Global trade is brisk?

The Baltic Dry is a composite index of shipping rates for various bulk goods. When global trade is brisk, the cost of transporting goods (as reflected in this index) is high, and conversely when trade is quiet the index is low. Looking at the chart of $BDI today, below, we can clearly see that global trade is still very much on the ropes since 2008.

You can also look at a chart of many commodities today and see there are high spot prices pretty much across the board. This is something of a divergence, and to me it suggests the high commodity prices are only high due to speculators bidding up paper prices for commodities, with a view towards the upcoming high inflation that they see as a result of rampant currency issuance by the world's Central Banks (most notably the US Fed, but by no means exclusively).

The actual physical demand for the commodities, according to the $BDI, just does not seem to be there. This ought to be implying commodity price deflation, rather than inflation.

Santa Wen Is Coming To Town

Oh! You better watch out,
You better not cry,
You better not pout,
I'm telling you why:

Santa Wen is coming to town!

He's making a list,
He's checking it twice,
He's gonna find out
who's naughty or nice.

Santa Wen is coming to town!

He sees you when you're sleeping,
He knows when you're awake.
He knows when you've been bad or good,
So be good for goodness sake!

So...You better watch out,
You better not cry
You better not pout,
I'm telling you why.

Santa Wen is coming to town.

Merry Christmas, and an Interesting New Year!

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8215923/Euro-rises-as-China-supports-EU-debt-action.html

Is the SDR a diversionary tactic to forestall financial Armageddon?

I was recently musing that I could perhaps see the SDR becoming the world’s trading numéraire, but that it felt likely that this would only come about after a global rebalancing of currencies. Looking into the SDR in more detail took me a way off track into the wilderness, where I had no idea I might find myself. I found myself all of a sudden staring at the Islamic Dinar!

The reason I ended up at this seemingly unlikely place was I stumbled into a site on the web which stated that 1 Islamic Dinar = 1 IMF SDR. This I found an intriguing detail, but since this site was just a blog I figured I should dig a little deeper and see if I could find an “official looking” source to back that claim up. At first, all of the sites I could find on Google were what I considered to be ”unofficial” sources. But then, eventually, I found what I considered to be an “official” source: the Islamic Trade Finance Corporation (a Member of Islamic Development Bank Group).^[1]

Now, an Islamic Dinar is very clearly and specifically a coin of fixed gold content: 4.25g of 22 carat gold, to be exact. ^[2]

The composition and value of an IMF SDR is determined by consensus at five year intervals, and we can see that the Islamic Development Bank group must be agreeing with other Central Banks that 1 SDR shall be deemed equal in value to 1 Islamic Dinar, at the time of negotiation at least.

So, right now the thought I am brought to is... are SDRs being set up as the way the Islamic states who endorse the Islamic Dinar^[3] can receive payments from other, non-Islamic states in SDR denomination, and redeem them for the equivalent weight of gold, perhaps through the Bank for International Settlements? 3.89725g of gold per SDR, according to the definition of an Islamic Dinar being 4.25g of 22 carat (91.7%) gold.

Is the SDR the way that The West will continue to get paid in paper, while The East get the gold that they really have wanted all along? Is it the way that the paper global currency system can be sustained a while longer, beyond the now very obviously flawed US$? With the world’s wealth continuing to drain away to The East but at a diminished pace than if nations the world over were to be paid in gold from tomorrow, or worse, the global economy were brought to a paralysed standstill in want of gold to settle all global trade imbalances?

This thought has now changed my opinion, to put the SDR ahead of global rebalancing, rather than after. In fact, I am now seeing it as perhaps the proposed means to defer that rebalancing a while longer, enabling business as usual for The West, and more time to accumulate gold for The East. But how long can this additional sticking plaster solution last? Another 40 year cycle? Is the Mahdi^[4] due, but not until about 2050 or so..? That’s a lot longer than I was thinking to wait and tough it out...


[1] http://www.itfc-idb.org/content/islamic-trade-finance-terminology
[2] http://en.wikipedia.org/wiki/Islamic_gold_dinar
[3] http://www.idbgrouponline.com/WFE/Pages/MemCountries/AllCountries.aspx
[4] http://en.wikipedia.org/wiki/Mahdi

To silver, or not to silver? That is the question...

I have been pondering a lot in recent months on the silver/gold question. I myself liked silver for some time, but more recently I have come to a personal decision that I should dishoard most of my silver holding, replacing it by increasing the gold holding; a process that is by now substantially completed.

I thought it might be interesting and educational, for myself and also I hope for others, to solicit some discussion on this topic, since many people are very passionate about silver, and if they have compelling and indisputable reasons then I am always open to changing my mind (again :-) ).

So, at the risk of possibly inciting a riot now, here is a quick and very short starting list of "some reasons for believing gold is the ultimate wealth preserver, while silver is not"...

1. Silver demand today comes predominantly from manufacturers. It is positively correlated to economic demand; it does well when there is strong consumer demand for the products it is used in. This is one of the reasons cited by silverbugs to justify future massive price rises they anticipate - its scarcity value. However, if (when?) the economic demand for those products dries up, perhaps brought on by the very same high inflation that the silverbugs foresee coming down the pike, industrial demand for silver will dwindle along with that. Silver is used in desirable consumer products, but I don't think it's in anything quite as necessary as, say, food or energy? That is the largest part of the current buyers -- who steps into their shoes to buoy demand for silver, when the manufacturers leave the market as a result of sluggish global demand? There is no significant industrial demand for gold; it is uncorrelated to global economic performance. If/when the global consumer economy contracts significantly, there will be no disappearance of industrial demand for gold -- there is only really investment demand, even in the form of jewelry the purchase is fundamentally an investment by the buyer. If (when) the global economy takes a bath, the desire for gold is likely to only increase, in my opinion.
   
   
2. Silver is the poor man's gold. The massive investors of this world, the Central Banks (CBs) and Sovereign Wealth Funds (SWFs) of current account surplus countries, do not add silver to their reserves in any meaningful degree. They keep gold in their reserves, but not much, if any, silver. If industrial demand for silver should fall, these giant potential buyers are not going to suddenly step into the shoes left empty by the manufacturers of this world, I strongly suspect. There are reasons that they do not keep silver...
   
   
3. Silver is a "necessary" commodity. Many products that people need and/or desire contain silver, and in many of those applications there is no substitute for using silver. This means that it would be deemed totally unacceptable to hoard silver, because it treads on the toes of consumers the world over. Imagine CBs or SWFs decided to hoard, say, wheat or corn? These are similarly necessary commodities, and hoarding of them would distort the supply/demand balance, speculatively increasing the price and impinging on consumers. There would be uproar. These foodstuff examples are intentionally selected to emphasise the principle -- clearly I am not attempting to say that silver is as necessary to human existance as wheat or corn! But the principle I am illustrating is the same, albeit to a significantly lesser degree. The reason gold has been selected over the millenia as "money", is specifically that it impinges on nobody if you choose to hoard it. The price can rise as high as is necessary to clear the supply/demand balance, and nobody would be hurt. In fact, unlike any other "commodity", the higher the price of gold goes the better people like it! This is simply not the case for silver.
   
   
4. Silver is actually not that rare to find, relative to gold. There are very few silver mines in operation today, with most silver mined as a by-product of mining other industrial metals. This is not due to there being little silver to mine in the world, but because the economics of mining silver mean that it is in most instances not economically viable to dig it up. Getting it as a by-product of some other activity is a bonus to the miners pulling out copper etc, it is an afterthought as far as they are concerned and they are not especially bothered how much they get for it. If the price were to significantly rise, it would mean that many more silver mines become economically viable, and the supply will ramp up to meet demand (bringing the price back into balance). There is plenty of silver to mine, just not at today's prices. This is quite unlike the case for gold, there are plenty of mines digging up only gold in the world today. When the price rises, I daresay more gold mines might become viable and there could be an increase in supply as a result, but I think you will find that the ability to respond in this way to higher prices is much less than is the case for silver.
   
   
5. Similarly, because silver is a part of many consumer products, as the prices rises it becomes increasingly viable to recover the silver from products at the end of their life, increasing the scrap supply. Since gold is not used to any significant degree in consumer products, that avenue for increased scrap recovery will not be available. Gold is held pretty much only for monetary purposes, and it will only be returned to the market at a price that people believe it is fully, or more likely over, valued. Given the on-going, by-design debasement of paper currencies, any thinking person should understand that there is no time that paper is better than gold, unless you want to spend your wealth immediately. So, if gold should some day become significantly overvalued then perhaps yes, it might be dishoarded until the price comes back to whatever is deemed to be fair value. But I don't think this significant perception of overvaluation is very likely to happen to be honest.
   

Do you have counter-comments to any of the above? Or perhaps further reasons that you would like to add to the list? This is just a short and hastily-compiled list that I have knocked up really for the sake of stimulating the debate! :->

If the Dollar fails, how can the Euro not fail along with it?

Inquisitive minds are wondering how anyone could possibly think the € might survive if (when) the $ fails — surely it must be taken down with the ship, along with everyone else, right?

I thought it might be interesting to play a quick game of 'pass the bomb'... here are the rules of this game, as I see them:

1. National Central Bank (NCB) holds mostly US$ in its international forex reserves, a little other currencies perhaps, and some amount of gold.
   
2. NCB wishes to find a way to dispose of excessive holding of US$, without simplistic sell-US$/buy-own-currency trades on forex markets. Excessive strength in its own currency would kill its exports, helping to sink the local economy.
   
3. European Central Bank (ECB) holds gold and some foreign currencies including US$. It issues its own currency, the euro, which is backed by these aforementioned reserves. The gold component percentage of the reserves expands as the market price of gold rises (and falls if the market price drops), as witnessed quarterly in its accounts on the website.
   
4. ECB can issue new euros to buy gold from NCB. Euro supply is increased (euro value decreases), but there is an offsetting increase in ECB gold reserves to balance that dilution (euro value increases again). Confidence is fully maintained in the ECB's currency, in spite of the increased number of euros, through the also increased gold reserves.
   
5. NCB has more euros in its reserves, lower percentage of currency reserves are in US$ now. But NCB's gold reserves are also lower... hmm... bummer!
   
6. NCB is free to sell US$ and buy gold. Even lower percentage of currency reserves are in US$ now, and restored holding of gold in NCB reserves again. Yay!
   
7. Eurozone total ECB+NCB's gold reserves net increased, exposure to US$ reserves net decreased. Euro retains valuation against gold.
   
8. Supply/demand balance of US$/gold now out of whack, US$ valuation against gold declines as a result of this supply/demand dynamic. Ergo, $:€ exchange rate declines too. Euro is by this stage net stronger, against Dollar. NCB is net up on the deal.
   
9. If NCB was able to obtain gold from the market OK, keep going back to (2), otherwise...
   
10. Boom! Strong Dollar Policy game over. Freegold reset.
    

Please try our new blockbuster game, Strong Euro Policy.

Mirror, mirror, on the wall... who are the 'richest' of them all?

This (link below) is, I think, an interesting set of data from the CIA. It ranks 156 countries of the world by their reserves of foreign currencies and gold.

I note the UK is 25th on this list, right below Turkey, Denmark, Poland and Iran, who also are not in the top 20.

The top 5 may hold some interesting surprises for many, or more accurately I would think interesting absenses.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2188rank.html

If you wanted to break out how much of a country's reserves are gold from the data linked above, rather than foreign currencies, my friend Patrick rather handily provided a link this morning to a germane article on Zero Hedge.
(Thanks, Patrick ;-) )

The Joy Of Stats

This video, I think, displays the positives made possible through paper credit. Much of the time we focus only on the negatives. It's not ALL bad.



(h/t Mish)

What is the targetted 2% inflation rate going to do to your purchasing power?

So why is 2% per year the "targetted rate" of the Central Banks? The short and sweet answer is that it'll quite quickly be eaten away, as the numbers above demonstrate. Fast enough you are encouraged not to hoard your cash in the bank, but will circulate it back out into the economy by "buying stuff" from others working in the economy alongside you. So you all will keep each other busy and in paying jobs. Not so fast that everyone might think "I must dump this money fast because it will be worthless by next year", but at the same time the average person should be able to subconsciously realise that keeping the cash forever is not the best use of it.

I have used euros for the denomination above, because the ECB only has a mandate to achieve 2% (or slightly below) inflation over a medium term horizon. In the Eurozone, they've done a pretty good job of maintaining 1.9% average inflation since the inception of the euro. In the UK in the course of the last few years we have seen CPI inflation anything from below 0% (deflation) to over 3%. This is why we have had an unstable business environment in the UK while economic activity has pretty much remained stable in the core Eurozone economies. This is why more and more countries are looking at the euro and thinking they'd like to be a part of it, most recently Russia.

The euro is the antidote to the natural fiscal problems that are a consequence of Democracy in combination with a locally-controlled paper currency. The politicians in the Eurozone can and will point at the euro as the reason they can no longer use public sector debt to satisfy voter's desires for something-for-nothing-today that will be paid for by someone-else-tomorrow. In the long term, that is a good thing in my opinion. Voters don't understand what they have been asking the politicians to do, it is not in their own best long term interests to continue borrowing from their own future. Look at the world today — we have reached "yesterday's" "tomorrow". In Europe this is being faced up to and dealt with. Elsewhere the attempts are to once again defer today's and yesterday's costs until yet another tomorrow, when it will cost even more still than it would today. Some day, yesterday simply must be paid for by someone today.

How big of a debt mountain has the UK got to climb today?

I thought it might be interesting, since I haven't found it anywhere else so far, to take a quick look at the gap between the UK M0 and M4 monetary aggregates of today. The bank, handily, publishes a series of recent data on these things, going back a couple of years -- not as good as a real long-term picture of what they've been up to, but definitely better than no data at all!

I had to get the "notes and coin" and "bank reserves" numbers and put them back together to get old-school M0, since they split these two numbers out in 2006 for better or for worse (or just to blur the monetary trail, perhaps?). Then I put the M4 numbers behind that reassembled M0 aggregate, on a graph. You can see it for yourself just a little way below here.

The thing I was interested to see visually, the reason I have decided to do this today and put it "out there" for anyone else who might also be interested, is how much of the UK's broad money supply (M4 - cash plus bank credit) is actually just hot air credit (banker promises based on money they don't have) and how much is cash (the stuff we could all take out of the ATMs and spend). The red M4 area towering over the black M0 "cash" monetary base, is the spoils of the Magic Never-Never Tree of Money that we have all collectively borrowed from the future over the last few decades since the Seventies. We've spent this money, and as you can see on the graph it is still trending up, but have yet to pay it off (which would show the gap between red and black contracting). It's money that doesn't really exist yet, but will need to some day, unless much of these current debts are to be defaulted on.

In order to bridge this gap, either the "printing presses" at the BoE are going to have to "run white hot" for some time, leading to the likelihood of an inflationary fire running through the economy, or much of this credit is going to be destroyed through defaults, leading to a deflationary holocaust. Interesting times we live in.


Click the image to see a larger version

On the much-misunderstood Euro

Many people are screaming at the top of their lungs that the European Central Bank (ECB) should print up wheelbarrows full of Euros to give out to desperate Eurozone nations in order to cover their over-spent public budgets. Some of these people are even in the camp who are calling for a "gold standard".

The problem is a misunderstanding of what the ECB and the Euro are. The Euro is a sort of synthetic gold. A "gold-lite".

The "problem" with a gold standard (a fixed, convertible price against gold for any given currency) is that it forces fiscal responsibility on those least able to deal with it: politicians and their electorate!

Politicians love nothing more than to be in power. That is their whole modus operandi summed up in a single sentence. They will do whatever they can to stay in power by winning as many votes as possible -- and the surest way to win a person's vote is to promise to put them on the payroll in some way, or to promise them free money or a tax break. That is all they have to offer you.

The electorate love nothing more than to live at the expense of everyone else. You want to tax other people and give me some of the money? Perhaps you're going to offer me a public sector job or offer my private company public sector contracts? Or perhaps you want to offer me some kind of tax credit to keep me sweet? Perhaps all of the above? Great! Where do I put the cross?

Within a paper money system under the control of the local politicians, such as the US Dollar, the UK Pound, the Yen, etc, anything is politically possible. They will just magic up some extra "money" and add it to their local monetary system, in order to balance the budgets and pay all the bills. They will call it "Quantitative Easing" because this sounds fancy and the man on the street will take no notice since it's obviously very complicated. The currency unit will be devalued by doing this, but hey -- nobody takes any notice of that, right? It's all good. We'll increase the money supply by, what? 30%? 50%? Hell, this year let's go with 100% why not! (It went down OK in 2008 after all, few people seemed to really notice eh?) And to make up for this, people will get, what do you think? Perhaps we go to town and give them 3% pay rises, what do you say? We can make the CPI and RPI numbers say whatever we want, so let's just pick a number and the pay rises will follow it pretty closely.

The difference with the ECB's Euro currency? Like gold, it is not under the direct control of any nation's politicians. You cannot just have as many new Euros as you want, to paper over your inconvenient political realities. Realities like, say, a massively over-extended bank credit boom that has gone pop and tipped into credit deflation. Or perhaps you have 50%+ of your population either sucking on the public welfare teat or working in/for the public sector. Mentioning no names, but there are a good few countries actually trying to cope with both of these example realities right now.

The good news is that, unlike gold, the Euro can be produced at will. Just not at the will of your nation's local politicians, but only by consensus of the ECB. The ECB are interested in one thing, and one thing only: price stability within the Eurozone area. They are only concerned with maintaining very close to 2% inflation, as measured by Eurozone-wide CPI. So far, for the last 12 years or so since the birth of the Euro currency, they have achieved this feat -- yes, even in the last couple of economically-challenging years. They achieve this objective by strictly controlling the Euro money supply. They don't achieve this by printing up more Euros willy-nilly like the Bank of England or the US Federal Reserve. They are able to negotiate temporary liquidity-enhancing programs, which are in line with their aforementioned price-stability objective. It is a breed apart from other currencies.

A classic gold standard carries the problem that it is rigidly restrictive. When a crisis appears, you cannot bend it to your will no matter how much you attempt it. You will just end up having to devalue, which will be a permanent thing since who ever heard of anyone getting away with revaluing their currency UPWARD before now?

A locally-controlled paper fiat currency carries the problem that politicians cannot be trusted to show restraint in the issuance of the currency. They will devalue it any time they get an excuse to do so, and their electorate will provide them with plenty of excuses because they are simple folk who know not what they request.

So that leaves the Euro, in between the two monetary extremes. The externally-enforced responsibility of a gold standard, but with the temporary flexibility of paper currency during times of crisis like today.

The problem today for nations who have opted to join the Eurozone, is that they didn't understand what it was they signed up to. They are going to have to get used to the idea that they will have to devalue themselves internally against the Euro. Everyone's getting a pay cut.

Is gold a bubble about to burst?

In the immortal words of Tommy Cooper: I wanna tell you a story...

From 1971, when President Nixon closed "the gold window" at the US Treasury, the Dollar was no longer exchangeable for anything but another Dollar. It was a piece of paper and a smile, in other words. Prior to this event, you could walk up to the Treasury and they would swap every $35 you presented to them, for 1 ounce of gold.

This was an acceptable deal -- everyone could measure, objectively, what a Dollar in their possession represented in terms of real value. Just about the whole world agreed to fix their currencies to the Dollar, rather than gold. All currencies became paper derivatives of the Dollar. What it could be expected to be exchangeable for in the real world, in terms of goods and services they might require at that time or sometime in the future, was a known measure of value and everyone found it acceptable.

Specifically, the Saudis found it an acceptable trade to supply their oil to the world in exchange for Dollars, at an exchange rate of $1.80/barrel. So, in effect (and reality) what they were prepared to do was to give you 19.44 barrels of oil in exchange for 1 ounce of gold. They simply took the $1.80/barrel that they were paid in exchange, used some of it to pay their bills to the rest of the world, and the remainder (a significant proportion, being desert nomads they were a people of simple needs) they simply used to purchase more gold, building up their signicant store of wealth for future use. Everyone will give you something for some amount of your gold, no matter when you want that thing and whatever happens in the world. They didn't think they could say the same thing about keeping stacks of paper Dollars; they could easily become worthless at some point in time. It wasn't worth that risk to them. They exchanged the paper for gold.

In 1971 this simple and cosy relationship broke down. When Nixon broke the exchange of Dollars for gold at the Treasury, this presented a problem for the Saudis (in particular, but not exclusively) and that is what caused the 70's oil crisis (among other things). The price of oil had to be ramped up, as the exchangeable value of the Dollar sank (in terms of gold, which is what they really wanted for their oil, after 5000 years or so of history demonstrating it was the only money they could put any degree of long term faith in). Very quickly, the oil price in Dollars spiked, keeping up with the newly-free price of gold on the open market.

This is a very short summation of a long and interesting story, but the main point I wanted to bring to your attention at this moment is the historical price relationship of oil and gold (through the exchange medium of the Dollar price). When the Dollar was "as good as gold" at $35/oz, you could get 19.44 barrels of oil for the prevailing price for 1oz of gold. Today the oil price is around $80/barrel, and the price of gold is around $1300-$1400.

19.44 x $80 = $1552.20

This is not very far from the current price for 1oz of physical gold, the kind of gold you can touch rather than the kind of gold you can see on an account statement from some bank or metals exchange. Gold is underpriced still today, and the Dollar is (as are its international paper equivalents) still being debased through Quantitative Easing. The stated intent of governments the world around, is to devalue their currencies to increase their export competitiveness. What are all these people devaluing their currencies against? Not the Dollar, because the US wants to see that devalued against everyone else too!

Unless you think the world is going to stop using this much oil, or the Saudis are going to stop thinking gold is the best kind of money the world has to offer, I think you know what is going to continue to happen to the price of gold when measured in terms of your local currency, wherever you are in the world.

Media cheer "unexpectedly strong growth in the 3rd quarter"

The media are all over the unexpectedly-good Q3 UK GDP growth story, hailing the boost to the value of Sterling on foreign exchange markets, against the Dollar and Euro.

However, the last thing our government wants is a stronger Pound. No, they are pinning their hopes on a private sector export-led recovery, like every other country. Improving exports is diametrically opposed to having a stronger currency -- that's only a good thing when you want to IMPORT more stuff, as in the previous decade (and look where that has taken us...). Ask China, Japan, Germany, Brazil, or any other country whose economy is export-driven, they will tell you that a strengthening currency strangles their economies. That is why the talk is of competitive currency wars lately; everyone wants to have a weaker currency, so they can sell stuff to everybody else.

So... what's going to give? Will we have nominal economic growth going forward, or will we have a strong Pound going forward. It's pretty unlikely we'll have both.

On the bright side, it's a positive to see the UK's credit rating upgraded to AAA with a stable outlook, from AAA with a negative outlook.

Banks and corporations: the bigger they appear, the harder they'll fall

Debt is the problem. Debt is going to destroy anyone and anything that is in its path -- so you'd better try to get out of the way as fast as you can! Given than all of the world's national currencies are debt-based, this has some serious implications that are set to affect every one of us.

I was just reading a post from Mish (here) discussing the nonsensical notion there is a wall of cash "on the sidelines, waiting to enter the stock market". It's an interesting read in it's entirety and I recommend it to you.

However, I thought something in the article was of particular interest and perhaps would make the picture a lot clearer for people, so I figured I should post it up for you to see it. It's an interactive tool for analysing how much cash and debt is being held by the top 50 US corporations. If you are not already quite clear on how bad the debt problems (private as well as public) are, then I think it is worth you taking a couple of minutes to look at this information below.

Once this tool has loaded, simply hover your mouse over the bar (not the title text) for, say, Bank of America, JP Morgan Chase, or Ford Motor. Take a look at the numbers that pop up -- I think you might be more than a little surprised at what they tell you about the health of these purportedly healthy and powerful corporations. It should tell you all you need to know about the precarious state of the global economy in general, engorged on wholely unpayable debts that continue to get only worse as time passes. Something has to happen to change this, either some radical change of path that is nowhere visible on the horizon so far, or something violently goes BANG sometime and very likely sinks the whole global economy with it, in a massive chain reaction of broken promises and debt defaults. Who is looking after your "money" at the moment? Are they going to give it back to you when you need it? Will it still be worth anything?

Still debasing our coins even now!

First I am going to provide a little potted history of British coinage, since most people have no idea of this track record and it is instructive and I think you will agree worth your five minutes to suck it up. If you wish to skip this back story and head straight to the meat of what is new for you, skip down BELOW.

Back in the day, that is up until 1919, our "small change" coins in the UK were made from Sterling silver -- 92.5% silver with 7.5% copper to make then tougher, so they last longer in circulation than pure silver. This was when money was still a real, tangible store of value, rather than just medium of exchange tokens; worth whatever the politicians wanted to make them worth, as is the case today.

A quick background for the uninitiated to pre-decimal money in the UK, a shilling was the equivalent of today's 5p, and in fact during the 1970's these two different coins from the decimal and pre-decimal systems were interchangable with each other at this official rate of exchange. A florin (two shillings) was interchangable with a 10p coin, and so on through the various denominations which were all proportionate multiples/fractions of the standard weight of a shilling. An old-school Pound (a gold sovereign coin) was equivalent to 20 shillings.

If you were to take a quick look on eBay you will readily find plenty of people buying and selling "pre 1920" silver coins, trading with each other for the silver bullion content by weight. Roughly speaking, at the moment, pre-1920 shillings will change hands for something upwards of £2 per shilling, based around the silver spot market price. As you will immediately see, this is somewhat more than the 5p face value they used to change hands for, which reflects the massive amount of inflation that has taken place over the time period.

Between 1920 and 1946, the coins were instead minted from an alloy containing only 50% silver. This was how a nearly 50% devaluation of the Pound was effected by politicians back in the day. In fact, debasing currency in this way by reducing the silver content goes way back, to well before the Romans; it's really nothing new for politicians to use the expedient of devaluing a nations currency in order to cover up their past economic mismanagement. The reason it was necessary to devalue the Pound in 1920? World War I had cleaned us out and this was the only way we could ever repay our debts. Everyone in the country took an almost 50% real-terms pay cut overnight, because the currency they were being paid in was worth just over half what it had been until that time. This was the beginning of the end of the mighty British Empire, the first empire that the sun never set on. The first truly global dominant power.

From 1947, UK coins were changed to 0% silver content - they were entirely made from an alloy of copper and nickel, called cupronickel. This was necessary as a result of the massive public spending during World War II, which essentially left our once-powerful nation completely bankrupt. The only way we could pay our bills to foreign creditors, was to do it with money that was virtually worthless like this. It was a default on our debts, through the political expedient of making the money intrinsicly worth almost nothing. The creditors still got piles of lovely shiney shillings and crowns, but they no longer contained any silver. All of which goes to prove the sage advice in the old adage never a borrower, or lender, be!


Similar to the "pre 1920" coins, you will find many people on eBay trading the "pre 1947" coins with each other, again based on the weight at 50% silver (no value is attributed to the remainder of metal making up the alloy). As you might expect, they change hands for about half the price of the "pre 1920" coins, because they have about half the silver content. You will not be too surprised, I'm sure, to know there is no such market for "post 1947" cupronickel coins.

Anyway, the reason (finally! :-) ) for this post is that today I read with interest the Royal Mint will soon be even removing the copper from our wonderful British coins, making our coins instead from steel covered in nickel.

How wonderful -- our currency is no longer as good as copper, let alone as good as gold. I wonder how many more years before they have to replace the steel with something a little cheaper...

You can read for yourself the BBC article on this subject, if you like. Here

The Telegraph are again quoting Mervyn King, Bank or England Governor, today. here He gave the last decade its moniker of "NICE", and now he has allocated a new one for this decade -- "SOBER". (I won't expand what these stand for, if you're interested it's all in the linked article.)

I figure on this the day that George Osborne will unveil later his "draconian budget cuts", I ought to step up and remind everyone that these cuts that will be announced, will not cut the national debt. No, that will continue to increase. The cuts will not even be sufficient to get rid of the budget deficit, we will still be spending more on public services expenditure each year than the government will collect in taxes.

The missing cash to pay the bills? Well, we'll just have to continue to print the missing money to pay those bills won't we (aka "Quantitative Easing"). I wonder who, if anyone, will buy all the UK government gilt bonds that will need to be issued to buy this money from the Bank of England when it is printed up? I wonder if buyers will show up in sufficient quantity that prices will remain bid up to the sky, and interest rates will accordingly remain this ridiculously low.

The most-read post on this blog -- still picked up several times a week via Google searches, mostly by people at financial institutions going on their IP addresses -- is one referring to Stuart Cheek of BGC Partners, back in May 2009 (here). The question remains unanswered, what will happen to the UK economy if we were to lose our AAA credit rating? But I wonder how much longer can pass before we find out... George better really take the UK's breath away with the cuts later today, or UK gilts and the Pound will likely take a beating from international investors.

Still a modern-day Glass-Steagall is recommended, and still it isn't happening

Today I read via the BBC that another think tank, the New Economics Foundation, have analysed the banking system once more and they still find it is in serious peril, even after all the lovely lolly, in the form of the various bail-outs and back-stops that were handed out like sweets to anyone [with a banking license] who wanted them, using your money. And your kids' money that will be recovered from them in the years to come as the longer-dated government bonds come to maturity. After all, never forget it's all our money the government spends; it doesn't have any of its own. Every year there is a goverment budget deficit, that's another future year of higher taxes and lower public service spending that has been extorted from you, regardless of whether you consent to it - they can spend all they want, but one way or another it all eventually has to be repaid, by taxpayers, to the people who lent it.

Once again, the only sustainable cure proposed is the equivalent of a modern-day Glass-Steagall act -- as per the laws instituted after the Great Depression, the last time a credit crisis of this kind occurred. Now, it's a shame Mervyn King [the governor of the Bank of England] was not actually running the country's finances all these years as you might think he has been, because my first post mentioning that a new Glass-Steagall was the necessary cure to prevent it happening all over again, back on the 21st October 2009 (here), recorded Mervyn was the first person from the halls of UK financial power to appear in the mainstream media mentioning this was the solution to the problems that had occurred.

Still, all this time later, it has not been put in place and there is no indication that it will be agreed to. It HAS been discussed, but is resisted by the bankers and their lobbies at parliament because it will destroy their profit-making machine. We are heading straight into further credit strain, and nothing has been done to avert disaster.

Click here to read the article about the New Economics Foundation findings, on the BBC website.

Should rates stay where they are for an extended period?

The Telegraph today have an article putting across the view of the Ernst & Young ITEM club, who believe that the Bank of England should keep the base interest rate at the current low level of 0.5% for years to come -- until 2014 in fact. This view is not shared by the government's new Office for Budget Responsibility (OBR), who forecast a similar level of economic growth over that period but they foresee the base interest rate going up steadily to around 3% over that time. Here.

Who are the ITEM club? Well, they're a bunch of economic thinkers paid by big business to come up with forecasts about what the future economic policies of the government should look like. They share the same model of the economy as used by the Treasury and also the OBR. So, you would think that all three parties ought to end up singing from a very similar song sheet at the end of the deliberations. But they don't. Could this be because ITEM's forecasts are spun in favour of the interests of big business, rather than the wider economy, do you think?

It seems to me that there is a significant body whose views have not been represented in the Telegraph article: the global bond market. These are the parties that will be buying (or not) the government's bonds at the paltry rates ITEM would offer. My feeling, and I am quite sure it is also the feeling of the Treasury and the OBR because they would never suggest raising rates if they didn't feel it was strictly necessary, is that the bond market will not buy our bonds at these rates for much longer. They are simply not being compensated for the risk they are taking, especially with the inflation rate in the UK unexpectedly being stubbornly high. If the bond market participants steer clear of our government bonds, we can't fill the budget deficit any more. Not unless Quantitative Easing (printing money to buy our own bonds from ourselves) is resumed in earnest, but at this point in time this approach would likely have dire consequences for confidence in the Pound, and therefore its exchange value. We would then be looking at a much worse problem than simply trying to keep the base interest rate down for political gain at home.

So much for fiscal austerity, eh?

If you believe the media, the Con-Dem coalition government are deadly serious about cutting the budget deficit, and will quickly make serious in-roads on the national debt too. Apparently, they're so serious that they are going to kill the economy with their rabid devastation of the public budgets.

However, according to National Statistics (via the BBC), I read today that last month our beloved government ran a deficit of £14.5bn, which they had to borrow from international investors and which thereby increased the national debt by this amount. This is a VERY large amount of money, only just short of that which was needing to be borrowed a year earlier when we were still in crisis and money was being sloshed about by New Labour like it was sweetie-water.

Anyone who believes the line that (a) the Con-Dems have already taken a hatchet to the economy with their "cuts", and (b) that thinks the long term results would have been better if only they would just spend even MORE money that they don't have, is just plain crazy -- but would you care to buy London Bridge from me for a very large sum of money perhaps..?

(A) the "cuts" so far are just cuts to Labour's planned increases, as far as I can see

(B) if you think taking on more debt will be the way out of a massive debt problem, then you really should seek professional assistance immediately because you will quickly find yourself bankrupt. The laws of mathematics are not different for governments than they are for individuals, the numbers are just bigger. There is, however, one slight difference between individuals and the government these days -- you can't print up the money you need to pay your debts, but they can. They call it "quantitative easing", but really it's just a counterfeiting operation. The more money they create, the less each of the Pounds in circulation is worth. This is inflation. This is how the debts will be taken care of, eventually. This is how governments believe "deficits don't matter". This is why "the rich" don't have a lot of cash, but they do have a lot of assets bought with debt -- they know that cash will only go down in value over the long term, and so will the real cost of repaying debts.

However, there are good times to get rich by taking on debts, and there are good times to go broke from doing the same thing. Before we get to "eventually", where all currently heavy debt loads then seem trivial, we have to survive through a period of serious credit destruction, which will be a highly deflationary force. So tread carefully.

http://www.bbc.co.uk/news/business-10696010

UK government credit rating downgrade is still a serious concern

In May 2009 I put up a post where I wholeheartedly agreed with Stuart Cheek, head of UK Government bonds at BGC Partners, that the UK's credit rating being downgraded to anything but AAA would be a very, very big deal. Here

At the time, the rating agency S&P were saying that the UK government had too much debt, but even more importantly, they were running too big of a deficit so the debt was growing much too quickly. They said that if the incoming government (this was way before the UK general election of course) were not able to demonstrate they were going to very quickly deal with and reduce the deficit and also the outstanding debt level, then the credit rating would be downgraded.

Since then of course we have elected the coalition Con-Dem government. There has been much noise and fanfare about the "cuts" they are imposing on the public sector finances. My own view is that actually all they are proposing to "cut" so far is the size of the spending increases -- I don't think you will find on close inspection that the public spending bottom line is going to be smaller at all. Most certainly, it is not going to be MEANINGFULLY smaller, such that there will be not only no deficit (some hope!) but actually some kind of dent being made into the outstanding national debt. We will still be running a significant budget deficit (adding to the national debt), no matter how savagely the Con-Dem government take the axe to the public budgets. Labour have simply run the finances into the ground and there is no way in hell we can ever pay off these levels of debt, with honest money.

No, I still see us running a large budget deficit, quantitatively easing more Pounds into the financial system to help paper over the problem, and receiving a credit rating downgrade to something below AAA. This will still be a massive problem, as many investment funds must hold securities that are only of AAA credit quality. Those investment funds will have no choice but to sell off the non-AAA government bonds if this downgrade does indeed come to pass, and more supply = lower prices. When it comes to bonds, lower price = higher yield. Higher yield is just another way to say higher interest rate.

It's instructive to also today see the Chinese already having downgraded our credit rating, along with almost all of the developed world. (See the link to that article on the Facebook fan page.)

It seems today that S&P wish to reiterate what they said a year ago, according to an article in the Telegraph (link follows). Perhaps it is a simple reminder that the government needs to be extremely serious indeed about dealing with the out of control public sector budget. Perhaps it is a matter of maintaining their own credibility, in the face of the Chinese rating agency now already having taken this action.

http://www.telegraph.co.uk/finance/economics/7886242/UK-dealt-rating-blow-as-economic-growth-fears-mount.html

Recently I was asked by friends what I thought the economic future might be like

They were asking of course because they were concerned about their personal financial well-being, and they are all currently trying to figure what is the best thing to do for their specific circumstances. They have varying current circumstances and short/long term desires, as you would expect. They were all smart people, and they all have their own opinions of how things are. I guess they asked me for the sake of conversation, perhaps they already knew from past experience that I would tell them something they probably won't like and maybe they feel it wouldn't do them so much harm to hear an alternative opinion they probably won't find in the newspaper or on TV.

My view of the concensus that appeared to form around the table was that they saw we have experienced a V shaped recovery to date, but there appeared to be a good chance of it turning into a W shaped "double dip recession". So far, you can get this from TV and the papers of course.

My own view that I expressed was we had not had a real recovery since 2008, nothing has been fixed but money has been printed by governments to buy up bad debts and paper over the problems, transferring the problem debts onto government balance sheets. This has resulted in a "recovery" to some extent when measured in nominal asset valuation terms, but the reality is that monetary inflation has taken place to cause those nominal asset price recoveries around the world. The REAL, inflation-adjusted values (try pricing items in ounces of gold, like we did in the not-so-very-distant past) of those assets is actually still far down from the 2008 peak. So, to my mind, any talk of a double-dip recession is pointless -- this is still the same dip, but I agree that things are set to get worse again from here. That's not a description of a V or a W shape. That's a lightning bolt shape I am talking about. Perhaps a downward slanting reversed Z, if you must assign it a letter(?). Going forward, unfortunately, the way I see it the problem assets are still problematic now they are held by the governments, they have not been "fixed" somehow. If there are more problems that need dealing with any time soon, the governments have all already fired their bullets dealing with the last round. There is no way we can rely on them to take on the problem assets again, if a problem materialised in the next few years. Unfortunately, there are a rash of financial problems set to explode over the course of the next few years, so times are only going to get more interesting, unfortunately.

In a piece of rather fortunate timing for me, today I came across an article on FinancialSense.com, by Krassimir Petrov. In it he articulates, much better than I have here, roughly how I too envisage things unfolding. He has looked outside of the standard alphabet, and found what he was looking for within the Greek alphabet -- the letter is called "eta", and it looks like this: ɥ

Here is the article, if you are interested to find out more. http://www.financialsense.com/contributors/krassimir-petrov/the-eta-recovery

"That is the only thing that stands between us and Zimbabwe, I mean, it really is as simple as that"

The title of this post is a quote from the very end of this interview with Edmund Conway, economics editor at The Telegraph. I have chosen that quote as the title of this post because I have been saying as much for some time, but at this point in time it is now painfully true and perilously close to becoming reality rather than concern.

If market participants, and people living and operating within the UK economy generally, begin to realise this perilous weakness in our currency and economy en-masse and confidence begins to vapourise, then things could get very, very ugly, very, very quickly. If people start to seriously think inflation is taking off, they will rush to get rid of Pounds to exchange them for something, anything, that they perceive to be a better store of value. This is exactly what happened in Zimbabwe, Weimar Germany, Argentina, Russia, Brazil, and all those many other places that have experienced economic collapse and hyperinflation over the course of history. You will read people saying that deflation is the overriding concern and hyperinflation is impossible as a result. However, hyperinflations always have happened within weak economic environments, when confidence disappears; to say that they cannot happen in a weak and deflationary economic environment is just nonsense — that is precisely when they do happen.

We are on the very edge of the abyss right now, with inflation threatening to seriously gain traction and take off over the coming years, while the Bank of England is stuck in a political box attempting to fight deflationary forces that demand interest rates be kept artificially low. The inflation we are seeing is due to the globally-set prices of commodities that form the basis of every economy, combined with weak confidence in the Pound internationally that has already significantly depressed its value. Meanwhile, the deflationary forces being fought are domestic, due to weak internal demand in our local economy and a lack of external demand for export products, since we do not manufacture very much and what we do is not in great demand elsewhere in the world.

Caveat custodis.

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

I have 3 issues with the article the Telegraph put out this evening by the same title as this post (link below).

1) Obama needs to get monetary policy the hell away from Larry Summers:

Mr Summers said it would be "pennywise and pound foolish" to skimp just as the kindling wood of recovery starts to catch fire.

Mr Summers is in thrall to the banks, and he is just saying what is good for the banks so they will continue to look after him, not saying what is good for the remainder of the US. I don't care who you are, a deadbeat family or the "richest nation on earth" -- if your problem is you owe too much money, stop borrowing and pay off that debt as quickly as you can, any way you can. That is the only rational answer, and it is the complete opposite of what Summers is proposing.

2) Contrary to what Tim Congdon says in this article, Bernanke totally does look at the quantity of money in the US financial system. It is just preposterous to seriously suggest that the Fed do not take any notice of monetary aggregates. He stopped the Fed reporting M3 because he didn't want to continue drawing high-profile attention to the message the M3 numbers were about to tell and continue to tell to this day. The M3 numbers have been telling everyone the US (and therefore, by extention the rest of the world since the US dollar is the overwhelmingly dominant world reserve currency) we are heading for deflation as a result of widespread credit destruction, and they continue to do so. If the Fed are not looking at the aggregates at all, why didn't they stop publishing all of them? Why just M3? I'll tell you why, because it's the broadest measure of money (cash + credit) and the likes of M1 and M2 are much narrower because they do not include credit, only cash and near-cash items like money market mutual funds, bonds, and certificates of deposit. The problem we were headed for was a massive round of debt defaults, such as residential and commercial property mortgages for example. That is why M3 ceased to be reported, nothing to do with Bernanke not wanting to see this number personally.

3) Paul Ashworth at Capital Economics surprised me with his ignorance at the end of this article when he stated:

Mr Ashworth warned against a mechanical interpretation of money supply figures. "You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets," he said.

It seems to me that if someone takes money out of their account and buys stocks, property or other assets, then they buy them from someone else. At the end of the chain of transations what will happen is that someone will take the cash and put it in their account — so how can that alter M3? All that happened is the "money" moved from one party's account to another party's account. I am totally amazed that someone at a respected outfit like Capital Economics would publicly say something as basic and indisputably wrong as that. What hope is there for the rest of the financial world if even gurus like that don't understand what they're talking about at such a rudimentary level..?

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

Spain enters the debt circus arena of mainstream media

Today Spain approved its own €15bn "austerity plan", in a bid to avoid the debt market disaster that Greece feel victim to. This is a much smarter plan, if you ask me. But don't get me wrong, it won't be enough to keep the wolfpack away. But they will probably make off with a much smaller chunk of Spain's flesh than they got from Greece.

Of course, the Greeks have already greased the path for Spain, Portugal, Italy, Ireland, France, and everyone else in the eurozone, so it's a much easier decision now to bite the bullet quickly and make a start on "dealing with" those unassailable national debts.

http://news.bbc.co.uk/1/hi/business/10134734.stm

Dubai reach "agreement in principle" on bank debt. Model for the rest of the world's debt restructuring?

The BBC article I just read on this topic is short on detail (link is at the end of this post). For example:

Dubai World, the state-owned investment vehicle, says it has reached an agreement "in principle" with most of its bank lenders to restructure debt worth $23.5bn (£16.4bn). It added it would be left with debts of $14.4bn after the restructuring.

The alert among you might be asking the same question that I am at this point: What happened to the other (approx 40%) $8.9bn then? Is this a partial default, or what?

Later in the article we have something that I for one find *very* interesting:

The terms of the restructuring, include converting $8.9bn of government debt into equity.

So it seems like they are looking to convert almost half of their debt commitments into equity commitments. On the little information we have available here, and the reality that surrounds us in the world right now, that looks to me like a pretty sweet deal for all concerned!

With the world's debt problems as deep they are, I am sure that stopping the bleeding of paying interest on those debts is the answer to the conundrum. For example in the UK we are paying £30bn+ per year just on the interest of our national debt. This is ludicrous! We have politicians arguing over the ability to afford a few £billion in public sector budget cuts, and meanwhile none of them is talking about the £30bn+ that is, literally, wasted on debt interest each year. That is about the same size as the budget for law&order and safety (police, firefighters, courts, etc). This is just madness!

We (and the rest of the world) will *never* be able to repay these debts in full [with honest money]. The simplest way to achieve that goal of ceasing the interest payments (short of simply defaulting, or hyperinflating the currency into oblivion) seems like it would be to have the bondholders agree to convert the debts into equity, like the holders of this Dubai debt are - so they will no longer receive the steady interest payments on the debts for the duration of the loan period, but they will instead receive their share of the distributed profits from whatever entity their equity is granted in, indefinitely.

This seems to me like the holy grail for both the debtors (who will otherwise never escape their debts honestly) and the creditors (who will never see all of their money back, in real terms) alike.

http://news.bbc.co.uk/1/hi/business/10129958.stm

Whatever happened to the Iceland financial crisis?

It was all over the news (including here!) not so long ago. Gordon Brown protrayed it as an act of terrorism in order to freeze the Icelandic assets that remained within UK jurisdiction. People there were storming the parliament in protest (not so dissimilarly to the people in Greece protesting now actually).

However, you don't hear anything about it now. Life is slowly returning to normal there, based on the little that we do hear. (Aside from that small matter of the inconvenient volcano of course.)

The thing that happened is the people of Iceland rose up and said NO to the bankers and their bailouts, so the Icelandic government has defaulted on its external liabilities. And that was pretty much the end of the matter! Before it happened, you would be told that this defaulting on obligations spelled total and final, catastrophic economic ruination for the entire country, and it should be avoided by any means possible.

Amazing how these financial disasters have a habit of blowing over and it turns out life does continue after all. Perhaps we should stop worrying so much about all those unpayable national debts we've racked up in the UK after all. Perhaps deficits really don't matter... we can just blow a raspberry at the creditors, like the Icelanders, Argentinians, Russians, and all the others before us.

Oh Mandy! Need I say more...

The problem with democracy

The problem with democracy, is that most people's vote is for sale as long as they will get some of the free bread at the circus you propose to put on today at tomorrow's expense. Political parties are forced into a race to buy your vote, with more and more outrageously unrealistic and unaffordable promises.

In Greece today, three people have died because mobs of angry protestors stepped far over the line separating peaceful protest from barbarity. They are angry that the supply of free bread, which they have by now come to accept as a right, has run out and the bill for many years worth of bread has been presented for imminent payment. So they are throwing around the toys in their pram and have brought the entire country to a standstill. It would appear some of those toys might have been Molotov cocktails... what wonderful, rational beings they are.

This is what redistributive economic policies bring about, eventually. Nothing is free, everything must be paid for at some point in time -- and the longer you put off paying for it, the more painfully expensive it will be. Think about that carefully tomorrow, when you're in the voting booths across the UK.

http://news.bbc.co.uk/1/hi/world/europe/8661385.stm

Orwell's Ministry of Truth alive and well in Brussels

In George Orwell's classic novel 1984, the government's Ministry of Truth made a living out of rewriting facts to suit the Party's agenda.

Today we can clearly see that the Ministry of Truth is very much alive and well, and its central office is in Brussels. Government's getting bad scores at school? Well, we'll just have to change the scoring system then won't we!

http://news.bbc.co.uk/1/hi/business/10097107.stm

ECB are effectively going to monetise Greek debt

According to Bloomberg yesterday, the European Central Bank (ECB) have stated they will accept Greek government bonds within their asset swap program, regardless of the fact that the credit rating on those assets does not meet the stated requirements for the program. http://www.bloomberg.com/apps/news?pid=20602007&sid=aTAygysllnxM

On 4th March 2010 I said "I smell a back door bailout of Greece here". To my mind, the Bloomberg story above appears to confirm this theory. In which case, the ECB just lost itself the reputation for fiscal prudence it had enjoyed up until now, and the euro will not be rebounding against the Dollar any time soon.

Greek interest rate update

Just a note to record progress on Greek interest rates, since at the end of last week I noted they were having to pay over 10% on their 2 year bonds, and I was asking what will happen this week -- would they be paying 12% on Monday, or even not being able to sell them at any price by the end of the week? Here

Today the 2 year bond rate went over 17% according to Bloomberg (and in fact went on after the Bloomberg article to top 18%). So I was too conservative so far with the suggestion they might be paying 12% on Monday -- it's Tuesday, and it did come to pass and worse besides. I sincerely hope my other question, whether they might find they cannot sell their bonds at any price by the end of this week, doesn't come back in the affirmative...

Again, are you a better credit risk than the Greek government? Or for that matter, is even your government a much better credit risk than them?

Let's be careful out there.

Greece gives up hope of bond markets regaining confidence in them

And they reluctantly make the call to take up the IMF/EU bail-out offer.

It remains to be seen what the exact terms of the agreement are, but given their reluctance to call on the offer you can imagine they are far from ideal from the Greek point of view.

It'll be interesting to know now whether the EU part of the bargain is really on offer, or if that was all said just in the hope markets would believe the bazooka in their pocket was loaded, but it isn't. I guess we get to find out imminently...

It's going to cost us all across Europe an awful lot of money (yes, including the UK) if this bail-out does indeed go ahead. Anyone got a hat we can pass around? It better be a big and sturdy one, because it'll be needed more than once and it'll need to be able to cope with the demands of bigger countries than Greece.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7624152/Greece-triggers-EU-IMF-rescue-loans.html

Who's right over pound, Ken Clarke or Goldman Sachs?

The Telegraph have an article up by the same title as this post. Here

Earlier this week Gordon Brown said he was going to follow the US Securities Exchange Commission (SEC) in calling the legal dogs on Goldman Sachs over perceived fraudulent activities.

Yesterday Goldman Sachs put out a recommendation to their clients that they should buy the Pound because it is heading up from here. (It should be noted here that Goldman are not exactly unknown for recommending one thing to their clients, and actually putting on the opposite trade themselves -- and coming out with a lot of money. See aforementioned allegations of fraudulent activity.)

Now, to me the above two items feel like an awfully big coincidence in the same week. Perhaps you agree? Do you think, just maybe, if Goldman were to agree to help prop up the Pound (and by extention the sitting UK government, just ahead of an election...) then some dogs might get put back on a leash?

Ken Clarke of the Conservatives, a man who has been around the block a few times, thinks the Pound is very precariously balanced and that a hung parliament outcome from the election will sink it, quite possibly bringing on a call to the IMF of Britain's very own, not unlike Greece's.

Given that I have a number of posts up here over the last couple of months calling for a fall in the Pound on chart technical grounds, and that our national debts are accellerating at an unsustainable (but to-be-sustained) rate. I have to agree with the right honourable Mr Clarke.

Buckle up.

Greece now paying over 10% for 2 year bonds

If you have a mortgage, you too ought to be concerned about the future direction of interest rates by now. Again I say, do you think you are a better credit risk than the Greek government?

Today I am reading that they are being forced to pay over 10% interest for 2 year loans (here). You, as just a regular person in the UK, can still fix your mortgage at about half that level for 5 years at the moment. It was only yesterday (here) that I was concerned at reading they were having to pay "only" 8%+ for 10 year loans. Will it be 12%+ on Monday? Will it be "not at any price" by the end of next week..?

Debt problems are starting to get out of control now. With the bond market beginning to seriously looking around at other countries with big deficits at this point, you should be aware that nobody has a faster growing budget deficit than us in the UK. Gordon Brown and Alastair Darling don't think it matters, but do you think the bond market agrees with them? The bond market is going to be the one deciding whether the debt is bought from the UK government at the end of the day, and I am confident they are increasingly going to say No Way Jose. There simply isn't enough money in the world for everyone's debt requirements to be satisfied at this point, only those with the very best credit rating and the most moderate deficits are going to get the cash they need going forward. Everybody else will just have to go and whistle.

If the bond market dries up for the UK, the alternatives are either that truly massive budget cuts must be implemented immediately (which will be politically unacceptable, so you can count this out already), or the Bank of England will restart the printing presses to buy the bonds (which will tank the value of the Pound again in the process). I think you know which of these outcomes is going to be the most likely.

There is no pain-free solution to this issue. Thirteen years of profligate social spending by the Labour government on the nation's creditcard has to be repaid now somehow, once again. When are the UK population going to understand that Labour = spending money the nation doesn't have, and eventual bankruptcy?

Update on exponential money supply growth

In a post a few days ago, I showed what I consider to be an exponential rate of growth in the UK M4 money supply ("money" defined as "cash and credit").

Today a friend who actually knows what they are talking about kindly directed me to the official M4 money stock data (many thanks ;-) ). This statistic is called "AUYM" by the Bank of England and they publish it monthly. This data is available for as far back as the end of the third quarter 1998, if you can be bothered to piece it together from their old reports.

Apparently a Mr G. Brown changed the methodolgy of how this statistic is compiled around that time (can't think why...) so it is impossible to meaningfully go back any further than this. Thanks again to you also then, Gordon - nothing quite like a nice spot of goalpost-moving to prevent people tracking reality is there? :-\

Anyway, this all means that I can now present an updated graph of UK M4 (broad money) growth with offical data in it, albeit over a shorter duration than previously used. The bad news is it turned out the growth was actually quite a lot larger than I had previously computed from the combination of National Statistics and Bank of England data. Bummer! :-(

Since this data only covers about ten years or so, I have also accordingly reduced the exponential trend line projection to 10 years rather than 25 previously. You can see that at the current rate of accelleration your money will be worth less than half what it is now in ten years time, unless something changes lickety-split. To spell it out, this is how your beloved government and the banks between them take the bulk of your wealth from you, without you even realising it is happening.



As before, I am entirely happy to provide you with a copy of the Excel file containing this data and the graph, here, in case you want to play around with it.

Precarious economic times

German voters are not keen to pay for Greece's past excesses. So they must be convinced immediately that not doing so could be much, much worse for them.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7615882/IMF-and-Bundesbank-fear-contagion-from-Greece-as-bond-spreads-soar-to-fresh-records.html

These are approximately the same circumstances that triggered the fall into Depression in the early 30's, after the 1929 stock market crash gave everyone the jitters. The good news is we have a different monetary system and it is possible our leaders will find a way to avoid the same circumstances (via monetary inflation, which was almost impossible in the 30's due to the Gold Standard), but the danger is that they get it "a bit too right" and inflation rages out of control.

Let's be careful out there.

The Greek government is having to pay 8.3% interest on its 10 year bond issues currently. Do you have a mortgage? Do you think you are a better credit risk than the Greek government? Can you afford to pay over 8% interest?

An alternative point of view on corporal punishment and the American justice system, by someone who has seen it from the other side of the bars

http://www.scribd.com/doc/29978086/From-the-Hole-14-a-Nations-Humanity-Cannot-Be-Judged-by-the-Death-Penalty-4-11-10

Exponential growth in UK M4 broad money

This is "inflation", not the rise in prices which follows it as you are made to believe.

I tried and failed to locate a long term historical data series of UK M4 (broad money) stock. The BoE does publish a historical series of quarterly Year-over-Year percentage rate of change data in their inflation report though, so I decided in the absence of anything more accurate I would have to take a recent baseline value for M4 money stock (2009Q4, highlighted in bold in the worksheet) from National Statistics and then compute the preceding 25 years worth of quarters backwards from that, using the BoE's quarterly Y-o-Y rate of change number to get the (rough) back data set.

Then I asked Excel to graph those numbers, and finally added an exponent trendline to project forward the data 25 years (the same period as I now have, rough, computed data for). To anticipate the question "why would you use an exponential trend line?", please observe how the trend line extremely closely matches the path of the blue data set line on the graph.



Bear in mind the Bank of England was set up in 1694, so it took 291 years to go from approximately nothing to the value you see at the start of this data, in 1985. Mentally project the line back on this basis and you can see the trajectory of the exponential curve would very likely pretty much match the data here too. You might consider it to be further confirmation that a gold sovereign coin originally was valued at £1, but today it will cost you upwards of £180 (and counting) to buy one.

I do have to concede that the data is not 100% accurate, but this is as close as I have been able to get to so far. If you happen to have the accurate historical set of M4 for a long time period such as this, please get in touch with me because I would appreciate it.

In the absence of a meaningful change in the monetary system, you can see why I might prefer to move any available capital from £'s into any asset class that benefits from inflation rather than being eroded by it. Bonds would qualify for the diametrically opposed category, but watch as the government attempts to forcibly corral as much money as possible into bonds, perhaps by stipulating that pension savings must be at least partially invested in bonds ("for your own safety" :-\ ). This is because any reduction in the demand for bonds will force up interest rates, which is incompatible with their idea to spend money they don't have on nice social policies through massive budget deficits, and also keeping property prices inflated which is good for voter morale as well as helping keep the wheels on the spendthrift consumer economy we enjoy these days.

Let's hope that someone can do something meaningful to change the trajectory of that data, and stop us buying rubbish from the Chinese that we don't need, with money they lend us. But in the meantime, caveat emptor.



You can have a copy of this Excel file if you think it would be useful, from here.

Looks to me like the Greece "solution" hasn't gone very well

http://news.bbc.co.uk/1/hi/business/8622835.stm

Previously I said I saw there being a temporary calm, but the situation would be back to unstable again before a few months. I should have said a few days I guess.

Why do I bang on, and on, and on about fiat money and Fractional Reserve Banking?

When the global economy collapsed in 2008, governments rescued the banks, the very ones responsible for the collapse. This is because without the banks’ debt-based paper money, governments could not spend the vast amounts they do not really have.

Politicians seek power and bankers seek profit and their collusion is responsible for the present crisis. Do not be surprised at the current state of affairs, the motives of the participants are clear and so are the consequences.

These are exceptional times and while we are helpless to prevent what is about to happen, so, too, are bankers and politicians. They have brought this state of affairs upon themselves and for this we should be grateful—for without their demise we would be enslaved forever.

Read much more at http://www.marketoracle.co.uk/Article18608.html

The great big dirty secret of financial innovation

What caused the Crisis?

Derivatives.

You’ve probably heard this term before, or have some vague understanding of what it means. But the actual reality of derivatives and what they mean for the financial markets remains a topic no one in the mainstream media (or the regulators for that matter) wants to touch.

Why?

The above is snipped from this article. Read it to find out the answer to this question, plus what you can realistically do about it to protect yourself to some extent.

Beginning of the end for China's economic miracle?

Is that a bell I hear? A bell for the start of the End Game perhaps?

Can you say "blow-off top"?

http://www.telegraph.co.uk/finance/china-business/7588579/Chinese-property-prices-jump-at-a-record-pace.html

Even an End Game can run for years of course, but let's see.

IMF publishes the New World Order data

Today, via the MarketTicker blog, I saw the IMF revised SDR (Special Drawing Rights) allocation data. This tells us ultimately how much say in world events each participating country wields. Where is your country on this list?



Download the Excel file if you want to compare the old and new data. (First sheet in the book contains a copy of the data from the IMF release itself, which is augmented with some computed %age columns, and the second and third sheets are added by yours truly to sort and show previous/current world ranking based on that data in sheet 1.)

Just for once, saying Go Green has real economic merit

http://lastditch.typepad.com/lastditch/2010/04/map-of-the-day-awesome-visualization-of-global-debt-levels.html

Interesting and surprising to see the USA is (roughly) it's correct size.

Entirely unsurprising to see the UK is so massively out of proportion to its real place in the world.

The Mogambo Guru on how Democrats/Labour see to it that the rich get richer through the wonder of fraudulent money

"Apparently, though, Senator Baucus is kind of stupid, as he does not understand that when a government deficit-spends, it does so by borrowing the money, but since the poor don’t have any money to loan to the government, the rich end up borrowing the money to loan to the government, whereupon the rich, over time, get all their money back, plus interest, making them richer, while, unfortunately, the poor get poorer because prices have risen."

He has much more to say, and as is customary for him he may or may not make you laugh, or cry, along the way.

http://dailyreckoning.com/stable-money-supply-the-real-way-to-help-the-poor

On exactly why Labour have killed our economy. Again.

Just one snippet from this linked blog post article tells you already all you need to know: "With government spending going over 50% of GDP, and approaching 52%, with more people taking from the pot than people being forced to fill the pot, then it soon becomes clear why we are on a desperate socialist road to nowhere."

But why not go and read the whole thing, it's not a long post.

http://angloaustria.blogspot.com/2010/04/up-in-flames.html

Greece situation

Germany has ensured that the IMF are involved in the bail-out plans for Greece (a) so that it will share the burden with non-European countries, and (b) so that its interest rate is lower than that required from the free market for purchase of Greek bonds, but it is also higher than the IMF-set rate which makes it almost-acceptable to its domestic voters and perhaps even not quite unconstitutional since some other party was offering assistance at a lower rate so their offer must therefore be anything but a free ride to the Greeks.

The hope is that this offer of 5% or so rates for Greek bonds will be enough to strong-arm the free market rate down into that vicinity and this will be bearable for the Greeks so the EU/IMF bail-out will not need to be called upon after all.

Me? I think there will be a brief period of calm as this is digested, in fact today I can see the Euro is up strongly against the Dollar. I don't see this lasting more than a few months at best before the fundamental insolvency of Greece (as many other places) comes back to the forefront though, but what would I know?

Investors seek 'traditional art' as prices rise

There were increases in prices reported in the silver and jewellery sectors, which have often been seen as havens for investments. Much of this was the result of the high scrappage values of precious metals, the survey said.

http://news.bbc.co.uk/1/hi/business/8610013.stm

As predicted previously, the IMF pay Athens a visit

http://news.bbc.co.uk/1/hi/business/8607213.stm

German banks get the all clear to continue gambling

To me, this is probably the most stupid solution that Germany (or any other country) could have come up with. The banks will pay what is effectively an insurance premium, paid into a bailout fund which will be called upon in the event they need financial assistance later. (Unfortunately, in reality it's more likely it will just end up in the Chancellor's tax slush fund and used to pay welfare recipients or something, like all the other taxes. A bailout will still end up really being paid by taxpayers if/when it occcurs.)

So, the banks will be allowed to take risks as before, but now they will have contributed to some limited extent to their bailout fund when it all blows up next time. I tell you this (even if this money is indeed kept somewhere in escrow for the time it is needed), I very much doubt that the "insurance fund" they will have paid into will be anywhere close to big enough to cover the cost of bailing them out -- the lion's share will almost certainly still, in my opinion, be contributed by taxpayers.

http://news.bbc.co.uk/1/hi/business/8597470.stm

Better solutions would have involved curtailment of certain bank activities and/or splitting their commercial and retail banking operations from their proprietary trading (gambling) operations, to reduce the risk of failures or at least to render them no-longer-too-big-to-fail. All this insurance fund will do is partially mitigate the problem, when it will occur. (The government would not require an insurance premium, if its plans somehow were going to credibly remove that risk.) It is like a green light for the banks to enjoy Business As Usual, but with a small insurance premium penalty.

It will probably convince a lot of voters that the banks are getting punished by politicians though, which is convenient...

So Greece are to call the IMF after all? No, really?

Well, nobody could have foreseen that, eh?

http://barondayne.blogspot.com/2010/03/as-i-said-long-ago-now-greece-will-be.html
http://barondayne.blogspot.com/2010/03/greece-another-step-closer-to-calling.html
http://barondayne.blogspot.com/2010/03/wooo-greece-mentioned-imf-word-today.html
http://barondayne.blogspot.com/2010/02/how-to-win-friends-and-influence-people.html
http://barondayne.blogspot.com/2010/02/eu-talking-shop-business-as-usual.html
http://barondayne.blogspot.com/2010/02/greece-countdown-to-necessary-imf.html


No, nobody.

Nobody can foresee they'll leave the eurozone and reinstate their drachma either.

The broken wheel of British politics

There is a broken wheel in British politics. It turns a little something like this...

Labour get voted in for promising the earth to voters and "someone else will be paying". What's not to like, if you can't see past the end of the Labour leader of the time's (very long) nose?

Then they get the banks to print money like sweetie water, and we get an inflationary boom. Weee! Our houses go up by £1000's a month, and everyone's out at the shops spending their equity withdrawl money. Wow! These Labour guys are geniuses aren't they? They're just The Best! Let's keep them in for EVER! The banks are pretty happy with their lot too.

Then... the reality. The interest on the bonds raised to exchange for the banks phoney "money" suddenly consumes most of the annual tax income. Bummer! Booooo! The mathematically inevitable bust comes around again.

Oh, guess who we have to vote in, to clean this mess up AGAIN? Ah yes, the lucky Conservatives who are prepared to tell it like it really is, act, and be nationally despised. Another term or perhaps two of being hated for doing what is required by the scale of the debts acrued, and then... It's Time For Change again!

This is going to continue all the time we have Fractional Reserve Banking, and we have to buy "money" from the BoE at interest. It IS possible, there is a practicable way - we just need to find it pronto. If we don't fix this, that dysfunctional cycle is going to turn forever.

We don't "need" Fractional Reserve Banking, and we certainly don't need the BoE to print our money and take interest. Take these away, put a firm leash on issuance of currency by the Department of Treasury, and this problem just goes away.

This is simplistic, but you know it's true.