Peter Schiff tells it like it is! (As Always!)

I was about to write a blog post about inflation figures - the real inflation figures, not the ones that the US government puts out. And, lo and behold, the inestimable Peter Schiff came out with a videoblog on this topic (more or less) just now. Firstly, I would like to bless everyone with a very good source for real (not governmental) statistics about the economy (here). As Mr. Schiff recently pointed out, inflation is probably closer to 10% than it is to the government 3.6% figures. But what I really wanted to talk about was gold. Why is gold getting more expensive? People seem to think there is a bubble in gold! That is very naive thinking, however. Gold is really just a way of observing price inflation. It is not the value of gold that is going up, it is the value of all fiat currencies that is going down (simple supply-and-demand). Supply of fake-money ('toilet' paper) is going up and the supply of real-money (gold) is staying relatively the same, therefore the price relations between the two have to change. A good example to illustrate this is the Swiss Franc - how come gold prices haven't risen that much in relation to it? Simply because until recently it was not being inflated by the Swiss Central Bank!
And I have a few questions to the fiat cultists out there. For example, if it's good to print lots of money and create 'wealth' that way, why is Zimbabwe not the richest country in the world right now? Why is hyperinflation bad, but low inflation good? Or, another example, can we just use toilet paper as money - wouldn't that be just as good? Then we don't even have to spend resources on printing Central Bank notes!

As Friedrich von Hayek wrote: "I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments." Indeed, it is not an exaggeration to say that. So why do we keep putting up with it?

Currency Inflation and Deflation - A Message to Donald Tusk

A lot of people, especially leading politicians, are still basing their opinions on policy on flawed Keynesian economics. They think stimulating demand is the key to prosperity. In fact the current policy of the Polish government harkens back to 17th and 18th Century Britain before the age of Liberalism. Namely - the policy is basically mercantilist. An important aspect of the current government strategy is control over the money supply. What that entails, as we know to be true in all states, is massive public debt and inflation. But what are the arguments for this inflation? Apparently there are still plenty of people who think inflation is actually good! And this kind of thing in Poland, which was nearly destroyed by inflation twice already (back before World War II and then again in the Communist era)?!
So let's assess these arguments. The current government would say that inflation "stimulates exports". They talk about it in a positive manner, i.e "inflation helps the part of the industry geared towards exporting goods" and it "brings capital into Poland when foreigners buy our products". But when you really think about it, this is just a restatement of the old mercantilist fetish of trade being a zero-sum game and only selling products being beneficial. This means that it is good when money flows into Poland, but it is somehow bad when money flows out of Poland (i.e. exports are preferable to imports). Now it is clear that exporting a lot and importing nothing can lead to an accumulation of capital, but ever since Adam Smith's days we know that trade is mutually beneficial to both buyer and seller. Imports are just as beneficial as exports are - trade in general is beneficial.
But, more importantly, we free-marketers must demolish the myth that inflation is a subsidy to the export industry. In actual fact inflation is a subsidy to the foreign buyer. He can now purchase Polish goods more cheaply than he could before because his currency is worth more when compared to the Polish currency. But what is even more important here is that inflation actually harms Polish people. When Polish goods are being bought up by foreigners the demand for them grows. When demand for goods grows, so does their price. But here we see that the foreigner has an advantage over a domestic (i.e. Polish) buyer of Polish goods - he is using his stronger currency. Polish goods are therefore more expensive not only because inflation increases the money supply, but also because the Polish consumer has to compete with foreigners now. Furthermore, because the Polish currency is weaker, the Polish consumer cannot effectively import goods from other countries. Prices in Poland sky-rocket due to these factors.
This is especially damaging when it comes to people on fixed incomes, such as old people. I do not see any advantage in the mercantilist policy. The exporters have a bit more money than usual (and not because their goods are better but because foreigners are artificially richer), but the rest of the populace have been impoverished by their money losing value and their consumer goods becoming more expensive. How does any of this many sense?
So, please Mr. Tusk, curb your appetite, stop borrowing, allow beneficial deflation, and give the Polish consumer some breathing room!

By the way, it might be important to point out that the country which is best off in Europe right now is the non-EU Switzerland. Why? Because it hasn't been suffering from massive bail-outs and inflation, the Swiss Franc is now worth quite a lot! In fact, this is a problem for many people who, years ago, took out loans in the Swiss currency (a popular practice in Poland). So now the Swiss can afford to buy anything they like with their amazingly deflated currency while we, the inflationists, are all poor and miserable.
Also, the Swiss Franc did not actually deflate per se, it was just all the other currencies that went into such huge inflation!

Inflation for 8 year olds!

I remember the first time I wondered what inflation is. I was about 8 and heard the word on the news. Afterwards I asked my father about it (sufficient to say he is a scientist, not an economics expert). I don't remember exactly what he told me, but what my little child mind understood is that there are some bad men someplace falsifying and creating fake money. I literally used to think that if the inflation rate is, say, 5%, this means that 5% of all the money people use is fake money printed by some thief in his basement. I didn't really give that much thought; inflation is not the most important thing for children. By the time I was 13 I was sure my definition was wrong and economics is so complicated I would never know what inflation is. But now at age 20, after a period of interest in economics (especially the Austrian school), I realize I may have been right. Now, I know inflation is not exactly false money, it is perfectly legal tender. However, there is more than just a grain of truth in my 8 year old assertions. Inflation is indeed a bunch of shady characters creating money. Of course they don't do it in the basement and in secret, they do it in the Central Bank and they do it openly. And that is what makes this whole process very strange. Of course I know liberals (i.e. Keynesians) would say I'm "prejudiced against inflation" because at a young age I received the impression it was bad. But now I'm an adult, I'm thinking about this rationally, and I still think it is wrong for some rich Yale/Harvard blokes to lower the value of my savings while enriching themselves (Bernanke is printing another $600Billion!). In fact it was easier to accept when I used to imagine it being done by some tattooed guys wearing ski masks in a badly-lit basement or garage.
When I was 8 I thought the government would get these guys. Then I realized "these guys" are the government...

I don't quote the great Ludwig von Mises nearly often enough. And he described inflation very well from an economic perspective when he said that "Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings". This is exactly right. There is no demand for larger cash holdings - this is shown by the cash holdings losing value when its supply increases. The only "demand" in this case is the demand of greedy politicians and their banker cronies.

Inflation - Continued...

I think everyone who read yesterday's blog entry now realizes it is actually the Government policy in general and the Federal Reserve in particular which is really causing the inflation. The so-called deflation we have now is just a contraction of the previously artificially expanded money supply. That expansion was actually inflation. Now the market is naturally purging itself of the inflation. Adam Smith's invisible hand is much more powerful than Mr. Bernanke or Mr. Greenspan could combat.
Now we can look at what the Fed wants its policy to do and what it's actually doing. Well, again using common sense and not econo-babble, what happens when you make more of something (in this case money...)? Its value drops! Supply and demand! So the Fed is actually achieving the reduction of the value of all dollar monetary assets in the United States and abroad (hear this Arab/OPEC countries!). It is, in effect, creating a process by which everyone wants to get rid of dollars. And how do you get rid of dollars? You buy things with them. And this, supposedly, is improving the economy. Unrestrained spending not backed at all by production or any commodity money value.
Again let's visit Mr.Smith. Mr.Smith has $500 in his bank account which he was planning to save for hard times. However, he realizes that the Federal Reserve is increasing the money supply and his money is going to drop in value. He can observe this without knowing anything about the Fed or its actions. All he needs to do is look at the fact prices are visibly rising in the stores (as they have been for the past 100 years). Now Mr.Smith is inclined to spend his money as fast as possible instead of saving it! After all his $500 might buy him and TV today and tomorrow it might not be enough for a radio... who knows? All is uncertain when Mr.Bernanke is at the helm! We are all Mr.Smiths. We all spend as quickly as possible. Fed policy discourages savings. And that drives market interest rates way up. So the Fed has to lower its own interest rates to near zero levels in order to allow for any investment to occur. And this vicious cycle continues... on and on and on. As I wrote earlier this month - the Fed are serial-bubble-blowers. This term, coined by Peter Schiff, has definitely become one of my personal favourites.

"The value of a currency depends on the volume of production standing behind it. Falling production weakens, rising production strengthens it. Money is only a matter of paper production. The real task is to increase production to the extent that money is increased." By no means are these words by German Führer Adolf Hitler about money ideally true. However, he seems to understand much more about the economics of money than Mr.Bernanke or Mr.Krugman. Fiat money is indeed just a matter of paper production. We need more viable production to back it. If not, the gold standard is the only option. In the long run the Commodity Standard is the only viable option!).

Inflation - What is It and how It works (Mr.Smith's Sad Story...)

A lot of people are wondering why the Federal Reserve plans to pump another extra $600Billion into the ailing US economy. Even the New World Order Commissars at the IMF and the World Bank are saying it's a bit crazy. So why are they doing it? Well, the Fed's claim is explained right here. To summarize:
1. The recession is supposedly leading to deflation.
2. Deflation is evil.
3. We must create illusory wealth to be lent out to stimulate new spending.
4. New spending will get the economy moving in an upward spiral again.
Okay, I honestly don't know how these people can fit so many fallacies into one policy. Now, let's be clear on this, I never took an economics class in my life. I am not an expert here. All I do is use common sense, a commodity largely undervalued in today's world. H.L. Mencken once wrote "I am strongly in favor of common sense, common honesty and common decency. This makes me forever ineligible to any public office of trust or profit in the Republic. But I do not repine, for I am a subject of it only by force of arms."
I know this inflation/deflation topic is a huge one, so I will try to limit it to basics and expand in some later post. After all, all four of the premises stated above (and in which our intellectuals believe) are false. So let's now use some common sense and apply it to the theories of those who "hold offices in the Republic"...
So what exactly happened over the course of the real estate bubble, while it was getting pumped by the government and the Fed? I previously touched on it here, but now I'll explain it using the example of one house belonging to one man.
Let's say Mr.Smith bought a house in the year 2000 (right after the Fed started subsidizing housing in the post tech-stock bubble era) for $200,000. Interest rates are at a low 4-5%. Money from the Fed is practically guaranteed to all banks who want it because of the low rates they would have to pay when getting it, so Mr.Smith easily gets a mortgage. He then realizes (miraculously!) that his house is appreciating in value because investment in the subsidized housing industry is growing so much. Mr.Smith then takes our all sorts of loans against the value of his house and lives off of them as if they were a salary. Heck, he might as well! The prices are doubling every year! But wait a second, if Mr.Smith started with $200,000 and he now has $400,000, what does this mean? It means one of two things, either (a) his house actually doubled in value, or (b) the liquidity frenzy and mania of malinvestment created the illusion of his house being worth so much money and it is actually still worth around $200,000. But he has already taken out another mortgage and so owes banks $400,000. He thinks the scenario (a) is true, and the bank is willing to gamble that it is so (after all, with money being so cheap because of the interest rate, it is only too easy to attempt this sort of investment in Mr.Smith's house). But, alas, 2008 has come around. Mr.Smith has by now taken out something like $600,000 on his property and lived happily until one day some guy somewhere realized that in reality Mr.Smith's house is only worth around $200,000. And hey, the bank still wants its money back from Mr.Smith. Scenario (b) was actually true! Now Mr.Smith cannot take out any more loans! And, what is more, it doesn't even occur to him to pay his current loans back. Why pay off the $600,000 to keep living in a house worth $200,000? So he simply stops making payments. Now the bank seizes Mr.Smith's house (he goes off to live in cheap rental housing) and must auction it off to reclaim some of its lost money. Sadly the house only fetches $150,000 at auction, so the bank just made a colossal loss of $450,000 (600-150=450)!
Let's go back to the Fed and their definition of deflation. They claim that this money which just disappeared off the markets (450,000 in asset value) is deflation of some kind. In reality, however, this value never existed! The "losses" of money supply are losses of people who made bad market decisions. Under a capitalist system this is perfectly acceptable.
Sadly Mr.Bernanke is not a capitalist...

"Serial-Bubble-Blowers"

This is one of the best epithets I've ever heard about the Federal Reserve bankers! I give fill credit to Peter Schiff (as always!) for this one! Just to clarify the upcoming analysis - the op-ed by Fed Chairman Ben S. Bernanke can be found here. In the op-ed the man practically admits that the Fed's goal is to blow up another fictitious asset bubble, this time in stocks. May I just remind everyone that the current crisis prompted by the collapse of the real estate bubble wouldn't have happened if nobody inflated this bubble in the first place. And may I also remind everyone that the real estate bubble was only created to offset the depression after the last stock market bubble burst in the late 1990's. So now the magicians at the Fed hope to created the mother of all bubbles on top of the last two. Indeed if they succeed (which I doubt) the ensuing recession after that bubble pops will probably mean the end of the world economy as we know it. For that type of policy the Fed definitely deserve the epithet of serial-bubble-blowers. It is difficult for businessmen to resist this free credit. Chairman Bernanke has now freely admitted he hopes to create inflation and trick everyone into believing in false asset prices. Let me just quote from the op-ed itself: "And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." If this isn't pure Keynesyanism I don't know what is! He wants people to spend their illusory wealth on real consumer goods! What this means is that he thinks of himself as a magician or, better, a GOD. Mr. Bernanke can create wealth out of thin air by pressing a few buttons! Federal Reserve credit is not real wealth. Creation of wealth requires production of it. And production precedes consumption. Chairman Bernanke wants us to sell our fake wealth to other countries in return for consumer goods. I really don't understand why other countries put up with this policy! Even Adolf Hitler, a radical socialist, understood that money has to be backed by production.

But why should we care about the laws of economics? Why should we care about the very fundamentals of human existence? Why should we think of the future? After all, didn't our hero, Lord Keynes, say "The long run is a misleading guide to current affairs. In the long run we are all dead." Keynes was a twisted evil man, and his charm tends to rub of on followers, as in case of all ideological movements. I am like Spencer and Bernanke is like Keynes.

The Fed is screwing us again!

Price of gold at over $1400 per ounce! The predictions of all the Austrian economists came true (every single one of them thought the dollar would drop down that low before the end of 2010). When will the masses (yes, I use this socialist word for those who do not deserve to be called individuals) finally start listening to people like Peter Schiff, Gerald Celente, or the Ludwig von Mises Institute? Just to clarify the situation - strong gold means a weak dollar. I wouldn't be surprised if the dollar lost value against the consumer price index as well. And why is this happening right now? Because the US Federal Reserve announced they will buy up another $600 billion worth of government debt. People who hold the dollar are not stupid. They see the supply of their assets rise on the world market thereby reducing the value of their own holdings. So, they get out of the dollar. The safest asset has always been gold, since other currencies can also diminish in value. On that note, I wouldn't be surprised if the dollar lost value against pretty much all currencies like the Euro and Swiss Frank and, to a lesser extend, other currencies pegged to the US Dollar.
Needless to say this is terrible news for the American people. Their currency is falling fast with little hope for recovery. They can buy less and less with their money. Individuals with large cash holdings (savings perhaps) or on set incomes (pension, Social Security, etc.) will see huge loses. And the government will in theory have to pay this debt off too, using tax dollars which will need to be collected (of course these future tax dollars will be worth less than the borrowed dollars, but this doesn't change the fact every American will need to pay them). The Fed is continuing to debase a currency which is now already worth only a small fraction (0.03) of what it was worth when the Federal Reserve was created.
Luckily I personally do not have any US dollar cash holdings to speak of (but some of my family members do!). It worries me that the great and proud American people are being drawn into the same pit as the Zimbabweans under Mugabe...

All who love America and Freedom should take up the cry "End the Fed!" with greats like Representative Ron Paul.

Most people just don't understand...

Since 2008 the world has faced a massive depression which is going to have dramatic consequences in the future. Due to US Federal Government and Federal Reserve policy the US will most likely forfeit its status as the world's greatest power and its currency, the US Dollar, is likely to collapse completely. When I talk to most people, however, they do not realize the consequences of the Fed's current actions. Often this is because they have been brainwashed into trusting 'intellectuals'. The US Fed, leading universities, and government administration are made up of intellectuals. The current President of the USA is considered an intellectual. Most people, however, do not see the processes clearly because they do not know the facts. So here is a clear summary of the events which have led up to the crisis and the events which follow on now due to government policy:

Pre-2008 Era:
1. Government wants people to own homes ("American Dream" gone wrong).
2. They decrease lending standards by threatening banks as well as backing their loans with federal money (Standard "Carrot and Stick" technique).
3. Since loans are easy to obtain a lot more buyers (very reckless buyers) appear on the market.
4. Ergo, demand for houses rises.
5. Increased demand and stable supply means that all real estate prices rise (Law of Supply and Demand ABC's)
6. Prices rise steadily leading to over-investment in the housing industry, more lax lending standards, and massive indebtedness of the entire society as a whole (AKA the "Housing Bubble")

Post-2008 Era:
1. People can no longer receive cheap and wild loans.
2. Demand for real estate falls as people can no longer afford the inflated houses without equally inflated easy credit.
3. House prices start to fall and some people have to foreclose their mortgages.
4. More properties come on the market - banks try to recover assets by selling foreclosed properties.
5. Supply is up, demand is down - prices fall dramatically.
6. The banks themselves now go under due to their lax lending practices during the pre-crisis era.
7. The US government intervenes by pumping money into the reserves of the banks in order to keep them afloat - this is financed by the Fed inflating the money supply.

Today we are in a limbo which will be explained in my next blog post. This limbo is the result of the government now pursuing two mutually exclusive policies:
a) Keeping real estate prices high above factual market levels.
b) Keeping the Dollar from going into an inflationary collapse due to debt monetization or return to previous lending standards.
These two aims are incompatible with one another, and thus cannot be achieved.

Dow Jones and pro-Fed Propaganda - Will it ever end?

Today I had a bit of a strange moment - I actually spent time looking through news on the economy coming out of the main-stream media. Among the piles of useless rabble I found somewhat of a trend. This past September was being totally hyped up as a great economic success and miracle (see here for Wall Street Journal article). Apparently the Dow Jones index last month beat a 71-year record high (since 1939) and rose by 7.7%! I didn't find this very surprising; the Dow has been on the rise for a while now due to inflationary policies of the US government. How do I know that? Well, there are two possible options for the 7.7% Dow Jones growth. Either, as the media claims, the stocks gained value, or, as I claim, the US Dollar actually lost value (due to simple rules of supply and demand). If either of those processes occurred the result would be the same, but could be mistakenly interpreted as the other. Now how could I verify my claim? I didn't want to point out the rise in price of gold and silver (and other precious metals and mining stocks) because main-stream economists are for some reason labeling this price growth as a 'bubble'. So I thought, why not try to prove my point by looking into price changes in other commodities? There cannot be a bubble in every single item on earth, like food, clothing, or furniture! And surely enough my findings were quite conclusive and in my favour. I checked common goods and non-precious metals with the following results (can also be found here):

Commodity - Percentage Value Rise in September 2010
Copper - 10%
Rice - 10%
Cotton - 17%

The Dow Jones was also outperformed by such mighty forces as orange juice and beans! From this data we can clearly deduce that it was not in fact the Dow which gained value, but the Dollar that lost value. In fact, the Dow gained less that these other commodities showing that the stock market is much weaker than the market in virtually any actual commodity. I expect this means that the US Dollar actually lost up to 10% of its entire net value in September alone (although not being an economist I don't want to be quoted on that figure)! Now that's what I call inflation! Of course it will take a while for all this to filter through into actual prices on shelves, but it will eventually hit. And who will be blamed for it? The businessmen and their greedy overpricing and profiteering...