TYR 19 November 2012 reads

Global Shadow Banking System Rises To $67 Trillion, Just Shy Of 100% Of Global GDP @ Zerohedge In case you assumed that 4 years after the onset of the present global financial crisis risks are at least gradually decreasing, please look again. The Financial Stability Board (FSB) in its latest report on the Shadow Banking System (SBS) has increased the global estimate for the size of the SBS by some $5 to 6 trillion in aggregate, bringing the 2011 estimate from $60 trillion with last year’s narrow coverage to $67 trillion, virtually the same as global GDP of $70 trillion at the end of 2011.

The Three “Financial Structure” Paradigms Of Modern Finance @ Zerohedge Please note how the second, “massive shadow banking system financing”, and third, “Central Bank finance based system”, paradigms are gradually displacing the traditional first paradigm, “conventional banking deposits as the main financing source”. As Zerohedge remarks…”the coordinated central bank cartel becomes the one and only source of money. And not just any money, but the definition of ‘Gresham Law’ money, as creeping central planning and ubiquitous monetization, means very soon only central banks will be the source of any incremental leverage, while all ‘good credit’ is slowly but surely driven out of the system”….”It is this third paradigm that is the preamble to the final collapse, because just before the endgame, it will be every central bank against everyone else, and against itself, whereby the only way to get ahead is to destroy your own currency of exchange as fast as possible, at first on a relative basis, by devaluing against all other currencies in a closed loop, then on an absolute, by devaluing against hard assets.”

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TYR 22 October 2012 reads

Lessons In Fiat Reality: “Why I Learned To Trade Less And Love The Farm” @ Zerohedge Hedge fund manager Stephen Diggle argues for farmland as the best risk-adjusted invesment for the next decade. Central bank generated inflation, a slowdown in agricultural productivity, a still growing global population and a global trend towards meat consumption in human diet underpin his thesis. The thesis looks solid.

IMF’s epic plan to conjure away debt and dethrone bankers @ The Telegraph Ambrose Evans-Pritchard comments a controversial and revolutionary paper published by the IMF this last august, in which Jaromir Benes and Michael Kumhof defend that: At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy. Can not get much more controversial than that.

TYR 15 October 2012 reads

How the neo-liberals perverted Adam Smith @ www.ianfraser.org Mr. Fraser argues that our present brand of capitalism has distorted the ideas of its intellectual founder Adam Smith (AS), whose ideas were cherry-picked  by the likes of Milton Friedman and the ‘Chicago School’ in the 1960s and 1970s and, with the help of political followers such as Ronald Reagan, Margaret Thatcher and their successors, spread their market fundamentalism throughout much of the rest of the world. Sadly however such people focused exclusively on Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776), ignoring his earlier work, The Theory of Moral Sentiments(1759), where AS gives the “invisible hand” a moral context: AS argues that the beginnings of morality are innate, in the sense that our connection to other human beings makes us sensitive to their needs and sentiments. The article could have gone well beyond the denunciation of global crony capitalism and dealt with wider concepts, such as neo-feudalism…and its roots.

Will central banks cancel government debt? by Gavyn Davies @ blogs.ft.com (requires free registration) where Mr. Davies hints at the possibility of western central banks cancelling the huge amounts of government debt sitting in their balance sheets and the inflationary risks involved by that policy. What is most remarkable is that such radical and potentially catastrophic ideas are gaining mainstream status in some academic and government circles. The intellectual underpinnings of these proposals can be found in a, until now, obscure monetary theory: Chartalism. Under Chartalism, government expenditure is financed not by the issue of government bonds to the private market, but by the issue of currency. Scary.

TYR reads Lacy Hunt: “No Increase in Standard of Living Since 1997”

In the following video posted @ Casey Research, Mr.Hunt convincingly argues that the increase in debt levels in the economy  from about 240% of GDP to 350% of GDP since 1997 is the real cause behind the stagnation of the standard of living in the USA during the same period. On a broader scale, the interventionist, Keynesian, policies followed by the USA government since the 1960s, an economic model that favors consumption over production, are at the root of the present economic crisis.

He traces the onset of this “age of debt” to the 1960s, when both political parties, republicans and democrats, advocated policies that increased the involvement of the government in the economy. James Tobin, Nobel Prize winner and a Keynesian economist, gave “theoretical” backing to this government (and monetary) intervention by postulating that macroeconomic science was powerful enough to modulate the business cycle (recessions/expansions) with a positive outcome, that is, increasing the welfare of society.

Another economist Arthur Okun proposed that a way to ascertain the validity of the assertion that government involvement creates positive welfare, might be the so-called Misery Index, defined as the addition of the Unemployment Rate (UR) and the Inflation Rate (IR). For instance, if the Unemployment Rate is 5% and the Inflation Rate is 3% the Misery Index would be 8. The lower the index the better off a society would be.

Mr. Hunt uses the Misery Index to prove that since the onset of the interventionist policies (1960s), the Misery Index has always been higher than before interventionist policies were used (1950s).

Perhaps the most important consequence of the application of these interventionist policies has been the secular increase in debt levels in the USA economy. The idea was supposed to be that by inducing people to get into debt, they would consume more and so the economy would grow more creating a virtuous circle. Reality could not be more different. As debt levels have steadily risen, welfare has not increased. The reason, according to Mr. Hunt lies in that debt has positive effects only when it is used in such a way that creates an income stream (cash flow) that repays the debt, that is, when is used for productive and sound investment, not consumption.

It is important to remark that Mr. Hunt’s calculation of the standard of living probably understates the severity of the retreat in living standards. The standard of living is computed by deflating Personal Disposable Income (PDI) with the Consumer Price Index (CPI) and getting a number that is comparable across time…or so it would be if the CPI was properly computed. The fact is though, that the CPI calculation has been changed many times, most specially since the 1980s, with the result that the official CPI in 2012 is much lower than what it would be if it had been computed according to the 1980s rules, that is, the CPI is misleading and systematically understated. Since a lower CPI gives you a higher real DPI, DPI is overstated, and the standard of living has not risen from many years before 1997, making Mr. Hunt’s thesis even more valid. For a complete treatment of this crucial issue please see John William’s ShadowStats.

TYR 9 September 2012 reads

Five Years Since The Great Financial Crisis: “No Growth, No Deleveraging” @ Zerohedge It illustrates the lack of debt deleveraging in developed economies from 2007 until now

Diverging like it is 1929 @ Safehaven  Interesting comparison of the divergence of market action and fundamentals today and in 1929

The Repricing of Oil @ Peak Prosperity It shows the fragility of the supply/demand balance in the oil market and how the present worldwide recessionary conditions mask the latent scarcity of oil, limiting the scope of price decreases and showing the potential for big price increases in a not too distant future