Sunday, November 28, 2010

22,727 Golden Geese

A goose egg weighs about 144 grams and is about the density of water.  Gold is 19.3 times the density of water.  So let us postulate that a golden goose lays a 2779 gram or about 89 troy oz gold egg.  At current market prices of about $1360/oz this comes to about $121,000 per egg.  If we figure a goose lays one egg each day then we get $44,165,000 worth per year. The US is printing about $1 trillion per year.  This is equal to the yearly profits from 22,727 golden geese. 

The total value of all US public companies is $14.2 trillion with a P/E of 18.2 and dividend yield of 1.85% which means total earnings of about $0.78 trillion and total dividend of $263 billion.  Bernanke's printing presses make more money each year than the total earnings of all US public companies and about 4  times as much as the total dividends.

The total of individual income taxes in the US is about $1 trillion.  So Bernanke's printing is as much as all individual income taxes.

The total US military spending in 2009 was $711 billion, more than the rest of the world combined. Bernanke is printing well over this amount.

There is an interesting phenomenon called the resource curse where countries exploiting natural resources tend to have lower growth rates than countries without much resources.  The US ability to print the world's money is like a magical resource equal to 22,727 golden geese.    The features of the resource curse seem to be applying to the US.

The total world production of gold was only 2,572 metric tons per year in 2009 which is equal to the production of 2,545 golden geese.  If the US really had 22,727 golden geese the total world gold production would be about 10 times the current rate.   If there were such high production of gold, clearly we would expect the dollars per ounce of gold to go down.  With such high production of dollars, we should expect the value of each dollar to go down in terms of gold.

When the world stops treating US dollars like they were "as good as gold", it will be as if all these golden geese die.  When they are gone the US will miss them.  The US will have to export real things to be able to import oil and stuff from China.   Life in the US will be much harder.

Saturday, November 20, 2010

The International Monetary System has a Structural Flaw

In a recent talk Bernanke gave he said, "As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances."  He is trying to put the blame on "surplus countries" like China.  But the real problem with the international monetary system is that it is based on the US dollar and there are no limits on the US as a "deficit country".  There is nothing stopping the US from printing as much money as it wants and having a huge trade deficit.  The only reason China has a trade surplus is that the US has a trade deficit.

People like to believe that their problems are due to others, so Bernanke and Obama saying the problem is due to China plays well in the US.  But clearly China is not buying it.

As the US prints more money it exports some in exchange for real goods.  Think about this, the US can run off some money (electronic or paper) and buy an oil tanker full of oil.  How cool is that?  The US can make some money, loan it to Goldman Sachs at 0.1%, who can then buy huge parts of Africa.  There is currently nothing limiting this kind of thing.  This US money made out of thin air can be used to buy up huge amounts of stocks on stock markets around the world and vast quantities of real estate around the world.   This is a huge structural flaw in the world financial system.

When central banks backed their currencies with gold, any country that printed too much would lose its gold to other countries.   As it lost gold, prices in both countries would naturally adjust to help keep it from losing more gold.  And theoretically if it ran out of gold it could buy nothing else.  The current system has no market forces to keep the US from just printing forever.

The world has been counting on the US to play nice and for most of the last 40 years this flawed system sort of worked.  But now the US is printing at a rate of about $1 trillion per year.  This is about the same as the $1 trillion per year the world spends on importing food.  So to the world this is a very big number, even if  Krugman thinks there should be $8 to $10 trillion in quantitative easing.  My own feeling is that $1 trillion per year will be enough to force the world to stop using the dollar as the world reserve currency.  At this point the US will have to export as much as it imports.  It is used to importing far more than it exports.  This will make things very hard for the US.

Thursday, November 18, 2010

The Bubble that Broke the World

I highly recommend that people read the book, "The Bubble that Broke the World".  It was written in 1931 and published in 1933.   It is available online for free as a PDF.  There are many similarities between the bubbles, excessive debt, and international bailouts back then and today.  It is a good book and helps in understanding what is going on today.

Wednesday, November 17, 2010

The Fed's Ponzi Gold Standard

In 1914 the Fed opened their doors.  We can see in the law governing the Fed that it says, "reserves in gold of not less than forty per centum against its Federal reserve notes in actual circulation".  So during the Roaring Twenties the Fed was issuing $2.50 for every $1 worth of gold it got and the money supply expanded.  This created a bubble in Treasury bonds, a bubble in Florida real estate, and a stock bubble. Then as people and countries took their gold back from the Fed the law required that they reduce the money supply.  Moving back to gold would undo this inflationary factor of 2.5.  This caused deflation and very hard times in the early Depression.  When they stopped redeeming paper money for gold in 1933 the deflation stopped.

This period from 1914 to 1933 is called the Interwar Gold Standard but I think "Ponzi Gold Standard" is a much better name. The Fed was acting like any other Ponzi scam.  As long as people are putting funds in things can work, but if people try to take their money out it all falls apart.  Instead of admitting that the Fed was a bankrupt Ponzi scam, the government made it illegal for citizens to own gold so the Fed did not have to pay people gold.

If the Fed had tried to keep paying out gold it would have run out of gold and been bankrupt.  As it became clear that was what was going on, paper money would have dropped rapidly in value, which is hyperinflation.  In order to save the Fed and paper money the US made it illegal to own gold. Given that gold has been money for 5,000 years and the US constitution says the states can only use gold and silver as money outlawing ownership of gold was a desperate measure.  So along with hyperinflation in the American Revolution and American Civil War, America came close to hyperinflation in the Great Depression.

The spacing between these periods is similar and about as long as from the Great Depression to the present.  This trend would say America is about due for hyperinflation once again.

Most economists seem to use the history of the Ponzi Gold Standard failing to claim that a gold standard does not work.  But gold has been money for more than 5,000 years and never failed.  Paper money fails all the time.   When the Ponzi Gold Standard ran into trouble the US dollar was 60% fiat money and after 1971 it was 100% fiat money.  Fiat money fails all the time.  Most economists learned the wrong lesson.

Friday, November 12, 2010

Euphemisms for "printing money"

The world is not overall better off when someone just "makes money out of thin air".  Nobody thinks that if a counterfeiter prints money the world is better off.  When money is printed some people become better off and some become worse off.  Let's call the people who become worse off "suckers".  The more people who do not understand what is going on the easier it is to have a good supply of suckers.   So the powers that be often try to keep people confused.  One way is talking about "making new money" using lots of different and confusing terms.   To try to help clear things up I am collecting euphemisms for "printing money".  I also have a video with these euphemisms. Here is my collection so far.
  1. accommodative monetary policy 
  2. achieving price stability 
  3. acting to the detriment of creditors
  4. adding to bank reserves
  5. adding liquidity
  6. aggressive monetary policy
  7. ample liquidity 
  8. acquiring Treasury securities on the open market and only on a temporary basis
  9. asset purchase plan 
  10. asset swap
  11. bailouts (*) 
  12. banana republic
  13. Bernanke's toolkit 
  14. bond-buying by the U.S. central bank 
  15. central bank financing of government deficits
  16. cheapen the currency 
  17. collecting an inflation tax
  18. conjuring money up from the ether with black magic Fed spells
  19. creating inflation 
  20. creating money 
  21. creating money electronically
  22. creating excess reserves 
  23. creating reserves ‘ex nihilo’ 
  24. crediting bank reserve accounts
  25. CTRL+P
  26. currency intervention 
  27. currency manipulation 
  28. dangerous experiments with our currency  
  29. default by stealth
  30. deficit accommodating
  31. deficit spending *
  32. dovish monetary policy 
  33. debasing the currency
  34. debasement
  35. destroying the value of the dollar
  36. devaluing the currency 
  37. disbursing currency
  38. dollar conjuring  
  39. driving the dollar down 
  40. dump more dollars onto the market
  41. easing credit 
  42. easing credit conditions
  43. easing monetary policy
  44. easy monetary policy
  45. easy money
  46. ensuring sufficient liquidity
  47. expansionary monetary policy
  48. expanding high powered money
  49. expanding liquidity
  50. expanding the Fed's balance sheet
  51. expanding the global supply of dollars
  52. Fed purchasing debt
  53. Fed’s purchase program
  54. fighting deflation 
  55. free money
  56. fully sovereign in its own currency
  57. funding the deficit
  58. government thievery
  59. helicopter drop 
  60. helping exports with cheaper dollars 
  61. imagineering money
  62. imposing an inflation tax
  63. increasing the money supply
  64. inflating away the debt
  65. inflation
  66. inflation targeting
  67. implementing alternative monetary policy
  68. increasing the monetary base 
  69. injecting money into the economy 
  70. issuing fiat currency 
  71. issuing reserves
  72. just monetary policy  (Bernanke)
  73. keep the short-term interest rate at exceptionally low levels
  74. Keynesian economics
  75. liquidity enhancement  
  76. liquidity injection 
  77. liquidity management operations
  78. liquidity operations
  79. loose monetary policy
  80. lowering interest rates 
  81. low-rate monetary policy
  82. making money
  83. marvelous monetary sweetener
  84. modern monetary theory (MMT)
  85. monetizing the debt
  86. monetization
  87. monetary diarrhea
  88. monetary expansion
  89. monetary policy tools 
  90. money out of thin air
  91. money rains
  92. mortgage security purchase program 
  93. no surer means of overturning the existing basis of society
  94. nontraditional policies 
  95. not monetizing the debt 
  96. not printing money
  97. open market operations 
  98. outright monetary transactions (OMT)
  99. papering over problems 
  100. playing god with the economy
  101. plucking money from a money tree
  102. policy of dollar depreciation 
  103. preventing the currency from strengthening
  104. printing money 
  105. promiscuous easing
  106. promoting price stability
  107. providing additional accommodation
  108. providing liquidity
  109. pump-priming 
  110. pumping money into the banking system
  111. pushing inflation upward
  112. pushing up inflation to levels consistent with our mandate (Bernanke) 
  113. qualitative and quantitative easing
  114. quantitative easing
  115. quantitative counterfeiting
  116. QE
  117. QE1
  118. QE2
  119. QE3
  120. QE Infinity
  121. QE to infinity and beyond 
  122. QE Tapering
  123. recipe for financial disaster 
  124. retiring Treasuries
  125. ruinous monetary insanity
  126. run the printing presses
  127. seigniorage
  128. solution to the credit crunch 
  129. sowing the seeds of future inflation
  130. spending without borrowing
  131. stemming disinflationary pressures
  132. stimulus (*) 
  133. supplying banks with extra cash 
  134. supporting the economic recovery
  135. surreptitious transfer of wealth 
  136. the punch bowl
  137. the US can always meet its financial obligations that are denominated in US dollars
  138. throwing money out of helicopters
  139. trick people into working for lower real wages - See page 9 of  Keynes "The General Theory"
  140. unconventional policy tools 
  141. unconventional monetary policy
  142. unsterilized intervention
  143. weakening the dollar
If you know other euphemisms for "printing money"  please post them them in the comments.

Some people try to make a big deal out of the fact that often money is represented on computers and not actually printed.  First, the Fed would print paper money if banks wanted delivery from their account.    From Bernanke's helicopter paper we know he understands this equivalence from his comment, "But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."  Also, from Bernanke's fantastic video we can see the electronic and paper money are essentially the same. 

A few of the above terms can also theoretically be used when reducing the money supply but that hardly ever happens.

The point of a euphemism is to make something not sound as bad as it really is.   Most of these are trying to hid the badness of "printing money".  However, some like "monetary diarrhea" are clearly used by people who are not happy with money printing. 

This reminds me of the idea that Eskimos who spend a lot of time on snow would have a lot of words for snow.  Seems like Americans spend a lot of time printing new money.

(*) In the case of the starred terms the government is deficit spending, which will lead to more money printing, but it is arguably not a true euphemism for "printing money".

Thursday, November 4, 2010

Money Printing and the Stock Market

The S&P has nearly doubled from the recent low of 666.  The Insider selling/buying ratio is at record highs.  The Mutual fund cash levels are very low.  People think that inflation will drive up stock prices; however, the first thing it does is drive up interest rates which drives down bond prices.  As bonds get cheaper and with higher yields people move from stocks to bonds, which lowers stock prices.  So the relatively high P/E ratios we see with low interest rates will drop as interest rates go up and stocks go down. 

Warning, this is not investment advice, just educational.