DougM

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  • Another Dr. Doom: Peter Schiff
    Schiff's been half right; he was right about the crash but made the wrong call on inflation. Schiff was and is pushing commodities and foreign investments. Turns out the deflationists (e.g. Shedlock) were right. Schiff may ultimately be proven right as the government's responses to deflation eventually lead to the inflation he's expecting. But right now anyone holding a basket of commodities, commodity-linked currencies or equities, or foreign equities of any kind especially emerging markets, has been clobbered.
    Jan 08 11:00 am |Rating: +3 -3 |Link to Comment |View article
  • New Mortgage Bankruptcy Bill Does Not Address Real Problem
    I agree this cram-down idea is terrible and likely to backfire. Plus all of us who didn't overpay for houses, didn't buy houses we couldn't afford, are paying our mortgages on time, or (heavens to betsy!) renting are effectively screwed to bail out people who were greedy, foolish, or both. A better idea might be to allow the banks (or government) to have an option-like ownership stake in any house where the loan is crammed down. If the homeowner ever sells, the bank has a claim on a portion of any profits above the loan balance.
    Jan 07 10:46 am |Rating: +8 0 |Link to Comment |View article
  • Government's Panicked Response to This Economic Crisis
    As long as you keep your cash in relatively short vehicles, you can redeploy it at higher interest rates when inflation returns. Then, assuming the government tries to get inflation back under control, you can ride down the backside with bonds paying sky-high rates. Indeed, we are arguably at the top of exactly such a bond bubble that began in the early 80s. Holders of long-dated bonds have made a killing because they locked in high interest rates while inflation fears were still fresh in people's minds.
    Jan 07 10:28 am |Rating: +2 0 |Link to Comment |View article
  • Obama's Option: Big Tax Cuts
    The tax "cuts" are never going to be reductions in the high marginal rates paid by the minority of taxpayers who pay most of the taxes. They are almost certainly going to take the form of "tax credits" to people who pay little or no income taxes. He campaigned on this - no surprises here.
    Jan 06 15:38 pm |Rating: +1 0 |Link to Comment |View article
  • Keynes vs. Von Mises
    At the end of the day, what really matters is whether the projects undertaken by government have a positive economic return. Would anyone care to argue that there never have been nor ever will be any government projects that have economic benefit? I expect there are plenty of such projects available, and their comparative attractiveness rises as other projects in the private sector fall off a cliff and as interest rates plunge. Unfortunately, there are all too many projects that have little or no value, and the machinery of government inevitably showers resources into the good, the bad, and the ugly.
    Jan 06 12:22 pm |Rating: +3 0 |Link to Comment |View article
  • First Call of a Double-Dip Recession: Setting Up a Market Bottom?
    Fitz919, as another poster has indicated, I believe you're referring to the Credit Suisse ARM reset chart, circa early 2007. A tidal wave of toxic "pick-a-payment&q... option-ARMs and "liar's loan" Alt-A loans are due to reset in 2009 and 2010. That housing bubble is a gift that just keeps on giving.

    That said, the chart was prepared almost 2 years ago. We don't know how many of those mortgages have been refied or have already defaulted. We also don't know (but can suspect) that the government's efforts to push fixed mortgage rates to artificially low levels will be successful in the short term and that many of these loans will somehow be rolled (despite negative equity) into fixed rate loans before the lid pops off the inflationary bubble the government's creating.
    Jan 03 17:38 pm |Rating: 0 0 |Link to Comment |View article
  • Ignore the Pundits
    Here's the answer to watching CNBC - just turn off the sound! Then enjoy the likes of Melissa Francis, Rebecca Jarvis, Becky Quick, Margaret Brennan, Erin Burnett, and guests like Saskia Scholtes.
    Jan 01 21:01 pm |Rating: +3 -1 |Link to Comment |View article
  • The Dr. Doom Space Is Getting Crowded
    Don't forget Peter Schiff and Bill Fleckenstein.
    Dec 31 11:50 am |Rating: +1 -2 |Link to Comment |View article
  • Returning to a Gold Standard Is a Bad Idea
    Sorry, one other point on the idea that all time deposits would have to be supported by a direct claim on gold, and only one such claim could exist for any piece of gold. It seems like that would inevitably lead to disastrous deflation.

    All actors in the economic system will have to have a certain amount of gold to meet necessary short-term transactions. Small actors will have enough gold for a few days/weeks/months of food/rent/energy, large actors will have enough gold to meet their next payroll run, fund major purchases, or whatever. The problem is, there's not enough gold to support the one-to-one claim. In the distant past, perhaps, but the rate at which gold is being mined is much slower than the rate of economic growth. Even if productivity improvements cease, the rate of increase in the population ensures that the gold supply is eventually going to be challenged.

    What happens when the supply of gold isn't keeping up with the economy? Lots of bad things. At first, the value of gold relative to all other goods and services goes up. This takes the form, eventually, of ever-decreasing wages and prices. Actors in the system early on benefit because their gold buys more and more. New actors have some trouble, though. What's worse, everyone can now see that by waiting, the value of everything relative to gold goes down. People begin to defer their consumption, holding their gold to buy things later. This reduces economic activity, eventually causing some actors to become unemployed. The potential wealth they might have created is lost - their time is a wasting asset similar to an unsold hotel room or airline seat. Things are worse still for debtors, who discover that they must pay back their loans in increasingly hard-to-obtain gold. People stop borrowing, knowing they cannot pay back, and so worthwhile projects begin to go unfunded. Lenders discover that simply storing their gold earns a better return than funding projects that might improve productivity, in terms of the goods and services that can be claimed later. Of course, huge numbers of people and resources are thrown at the gold-mining industry in a futile effort to wrest more gold from the earth, effort that is disproportionate to the actual value of gold as a commodity. This economy spirals down until people eventually get the gold monkey off their backs. At first, they begin to barter goods and services, bypassing the gold mechanism entirely. This is of course very inefficient, and so they begin to use IOUs backed by either assets or future productivity of known actors in lieu of gold. Eventually they realize that they could have kept the gold-based standard of measure for money but without restricting the supply of money to the physical amount of gold available, simply by allowing the gold necessary for short-term transactions to be lent out.
    Dec 31 02:35 am |Rating: +2 0 |Link to Comment |View article
  • Returning to a Gold Standard Is a Bad Idea
    Thanks, Smarty, I've downloaded it and I'll read through it as time permits. One other issue/question/quibble about your earlier post where you wrote:

    "The problem with fractional reserve banking is that the banker takes advantage of that trust for his own benefit by lending your money out multiple times and counting on the fact that enough depositors will leave enough money in the bank to cover all withdrawls.

    A gold standard without fractional reserve lending would minimize this (some would try anyway, but be caught and imprisoned eventually) as it would not be allowed for any piece of money (gold) to have more than one claim on it at any instant. Since the banker can't "print" more gold they can't cheat the depositors for their own gain."

    Technically, the banker's aren't doing this, the system as a whole is. When gold is lent to another person, the lender doesn't have a claim on that particular piece of gold anymore, the lender has a claim on the borrower, and/or on any collateral posted for the loan.

    When the gold eventually gets redeposited in a bank, it's indistinguishable from a piece of gold that was, say, panned from a river and deposited. There's still only one claim on it, by the depositor.

    Even there, the depositor gives up a direct claim on gold when he/she crosses the line from simply asking that the gold be stored, and agrees to lend out the gold, or have it lent, in exchange for interest. The depositor is now in the same position as the bank with respect to lending out gold - he has a claim on the bank, or the bank's collateral, but not on the gold per se. The depositor has, in effect, become a lender, without a direct claim on gold. The bank may well have collateral, in the form of a loan portfolio, to back up the depositor's claim. The depositor could, of course, have lent his or her gold directly to a borrower, and the state of affairs would, in the aggregate across the entire system, be no different.

    Why then have the bank as an intermediary? It strikes me that the bank serves several economically useful functions in this example:
    1. It serves, system-wide, to pool risk, so that no single depositor is exposed to a single bad loan. This is similar in principal to the economic value provided by insurance.
    2. It is more efficient to centralize (for a fee, of course) the function of checking the credit of borrowers, servicing loans, and collecting on bad loans.
    3. It allows for a decoupling of maturities that is useful but potentially dangerous - namely, it allows a large enough number of short-duration deposits to fund a smaller number of long-duration loans.

    It's point (3) that you seem to argue most strongly against, so I'd like to drill into it. I'll assert that people need a goodly amount of gold in relatively short-duration deposits to fund day-to-day and month-to-month activities. In fact, there may be more gold of this sort in a large economy of relatively small actors than there is gold in the hands of very wealthy actors able to directly make investments or long-duration loans. Banks can make these short-duration deposits available for loans that almost always have longer duration, relying once again on pooling to ensure that demands are met with a smaller amount of gold kept on reserve. This is economically valuable because more worthwhile projects can be funded through loans, benefitting both the borrowers and, through the interest they earn, the depositors as well. The depositors must agree to this, of course - otherwise they can still choose to earn no interest by simply stockpiling their gold and making it unavailable to the pool. This system of using short-term money to fund long-term projects is obviously inherently unstable - as has been discovered many times, including recently, it depends on pool statistics, and is vulnerable to runs. Society has decided that this economic function of banking has enough value that we don't want to lose it, and so we have various mechanisms for preventing runs, namely government insurance on the deposits coupled with reserve requirements and regulations regarding prudent lending practices. Sadly, this last bit has been neglected recently. The old rules for trying to support this included having depositors wait for their withdrawals and allowing banks to call in loans. These rules were found to have disastrous consequences in the 1930s, so we abandonded them.

    So either we forgo the economic benefits of (3), or we find a better system than the one we have now. If there's one in the book, I'll be glad to read about it. All I know now is that (3) appears to have benefit (I personally benefit from it as both a depositor and a borrower), and the current set of rules to fix the inherent vulnerability is better than what we had in the past.
    Dec 31 01:52 am |Rating: 0 0 |Link to Comment |View article
  • Returning to a Gold Standard Is a Bad Idea
    Smarty, I still don't get it. I'm not sure I know what "savings" are. You appear to define them in terms of "money", but this seems circular. In the real world, all we have are assets and, if they're allowed (don't see how you can realistically outlaw them), loans.

    I'll start with a simple economy that only produces consumable goods, like food and clothing. Every year, all participants produce a certain amount of these items, and then consume them. We don't all produce the same things - some people raise cattle, some raise corn, etc. We could inefficiently barter these items, or we could trade them in a more efficient "hub-and-spoke&qu... manner with one of the goods standing in as a unit of value against which all others are measured. Loans in this world would take the form of someone foregoing some portion of his consumption to enable someone else to consume more, receiving an IOU from the other person.

    Throw in services, things don't really change. After all, the workers in the earlier economy were doing things like growing corn and raising cattle. The folks working on the cattle ranch will accept from the ranch's owner some portion of the eventual cattle sales. The rancher doesn't really have any other way to "pay" them except in the form of either actual goods from a stockpile laid in earlier, or in the form of IOUs that can be redeemed when the cattle are marketed. Now this situation doesn't really change no matter what the service is.

    Throw in more durable items, things change a little. For example, someone has to put in the time to construct the bulidings making up the cattle ranch, and has to do this well before any cattle will actually be sold. We're well beyond the point where a single person or family can construct such businesses entirely by their own efforts. Somehow, other actors in the economy have to be encouraged to help construct the ranch. Once again, we have the problem that either a stockpile of goods is available to pay them with, or they can be paid with IOUs, or (and finally a difference from the original example) they can be paid via part-ownership in the ranch and a claim on its future productivity.

    I don't actually need money per se for any of the above. In a sense, "money" has shown up once we instituted the "hub-and-spoke&qu... valuation system, but no actual quantities of the hub commodity need to be in "circulation"... to support the system described. It's true that a durable commodity such as gold could take the place of the hand-waived "stockpile of goods" with which to pay various actors, eliminating the need for IOUs. But what exactly are "savings"? Is the definition simply to stockpile some goods? Or just particular goods, namely quantities of the hub commodity? How does a stockpile of the hub commodity differ, fundamentally, from a stockpile of any other commodity? Do all savings have to be in the hub commodity? For that matter, the hub commodity was produced through some amount of effort. So was the ranch, though. Except the ranch has the potential to produce more value in the future (more than going out and hunting wild cattle, say). Isn't this also a form of savings (an investment)?

    Specifically to the inflation/deflation question, it strikes me that even with a hub commodity such as gold, that had to be physically circulated, you might nevertheless have inflation if the velocity of transactions was high enough. In other words, the speed at which it was flowing in and out of different stockpiles. And I don't see how you've eliminated fractional reserve banking. Consider again the workers at the ranch. Suppose the rancher has to borrow gold from someone who has a large stockpile and is willing to lend out their gold in exchange for a share of the ranch's future profits. Now suppose that the workers are going to "save" some of their "money". Where, exactly? The instant that they decide they'd rather earn some "interest" on the "money", you are back to banking again, as their savings collectively form the large stockpile that was in part lent to the rancher. By choosing to "save" some of the gold they were paid, the workers are saying (to the economy as a whole) "please produce less consumable items such as food, and please hire more people and engage them in the business of constructing things (like the ranch) that will provide even more food in the future. And this then creates more "supply" of money to accept the projects that are "bidding" for loans.

    So even with gold as the hub commodity, you'd still IMO end up with lending, and therefore an expansion of the effective "money supply", as well as velocity effects that could drive the relative prices of things up or down relative to the currency. Although obviously the big danger is that the velocity would be too slow, and the economy would be held back or even slide into deflation as people began to over-value the hub commodity, which is in limited supply relative to it's special role, even though it's in abundant supply relative to actual (industrial) uses. This is IMO the big danger of sticking to a gold-based system.

    So where's the problem here? Presumably the amount of lending wouldn't just expand to infinity even if there were no lower limit on bank reserves. Reason: you'd run out of projects looking for loans at some point (or at least, reasonable projects). Where else might there be trouble? One big problem is "human capital". Every actor in the system has some economic value based on their expected future contributions to the overall production. This future value is very high compared to what most people have in stockpiled "savings". There is a temptation to overconsume now at the expense of future consumption, given a lending mechanism that facilitates this. Some of this is good (borrowing to acquire productive or durable assets), and some isn't (borrowing to fuel short-term consumption). Indeed, arguably the government is the worst actor of all on this score.

    I would still argue that it's best to manage the money supply (whatever the money's based on) to grow in line with the economy, avoiding both inflation and deflation. I'd define the money supply in terms of the amount of IOUs in the system (including the ones issued by the government itself, otherwise known as currency).
    Dec 31 00:23 am |Rating: 0 0 |Link to Comment |View article
  • Returning to a Gold Standard Is a Bad Idea
    At the end of the day, money is just a score-keeping mechanism and what really matters are assets, production, and claims on assets and production, including via debt. Every year, X amount of goods and services are produced. Some are consumed, some are durable and asset-like. We collectively produce them, then collectively lay claim to our share of them. Money is way we score all that out. I save for my retirement, but I cannot literally stockpile food, energy, healthcare, and all other goods and services (some of which probably haven't even been invented yet) out of my share of the collective production. I'm going to be counting on someone else to give me a share of their future production when I'm retired. Equity in the form of ownership of assets (businesses, land, etc.) are part of the answer, but so too is debt, wherein I've lent at interest some of my current share of collective production in exchange for part of someone else's future share of collective production. It really cannot be any other way, regardless of the basis for the money.

    The beef is, you cannot do any level of realistic planning on this basis when the measuring stick (the money) is constantly fluctuating in value. The lion's share of the "money supply" isn't currency issued by the government, it's bank deposits lent out at interest. If I didn't care about interest, I can of course simply buy assets, including gold, and hope to swap them later for a share of other goods and services I really need. In this way, we could possibly function without government-issued money of any kind. But whatever asset was chosen, there is a risk that it's value will not be constant with respect to other things you'll need to consume in the future. Like all assets, even gold's value can fluctuate.

    I think the key point in the above essay is that it would be difficult to function without any form of debt or lending, i.e. with a 100% equity/asset-based system. Everyone would always have to lay claim to some share of annual production, even if unneeded, as a means of bartering it for something else in the future. And anyone needing to temporarily consume more than their share (for example, to start a new business, or do anything that will improve production in the future) would have to either sell shares in their enterprise, or engage in some sort of direct or indirect loan agreement. Banking would be reduced to depositors putting money into irredeemable certificates of deposit with fixed, longish terms, geared to match the loan portfolio's term structure. We'd lose the flexibility of being able to lend short (as depositors) to people who are borrowing long, relying on the collective rate of inflow/outflow to bridge the gap. This seems like a recipie for a much more constricted, low-tech economy to me.
    Dec 30 22:03 pm |Rating: +1 0 |Link to Comment |View article
  • Madoff Investors Deserve Sympathy, Not a Bailout
    At any rate, those of us who've been suffering along with 2-5% returns in bank deposits for the last 5 years (and negative returns in stocks) shouldn't have to make good on the phony 12-15% "returns" Madoff's victims thought they were making. They should count themselves lucky to get their original investments back from the dissolution.
    Dec 29 19:52 pm |Rating: +1 -1 |Link to Comment |View article
  • Resuscitating Keynes: Oh No, Not Again!
    I think you are misinterpreting the "spend all our income" idea. You go wrong when you talk about money (and the lack thereof being a problem), because money (even gold) is just a measure of wealth, not actual wealth. Supply must equal demand, production must equal consumption, over anything other than the comparatively short time periods that goods can be stored. Think about it: a person "saving money" for retirement can't actually stockpile the goods and services he or she will consume in the future. Instead, that person can defer some consumption now to help build other forms of wealth that will hopefully enable future generations to produce what he/she needs.

    What I think Keynes was on about is that every able-bodied person is a potentially wasting asset, like an unsold airline seat or hotel room. To undergo long periods of unemployment is to forego whatever wealth the unemployed people might have produced, while still feeding, housing, and clothing them. Money, the score-keeping system, is irrelevant to this fundamental fact. Of greater concern IMO is the mis-allocation of resources. Government is often guilty of this, but market forces have also produced some whoppers. Building unneeded shopping malls, SUVs, or McMansions is just as much a loss of potential wealth as unemployment - moreso, perhaps, because of the natural resources also consumed.
    Dec 29 12:13 pm |Rating: +2 0 |Link to Comment |View article
  • Gold: Not an Effective Hedge Against Inflation
    aitvaras, I believe you're mistaken about the CPI - it does include food and energy costs, and this year social security recipients got almost 5% as a COLA resulting largely from these factors. CNBC often quotes the so-called "core" rate that excludes these items, which, as Bill Fleckenstein likes to say, is "inflation excluding inflation". That number can be very misleading, but it's not the number used for COLAs etc. Now, you could make the argument that the CPI used for COLAs is also inaccurate due to hedonic adjustments, improper weighting, owner-equivalent rent, etc., but that is a different argument.
    Dec 23 15:19 pm |Rating: +2 0 |Link to Comment |View article

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