Ron Paul: Inside Sources Told Me Fed is Panicking at Mass Awakening
The Same Big Fat Greek Problems are Coming to America Posted: May 31 2010 By: Greg Hunter Post Edited: May 31, 2010 at 12:57 am
Filed under: USAWatchdog.com
Dear CIGAs,
We would all like to think the U.S. will not suffer the same problems as Greece. I am talking about drastic spending cuts to just about everything. Teachers, police pensions and social programs are all going to take big cuts whether the Greeks like it or not. It is not just the Greeks in financial trouble, but all of Europe. You know it is bad when former Fed Chief Paul Volcker says, “You have the great problem of a potential disintegration of the euro.” (Click here to see the full Reuters story.) There is no way a pro like Volcker would say that if it was not already a distinct possibility.
The fact is we already are dealing with too much debt and not enough money here in America. Recent stories show the cracks in our economy getting bigger, not smaller, as the “recovery” camp would have you believe. There are now 40 million U.S. citizens on food stamps—a new record. It was reported just last Friday that “Up to 300,000 Public School Teachers May Lose Their Jobs This Year Due to Local Budget Cuts.”
Remember, states cannot print money; so, the Obama Administration is going to try to save teaching jobs with an emergency federal spending bill. It will mean an additional $23 billion to the deficit. Illinois has reportedly stopped paying its bills! Contractors are owed $4.4 billion, and nonpayment may cause a wave of bankruptcies in that state. There are nearly 3 dozen other U.S. states facing similar severe budget problems. These are just a few stories from the last week or so showing the slow motion train wreck of a debt saturated economy.
In the latest report from Shadowstats.com, economist John Williams says look out for another nasty downturn in the economy because the money supply (M3) is shrinking. Williams writes, “. . . near-term economic activity will turn down, with major negative implications for the federal budget deficit, U.S. Treasury fundings, systemic solvency and the U.S. dollar. Such developments should place significant upside pressure on domestic inflation. U.S. difficulties eventually should dwarf the European sovereign solvency concerns. . .”
So, what will perform well in this environment? You better start looking for an exit if you are holding dollars, stocks or bonds. According to Williams, “. . . the long-term outlook for the U.S. dollar and U.S. equity and credit markets remains bleak, while the long-term outlook for gold and silver remains extremely strong.”
All the spending for things such as $23 billion to save teachers jobs is mushrooming the deficit in this country. According to Williams, from March 31 to April 30, 2010, the government added $175.6 billion in debt. Let me say this again, $175.6 billion in debt was added in a single month! Because of high unemployment, tax collections are imploding. This is not what you want to see while spending and money printing are exploding.
Meanwhile, Nobel Prize winning economist Paul Krugman takes the opposite point of view. Krugman wrote an op-ed piece last week called, “We’re not Greece.” He says, “In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.” He also says, “So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.” (Click here for the complete Krugman op-ed.)
These are just “crises . . . to frighten us into giving them what they want.” You have got to be kidding. When this blows up, and it will sooner than later, I wonder if the Nobel people will ask for their prize back?
Link to full article…
The following recently ran in The Daily Bell, published in Appenzell, Switzerland: Euro Crisis to Set One World Currency? (OBTW, subscriptions and RSS feeds to The Daily Bell are free. I read it often, and recommend it.)
interesting analysis: ObamaCare's Economic Dominoes
David Einhorn: Easy Money, Hard Truths. Here is a key quote: "According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble."
Richard Russell: This Market Has Nowhere to Go But Down
US Plays Down European Crisis But China Worried
Six New Hurdles for Home Financing
If they were smart... they would spend every last dime and buy Gold and Silver...(I would).
Consumers More Cautious About Spending in April
Capital Gains Tax Rise to Punish Prudent Savers
Stocks Retreat as Fitch Downgrades Spain's Debt
Clock Ticking On 100,000 Teacher Jobs
Monday, May 31, 2010
Sunday, May 30, 2010
Detroit to bulldoze thousands of homes in fight for survival"...
"Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities will not cease to rise, everybody becomes eager to buy as much as possible and restrict his cash holdings to minimum size… If the credit expansion is not stopped in time, the boom turns to CRACK-UP BOOM: the flight into real values begins, and the whole monetary system founders."
-- Ludwig von Mises (1949)
"Bankruptcy talk spreads among California muni officials". link is here.
'Pieces of Eight': The Constitution and the Dollar. link is here... and it's worth the read.
latest Markets at a Glance commentary from Eric Sprott and David Franklin over at Sprott Asset Management in Toronto. This month's commentary is headlined "A Busted Formula". It's definitely worth the read... which I've already done myself... and the link is here.
France warns on credit rating
The Looming Financial Holocaust, Massive Bearish Patterns Across Multiple Markets
Greeks, Germans, Italians, British, Americans and anybody else that has a brain...Greek Scramble for Physical Brings Gold Price to $1,700 Per Ounce
Hyperinflation is largely a twentieth-century phenomenon. The most widely studied hyperinflation occurred in Germany after World War I. The ratio of the German price index in November 1923 to the price index in August 1922—just fifteen months earlier—was 1.02 × 1010. This huge number amounts to a monthly inflation rate of 322 percent. On average, prices quadrupled each month during the sixteen months of hyperinflation.
While the German hyperinflation is better known, a much larger hyperinflation occurred in Hungary after World War II. Between August 1945 and July 1946 the general level of prices rose at the astounding rate of more than 19,000 percent per month, or 19 percent per day.
Even these very large numbers understate the rates of inflation experienced during the worst days of the hyperinflations. In October 1923, German prices rose at the rate of 41 percent per day. And in July 1946, Hungarian prices more than tripled each day.
What causes hyperinflations? No single shock, no matter how severe, can explain sustained, continuously rapid growth in prices. The world wars themselves did not cause the hyperinflations in Germany and Hungary. The destruction of resources during the wars can explain why prices in Germany and Hungary would be higher after the wars than before. But the wars themselves cannot explain why prices would continuously rise at rapid rates during hyperinflation periods.
Hyperinflations are caused by extremely rapid growth in the supply of “paper” money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining. Hyperinflations are very large taxation schemes.
During the German hyperinflation the number of German marks in circulation increased by a factor of 7.32 × 109. In Hungary, the comparable increase in the money supply was 1.19 × 1025. These numbers are smaller than those given earlier for the growth in prices. What does it mean when prices increase more rapidly than the supply of money?
Economists use a concept called the “real quantity of money” to discuss what happens to people’s money-holding behavior when prices grow rapidly. The real quantity of money, sometimes called the “purchasing power of money,” is the ratio of the amount of money held to the price level. Imagine that the typical household consumes a certain bundle of goods. The real quantity of money measures the number of bundles a household could buy with the money it holds. In low-inflation periods, a household will maintain a high real money balance because it is convenient to do so. In high-inflation periods, a household will maintain a lower real money balance to avoid the inflation “tax.” They avoid the inflation tax by holding more of their wealth in the form of physical commodities. As they buy these commodities, prices rise higher and inflation increases. Figure 1 shows real money balances and inflation for Germany from the beginning of 1919 until April 1923. The graph indicates that Germans lowered real balances as inflation increased. The last months of the German hyperinflation are not pictured in the figure because the inflation rate was too high to preserve the scale of the graph.
Hyperinflations tend to be self-perpetuating. Suppose a government is committed to financing its expenditures by issuing money and begins by raising the money stock by 10 percent per month. Soon the rate of inflation will increase, say, to 10 percent per month. The government will observe that it can no longer buy as much with the money it is issuing and is likely to respond by raising money growth even further. The hyperinflation cycle has begun. During the hyperinflation there will be a continuing tug-of-war between the public and the government. The public is trying to spend the money it receives quickly in order to avoid the inflation tax; the government responds to higher inflation with even higher rates of money issue.
Most economists agree that inflation lowers economic welfare even when allowing for revenue from the inflation tax and the distortion that would be created by alternative taxes that raise the same revenue.1
Figure 1 During the German Hyperinflation, the Real Quantity of Money Fell as Inflation Increased
ZOOM
How do hyperinflations end? The standard answer is that governments have to make a credible commitment to halting the rapid growth in the stock of money. Proponents of this view consider the end of the German hyperinflation to be a case in point. In late 1923, Germany undertook a monetary reform, creating a new unit of currency called the rentenmark. The German government promised that the new currency could be converted on demand into a bond having a certain value in gold. Proponents of the standard answer argue that the guarantee of convertibility is properly viewed as a promise to cease the rapid issue of money.
An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation. According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. The second is a commitment to bring the government’s budget into balance. This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation. If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future. Thomas Sargent, a proponent of the second view, argues that the German reform of 1923 was successful because it created an independent central bank that could refuse to monetize the government deficit and because it included provisions for higher taxes and lower government expenditures. Another way to look at Sargent’s view is that hyperinflations end when people reasonably believe that the rate of money growth will fall to normal levels both now and in the future.
What effects do hyperinflations have? One effect with serious consequences is the reallocation of wealth. Hyperinflations transfer wealth from the general public, which holds money, to the government, which issues money. Hyperinflations also cause borrowers to gain at the expense of lenders when loan contracts are signed prior to the worst inflation. Businesses that hold stores of raw materials and commodities gain at the expense of the general public. In Germany, renters gained at the expense of property owners because rent ceilings did not keep pace with the general level of prices. Costantino Bresciani-Turroni argues that the hyperinflation destroyed the wealth of the stable classes in Germany and made it easier for the National Socialists (Nazis) to gain power.
Hyperinflation reduces an economy’s efficiency by driving people away from monetary transactions and toward barter. In a normal economy, using money in exchange is highly efficient. During hyperinflations people prefer to be paid in commodities in order to avoid the inflation tax. If they are paid in money, they spend that money as quickly as possible. In Germany, workers were paid twice per day and would shop at midday to avoid further depreciation of their earnings. Hyperinflation is a wasteful game of “hot potato” in which people use up valuable resources trying to avoid holding on to paper money.
Hyperinflations can lead to behavior that would be thought bizarre under normal conditions. Gerald Feldman’s book The Great Disorder shows a photo of a small firm transporting wages in a wheelbarrow because the number of banknotes required to pay workers grew very large during the hyperinflation (Feldman 1993, p. 680). Corbis, an Internet source of photos (http://www.corbis.com/), shows an image of a German woman burning banknotes in her stove because doing so provided more heat than using them to buy other fuel would have done. Another image shows German children playing with blocks of banknotes in the street.
More-recent examples of very high inflation have occurred mostly in Latin America and former Eastern bloc nations. Argentina, Bolivia, Brazil, Chile, Peru, and Uruguay together experienced an average annual inflation rate of 121 percent between 1970 and 1987. In Bolivia, prices increased by 12,000 percent in 1985. In Peru, a near hyperinflation occurred in 1988 as prices rose by about 2,000 percent for the year, or by 30 percent per month. However, Thayer Watkins documents that the record hyperinflation of all time occurred in Yugoslavia between 1993 and 1994.2
The Latin American countries with high inflation also experienced a phenomenon called “dollarization,” the use of U.S. dollars in place of the domestic currency. As inflation rises, people come to believe that their own currency is not a good way to store value and they attempt to exchange their domestic money for dollars. In 1973, 90 percent of time deposits in Bolivia were denominated in Bolivian pesos. By 1985, the year of the Bolivian hyperinflation, more than 60 percent of time deposit balances were denominated in dollars.
What caused high inflation in Latin America? Many Latin American countries borrowed heavily during the 1970s and agreed to repay their debts in dollars. As interest rates rose, all of these countries found it increasingly difficult to meet their debt service obligations. The highinflation countries were those that responded to these higher costs by printing money.
The Bolivian hyperinflation is a case in point. Eliana Cardoso explains that in 1982 Hernán Siles Suazo took power as head of a leftist coalition that wanted to satisfy demands for more government spending on domestic programs but faced growing debt service obligations and falling prices for its tin exports. The Bolivian government responded to this situation by printing money. Faced with a shortage of funds, it chose to raise revenue through the inflation tax instead of raising income taxes or reducing other government spending.
About the Author
Michael K. Salemi is an economics professor at the University of North Carolina in Chapel Hill.
-- Ludwig von Mises (1949)
Great article...
Gold Correction Factors, Hidden Dollar Swap Hammer."Bankruptcy talk spreads among California muni officials". link is here.
'Pieces of Eight': The Constitution and the Dollar. link is here... and it's worth the read.
latest Markets at a Glance commentary from Eric Sprott and David Franklin over at Sprott Asset Management in Toronto. This month's commentary is headlined "A Busted Formula". It's definitely worth the read... which I've already done myself... and the link is here.
France warns on credit rating
The Looming Financial Holocaust, Massive Bearish Patterns Across Multiple Markets
"It looks like some of us will be paying a lot more tax next year - [in all] more than 50 percent [income tax]. The 35 percent [Federal income tax] rate goes back to 39.6 percent next year, plus state income tax (6.9 percent in my state) plus 3.8 percent to cover the new health care that just passed. I find it amazing that dividends will be taxed like ordinary income; that will get all the old people; it'll get the ones who voted for BHO and they thought that only 'the rich' would have to pay..."
Jim’s Mailbox Posted: May 30 2010 By: Jim Sinclair Post Edited: May 30, 2010 at 12:45 pm
Filed under: Jim's Mailbox
Dear LT,
You know it’s bad when Wal-Mart has to drop prices to lure back shoppers!
This has your Formula written all over it.
Best, CIGA BT
Dear CIGA BT,
All downward spirals go to zero unless interventions take place at the cause point. The cause point is OTC derivatives for which nothing of merit has been proposed or done.
Regards, LT
Wal-Mart makes splashy price cuts to boost sales Sat May 29, 4:09 PM By Anne D’Innocenzio, The Associated Press
NEW YORK, N.Y. – Wal-Mart is counting on $1 ketchup bottles and sub-$4 cases of Coke to re-ignite sales in America.
The sharp cuts at U.S. stores, which came ahead of the Memorial Day holiday weekend, have already pushed rivals such as Target into price wars. And the markdowns are expected to keep coming throughout the summer.
They’re one of the boldest moves the world’s largest retailer is making to turn around sluggish business at its U.S. namesake chain and win back shoppers from rivals. The cuts aren’t across the store but target 22 foods and other essentials at an average savings of 30 per cent — splashy enough to get attention and perhaps change perceptions.
More…
Debt Level, Spending Pose Risk to U.S.'s Aaa Credit Rating, Moody's Says
Greeks, Germans, Italians, British, Americans and anybody else that has a brain...Greek Scramble for Physical Brings Gold Price to $1,700 Per Ounce
Stocks Close Out Their Worst Month in Over a Year
What you need to know about hyperinflation...
Inflation is a sustained increase in the aggregate price level. Hyperinflation is very high inflation. Although the threshold is arbitrary, economists generally reserve the term “hyperinflation” to describe episodes when the monthly inflation rate is greater than 50 percent. At a monthly rate of 50 percent, an item that cost $1 on January 1 would cost $130 on January 1 of the following year.Hyperinflation is largely a twentieth-century phenomenon. The most widely studied hyperinflation occurred in Germany after World War I. The ratio of the German price index in November 1923 to the price index in August 1922—just fifteen months earlier—was 1.02 × 1010. This huge number amounts to a monthly inflation rate of 322 percent. On average, prices quadrupled each month during the sixteen months of hyperinflation.
While the German hyperinflation is better known, a much larger hyperinflation occurred in Hungary after World War II. Between August 1945 and July 1946 the general level of prices rose at the astounding rate of more than 19,000 percent per month, or 19 percent per day.
Even these very large numbers understate the rates of inflation experienced during the worst days of the hyperinflations. In October 1923, German prices rose at the rate of 41 percent per day. And in July 1946, Hungarian prices more than tripled each day.
What causes hyperinflations? No single shock, no matter how severe, can explain sustained, continuously rapid growth in prices. The world wars themselves did not cause the hyperinflations in Germany and Hungary. The destruction of resources during the wars can explain why prices in Germany and Hungary would be higher after the wars than before. But the wars themselves cannot explain why prices would continuously rise at rapid rates during hyperinflation periods.
Hyperinflations are caused by extremely rapid growth in the supply of “paper” money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining. Hyperinflations are very large taxation schemes.
During the German hyperinflation the number of German marks in circulation increased by a factor of 7.32 × 109. In Hungary, the comparable increase in the money supply was 1.19 × 1025. These numbers are smaller than those given earlier for the growth in prices. What does it mean when prices increase more rapidly than the supply of money?
Economists use a concept called the “real quantity of money” to discuss what happens to people’s money-holding behavior when prices grow rapidly. The real quantity of money, sometimes called the “purchasing power of money,” is the ratio of the amount of money held to the price level. Imagine that the typical household consumes a certain bundle of goods. The real quantity of money measures the number of bundles a household could buy with the money it holds. In low-inflation periods, a household will maintain a high real money balance because it is convenient to do so. In high-inflation periods, a household will maintain a lower real money balance to avoid the inflation “tax.” They avoid the inflation tax by holding more of their wealth in the form of physical commodities. As they buy these commodities, prices rise higher and inflation increases. Figure 1 shows real money balances and inflation for Germany from the beginning of 1919 until April 1923. The graph indicates that Germans lowered real balances as inflation increased. The last months of the German hyperinflation are not pictured in the figure because the inflation rate was too high to preserve the scale of the graph.
Hyperinflations tend to be self-perpetuating. Suppose a government is committed to financing its expenditures by issuing money and begins by raising the money stock by 10 percent per month. Soon the rate of inflation will increase, say, to 10 percent per month. The government will observe that it can no longer buy as much with the money it is issuing and is likely to respond by raising money growth even further. The hyperinflation cycle has begun. During the hyperinflation there will be a continuing tug-of-war between the public and the government. The public is trying to spend the money it receives quickly in order to avoid the inflation tax; the government responds to higher inflation with even higher rates of money issue.
Most economists agree that inflation lowers economic welfare even when allowing for revenue from the inflation tax and the distortion that would be created by alternative taxes that raise the same revenue.1
Figure 1 During the German Hyperinflation, the Real Quantity of Money Fell as Inflation Increased
ZOOM
How do hyperinflations end? The standard answer is that governments have to make a credible commitment to halting the rapid growth in the stock of money. Proponents of this view consider the end of the German hyperinflation to be a case in point. In late 1923, Germany undertook a monetary reform, creating a new unit of currency called the rentenmark. The German government promised that the new currency could be converted on demand into a bond having a certain value in gold. Proponents of the standard answer argue that the guarantee of convertibility is properly viewed as a promise to cease the rapid issue of money.
An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation. According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. The second is a commitment to bring the government’s budget into balance. This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation. If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future. Thomas Sargent, a proponent of the second view, argues that the German reform of 1923 was successful because it created an independent central bank that could refuse to monetize the government deficit and because it included provisions for higher taxes and lower government expenditures. Another way to look at Sargent’s view is that hyperinflations end when people reasonably believe that the rate of money growth will fall to normal levels both now and in the future.
What effects do hyperinflations have? One effect with serious consequences is the reallocation of wealth. Hyperinflations transfer wealth from the general public, which holds money, to the government, which issues money. Hyperinflations also cause borrowers to gain at the expense of lenders when loan contracts are signed prior to the worst inflation. Businesses that hold stores of raw materials and commodities gain at the expense of the general public. In Germany, renters gained at the expense of property owners because rent ceilings did not keep pace with the general level of prices. Costantino Bresciani-Turroni argues that the hyperinflation destroyed the wealth of the stable classes in Germany and made it easier for the National Socialists (Nazis) to gain power.
Hyperinflation reduces an economy’s efficiency by driving people away from monetary transactions and toward barter. In a normal economy, using money in exchange is highly efficient. During hyperinflations people prefer to be paid in commodities in order to avoid the inflation tax. If they are paid in money, they spend that money as quickly as possible. In Germany, workers were paid twice per day and would shop at midday to avoid further depreciation of their earnings. Hyperinflation is a wasteful game of “hot potato” in which people use up valuable resources trying to avoid holding on to paper money.
Hyperinflations can lead to behavior that would be thought bizarre under normal conditions. Gerald Feldman’s book The Great Disorder shows a photo of a small firm transporting wages in a wheelbarrow because the number of banknotes required to pay workers grew very large during the hyperinflation (Feldman 1993, p. 680). Corbis, an Internet source of photos (http://www.corbis.com/), shows an image of a German woman burning banknotes in her stove because doing so provided more heat than using them to buy other fuel would have done. Another image shows German children playing with blocks of banknotes in the street.
More-recent examples of very high inflation have occurred mostly in Latin America and former Eastern bloc nations. Argentina, Bolivia, Brazil, Chile, Peru, and Uruguay together experienced an average annual inflation rate of 121 percent between 1970 and 1987. In Bolivia, prices increased by 12,000 percent in 1985. In Peru, a near hyperinflation occurred in 1988 as prices rose by about 2,000 percent for the year, or by 30 percent per month. However, Thayer Watkins documents that the record hyperinflation of all time occurred in Yugoslavia between 1993 and 1994.2
The Latin American countries with high inflation also experienced a phenomenon called “dollarization,” the use of U.S. dollars in place of the domestic currency. As inflation rises, people come to believe that their own currency is not a good way to store value and they attempt to exchange their domestic money for dollars. In 1973, 90 percent of time deposits in Bolivia were denominated in Bolivian pesos. By 1985, the year of the Bolivian hyperinflation, more than 60 percent of time deposit balances were denominated in dollars.
What caused high inflation in Latin America? Many Latin American countries borrowed heavily during the 1970s and agreed to repay their debts in dollars. As interest rates rose, all of these countries found it increasingly difficult to meet their debt service obligations. The highinflation countries were those that responded to these higher costs by printing money.
The Bolivian hyperinflation is a case in point. Eliana Cardoso explains that in 1982 Hernán Siles Suazo took power as head of a leftist coalition that wanted to satisfy demands for more government spending on domestic programs but faced growing debt service obligations and falling prices for its tin exports. The Bolivian government responded to this situation by printing money. Faced with a shortage of funds, it chose to raise revenue through the inflation tax instead of raising income taxes or reducing other government spending.
About the Author
Michael K. Salemi is an economics professor at the University of North Carolina in Chapel Hill.
Saturday, May 29, 2010
Dollar Primed for Collapse by End June. Yes, the US Dollar is presently artificially strong. But we are looking at a study of relative weaknesses. All the major fiat currencies are in a race to the bottom. Don't make the foolish mistake of swapping from one un-back currency into another. Instead, swap into tangibles!
US money supply plunges at 1930s pace as Obama eyes fresh stimulus. The money multiplier effect works in reverse, as credit collapses. But at some point the huge waves of stimulus spending will be financed by monetization, and that will be hugely inflationary. Be ready for a rapid transition from deflation to inflation, possibly as soon as late 2010 or early 2011.
Germany confirms Fed intervention in currency marketsSubmitted by cpowell on Fri, 2010-05-28 18:41. Section: Daily Dispatches
That's funny. ... The Fed hasn't announced any such interventions lately. They'd never intervene surreptitiously in the gold market too, would they?
Hidden Dollar Swap Hammer Jim Willie CB
Preparing for What's Next David Galland
Stocks on Track for Worst May Since 1962.
Home Sales Set to Plummet in Markets Hit Hard by Foreclosures
Plus 1 California Bank and 1 Las Vegas Nevada bank...
Three Florida Banks Closed May 28, 2010
Spain Loses its AAA Credit Rating at Fitch Amid Debt Struggles
Double-Dip Fears Over Worldwide Credit Stress
Collapse of Euro Would Open Door to Democracy
Eric Sprott on Financial Farcism
Pay close attention to EVERYTHING this man says...or you will live to regret it...
Inflation, Money Supply, GDP, Unemployment and the Dollar
Dysfunctional Markets that Change Every Hour
Once again..repeat after me, there is no recovery...there is no recovery...
Slow-Motion Recovery Keeps Unemployment High
You just might see the day, that you can get a zero interest home loan...
Mortgage Rates are Back Near Record Low
US Corporate Debt Sales Fall to Least in Decade- Bloomberg
This Idiot shouldn't be telling anybody what to do...His answer for everything is print more money...Zimbabwe here we go...
Geithner Tells Europe: "Emulate China"- Sydney Morning Herald
Spain Narrowly Approves Spending Cuts- NY Times
US Automakers Rely on 0% Financing to Close Deals- USA Today
These people know what money is...and isn't...Do you?
Indian Farmers Trade Gold for Seeds- Reuters India
Isn't this just great....Think about it...we have to help pay for a car nobody wants...at a price nobody in their right mind will pay... that only goes about 80 miles on a charge...(wait till you get your electric bill...)
About the only people stupid enough to buy them are the environmentalist wacko's...Remember there is a reason you can't spell environmentalist without the word "MENTAL".
Congress Proposes Electric Car Tax Break- Detroit News
Wall Street Journal features GATA consultant Edwin VieiraSubmitted by cpowell on Sat, 2010-05-29 03:30. Section: Daily Dispatches
'Pieces of Eight': The Constitution and the Dollar
"I am for doing good to the poor, but...I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed...that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer." - Benjamin Franklin
US money supply plunges at 1930s pace as Obama eyes fresh stimulus. The money multiplier effect works in reverse, as credit collapses. But at some point the huge waves of stimulus spending will be financed by monetization, and that will be hugely inflationary. Be ready for a rapid transition from deflation to inflation, possibly as soon as late 2010 or early 2011.
Germany confirms Fed intervention in currency marketsSubmitted by cpowell on Fri, 2010-05-28 18:41. Section: Daily Dispatches
That's funny. ... The Fed hasn't announced any such interventions lately. They'd never intervene surreptitiously in the gold market too, would they?
Hidden Dollar Swap Hammer Jim Willie CB
Preparing for What's Next David Galland
Stocks on Track for Worst May Since 1962.
Home Sales Set to Plummet in Markets Hit Hard by Foreclosures
Plus 1 California Bank and 1 Las Vegas Nevada bank...
Three Florida Banks Closed May 28, 2010
Spain Loses its AAA Credit Rating at Fitch Amid Debt Struggles
Double-Dip Fears Over Worldwide Credit Stress
Collapse of Euro Would Open Door to Democracy
Eric Sprott on Financial Farcism
Pay close attention to EVERYTHING this man says...or you will live to regret it...
Inflation, Money Supply, GDP, Unemployment and the Dollar
Dysfunctional Markets that Change Every Hour
Once again..repeat after me, there is no recovery...there is no recovery...
Slow-Motion Recovery Keeps Unemployment High
You just might see the day, that you can get a zero interest home loan...
Mortgage Rates are Back Near Record Low
US Corporate Debt Sales Fall to Least in Decade- Bloomberg
This Idiot shouldn't be telling anybody what to do...His answer for everything is print more money...Zimbabwe here we go...
Geithner Tells Europe: "Emulate China"- Sydney Morning Herald
Spain Narrowly Approves Spending Cuts- NY Times
US Automakers Rely on 0% Financing to Close Deals- USA Today
These people know what money is...and isn't...Do you?
Indian Farmers Trade Gold for Seeds- Reuters India
Isn't this just great....Think about it...we have to help pay for a car nobody wants...at a price nobody in their right mind will pay... that only goes about 80 miles on a charge...(wait till you get your electric bill...)
About the only people stupid enough to buy them are the environmentalist wacko's...Remember there is a reason you can't spell environmentalist without the word "MENTAL".
Congress Proposes Electric Car Tax Break- Detroit News
Wall Street Journal features GATA consultant Edwin VieiraSubmitted by cpowell on Sat, 2010-05-29 03:30. Section: Daily Dispatches
'Pieces of Eight': The Constitution and the Dollar
"I am for doing good to the poor, but...I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed...that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer." - Benjamin Franklin
Friday, May 28, 2010
“It’s a race in the purchasing power of paper money to the bottom, and the only assets that will, for sure, keep their purchasing power are precious metals.”
Dr. Marc Farber
Gold and Silver Insurance
Here's a cute story that was in Tuesday's New York Post. It's about all these new U.S. Census workers that are being hired, then fired, then rehired, then fired... all to make the job statistics look better than they really are. The headline reads "Two more Census workers blow the whistle". I 'borrowed' this story from yesterday's King Report... and the link is here.
Gold vending machines go global
posted by Eric De Groot at Eric De Groot - 46 minutes ago
How long before the physical dominates the paper market to the extent that even the public can see. That is, how long before the public realizes, or centralized control can no longer hide, the difference i...
Number of the Week: 75% Chance of Greek Default
Moody’s Reiterates U.S. Spending Risks Credit Rating
article by Mish Shedlock that illustrates the incredible depth of California's budget crisis: California to borrow next 20 years worth of bottle returns.
At this point...there is no bottom...
Falling Home Prices Stir Fears of New Bottom
I'll bet the 40 MILLION people on food stamps disagree...
Consumer Confidence Up Again
The Government is paying builders to build to keep people working...
Factory Orders And New-Home Sales Rise in April
Inflation...
Oil Prices Jump 4% After 3-Week Slump
The Nightmare German Inflation
from a NEWS & VIEWS SPECIAL REPORT
"The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value."
Foreword:
The many parallels between 1924 Germany and present-day United States are cause for concern. Though the U.S. has not yet reached the depths to which Germany descended in that era, few can look at the constant depreciation of the dollar since the early 1970's and fail to be alarmed. It seems contemporary America differs from 1924 Germany only in the duration between cause and effect. While the German experience was compressed over a few short years, the effects of the American inflation have been more drawn out.
In my view, this has occurred for two good reasons:
First, American central bankers have learned enough from the German experience to delay and extend the consequences of printing too much fiat money.
Second, Germany was a small state isolated from the rest of the world, a pariah nation of sorts following World War I. As a result, it had a difficult time finding a market for its government bonds. German deficits had to be financed internally -- a difficulty which greatly accelerated the printing of fiat currency.
Up until recently, the United States enjoyed a strong world-wide demand for its government paper. Thus, the negative affects of government deficits have been subdued. Now, with consistently low interest rates, and a growing fear globally that U.S. deficits may have run out of control, foreign support for the U.S. bond market has faltered. In the absence of international buyers, the Fed could be forced to monetize an ever larger portions of the debt -- the modern equivalent of printing money.
Whether or not the situation will slip out of control is a matter for debate. The trend, however, is alarming. The largest annual contribution to the outstanding public debt during the Nixon years was $30.9 billion; Ford - $87.2 billion; Carter - $81.2 billion; Reagan - $302 billion; Bush(Sr.) - $432 billion; Clinton - $347 billion; GW Bush - $1,017 billion; Obama - $1,885 billion.
As this report points out, the correlation between deficits and inflation is sacrosanct -- deficits lead to inflation and uncontrolled deficits lead to uncontrolled inflation. Whether or not there will be a Nightmare American Inflation remains to be seen. Let it be said though that the trend is not favorable.
The survivors of the German debacle did so by purchasing gold early in the process. As a citizen and an investor, the best you can do is prepare, and then hope that it doesn't happen here. This report of Germany's hyperinflation, originally published in 1970 by Scientific Market Analysis, could play an important part in your preparation process. There is little doubt it will affect your thinking. - Michael J. Kosares
Introduction
If history teaches anything, it is that government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment and the conscience of the politicians. (That is the situation in this country today.)
Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming. Any alternative may seem politically disastrous. Whether it be the Roman emperors repeatedly debasing their coinage, the French revolutionary government printing a flood of assignats, John Law flooding France with debased money, or the Continental Congress issuing money until it was literally "not worth a Continental," the story is similar. A government in financial straits finds its easiest recourse is to issue more and more money until the money loses its value. The entire process is accompanied by a barrage of explanations, propaganda and new regulations which hide the true situation from the eyes of most people until they have lost all their savings. In World War I, Germany -- like other governments -- borrowed heavily to pay its war costs. This led to inflation, but not much more than in the U.S. during the same period. After the war there was a period of stability, but then the inflation resumed. By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread.
Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless. How could this happen in a highly civilized nation run at the time by intelligent, democratically chosen leaders? What happened to business, to wages and employment? How did some people manage to save their capital while a few speculators made fortunes?
The Years 1914-1921
When the war broke out on July 31, 1914, the Reichsbank (German Central Bank) suspended redeemability of its notes in gold. After that there was no legal limit as to how many notes it could print. The government did not want to upset people with heavy taxes. Instead it borrowed huge amounts of money which were to be paid by the enemy after Germany had won the war, Much of the borrowing was discounted and monetized by the Reichsbank. As explained later, this amounted to issuing straight printing press money.
By the end of the war, the amount of money in circulation had increased four-fold. In view of this, the extent of inflation was less than one might have expected. The consumer price index had risen 140% by December 1918. This was equal to the inflation during the same time in England, a little more than in the United States, but less than in France. Yet the floating debt of the Reichsbank had increased from 3 billion to 55 billion marks!
Why was inflation kept within bounds? For the same reason that it got off to a slow start in the Unites States during World War II. Necessities were rationed and luxury goods were not easily available. Millions of men were at the front and not in the market for goods. Civilians worked hard and had little leisure for spending. People saved money against peace time, and in some cases to evade taxes. But the fuel for inflation was accumulating in the form of vast hoards of money.
The harsh reparation payments imposed on Germany led the mark to depreciate against foreign currencies. Also, the new democratic socialist leaders had promised the people all types of bounties--increased wages, reduced hours, an expanded educational system, and new social benefits. But all this meant a vastly increased demand on a limited production capacity.
For these reasons inflation resumed after the peace until by February 1920 the price level was five times as high as it had been at the armistice. Yet during this same time the amount of currency in circulation had only doubled. Prices were in fact rising much faster than the rate at which money was being printed. Therefore, reasoned the officials, the price inflation could hardly be blamed on the government. Actually, as we shall see, the ebb and flow of confidence can play a big role in the short-term trend of prices. Confidence in the mark had weakened. At the same time, and as a consequence, billions of hoarded marks came out of hiding and entered the marketplace. The accumulated fuel was burning.
By February 1920 this inflationary episode had run its course. For the next fifteen months the price index held stable. The mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%. Here was a golden opportunity to establish a stable currency. However, during these fifteen months the government kept issuing new money. The currency in circulation increased by 50% and the floating debt of the Reichsbank by 100%, providing fuel for a new outbreak.
In May 1921, price inflation started again and by July 1922 prices had risen 700%. The Reichsbank continued printing new currency, although more slowly than the rate at which prices were rising. In fact, all through this period the issue of currency proceeded at a fairly smooth steady rate, while the price index moved up in great surges, interspersed by periods of stability.
After July 1922 the phase of hyperinflation began. All confidence in money vanished and the price index rose faster and faster for fifteen months, outpacing the printing presses which could not run out money as fast as it was depreciating.
Wholesale Price Index
July 1914
1.0
Jan 1919
2.6
July 1919
3.4
Jan 1920
12.6
Jan 1921
14.4
July 1921
14.3
Jan 1922
36.7
July 1922
100.6
Jan 1923
2,785.0
July 1923
194,000.0
Nov 1923
726,000,000,000.0
The Years 1922-1923 -- Hyperinflation!
From Mid-1922 to November 1923 hyperinflation raged. The table above tells the story. Seemingly Reichsbank officials believed that the basic trouble was the depreciation of the mark in terms of foreign currencies. In late 1922 they tried to support the mark by purchasing it in the foreign exchange markets. However, since they continued printing new currency at a feverish rate, the attempt failed. They merely succeeded in buying worthless marks in return for valuable gold and foreign exchange.
All hope of checking the collapse of the mark vanished in January 1923 when the French--alleging treaty violations--occupied Germany's key industrial district, the Ruhr. Germany subsidized the occupied companies and financed an expensive program of "passive resistance." New billions of marks were printing to finance these heavy new costs. By late 1923, 300 paper mills were working top speed and 150 printing companies had 2000 presses going day and night turning out currency.
Under the forced draft of inflation, business was now operating at feverish speed and unemployment had disappeared. However, the real wages of workers dropped badly. Unions obtained frequent increases, but these could not keep pace. Workers --domestics, farm workers and various white collar groups-- fared especially badly. They had no unions to fight for pay boosts for them, and often they were reduced to hunger. Many people showed visible signs of malnutrition. Skilled workers, writers, artisans and professionals found their wages lagging until they reached the unskilled worker level, which often meant the bare minimum needed to support life.
Businessmen began to abandon their legitimate occupations to speculate in stocks and in goods. Thousands of small businessmen tried to eke out a living by speculating in fabrics, shoes, meat, soap, clothing--in any produce they could obtain. Each fall in the mark brought a rush to the shops. People bought dozens of hats or sweaters.
By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing.
Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.
Then by a mere effort of will, the government stepped in and stabilized the currency overnight.
Throughout the "miracle of the Rentenmark" the depreciation halted in its tracks, business revived, the inflationary spree was ended although, as we shall see, there was a nasty hangover yet to come.
Millions of middle-class Germans--normally the mainstay of a republic--were ruined by the inflation. They became receptive to rabid right wing propaganda and formed a fertile soil for Hitler. Workers who had suffered through the inflation turned, in many cases, to the Communists. The biggest beneficiaries of this enormous redistribution of wealth were feudalistic industrial leaders who distrusted the democracy and who proved willing to deal with Hitler, thinking that they could control him. The democratic parties and the labor unions lost their capital and were weakened. The liberal democratic regime was discredited.
What caused the inflation?
Our thesis is simple: The inflation was caused by the government issuing a flood of new money, causing prices to rise. Then, as the inflation gained momentum, events seemed to demand the printing of larger and larger issues of currency. To half the process would have taken political courage, and this was lacking. As usual, the true facts were hidden behind a barrage of excuses, explanations and propaganda laying blame on everyone except the true culprit.
First, it would be wrong to think that everyone was opposed to inflation. Many big business leaders accepted it cheerfully. It wiped out their debts. They knew how to protect themselves and even profit--by speculating in foreign exchange, by converting money into goods and fixed plant, by borrowing money from the bank and using it to buy up cheap stocks and competing companies. Their wage costs, in true value, decreased, swelling their profits. Yet many workers also thought that they were benefiting, at least in the earlier stages of the inflation. Their wages were increased, and it took time before they recognized that, with prices soaring even faster, they were actually suffering a cut in true income.
A crew of speculators arose who traded in goods and foreign exchange, they had a vested interest in continued inflations. And the government could not help realizing that the inflation was wiping out its burden of debt and would ease its financial problems.
Above all, it became an article of faith among the political leaders and most ordinary citizens that the inflation was really due to the burden of reparation payments imposed by the peace treaty. This meant, so the argument ran, that Germany would be stripped of its gold, foreign exchange and wealth; it would be bankrupt. Hence, the mark fell in value in terms of gold or dollars. This drop in the foreign exchange value of the mark was said to be the true reason for the inflation.
The German leaders felt that the collapse of the mark was proving how impossible it was for Germany to pay the reparations which were demanded. Stabilization of the mark would have spoiled this "proof." Especially after France occupied the Ruhr in January 1923, it was felt that the destruction of the mark was somehow a blow against the hated occupier--the only patriotic response available to disarmed Germany.
Finally, inflation seemed to bring prosperity. In 1921, when the rest of the world was in a severe post-war recession, production indices in Germany rose sharply. Late in 1921 the mark stabilized temporarily, and business promptly weakened. By early 1922 the mark was sliding again, and business immediately revived. People were buying goods as fast as they obtained money; companies rushed to expand plants and turn money into fixed investment. Germany was actually envied for its "prosperity" by many foreigners. [Does this sound like modern-day America, albeit with people spending on stocks in addition to goods?]
The mechanism of inflation was simple. The government issued paper promises to pay, and the Reichsbank issued money on the security of these promises. When a government spends more than its income, it must borrow. If it merely borrows money from its citizens by selling them bonds, there need be no inflation. Instead of that money being spent or invested by the citizen, it is borrowed and spent by the government, but the total amount of money is not increased.
When the government needs more money than its people are able or willing to lend it, it monetizes the debt. That is what happens in this country when the government runs a big deficit. The Federal Reserve (our central bank) "buys" as many bonds as necessary to stabilize the market. It prints money on the security of these bonds. Despite the facade of the government supposedly "borrowing," the net result is the creation of printing press money. (Actually these days the money is created in the form of new bank deposits--checkbook money--but the net result is exactly the same as if bills were printed.)
This is what happened in Germany. The government issued notes which were promptly discounted by the Reichsbank, i.e., the bank issued money on the "security" of these worthless notes. To compound the evil, the bank failed to raise its interest rate sufficiently. Businessmen found it very profitable to borrow money from the bank and buy up goods, shares and companies. Their debt was wiped out within weeks by the rapid inflation, and the businessman remained holding the valuable assets he had bought. The net result was a huge "private inflation" caused by the rapid expansion of credit. Even foreign exchange was bought with borrowed money, so that the Reichsbank actually financed speculation against its own currency. Yet the bank refused to raise interest rates, arguing that this would only add to the cost of business and thus would increase inflation!
The tax system virtually broke down. Businessmen found that by merely delaying tax payments, the depreciation in the mark would virtually eliminate their true value. But the government, lacking adequate income, felt forced to resort more and more to creating money. By October 1923, 1% of government income came from taxes and 99% from the creation of new money.
But the main force which gave inflation its momentum was the steady decrease in the true value of money in circulation. This has been observed in all past rapid inflations and it is vital to understand it if inflation is to be coped with. During the war, as we saw, the price inflation lagged behind the rate at which money was issued. But now, as people lost confidence, prices began jumping much faster than the government could generate new money. Thus the total circulating currency fell drastically when measured in terms of its true value. One economist stated that, "In proportion to the need, less money circulates in Germany now than before the war. This statement may cause surprise but it is correct. The circulation is now 15-20 times that of pre-war days, whilst prices have risen 40-50 times." In fact, the total currency when calculated in gold value fell from 7428 million marks in January 1920 to a mere 168 million by July 1923.
Despite the proliferating billions of trillions of marks, the average citizen found it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks. Businessmen were strapped for money to buy materials and meet payrolls. The government faced the same problem. It appeared that there was not too much money around, but rather much too little. The clamor for more money grew on all sides. It seemed that any halt to the printing presses would bring business to a standstill and throw millions of workers out on the street. The government itself would be unable to carry on. Riding a tiger, it dared not dismount. On October 25, 1923, the Reichsbank noted that it had that day printed 120,000 trillion marks. Unfortunately, the day's demand had been for one million trillion. However, it announced that it was expanding production and the daily issue would soon be 500,000 trillion!
Once people lose confidence in a currency, they try to get rid of it. As Lord Keynes pointed out, this makes circulation speed up enormously, and hence prices rise faster than the government can print new money. Marshall, studying this process, concluded that, "The total value of an ' inconvertible paper currency cannot be increased by increasing its quantity; any increase in quantity which seems likely to be repeated will lower the value of each unit more than in proportion to the increase."
Customarily, however, governments blame everyone and everything except themselves for inflation. When inflation lags behind issue of money, as it did in the war, they say that this shows that the issue of money is not dangerously high. Later, when confidence vanishes, and prices soar ahead of currency issues, that again is taken to prove that the government is not to blame--it is only reluctantly issuing money that is desperately needed in view of rising prices.
We will conclude this discussion with a quotation from Dr. Milton Friedman's book, Dollars and Deficits. Friedman notes that after the Russian revolution, the Bolsheviks introduced a new currency. They printed huge amounts of it and soon it became almost worthless. At the same time some of the older Czarist currency still circulated and maintained its value in terms of goods. It appreciated enormously in terms of the new money. Why? This money was not redeemable. Nobody expected the Czarist government to return. Why did this currency hold up? "Because," says Friedman, "there was nobody to print any more of it."
Effects of Inflation on Business
As inflation proceeded, people rushed to buy goods and get rid of their depreciated money. For similar reasons, businessmen hastened to buy machinery, to build new factories, to buy huge stocks of coal, steel and other raw materials. Those who had access to credit borrowed heavily for these purposes, and inflation wiped out their debt. There was a tremendous conversion of working capital into fixed investments. Business was booming and unemployment virtually vanished until the last stages of the inflation.
Farmers got rid of currency by heavy purchases of equipment, and later many were left holding large supplies of useless machinery. Shipbuilding was expanded beyond all market needs. Marginal mines were opened leading to serious overproduction later on. But while basic industries prospered, there was a severe depression in consumer goods industries such as textiles, meat, beer, sugar and tobacco. Too many workers and persons on fixed incomes had lost their purchasing power.
There was a tremendous move toward concentration of industry. Large firms or combinations found it much easier to raise prices, to obtain raw materials and above all to obtain bank credit. Also, they could issue "notgeld" or emergency money which more and more came to replace the paper mark as a medium of exchange. Some of these new industrial combinations were rational and efficient, but many were purely speculative operations. A new breed of financier arose.
Earlier the great German industrial leaders--men like Krupp, Thyssen and Siemens--had developed basic new ideas in technology or in organization. But now the rising stars were those of shrewd speculators and manipulators geared to quick trading and to jumping from deal to deal and from company to company. The most successful were those who saw the trend of events early, who borrowed to the hilt and bought up goods, shares and companies at bargain prices. Conglomerates sprung up forty years before the heyday of the conglomerate movement in the U.S. Perhaps the biggest operator of the day, Hugo Stinnes, formed a giant conglomerate including companies in oil, coal, steel, shipyards, electrical works, insurance, newspapers and hotels. He died in 1924, just before his empire fell apart in the cold winds of the stabilization period. Most of these new mushroom combinations and conglomerates were speculative bubbles which were only able to survive as long as they benefited from ongoing inflation.
Beneath the surface of prosperity there was enormous waste and inefficiency. Much of the new capital plant proved inefficient or unneeded. Middlemen multiplied like locusts, and more and more time and energy went to speculation and to endless paperwork generated by currency fluctuations, new tax law regulations and labor disputes. Speculation caused banks to multiply; there were 100,000 bank workers in 1913 and 375,000 in 1923. Labor became much less productive. Workmen were pre-occupied with their own problems of trading, getting wage boosts, and staying ahead of inflation. With paper wages rising rapidly and full employment, they were less inclined to work hard. Despite the surface boom, net production was really much less than before the war.
Bewildering fluctuations in costs prices and wages made it impossible to allocate resources and production rationally. More and more, the businessman became a speculator in goods and currencies. However, very few businesses failed, since their debts were constantly wiped out by inflation. Bankruptcies had run to 815 per month in 1913; by late 1923 they were 10 per month.
Finally, however, in the last stages of the inflation, the economy began to collapse. Retailers could not get goods or else could not sell at a profit. The money they received was depreciating too fast. Farmers stopped selling their produce. More and more stores became empty. Now unemployment began to soar.
Some economists argued that inflation may have helped Germany by stimulating the building of capital plant and the rationalization of industry. But much of this investment proved to have no value except in the dream world of inflation. Most of the inflation combinations fell apart after stabilization. On the whole, much energy and wealth was wasted in unproductive channels--speculation, paperwork and unprofitable equipment. The working capital of industry was largely dissipated, making that much harder the eventual process of economic rebuilding and rationalization.
Stabilization--The Rentenmark Miracle
In November 1923, a currency reform was undertaken. A new bank, the Rentenbank, was created to issue a new currency--the Rentenmark. This money was exchangeable for bonds supposedly backed up by land and industrial plant A total of 2.4 billion Rentenmarks was created, and each Rentenmark was valued at one trillion old paper marks. From that moment on the depreciation stopped--the Rentenmarks held their value; even the old paper marks held stable. Inflation ceased.
What was the secret of the "miracle of the Rentenmark"? After all, the new currency was not redeemable in anything. Its backing by real property was a fiction, since there was no way by which property could be foreclosed or distributed. Further, there we have the government distributing a vast new supply of money--2.4 billion trillion in terms of the old mark. Ought that not have led to a new wild inflation?
To understand this, we must recall that the real value of the money circulating in late 1923 was small--equal to a mere 168 million pre-war gold marks. The continued depreciation at this point was due to utter lack of confidence--to the belief that the printing presses would run indefinitely. But actually there was a great shortage of and need for money. New money could be introduced without price inflation if only people had confidence in it. How was confidence developed?
First, the government announced that the new currency would be "wertbestaendig"--stable in value. In their hunger for usable money people accepted this, at least until it should be proven false. Then the property backing seemed to give the currency value. True, the Assignats of the French Revolution, backed by fixed property, had depreciated, but still the backing helped.
Second, and certainly most important, the government limited strictly the amount of Rentenmarks which could be issued and it halted the issue and discounting of notes and the creation of paper marks. Finally, after April 1924, the Reichsbank stopped the expansion of credit to businesses which had been stimulating inflation. Businessmen were required to repay loans in gold marks, equal to the original value of the loan. Thereafter, incentive was gone to borrow except for legitimate needs.
In August 1924 the reform was completed by introduction of a new Reichsmark, equal in value to the Rentenmark. The Reichsmark has a 30% gold backing. It was not redeemable in gold, but the government undertook to support it by buying in the foreign exchange markets as necessary. Drastic new taxes were imposed, and with the inflation ended, tax receipts increased impressively. In 1924-1925 the government had a surplus.
After the stabilization, most companies found that they were critically short of working capital. Their funds had been dissipated or converted into goods and plant, and cash was very short. They could no longer rely on a stream of incoming capital at the cost of bond holders and workers. Taxes were again a serious burden, as were wage agreements that had been made under the inflation.
In other ways the business climate changed. Now there was a huge demand for consumer goods, but the capital goods industries which had so overexpanded in the inflation were depressed. Huge stocks of coal, steel and other materials which had been accumulated were a drug on the market. Agriculture and building, however, flourished.
Many of the speculative and conglomerate companies which had been formed in the inflation were unable to survive. They failed, or split up into their original components. In 1923 there had been only 263 bankruptcies; in 1924 there were 6,033. Most of the great inflation speculators were ruined or faded from the business scene. However, strong, well-organized companies like Krupp and Thyssen which had resisted overexpansion and speculation were able to weather the stabilization period and to thrive.
How Investments Fared
At the start it is important to understand how hard it was to obtain real income during the inflation. Professionals, skilled workers and others used to enjoying good income found their real salaries disastrously cut. Those who depended on savings, pensions or investment income for a living faced a terrible situation.
Interest from bonds or savings deposits soon depreciated to where they had no real value. Stocks paid meager dividends or none at all; corporate managements needed the money for working capital, or used it for capital building and speculation. Owners of rental property fared no better; the government froze rents, which soon meant that tenants were occupying premises virtually rent-free. Dipping into capital led to big losses, since cash, bonds and even stocks quickly shrunk drastically in value. The urgent need for income had important effects on the true prices of various types of property and investments.
Cash: Money held in cash lost value rapidly and soon became completely worthless. Of all investment forms, this was the most disastrous.
Bank Deposits: In theory, bank deposits became as worthless as cash. However, after the stabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid. Naturally, however, the great majority of depositors withdrew their funds at some time during the inflation, after much of the value had been lost, and exchanged them for goods. Few Germans held money in deposits through the entire period.
Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even faster than cash. After the stabilization, some restitution was provided by law. Holders of government bonds were reimbursed to the extent of 2.5% of the original bond values. Mortgage holders also received some repayment, while a 1925 law provided for 15-25% reimbursement of corporate bondholders, though the payment was delayed for some years. Here again, few investors held bonds or mortgages throughout the entire period; most holders got rid of them for whatever pittance they would bring during the inflation.
Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.
Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.
Personal Property: Capital was preserved by those who early changed it into objects of lasting value--rare coins, stamps, jewelry, works of art, antiques--or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.
Common Stocks: In an inflation, common stocks are generally considered a desirable hedge to protect against or even to profit from the rise in prices. In practice, it is not so simple. In this country stock prices have been known to fall violently just when inflation was most evident (1946, 1957, 1966, 1969). Market fluctuations--the rise of exciting new speculative stocks, waves of fear or greed--all make it much too easy to buy or to sell at the wrong time or to go into the wrong stocks.
Getting down to specifics, we can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.
Many very sharp but brief advances and declines in the market led to widespread speculation, and well-intentioned investors often wound up as traders. Naturally most of them did as badly as amateur speculators generally do. Many decided that speculation was the only sensible approach; when the entire economy and financial structure was visibly crumbling, who could wait patiently with confidence in the long-range value of anything?
Could it Happen Here?
Since 1939 the general price levels have gone up some 200% in this country. Much of this inflation was due to the government generating large amounts of money to pay for three wars. You can be absolutely certain that if we are involved in any further wars for big increases in military spending, there will be new inflationary surges. Modem governments do not dare to impose the taxes needed to pay for war. They find it much easier politically to inflate instead.
The most recent wave of inflation, which got underway in 1965, was triggered by enormous expansion in spending for the Vietnam war. The government ran deficits as big as $25 billion, and much of this debt was monetized by a process similar to that by which the Reichsbank monetized the German government's debt. The main difference is that the newly generated money shows up mainly as bank deposits instead of printed currency. Since bank demand deposits are in fact money, convertible into currency and usable for any type of purchase, the net result is the same.
At the same time that Vietnam war spending mushroomed, our government undertook a vast program of expensive social welfare spending. It was argued that this country could afford guns and butter. The result was an inflation which already has imposed a 20% capital tax on all savings held as cash, bonds, insurance and on pension payments and other fixed income.
Now, in March 1970, the government and the Federal Reserve have been fighting for a year to check the inflation. Thus far, they have succeeded in slowing down the economy, but prices have continued rising as fast as ever. The reason is simple. Inflation has developed momentum. Many people, especially businessmen, have no faith that the government will stick to its policy. They look for more boom and inflation ahead. Hence, they have continued to get rid of money as fast as possible and convert it into goods, machinery and factory buildings. Even though our manufacturing plant is already in excess in needs and is being utilized at only 82% of capacity, the building boom continues. The reasons are precisely those which led to this behavior in the German inflation.
The late 1960s also saw the rise of a new breed of financial speculator. Huge conglomerates were organized, often with heavy borrowing, taking advantage of inflationary trends. Although their stocks soared in 1967-1968, even a hint of possible deflation and a cooler economy led to drastic declines of 60-80% in 1969. Many reported serious losses or sharply lower earnings. We believe that many of these companies could not survive a period of recession and deflation. Further, some bankruptcies in a few huge, prominent speculative companies could set off a chain reaction and a financial crash. And that is where the great danger of a wild inflation lies.
Today the public expects and demands that the government must maintain prosperity and full employment. If a very severe business slump developed, Washington would have no choice at all--it would have to spend huge sums for relief, public works, to pay off mortgages, etc. Yet at the same time tax payments would drop sharply as business profits disappeared. Taxes could hardly be raised under such circumstances. What would the President do? Turn on the printing presses? What else could he do? [Editor's note: As a reminder, after this report was written, the redeemability of the dollar for gold was terminated in 1971, two Oil Crises struck in 1973 and 1979, and massive Cold War expenditures characterized the 1980's.]
Ironically enough, we think that all this could be triggered by the anti-inflation campaign. It may prove all too successful. The money managers in Washington are aiming at a mild cooling down in business. This would reduce spending and investment, and hopefully would slow down the rate of price escalation. We think that it may work for a while and to a degree. Unhappily it poses tremendous danger.
During the last several years of inflationary boom, debt has gone far too high. Government, individuals and especially businesses have borrowed and spent without limit. In an inflationary period, this makes sense. At the same time liquidity is at an all-time low. Cash and government bills are less than 20% of the current liabilities of business against a normal 40-50% (and 90% right after the war).
The danger is that some of the especially vulnerable businesses will get into deep trouble and that the trouble will spread. In 1954, 1958 and 1960 the economy could stand a moderate recession without its escalating into something worse. In 1970 this may no longer be the case. The trend toward illiquidity and dangerously high debt has proceeded for twenty years, and other figures indicate that the breaking point is near. It might come very soon, or not for many months or even a year or two. Who can tell just when some stray breeze will cause a rickety house of cards to collapse?
Once a snowballing financial and economic deflation gets underway, it could develop with breathtaking speed. Soon the government, instead of worrying about inflation, would be using desperation measures to halt the collapse, even if it had to run budgetary deficits of 100 billion or more. In the short run, in a pragmatic sense, Washington would simply feel that it was tackling an overriding emergency, relieving hardship, etc. In the long term, what it would be doing was to inflate up to the point where most of the huge debt burden was wiped out, and a fresh start could be made. Of course, this would be at the expense of millions of savers who would lose most of their capital. Hopefully the expropriation would be less drastic than it was in Germany.
Reprinted from The Nightmare German Inflation by Scientific Market Analysis, 1970.
"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." - Kenneth Boulding
Dr. Marc Farber
Gold and Silver Insurance
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The Nightmare German Inflation
from a NEWS & VIEWS SPECIAL REPORT
"The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value."
Foreword:
The many parallels between 1924 Germany and present-day United States are cause for concern. Though the U.S. has not yet reached the depths to which Germany descended in that era, few can look at the constant depreciation of the dollar since the early 1970's and fail to be alarmed. It seems contemporary America differs from 1924 Germany only in the duration between cause and effect. While the German experience was compressed over a few short years, the effects of the American inflation have been more drawn out.
In my view, this has occurred for two good reasons:
First, American central bankers have learned enough from the German experience to delay and extend the consequences of printing too much fiat money.
Second, Germany was a small state isolated from the rest of the world, a pariah nation of sorts following World War I. As a result, it had a difficult time finding a market for its government bonds. German deficits had to be financed internally -- a difficulty which greatly accelerated the printing of fiat currency.
Up until recently, the United States enjoyed a strong world-wide demand for its government paper. Thus, the negative affects of government deficits have been subdued. Now, with consistently low interest rates, and a growing fear globally that U.S. deficits may have run out of control, foreign support for the U.S. bond market has faltered. In the absence of international buyers, the Fed could be forced to monetize an ever larger portions of the debt -- the modern equivalent of printing money.
Whether or not the situation will slip out of control is a matter for debate. The trend, however, is alarming. The largest annual contribution to the outstanding public debt during the Nixon years was $30.9 billion; Ford - $87.2 billion; Carter - $81.2 billion; Reagan - $302 billion; Bush(Sr.) - $432 billion; Clinton - $347 billion; GW Bush - $1,017 billion; Obama - $1,885 billion.
As this report points out, the correlation between deficits and inflation is sacrosanct -- deficits lead to inflation and uncontrolled deficits lead to uncontrolled inflation. Whether or not there will be a Nightmare American Inflation remains to be seen. Let it be said though that the trend is not favorable.
The survivors of the German debacle did so by purchasing gold early in the process. As a citizen and an investor, the best you can do is prepare, and then hope that it doesn't happen here. This report of Germany's hyperinflation, originally published in 1970 by Scientific Market Analysis, could play an important part in your preparation process. There is little doubt it will affect your thinking. - Michael J. Kosares
Introduction
If history teaches anything, it is that government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment and the conscience of the politicians. (That is the situation in this country today.)
Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming. Any alternative may seem politically disastrous. Whether it be the Roman emperors repeatedly debasing their coinage, the French revolutionary government printing a flood of assignats, John Law flooding France with debased money, or the Continental Congress issuing money until it was literally "not worth a Continental," the story is similar. A government in financial straits finds its easiest recourse is to issue more and more money until the money loses its value. The entire process is accompanied by a barrage of explanations, propaganda and new regulations which hide the true situation from the eyes of most people until they have lost all their savings. In World War I, Germany -- like other governments -- borrowed heavily to pay its war costs. This led to inflation, but not much more than in the U.S. during the same period. After the war there was a period of stability, but then the inflation resumed. By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread.
Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless. How could this happen in a highly civilized nation run at the time by intelligent, democratically chosen leaders? What happened to business, to wages and employment? How did some people manage to save their capital while a few speculators made fortunes?
The Years 1914-1921
When the war broke out on July 31, 1914, the Reichsbank (German Central Bank) suspended redeemability of its notes in gold. After that there was no legal limit as to how many notes it could print. The government did not want to upset people with heavy taxes. Instead it borrowed huge amounts of money which were to be paid by the enemy after Germany had won the war, Much of the borrowing was discounted and monetized by the Reichsbank. As explained later, this amounted to issuing straight printing press money.
By the end of the war, the amount of money in circulation had increased four-fold. In view of this, the extent of inflation was less than one might have expected. The consumer price index had risen 140% by December 1918. This was equal to the inflation during the same time in England, a little more than in the United States, but less than in France. Yet the floating debt of the Reichsbank had increased from 3 billion to 55 billion marks!
Why was inflation kept within bounds? For the same reason that it got off to a slow start in the Unites States during World War II. Necessities were rationed and luxury goods were not easily available. Millions of men were at the front and not in the market for goods. Civilians worked hard and had little leisure for spending. People saved money against peace time, and in some cases to evade taxes. But the fuel for inflation was accumulating in the form of vast hoards of money.
The harsh reparation payments imposed on Germany led the mark to depreciate against foreign currencies. Also, the new democratic socialist leaders had promised the people all types of bounties--increased wages, reduced hours, an expanded educational system, and new social benefits. But all this meant a vastly increased demand on a limited production capacity.
For these reasons inflation resumed after the peace until by February 1920 the price level was five times as high as it had been at the armistice. Yet during this same time the amount of currency in circulation had only doubled. Prices were in fact rising much faster than the rate at which money was being printed. Therefore, reasoned the officials, the price inflation could hardly be blamed on the government. Actually, as we shall see, the ebb and flow of confidence can play a big role in the short-term trend of prices. Confidence in the mark had weakened. At the same time, and as a consequence, billions of hoarded marks came out of hiding and entered the marketplace. The accumulated fuel was burning.
By February 1920 this inflationary episode had run its course. For the next fifteen months the price index held stable. The mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%. Here was a golden opportunity to establish a stable currency. However, during these fifteen months the government kept issuing new money. The currency in circulation increased by 50% and the floating debt of the Reichsbank by 100%, providing fuel for a new outbreak.
In May 1921, price inflation started again and by July 1922 prices had risen 700%. The Reichsbank continued printing new currency, although more slowly than the rate at which prices were rising. In fact, all through this period the issue of currency proceeded at a fairly smooth steady rate, while the price index moved up in great surges, interspersed by periods of stability.
After July 1922 the phase of hyperinflation began. All confidence in money vanished and the price index rose faster and faster for fifteen months, outpacing the printing presses which could not run out money as fast as it was depreciating.
Wholesale Price Index
July 1914
1.0
Jan 1919
2.6
July 1919
3.4
Jan 1920
12.6
Jan 1921
14.4
July 1921
14.3
Jan 1922
36.7
July 1922
100.6
Jan 1923
2,785.0
July 1923
194,000.0
Nov 1923
726,000,000,000.0
The Years 1922-1923 -- Hyperinflation!
From Mid-1922 to November 1923 hyperinflation raged. The table above tells the story. Seemingly Reichsbank officials believed that the basic trouble was the depreciation of the mark in terms of foreign currencies. In late 1922 they tried to support the mark by purchasing it in the foreign exchange markets. However, since they continued printing new currency at a feverish rate, the attempt failed. They merely succeeded in buying worthless marks in return for valuable gold and foreign exchange.
All hope of checking the collapse of the mark vanished in January 1923 when the French--alleging treaty violations--occupied Germany's key industrial district, the Ruhr. Germany subsidized the occupied companies and financed an expensive program of "passive resistance." New billions of marks were printing to finance these heavy new costs. By late 1923, 300 paper mills were working top speed and 150 printing companies had 2000 presses going day and night turning out currency.
Under the forced draft of inflation, business was now operating at feverish speed and unemployment had disappeared. However, the real wages of workers dropped badly. Unions obtained frequent increases, but these could not keep pace. Workers --domestics, farm workers and various white collar groups-- fared especially badly. They had no unions to fight for pay boosts for them, and often they were reduced to hunger. Many people showed visible signs of malnutrition. Skilled workers, writers, artisans and professionals found their wages lagging until they reached the unskilled worker level, which often meant the bare minimum needed to support life.
Businessmen began to abandon their legitimate occupations to speculate in stocks and in goods. Thousands of small businessmen tried to eke out a living by speculating in fabrics, shoes, meat, soap, clothing--in any produce they could obtain. Each fall in the mark brought a rush to the shops. People bought dozens of hats or sweaters.
By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing.
Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.
Then by a mere effort of will, the government stepped in and stabilized the currency overnight.
Throughout the "miracle of the Rentenmark" the depreciation halted in its tracks, business revived, the inflationary spree was ended although, as we shall see, there was a nasty hangover yet to come.
Millions of middle-class Germans--normally the mainstay of a republic--were ruined by the inflation. They became receptive to rabid right wing propaganda and formed a fertile soil for Hitler. Workers who had suffered through the inflation turned, in many cases, to the Communists. The biggest beneficiaries of this enormous redistribution of wealth were feudalistic industrial leaders who distrusted the democracy and who proved willing to deal with Hitler, thinking that they could control him. The democratic parties and the labor unions lost their capital and were weakened. The liberal democratic regime was discredited.
What caused the inflation?
Our thesis is simple: The inflation was caused by the government issuing a flood of new money, causing prices to rise. Then, as the inflation gained momentum, events seemed to demand the printing of larger and larger issues of currency. To half the process would have taken political courage, and this was lacking. As usual, the true facts were hidden behind a barrage of excuses, explanations and propaganda laying blame on everyone except the true culprit.
First, it would be wrong to think that everyone was opposed to inflation. Many big business leaders accepted it cheerfully. It wiped out their debts. They knew how to protect themselves and even profit--by speculating in foreign exchange, by converting money into goods and fixed plant, by borrowing money from the bank and using it to buy up cheap stocks and competing companies. Their wage costs, in true value, decreased, swelling their profits. Yet many workers also thought that they were benefiting, at least in the earlier stages of the inflation. Their wages were increased, and it took time before they recognized that, with prices soaring even faster, they were actually suffering a cut in true income.
A crew of speculators arose who traded in goods and foreign exchange, they had a vested interest in continued inflations. And the government could not help realizing that the inflation was wiping out its burden of debt and would ease its financial problems.
Above all, it became an article of faith among the political leaders and most ordinary citizens that the inflation was really due to the burden of reparation payments imposed by the peace treaty. This meant, so the argument ran, that Germany would be stripped of its gold, foreign exchange and wealth; it would be bankrupt. Hence, the mark fell in value in terms of gold or dollars. This drop in the foreign exchange value of the mark was said to be the true reason for the inflation.
The German leaders felt that the collapse of the mark was proving how impossible it was for Germany to pay the reparations which were demanded. Stabilization of the mark would have spoiled this "proof." Especially after France occupied the Ruhr in January 1923, it was felt that the destruction of the mark was somehow a blow against the hated occupier--the only patriotic response available to disarmed Germany.
Finally, inflation seemed to bring prosperity. In 1921, when the rest of the world was in a severe post-war recession, production indices in Germany rose sharply. Late in 1921 the mark stabilized temporarily, and business promptly weakened. By early 1922 the mark was sliding again, and business immediately revived. People were buying goods as fast as they obtained money; companies rushed to expand plants and turn money into fixed investment. Germany was actually envied for its "prosperity" by many foreigners. [Does this sound like modern-day America, albeit with people spending on stocks in addition to goods?]
The mechanism of inflation was simple. The government issued paper promises to pay, and the Reichsbank issued money on the security of these promises. When a government spends more than its income, it must borrow. If it merely borrows money from its citizens by selling them bonds, there need be no inflation. Instead of that money being spent or invested by the citizen, it is borrowed and spent by the government, but the total amount of money is not increased.
When the government needs more money than its people are able or willing to lend it, it monetizes the debt. That is what happens in this country when the government runs a big deficit. The Federal Reserve (our central bank) "buys" as many bonds as necessary to stabilize the market. It prints money on the security of these bonds. Despite the facade of the government supposedly "borrowing," the net result is the creation of printing press money. (Actually these days the money is created in the form of new bank deposits--checkbook money--but the net result is exactly the same as if bills were printed.)
This is what happened in Germany. The government issued notes which were promptly discounted by the Reichsbank, i.e., the bank issued money on the "security" of these worthless notes. To compound the evil, the bank failed to raise its interest rate sufficiently. Businessmen found it very profitable to borrow money from the bank and buy up goods, shares and companies. Their debt was wiped out within weeks by the rapid inflation, and the businessman remained holding the valuable assets he had bought. The net result was a huge "private inflation" caused by the rapid expansion of credit. Even foreign exchange was bought with borrowed money, so that the Reichsbank actually financed speculation against its own currency. Yet the bank refused to raise interest rates, arguing that this would only add to the cost of business and thus would increase inflation!
The tax system virtually broke down. Businessmen found that by merely delaying tax payments, the depreciation in the mark would virtually eliminate their true value. But the government, lacking adequate income, felt forced to resort more and more to creating money. By October 1923, 1% of government income came from taxes and 99% from the creation of new money.
But the main force which gave inflation its momentum was the steady decrease in the true value of money in circulation. This has been observed in all past rapid inflations and it is vital to understand it if inflation is to be coped with. During the war, as we saw, the price inflation lagged behind the rate at which money was issued. But now, as people lost confidence, prices began jumping much faster than the government could generate new money. Thus the total circulating currency fell drastically when measured in terms of its true value. One economist stated that, "In proportion to the need, less money circulates in Germany now than before the war. This statement may cause surprise but it is correct. The circulation is now 15-20 times that of pre-war days, whilst prices have risen 40-50 times." In fact, the total currency when calculated in gold value fell from 7428 million marks in January 1920 to a mere 168 million by July 1923.
Despite the proliferating billions of trillions of marks, the average citizen found it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks. Businessmen were strapped for money to buy materials and meet payrolls. The government faced the same problem. It appeared that there was not too much money around, but rather much too little. The clamor for more money grew on all sides. It seemed that any halt to the printing presses would bring business to a standstill and throw millions of workers out on the street. The government itself would be unable to carry on. Riding a tiger, it dared not dismount. On October 25, 1923, the Reichsbank noted that it had that day printed 120,000 trillion marks. Unfortunately, the day's demand had been for one million trillion. However, it announced that it was expanding production and the daily issue would soon be 500,000 trillion!
Once people lose confidence in a currency, they try to get rid of it. As Lord Keynes pointed out, this makes circulation speed up enormously, and hence prices rise faster than the government can print new money. Marshall, studying this process, concluded that, "The total value of an ' inconvertible paper currency cannot be increased by increasing its quantity; any increase in quantity which seems likely to be repeated will lower the value of each unit more than in proportion to the increase."
Customarily, however, governments blame everyone and everything except themselves for inflation. When inflation lags behind issue of money, as it did in the war, they say that this shows that the issue of money is not dangerously high. Later, when confidence vanishes, and prices soar ahead of currency issues, that again is taken to prove that the government is not to blame--it is only reluctantly issuing money that is desperately needed in view of rising prices.
We will conclude this discussion with a quotation from Dr. Milton Friedman's book, Dollars and Deficits. Friedman notes that after the Russian revolution, the Bolsheviks introduced a new currency. They printed huge amounts of it and soon it became almost worthless. At the same time some of the older Czarist currency still circulated and maintained its value in terms of goods. It appreciated enormously in terms of the new money. Why? This money was not redeemable. Nobody expected the Czarist government to return. Why did this currency hold up? "Because," says Friedman, "there was nobody to print any more of it."
Effects of Inflation on Business
As inflation proceeded, people rushed to buy goods and get rid of their depreciated money. For similar reasons, businessmen hastened to buy machinery, to build new factories, to buy huge stocks of coal, steel and other raw materials. Those who had access to credit borrowed heavily for these purposes, and inflation wiped out their debt. There was a tremendous conversion of working capital into fixed investments. Business was booming and unemployment virtually vanished until the last stages of the inflation.
Farmers got rid of currency by heavy purchases of equipment, and later many were left holding large supplies of useless machinery. Shipbuilding was expanded beyond all market needs. Marginal mines were opened leading to serious overproduction later on. But while basic industries prospered, there was a severe depression in consumer goods industries such as textiles, meat, beer, sugar and tobacco. Too many workers and persons on fixed incomes had lost their purchasing power.
There was a tremendous move toward concentration of industry. Large firms or combinations found it much easier to raise prices, to obtain raw materials and above all to obtain bank credit. Also, they could issue "notgeld" or emergency money which more and more came to replace the paper mark as a medium of exchange. Some of these new industrial combinations were rational and efficient, but many were purely speculative operations. A new breed of financier arose.
Earlier the great German industrial leaders--men like Krupp, Thyssen and Siemens--had developed basic new ideas in technology or in organization. But now the rising stars were those of shrewd speculators and manipulators geared to quick trading and to jumping from deal to deal and from company to company. The most successful were those who saw the trend of events early, who borrowed to the hilt and bought up goods, shares and companies at bargain prices. Conglomerates sprung up forty years before the heyday of the conglomerate movement in the U.S. Perhaps the biggest operator of the day, Hugo Stinnes, formed a giant conglomerate including companies in oil, coal, steel, shipyards, electrical works, insurance, newspapers and hotels. He died in 1924, just before his empire fell apart in the cold winds of the stabilization period. Most of these new mushroom combinations and conglomerates were speculative bubbles which were only able to survive as long as they benefited from ongoing inflation.
Beneath the surface of prosperity there was enormous waste and inefficiency. Much of the new capital plant proved inefficient or unneeded. Middlemen multiplied like locusts, and more and more time and energy went to speculation and to endless paperwork generated by currency fluctuations, new tax law regulations and labor disputes. Speculation caused banks to multiply; there were 100,000 bank workers in 1913 and 375,000 in 1923. Labor became much less productive. Workmen were pre-occupied with their own problems of trading, getting wage boosts, and staying ahead of inflation. With paper wages rising rapidly and full employment, they were less inclined to work hard. Despite the surface boom, net production was really much less than before the war.
Bewildering fluctuations in costs prices and wages made it impossible to allocate resources and production rationally. More and more, the businessman became a speculator in goods and currencies. However, very few businesses failed, since their debts were constantly wiped out by inflation. Bankruptcies had run to 815 per month in 1913; by late 1923 they were 10 per month.
Finally, however, in the last stages of the inflation, the economy began to collapse. Retailers could not get goods or else could not sell at a profit. The money they received was depreciating too fast. Farmers stopped selling their produce. More and more stores became empty. Now unemployment began to soar.
Some economists argued that inflation may have helped Germany by stimulating the building of capital plant and the rationalization of industry. But much of this investment proved to have no value except in the dream world of inflation. Most of the inflation combinations fell apart after stabilization. On the whole, much energy and wealth was wasted in unproductive channels--speculation, paperwork and unprofitable equipment. The working capital of industry was largely dissipated, making that much harder the eventual process of economic rebuilding and rationalization.
Stabilization--The Rentenmark Miracle
In November 1923, a currency reform was undertaken. A new bank, the Rentenbank, was created to issue a new currency--the Rentenmark. This money was exchangeable for bonds supposedly backed up by land and industrial plant A total of 2.4 billion Rentenmarks was created, and each Rentenmark was valued at one trillion old paper marks. From that moment on the depreciation stopped--the Rentenmarks held their value; even the old paper marks held stable. Inflation ceased.
What was the secret of the "miracle of the Rentenmark"? After all, the new currency was not redeemable in anything. Its backing by real property was a fiction, since there was no way by which property could be foreclosed or distributed. Further, there we have the government distributing a vast new supply of money--2.4 billion trillion in terms of the old mark. Ought that not have led to a new wild inflation?
To understand this, we must recall that the real value of the money circulating in late 1923 was small--equal to a mere 168 million pre-war gold marks. The continued depreciation at this point was due to utter lack of confidence--to the belief that the printing presses would run indefinitely. But actually there was a great shortage of and need for money. New money could be introduced without price inflation if only people had confidence in it. How was confidence developed?
First, the government announced that the new currency would be "wertbestaendig"--stable in value. In their hunger for usable money people accepted this, at least until it should be proven false. Then the property backing seemed to give the currency value. True, the Assignats of the French Revolution, backed by fixed property, had depreciated, but still the backing helped.
Second, and certainly most important, the government limited strictly the amount of Rentenmarks which could be issued and it halted the issue and discounting of notes and the creation of paper marks. Finally, after April 1924, the Reichsbank stopped the expansion of credit to businesses which had been stimulating inflation. Businessmen were required to repay loans in gold marks, equal to the original value of the loan. Thereafter, incentive was gone to borrow except for legitimate needs.
In August 1924 the reform was completed by introduction of a new Reichsmark, equal in value to the Rentenmark. The Reichsmark has a 30% gold backing. It was not redeemable in gold, but the government undertook to support it by buying in the foreign exchange markets as necessary. Drastic new taxes were imposed, and with the inflation ended, tax receipts increased impressively. In 1924-1925 the government had a surplus.
After the stabilization, most companies found that they were critically short of working capital. Their funds had been dissipated or converted into goods and plant, and cash was very short. They could no longer rely on a stream of incoming capital at the cost of bond holders and workers. Taxes were again a serious burden, as were wage agreements that had been made under the inflation.
In other ways the business climate changed. Now there was a huge demand for consumer goods, but the capital goods industries which had so overexpanded in the inflation were depressed. Huge stocks of coal, steel and other materials which had been accumulated were a drug on the market. Agriculture and building, however, flourished.
Many of the speculative and conglomerate companies which had been formed in the inflation were unable to survive. They failed, or split up into their original components. In 1923 there had been only 263 bankruptcies; in 1924 there were 6,033. Most of the great inflation speculators were ruined or faded from the business scene. However, strong, well-organized companies like Krupp and Thyssen which had resisted overexpansion and speculation were able to weather the stabilization period and to thrive.
How Investments Fared
At the start it is important to understand how hard it was to obtain real income during the inflation. Professionals, skilled workers and others used to enjoying good income found their real salaries disastrously cut. Those who depended on savings, pensions or investment income for a living faced a terrible situation.
Interest from bonds or savings deposits soon depreciated to where they had no real value. Stocks paid meager dividends or none at all; corporate managements needed the money for working capital, or used it for capital building and speculation. Owners of rental property fared no better; the government froze rents, which soon meant that tenants were occupying premises virtually rent-free. Dipping into capital led to big losses, since cash, bonds and even stocks quickly shrunk drastically in value. The urgent need for income had important effects on the true prices of various types of property and investments.
Cash: Money held in cash lost value rapidly and soon became completely worthless. Of all investment forms, this was the most disastrous.
Bank Deposits: In theory, bank deposits became as worthless as cash. However, after the stabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid. Naturally, however, the great majority of depositors withdrew their funds at some time during the inflation, after much of the value had been lost, and exchanged them for goods. Few Germans held money in deposits through the entire period.
Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even faster than cash. After the stabilization, some restitution was provided by law. Holders of government bonds were reimbursed to the extent of 2.5% of the original bond values. Mortgage holders also received some repayment, while a 1925 law provided for 15-25% reimbursement of corporate bondholders, though the payment was delayed for some years. Here again, few investors held bonds or mortgages throughout the entire period; most holders got rid of them for whatever pittance they would bring during the inflation.
Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.
Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.
Personal Property: Capital was preserved by those who early changed it into objects of lasting value--rare coins, stamps, jewelry, works of art, antiques--or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.
Common Stocks: In an inflation, common stocks are generally considered a desirable hedge to protect against or even to profit from the rise in prices. In practice, it is not so simple. In this country stock prices have been known to fall violently just when inflation was most evident (1946, 1957, 1966, 1969). Market fluctuations--the rise of exciting new speculative stocks, waves of fear or greed--all make it much too easy to buy or to sell at the wrong time or to go into the wrong stocks.
Getting down to specifics, we can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.
Many very sharp but brief advances and declines in the market led to widespread speculation, and well-intentioned investors often wound up as traders. Naturally most of them did as badly as amateur speculators generally do. Many decided that speculation was the only sensible approach; when the entire economy and financial structure was visibly crumbling, who could wait patiently with confidence in the long-range value of anything?
Could it Happen Here?
Since 1939 the general price levels have gone up some 200% in this country. Much of this inflation was due to the government generating large amounts of money to pay for three wars. You can be absolutely certain that if we are involved in any further wars for big increases in military spending, there will be new inflationary surges. Modem governments do not dare to impose the taxes needed to pay for war. They find it much easier politically to inflate instead.
The most recent wave of inflation, which got underway in 1965, was triggered by enormous expansion in spending for the Vietnam war. The government ran deficits as big as $25 billion, and much of this debt was monetized by a process similar to that by which the Reichsbank monetized the German government's debt. The main difference is that the newly generated money shows up mainly as bank deposits instead of printed currency. Since bank demand deposits are in fact money, convertible into currency and usable for any type of purchase, the net result is the same.
At the same time that Vietnam war spending mushroomed, our government undertook a vast program of expensive social welfare spending. It was argued that this country could afford guns and butter. The result was an inflation which already has imposed a 20% capital tax on all savings held as cash, bonds, insurance and on pension payments and other fixed income.
Now, in March 1970, the government and the Federal Reserve have been fighting for a year to check the inflation. Thus far, they have succeeded in slowing down the economy, but prices have continued rising as fast as ever. The reason is simple. Inflation has developed momentum. Many people, especially businessmen, have no faith that the government will stick to its policy. They look for more boom and inflation ahead. Hence, they have continued to get rid of money as fast as possible and convert it into goods, machinery and factory buildings. Even though our manufacturing plant is already in excess in needs and is being utilized at only 82% of capacity, the building boom continues. The reasons are precisely those which led to this behavior in the German inflation.
The late 1960s also saw the rise of a new breed of financial speculator. Huge conglomerates were organized, often with heavy borrowing, taking advantage of inflationary trends. Although their stocks soared in 1967-1968, even a hint of possible deflation and a cooler economy led to drastic declines of 60-80% in 1969. Many reported serious losses or sharply lower earnings. We believe that many of these companies could not survive a period of recession and deflation. Further, some bankruptcies in a few huge, prominent speculative companies could set off a chain reaction and a financial crash. And that is where the great danger of a wild inflation lies.
Today the public expects and demands that the government must maintain prosperity and full employment. If a very severe business slump developed, Washington would have no choice at all--it would have to spend huge sums for relief, public works, to pay off mortgages, etc. Yet at the same time tax payments would drop sharply as business profits disappeared. Taxes could hardly be raised under such circumstances. What would the President do? Turn on the printing presses? What else could he do? [Editor's note: As a reminder, after this report was written, the redeemability of the dollar for gold was terminated in 1971, two Oil Crises struck in 1973 and 1979, and massive Cold War expenditures characterized the 1980's.]
Ironically enough, we think that all this could be triggered by the anti-inflation campaign. It may prove all too successful. The money managers in Washington are aiming at a mild cooling down in business. This would reduce spending and investment, and hopefully would slow down the rate of price escalation. We think that it may work for a while and to a degree. Unhappily it poses tremendous danger.
During the last several years of inflationary boom, debt has gone far too high. Government, individuals and especially businesses have borrowed and spent without limit. In an inflationary period, this makes sense. At the same time liquidity is at an all-time low. Cash and government bills are less than 20% of the current liabilities of business against a normal 40-50% (and 90% right after the war).
The danger is that some of the especially vulnerable businesses will get into deep trouble and that the trouble will spread. In 1954, 1958 and 1960 the economy could stand a moderate recession without its escalating into something worse. In 1970 this may no longer be the case. The trend toward illiquidity and dangerously high debt has proceeded for twenty years, and other figures indicate that the breaking point is near. It might come very soon, or not for many months or even a year or two. Who can tell just when some stray breeze will cause a rickety house of cards to collapse?
Once a snowballing financial and economic deflation gets underway, it could develop with breathtaking speed. Soon the government, instead of worrying about inflation, would be using desperation measures to halt the collapse, even if it had to run budgetary deficits of 100 billion or more. In the short run, in a pragmatic sense, Washington would simply feel that it was tackling an overriding emergency, relieving hardship, etc. In the long term, what it would be doing was to inflate up to the point where most of the huge debt burden was wiped out, and a fresh start could be made. Of course, this would be at the expense of millions of savers who would lose most of their capital. Hopefully the expropriation would be less drastic than it was in Germany.
Reprinted from The Nightmare German Inflation by Scientific Market Analysis, 1970.
"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." - Kenneth Boulding
Thursday, May 27, 2010
U.S. NOW ADDING 5.5 BILLION DOLLARS A DAY NATIONAL DEPT...IN 1 FREAKING DAY...
Judy Shelton: The recovery starts with sound money
How Do You Answer the Question? Toby Connor
Fixing Europe May Be an 'All or Nothing' Affair
Gold soars to $1,700 in Greece
Thursday, May 27, 2010Text Size:
From Zero Hedge:... Coinupdate.com reports that prices at which the Greek Central Bank is selling one ounce gold equivalents are as high as $1,700 (40% over spot), and prices on the black markets are even higher.The punchline, as Athens slowly returns to a forced gold standard: " A popular spot for street vendors to sell their coins is near the Athens Stock Exchange. There the traders wait for citizens to bring payments received from unloading their paper assets like stocks and bonds."That's good...Read full article...
Business-Economics
25 Questions To Ask Anyone Who Is Delusional Enough To Believe That This Economic Recovery Is Real
Published on 05-25-2010
Email To Friend Print Version
By Michael Snyder - BLN Contributing Writer
If you listen to the mainstream media long enough, you just might be tempted to believe that the United States has emerged from the recession and is now in the middle of a full-fledged economic recovery. In fact, according to Obama administration officials, the great American economic machine has roared back to life, stronger and more vibrant than ever before. But is that really the case? Of course not. You would have to be delusional to believe that. What did happen was that all of the stimulus packages and government spending and new debt that Obama and the U.S. Congress pumped into the economy bought us a little bit of time. But they have also made our long-term economic problems far worse. The reality is that the U.S. cannot keep supporting an economy on an ocean of red ink forever. At some point the charade is going to come crashing down.
And GDP is not a really good measure of the economic health of a nation. For example, if you would have looked at the growth of GDP in the Weimar republic in the early 1930s, you may have been tempted to think that the German economy was really thriving. German citizens were spending increasingly massive amounts of money. But of course that money was becoming increasingly worthless at the same time as hyperinflation spiralled out of control.
Well, today the purchasing power of our dollar is rapidly eroding as the price of food and other necessities continues to increase. So just because Americans are spending a little bit more money than before really doesn’t mean much of anything. As you will see below, there are a whole bunch of other signs that the U.S. economy is in very, very serious trouble.
Any “recovery” that the U.S. economy is experiencing is illusory and will be quite temporary. The entire financial system of the United States is falling apart, and the powers that be can try to patch it up and prop it up for a while, but in the end this thing is going to come crashing down.
But as obvious as that may seem to most of us, there are still quite a few people out there that are absolutely convinced that the U.S. economy will fully recover and will soon be stronger than ever.
So the following are 25 questions to ask anyone who is delusional enough to believe that this economic recovery is real….
#1) In what universe is an economy with 39.68 million Americans on food stamps considered to be a healthy, recovering economy? In fact, the U.S. Department of Agriculture forecasts that enrollment in the food stamp program will exceed 43 million Americans in 2011. Is a rapidly increasing number of Americans on food stamps a good sign or a bad sign for the economy?
#2) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in the month of March. This was an increase of almost 19 percent from February, and it was the highest monthly total since RealtyTrac began issuing its report back in January 2005. So can you please explain again how the U.S. real estate market is getting better?
#3) The Mortgage Bankers Association just announced that more than 10 percent of U.S. homeowners with a mortgage had missed at least one payment in the January-March period. That was a record high and up from 9.1 percent a year ago. Do you think that is an indication that the U.S. housing market is recovering?
#4) How can the U.S. real estate market be considered healthy when, for the first time in modern history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together?
#5) With the U.S. Congress planning to quadruple oil taxes, what do you think that is going to do to the price of gasoline in the United States and how do you think that will affect the U.S. economy?
#6) Do you think that it is a good sign that Arnold Schwarzenegger, the governor of the state of California, says that “terrible cuts” are urgently needed in order to avoid a complete financial disaster in his state?
#7) But it just isn’t California that is in trouble. Dozens of U.S. states are in such bad financial shape that they are getting ready for their biggest budget cuts in decades. What do you think all of those budget cuts will do to the economy?
#8) In March, the U.S. trade deficit widened to its highest level since December 2008. Month after month after month we buy much more from the rest of the world than they buy from us. Wealth is draining out of the United States at an unprecedented rate. So is the fact that the gigantic U.S. trade deficit is actually getting bigger a good sign or a bad sign for the U.S. economy?
#9) Considering the fact that the U.S. government is projected to have a 1.6 trillion dollar deficit in 2010, and considering the fact that if you went out and spent one dollar every single second it would take you more than 31,000 years to spend a trillion dollars, how can anyone in their right mind claim that the U.S. economy is getting healthier when we are getting into so much debt?
#10) The U.S. Treasury Department recently announced that the U.S. government suffered a wider-than-expected budget deficit of 82.69 billion dollars in April. So is the fact that the red ink of the U.S. government is actually worse than projected a good sign or a bad sign?
#11) According to one new report, the U.S. national debt will reach 100 percent of GDP by the year 2015. So is that a sign of economic recovery or of economic disaster?
#12) Monstrous amounts of oil continue to gush freely into the Gulf of Mexico, and analysts are already projecting that the seafood and tourism industries along the Gulf coast will be devastated for decades by this unprecedented environmental disaster. In light of those facts, how in the world can anyone project that the U.S. economy will soon be stronger than ever?
#13) The FDIC’s list of problem banks recently hit a 17-year high. Do you think that an increasing number of small banks failing is a good sign or a bad sign for the U.S. economy?
#14) The FDIC is backing 8,000 banks that have a total of $13 trillion in assets with a deposit insurance fund that is basically flat broke. So what do you think will happen if a significant number of small banks do start failing?
#15) Existing home sales in the United States jumped 7.6 percent in April. That is the good news. The bad news is that this increase only happened because the deadline to take advantage of the temporary home buyer tax credit (government bribe) was looming. So now that there is no more tax credit for home buyers, what will that do to home sales?
#16) Both Fannie Mae and Freddie Mac recently told the U.S. government that they are going to need even more bailout money. So what does it say about the U.S. economy when the two “pillars” of the U.S. mortgage industry are government-backed financial black holes that the U.S. government has to relentlessly pour money into?
#17) 43 percent of Americans have less than $10,000 saved for retirement. Tens of millions of Americans find themselves just one lawsuit, one really bad traffic accident or one very serious illness away from financial ruin. With so many Americans living on the edge, how can you say that the economy is healthy?
#18) The mayor of Detroit says that the real unemployment rate in his city is somewhere around 50 percent. So can the U.S. really be experiencing an economic recovery when so many are still unemployed in one of America’s biggest cities?
#19) Gallup’s measure of underemployment hit 20.0% on March 15th. That was up from 19.7% two weeks earlier and 19.5% at the start of the year. Do you think that is a good trend or a bad trend?
#20) One new poll shows that 76 percent of Americans believe that the U.S. economy is still in a recession. So are the vast majority of Americans just stupid or could we still actually be in a recession?
#21) The bottom 40 percent of those living in the United States now collectively own less than 1 percent of the nation’s wealth. So is Barack Obama’s mantra that “what is good for Wall Street is good for Main Street” actually true?
#22) Richard Russell, the famous author of the Dow Theory Letters, says that Americans should sell anything they can sell in order to get liquid because of the economic trouble that is coming. Do you think that Richard Russell is delusional or could he possibly have a point?
#23) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. In fact, that was almost twice the level of a year earlier. Does that look like a good trend to you?
#24) In March, the price of fresh and dried vegetables in the United States soared 49.3% - the most in 16 years. Is it a sign of a healthy economy when food prices are increasing so dramatically?
#25) 1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005. So shouldn’t we at least wait until the number of Americans filing for bankruptcy is not setting new all-time records before we even dare whisper the words “economic ".
Breaking from Moneynews.com
Report: US Money Supply Plunging at 1930s Rate
The United States’ M3 money supply reportedly is plunging at an accelerating pace similar to that in 1929 to 1933, despite near-zero interest rates.
The M3 data — which include a broad range of bank accounts and are tracked by British and European experts for danger signs about the U.S. economy — began shrinking a year ago, London’s Daily Telegraph reported. That race has since picked up speed.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6 percent, the report said. The assets of institutional money market funds fell at a 37 percent rate, the sharpest drop ever.
"It’s frightening," Professor Tim Congdon, from International Monetary Research, told the newspaper.
"The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.
White House officials plan even more spending, despite warnings from the IMF that the gross public debt of the United States will reach 97 percent of GDP next year and 110 percent by 2015.
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a new financial boost of $200 billion to keep growth on track.
"We are nearly 8 million jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.
Meanwhile, a top Federal Reserve official said the central bank will watch the U.S. economy's progress through autumn and into 2011 as it decides how long it will hold interest rates at ultra-low levels, Reuters reported.
In an interview earlier this week with Reuters Insider television in London, St. Louis Federal Reserve Bank President James Bullard said the U.S. economic recovery was on track and that the Fed was keeping a close eye on risks stemming from the euro debt crisis.
He said the Fed could not make any promises on when it would change its monetary policy stance.
"The economy is doing fairly well so far," Bullard said.
"We have some risk, we have the situation in Europe we're watching very closely, but we'll see how things proceed through the fall and into 2011."
The Fed has chained rates to near zero since December 2008 to help steer the world's biggest economy through the financial crisis and resulting recession.
© Moneynews. All rights reserved.
The #1 Reason to Own Gold and Silver
By Greg McCoach Thursday, May 27th, 2010
If you want to get a glimpse into the future of things to come in the United States, you need look no further than recent events in Greece.
The protests and riots that have been underway because of the unpopular cuts in pensions, wages, and benefits (along with increased taxes) are a precursor of things to come for the world at large.
The reason this is happening is that Greece's government spent and borrowed themselves into oblivion, and must now submit to harsh terms in order to receive a bailout. They have no choice in the matter.
They either rein in their spending and raise taxes or suffer the horrible consequences of not getting a bailout, which essentially would mean the death of Greece as a country.
The difficult and harsh realities now faced by the people of Greece should be a wake-up call for all citizens of the world.
Running deficits and spending yourself beyond your means does matter and eventually catches up with you. When that moment comes, it will not be pleasant for the people of that state or country.
And the Greeks, like most governments around the world, have been overspending for decades. The ridiculous, failed government-owned businesses, benefit programs, and subsidies of every kind have made Greece a laughing stock and the classic example of "out of control" government.
But until the unsustainable situation caused a dire problem, most people (voters) went along with the status quo. So long as they were getting theirs, who cares?
This is the essence of what ails America and every other country that thinks it can create money out of thin air — whenever it wants or needs to, to get whatever it so desires.
This line of thinking — that government has a limitless checkbook and can take care of its citizens from cradle to grave — is complete and utter stupidity. It always has consequences and now those consequences are going to be felt around the world. The painful process of fiat currency unraveling and bubble popping is picking up momentum.
The rioting, protests, strikes, and violence we are seeing in Greece right now will also happen in the United States and around the world as one fiat currency domino after another topples.
Mark my words: Civil unrest is coming to many countries (including the United States), and it is coming sooner than most people understand.
The 1,000-point drop in the Dow earlier this month was blamed at first on the mess in Greece as the complexity of a financial solution became more apparent.
In reality, the reason for the drop in the Dow is multi-faceted; in my opinion, it was the result of its being grossly overvalued.
When I heard the mainstream media eventually try to tell us that the massive drop in the Dow was caused by a computer mistake, I actually burst out laughing... The powers that be certainly don’t want mainstream Americans to understand the truth of just how weak the whole system is, and that the Dow can sell off 1,000 points in less than a few hours...
For now, however, the next trillion dollar bailout is underway as I promised you would happen again as we tried to bailout the first wave (TARP). We will continue to hear about bailouts of all kinds.
The latest one is a three-year plan with a $1 trillion price tag, combining efforts from the European Commission, Eurozone countries, and the International Monetary Fund to support the euro and poorer EU countries at risk for default like Greece, Spain, Ireland, and Portugal.
These bailouts are a joke and give those in power even greater authority to steal from the masses and bring the world to the economic precipice.
The de-coupling that I have been talking about for almost a year and a half is now underway. The first major signal occurred as the Dow dropped 1,000 points and gold jumped higher on the news.
In other words, when we see that gold is going higher as world markets continue to sell off, that is the signal that safe haven buying is about to become a main stream event.
I would imagine that gold is getting ready to run to the next new high, which I anticipate will take us to the $1,350 level or possibly higher. The story in silver, however, is getting even more interesting...
To summarize, now that the de-coupling is underway, I believe we are going to see major moves in the precious metals and mining stocks as the masses run for the exits on their failing government currencies and grossly overvalued general stock and bond market portfolios.
As this movement grows in maturity, the stampede into the precious metals is going to be one for the record books.
Hold on tight to your precious metals investments as the currency and general stock markets whipsaw back and forth before their ultimate collapse.
Gold and silver is the place you ought to be!
For investors looking for leverage, Van Eck offers the Gold Miners ETF (NYSE: GDX), based on an index that provides exposure to publicly-traded companies engaged in mining for gold. Another option is the Junior Gold Miners ETF (NYSE: GDXJ), also from Van Eck. This fund focuses on equities of small and mid cap gold companies.
For investors looking to leverage the price of gold even further, I invite you to check out the profits you could be making right now by joining Luke Burgess' Hard Money Millionaire advisory service.
In 2009, the Hard Money Millionaire portfolio delivered 22 winning investment recommendations out of 23 ventures — a 95.7% success rate. At its best, his portfolio returned members seven (7) winning investments that each returned a +100% gain.
In fact, the gains from his Hard Money Millionaire portfolio are on par with $100 million hedge funds!
For the year, the Hard Money Millionaire portfolio returned an average of 21.3%. The Barclay Hedge Fund Index, which uses data from 1,658 hedge funds around the world, calculates that hedge funds returned an average of 24.1% for 2009 — only slightly higher than his average return.
The difference between the hedge fund gains and Hard Money Millionaire? You don't need a million dollars to join.
You can even check out his latest recommendation right now.
Good Investing,
Greg McCoach
French Strike on Plans to Raise Retirement Age- USA Today
Mining Equipment Sold Out until 2011- CNN Money
Gold ETF Edges Up on Safe Haven Appeal- Financial Post
US Spending on Food Stamps at All-Time High- Fox News
Health Insurance Hikes Hitting CA Small Businesses- LA Times
More Cities on the Brink of Bankruptcy- CNBC
How Do You Answer the Question? Toby Connor
Fixing Europe May Be an 'All or Nothing' Affair
Gold soars to $1,700 in Greece
Thursday, May 27, 2010Text Size:
From Zero Hedge:... Coinupdate.com reports that prices at which the Greek Central Bank is selling one ounce gold equivalents are as high as $1,700 (40% over spot), and prices on the black markets are even higher.The punchline, as Athens slowly returns to a forced gold standard: " A popular spot for street vendors to sell their coins is near the Athens Stock Exchange. There the traders wait for citizens to bring payments received from unloading their paper assets like stocks and bonds."That's good...Read full article...
Business-Economics
25 Questions To Ask Anyone Who Is Delusional Enough To Believe That This Economic Recovery Is Real
Published on 05-25-2010
Email To Friend Print Version
By Michael Snyder - BLN Contributing Writer
If you listen to the mainstream media long enough, you just might be tempted to believe that the United States has emerged from the recession and is now in the middle of a full-fledged economic recovery. In fact, according to Obama administration officials, the great American economic machine has roared back to life, stronger and more vibrant than ever before. But is that really the case? Of course not. You would have to be delusional to believe that. What did happen was that all of the stimulus packages and government spending and new debt that Obama and the U.S. Congress pumped into the economy bought us a little bit of time. But they have also made our long-term economic problems far worse. The reality is that the U.S. cannot keep supporting an economy on an ocean of red ink forever. At some point the charade is going to come crashing down.
And GDP is not a really good measure of the economic health of a nation. For example, if you would have looked at the growth of GDP in the Weimar republic in the early 1930s, you may have been tempted to think that the German economy was really thriving. German citizens were spending increasingly massive amounts of money. But of course that money was becoming increasingly worthless at the same time as hyperinflation spiralled out of control.
Well, today the purchasing power of our dollar is rapidly eroding as the price of food and other necessities continues to increase. So just because Americans are spending a little bit more money than before really doesn’t mean much of anything. As you will see below, there are a whole bunch of other signs that the U.S. economy is in very, very serious trouble.
Any “recovery” that the U.S. economy is experiencing is illusory and will be quite temporary. The entire financial system of the United States is falling apart, and the powers that be can try to patch it up and prop it up for a while, but in the end this thing is going to come crashing down.
But as obvious as that may seem to most of us, there are still quite a few people out there that are absolutely convinced that the U.S. economy will fully recover and will soon be stronger than ever.
So the following are 25 questions to ask anyone who is delusional enough to believe that this economic recovery is real….
#1) In what universe is an economy with 39.68 million Americans on food stamps considered to be a healthy, recovering economy? In fact, the U.S. Department of Agriculture forecasts that enrollment in the food stamp program will exceed 43 million Americans in 2011. Is a rapidly increasing number of Americans on food stamps a good sign or a bad sign for the economy?
#2) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in the month of March. This was an increase of almost 19 percent from February, and it was the highest monthly total since RealtyTrac began issuing its report back in January 2005. So can you please explain again how the U.S. real estate market is getting better?
#3) The Mortgage Bankers Association just announced that more than 10 percent of U.S. homeowners with a mortgage had missed at least one payment in the January-March period. That was a record high and up from 9.1 percent a year ago. Do you think that is an indication that the U.S. housing market is recovering?
#4) How can the U.S. real estate market be considered healthy when, for the first time in modern history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together?
#5) With the U.S. Congress planning to quadruple oil taxes, what do you think that is going to do to the price of gasoline in the United States and how do you think that will affect the U.S. economy?
#6) Do you think that it is a good sign that Arnold Schwarzenegger, the governor of the state of California, says that “terrible cuts” are urgently needed in order to avoid a complete financial disaster in his state?
#7) But it just isn’t California that is in trouble. Dozens of U.S. states are in such bad financial shape that they are getting ready for their biggest budget cuts in decades. What do you think all of those budget cuts will do to the economy?
#8) In March, the U.S. trade deficit widened to its highest level since December 2008. Month after month after month we buy much more from the rest of the world than they buy from us. Wealth is draining out of the United States at an unprecedented rate. So is the fact that the gigantic U.S. trade deficit is actually getting bigger a good sign or a bad sign for the U.S. economy?
#9) Considering the fact that the U.S. government is projected to have a 1.6 trillion dollar deficit in 2010, and considering the fact that if you went out and spent one dollar every single second it would take you more than 31,000 years to spend a trillion dollars, how can anyone in their right mind claim that the U.S. economy is getting healthier when we are getting into so much debt?
#10) The U.S. Treasury Department recently announced that the U.S. government suffered a wider-than-expected budget deficit of 82.69 billion dollars in April. So is the fact that the red ink of the U.S. government is actually worse than projected a good sign or a bad sign?
#11) According to one new report, the U.S. national debt will reach 100 percent of GDP by the year 2015. So is that a sign of economic recovery or of economic disaster?
#12) Monstrous amounts of oil continue to gush freely into the Gulf of Mexico, and analysts are already projecting that the seafood and tourism industries along the Gulf coast will be devastated for decades by this unprecedented environmental disaster. In light of those facts, how in the world can anyone project that the U.S. economy will soon be stronger than ever?
#13) The FDIC’s list of problem banks recently hit a 17-year high. Do you think that an increasing number of small banks failing is a good sign or a bad sign for the U.S. economy?
#14) The FDIC is backing 8,000 banks that have a total of $13 trillion in assets with a deposit insurance fund that is basically flat broke. So what do you think will happen if a significant number of small banks do start failing?
#15) Existing home sales in the United States jumped 7.6 percent in April. That is the good news. The bad news is that this increase only happened because the deadline to take advantage of the temporary home buyer tax credit (government bribe) was looming. So now that there is no more tax credit for home buyers, what will that do to home sales?
#16) Both Fannie Mae and Freddie Mac recently told the U.S. government that they are going to need even more bailout money. So what does it say about the U.S. economy when the two “pillars” of the U.S. mortgage industry are government-backed financial black holes that the U.S. government has to relentlessly pour money into?
#17) 43 percent of Americans have less than $10,000 saved for retirement. Tens of millions of Americans find themselves just one lawsuit, one really bad traffic accident or one very serious illness away from financial ruin. With so many Americans living on the edge, how can you say that the economy is healthy?
#18) The mayor of Detroit says that the real unemployment rate in his city is somewhere around 50 percent. So can the U.S. really be experiencing an economic recovery when so many are still unemployed in one of America’s biggest cities?
#19) Gallup’s measure of underemployment hit 20.0% on March 15th. That was up from 19.7% two weeks earlier and 19.5% at the start of the year. Do you think that is a good trend or a bad trend?
#20) One new poll shows that 76 percent of Americans believe that the U.S. economy is still in a recession. So are the vast majority of Americans just stupid or could we still actually be in a recession?
#21) The bottom 40 percent of those living in the United States now collectively own less than 1 percent of the nation’s wealth. So is Barack Obama’s mantra that “what is good for Wall Street is good for Main Street” actually true?
#22) Richard Russell, the famous author of the Dow Theory Letters, says that Americans should sell anything they can sell in order to get liquid because of the economic trouble that is coming. Do you think that Richard Russell is delusional or could he possibly have a point?
#23) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. In fact, that was almost twice the level of a year earlier. Does that look like a good trend to you?
#24) In March, the price of fresh and dried vegetables in the United States soared 49.3% - the most in 16 years. Is it a sign of a healthy economy when food prices are increasing so dramatically?
#25) 1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005. So shouldn’t we at least wait until the number of Americans filing for bankruptcy is not setting new all-time records before we even dare whisper the words “economic ".
Breaking from Moneynews.com
Report: US Money Supply Plunging at 1930s Rate
The United States’ M3 money supply reportedly is plunging at an accelerating pace similar to that in 1929 to 1933, despite near-zero interest rates.
The M3 data — which include a broad range of bank accounts and are tracked by British and European experts for danger signs about the U.S. economy — began shrinking a year ago, London’s Daily Telegraph reported. That race has since picked up speed.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6 percent, the report said. The assets of institutional money market funds fell at a 37 percent rate, the sharpest drop ever.
"It’s frightening," Professor Tim Congdon, from International Monetary Research, told the newspaper.
"The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.
White House officials plan even more spending, despite warnings from the IMF that the gross public debt of the United States will reach 97 percent of GDP next year and 110 percent by 2015.
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a new financial boost of $200 billion to keep growth on track.
"We are nearly 8 million jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.
Meanwhile, a top Federal Reserve official said the central bank will watch the U.S. economy's progress through autumn and into 2011 as it decides how long it will hold interest rates at ultra-low levels, Reuters reported.
In an interview earlier this week with Reuters Insider television in London, St. Louis Federal Reserve Bank President James Bullard said the U.S. economic recovery was on track and that the Fed was keeping a close eye on risks stemming from the euro debt crisis.
He said the Fed could not make any promises on when it would change its monetary policy stance.
"The economy is doing fairly well so far," Bullard said.
"We have some risk, we have the situation in Europe we're watching very closely, but we'll see how things proceed through the fall and into 2011."
The Fed has chained rates to near zero since December 2008 to help steer the world's biggest economy through the financial crisis and resulting recession.
© Moneynews. All rights reserved.
The #1 Reason to Own Gold and Silver
By Greg McCoach Thursday, May 27th, 2010
If you want to get a glimpse into the future of things to come in the United States, you need look no further than recent events in Greece.
The protests and riots that have been underway because of the unpopular cuts in pensions, wages, and benefits (along with increased taxes) are a precursor of things to come for the world at large.
The reason this is happening is that Greece's government spent and borrowed themselves into oblivion, and must now submit to harsh terms in order to receive a bailout. They have no choice in the matter.
They either rein in their spending and raise taxes or suffer the horrible consequences of not getting a bailout, which essentially would mean the death of Greece as a country.
The difficult and harsh realities now faced by the people of Greece should be a wake-up call for all citizens of the world.
Running deficits and spending yourself beyond your means does matter and eventually catches up with you. When that moment comes, it will not be pleasant for the people of that state or country.
And the Greeks, like most governments around the world, have been overspending for decades. The ridiculous, failed government-owned businesses, benefit programs, and subsidies of every kind have made Greece a laughing stock and the classic example of "out of control" government.
But until the unsustainable situation caused a dire problem, most people (voters) went along with the status quo. So long as they were getting theirs, who cares?
This is the essence of what ails America and every other country that thinks it can create money out of thin air — whenever it wants or needs to, to get whatever it so desires.
This line of thinking — that government has a limitless checkbook and can take care of its citizens from cradle to grave — is complete and utter stupidity. It always has consequences and now those consequences are going to be felt around the world. The painful process of fiat currency unraveling and bubble popping is picking up momentum.
The rioting, protests, strikes, and violence we are seeing in Greece right now will also happen in the United States and around the world as one fiat currency domino after another topples.
Mark my words: Civil unrest is coming to many countries (including the United States), and it is coming sooner than most people understand.
The 1,000-point drop in the Dow earlier this month was blamed at first on the mess in Greece as the complexity of a financial solution became more apparent.
In reality, the reason for the drop in the Dow is multi-faceted; in my opinion, it was the result of its being grossly overvalued.
When I heard the mainstream media eventually try to tell us that the massive drop in the Dow was caused by a computer mistake, I actually burst out laughing... The powers that be certainly don’t want mainstream Americans to understand the truth of just how weak the whole system is, and that the Dow can sell off 1,000 points in less than a few hours...
For now, however, the next trillion dollar bailout is underway as I promised you would happen again as we tried to bailout the first wave (TARP). We will continue to hear about bailouts of all kinds.
The latest one is a three-year plan with a $1 trillion price tag, combining efforts from the European Commission, Eurozone countries, and the International Monetary Fund to support the euro and poorer EU countries at risk for default like Greece, Spain, Ireland, and Portugal.
These bailouts are a joke and give those in power even greater authority to steal from the masses and bring the world to the economic precipice.
The de-coupling that I have been talking about for almost a year and a half is now underway. The first major signal occurred as the Dow dropped 1,000 points and gold jumped higher on the news.
In other words, when we see that gold is going higher as world markets continue to sell off, that is the signal that safe haven buying is about to become a main stream event.
I would imagine that gold is getting ready to run to the next new high, which I anticipate will take us to the $1,350 level or possibly higher. The story in silver, however, is getting even more interesting...
To summarize, now that the de-coupling is underway, I believe we are going to see major moves in the precious metals and mining stocks as the masses run for the exits on their failing government currencies and grossly overvalued general stock and bond market portfolios.
As this movement grows in maturity, the stampede into the precious metals is going to be one for the record books.
Hold on tight to your precious metals investments as the currency and general stock markets whipsaw back and forth before their ultimate collapse.
Gold and silver is the place you ought to be!
For investors looking for leverage, Van Eck offers the Gold Miners ETF (NYSE: GDX), based on an index that provides exposure to publicly-traded companies engaged in mining for gold. Another option is the Junior Gold Miners ETF (NYSE: GDXJ), also from Van Eck. This fund focuses on equities of small and mid cap gold companies.
For investors looking to leverage the price of gold even further, I invite you to check out the profits you could be making right now by joining Luke Burgess' Hard Money Millionaire advisory service.
In 2009, the Hard Money Millionaire portfolio delivered 22 winning investment recommendations out of 23 ventures — a 95.7% success rate. At its best, his portfolio returned members seven (7) winning investments that each returned a +100% gain.
In fact, the gains from his Hard Money Millionaire portfolio are on par with $100 million hedge funds!
For the year, the Hard Money Millionaire portfolio returned an average of 21.3%. The Barclay Hedge Fund Index, which uses data from 1,658 hedge funds around the world, calculates that hedge funds returned an average of 24.1% for 2009 — only slightly higher than his average return.
The difference between the hedge fund gains and Hard Money Millionaire? You don't need a million dollars to join.
You can even check out his latest recommendation right now.
Good Investing,
Greg McCoach
French Strike on Plans to Raise Retirement Age- USA Today
Mining Equipment Sold Out until 2011- CNN Money
Gold ETF Edges Up on Safe Haven Appeal- Financial Post
US Spending on Food Stamps at All-Time High- Fox News
Health Insurance Hikes Hitting CA Small Businesses- LA Times
More Cities on the Brink of Bankruptcy- CNBC
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