The Art of Not Seeing the Inflation Right in Front of Your Eyes

It is remarkable to me that analysts like the widely-read Mike Shedlock continue to miss the inflation that is going on all around us. It's like a passenger on a boat remarking on how slow the boat is going, when the engines are running 101 mph against a 100 mph current. [Of course, he also misses the obvious destruction unleashed by so-called free trade and is only just now hedging over to the side of debt-forgiveness, so it is probably accurate to say he is more clever than intelligent.]

Even the CPI, which is a misleading piece of junk when it comes to measuring total economy-wide inflation, is showing inflation. And this is in the face of the greatest destruction of household wealth in history, a worldwide industrial collapse, a worldwide credit collapse, and the highest levels of unemployment since the Great Depression. And inflation only took a couple months vacation!

The consumer price index peaked in August 2008 and bottomed in December 2008 (source). From then to August 2009, just a bit over half a year, the cpi has risen 2.7%.

To put this in perspective, from December 2000 to December 2006, the average increase in the CPI was 2.6% per year. So how is it that even during an historic collapse in consumer credit, household wealth, and employment, we are seeing higher than normal inflation on the consumer level???

And let's remeber, the CPI doesn't even measure the inflationary investment environment, aka bubblenomics, such as the bubble in stocks or the bubble in government bonds, or the previous inflation in home values prior to 2008.

Combine the above facts with the slow death spiral of the US dollar and the surging rate of federal debt spending, not to mention the monetization of the debt. The upcoming inflation is not going to be pretty.

Worker Owned Businesses - the Wave of the Future

Interesting spotlight on worker-owned businesses in the CNN Small Business section (here).

In theory, the worker-owned business (WOB) should be superior to a non-WOB. For one, the WOB would have a more motivated employee base.

More importantly even than that, the WOB is simply an economically superior entity. Because profits are not being siphoned off to an ownership group, the WOB should also be able to operate at lower margins. For the WOB, the bare minimum cost is employee salaries, but for the non-WOB, the bare minimum is employee salaries plus ownership profits. In tough times, the WOB becomes more competitive because it can lower employee salaries and still operate at full power. A non-WOB has to fire employees, which leads to lower overall output, forcing the understaffed business to operate at a competitive disadvantage.

So, why don't we see more WOBs? Ignorance and capital barriers are the main forces preventing WOBs from proliferating. Ignorance, simply because most people have never heard or thought of such a business arrangement. Capital barriers, because most people who would like the idea of a WOB are too poor to set one up.

Some might say that greed is a barrier to WOBs, but that is not true. It is true that most people who have the money to start a business are dreaming of their own personal enrichment. However, the power of greed can be harnessed to advantage WOBs as well, specifically, the greed of the disemplowered worker.

The WOB cannot be sold to the general public on the basis of overcoming greed or other utopian ideals. Such economic utopianism has failed time and time again. The establishment of the WOB is an act of greed by the workers who establish it, and that fact should be recognized. The purpose of the WOB is to leverage its inherent advantages to wipe other non-WOBs out of the market.

Even the barrier of capital is somewhat of an illusion. A business that requires 20K to capitalize is out of reach for the average worker. But say that business requires 10 employees -- that is really just a capital barrier of 2K per employee, which is not out of reach.

In the end, the establishment of a WOB is mainly prevented by ignorance, ignorance of its possibility and ignorance of how to accomplish it.

It is no accident that business textbooks do not list the WOB as one of the basic business entity forms. That is part of the conspiracy of intentional ignorance that keeps people enslaved. The artificial constraint of possibilities is the ultimate method of thought control, effectively preventing people from even contemplating certain lines of thought.

The victory of WOB is substantially enabled simply by publicizing their possibility. By making intelligent but dispossessed people aware of their possibility, the natural creativity of humankind is unleashed, making their implementation an inevitability.

Why is Treasury Demand Still Strong

Many of us have been waiting for the market for US debt to collapse, but the demand seems to be increasing? What is going on?

In short, the banks need somewhere to park all the excess reserve money they have on hand. The last thing they want to do is invest it in the real economy during a deflation. They are just riding it out, holding cash, as the real economy crashes. At some point, they will swoop back in, picking up dollars for dimes.

Why do they have so much reserve money now? Government bailouts! Lovely pattern isn't it? A pattern sometimes known as the clusterfuck...

Government bails out banks, banks use the money to buy government debt. Economy continues to grind down and future prospects continue to darken.

Welcome to Screw-ville, baby, population: YOU!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEZxetP0Q2Zw

Treasury Bond Auctions Show Insatiable Debt Demand

Sept. 11 (Bloomberg) -- The U.S. Treasury Department’s auctions this week of $70 billion in notes and bonds shows the unprecedented amount of debt being sold to finance the record budget deficit is failing to curb investor demand.

Fixed-income investors can’t see a recovery strong enough to spur central banks to raise interest rates anytime soon, especially with the Obama administration forecasting that unemployment in the U.S. -- the world’s largest economy -- will rise above 10 percent in the first quarter.

“The auction shows investors are not afraid of inflation going forward,” said Ira Jersey, an interest-rate strategist in New York at primary dealer RBC Capital Markets. “There was a lot of cash on the sidelines that needed to go to work.”

Global Trade, Debt, and Stimulus: a short Explanation

The Chinese run a large trade surplus with the US. This leads them to have a huge stockpile of dollars. This allows them to peg their own currency to whatever dollar value they want. Since they do all their foreign trade in dollars, there is simply no international market for their domestic currency, so international traders are simply shut out. (For other countries who do trade their currencies on the international market, lacking a supply of dollars means that currency traders could make runs on their currency, and the buying and selling of it would be out of their control.)

The surplus of extra dollars leaves the Chinese with a question of what to do with those dollars. In the past, they were content to invest in US debt securities, in effect, expanding their supply of dollars. However, stockpiling dollars is good for the Chinese in absolute terms, because dollars are the international trade currency. Thus, with extra dollars, they can buy anything else in the world.

When the international collapse in trade happened last year, many analysts thought China would be hit hard, because they are so export-dependent. However, they responded to the collapse in export trade with an almost unbelievably large dose of domestic spending. This is where their dollar stockpile came in, because they were able to stimulate their own economy by spending all the dollars they had stockpiled buying raw materials.

Oil, copper, rare elements, whatever they wanted, they were able to buy, using their dollars. They have also been investing heavily in gold, although not for use in industrial stimulus, but as a hedge against dollar collapse.

They could then pay their citizens in their own currency to do the work. Printing out their own money for domestic projects was not necessarily inflationary. For one, it was partially just holding the line, fighting deflation and unemployment from the collapse in international trade. For another, it can’t cause a currency devaluation, because their currency is not traded internationally.

The same process, printing out your own money, does not work for making international payments. Foreigners will see that you are diluting your money, and the exchange rate will fall. This defeats the purpose of printing more money in the first place, since it now costs more for the same trade.

For this reason, many times throughout world history, two types of money are used, one for domestic trade, one for international trade. For example, the US went off the gold standard for domestic dollars in 1933, but didn’t go off the gold standard for international dollars until 1971. It is also the reason why the world is clamoring for a new international trade currency now. International trade needs an absolute standard of measure, to prevent countries from screwing the system by printing more of their own currency (such as they see the US doing now).

So, with their stimulus money, the Chinese have been stockpiling raw materials and using them to put their people to work on infrastructure projects. This is true capital investment, and increases their wealth-creating capacity for the future, as well as putting people to work today.

Our stimulus money is not based on a trade surplus, but is simply based on diluting the dollar through deficit spending and monetization of government debt. Nor is our stimulus money providing the basis for future wealth creation or even repairing old infrastructure. Our stimulus money is simply covering budget shortfalls and continuing welfare payments. Thus, we will be in a worse position when the stimulus ends, having the same economic condition, but then with a higher debt load.

Looking forward, the US economy is in between a rock and a hard place. Keeping the dollar as the international reserve currency means that the US will continue to have its industrial base undercut by cheaper foreign competition and be the target for mass immigration because of the overvalued dollar. When the change finally happens, and the dollar is removed as international reserve, the US faces a massive inflation, from the return of dollars to domestic use and currency devaluation. The longer we wait, the worse the economic collapse will be when it does happen, since we will have to rebuild our industrial economy from scratch.

The only solution to that guaranteed eventuality is to take aggressive proactive steps, sooner rather than later. For example, the US should take decisive steps to safeguard its industrial base now, while the dollar is strong, rather than later, after currency collapse. The US should also cease all inflationary policies (such as deficit spending and monetization of debt), which are literally driving the world away from the dollar reserve standard. An even more radical approach would involve repudiation of the national debt, leaving the rest of the world holding the bag of worthless paper, and reinvesting in America’s industrial powerbase through protection from imports and outsourcing/off shoring.

In short, Americans should start thinking of themselves a people, rather than just as expendable units of profit manipulation in an international economy.

Economics of the Higher Education System: Ponzi Exploitation

College education exhibits the same structure as any other economic ponzi scheme: masses recycling of suckers through the bottom levels funnels big profits to those at the top of the pyramid. The really funny thing is, because it is the EDUCATIONAL industry, its main beneficiaries have effectively created the perfect mass brainwashing to support their scheme. People think they are supporting a necessary and benevolent educational system, rather then being exploited by a superfluous and destructive ponzi scheme.

--Lecture halls are the most visibly obvious place the masses are fleeced out of their money. These are the pedagogical profit centers for the universities, where the real money is made, like soda sales in a fast food restaurant.

--State legislative buildings are the hidden location where the masses are fleeced. State universities have most of their budget covered by legislative decree, extracted directly from tax dollars.

--The federal government completes the loop of economic exploitation through loan guarantees, extending the credit that pumps up the bubble.

When the credit flow is stopped, as it soon will be, the bubble will pop. The federal government delayed the day of reckoning this year through mass bailout money. State universities across the nation were facing huge budget cuts this year, but were largely spared big cutbacks by accounting tricks and the bailout money. The federal government, of course, covered those bailouts with borrowed money, expanding the federal debt. The problem is, the budget cuts which will be necessary next year and the year after, are going to be even worse, and the federal government will not be able to continue its bailouts.


The higher ed industry is also being undermined by the internet and a dawning race to bottom in cost competition. The internet is doing for education what it did for newspapers and music, threatening entire institutional paradigms by undercutting revenue streams. The latest headline-grabbing educational company is offering fully accredited college credits for $99 a month, and guess how they do it? Foreign outsourcing! Why not? This is the logic of the contemporary capitalist world. As long as the overvalued dollar persists, hiring Indian tutors and professors to grade online classes is cheaper than having Americans teach the classes.

The genie was let out of the bottle with the rise of private for-profit universities, who were the first to capitalize on the bubbly educational profit stream. Theoretically, you could offer a college degree via the internet for really cheap. However, in the actual market, online companies have been able to sell the products based largely on their convenience and availability, rather than on their cost.

Because the market is being pumped up with guaranteed government-backed credit, for the last decade there was little need for cost competition and a number of highly profitable private universities have arisen. Government subsidy sets the bar for costs, and everyone just charges up to that level. This is no economic theory, this is empirical fact: when government raises student loan amounts, for-profit universities simply raise tuition costs. Just like in the health-care market, when government picks up the check, costs simply spiral upward. Only when the credit flow is stopped do we see a downward trend in prices.

However, the dawning issue facing higher education is market saturation. When a market is saturated, price competition begins in earnest, even when the market is pumped up by credit. Higher education is approaching that saturation point, when everyone has access to classes offered by a wide range of companies, including the traditional universities themselves who are moving online. In economic terms, the supply of education is growing greater than the demand for education.

Under these conditions of market saturation and intense competition, price competition kicks in, which we are seeing exhibited spectacularly in such companies as StraigherLine, offering college credit for $99 a month. So far, StraigherLine is offering only a handful of lower-level classes, but there is no theoretical limit on classes that can be offered at that price.

StraigherLine’s main impediment to this point is simply regulation, but keep in mind, there is no regulation regarding the outsourcing of teaching. While StraigherLine is hampered by having to jump over the regulatory wall to get accreditation, there is no such impediment faced by they universities which are already accredited.

In short, any already-accredited online university could right now make the switch to a foreign faculty and slash its costs and prices. This is really just a matter of time. It is not just about increasing corporate profits. The fact is, under the new market-saturated conditions, many institutions will be fighting for their financial survival.

The more students take bargain-basement classes like that, not just the cash cow courses at the big universities, but the very survival of local colleges is threatened. At that price, even community colleges, as heavily subsidized by taxes as they are, are undercut by price competition. The irony is, students are often forced into online classes because classes at their local colleges are cancelled because of low enrollment, created a self-perpetuating cycle of low enrollment and cancelled classes driving students into online environments. If the local college can’t enroll enough students to pay the faculty salary for a class, the class has to be cancelled, but an online university paying teachers in India faces no such constraints. Another irony there, as community college are already exploitation machines, seeing that upwards of 80% of their classes are already “outsourced” to part-time faculty (which means a third of the salary with no benefits).

Thus, the current higher education system is strained by three forces: outsourcing of cheap classes, collapse in enrollment in the most profitable classes, and collapse of government subsidies. State budget cuts will be traumatic, but a loss of federal loan guarantees would be absolutely catastrophic, and I mean literally the collapse of higher education as we know it, the downsizing to maybe a tenth of its current size, without exaggeration. The upcoming collapse in debt financing at the federal level pretty much guarantees this end result.

Tis a consummation devoutly to be wished. Most higher education is simply a drain on society, not to mention a subsidy for anti-American post-modernist ideology. The costs of education should be born by industry and business, if it is required by them for vocational reasons. Vanity degrees should be paid for exclusively by the wealthy students who use them.

The best consequence of the coming deflation of the educational bubble will be the end of the credentialism hamster wheel that sucks up so much time for the average professional American these days. One of the prime reasons people feel so much busier and stressed today is that people are forced to constantly go to school, soaking up hours of their leisure and family time. Credentialism and its constant pressure to upgrade educational levels is a major source of stress today, one that we can frankly do without.

Father of Legal Tender - Elbridge Gerry Spaulding

Article in today's NY Times (http://www.nytimes.com/2009/09/04/business/economy/04norris.htm) attempts to equate Bernanke to E.G. Spaulding, the man who financed the US government during the Civil War by firing up the printing presses. In funny part is, Spaulding didn't even support his own actions, except for the necessity of specifically WAR TIME funding, and to say he was a proponent of fiat paper money is completely false.

The Times article is basically a propaganda piece suggesting that money printing by government is not bad. Well, I guess it’s all relative, right? The article presents some of the doom and gloom statements of that debate that did not pan out, even flatly dismissing the inflation problem, which as predicted, did occur. By suggesting by extension that today’s naysayers are equally wrong, that Bernanke has a chance at historical vindication when this is all said and done, the Times produces a lame pro-Bernanke publicity piece. [As for Bernanke, it has been proven conclusively that he is an intellectual idiot who completely fails in every prediction he makes, demonstrating his lack of mastery of what is really going on with the economy. His only successful function is enriching the banking class at the public’s expense, so it is no surprise that the Times, the voice of that banking class, lauds him.]

The article pays homage to Spaulding, an important factor in the victory of the Union in the War for Southern Independence (what he called the Great Rebellion and we call the Civil War), while totally misleading us about what Spaulding really did and what he stood for. The article calls him the father of fiat currency, a man who was willing to throw out the economic orthodoxy of his day. He article falsely states: “Contrary to the expectations, paper money did not set off sharp inflation over time, and when the paper money eventually was made convertible into gold, there were no lines of people wanting to trade in paper for bullion.”

The facts of history debunk this. In fact, the greenbacks were indirectly backed by gold for the first half of the war. When its gold backing wavered in the first half of 1864, inflation spiked over 100%, and in the end, the dollar went back on gold, which was used to pay off all wartime debts including the redemption of the war time greenbacks! Such blatant and easily verified factual errors calls into question both the competence and honesty of the Times.

After it was all said and done, Spaulding wrote a book documenting it all for posterity, and God bless him for it. Spaulding’s book, History of the Legal Tender Paper Money Issued During the Great Rebellion, published in 1869, is an absolute treasure trove of speeches and letters, the very substance of the money argument at the time. It is full of weighty economic theorizing on matters of money, economics, and government finance. Some of the language is a bit archaic, as we no longer use some of their financial terms, but it is always elegant, and merely sampling the book pays off intellectual gold.

One thing that may surprise the average reader today is that the central terms of the debate were not whether the government should issue lots of paper money to pay for the war effort. That was generally granted by all, save the northern banking class of the day, which wanted the government to pay for the war through bonds sold on the open market (a scheme roundly denounced as most assuredly designed for the enrichment of the bankers, not for the good of the Union).

Rather, the most tendentious issue of the day was the establishment of the newly issued federal script as legal tender. At the time, there was no legal tender, no money that you had to accept in payment by force of law. Regional notes competed in an open market, and inferior notes would suffer discounting. Greenback advocates like Spaulding did not want their federal notes to suffer competition, while holders of solid regional notes did not want to have honor these obviously inflationary greenbacks at face value, which legal tender laws would require.

Another fascinating aspect of the war-time greenback effort was an ingenious bond conversion program they developed. For the first year of their issue, each newly issued federal note had the following statement engraved on it: “This note is a legal tender for all debts, public and private, except duties on imports and interest on public debt, and is exchangeable for US six percent bonds, redeemable at the pleasure of the United States after a period of five years.”

On the one hand, this bond conversion option was seen as a compensation for people forced to accept the notes. It was openly acknowledged that the legal tender issuance of federal notes was a loan to the federal government forced on the public. The bond conversion option was like a bonus to offset the rightful discounting that could have been taken in the absence of legal tender law.

The bond conversion option was also intended, in modern terms, to soak up liquidity. This convertibility would prevent any great inflation, as Spaulding wrote, “for the reason that as soon as this currency became redundant in the hands of the people, and not bearing interest, they would invest it in the six percent bonds” (pg 188).

The interest on those government bonds was to be paid in coin, meaning gold, every six months, while the bond’s principle would be paid in gold within 20 years. In other words, these greenabacks were not really debt-free fiat money, as Ellen Brown would have them. They were still on the gold standard!

Spaulding stated explicitly on this matter: “There was no very great danger that the currency would become excessively inflated so long as every person holding greenbacks, not bearing interest, could exchange them at his own will into gold-bearing bonds at six per cent interest per annum” (pg 192).

The bond conversion aspect of federal notes was, however, suspended after the first year of their issuance, in March 1863. Spaulding does not explain why, although presumably, the government simply no longer wanted to pay interest on their forced loan. After that time, it was up to the discretion of the Treasury Secretary how much interest he would pay, if any at all. After that change in the greenback, after it had been removed from the gold anchor, inflation kicked in. Spaulding was against giving that power to the Secretary, calling it a mistake, and blamed it for “the inflations, fluctuations, and changes now so apparent” (pg 194). An inflation spike of 100% took hold in the first six months of 1864. By mid July, these US notes were worth only 35 cents on the dollar.

After the war was over, Spaulding was an enthusiastic proponent of paying back the national debt in gold and silver. The way he saw it, abandonment of the gold standard during war was necessary because those war loans paid for destruction, meaning an unproductive purpose. As he put it, “Every dollar expended took out of existence a dollar of value for which the Government gave its promise to pay. Every dollar of property thus destroyed led us farther and farther away from the specie standard, and has to be produced again by labor before the value is restored” (211-2). Eventually, the debt was paid back in gold, as Spaulding called for.

To cite this man as anything but a gold-standard enthusiast is completely dishonest.

Currency Reform: a Modest Proposal

Currency reform is a deep-level concept. Few people understand economics, let alone money or how it works, so it is a conversation that lacks traction. Nontheless, currency underlies everything, it is the foundation of the economy, and people seem to get that. They intuitively shy from any major changes or tinkering with the money system, since the potential effects are potentially so large, and are therefore easily opposed with catastrophic imagery.

I believe Ron Paul's campaign suffered from this problem, as he was easily painted as a fringe candidate because of his strident gold standard advocacy. The fact is, such a big change as establishing a gold standard frightens the average person.

I propose that any currency reform must be accomplished in small stages, not only to avoid scaring the average citizen, but also to avoid hardening the opposition of the monetary powers-that-be. There are only a handful of monetary reform camps, and I believe they could all be accomodated in a non-threatening way, which would foster genuine currency improvement for society.

--The Ron Paul libertarian wing seeks to return the US dollar to gold backing.

--The modern-day Greenbackers (such as Ellen Brown) seek an end to the private money supply, ending the Fed, but keeping paper money and giving its control directly to the government, to issue debt-free.

--Community currency advocates (such as Thomas Greco) seek to end federally-mandated legal tender currency, fostering a return to community control of currency, and a free market competition among currencies.

The monopolistic imposition of any one of these monetary reform regimes would likely be impossible to accomplish, as the change would be too great, opposition to general, and support too fragmented.

Rather, I propose implementing all three, simultaneously. Well, naturally, the proposals would need to be scaled back, since they are contradictory in many ways, but the idea is to implement alternative currency schemes, based on those principles, to compete with each other. Thus, it would not be a wholesale repeal of legal tender, a la Greco and the Wildcat Banking Era, but it would expand legal tender to a small number of recognized issues.

Consider the following actions being taken simultaneously, or rolled out successively:
-Greenbacks spent into circulation by the Treasury for federal expenditures
-new Treasury notes issued which are fully backed by gold and silver
-Two regional banks chartered to issue private currencies

Thus, a limited version of currency competition. Nothing threatening the collapse of the current system, just available alternates, an expansion of monetary freedom. Who could oppose that?

Let the best currency win!

China Establishes their own Gold Market, Preparing to Monetize Gold

Clearly, gold is returning to its role as money, the ultimate store of value and settlement medium. The Chinese are deftly, and quietly, preparing to exit the dollar-denominated international system by establishing their own regional gold market. There is even overt mention of monetizing the gold, which, in plain language, means a return to the gold standard as an objective unit of international settlement.

All the talk of the slow, almost impossible process of displacing the US dollar as international reserve currency would be rendered moot instantaneously if China backed a currency with gold. The dollar would be obliterated overnight if the Chinese introduced a trade currency pegged to gold.

Is it a coincidence that gold has spiked in the last 36 hours (hovering just below $1000/oz.)???


HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday. The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.

"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region.

The Hong Kong Monetary Authority, which functions as the territory's unofficial central bank, will transfer its gold reserves stored in other vaults to the depository later this year, the Hong Kong government said in an earlier statement. The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement.

Traders said the new depository facility could also foster new financial products, such as exchange-traded funds based on precious metals.

Martin Hennecke, a financial advisor with the Hong Kong-based Tyche Group Ltd., said that could be appealing to regional central banks unnerved after watching the global financial system teeter on verge of implosion last year.

"Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal," he said.

Meanwhile, local newspaper reports said the Hong Kong Mercantile Exchange had signed an agreement to use the depository for its physical settlement and storage needs.

Marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility, according to reports citing Raymond Lai, finance director with the Hong Kong Airport Authority. Efforts will also be made to reach out to commodity exchanges, banks, precious-metals refiners and ETF providers, the reports said. Management firm Value Partners planned to launch an ETF gold fund that will use Hong Kong instead of London as a repository for the gold backing the fund, local reports said Thursday.

http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03