The Bernank Speaks – Liar or stupid?

Never in all my years of Fed Watching have I come away from a Fed Chairman testimony wondering if they were stupid or just lying. Today was different.

The Bernank testified. Ol’ Greenspan would just do Bafflegab until the congress critters were done making their “constituent brownie point” posturing speeches, then everyone would go home, wondering if he’s actually said anything, but sure that whatever it was, it must have been important.

The Bernank speaks clearly, and advocates directly for his goals. Supporting particular political outcomes with fairly transparent speech. Today he stuck his foot firmly in mouth at least 2 times that left me wide eyed and wondering: “Is he really that stupid or is he lying for political effect?”.

One was when he said, roughly, “not raising the debt limit is like going on a spending spree then not paying the bill”.

Excuse me? Rolling the spending spree over onto a NEW credit card is what is “Not paying the bill”. Saying “I’m cutting up the credit card, now start making regular payments until the old one is paid off.” is paying the bill.

Is he THAT out of touch with reality? A new Chinese Credit Card is now the equal of paying the bill?

The second left me thinking “He must be lying. He simply MUST know about the Krugerrand and other legal tender gold currency. He simply MUST know that currency is not money.” In his defense, he might have chosen to use the word “money” in the common way that means “currency” rather than in the formal economic way that means “medium of exchange that includes a store of value function” which store of value function is poorly served by “currency” (that is only a medium of exchange”). But even if so, he passed up an excellent chance to explain the difference and made himself look the fool to anyone with a decent economics background.

Under direct questioning he was asked: “Do you think gold is money?”. His answer? A very direct and unequivocating “No.” When then further asked why banks hold gold, he said “it is an asset”. Sigh.

Dear Mister Bernanke:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Note the use of “coin” as the process done to create money. Note the use of gold and sliver coin as ‘tender in payment’. That we are IGNORING the constitutional demand does not negate it nor does it remove the meaning.

I’m not the only one to notice:

Bernanke Grilled: ‘Is Gold Money?’
Published: Wednesday, 13 Jul 2011 | 11:40 AM ET Text Size
By: Bob Pisani
CNBC Reporter

Is gold money? In between the rants of congressmen, Ben Bernanke was asked a somewhat improbable question: is gold money?

Mr. Bernanke said, “No.” Why?

Aside from the desire to avoid ideological debates (going back to the gold standard, clearly impossible), he is most likely expressing a view that gold fails the primary test of what money is: something that is accepted in exchange for goods and services, or to repay debts.

Does gold satisfy this criteria?

In saying “no” Mr. Bernanke is likely thinking, where do you find gold accepted as a means of payment? What store anywhere on earth will accept gold in exchange for, say, food, or a new stereo system? None.

Gold Hits Record, Silver Soars, on Bernanke Remarks
But Mr. Bernanke is referring to the modern world, which has been overtaken by paper assets. Gold, of course, has been accepted as payment for goods and services, or to repay debts, in other cultures at other times. So have shells and beads, but that’s besides the point. Gold clearly has been money in the past.

Furthermore, gold does meet another definition of what money should be: as a “store of value,” that is, that whatever is being held will have value in the future.

The bottom line: gold was money in the past. Some have argued it should be money in the future.

Bob Pisani is one great reporter. Level headed. Bright and clueful. Has depth in his field and broad understanding. IMHO, he gives The Bernank too much credit. He also has accepted that “currency” can also be “money”, a small broken “understanding” that is gaining in use, but does NOT make it right.

I know, I’m tilting at windmills trying to stop this slide into mass stupidity, but the meanings of words MATTERS. Some folks have now adopted the use of “hard money” to mean gold and silver and “soft money” to mean paper currency. There ought not be any need for such neologisms. The correct and traditional terms have “money” as a store of value, meaning hard assets such as gold, silver, and sometimes copper or other things of value; and “currency” meaning paper notes signifying an obligation to be paid in “lawful money” (as originally defined… i.e. gold and silver coins).

Please realize, I am NOT advocating a return to gold and silver coinage for day to day transaction. This is more about purity of speech and language than it is about what “medium of exchange” we ought to use. If your language is corrupted, your thoughts soon follow. And The Bernank has shown a profound corruption of his language; especially for a trained Economist. While I don’t have my books with me (to cite a reference), I clearly remember the distinction of money vs currency being made. I think it was in Samuelson “Economics”, but it could have been in the (small black and white cover title like “Money”) text from my class on money and banking systems. In any case, it was Freshman or Sophomore level basics, not some esoteric stuff. Not like the difference of M1, M2, M3, M4 etc. and the discussion of what does a change of credit card limits do to the money supply, and in which category…

Yes, I know, FDR buggered the “money” system of the USA in 1933 and Nixon finished it off with the killing of the Gold Standard and the last link to “lawful money”, so I’m ranting about irrelevancies and ancient history from the point of view of most folks. But it is vitally important to “keep a tidy mind”, and in this case, for THE key guy in charge of our financial world to screw the pooch like that, it just makes me very concerned for what his expectations and agenda overall might be.

In Conclusion

Clearly, too, I’m not the only one. Silver jumped over 4%, Gold and the rest of the metals too.

GLD vs SLV and metals July 2011

GLD vs SLV and metals July 2011

All the metals have turned up (GLD giving an ‘buy’ indication about 4 days ago with that MACD crossover to “blue on top” and is up over 1% today).

Sigh. He could simply have said “Many things are used for money or currency, they include gold, paper currencies, coins of many metals, and much more”. Been factually correct, not provided any political spin, and not have caused folks all over to gasp at a Fed Chairman who does not know that a Krugerrand is money…

Or a US American Eagle…

American Eagle Gold Coin Proof

American Eagle Gold Coin Proof

Note the “50 Dollars” engraved on this side:

50 Dollars Engraved on the back side of the US American Eagle

50 Dollars Engraved on the back side of the US American Eagle

Original Image

Here is a live chart of metals, for future metals watching:

GLD vs SLV and other metals live chart - 6 month daily tick marks

GLD vs SLV and other metals live chart - 6 month daily tick marks

GLD  - Gold ETF
XAU  - Gold and Silver Miners index
SLV  - Silver ETF
CU   - Copper ETF
PALL - Palladium ETF
GLTR - Precious Metals basket ETF
PPLT - Platinum ETF

While I still think Silver is a bit “bubbly”, it will move the fastest (both ways…). Platinum and Palladium have a significant industrial component, so ramp up with economic recovery globally, as does copper (which does not have the political content of gold and platinum), while the miners index is often in sync with both metals prices AND general stock market movements. GLTR is an interesting name I just found (“all that GLiTeRs is not gold?”) and I just liked the name ;-) From the shape of the graph you can see it has some silver in it, but blended with some other metals.

So, looks to me like the industrial metals are pretty much bottomed, the “money metals” are running. Silver has had a bubble, bust, ‘ring down’, and is now starting a new surge on this news. (It would need some more analysis, IMHO, before being a flat out ‘buy’, things like relative up / down volume) and all of that implies the miners ought to be good buys, so SLW Silver Wheaton (up 4.77% as I type…)

IMHO, The Bernank has just told the world that only paper matters, and he can print LOTS of it if he thinks it’s needed…

The other “brain fade” IMHO was his saying that the government could spend like a drunken sailor and print money, but he could keep inflation down via high interest rates… but an exposition on that one would be long and complicated… The bottom line is just “Hubris knows no bounds”, certainly at The Fed, and he thinks paper is a store of value but gold is not money…

Not good. Very much double plus un-good not good.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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52 Responses to The Bernank Speaks – Liar or stupid?

  1. R. de Haan says:

    Gold goes parabolic chairsatan resumes vendetta US dollar Middle Class

    Stealth inflation by dollar devaluation is Bernanke’s only weapon

    We have the Mafia in power, no doubt about it.

  2. Richard Ilfeld says:

    The meagre currency in my wallet says “note” on the front, as in Banknote or Promissary Note. One upon a time it said Silver Certificate. But it was always clearly defined as a proxy for money, not as a store of value.

  3. It is an amazing thing, where Ben Bernanke wound up, considering where he started. But for years now, his attitude toward money, gold and paper has been in this general vein.

    Consider this speech excerpt from nearly a decade ago:

    As I have mentioned, some observers have concluded that when the central bank’s policy rate falls to zero–its practical minimum–monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

    The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

    What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. 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. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

    Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).

    That last comment was sort of prophetic, wasn’t it? He meant “later in this speech” — but wound up meaning “later in my career” (to the detriment of the United States, unfortunately). Perhaps the word “practical” does not mean what he thinks it does, here.

    I’ve heard it said that an unlimited money-printing press in the control of Ben Bernanke is a bit like a nail gun in the hands of a spider monkey. I don’t quite like this simile, as it implies utterly unconscious harm being done. I think, instead, that Benanke is set to pursue wrong-headed policy goals. His actions, however ultimately harmful to US and global economics, are intentional.

    He’s also one who takes an academic approach to these things; he has shown great willingness to adapt his thinking to reflect that of his current master, since “all truth is relative.”

    ===|==============/ Keith DeHavelle

  4. Adrian Vance says:

    Bernanke is expressing the Ivy League attempt to have us believe in them and them alone. Gold is a commodity money with limitations. We really need something more adaptable to an expanding economy in intellectual property, which metals cannot, but honesty is required. That is the problem.

    For clear, entertaining analysis and humor see “The Two Minute Conservative” via Google, Ask, etc or Kindle.

  5. Today I see encouraging signs that some NASA employees, editors of and some politicians are beginning to see the connection between:

    a.) Hiding and manipulating data on the Sun – Earth’s heat source,
    b.) The world-wide fable of CO2-induced global warming,
    c.) Disintegration of the USA space program,
    d.) Disintegrating world’s economy, and
    e.) Loss of our national sovereignty

    Those are not a mere coincidence!

    It is all follows from a 1972 decision by world leaders to use “Global Climate Change” as the common enemy to unite nations, end nationalism, and avoid mutual destruction by nuclear annihilation.

    Many skeptics endorse those noble goals, but not the abuse of scientific information as a propaganda tool that could lead us to a tyrannical world government, like that described by George Orwell in “1984”.

    NASA scientists and the editors of are starting to see the connection [1].

    1. “Dark Fireworks on the Sun,” by NASA’s own
    Dr. Tony Phiilips [ 12 July 2011]

    With kind regards,
    Oliver K. Manuel
    Former NASA Principal
    Investigator for Apollo

  6. BlueIce2HotSea says:


    Bernanke seems to believe that tight monetary policy caused the recession which preceded the Great Depression. So, I expect he will be more likely err on the side of hyperinflation than deflationary depression. Plus, it’ll make paying back those credit cards a lot easier when dollars are a dime a dozen!


  7. PhilJourdan says:

    IMHO, The Bernank has just told the world that only paper matters, and he can print LOTS of it if he thinks it’s needed…

    You hit the nail on the head there. That is exactly what he is trying to do, but I think he will eventually fail at it.

    Richard Ilfeld –

    One upon a time it said Silver Certificate. But it was always clearly defined as a proxy for money, not as a store of value.

    Some even said Gold Certificate (I had my hands on one back in the 70s). Both the silver and gold certificates are still legal currency in the US (I have some as I am a collector), you just cannot redeem them for gold or silver (just a crisp new bill if you are daft enough).

    But to the main point of the article, I think he is stupid. I am sorry, but I admired Volcker for his monetary savy. And Greenspan for his obfuscation of what he was doing (as congress would never understand in any event). I do not think Greenspan was a good Fed chairman except at keeping congress at bay. Bernanke? No, I have had no faith in him at all. he failed his first tests there and that is part of the reason we are stuck in the doldrums (fed policy is a scalpel, not a scythe – he tried to make it the latter).

    I always say that a bad law is worse than no law. When it comes to the Fed, a bad chairman is worse than no chairman. In other words, there are times when it is best to do nothing, but Bernanke does not comprehend that path as he is not smart enough to.

  8. PhilJourdan says:

    @Keith DeHavelle – Thanks for the quote and a great analysis! I should have read your entry before penning my own. You said some of what I did much better than I did.

  9. Pascvaks says:

    What is lost to many “observers” down here at the bottom of our modern pyramid of Global Finance is that the USofA just ain’t the same Fat Cat it was in 1929. We’re fat alright, just not in the money category. The Big Daddy Fat Cat of 2011 is China. Think of the US today as the UK of 1929. Really!

    The Bernank is stupid, and he is lying, but he ain’t dumb. If he tells Congress, or our Glorious Infallible Leader, or the UN-American “Free” Press the unvarnished truth, “The Greatest Crash Ev’a” begins and will wash us all away in about 36 hours. He’s not going to say anything until the painters have finished putting a nice, fresh coat of paint around the big picture window in his office. He wants to go out in ”style”.

  10. R. de Haan says:

    The current policies are destroying the Middle Class.
    Only 5% of the available budget to stimulate small companies, yes, those who hire people has arrived on target. The remaining money went to the big corporations.

    This is not the way to go.

    America can do much better but first we have to get rid of the current establishment.

  11. John F. Hultquist says:

    Here is another golden “double eagle” story:

    . . . —ten Double Eagle gold coins dated 1933,

    Mint officials confirmed the coins were legitimate—and among the rarest, according to collectors—then confiscated what they said was U.S. property.

  12. R. de Haan says:

    The video Congress doesn’t want you to see

  13. R. de Haan says:

    Obama creating panic to push through debt hike
    Senator Jim DeMint has accused President Barack Obama and Timothy Geithner of deliberately fostering panic in order to push through an agreement that would allow the debt ceiling to be raised, accusing the White House of “burning the clock” in order to push a decision close to the deadline, echoing how Congress was threatened with “martial law in America” before the 2008 bailout vote.

  14. Jerry Franke says:

    Bernanke was also asked whether raising taxes would create jobs. He skated by the question by saying that he didn’t want to “takes sides” on the issue. The representative asking the question didn’t insist that he answer. Was the representative so stupid that he believed a truthful answer would be “taking sides”?

    The question posed was about the affect of tax policy on job creation – it was not a partisan question. If the Fed chief won’t answer a basic economic question, why should we trust his judgement on more complex issues?

  15. This seems to be a purposeful plan to sell the USA into servitude to the World Bank and a tyrannical world government like that George Orwell described in “1984.”

    As noted above, the following are not mere coincidences:

    a.) Manipulating data on the Sun – Earth’s heat source,
    b.) Spreading a fable of CO2-induced global warming,
    c.) Disintegration of the USA space program,
    d.) Disintegration of the US economy, and
    e.) Loss of US national sovereignty.

    Eisenhower warned in 1961 that science might be used this way:

  16. Serioso says:

    Fascinating discussion. But I wonder how the discussion would have gone if Bernanke had been asked if silver is money. The ancient relationship between the price of gold and the price of silver — (in the range of 10 or 15 to 1) which was based on the labor cost of finding and purifying each one — has been completely broken, and it is worthwhile to speculate as to why. As for Bernanke — he’s a very smart fellow, but his job is to lie. The wonder is so many observers take his words seriously.

  17. David says:

    Hum?, the Bernake signals more currency debasement, (QE3), Gold soars and holds most of its gains, stocks move up sharply higher, and then second thoughts creep in, and Moody talks about rethinking the US credit rating. Are we moving closer to when the Bond Markets and interest yields finally slap Bernake silly?

  18. kuhnkat says:


    when you have one million dollars in currency in your pocket after paying off your credit card bills you then find it won’t buy you a slice of bread or anything else you need to survive.

  19. BlueIce2HotSea says:

    Yup, that’s the downside.

  20. @kuhnkat, who wrote:


    when you have one million dollars in currency in your pocket after paying off your credit card bills you then find it won’t buy you a slice of bread or anything else you need to survive.

    Two Robert Heinlein quotes come to mind:

    $100 placed at 7 percent interest compounded quarterly for 200 years will increase to more than $100,000,000 – by which time it will be worth nothing.

    If men were the automatons that behaviorists claim they are, the behaviorist psychologists could not have invented the amazing nonsense called “behaviorist psychology.” So they are wrong from scratch – as clever and as wrong as phlogiston chemists.

    The last quote seems to describe all economists, in a sense, but on examination it most particularly focuses on those who think that state-directed economies are practical and appropriate. The individualists, content to let the free market sort things out, have the right idea.

    It doesn’t matter how often the Keynesian statists have been proven wrong. The epic battle between Keynes and Hayak will be fought over and over again until the statists have utter control, or are run out of town.

    ===|==============/ Keith DeHavelle

  21. Sera says:

    Maybe the Bernanke is thinking about printing up some renminbi?

    “Put a new blanket on the press- and call for my engravers!”

  22. Jeff Alberts says:

    Looks like Lady Liberty isn’t wearing any undies.

  23. Pascvaks says:

    What this country needs is a good fifty cent cigar and seperate, statewide power grids. I understand Texas already has their’s. Of course New England may just want to go Collective, they do all speak the same language I hear. Everyone has to pull their own weight, too. No more of this robbing Peter to pay Pauline stuff or sending anymore aid to anyone outside the 3 mile limit. Right? You bet! On yes, California and New York, if they want to go Commie all the way that’s up to them; they’ll come to their senses sooner or later, maybe.

    If and when the Federal Government collapses we all need to treat that like another Katrina, but in reverse, everyone needs to chip in. We’ll need to work fast, while we still have some gas, so we can build a nice, secure, very high wall around the District to seal in all those responsible for the Great Collapse before they realize what’s happening. We should have about 6 months.

  24. Another Ian says:

    Were this bloke and Ross Garnaut classmates somewhere?

  25. Ralph B says:

    If anything I think we need a gold standard now more than ever.

  26. Pascvaks says:

    @Ralph B

    How about the old $32.00/Oz rate? You don’t want anyone out robbing Little Old Ladies dressed to the nines with less than an ounce to their name. Today it’s more and more dangerous to have a Wedding ring on. (Because of the current exchange rate;-)

  27. E.M.Smith says:

    I’ve added the ‘reverse’ side image of the American Eagle coin where the “50 Dollars” is engraved, just to emphasize the point that this coin IS money (even if the rate on the coin is out of step with current gold market prices). Yes, the rate was set that low to assure it stayed a ‘collectable’, but it was also done to assure the coin was US money and avoid things like folks putting sales taxes on it in California.

    @Another Ian:

    When I was getting my Econ degree Keynesian Economics was all the rage. There is a whole generation of folks who know nothing but that. I like to say “I’m a recovering Keynesian” as it was only on my own that I learned about The Austrian School. My entire formal exposure to it consisting of one class where the professor said “There is also an Austrian School that thinks this is not correct” and then some minor disparagement of them. That was IT, total. Almost as little on the Chicago School (Milton Friedman et. al.) Though IIRC it ran out to about a paragraph of “They exists, they believe in The Classical view, explain why they do not understand Keynes.” Somewhat less than in this page, but with similar flavour:

    @Keith De Havelle:

    I think you need to make that “describe all” Keynesian “economists, in a sense”… The Classical folks just ask that folks in aggregate act in their own best interests as supply and demand sort out the level of that interest. It is up to the individual to decide what that interest may be… while the Austrian School argues for a large variation in individual action. See the vehemence with which the Wiki attacks that point:

    The Austrian School is a heterodox school of economic thought that emphasizes the spontaneous organizing power of the price mechanism. Its name derives from the identity of its founders and early supporters, who were citizens of the old Austrian Habsburg Empire, including Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Nobel laureate Friedrich Hayek. Currently, adherents of the Austrian School can come from any part of the world, but they are often referred to simply as Austrian economists and their work as Austrian economics.
    From the middle of the 20th century onwards, it has been considered outside the mainstream, with notable criticisms related to the School leveled by economists such as Bryan Caplan, Jeffrey Sachs, and Nobel laureates Paul Samuelson, Milton Friedman, and Paul Krugman. Followers of the Austrian School are now most frequently associated with libertarian political perspectives that emanate from such bodies as the Ludwig von Mises Institute and George Mason University in the US.

    Austrian School principles advocate strict adherence to methodological individualism – analyzing human action exclusively from the perspective of an individual agent.[9] Austrian economists also argue that mathematical models and statistics are an unreliable means of analyzing and testing economic theory, and advocate deriving economic theory logically from basic principles of human action, a method they term ‘praxeology’. Additionally, whereas experimental research and natural experiments are often used in mainstream economics, Austrian economists contend that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions. Mainstream economists are generally critical of methodologies used by modern Austrian economists; in particular, a primary Austrian School method of deriving theories has been criticized by mainstream economists as a priori “non-empirical” analysis and differing from the practices of scientific theorizing, as widely conducted in economics.
    Austrian School economists generally hold that the complexity of human behavior makes mathematical modeling of an evolving market extremely difficult (or undecidable). They generally advocate a laissez faire approach to the economy.
    Austrians hold their methodology to be superior to the scientific method and empiricism, principles which mainstream economists strive to follow.
    On the Austrian critiques of mainstream economics, economist Bryan Caplan has argued that, “Mises and Rothbard reject the foundations of modern neoclassical economics too quickly, and their substitutes are inadequate.”

    That last one particularly irks me. To assert the Keynesians (“the mainstream”) guys have sloppy technique in their “science” is to be against the “scientific method”? Really? To assert that something is not knowable with the present level of skill is to “reject the foundations” “too quickly”?

    Basically, to say “You have no way to prove that.” is to be anti-science and a fool? Golly, where have I seen THAT paradigm of “defensiveness” before…

    So might I suggest adding the word “Mainstream” in front of “Economists” when disparaging them… I think that will focus the ire where it is due…


    The “problem” with the “old $32.00/Oz rate” is not that price of gold, but the shrunken value of our present dollar. It does not matter what rate you ‘set’, an ounce of gold still has the same value. (It is the length of the “rubber dollar ruler” that changes). Make it $1 or $10,000, no difference to the gold… but a lot of other things will have to shift their prices… At the $1 rate, a new car would sell for about 15 $Gold Dollars, for example.

    @Ralph B:

    There are problems with a gold standard. At this point I’m leaning toward the notion that those problems are less than the problems of the alternative… but the problems do remain.

    1) The “money supply” depends on who owns the mines. Right now, a lot of the gold is mined out of the USA and in Russia in particular. Having the USSR in charge of the US Gold Standard was one of the rationales for leaving it under Johnson / Nixon.

    2) Money in circulation “wears”. The total mass lost per year from circulating gold and silver coinage is measured in tons… Just a dead weight loss. A gold standard is better than gold coins in that regard.

    3) Gold, and to an even greater degree silver, are prone to fairly large swings in demand short term (thus the value of the money shifts short term too). Seasonal patterns (like we saw in an earlier posting) persist so cause some angst when reflected in the prices of everything. ( I remember some such when I was very young. Folks talking about seasonal shifts in inflation / deflation caused by gold demand shifts. IMHO, less than the present price changes de jour of inflation).

    4) The total mass of Gold and Silver is rather low. Too low, in fact, to cover a global economy measured in many $Trillions today without a gigantic rise in the price of Gold and an astounding rise in Silver. As a commodity, there just isn’t enough of it to trade for all the other things we’ve got in economic circulation. So ether the face value of gold must go way high, or the velocity of money must rise greatly.

    5) Technological changes in mining make the old Gold / Silver ratio incorrect. Changes in the demand projected make the future ratio different from the present. “Bi-metalism” has a lot of “issues” in trying to keep the two metals in sync. This has, historically, resulted in mass melting of coins as things got out of whack.

    6) In emergencies (like wars and natural disasters) there is nothing you can do to fund what may be an actual survival level of need. In a way, this is a ‘feature’ as folks can’t just print gold to fund a mindless war in, oh, Iraq. They must go take it from someone. On the other hand, if your choices are “deficit spend to stop the Nazis or learn German”… So there were War Bonds and all sorts of taxes enacted. And that FDR thing about confiscating all the gold coins… Much less disruptive to just print and spend, at least, in the short run.

    7) It is a royal PITA to move thousands of tons of gold around the planet to settle up accounts. Hugh volumes sit at the bottom of the ocean due to ships sinking during the “Gold Standard” and Gold Coinage eras. Again, I’m inclined to think that risk is ‘worth it’ given the observed alternative today… but that risk and PITA still exists.

    Those are the ‘big lumps’ with the idea of a return to a Gold Standard.

    The “little lumps” include things like the risk of deflation increasing (as your money value spends more time very near 0 on the inflation / deflation scale and will sometimes wobble to the deflation side). The Government can’t promise you stuff that makes you happy then ‘stealth tax’ via money printing to pay for it. Folks must love that, as they keep doing it / voting for people who do it; and they clearly hate dealing with the reality of “pay as you go for what you get”. A “run on the bank” is harder to deal with. (Now we can just print some money and hand it out, so it rapidly self limits as folks can hold the money, then decide to put it back in the bank. With Gold, you get a run and you simply can not get enough gold to hand out quickly enough, so the run turns into a panic and then spreads.)

    And The Fed does not get to play “Keynesian Games” to do counter cyclical balancing of money supply vs velocity of money. As a recession hits, the velocity of money drops. This means the existing money supply covers more of the annual need. (If 1,000,000 ounces changed hands per month before, as the velocity drops, that 1,000,000 ounces covers 2 months, or only 500,000 oz/month needed… that other 500,000 ounces represents ‘over supply’ of money. Now the question becomes: Are folks hoarding it in their basements? Or trying to spend it on things they need? As that choice swaps around, aggregate demand for goods and services will push aggregate prices up / down and there is nothing The Fed can do to dampen those swings as the velocity x quantity product changes. At present, it can change lots of things (from bank reserve requirements to number of credit cards issued and authorized limits to just creating cash out of computer bits overnight). With a Gold Standard, they mostly get to watch and worry and have a small influence via bank reserve requirements. I’m starting to think these Keynesian Games are more trouble than the alternative of a somewhat more pro-cyclical business cycle from the inherent instability of the VxQ product of total money circulation.

    At any rate, that’s the kind of stuff that Economists think about and worry about with a Gold Standard and using Gold as money.

    FWIW, one of my favorite little fantasies is to have one or two states make their own money out of gold and silver. As the constitution forbids them to “coin Money”, they would need a bit of ‘slight of hand’ here: Issue a Coin Standard that said “must look like this and have this much gold in it, and be approved by the State Treasurer”. Then The State would not be “coining Money”, but a private company… just to State spec ;-) At that point, the State can, per the constitution, “make it a tender” for use “in Payment of debts”. If nothing else, it would push the constitutional issue of just what IS legal tender into the Supreme Court… Clearly if the constitution says a state can ONLY make gold and silver a tender for payment, then the state CAN make gold and sliver money a tender in payment of debts… There is no need for a GOVERNMENT ISSUED coin to be that tender, just a State Standard that “A Gold Coin for payment of debts and legal tender shall be in increments of 1/10 ounce, 1/4 ounce, 1/2 ounce, and a full ounce and shall contain no less than 95% Fine Gold. All such coinage shall have an approval issued by the State Treasurer as meeting the standards.”

    So, for example, New Hampshire or Nevada could “approve” the Maple Leaf and Krugerrand coinage as “meeting State Standards” and make them legal tender inside the states. Then the fun begins…. State chartered banks would have to accept gold deposits. Contracts could specify gold coins as payment. All like it was before…

    Over time, folks would tend to send their paper money to DC in payment of taxes (thanks to Gresham’s Law) while keeping the gold money inside the state… The eventual result (as we have about a 25% Fed Rake) is that in about 4 years most of the currency would be out of there… (modulo new influxes from folks selling goods to other states who did NOT chose to convert that ‘income’ to gold). Basically, Gresham would cause home “hoards” to become gold first, then bank accounts and corporate reserves, and eventually large purchases in circulating money. The ‘worse money’ would be shipped off to the folks who had to take it – other States and The Federal Govt. along with out of state contracts…

    Would be fun to watch ;-)

    The Fed and The Federal Government would both be livid overnight, of course, and would try all sorts of monkey business to make it impossible to do (which is why it ends up in the lap of The Supremes ‘right quick’…) but then they would be faced with the need to actually address just what that part of the constitution means…

  28. George says:

    My experience with this administration is that they tend to do the thing that causes the most possible damage at the worst possible time.

    Looks like Asia is dumping the dollar as a result of his comments yesterday.

  29. PhilJourdan says:

    @E.M. – I was more fortunate than you in that while most of the professors at my school were Keynsians, one was not. And he was my program advisor (I did get to chose). So I learned about Keynsian theory a lot, but was exposed to the Chicago and Austrian Schools a great deal more than you. Then in my senior year, Dr. Walter E. Williams came to my school and debated some economists from the state AFL/CIO on the minimum wage (at the time about $1.75/hr). He mopped the floor with them! Needless to say, I have been a Monetarist since then, and while it use to be closely associated with the University of Chicago (due to Friedman), is now lead by GMU (as you point out). That is why I like the more generic term over the source of the school of thought being the descriptor.

  30. Joel Heinrich says:

    @E.M. >So, for example, New Hampshire or Nevada could “approve” the Maple Leaf and Krugerrand coinage as “meeting State Standards” and make them legal tender inside the states. Then the fun begins…. State chartered banks would have to accept gold deposits. Contracts could specify gold coins as payment. All like it was before…<

    Didn't Utah just do that in March?

  31. E.M.Smith says:

    @Joel Heinrich:

    OMG! Looks like some “fellow travelers” out there are ploughing the same thought path….

    However, that article just says the House passed it and it was off to the Senate, so not sure what the status is now. HOWEVER, that list of “other states” thinking about it is very encouraging! Time for The Several States to take back control of their creation, the Federal Government…

    If the bill passes, Utah would become the first of 13 states that have proposed similar measures. The others states are Colorado, Georgia, Montana, Missouri, Indiana, Iowa, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont and Washington.
    Backers of Utah’s bill say they want to send a message to the rest of the country.
    “People sense that in the era of quantitative easing and zero interest rates, something has gone haywire with our monetary policy,” said Jeffrey Bell, policy director for the Washington-based American Principles in Action, which helped shape the bill.
    “If one state recognizes gold as a valid currency, I think it would embolden people not just in other states but in Washington,” he said.
    The U.S. used the gold standard from 1873 until 1933, when President Franklin D. Roosevelt outlawed the private ownership of gold amid the Great Depression. President Richard Nixon abandoned the gold standard altogether when he announced in 1971 that the U.S. would no longer convert dollars to gold at a fixed value.
    Critics of the gold standard say it limits countries’ control over its monetary policy and leaves them vulnerable to financial shocks, such as the Great Depression. But supporters argue that the current financial system’s dependence on the Federal Reserve exposes the value of U.S. money to the risk of runaway inflation.

    I had no idea…. and I’m so glad to see this as at least a jab in the ribs of The Federales with a sharp elbow ;-)

  32. David says:

    @E.M. Perhaps the new state of So Cal could try such a move. Also perhaps then your projected move could be much shorter. BTW, good luck on your job interviews, (I think, that is if your really want it)

    Have you considered posting on the current budget battle and the cry baby in chief walking out, as none believe in his promised future cuts?

  33. E.M.Smith says:


    I’m hoping to hear a “yes!” today… or maybe Monday…

    Yeah, I’d like the job. Aside from needing the money, it would get me into a company where I could restart the “career path” longer term. I “gave it a good go” at trying to generate a new career path in “climate analysis” but the money is all on the “pro-AGW” side, so “no joy” in the income department. (Thanks to all who have given donations, but my traffic here is just not enough to generate more than “fun money”… and it IS fun money to spend ;-) but not “mortgage money” or “college payment” money…)

    Per the budget battle: As it is being “four walled” on the news, I’ve not said much on it. Mostly just oblique pointers at the foolishness of the whole ‘argument’. “Cut spending vs raise tax rates” is a false dichotomy and, at most, deserves a “MU!” whack with a stick…

    The “Mu” koan

    The word mu is central to the following well-known Zen Buddhist koan, which is also known as the Mu koan[1]:
    A monk asked Zhaozhou Congshen, a Chinese Zen master (known as Jōshū in Japanese), “Has a dog Buddha-nature or not?” Zhaozhou answered, “Wú” (in Japanese, Mu)
    —The Gateless Gate, koan 1, translation by Robert Aitken [5]
    This koan is one of several traditionally used by Rinzai school to initiate students into Zen study,[1] and interpretations of it vary widely. Some earlier Buddhist thinkers maintained that animals did have Buddha nature, others believed that they did not.[citation needed] Zhaozhou’s answer, which literally means that dogs do not have Buddha nature, has been interpreted[where?] to mean that such categorical thinking is a delusion, that yes and no are both right and wrong. Alternatively, Yasutani Haku’un of the Sanbo Kyodan maintained that “the koan is not about whether a dog does or does not have a Buddha-nature because everything is Buddha-nature, and either a positive or negative answer is absurd because there is no particular thing called Buddha-nature.”[6]
    The koan originally comes from the Zhaozhou Zhenji Chanshi Yulu (traditional Chinese: 趙州真際禪師語錄). An English translation of the koan, with the original Chinese, follows.


    As pointed out in a more analytical way in the new update to the posting here:

    wiggling rates can not fix the budget shortfall nor the debt limit problem. It does not change revenue amounts (though can change who pays it, so is an unrelated political football issue, not a debt limit deficit spending issue).

    Mu! The question is ‘ill formed’ and ‘void’…

    So what more is there to say on it?

    THE only two “fixes” possible are: Reduce spending. Inflate the currency such that the spending is effectively reduced.

    There simply are not enough young workers to fund the 211 Trillion of unfunded future entitlements and liabilities. They simply must be defaulted. The only questions are: Via what method? Now visibly? Who will benefit politically from the maneuvering? When?

    And, maybe just a little, how can I gain from it via investment techniques?

    “Demographics is Destiny”, and the demographic bomb is exploding now as The Baby Boomers retire on large pension expectations… and with massive medical bills they would like to third party onto…. Whom?… A too small Gen X, Y, and Millennial population that can not pay that bill, no matter what percent of income is taken as tax…

    Mu is your friend. Embrace the Mu… and whack a politician with the Clue Stick whenever possible…


    Very likely. Fiat currencies inevitably implode, and then folks run to real assets. I like copper and other industrial metals better (as they lack the political football / panic / central bank wobbles), but anything of ‘inherent worth’ is better than pretty pieces of printed paper ….

    One is money (store of value) the other is merely currency (medium of exchange)…

  34. Q: Has a cow Buddha-nature or not?
    A: Moo.

    We can, technically, pay all of our debts without raising the debt ceiling. This would be a massive (majority) cut of current discretionary spending, and rough as a corn cob in the outhouse on a cold winter morning, but it is possible.

    Defaulting on debt, then, is a choice.

    With that in mind, a rollback to the point where spending equaled the current income is sadly not enough, as the entitlements have risen since then. But go back another year or two, pick a Clinton budget, and one could make it work.

    Traumatic indeed, but ultimately good for us perhaps.

    ===|==============/ Keith DeHavelle

  35. gnomish says:

    ha ha! impersonating gnomish now?
    in fact you’ve done a pretty nice job of paraphrasing the main points of my last rant/essay for which you singled me out for lengthy reproach with a bit of ad populum (known as argument from intimidation) to strongly hint that i should not post any more – it was all very meta- i used too many big words, was too confusing…none of the facts could be disputed so you could only grind on about your disapproval.
    now i see you have made the ideas your own – to your credit- but i am now entitled to give your big red rubber nose a honk for it.

  36. @gnomish:

    I’d be interested in reading the thread in question. Clearly I am not signed up for all of them, and this one must have been significant.

    Can you provide a link, please?

    ===|==============/ Keith DeHavelle

  37. E.M.Smith says:

    @Gnomish: Not impersonating (my name is on the piece…) just practicing my “reflective listening skills”… besides, you’d gone completely silent (when all I really wanted was a bit lower volume for a short time) and I was feeling lonely ;-)

    FWIW, I’ve always made the distinction of money vs currency (my Dad introduced me to the idea about age 6?) and most of the piece is about The Bernank having a Senior Moment and / or the metals starting a new run. Not particularly praise for Atlas Shrugged as Bible Of Life… ( it really IS just a novel. Has some interesting ideas, but does NOT replace centuries of economic thought.)

    Also note that I recognize the “problems” with using gold and silver as your currency along with the benefits. And make no mistake, there are MAJOR problems with it.

    So, just to be clear where we diverge: I agree that precious metals are money and paper currencies are not (at least when they start to inflate, as they always do). I note the major problems with metals as money/currency while you tend to gloss over them. I do not see an unfettered market with complete autonomy of players as a good thing (as we’ve got plenty of history of what Robber Barons do without some countervailing power) and advocate for prevention of excess power concentrated in either the government or a set of oligarchs. I’m for a ‘conservative middle’ leaning toward the direction of Ayn Rand (but not reaching it), while you are “all in” (history of Standard Oil be damned.)

    I don’t see that as “making your ideas my own”…

    Oh and asking to give it a break for a while is not demanding silence and abandonment…

    One final point: My nose has not been big and red for several decades now. A nice course of tetracycline cured my Acne Rosacea some time back and it’s been a demure beige ever since. So if any honking hooters are to be honked, you will need to bring your own…

  38. E.M.Smith says:

    @Keith DeHavelle:

    I think it was here:

    Where I was having Boballab mad at me for quoting market data on wage rates at Walmart while Gnomish was tossing rocks at me for not being a devotee to excess of Ayn Rand… And I was just trying to steer a middle course…

    Oh Well…

  39. R. de Haan says:
  40. Richard Ilfeld says:

    I talked to Aunt Lilo. She asked if it is time to buy gold again. The last time was 1936. She was very fortunate because her husband was a dentist, thus the prohibitions could be circumvented. She is 96, and has seen a lot of life. She remembers a time when, not only was gold the official standard, but gold, and other portable desireable commodities were the practical standard. She remembers a time when coal woud serve as money, or cigarettes, or chocolate. The gold saved her life.

    Oils persists in cars, despite official disapproval, because of its energy density and utility.

    Gold persists as a monetary standard because of its density, and physical property of relative immutability. Now, I’ve blathered here about gold being just another commodity, and it surely is…Adam Smith was right.

    BUT – every society NEEDS a monetary standard, if there is enough economic activity to move beyond barter, whether it be seashells, or oxen, or silver, or gold.

    Watching countries – who is buying and who is selling, and watching the same countries deprecate the value of fiat currencies even when they might be enhanced, one could conclude that we are, de facto, on a gold standard.

    The Barnank has surely been blowing up the baloon as fast as he can — but if we wanted to support the fiat dollar, we might do so something like this….

    The US has untold riches on federal land. We have oil, gas, rare earths. We have an infrastructure second to none. We manufacture more than anybody, and have oodles of idle capacity and surplus recources we could call on if needed. We have the most productive farmers in the world, and can grow cost effectively on land most countries wouldn’t inhabit. Our balance sheet is far and away the world’s strongest and we’re good for our debts. We used to have a free enough economy to exploit all this, and have enough folks who haven’t forgotten how to do so again. So enough already. With sensible politics (an oxymoron if i ever heard one) the dollar could be fine.

    The world thinks an ounce of gold is worth 1600 of these cheap dollars.

    The Chinese buy gold, and dislike our debt more and more.

    In any city in America, you can take gold in almost any form and buy groceries. Yes, its a two step transaction, but there’s probably a buyer in the same strip center witht he grocery store –taking a devils vigorish for the transaction but competition will change that.

    De facto, the gold standard is here. De jure, the Politicocritters will resist cause it cuts their power for cupidity tremendously, but we may be talking about a done deal.

  41. E.M.Smith says:

    @Richard Ilfeld:

    Well put.

    I would only add that there is a natural standard. The standard of inherent worth. In some ways, Gold is not a very good money as it has a highly volatile price, but the inherent worth is a secondary aspect. Jewelry demand, for example, can be fickle. Part of why I like platinum more is that the price varies directly with two things: Industrial demand and mass inflation. It’s easy to ‘de-trend’ for the industrial cycle… while Gold has much more news driven movement (so prone to bubble and bust more).

    But at it’s core, “worth just is. -E.M.Smith”. So is a loaf of bread “worth” a dime? A dollar? $4? In paper money “yes”. It has been all of those in my lifetime. Yet it is still “worth” about one silver dime (modulo the recent silver bubble). Gasoline that was “worth” $0.25/ gallon when I was kid marked the 90% devaluation point of the dollar rather smartly at $2.50 / gallon. Now it’s running about $4/gallon….

    So, in a very real sense, ANY relatively stable commodity can be a “store of value” and can be exchanged, so is “money” in the classical sense. We just used Gold due to the high value per small mass, and Silver for the smaller things where a 1/100th ounce gold coin would be hard to measure… Then Copper for the even smaller things….

    But we could just as easily use Aluminum or Zinc or even Iron.

    The two major ‘complications’ are keeping different ‘standards’ in sync (the Silver : Gold ratio that has changed with technology of mining costs) and that the suppliers of the commodity become de facto the folks in charge of money supply and thus monetary policy… Not Good if they are not your friends (and almost as bad if they ARE your friends. Massive import of Maya gold to Spain caused significant inflation and destabilization…)

    So what is “money”? Just about everything you can trade… but only some of it is “currency”…

    BTW, I bought my last car with Krugerrand… plus a bit of currency. It’s not at all hard to spend gold coins, it’s just that the size of bill that justifies them is a bit large…

    That I recognize the problems with Gold as currency does not mean I don’t know how to use it… (Kind of like Quigley talking about revolvers in Down Under ~”I said I never had much use for one. Never said I didn’t know how to use it…” — after shooting his antagonist with a handgun rather than his preferred Sharps Rifle…)

    So for day to day use, currency is just fine and it lets the money policy guys “play” more easily… But Gold works too, even if it is a bit harder to use…

    (Sometimes I’ve pondered a variation on “bi-metalism” where Gold coins replace the $100 on up – probably $500 bill now – and currency is kept in use for ‘small stuff’ instead of silver. That lets you have a conveniently divided unit for things like bread and beer, but still have a foundation in gold for things like major purchases and contracts. Gets rid of the gold / silver mining cost ratio change problem… though still left with a Gresham’s Law issue… but it’s not as bad as one might think. A decent discussion is here: )

    @R. de Haan:

    That article is a reprise of the Democratic position that the best thing that could happen would be for a default on Aug 2 as “then the stock market would crash and they would be forced to give Obama anything he wants” (as heard straight from the mouth of a high Democratic strategist on a TV interview…)

    But it is wrong…

    Sure, there would be some folks pushing for a sell off. There would also be a counter-push wave of euphoria about maybe, just maybe, getting some government off the throats (and wallets) of the people and businesses of America. I guess about an 800 point drop, then a reversal in about an hour to end slightly higher (maybe 200 points?) on the day.

    The reason is very simple:

    There are plenty of tax receipts to pay the notes and bonds of America.

    Any decision to default rests entirely with the guy deciding to pay something ELSE first…

    BTW, the USA has defaulted on payments before. Yeah, it’s been a while, but it has been done. This is not “unprecedented”… and there is no such thing as a ‘permanent’ change of credit status.

    Per the Tea Party being a ‘one issue movement’: The author of that piece is clueless. It is much more than that. It is a gathering place of like souls who will NEVER submit to a party central planning committee telling them what to accept and that ‘triangulation’ is better than principled action. It is a direct reaction to the crap both “major parties” have been shoveling for years. A “bottom up” party, not a ‘top down’ party…

    (Someday I’m going to have to find out how one joins such a non-party party … as I agree with much of their movement… Then again, there is a certain charm to “belonging by association of understanding” without any formal party structure / sign-up process…)

    Oh, and what that article also misses is that it is the REPUBLICANS who can lose seats, or the DEMOCRATS, but not the Tea Party… As long as they do not let go of their ideals, it does not matter one whit if it’s an R or a D that gets dumped. A “Nogo” is a no go whatever party they are in and a RINO is no better than a Democrat so is at best a false choice and at worse a bald faced lie. At least if there is a D after their name the blame will be clearly assigned where it belongs…

    So lets just go right ahead and hit the Debt Wall. Let the markets have a bad day. Let the Dimocrats try to play their little “Oooohh it’s all dem nasssty Repuublicons what done it!” game. Whatever they pass will then stick to them for 20 years… And if the Republicans manage to hold the debt line, then by the end of the week the markets will recover (and I would expect next day at the more probable latest) and then they will have a decade of easy wins over the Democrats.

    The simple fact is that they can not get enough more tax revenue to fix anything. Simply does not matter what they do to tax rates. Borrowing the money is a long term path to doom (vis Greece and in prior years most of Latin America and Weimar Germany and Zimbabwe and…) so it’s not going to work. Anyone who ‘stays the course’ on those paths will be causal of a very bad collapse and pay for it. “Pop the bubble now” causes short term angst and then longer term recovery. (Yes, we are in a “Government expenditures and transfer payments” bubble. Just like all bubbles it grows to excess then must pop and the parabolic rise return to the trend mean… which as we’ve seen is about 18% of GDP…)

    So it really does not matter what happens Aug 2. All that matters is that Republican (or Smart Democrat) politicians clearly stick the tar baby of any tax rate change or debt limit raise onto Obama and the Dimocrats. Then wait. OR, hold the line on the debt rise and remind folks what America is all about: Point out the short term dislocations that WILL happen, then that the long term result is more freedom, more income, and more prosperity. Then wait.

    (The only ‘bad thing’ is that the Republicans have regularly done a horrid job of affixing the blame for things to where it belongs. Heck, they don’t even remind anyone that it was a Republican who freed the slaves and it was Southern Democrats who wanted to keep a slave economy in place… Why they let the Democrats ‘rebrand’ the blame for stupid progressive policies onto Republicans is something I just do not ken…)

  42. R. de Haan says:

    @E.M Smith,
    Thanks for your extensive views on the Spengler article.
    I don’t understand why the Reps allow their history watered down by Dems like I still don’t understand why Bush signed the ban of the incandescent light bulb ban.

    The Dems really are a bunch of dopes.

    Today we have “Paint the roof of your house white” Bill Clinton advising Obama to ignore Congress on the debt ceiling and invoke the 14th amendment.

    It really gives me the chills that this hack has been a two term President of the US. Obama however is the worst i’ve ever seen and I personally think the opposition should block his policies with all means available.

    As you said, increasing taxes is not an option but tax increases is exactly what they will decide upon.

  43. R. de Haan says:

    Yep, the latest proposal includes 1 billion in tax increases

  44. H.R. says:

    @R. de Haan

    1 billion in taxes is spit in the ocean. The Repubs should hold the line on taxes.

    @E.M. I think your projection of the market reaction to hitting the debt wall is pretty much correct. The markets will realize that businesses can continue to do business (exist) without the government, but government cannot do business (exist) without businesses.

    The only mess to clean up is what to do with all the unemployed government workers.

  45. R. de Haan says:

    I know but any tax increase dents the Reps.

    As for those unemployed government workers?
    They have to take responsibility for their own future just like everybody else.

    Hopefully we see the end of grand scale Government subsidies of business like the ethanol lobby and all the crazy sustainable energy projects.

    Yesterday the EU declared tougher rules and regulations on ethanol production.
    Until now a significant share of the mandatory ethanol policies have been realized by ethanol imports from the USA (and Brazil).

    I am sure the new regulations will be the end of the ethanol madness because there will be restriction on the transformation of food crops into ethanol.
    Other ethanol sources besides sugar cane are simply too expensive.
    Eliminating the subsidies will tip this sector over the edge.

    We will have a tough ride anyhow.
    Inflation in the US is already at a level of 9% and rising.
    Even those with low paid jobs will be in a position where they lack buying power.

    In Southern Europe we have entire area’s that have been turned into a war zone but without bombs.

    Friends of mine go to the same holiday resort in Italy for years.
    This year they found their holiday resort closed and abandoned because the bank cut of their credit line. This was a thriving resort run by the same family for more than 40 years.
    When they went into the local town they found closed hotels and closed shops and closed wineries. In short the entire region had defaulted.
    Thousands of people had lost their jobs.
    What wonders me is the fact that they didn’t have to close because of a lack of customers. The region saw growing tourist numbers over the past years.
    The financial collapse came so fast and so rigorous that they didn’t make it into the next tourist season.

    Flight carriers like Ryan Air offering cheap tickets to city centers all over Europe are closing down connections with former holiday paradises in the South at an alarming rate.

    We can’t see the developments in Europe separately from the developments in the USA.

  46. Richard Ilfeld says: Haan. Absolutely. It is often said that government types don’t have ‘business dna’. If you try to explain that to a liberal, you get a blank look —
    ‘heck, doesn’t Obama buddy with Jeff Immelt?”. Whats to understand?

    One of those under-appreciated subtleties is how close most small to medium size businesses are to disaster. No huge lines of credit. No several years to ramp up like a new government agency. No year long timelines like a local board and their permitting hearings.

    But any one who has been there realizes that small business runs from the cash drawer, and profits, even if a decent percentage, are tiny in absolute terms. One bad month, on unanticipated repair….well yes, you can borrow a little money, but the debt service changes the P to an L.

    A truly pernicious fact that I’ve lived and EM has written about, is that growing in size and hiring folks can actually reduce your net, not to mention increasing your fatigue, shortening you temper, and infuriating your significant other.

    I’ve dropped a couple of profitable small operations, and let go some decent folks, accepting a small change in net income to gain free weekends for the workshop and peace at home.

    And about 20 years ago I decided to absolutely, positively never take another government contract…..lending them money at no interest for months on end was unrewarding.

  47. My experience with the Social Security Administration was interesting. I spent one week a month there training their team of programmers, back when microcomputers were relatively new.

    The team leader had a prominent sign in his cubicle office:

    If at first you don’t succeed
    Get a government job
    Then you don’t have to try anymore

    It was clear that the entire team, and the 27,000 employees in the building they were working in, were similarly inspired. Some of them, I thought, might be salvaged by transferring them into the private sector immediately. But most were beyond hope. They would hold fire drills, dumping people into the street every week, to keep from getting too much done.

    There were people that read magazines all day, and were not to be disturbed because they had union or lawyer connections. The entire project was intended to be as inefficient as possible. Most people had no clue how to “work” — and were generally frustrated by their unsupported attempts.

    A few strugglers in that environment were trying to make a difference, but the entire system was engineered to provide incentives to defeat them.

    The military can be quite different, especially at the edges. Unfortunately, the closer you get to the bureaucracy, the less the military looks like an efficient combat team, and the more it resembles the Social Security Administration.

    Government should have only the clearly defined roles laid out in the Constitution as amended, and be limited in size and scope so that it accomplishes those roles as efficiently as possible, and does nothing else.

    From Ben Bernanke attempting to control a feedback process from the wrong end to Obama and other catastrophists mandating that expensive boondoogles suddenly become popular by fiat, we now have a government that is massive, massively corrupt, and rigging the game to grow itself at the expense of the nation.

    The last century has seen the government at all levels moving into the bread-and-circuses business, displacing literally hundreds of thousands of organizations set up to care for the truly needy. In so doing, the government directs most of its effort to take care of what it considers the most needy: government bureaucrats, and voters who will sustain it.

    The money and favors given to people to vote for this could be called “bootliquor.” We need to change the system so that this incentive instead points in the right direction.

    We can afford an organization [but reduced!] like the State Department, who considers their role to be “making the world safe for cocktail parties.” But we cannot afford that mindset being in charge of the US economy, or any significant part of it.

    Unfortunately, it is already there, and will be tough to unwind. And bureaucracies, like any other living organism, will fight hard to survive.

    ===|==============/ Keith DeHavelle

  48. E.M.Smith says:

    @Richard Ilfeld:

    You got it…

    One of my ‘surprises’ was that the more my business grew, the less money I had to spend…

    Take on a new contract. Great, add a person at about my pay scale. Start him at work. Issue paycheck week one. Week two. Week three. Week four. Bill client. Pay government ‘cut’ in SSI and tax withholding et. al. both Fed and State. Issue paycheck week five. Week six. Week seven. Week eight. Bill client. Pay government “cut’ in SSI and tax withholding et. al. both Fed and State. (I’m now ‘into it’ about 2.5 months of MY pay or about 5 months of my ‘takehome pay’ used to fund the business…) Client pays Month One. Deposit in bank. Paycheck week nine. Check clears.

    Customer wants to take on a second new person. Great!. Add a person about my pay scale… repeat…

    At this rate, I’m going ‘into the hole’ about 2 months of gross or 4 months of net pay per client / employee pair…

    At about 12 employees (and some contracts ending so having finally had the Float Monster pay off some of the earlier contracts) I’d reached my limit. I was, at that point, about 1.5 years of “my pay” in “float” and just could not carry any more. The choices were:

    1) Go to the bank and get a loan and pay THEM a ‘cut’.
    2) Try to stabilize and get the float caught up some.
    3) Shrink.

    About then, one client declared bankruptcy and I was stuck with a ‘5 figure’ loss (and paychecks STILL must be issued…) and the bubble started bursting, so new ‘gigs’ were harder to find.

    I opted for #3 “big time”. Just packed it in. After several years of 16 hour days ‘growing a business’ and with everyone but me taking a ‘rake’ from it, I’d had it.

    For the next year, I had a nice semi-vacation ‘recovery’ as the Float Monster paid me. About a year of ‘my pay’ came in as the float contracted to zero and I let folks go at the end of contracts. One of the best years in my business, for me anyway…

    But another way to look at it is that I’d put that much money at risk in a zero return investment (float does not pay you interest) and been clipped for 5 figures of it legally just to massage my ego that I could build a business that made a small profit. Oh, and for the joy of doing a corporate income tax return every single quarter… The Federals do not like to wait for THEIR ‘cut’ in float…

    So the Obaminator doesn’t understand why “business is sitting on so much cash”… perhaps because they know they have a Float Monster to feed and that if a client files bankruptcy they may need to cover that cost; and have no idea what The Federales “rake” is going to be going forward or how many “figures” will have to be sent on new “regulatory compliance” and that adding a couple of new employees is just going to suck down a few more months of cash flow and add a heaping helping of Medical Costs…

    Oh, and a visit to the bank for a ‘float loan’ will be met with derision as they bank needs to sit on all that loverly TARP and stimulus money to meet the Federales demands that they have a larger ‘percentage of reserves’. So no business loans, sorry, come back next Presidential Election and we’ll see what the rules are then…

    Yeah, I’ve “lived that dream”… which is why I’m signing up for a gig that pays me a weekly paycheck and lets someone ELSE take a 2 month guzzle from The Float Monster…

    Oh, and the spouse was much happier with me too… other than the lack of my going to work for a couple of years…


    I once worked at a State of California job doing clerical work at a hospital (putting self through school).

    One fellow had a job in a closed room with some never-accessed files. He came in, in jacket and tie, and sat at a miniature desk in the closed room staring at the wall. Never a word to anyone. Never any movement other than to / from work and lunch.

    I asked someone “what’s with him?”. Was told “Don’t tell anyone, but about 5 years ago he groped a girl in the file room. When confronted, he was so embarrassed is just sort of ‘lost it’ and just kind of went zombie. So he shows up each day and sits at the desk. Just ignore him.” Silly me, I asked: “Why don’t you fire him?”. The answer? “It would just put him on welfare and the State would still have to pay him. This is easier on everyone.”

    That answer has stuck with me. It explains much. The common mindset inside government agencies is simply that to reduce government employment would simply result in more welfare, so just let them hang around on “social justice welfare” or “self esteem welfare” instead…

    The only answer I’ve been able to figure out is to simply end agencies wholesale. Create a new one for any parts that really DO need to be done and staff with new hires at about 10% of the prior staffing level.

    Since the folks inside the agencies are categorically unable to do a layoff for efficiency, the only answer is a reboot.

    Think of it as a pernicious memory leak in some code. If you can’t patch the binary, the only answer is either an infinite growth of memory or a periodic reboot of the system…

    Same problem, just substitute ‘money’ for ‘memory’ and ‘government’ for ‘system’ and ‘code’…

  49. Off topic, but germaine to prior exchanges. Here is your economics exam:
    Financial Crisis: Final Essay Exam
    By Barry Ritholtz – July 20th, 2011, 9:30AM Good morning class.

    This past academic year, we have studied the many causes of the financial crisis. We’ve looked at how this stock market collapse compared to others, the impact of bank bailouts on competition, and of course, the Great Recession. There are lots of moving parts in this saga, and understanding them all is our goal.

    Your final examination is in essay form. Answer each of the following 10 questions, using specific data and facts to buttress your arguments. Note you will be penalized for unsupported assumptions and unproven theories. Ideological arguments that lack a factual basis will also penalize you.

    You have 3 hours (~15 minutes per question).

    Good luck.


    Final Examination

    1. Following the dotcom implosion and 2000 market crash, the Federal Reserve lower rates to then unprecedented levels to 2% for 3 years, including 1% for a year. Discuss the impact this has on various asset classes, including Real Estate, Fixed Income, Oil and Gold. What difference might a more traditional interest rate regime have made for these assets?

    Bonus Question: Imagine you were FOMC Chair. Where would you have set rates in the 1990s? After the 2000 crash? Today?

    2. Prior to the late 1990s, the rating agencies (NRSROs) — Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings — business models was funded by bond investors buying their research. This changed to a securities syndicating underwriter funded model. How did this business model change impact the performance of ratings agencies?

    Bonus question: Does the financial world still require NRSROs? What potential alternatives might replace these entities in evaluating complex financial products.

    3. The Commodity Futures Modernization Act of 2000 was an unusual piece of deregulatory legislation, creating a new world of uniquely self-regulated financial instruments. What was the impact of this on risk management, leverage, and mortgage underwriting?

    Bonus: What did the lack of reserve requirements for derivative mean for firms such as AIG, Bear Stearns and Lehman Brothers specifically?

    4. More than 50% of subprime loans were made by nonbank mortgage underwriters not subject to comprehensive federal supervision; another 30% were made by banks or thrifts also not subject to routine supervision or examinations. What did this do to the supply/demand curve in the housing and mortgage markets?

    Bonus: What is the role of changing credit standards in prior bubbles and financial crises?

    5. In 2004, the SEC issued the Bear Stearns exemption: They changed the Net Capitalization rule from 12 to 1 leverage to essentially unlimited for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. None of these companies exist today in the same structure as prior to the rule change. Discuss.

    Bonus: Changing broad legislation for only 5 companies is unusual. What does this say about regulatory capture, democracy and the impact of lobbying on American society?

    6A. Mortgage underwriting standards changed rapidly in the 2000s. Many lenders stopped verifying income, payment history, credit scores.

    6B. The loans themselves changed: Loan to value (LTV) went from 80% (20% down payment) to 100% (No Money Down) to even 120% (Piggyback mortgages).

    6C. “Innovative” new mortgage products were developed and marketed in the 2000s: 2/28 ARMs, I/O s, Neg Ams

    Discuss the correlation this had on a) home prices; b) new inventory build; and c) foreclosures.

    7. Banks developed automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible. What was the impact of this on Housing prices, defaults and foreclosures?

    Bonus: Real estate agents and mortgage brokers were known to repeatedly use the same corrupt appraisers to facilitate loans approval. Did this correlate with AU? Discuss how.

    8. Collateralized debt obligation (CDO/CMOs) managers who created trillions of dollars in mortgage backed securities and the institutional investors (pensions, insurance firms, banks, etc.) who purchased these appear to have failed to engage in effective due diligence prior to the purchases of these products. Reconcile this in terms of the Efficient Market Hypothesis

    Bonus: What does this mean for self regulation of the financial industry?

    9. The Depression era Glass Steagall legislation was repealed in 1998. What impact did this have on the size of banking institutions? What did this do to the competitive landscape of financial services industry? Did this impact bank risk taking? Discuss.

    10. Numerous states had anti-predatory lending laws which were in 2005 “Fedrally Pre-empted” by order of John Dugan, head of the Office of the Comptroller of the Currency (OCC). What impact did this have on states with anti-predatory lending laws default and foreclosure levels, pre and post pre-emption?

    11. In 2006, more than 84% of subprime mortgages were issued by private lending institutions not covered by government regulations (McClatchy). Discuss what this means in terms of profit motive, government policy, and GSEs.

    12. The Bank Bailouts “rescued” the system, but may have created additional issues int he future. Discuss the Moral Hazard of bailouts, what they mean in terms of competitive landscape and concentration of assets in the financial services industry.

    Bonus: What impact might the Consumer Financial Protection Bureau on lending and future credit bubbles?


    Economics 301, Professor Ritholtz
    Causes and Elements, Financial Crises and Depressions
    Office hours Tu-Thu 3-5

    Category: Bailouts, Politics, Real Estate, Really, really bad calls, Regulation.

    [ Not sure what your point is. That professors can make interesting tests? That they can tilt their questions to a political bent? That there are a lot of moving parts? At any rate, here it is… -MOD ]

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