Archive for July, 2010

The Broken Window Fallacy

July 31, 2010

A short film (less than 4 minutes) made by some Mises University students.

Here

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Gold Required As Collateral By The BIS (Central Banks’ Central Bank)

July 31, 2010

I have a question. If gold is a ‘barbaric relic’ and isn’t money, then why is the central banks’ central bank (the BIS) only willing to do a swap transaction with commercial banks if they post gold as collateral? I mean, if the commercial banks default on the swap, the BIS (Bank of International Settlements) will simply be left holding a useless rock. Or could it be that gold is not only money, but that  “gold still represents the ultimate form of payment in the world” as Alan Greenspan told Congress in 1999?

Three big banks — HSBC, Societe Generale, and BNP Paribas — were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals that caused confusion in the gold market and left traders scratching their heads.

The mystery of who was involved in deals with the BIS, the bank for central banks, and what they were doing, has become clearer.

The BIS asked the commercial banks to pledge a gold swap as guarantee for the dollar deposits they were taking from the Basel-based institution.

In a gold swap, one counterparty, in this case a bank, sells its gold to the other, in this case the BIS, with an agreement to buy it back at a later date.

The gold swaps were, in effect, a form of collateral against the US dollar deposits placed by the BIS with commercial banks. Gold is widely regarded as one of the safest assets, but has not been widely used as collateral in the past. Mr Caruana described the transactions as “loans with a guarantee.”

George Milling-Stanley, managing director for government affairs at the industry-backed World Gold Council, said: “The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity. The issue also feeds right into the current debate among Asian central banks about the lack of assets suitable for use as cross-border collateral.”

Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee.

Did you read those last two sentences? Anyone who holds gold in unallocated accounts at commercial banks may be out of luck if their banks pledge their gold as collateral for a swap with the BIS and can’t afford to reverse the swap when the time comes. That means your gold would then belong to the BIS. Once again, when the currency crisis takes off, if you can’t physically touch your gold, you don’t really own it.

The gold used in the swaps came mainly from investors’ deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called “allocated accounts,” which restrict the custodian banks’ ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper “unallocated accounts,” which give banks access to their bullion for their day-to-day operations.

Financial Times

Fed May `Ease,’ Though Form Debatable, Nomura Says

July 30, 2010

Nomura Holdings Inc., one of the 18 primary dealers that trade with the Federal Reserve, said policy makers will “ease” at their Aug. 10 meeting, though what form it takes is debatable.

Central bankers may change the language of their policy statement to signal that the Fed’s balance sheet will remain expanded and change policy on the mortgage program to start reinvesting paydowns, the firm said in a note to clients today. There is also a chance of other actions, such as a cut in the rate on excess reserves, Nomura’s global economics team said.

“Easing is going to be very seriously considered given several months of disappointing data and the very dovish tone of public commentary across the spectrum,” said Zach Pandl, an economist at Nomura Securities International in New York. “If the Fed is averse to buying more assets, then cutting the rates of interest on reserves could be the next option.”

Bloomberg

Given the increase in chatter about the Fed easing, it would appear they are getting us ready for it so that it isn’t such a shock when it begins. Whether it be easing via monetary base expansion by purchasing treasuries and agency debt (mortgage-backed) or easing by reducing the rate that the Fed pays on excess reserves (the idea of which is to try and get banks to lend to businesses and consumers at much higher rates than the tiny amount the Fed pays, but of course this carries more risk), no one knows. My guess is that we will see base expansion by purchasing securities as the Fed can directly control the amount of expansion and make it happen whereas with reducing the interest rate paid on excess reserves, it is still up to the banks whether they want to extend credit or not. Given that one of the main reasons for ‘easing’ is because the economy is still weak, it is not likely that banks will lend anyway. To circumvent the ‘pushing on a string’ concept of trying to get banks to lend, the Fed can simply lend directly by purchasing treasuries… in effect, no different than a direct loan to the government… the Fed holds the treasury and the government gets the cash. Of course the Fed doesn’t really buy directly from the government, but rather from the 18 primary dealers, but the 18 dealers only buy the government debt at the auctions because they know they can flip it right to the Fed for a quick profit… and because of this, for all intents and purposes, the Fed IS lending directly to the government… plus the banks know that even if they don’t immediately flip the treasury to the Fed, the treasury can be used in a repo transaction which just goes back to the same concept of the Fed lending to the government. In a repo, the the Fed ‘buys’ the security from the bank and then the bank must ‘repurchase’ (repo) the security at a later date at an agreed upon price.

On Labor Unions and Governments Creating Unemployment

July 30, 2010

This is a good example of how labor unions and governments create unemployment by restricting entrants into a specific industry.  This keeps prices artificially high (lower supply of workers relative to market demand for their services forces up wage rates above what the marketplace would otherwise have to pay) and benefits those ‘inside’ the union at the expense of everyone else, including those who remain unemployed since they can’t become truck drivers in this case.  Greece is finally coming to terms with this and is opening up industries to competition.

Papandreou said yesterday that the government would move ahead with plans to open up professions such as trucking that are bound by rules which prevent new entrants and drive up prices.

About 33,000 truckers, including tanker owners, are protesting government plans to open up the freight industry and issue new licenses.

Other professions to be revamped include civil engineers, public notaries and pharmacists. No new licenses for trucking have been issued since the early 1970s, according to the Transport Ministry, which has driven up the price of acquiring an existing license.

And then on the ‘rule of law’…

“The refusal of private truck drivers to comply with the decisions of the state to mobilize vehicles and personnel is a heavy blow to the rule of law,” according to an e-mailed statement today from the office of Minister of State Haris Pamboukis in Athens. “It harms the social fabric and will be immediately dealt with.”

Truckers who fail to return to work will face criminal charges and their licenses will be revoked, according to the statement.

Authorities yesterday began serving papers requesting truck owners to resume work or face penalties, including the seizure of licenses or vehicles.

Bloomberg

So it is now a ‘crime’ to choose to not go to work?  Seems that is the opposite of the ‘rule of law’.  If a government can make not working a crime, then what that really is in practice is communism… if someone doesn’t work for the ‘social good’, then they will be punished.  It means that the ‘state’ owns you and you must do as commanded or else face consequences.

Gold – Ready for a Parabolic Move Up?

July 30, 2010

We are on the cusp of a parabolic move underwritten by physical shortages. Central banks can no longer supply the amount needed to balance supply and demand.

John Embry – Sprott Asset Management

To which I would add that not only are central banks no longer net suppliers of gold, but rather they are now net buyers according to the World Gold Council.

Central Banks Join Gold Rush

Benefits Of Capitalism by Mises

July 30, 2010

The history of capitalism as it has operated in the last two hundred years in the realm of Western civilization is the record of a steady rise in the wage earners’ standard of living. The inherent mark of capitalism is that it is mass production for mass consumption directed by the most energetic and far-sighted individuals, unflaggingly aiming at improvement. Its driving force is the profit motive, the instrumentality of which forces the businessman constantly to provide the consumers with more, better, and cheaper amenities. An excess of profits over losses can appear only in a progressing economy and only to the extent to which the masses’ standard of living improves. Thus capitalism is the system under which the keenest and most agile minds are driven to promote to the best of their abilities the welfare of the laggard many.

The ensuing rise in the masses’ standard of living is miraculous when compared with the conditions of ages gone by. In those merry old days, even the wealthiest people led an existence that must be called straightened when compared with the average standard of the American or Australian worker of our age. Capitalism, says Marx, unthinkingly repeating the fables of the eulogists of the Middle Ages, has an inevitable tendency to impoverish the workers more and more. The truth is that capitalism has poured a horn of plenty upon the masses of wage earners, who frequently did all they could to sabotage the adoption of those innovations that render their life more agreeable. How uneasy an American worker would be if he were forced to live in the manor of a medieval lord and to miss the plumbing facilities and the other gadgets he simply takes for granted!

The term “social gains” is utterly misleading. If the law forces workers who would prefer to work 48 hours a week not to give more than 40 hours of work, or if it forces employers to incur certain expenses for the benefit of employees, it does not favor workers at the expense of employers. Whatever the provisions of a social-security law may be, their incidence ultimately burdens the employee, not the employer. They affect the amount of take-home wages; if they raise the price the employer has to pay for a unit of performance above the potential market rate, they create institutional unemployment. Social security does not enjoin upon the employers the obligation to expend more in buying labor. It imposes upon the wage earners a restriction concerning the spending of their total income. It curtails the worker’s freedom to arrange his household according to his own decisions.

Mises