Saturday, July 17, 2010

Scott Brown and the Tea Party

This is in response to today's commentary at The Daily Bell

"While the perspective of American punditry is that the Tea Party movement has been co-opted by the Republican party, we would humbly submit that this is not a true reading of the situation. The inchoate Tea Party movement may have been formalized and reconfigured to make it palatable, but the underlying frustrations remain the same and cannot be palliated by political formulations and rhetoric."

The Tea Party as a structure, an entity, is being co-opted -- to the extent that an entity that is yet to take any significant unifying form can be co-opted. I agree that the underlying frustrations have not (and cannot) be co-opted, but the political outlet for these is at risk.

Also, I do not yet accept the idea that the frustrations of the Tea Party are focused around smaller government and less intrusion. I think there is a segment of that -- those that came to the movement from the Ron Paul 2008 candidacy -- but many seem to be of the view that the new programs are putting at risk the old stop the new programs and don't mess with my old program.

"Government, keep your hands off my medicare."

When students agree to give up subsidized schools, and seniors agree to give up medicare and social security, we may be on to something. When the Tea Party as a smaller / shrinking government movement lasts for at least ten years and effects local and national elections with better candidates than Scott Brown, we might have something.

The best we have going for us is that the promises will be broken. Then people will look to local solutions vs. national (or international) ones. That the promises will be broken is certain.

Wednesday, July 7, 2010

China on the Brink? at the Daily Bell

In reply to the Daily Bell article:

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.

Tuesday, July 6, 2010

Dr. Fekete, I agree on this one

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

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.

Dr. Ebeling at The Daily Bell

The original editorial appears at the Daily Bell. Once again, I could not post.

I have two comments regarding Dr. Ebeling's commentary:

1) While I can appreciate his differentiation of different types of deflation, I will paraphrase (and modify) Milton Friedman, "Deflation is always and everywhere a monetary phenomenon." Just follow the money (supply), don't worry about the other stuff.

Deflation would be the natural state absent manipulation and with sound currency. With increases in productivity, all would share the benefits. In our system, the benefits of productivity have all been siphoned off the top, witness that disposable income and other various measures of productivity benefits have been at best unchanged in 40 years. Where has all the productivity gone? We know, of course.

2) I don't believe the big banks are holding excess reserves for the benefit of 0.25% interest income. They could lend risk free for a year or two to the US for a much better rate than that (I don't want to elaborate or debate on the concept of "risk free" sovereign debt at the moment, I know the risks of this).

They don't lend because they are scared. By "they" I mean the cartel that includes the FED and the large NYC banks. They want liquidity because they know the mess they are in. They might trust the US government to pay them back in a year or two, but they don't trust that they will remain liquid in the meantime.

In this light, I would rephrase my answer to a question posed to me by the Daily Bell a couple of days ago (paraphrased): is it too late for the FED to reign in price inflation? Technically, no, if they eventually suck up the excess reserves. Of course, this won't happen because the banks (while by definition are always insolvent) are even more insolvent today. They (the FED and the banks) KNOW this liquidity is necessary.

It will eventually leak out, and it will unleash a good bout of price inflation.

Sunday, July 4, 2010

Rick Rule at The Daily Bell

This post is in response to the interview with Rick Rule at The Daily Bell. I attempted to post it on the site, but again had difficulty.

The original Daily Bell article can be found here:

In deference to Weeble, I will keep my post short. I also will second (or third, or fourth) Weeble's comment that the Daily Bell writes wonderfully well. I myself have nitpicked one or two items that seemed flawed philosophically, however after the hundreds of articles I have read, to nitpick one or two makes clear the exemplery quality of the work.

Inflation or deflation -- as the Daily Bell makes clear -- define the terms. In the only true (Austrian) sense, it is defined via the money supply. In this case, we have inflation, and will only have inflation. The central banks will create more money and as long as CPI doesn't grow they won't slow down. The worst (best), they eventually slow down when the CPI takes off. They will not stop or certainly not reverse.

If defined via the CPI or some such, again we have only had inflation and will only have inflation. Even Japan (the darling of the deflationist camp) has never had more than a percent or two of price deflation in a year or two over the last 20 years...statistically insignificant.

Where I believe there is merit in the deflation camp is in asset prices and certain other areas wherever fiat has ruled: housing prices, college tuition, various financial assets, etc. I don't believe gold will be affected in this, or if so to a relatively minor degree.

Now, if one really believes in deflation (any of the above definitions) why would you own gold? By definition, with deflation your dollar (or swissie or euro) will buy more (of whatever) tomorrow than today. What reason would I have to own gold -- subject to various tax and control issues, when I can hold currency that will increase in value at no cost, no tax ramifications, no political risks?

There is no reason if you believe in deflation. Deflation does not destroy the currency. If you believe it will destroy the currency, then by definition you believe we are headed for inflation, not deflation. A destroyed currency cannot buy what it used to buy (if it can even buy anything at all). This is inflation in any definition you want to choose.