The Devilish Mixture of Stagflation

By Bill Bonner

"One part slump…one part inflation…and one part who-knows-what. Of course, the feds are eager to put more inflation into the brew. If they had their druthers, the concoction would have more of a kick - with more exciting price increases and less depressing slump."

Read the rest

The Frightful Face of Stimulus

Among businesspeople, bankers, and investors, there is a growing fear that the economy is headed towards recession or already in one. But that alone is not the source of worry. After all, an economy if left alone to function in freedom can recover. The real problem has to do with the political response. There is every indication that no matter who comes to be in charge in November, we face a future of massive spending, inflating, and regulating.

And here is the real danger. One only needs to look at such preposterous measures as the "stimulus package" that congress passed to much fanfare. Dumping money into consumers' hands, drawn from wherever they can get it, is the only means these guys can dream up to shore up prosperity. That only proves that they don't know what brings about prosperity in the first place, which is not congress but free enterprise.

Economist Robert Higgs compares a "stimulus package" to getting water out of the deep end of the swimming pool and dumping in the shallow end – all with the expectation that the water level will rise. As he emphasizes, economists should never tire of asking where the money for stimulus is going to come from. Mankind has yet to invent a machine to create it out of nothing: it's either taxing, inflating, or going into debt that has to be paid later (and crowds out capital creation now). There is no other way.

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Dow Jones Musical Chairs - Part 2

I discussed the chopping and changes made on the Dow in Dow Jones Musical Chairs

Mark Hulbert at Marketwatch touches on the same issue: What happens to Stocks added and deleted form the Dow?

According to Norman Fosback, editor of Fosback's Fund Forecaster, the Dow would today be more than twice its quoted level had IBM not been removed in 1939.

Are these examples typical of all changes made over the past 110 years? I don't know, since I have not gone back and calculated the returns of all stocks that were added or deleted to the Dow subsequent to its creation in 1896. But I wouldn't be surprised if the average deleted stock has outperformed the average addition.

That's because companies that are added often are coming off a period of dynamic growth. A company that is substantially out of favor typically does not get added. This skews the Dow towards the large-cap growth sector of the market, which historically has underperformed smaller stocks and issues that are closer to the value end of the value-growth spectrum.

Therefore, to follow the Dow's moves is not a very good way to track the performance of the US stock market.

I suggest you rather monitor the Willshire 5000 index, which represents the broadest index for the U.S. equity market. This should give you a better indication of where the market is heading.

January US Retail Sales are Down

In nominal terms, Retail Sales might be up 0.3%, if you can trust those figures.

However, the picture changes if you deduct CPI. If you use the US Government CPI of 4.1%, real sales are down to -3.8%.

If you use the CPI value of Shadow Stats, which estimates CPI at around 7.5%, then Retail Sales are down -7.2%! That makes more sense. I can not see how Retail Sales can grow when business is scaling back. Shedding more light on this, Mike Shedlock asks the question, Does The Shopping Center Economic Model Work?

The hype reflected on the stock markets over statistics like this, leaves me cold. Is this a sucker trap being used by big players to offload shares onto the next fool ?

I just can not see any valid reason for equities to go up in the current local and global economic environment.

Economics Teaches Us Not To Fret

In a world of scarcity, every choice requires that something else of value must be given up, and the highest-valued alternative given up is the opportunity cost.

That opportunity-cost emphasis focuses on the question of what is actually being given up when a choice is made. Its purpose is to ensure that we don't mislead ourselves with basic errors, because if we misunderstand the relevant costs, our understanding can well be incorrect even if our theory from that point on is correct (following the maxim that logic only means making no more mistakes than you are already committed to).

Equally important, it helps ensure that others can't mislead us with their confused understanding, as so often happens when people try to sell government "solutions" to perceived problems (e.g., ignoring the cost to society of the taxation required to fund some spending program).

FULL ARTICLE

FMM Comment: On the other hand, you SHOULD fret when people vote for warmongers, socialists, fascists, welfarists, big spenders, inflationists, thiefs and liers.

Words from the (Investment) Wise

by Prieur du Plessis


The past week witnessed a turnaround in sentiment as renewed recession fears dominated investors' actions. Stock markets across the globe were subjected to selling pressure, while credit spreads scaled new highs. "What the market giveth [the previous week], it also taketh away [last week]," was Briefing.com's very apt description of events.

A particularly weak ISM Services report and the specter of bond insurer downgrades further reignited recession concerns, and reminded pundits of the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."

Randall Forsythe of Barron's offered the following commentary: "The Mardi Gras that's lasted four decades for the American consumer is drawing to an end, if it is not already over. After Fat Tuesday comes Ash Wednesday, which is observed today, and is the beginning of Lent, a 40-day period of fasting, self-examination and renewal for Christians, analogous to Ramadan for Muslims or Yom Kippur for Jews. Lower interest rates are a palliative, not a cure, for the economy's woes. Time is the only healer. Economists call that time a recession, and it can no longer be avoided."

Before highlighting some thought-provoking news items and quotes from market commentators, let's briefly review the financial markets' movements on the basis of economic statistics and a performance chart.

Read the rest

The Mother of All Bubbles

By Peter Schiff

In contrast to the dismal forecasting record of mainstream economists over the last few years, the forecasts that I have made regarding the dollar, oil, commodities, precious metals, global stock markets, inflation, and the U.S. economy have all come to pass. In addition, unlike the top economic oracles on Wall Street and in Washington, I can also point to similar accuracy in predicting the bursting of growing bubbles, first with technology in the late 1990’s, and more recently with real estate. However, my long-standing prediction about the fate of the bond market has fared much worse. I still do believe this prediction was not wrong, but simply premature.

For years I have predicted that the falling dollar, persistent trade deficit, and the lack of domestic savings would combine to send long-term interest rates sharply higher. The effects of these fundamental drivers would undermine the Fed’s efforts to lower short-term rates and compound the problems for the housing market and the U.S. economy. Yet as of today, the yield on the thirty-year Treasury bond still stands below 4.5%, within 40 basis points of a generational low. Either this is the one piece of the puzzle that I somehow got wrong, or other factors are working to temporarily confound fundamental economics and prop up the bond market. As you might imagine, I am confident that it is the latter and consider the U.S. Treasury market to be the mother of all bubbles.

I have often said that the only thing worse than holding U.S. dollars is holding promises to be paid U.S. dollars at some distant point in the future. However, this is precisely what U.S. Treasuries represent. Given all of the inflation that already exists, and all of the additional inflation likely to be created over that time period, why would anyone pay par value for the right to receive $1,000 in thirty years in exchange for a mere 4.5% coupon? Although it looks like the sucker bet of the century, the fools have been lining up to buy. Alan Greeenspan called this a "conundrum." I simply call it mass delusion of the same variety that brought us pets.com, and $800,000 tract homes in the middle of the California desert.

Just like dot coms or real estate, today’s bond prices reflect a fantasy world. In this "Bizarro" reality, the dollar will remain strong, inflation will stay low, economic strength will persist uninterrupted, and Fed policy will be predominantly hawkish for the foreseeable future. But when the fog finally lifts, and investors come to grips with a sagging dollar, recession, gaping budget and current account deficits, and the most accommodative Fed imaginable, bond prices will collapse, sending long-term interest rates skyrocketing higher. Unfortunately, for investors who hitched their wagons to benign government CPI statistics and ignored real world evidence of inflation [rapid money supply growth, surging gold, oil and other commodity prices (wheat and soy beans prices catapulted to record highs this week), the sinking dollar, and actual increases in consumer prices,] the losses will be excruciatingly real.

It is important to remember that for every borrower there has to be a lender. For example, if a homeowner wants to refinance his mortgage, there must be someone willing to loan him the money. Practically everyone on Wall Street is hailing the Fed’s recent rate cuts because they believe it will allow strapped ARM holders to refinance into more affordable mortgages. However, while low rates are great for borrowers, they are lousy for lenders. Why would anyone want to offer a thirty-year mortgage at an artificially depressed interest rate? As soon as the Fed raises rates again, as it clearly intends to do once the crisis ends, all that low yielding mortgage paper will collapse in value. Lenders can surely figure this out and will therefore refuse to volunteer to be the patsy in this plan.

Eventually, the world’s lenders will reach similar conclusions with respect to U.S. Treasuries. No matter how low the Fed funds or discount rates get, private savers around the world will simply refuse to lend given the inherent risks and paltry returns. At some point the sheer absurdity of holding long-term, low-yielding receipts for future payments of depreciating U.S. dollars will be apparent to all. After all, it was not too long ago that investors thought holding subprime mortgages from financially strapped borrowers who could not possibly repay them was also a great idea -- so great in fact that many leveraged themselves to the hilt to buy them. Judging from the extremely poor demand at this week’s $9 billion auction of thirty-year Treasury bonds, the day of reckoning may not be too far off.

For now there are a host of factors temporarily propping up the Treasury bond market, such as unrealistically sanguine inflation expectations, foreign central bank and hedge fund buying, short covering, credit spreads, problems in the mortgage market, recession fears, and flight to what is falsely perceived to represent the ultimately in safety and quality. When these props give way, look out below! As we have learned from previous bubbles they can inflate for a long time before they burst. As this one has been inflating longer then most it has amassed quite a bit of air. When it ultimately finds its pin the popping sound will be deafening.

For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

******

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for over twenty years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, Peter is a highly recommended broker by many leading financial newsletters and investment advisory services. He is also a contributing commentator for Newsweek International and served as an economic advisor to the 2008 Ron Paul presidential campaign.

>> Click here for Mr. Schiff's video interviews.

Passing the Buck back to the Future

The BIG Kahunas are getting plans in place to postpone the inevitable market collapse to an unknown future date. It will be interesting to see what plans these fools come up with. It's either "Inflation or Death!"

******

TOKYO (Reuters) - Financial leaders from the world's richest nations stood ready to discuss a global policy response to the credit crisis, which has unleashed economic downdrafts and market turbulence that knows no borders.

Aggressive action by the United States to cut interest rates and taxes to ward off recession has tested the limits of cooperation in the Group of Seven.

A question of how far other major economies should follow has provided a tense backdrop for finance ministers and central bankers as they gather in Tokyo to seek ways to repair damage to their economies and financial markets wrought by the U.S. subprime mortgage crisis.

But officials arriving on Friday for G7 meetings this weekend showed a readiness to begin tackling problems together.

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Moral Obligations Of Walking Away

Walking away is certainly a hot topic. I brought up the issue of walking away on October 2nd 2007 in Mortgage Forgiveness Act - The Seen and Unseen.

The winner in the debt forgiveness provision (if there is a winner) is the struggling homeowner. The unseen loser is the mortgage holder, the NAR and the NAHB. Prior to this legislation a homeowner had to worry about tax liabilities of just handing over the keys and walking away. If debt was forgiven prior to bankruptcy, there was also a tax liability. Such considerations have been removed. At the margin, more people will be tempted than before to hand over the keys and walk away.

Read the rest

FX Insights Trade Team Update 07/02/2008

By FX Insights Moderator

Did you enjoy today's 200 pip drop as much as you enjoyed it on Tuesday? I hope so... we surely did, these are the kinds of days we live for as traders!

So what drove the euro down today? Very simple -- his name is Jean-Claude Trichet, and right now, I'd love to shake his hand!

As expected, the ECB held interest rates at 4.00%, but it was what Mr. Trichet had to say at his press conference that caused the euro to get beat up in today's trading... lets re-cap:

Back in November we started giving warnings that European growth would slow in 2008 and that the ECB would eventually be forced to cut interest rates, hopefully those of you who were around back then and read the updates will remember... in fact, I've probably devoted a dozen or more updates over the past few weeks talking about this and now we're finally starting to see the market respond to Europe's weakening fundamentals and the market's speculations of ECB rate cuts.

At this morning's press conference, Trichet was the most dovish about European growth as I've ever seen him... in addition, he basically said that current interest rates would be just enough to stabilize European inflation... plus, he indicated European inflation would subside while downside risks to growth would grow! He almost seemed relieved to get all this off of his chest, it was very odd to watch and observe his body language, but that's an important thing we do because it can signal how the market will decide to react, which was clearly to bring the euro down...

In nutshell, Trichet told the markets the following:

*Rates are on hold and will not need to be raised = EUR-
*M3 growth is slowing = EUR-
*Inflation pressures will subside this year = EUR-
*Growth facing serious risks to the downside = EUR-
*Risks to GDP are on the downside = EUR-
*ECB will not surprise markets = EUR-

Basically, Trichet gave the market six major, mega, no-brainer reasons to short the living crap out of the EUR/USD and to likely keep shorting it in the near-term...

With Trichet giving the market the greenlight to unload euros today, his comments triggered a chain reaction of profit taking, loss taking, and shorting of the EUR/USD, which took us down another 200 pips from yesterday's topside resistence at 1.4638... and as far as today's down move goes, the EUR/USD held to its very reliable pattern of not making a move (up or down) of more than 200-220 pips during a trade day. It moved exactly 201 pips from the top of the range at 1.4638.

As we indicated, sustained break of 1.4550 would open the doors to the downside and we certainly saw this play out in today's market action...

So now we have the EUR/USD making two 200-pip moves down so far this week... if patterns hold true, we'll likely see a retracement back up as the market is slightly overextended and exaggered itself this week... that being said, we have seen EUR/USD patterns where it'll move 500 points in a week, but this is very rare and I'm not expecting this to play out before we see a bit of retracement...

EUR/USD trading...

As we indicated, the break below 4740 took away the market's momentum to push the euro up any higher and now the break below 4550 has opened the doors to test lows we haven't seen for weeks and months.

For most of last year the market punished the dollar for its weak fundamentals and then for the Fed rate cuts... the dollar has recieved the worst of its punishment in the near-term...

The market has yet to fully begin punishing the euro for it's weakening fundamentals because the Eurozone's fundamentals have just barely started to show signs of decline and weakness, which means we have a potentially long road ahead of us... then, the market will need to punish the euro for the ECB rate cuts that are likely coming this spring or sometime early in the second half of this year...

By that time, we'll be in a full-blown U.S. recession, and the global markets as a whole will be crumbling all around us... we've already talked about what a recession will do to gold and the dollar, so I'm not going to take time to get into that now, you can read those posts...

As far as trading goes, I'll be shorting the rises, as indicated in yesterday's update and in the chat today... the only time I'll likely take a euro long is when we trigger a signal... on an intraday trade basis, I will likely be short when I trade within a range...

I would love to tell you where the market will decide to find a bottom or find the next top, but please understand that the landscape is in the beginning stages of shifting...

The dollar's been beaten up left and right, up and down all last year... the market already knows the fundamentals are crap, that interest rates are abysmal, that the jobs market is fickle, and that growth is slowing to recessionary paces -- there are no more big secrets to reveal about the sad state of affairs with the U.S. economy...

For Europe, on the other hand, the secrets are just now coming out and the market has just begun licking its chops to do to the euro what it did to the dollar... at least this is how I see things playing out... I could be dead-wrong, but I'm going to stick with this same forecasting we've had since last November and I'll have to trade it accordingly and consistently...

Lets look at some key levels to keep an eye on:

Downside:

4429
4401
4384
4364

Upside:

4495
4512
4538
4554

For me, the plan is simple, short the rises unless price action dictates otherwise...

Early this morning Yeno gave those in our chat a killer EUR/USD short on a live trade call:

Click on Image

And I just have to give a big congrats to one of our community members who goes by the screename CK33 -- this smart and patient trader took the live trade call, shorted at 4636 and held his short all the way to 4445, picking a perfect bottom to close out and bank 191 pips... we love hearing those success stories!

Fundamentally tomorrow, we only have one noticeable piece of data which is German Industrial Production, which very likely could disappoint this go around...

As far as the market goes, I don't expect another 200 pip move tomorrow, but I'm ready for continued volatility should the market decide to stay active...

Currently, we are in a signal which will close out at 1.4513 should we stay above our last buy level of 1.4420... so far, we've held above this level... I feel confident this signal will payout just as all the others have... if this signal is making you squirm, find me in the chat so we can discuss it

I think that's all for now... see ya in the chat...

-FX Insights

FX Insights Trade Team Update 06/02/2008

By FX Insights Moderator

Another boring day in the market with little volatility to speak of. We do, however, have some important things to cover in today's update... a few different topics we need to talk about...

I'd first like to talk about the signal that was triggered this morning and why we had to "cancel" it... very early this morning we triggered a buy signal and decided to make our first buy level at 4600. The signal triggered exactly at the price of 4608. Based on the time of day and based on market conditions, we felt as if the market would come down to at least the 4600 level and determined this to be a good place to take our first entry.

The market, unfortunetly had some other ideas and decided not to come down, but to take off from the exact point where we triggered the signal. When the market reached 4635, we decided to "cancel" the signal because our first buy level was never reached. This is only the second time in the history of our signal that we had to cancel it for this reason.

Why do we cancel a signal if the market takes off before our first buy level is touched? It's all in the name of risk managment... you see, we knew the market would go up at least 20 pips from the place where the signal was triggered, however, we also knew that if it first went up only to come back down, it may continue down and or stay down today. So, in managing risk, we simply let the market do its thing... the market did go up to 4672 today, so even if you bought in at the trigger price of 4608 when you got your SMS, you still would have made some great profits even though we had to cancel out the signal.

I just wanted to clarify why we did this in case there was any confusion. I don't want anyone to think we are playing games or manipulating things, but rather this is something we had to do to ensure proper risk management during these odd market conditions. If you have any more questions about this, please let us know. Thanks.

Now, let take a look at the market...

As we talked about this week, I see continued aversion to risk happening in the market, which I believe is a big contributing factor in why the euro is under the gun against the dollar... so, lets break this down:

Equities -- overnight the Nikkei closed down over 600 points, signaling continued fear of risk in Asia. Today, the Dow closed down 65 points, closing at 12,200 on the dot. Now I'm hardly an expert on the Dow, but I have to believe that a break below the 12,000 level would put renewed selling pressure on the Dow and Dow futures. For the euro, these declines in the equity markets will only get it pressured against the dollar, and will keep the EUR/USD at the bottom of the range.

Recession -- After yesterday's abysmal ISM services data, once again the markets were talking recesion... not just the U.S. recession, but a global recession. These recession fears are real, not unfounded. Fundamentals point to true recession happening. The problem with this recession issue as it relates to the euro and the dollar is where things get a little weird and tricky.

I'm still firmly believing that a full-blown U.S. recession will negatively impact growth in Europe and will negatively impact the value of the euro and will negatively impact demand for the euro. Logic would tell you that a U.S. recession should keep the dollar under the gun and keep it weak against higher yielders like the euro, but almost by the day I'm more convinced the dollar is somehow going to come out smelling like a rose as the year rolls on.

And here's where I start thinking like a bank would think -- if the U.S. causes a global slowdown which would directly effect European growth, are the banks going to be as over-the-top bullish on the euro as they were in 2007? No way. Much of the euro's strength is built upon strong growth fundamentals, a very hawkish central bank, a central bank that so far has been very tight on monetary policy and hawkish with rates.

At the same time, the euro rose to stardom the past few years on the back of the U.S.'s weakening fundamentals and the fore-knowlege from the banks that the Fed would eventually have to slash rates. In addition, the EUR/USD was bolstered by rising gold, rising oil, lower bond yields, and skyrocketing equities markets.

But in today's market landscape, we need to paint a different picture... many of those factors that have compelled the banks to keep buying the euro and to keep pushing it higher against the dollar are turning the other direction...

We've said it a million times, but growth in Europe is slowing and will keep slowing -- the European fundamentals will be weak this year overall. The ECB while remaining hawkish on price stability, will have to cut rates later this year because Trichet eventually will have to address Europe's growth issues and the only way central banks deal with slow growth is to cut rates.

If we do fall into recession, commodities should level off or decrease in value. Equities may have a tough time this year. And if the markets decide to go heavily into risk aversion mode, this usually means they flock to so-called save havens like U.S. securities, and believe it or not, the USD.

I hope you don't think we're beating a dead horse here, but I just want to explain why our concerns about the euro are mounting as the year rolls along. I want to state our case clearly... and give you some food for thought.

EUR/USD trading...

With the EUR/USD meandering in the low 4600's, this pair is in what I consider to be a very precarious spot... with the euro falling under the 4740 level, this leaves the door wide open for more downside testing... staying below that level removes much upside momentum and potential. That being said, staying above the 4550 level also leaves some room for buyers to emerge to push the pair back up towards the top of the range... so, this is why I say we're in a weird spot at the moment.

As far as trading goes, there's no clear direction to trade with any fair degree of certainty unless we can sustain a break above 4740 or sustain a break below 4550... based on current market conditions and what's happening with the global indicies, I can't really be biased one way or the other -- my personal risk management rules will not allow me to go heavy long or short at the moment... this means I'm tightening up my accounts, not trying to catch a big move, but playing the intraday, taking a few pips per trade and getting out. They key is that I do not want to get caught going the wrong way should the market decide to go nuts and make another 200+ pip move...

Playing the intraday for me has meant shorting the rises... I've felt more comfortable shorting the rises the past 48 hours, and this bias is based on what I see with price action, what I see with gold, oil, the Dow, and the 10-year... speaking of the 10-year, yields have made a strong comeback in recent days which has put even further downside pressure on the EUR/USD.

Tomorrow...

Tomorrow is the big day -- ECB interest rate policy at 0745 EST, followed by Trichet's press conference at 0830 EST. Trichet will hold rates at 4.00%. With Eurozone inflation running at 3.2%, there's really no way he can cut rates while remaining so vigilent on price stability. Of course, the market will be watching closely to what he says about the near-term future...

The past two press conferences Trichet has been somewhat dovish on growth. He's not made a single reference to possible rate cuts, in fact, he's said a rate cut option was not on the table.

Now there's no way I can predict what the man will say tomorrow, but I'm warning you now, if he ups the rhetoric on Europe's slowing growth, and if he says Eurozone inflation will subside later this year, the euro will stay under pressure. In addition, if he says all of those things and even slightly hints at possible ECB rate cuts happening this year, I fully expect the market to hammer the euro.

I will be tightening things up as we draw close to the rate decision and following press conference. As Yeno says, expect the unexpected...

I don't believe we'll see any mega moves before tomorrow morning as the market should fall into a wait-and-see mode. Should we dip below the 4600 level, some buyers may emerge to push the euro back up, so keep that in mind over the next 12 hours or so...

You'd be well served watching Trichet's press conference tomorrow. You can view it here.

-FX Insights

The ECB Rate Rebels

By Nico Isaac

On January 28, the annual International Monetary Fund meeting was held in Davos, Switzerland. There, the world’s economic leaders came together to address the central concerns facing the global marketplace.

Result: the European Central Bank was put under more fire than a spit-roasting pig.

The short version is that the ECB has opted not to join the U.S. Federal Reserve’s rate-cutting crusade; instead, holding rates firmly to a six-year high of 4% since June 2007. Lofty rates, so say the "experts," keep the euro at record-high levels, which further compounds the setbacks currently facing Eurozone economic growth.

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Meredith Whitney fears $70bn carnage on monoliners

The high-profile banking analyst who triggered the resignation of Citigroup chairman Charles "Chuck" Prince is predicting investment banks will need to take further write-downs of $40bn (£20bn) to $70bn as a result of the current crisis in the bond insurance market.

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Zimbabwe Economics

by Bill Bonner

Bill Clinton should have gone to the Alps. Instead, the poor man went to the piedmont...to the aid of his wife in South Carolina.

At the annual Davos, Switzerland, conference of celebs, power-brokers, and do-gooders, Clinton was always a hit. In Carolina, he was a flop.

If he’d been in Davos, he might have given the meeting some of the magic of the old days. Every year, the movers and shakers gather to tell each other how to make a better world. Most just blather in a way that began naïvely, early in their careers, soured into cynicism in middle age, and finally becomes merely stupid. Some probably still think they can improve things. A few probably succeed.

But this year’s meeting seems to have had a defeatist tone to it. Probably because the news was bad.

Last Sunday, it was discovered that a young man at an old bank had managed to get himself into $50 billion worth of positions – most of them losing positions. This was more than half of the value of all of France’s gold and currency reserves. It was more than the entire value that had been built up by the bank over decades. How could it happen? What was wrong? How could banks be so fragile...and what could you think of the whole world’s financial system when it was built with bricks that cracked up so readily?

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Money and the Economic Crisis

Money: Pathology and Reality

Recent daily articles on Mises.org and LewRockwell.com have addressed the economic downturn, and the unbearably bad response from Washington and the Fed. These people have learned all the wrong lessons from the Great Depression. There is nothing that the planners won't consider at this point: wage and price controls, floods of new money, exchange controls, protectionism, hundreds of billions in public works – you name it.

The good news is that all the literature necessary to combat this nonsense is in print. The Austrian perspective is there to make sense of the current economic mess.

HERE ARE ALL THE RECOMMEND BOOKS

(NB: I'll be making an effort to add as many of these books listed to my list of E-Books, which can be downloaded in PDF format) Note: DONE !!! :-)

What You Should Know About Inflation

I have added "What You Should Know About Inflation" by Henry Hazlitt to the list of Educational Economic E-Books, which you can download in PDF format.

Just right-click on the link and "Save Target As..."

A quick overview of the book and what it's about:

The book's title—What You Should Know About Inflation—only hints at the extent of the issues that Hazlitt addresses. He presents the Austrian theory of money in the clearest possible terms, and contrasts it with the fallacies of government management. He takes on not only the Keynesians but also the monetarists, as well as anyone who believes that government debt accumulation and manipulation of interest rates are harmless.


So this book is about far more than inflation. He touches on a wide variety of macroeconomic topics, any area of economic policy that is related to the monetary regime, including budget and trade issues, as well has the economic history of inflation.


Neither does he neglect the moral cost of inflation:


It is not merely that inflation breeds dishonesty in a nation. Inflation is itself a dishonest act on the part of government, and sets the example for private citizens. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. Notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.


Particularly interesting is the final section of the book in which Hazlitt critiques various proposals for monetary reform and then presents his view.


What is Hazlitt's own idea for monetary reform? He wants competitive monies, which he believes will be based in precious metal. He doesn't demand that governments get out of the monetary business altogether but merely that government permit everyone to choose to use any money and make any form of contract.


Hazlitt lays out a scenario that he believes will lead to a 100 percent gold standard rooted in private coinage. In effect, he argues that private markets can do for money what private services have done to a whole host of government ones: outcompete and displace them. It is a challenging thesis, particularly because it doesn't depend on any reform other than freeing the market.

• What Inflation is
• Some Qualifications
• Some Popular Fallacies
• A Twenty-Year Record
• False Remedy: Price Fixing
• The Cure for Inflation
• Inflation Has Two Faces
• What 'Monetary Management' Means
• Gold Goes With Inflation
• In Dispraise of PAper
• The Cure for Inflation
• Inflation and High Costs
• Is Inflation a Blessing?
• Why Return to Gold
• Gold Means Good Faith
• What Price for Gold?
• The Dollar-Gold Ratio
• Lessons of the Greenbacks
• The Black Market Test
• How to Return to Gold
• Some Errors of Inflationists
• Selective Credit Control
• Must We Ration Credit?
• Money and Goods
• The Great Swindle
• Easy Money = Inflation
• Cost-Push Inflation?
• Contradictory Goals
• Administered Inflation
• Easy Money has an End
• Can Inflation Merely Creep?
• How to Wipe Out Debt
• The Cost-Price Squeeze
• The Employment Act of 1946
• Inflate? Or Adjust?
• Deficits vs. Jobs
• Why Cheap Money Fails
• How to Control Credit
• Who Makes Inflation?
• Inflation as a Policy
• The Open Conspiracy
• How the Spiral Spins
• Inflation vs. Morality
• How Can You Beat Inflation?
• The ABC of Inflation

You can also purchase the paperback version here.

Enjoy!!!

Another One Bites the Dust

Over the past half-century, the United States has seen its global dominance in dozens of industries slip away. One plum that we have maintained is our gargantuan financial services industry, whose contribution to total GDP more than tripled between 1947 and 2005.

However, the current global financial crisis, manufactured on Wall Street and exported to the entire world, may result in the U.S. losing its financial crown as well.Once upon a time America owned the automobile industry. But after several decades of excessive taxation, onerous government regulation, union extortion, and a crushing lack of foresight and innovation, we no longer dominate an industry that we practically invented.

Just as Detroit no longer claims center stage in the world automobile marketplace, soon New York will lose its position at the center of global capital markets.In the first place, the center of finance tends to go where the money is. Right now all the money is coming from Asia and the Middle East. When the United States was the world’s greatest creditor nation and its largest supplier of capital it made prefect sense for that capital to be allocated here.

But why should the Chinese send their savings to New York only to have it re-invested back in China? Wouldn’t it make more sense for the Chinese to allocate their capital locally rather then out-sourcing the job to us?In the second place, when the strength of the dollar was widely regarded it made sense for global savers to allocate substantial percentages of their savings to U.S. dollar denominated investments.

This preference gave Wall Street a competitive advantage in attracting capital. However, now that confidence in the dollar has evaporated, perhaps permanently, this advantage has been lost. Further, investment in the U.S. was encouraged by America’s respect for private property, low taxes, and minimal government regulation.

However, this advantage has been lost as other nations have strengthened their private property laws, deregulated, and lowered taxes, while we have done the opposite. As a result, thus far this century, the returns on U.S.-based investments have far underperformed those achieved in every other major market.Most importantly, Wall Street’s reputation, once its greatest asset, is also in jeopardy. Just as Detroit lost its reputation for high quality cars, bankrupted dotcoms and worthless subprime debt are creating similar problems for Wall Street.

You can’t expect to keep your customers if you continually sell them shoddy merchandise. Wall Street has spread hundred of billions of dollars in losses around the world and in so doing shattered its reputation with some of its best customers.However, in the last few years Wall Street has not only screwed customers but their own shareholders as well. At one time all of our major investment banks, such as Goldman Sachs, Lehman Brothers, Morgan Stanley, Bear Stearns, Smith Barney, Shearson, E.F. Hutton, Kidder Peabody and Solomon Brothers, were private partnerships.

However, during the 1990’s they all went public (of course many merged first so they no longer exist as independent firms). Goldman Sachs was the last to go public in 1999. The transition allowed Wall Street partners to cash out, transferring future risks to new shareholders. In so doing they were able to capitalize on bubble valuations, yet through lavish bonus compensation packages, still keep the lion’s share of the profits for themselves. In other words they got to have their cake and eat it too.

As a result of this transfer of risks, the business models of America’s leading financial institutions shifted, with profits coming from riskier sources such as proprietary trading and structured finance. To line their own pockets, Wall Street willingly exposed its shareholders to risks that it would never have assumed with its own capital. This moral hazard set the stage for the enormous losses shareholders are now suffering, and are a direct consequence of the phony profits booked in prior years.

However, while shareholders are left holding the bag, Wall Street’s former partners now turned employees have already walked away with huge IPO and stock option windfalls, as well as lavish bonuses paid on phantom profits.The coming crash will plainly expose these conflicts of interest, and the reaction will be severe. In the end, finance and banking, like manufacturing, will be yet another industry lost to foreign competition.

The new financial capitals will likely be in Asia, the Middle East, and Europe. New York will certainly still have a role to play, but much like Detroit, it will be but a shadow of its former self.For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

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Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for nineteen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.