A few things have happened recently that have the hairs on the back of my neck standing up in economic terms. It feels like it did right before the crash in 2007-8, when we were still in the end stages of the bubble.
One – Japanese and Venezuelan devaluation
Japan (a thoroughly modern economy) and Venezuela (a semi-dictatorship oil economy) both recently devalued their currency. Japan was warned by the G7 (fat lot of good that will do) here about it:
The official said: “The G7 statement signaled concern about excess moves in the yen. The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.”
Venezuela did more of an “old school” devaluation, where the “official” rate is moved closer to what it really is trading for in the black market, and Bloomberg writes about it here.
Venezuela devalued its currency for the fifth time in nine years, a move that may undermine support for ailing President Hugo Chavez and his allies ahead of possible elections later this year… He ordered his government to weaken the exchange rate by 32 percent to 6.3 bolivars per dollar… A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-year term. The devaluation can help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports. Yet the move also threatens to accelerate annual inflation that reached 22 percent in January.
I kept that whole paragraph in the block quote because it encapsulates all the elements of fiscal ruin so succinctly – profligate government spending, impact on commodities imported or exported (that move opposite of currencies), and the impact on inflation.
Two – The Chinese and Russians Aren’t Buying Our Debt – We Are
I had thought that the Chinese and other countries were big buyers of our debt which funds our budget deficit. But I was wrong. Per this WSJ article:
China’s holdings of $1.17 trillion in U.S. Treasurys in November 2012—the most recent date for which we have a figure—are virtually unchanged from two years earlier, when they stood at $1.16 trillion. Beijing has purchased a lot of Treasurys over this period but many have been redeemed. Net new investment is essentially zero.
But if the Chinese aren’t buying our debt, who is? The answer – the US government.
The largest buyer of new U.S. Treasurys during the past three years has been not China but the U.S. Federal Reserve. In fiscal year 2011, for example, the Fed bought more than three-fourths of all new Treasury debt.
Here’s a challenge for you – try explaining to a child or someone unfamiliar with economics how it is that we can spend money that we don’t have, issue debt, and buy it back ourselves.
In Russia, Putin has taken steps to distance himself from the US dollar and the havoc that it has caused their greatest (and virtually only) export, oil and gas, per Bloomberg.
Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.
Aside from a hatred of the US, why is Putin doing this?
In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold, data compiled by Bloomberg show. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5 — less than half what it is now — the president told the central bank to buy.
Once again this blurb explains the key relationships between commodities, which retain value even when paper currencies are devalued, and the impact on the economy.
“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.
I can’t believe that I agree with this guy.
All in, it feels to me like that quote from the movie “28 Days Later” that was scrawled on the wall…
Cross posted at LITGM
try explaining to a child or someone unfamiliar with economics how it is that we can spend money that we don’t have, issue debt, and buy it back ourselves.
Actually it is relatively easy to do that. Just explain how coins were DEBASED by the king back in the bad olden days when coins were supposed to be worth their weight in gold, silver, nickle or copper. A child understand the physical process and that theft is occurring. The child will then understand why dimes and quarters have those rough edges. The government is doing the same thing today by printing much more money than the increased value being created by the economy. But there are no rough edges on dollar bills, let alone credit cards.
Sorry for not closing that link properly. A preview function would help.
Some things are different from 2007-8. There is no privately held housing bubble or excessive leverage, though there is a financial asset bubble and excessive government leverage. Bernanke is confident that the Masters of the Universe can let the air out of the bubble without bursting it. I am less confident of his ability, but he still appears clothed. As households were hurt by the bursting of the housing bubble, so financial institutions and governments will be hurt by the bursting of the bubble in financial assets. Though the primary effects of the bubble bursting (loss of confidence leading to political instability) will be felt primarily by governments, the secondary effects on individuals may be worse than 2007-8 and more wide spread.
The Venezuelan model and the US model are just different approaches to the same goal. A major part [but not all] of the inflationary increases in prices for goods has not been supply and demand or regime risk/regulatory costs, but because the value of the dollar has been devalued by Bernanke’s magic computers.
Spontaneously generated Federal Reserve dollars are used to buy US government debt [that has no real chance of ever being redeemed at value]. Under the magic of Fractional Reserve Banking, the US government debt is counted as an asset that allows the creation of multiples more Federal Reserve dollars than the US government debt purchased, part of which is used to purchase the next tranche of US government debt, and part of which is flushed into the financial system to reward the cronies of the administration. With more dollars chasing the same or fewer goods and services, the value of each dollar is less.
For the record, the economic multiplier effect of that government spending is probably less than zero, because it is done by either reducing the value of the currency used, or by taxing away more than the amount flushed into the economy; the government being notoriously inefficient at anything.
The administration and BOTH the Democrats and the Institutional Republicans are sure that they have created a fiscal perpetual motion machine. And they have, until a tipping point is reached. Then it all collapses, like it has every time it has been tried in recorded history.
Guess who is left holding the bag?
When the value of the fiat currency is shrinking, the only rational move is into tangibles. One of which is gold. Gold is not a move for profit. It is an attempt to preserve value in order to be able to still purchase the tangibles and consumables needed to survive.
If there is a fiat collapse in one or more countries, gold and other precious metals and commodities will not protect you from every economic hazard; but they will put you in a better position than others who lack them. That holds for nation-states too, in that there may be something at least semi-credible that can considered to anchor the value of whatever succeeds the fiat currency.
Don’t have to look as far as Russia to see that phenomenon, by the way. In August 2012, the Germans asked for access to the 300 metric tonnes of their gold reserves at Fort Knox that had been stored there during the Cold War. It was a purely bureaucratic request, just because someone had noticed that it had not been audited since the 1950’s when it was moved there.
We said it was not possible because there was no room at Fort Knox to separate it out and have the German team count it.
In December 2012, Germany announced that it was repatriating all its gold reserves stored outside the country [France and the US]. Part of that, I believe, is positioning in case the Euro goes Tango Uniform and a Neues Deutschmark has to be issued. But part of it is probably a response to the audit question.
We are saying it will take years to move it for technical reasons.
I am not reassured. And on a number of levels I am sure that the countries who store their gold here are not either. I would add that there is a strong possibility of a national referendum in Switzerland, soon, demanding that all their gold reserves stored overseas be brought home. They are less than 10,000 signatures away from triggering the constitutionally mandated vote. Even in the unlikely event that they have no gold here, it will play hob with world monetary policy.
The Black Swans are flocking.
Subotai Bahadur
Thw only thing that matters is whether subjects are buying the king’s debt or if foreignors buy it. If subjecta buy the debt then money is taken from the king’s economy by the subject, handed to the king, then the king spends it in the king’s economy. ‘Borrowing’ from subjects has the same effect as taxing subjects. No increase in the money supply, no inflation.
But if the king borrows from himself, then the money supply increases and there is inflation. Borrowing from himself is the same as printing more money.
If the King borrows from a foreignor, then the foreign money that was borrowed increases the money supply, and there is inflation.
Kings solve the inflation problem by passing a law that says only the King can measure inflation. Kings always report there is no inflation.
Inflation is too much money chasing the same amount of goods & services.
One fact that seems relatively unappreciated is that, when our national debt spiked during World War II, we owed that money to ourselves. War Bonds were the source of the borrowing and inflation was kept fairly small. Gold in 1929 was $20 per ounce, the 20 dollar gold piece. When Roosevelt devalued the currency in 1932 by raising the gold price to $35 per ounce, the price stayed there until Johnson started the flight from the dollar in 1965. Nixon formalized the devaluation by removing the gold backing from the dollar but by 1978, gold was still around 200 dollars. That year it spiked to $800 but fell back to about $200 by 2000.
charts.
I tell my kids what I paid for things in the 1970s and I don’t think they believe me. What the government has done, by both parties, is criminal. Or should be.
I remember when friends of mine in the 70s were buying bags of dimes and quarters because they thought gold would be too expensive for daily use. I wish I had done the same. In the 50s, casinos in Vegas used silver dollars as chips.
The charts were of the gold price in the years I mentioned. I guess you have to enter them again.
As usual Belmont Club has useful things to add.
What may follow next is described by Victor Davis Hanson in his article Why Do Societies Give Up? On the heels of the Dream comes Depression. Not just of the economic kind, but also of the emotional sort. “Why do once-successful societies ossify and decline?” Hanson asks. His brief answer is because they got lost in the Dream. They left reality. For societies which find themselves in a state of despair first began their downward path by imagining they had conquered reality and running off the cliff like Wile E. Coyote.
Hanson explains with lessons plucked from history. Time and again societies have given themselves over to the dreamers who thereafter produced a Nightmare.
One recurring theme seems consistent in Athenian literature on the eve of the city’s takeover by Macedon: social squabbling over slicing up a shrinking pie”¦. For Gibbon and later French scholars, “Byzantine” became a pejorative description of a top-heavy Greek bureaucracy that could not tax enough vanishing producers to sustain a growing number of bureaucrats ”¦
Britain missed out on the postwar German economic miracles, in part because after the deprivations of the war, the war-weary British turned to class warfare and nationalized their main industries, which soon became uncompetitive.
Hanson’s piece is another version of the one linked above.
I am amazed that you did not know about the Fed / Treasury scam. I thought that was common knowledge. You can, if you are one of the, I think 19, recognized institutions borrow money at the discount window for 0.25% the turn around and buy bonds and sell em’ back to the Fed for somewhere in the 2% range.
I may spend a bit too much time trolling Zerohedge:
http://www.zerohedge.com/
“A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-year term. ”
That seems so familiar….