is real, how does this affect his “intuition”?  If it isn’t, say so and explain why not.

DSL: When you see record level prices with no growth, especially commodity prices, that's unheard of. The only explanation is major scarcity.

BM: There is one other explanation.  It isn’t so difficult to intuit.  Even Dr. Leeb sees this later in the interview, without stating it directly.

DSL: China right now is preparing to build out an infrastructure that will take them through the 21st century. They think long term. China does not think in nanoseconds. They think in 100-year-old intervals, if you will, 20- and 30-year intervals. This country is unfortunately complacent and it thinks very short term, quarter-to-quarter, election-to-election, etc.

BM: Let me translate: Central planning is our only hope, and since China has more of it than does the west, they will succeed while the west will fail.

DSL: I am not an expert in Chinese politics, far from it, but if you look at how they pick their current standing committee, those seven people who are running the country, they really centralize power in two people and I think that was done very deliberately. They know they have a lot of things to do. They have to clean up a lot of corruption and they've got to get this machine working so they can accomplish their goal.

BM: I will translate again: In order to combat corruption, one must centralize power and decision-making to the maximum extent possible.  Concentration of all power in one person is best, but one can’t condemn China for getting the number down to two.  There is no concern that this centralized power will lead to corruption.

DSL: I believe we are headed to a world in which we are going to have to make do with less, a world in which qualitative improvements are going to have to count for more than quantitative improvement. We've gone about as far as we can go with current economic analysis, whether it be Austrian, Keynesian, etc.

BM: It isn’t clear that he understands the first thing about Austrian economics.  How can someone lump Austrian with Keynesian when discussing “current economic analysis”?  What is the one (high-level) distinction about Austrian economics from every mainstream school of economics if it isn’t the distinction of “qualitative” vs. “quantitative”?

DSL: …but the kinds of recessions that we are getting or you've gotten since 1960 or maybe 1970 are probably not the kind you can apply business cycle analysis.

BM: Yes, he doesn’t understand Austrian economics.  These are precisely the types of recessions to which one can apply Austrian economics.  The period since 1971 is one where every major currency (and the associated credit) was fiat – tied to nothing.  This is at the root of Austrian Business Cycle Theory.

DSL: I think central bankers are doing what they can. They are between a rock and a hard place. Central bankers cannot print silver or copper or gold. They can just print money or take away money.

BM: Here Dr. Leeb, states the other possible cause of increasing commodity prices at a time of slow or no growth – they can print money, but not the stuff it can buy.  This would be called what, exactly?  Too bad he didn’t “intuit” this in his earlier reply.

DSL: Incidentally, I know you may be from the Austrian school and I'm very agnostic about this but as a sidebar, when you look at history very rarely do you see horrible things happening because of inflation, even in Germany during the 1920s.

BM: Does he have the slightest idea about the absolutely miserable life of the average German during this time?

DSL: It did not even bring down the government….

BM: I see.  As long as the government survives, there are no “horrible” consequences to hyperinflation.

DSL: You had massive dislocations, very painful dislocations, but the last half of the 1920s in Germany – or last two or three years of the '20s were fine.

BM: I will translate: if you ignore all of the horrific consequences of German hyperinflation, there were no horrific consequences.

DSL: So what really happened? What brought on the horror in Germany and a lot of other countries? It wasn't the inflation, per se. It was deflation; it was depression. That's what led to the rise of Hitler. Hitler never would have gotten anywhere if Germany hadn't fallen into this deep, dark depression.

BM: Too bad he doesn’t understand Austrian Business Cycle Theory.  He might then stop to think what it was that caused the depression.  Could it have had something to do with the inflation that preceded it?

DSL: [The Chinese] know if they have enough gold, anything that they don't have they'll be able to get…. I think the yuan itself will partially be backed by gold, and that's where the Chinese are headed, in my opinion, will certainly be the critical, most important currency.

BM: I have intuited this for some time:

http://bionicmosquito.blogspot.com/2010/07/china-on-brink-at-daily-bell.html

From that post (so you don’t have to look if you don’t choose to): [The Chinese] are locking up resources around the world. These contracts are likely priced in dollars -- something the Chinese have plenty of and don't want to hold. At some point, China can declare the Yuan partially backed by gold -- even 15% - 25% would be sufficient. This strengthens the Yuan and makes it easier to buy those resources now priced in cheaper dollars.

DSL: At the end of the '70s you had this huge surge in commodity and the price of oil. A lot of that was political.

BM: To the extent central banking and money printing is political.  But Dr. Leeb never peeks under that curtain, even though this suggests he understands another possible cause for seeing record level prices with no growth.

DSL: So [one] of the things we are going to see in the next ten years are a harsh bear market in bonds….

BM:  Sooner or later, correct.

DSL: So, we've got to segue into something that's much different and we've got to do it in a hurry and we've probably got to do it as a world, not as a country.

BM: To translate, one last time: bring on global government.

Jim Rogers at The Daily Bell

http://tinyurl.com/3d45dq2

Or go to search The Daily Bell site, at: http://www.thedailybell.com/index.asp

JR: [On central planning in China] Centralized planning is rarely, if ever, good for the economy. But the kind of construction you are describing is at the provincial level – not the national level.

BM: The provinces are larger than most countries. This is “central” enough, and I am certain Jim Rogers understands this. Perhaps he is sending a message: don’t look at China as one; don’t look at all of the problems as country-wide, you must understand each province, each district, if you want to invest wisely in China.

JR: [On civil and social unrest] There is going to be more social unrest worldwide including the US. More governments will fall. More countries will fail.

BM: It is a dangerous balancing act that the elite play. Unrest may help them bring in desired change, but how to manage a few billion upset people? Talk about herding cats! This unrest can backfire just as easily as it can work to the elite’s benefit. Perhaps the size of the gamble suggests something about the desperate position the elite’s find themselves in.

JR: [On Europe and the Euro] I think we are getting closer and closer to the point where someone in Europe is going to have to take some losses, whether it's the banks or the countries….

BM: Either lose on the currency or lose on the bonds; this choice must be made. In the end they will take haircuts on the bonds. The currency is too big a tool for control for the elite. To lose it only to usher in something bigger, the SDR? Much easier to build on the foundation of large states as opposed to smaller states, especially after a failed experiment of a common currency. If that is the gamble, it only again demonstrates the level of desperation.

JR: [On the Tea Party in the US] We still haven't seen much action.

BM: Yes we have. They extended every draconian position of the Patriot Act, if my understanding is correct. If Americans believe they can change the system through politics (just play along with me for a moment, as there is no answer in politics as it stands today), vote them ALL out at the same time, and only vote in third parties. Repeat every two years. That will make it fun for a while.

JR: [On continuing American wars and empire] Why are we supporting the guy in Yemen and not the guy in Libya? I can see absolutely no intellectual, philosophical, or even political justification for what we are doing.

BM: I read that the US gave Saudi the OK to go into Bahrain in exchange for Arab League support on Libya. Such is political justification these days.

JR: I don't know there's more military tension between China and the US these days.

BM: Yes, the US believes the western Pacific (including Taiwan) is US territory, China believes otherwise.

JR: Politicians may be railing more and more about China, but that's a verbal encirclement of China, not a military one.

BM: But isn’t this how it always starts?

JR: [On the IMF replacing the dollar with the SDR as reserve currency] I can see if something dramatic happened tomorrow or if people are desperate, but I don't see SDRs working at all.

BM: Is this a hint, where Rogers knows more than he is willing to say? The elite are likely rather desperate. Although he is right, the SDR won’t work any better than any other fiat currency. Just more pain for us little people in the meantime.

JR: [On Bernanke purposely trying to ruin the dollar such that the IMF can usher in a new world currency] That's a conspiracy theory that assumes these people could work together. No, he actually believes in what he is doing and he believes he's going to save us all.

BM: That Bernanke is a true believer in his models and capabilities I have no doubt. This doesn’t negate the possibility that there is an attempt to purposely ruin a currency. Knowing what Bernanke believes about monetary policy, wouldn’t you choose him as the key central banker if you wanted to ruin a currency?

JR: But I would hope that everybody takes out some kind of insurance policy for their money

BM: This is all that gold is. Don’t plan on getting rich off of it, and pray that it returns in price to a few hundred dollars an ounce; a sign of return to some stable money. Like fire insurance on your house, you don’t desire that your house burns down such that you can feel like you got value for your insurance policy; and you don’t feel wealthier if your house is destroyed. Yet, each year, when it doesn’t burn down, you renew the policy anyway.

DB: The remonstrations show something specific about the man and his character. Jim Rogers is someone who will patiently sit through interview after interview (he says he's been giving too many of them) and express informed opinions on any one of a number of topics. This generosity can fool you into thinking you are speaking to an amiable, even low-key gent, and not one of the sharpest most successful investors alive today.

BM: This struck me throughout the interview. Then I thought about how he appears on the TV and YouTube interviews. He says the same words; yet they do not come out sounding so blunt when heard in that southern drawl. Conversely, on the TV interviews, the pleasant southern drawl and demeanor tend to hide the fact that his is a very sharp mind; something that came across quite strongly in this DB interview. Altogether, the same man saying the same words, yet two very different perceptions on my part depending on if it is live TV or the printed word. This DB interview added depth to my view of Jim Rogers.

China and the West: The Transition

I posted at The Daily Bell regarding their article entitled "What's Behind the US Currency Promotion?" The original article can be found here: http://www.thedailybell.com/1471/Whats-Behind-the-US-Currency-Promotion.html

I felt it necessary to expand on the comments I made at The Daily Bell. Following are my exact comments (in quotation marks), with further explanation and clarification added. Additionally, while this is inherently a political analysis, I feel I should state clearly that my desired preference for social order is quite anarcho-libertarian. However, the reality is that a power and political transition is ahead of us. Following is my speculation on this transition:

"The US wants to maintain control, while trying to pretend that the emperor has clothes. The Chinese want a seat at the table, while pretending (as best they can, because it is so obviously laughable) that the emperor's clothes are still stylish (let alone...exist) in order that the transitions occur as smoothly as possible."

It is obvious on its face that the world order is undergoing a major transition, driven by the drastic economic dislocations which inherently will drive politics, alliances, and control. For much of the last century the US has established and maintained the dominant position on the world stage. For even longer, this can be said about the West in general.

However, while it is obvious to all, both the US and China are trying to go through the transition without admitting the emperor (the US) has no clothes. The US, of course, wants to maintain the appearance of power. China wants a more enhanced seat at the table, with a clear path that corresponds to China's likely continued growth. China, of course, wants the dollar to remain reasonably strong - however recognizes that the US has no political will to make it so (and in fact it may be too late, anyway). Dollar weakness comes sooner if the US is sooner exposed as naked.

"The Chinese will go along with the act as long as they feel power is appropriately being allocated toward them. I believe the Chinese can accept a power-sharing arrangement with the West, as long as they view it is "fair" in their eyes."

It doesn't strike me that China wants to dominate the globe the way the West has attempted to do so. They just want the respect of their position on the world stage.

"The US will move as slowly as China allows. In the long run, this can only be a delaying tactic ‒ absent the US taking China on directly, militarily, which is...NFW."

Certainly, the US doesn't want to race off the stage, they will move as slowly as possible. China, understanding respect - and that an orderly transition is better than a violent one - can go along with this pace, as long as progress is evident.

However, it is only a delaying tactic; the transition will happen...unless the US wants to make military hash of the world to avoid the de-throning. I view this as highly unlikely. The costs and risks are too high, and the US and USSR showed that some sort of sanity can prevail when the alternative is global Armageddon.

"China, and a few others will play their parts in G20 and other global organizations, while at the same time having other conferences without the Western powers in order to focus on alternatives."

To think China and other countries are not working independently to try and find the best path forward is naive. Yes, they will work in established structures, but these structures are dominated by the West - G20, UN, BIS, IMF, World Bank, etc. There is likely some lack of trust by China and others of these institutions, wouldn't you think? For China, pursuing parallel paths is prudent, and I think that it is happening is virtually certain.

"Nothing says China only has the gold they say they have, just as nothing says the West has all the gold they say they have. Both have reasons to share the common lie."

It would cost the dollar if China said they had far more gold than they admit already, and if the US says they have far less. Yet both are possible, and plausible. First, the actual gold reserves are not audited anywhere. Second, it benefits both parties to share the same false information. Third, how much gold has the FED lent to bullion banks which have sold the gold to third parties? We don't know, other than it happens. And to my understanding, this gold is still shown on the FED's books. But if the banks sold the gold to a third party, is it not also on the third party's books as well? Yes, I think.

"China's reserves aren't worth much to the extent they are denominated in USD & EUR (among others). China knows this."

There may be reasons for the Yuan to be a strengthening currency. To the extent the reserves are in USD and EUR, the quality of reserves is not one of the reasons. It is well publicized that China is trying to diversify its reserves. Do we really know how much?

"It is in China's interest (and in the interest of the USG and EU) to lie - in the same direction - regarding China's holdings of these currencies."

Both parties have reasons to say that China's holdings of USD (and separately EUR) are higher than they actually might be. The US wants some semblance of credibility to the dollar, and China doesn't want to lose value in reserves...during its race against diversification.

"China is buying real assets, spending their fiat currency reserves - others still take dollars & Euros in exchange for real stuff."

This is the race - trade pictures of dead Presidents for real stuff. Is China already out in front of the crack up boom? Very likely.

"China, in combination with Russia could easily institute a gold backed currency. Both countries have a complimentary use for each other. While transitioning to a gold backed currency will cause short-term internal havoc in China, such havoc is coming anyway and the CCP needs some way out for the long term. The Chinese are nothing if not long-term thinkers."

Now, I am going way out there (in case you felt I wasn't out there already).

China has a problem. They have a problem no matter what they do. They must transition their economy because they know the US can no longer buy what they used to buy. And even if the US could, does China still want the paper in trade?

China is buying assets, locking up future supply, etc. These can easily be priced in dollars. A strong Yuan (relative to the dollar) would work wonders for controlling future price inflation in China (which is quite well baked in from the monetary side). What better way to strengthen the Yuan than tie it to gold? Maybe backed 20% or so. Then pay for the assets for pennies on the Yuan, so to speak.

Going to a gold backed currency will cause a large disruption to China's economy. But this disruption is here and now, and is only going to get worse no matter what. In this case, why wouldn't China try to gain some real long term benefit for this pain?

With Russia, there are plenty of gold reserves. With Russia, China secures long term access to commodities. With Russia, military equivalence with the West (if not superiority) is assured.

"This move will be the final dagger to the West's dominance ' a death blow to the self-inflicted wounds (both economically and militarily) begun in the early 1900s."

Inflation in the West skyrockets. With a destroyed currency (relative to the Yuan), what can the West buy?

Everyone looks at currency from the seller's perspective - product can be sold cheaper, therefore I can sell more (a false equation, but one parroted exclusively). However, in order to sell, one must buy. With a weakened currency, the West buys less, so it sells less. Let alone, the drastic impact to the standard of living brought on by mass inflation.

The West has been committing suicide since at least 1914 - so much happened then, but it is enough to say the FED, and WWI. WWII put the nail in the coffin, and having false gold-standards (and after 1971, no gold standard), removed all discipline from the system, allowing clear sailing for complete self-destruction. This end was certain, only a question of when.

"Germany (without EU baggage) and Japan would be natural fits for this China / Russia combination, they just need to figure out how to un-encumber themselves from a no-longer-welcomed tenant."

Germany and Japan bring technology that both China and Russia desire. Russia offers resources desired by both Germany and Japan. In fact, could Australia also be brought in to this new alliance? It makes more sense for Australia economically to be tied in here than with the West.

How does Germany, Japan, and maybe Australia break the current strings? I don't know, but it won't be the first time alliances change. Especially alliances brought on only because of conquest in war, as in the case of Germany and Japan.

"Unlike the West, China does not have a history of desiring global dominance - they just don't want to be dictated to about what they view as their own internal affairs. It is not likely that a new global elite will emerge from China."

If I understand correctly, China voluntarily stood down 500 years ago - destroying the fleet and all records, etc. They haven't explored far since. They just don't want to be told what to do. Given the way the world is turning, that isn't likely to be a problem for China in the coming years, especially under the scenario painted in this speculative piece.

China on the Brink? at the Daily Bell

In reply to the Daily Bell article:

http://www.thedailybell.com/1194/China-on-the-Brink.html

The validity of the Austrian Theory of the Business Cycle (do we really have to call it a "theory" anymore?) does not only apply to the west. China will bust because it has to.

The Chinese leadership is faced with a few options, all bad. They can certainly continue to do what they are doing (no, I don't believe there is such a thing as a soft landing when you have pumped as much as they have pumped).

They also aren't sitting around waiting for the G8 or G20 or any other "helpful" organization of the west to solve the world's (China's) problems.

They are locking up resources around the world. These contracts are likely priced in dollars -- something the Chinese have plenty of and don't want to hold. At some point, China can declare the Yuan partially backed by gold -- even 15% - 25% would be sufficient. This strengthens the Yuan and makes it easier to buy those resources now priced in cheaper dollars. Yes a) their reserves lose value (this will happen no matter what), however if these reserves still buy resources, do they care? and b) this will send China into a recession/depression (this will also happen no matter what).

What comes out the other side is a stable internal economy with a strong currency that allows the Chinese to buy commodities at favourable prices...helping to keep internal price inflation down and keeping the masses somewhat settled.

They could do this in conjunction with Russia (though not mandatory) as Russia brings additional muscle and significant natural resources. The US won't go to war over this (the DB has done a good job of pointing out the minimal chances of nuclear war in our future by nation-states).
Not a great solution, not even a good solution, but maybe the best of many bad solutions and a solution that gives the Chinese a chance post the trauma.

Yesterday the DB asked if the Chinese elite are married to the west. I think not. I think when the Chinese elite were courted, they did the "winkie-winkie," but didn't make any promises. The west, having no alternative, decided they would take the chance and hope the flirting would lead to marriage. The Chinese feel no obligation to this johnny-come-lately anglo elite -- they have been around 6000 years compared to a few hundred. They will be around long after, they figure.

My guess is China has figured out they have gained everything they are going to gain from the US, it is time to move on. No need to buy the cow, so to speak. Yes, the flirtation came at some cost -- but none long term -- and oh by the way brought a few benefits.

Dr. Fekete, I agree on this one

Again, unable to post at the Daily Bell...so here it is:

http://www.thedailybell.com/1193/Antal-Fekete-Floating-Exchange-Rates-Scheme-to-Embezzle-the-Dollar-Balances-of-Surplus-Countries.html

I have strongly disagreed with Dr. Fekete's commentary here at the Daily Bell in the past, and have commented accordingly. This time, I agree. Morally and philosophically he is correct - by what "right" does the US have to dictate to its largest creditor that the creditor destroy the value of the debt owed?

None, of course, in a moral world.

However, I will posit that eventually, China will have no choice but to act and in fact will take actions that offer the least of several bad alternatives.

China will eventually back its currency with gold, silver, and/or other assets. China is currently securing these assets via contracts around the world. These are likely priced in USD. When they go to a gold backed Yuan, the Yuan will rise and the dollar will sink, making these commodities much cheaper for China to pay for.

They may bring Russia along for the ride, as Russia has plenty of resources for which they will want some currency besides the dollar in exchange, and Russia has a military that, when added to China's (although China could also somewhat go it alone) would deter any possible threat from the US. So Russia will trade protection for pricing in a (relatively) hard currency.

To China, the Anglo American power elite is a short term blip on a 6,000 year radar.

I believe I read it at the DB first, perhaps Mr. Suess - we are very likely in the midst of the real WWIII, and the battle will be played out financially, as the Bell has pointed out the world cannot afford to play this out militarily.