iftttwall

Submitted by Philipp Bagus via the Ludwig von Mises Institute,

Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.

However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.

The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.

Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.

In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.

To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.

At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.

For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.

Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.

As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.

Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.

Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/suR4tpC7fSE/story01.htm Tyler Durden

Submitted by Philipp Bagus via the Ludwig von Mises Institute,

Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.

However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.

The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.

Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.

In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.

To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.

At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.

For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.

Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.

As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.

Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.

Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/suR4tpC7fSE/story01.htm Tyler Durden

Warren Buffett once noted, Gold doesn’t do anything “but look at you.” It doesn’t pay a dividend or produce cash flow.

 

However, the fact of the matter is that Gold has dramatically outperformed the stock market for the better part of 40 years.

 

I say 40 years because there is no point comparing Gold to stocks during periods in which Gold was pegged to world currencies. Most of the analysis I see comparing the benefits of owning Gold to stocks goes back to the early 20^th century.

 

However Gold was pegged to global currencies up until 1967. Stocks weren’t. Comparing the two during this time period is just bad analysis.

 

However, once the Gold peg officially ended with France dropping it in 1967, the precious metal has outperformed both the Dow and the S&P 500 by a massive margin.

 

See for yourself… the above chart is in normalized terms courtesy of Bill King’s The King Report.

According to King, Gold has risen 37.43 fold since 1967. That is more than twice the performance of the Dow over the same time period (18.45 fold). So much for the claim that stocks are a better investment than Gold long-term.

 

Indeed, once Gold was no longer pegged to world currencies there was only a single period in which stocks outperformed the precious metal. That period was from 1997-2000 during the height of the Tech Bubble (the single biggest stock market bubble in over 100 years).

 

In simple terms, as a long-term investment, Gold has arguably been the single best passive investment of the last 40+ years.

 

Moreover, I think there is considerable value in Gold today as an investment. Indeed, I can make the arguments that Gold is both cheap as a cigar butt and as a moat.

 

If we look at Gold as a cigar butt (trading at a discount to its intrinsic value), we must first consider Gold’s intrinsic value.

 

Many investors argue that Gold has no intrinsic value. I disagree with this assessment as it does not consider the nature of the financial system.

 

Let’s compare Gold to the US Dollar.

 

Every asset in the financial system trades based on relative value. Ultimately, this value is denominated in US Dollars because the Dollar is the reserve currency of the world.

 

However, even the US Dollar itself trades based on relative value. Remember the Dollar is merely a sheet of linen and cotton that is printed by the Fed and is backed by the full faith and credit of the Unites States.

In this sense, the Dollar’s value is derived from the confidence investors that the US will honor its debts.

 

A second item to consider is the fact that the Dollar’s value today also derived from the Fed’s money printing. Indeed, a Dollar today, is worth only 5% of a Dollar’s value from the early 20^th century because the Fed has debased the currency.

 

As a result of this the world has adjusted to this change in relative “value” resulting in a Dollar buying less today than it did 100 years ago.

 

In this sense, Gold’s value is derived from investors’ faith in the Financial System (ultimately backstopped by the Dollar) and the Fed’s actions.

 

Gold also moves based on investors’ confidence in the system. If investors’ are afraid that the system is under duress (meaning that they have little confidence in the Dollar-based financial system) then they perceive Gold has having a higher value.

 

Similarly, if the Fed prints Dollars by the billions, Gold is perceived as having a higher value relative to the Dollar.

 

Thus, Gold does not have any less intrinsic value than the US Dollar does. In that regard we can price it relative to the Fed’s actions and to the fear of systemic risk to get an assessment of its true value.

 

With that in mind, today Gold is clearly undervalued relative the Federal Reserve’s balance sheet (see Figure 3 on the next page).

 

Since the Crash hit in 2008, the price of Gold has been very closely correlated to the Fed’s balance sheet expansion. Put another way, the more money the Fed printed, the higher the price of Gold went.

 

Gold did become overextended relative to the Fed’s balance sheet in 2011 when it entered a bubble with Silver.  However, with the Fed now printing some $85 billion per month, the precious metal is now significantly undervalued relative to the Fed’s balance sheet.

 

Indeed, for Gold to even realign based on the Fed’s actions, it would need to be north of $1,800. That’s a full 30% higher than where it trades today. Eventually this relationship will normalize. Gold is clearly being manipulated lower.

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

 

http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

 

Phoenix Capital Research

 

 

 

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NOJ-7GJ4eJQ/story01.htm Phoenix Capital Research

With just a week to go until the Obama-promised “all clear” healthcare.gov date of November 30, the president is scrambling to boost enrollment in the 11th hour. As reported by Reuters, the administration announced a flurry of fixes to its troubled HealthCare.gov website on Friday that officials said would soon double its current capacity, a crucial step toward getting the system working by a November 30 deadline. It also pushed back a deadline for people to enroll in insurance plans for 2014 under President Barack Obama’s Affordable Care Act in a nod to millions of applicants who have been unable to sign up because of technical glitches for nearly two months. The reason for the push is that consumers need to make decisions on healthcare plans in December if they want insurance in place by January.

The problem as discussed ad nauseam is that with its 500 million lines of code, its accessibility problems and its security concerns,  healthcare.gov is simply not a viable option in the long or short-run. And yet Obama keeps insisting on band aid fixes only now the president has decided to boost direct enrollment as a workaround would the latest attempt to fix the site crash and burn again.

Jeffrey Zients, the troubleshooter named by Obama to oversee fixes to HealthCare.gov told reporters on Friday that the website will soon be able to handle 50,000 simultaneous users – twice its current capacity, and up from fewer than 1,000 in the days after its botched launch on Oct 1.

 

Some of the technical fixes will allow insurance companies to more easily directly enroll consumers in health plans, a senior administration official said.

 

The administration will run a pilot program for direct enrollment in three states with large numbers of uninsured people – Texas, Florida and Ohio – and use the results to expand the availability of the “direct enrollment” option.

 

“We do believe that it’s substantial. We’re looking at hundreds of thousands of people who we believe may well opt to do this,” the official told Reuters.

In the meanwhile the first delay to the rollout was announced: it will, however, hardly have a meaningful impact:

People needing health insurance by January 1, 2014 will have eight extra days to sign up, officials said. The original deadline for year-end coverage was December 15, but now will be moved to December 23.

More importantly, the administration has also decided to push back the deadline for the second yearof enrollment, which just happens to fall at a critical time – just after the midterm elections which also means Americans will not know how high premiums surge as a result of Obamacare until after the election.

With the first enrollment period barely off the ground, the Obama administration also has decided to delay enrollment for the second year of the program to give insurance companies more time to calculate rates, White House spokesman Jay Carney told reporters.

 

The delay will mean consumers will start shopping for insurance for Year Two of Obamacare on November 15, 2014 – more than a week after voters go to the polls for midterm elections, when congressional Democrats are expected to face tough questions about the policy they supported.

 

“That means that if premiums go through the roof in the first year of Obamacare, no one will know about it until after the election,” said Republican Senator Charles Grassley of Iowa. But Carney rejected any assertion that politics was behind the extension.

“The fact is, we’re doing it because it make sense for insurers to have as clear a sense of the pool of consumers they gain in the market this year, before setting rates for next year,” Carney said.

And as usual, the White House is convinced it can just lie and just keep getting away with it thanks to a press that is infatuated with a president who until recently could, in the eyes of the “independent” media, walk on water but no more.

Elsewhere, in an attempt to artificially boost excitement in a program that has gone from Obama’s crowning achievement to his most abysmal failure, the WaPo reports that there has been a surge in enrollment after the abysmal results from the first enrollment month:

After anemic enrollment in the federal health insurance marketplace, several states running their own online exchanges are reporting a rapid increase in the number of people signing up for coverage, a trend officials say is encouraging for President Obama’s health-care law.

 

By mid-November, the 14 state-based marketplaces reported data showing enrollment has nearly doubled from last month, jumping to about 150,000 from 79,000, according to state and federal statistics. The nonprofit Commonwealth Fund, which has been tracking the data, called the most recent numbers “a November enrollment surge.”

 

The latest figures from the state-run exchanges, combined with totals on the federal exchange, bring the national number to at least 176,000.

One wonders how much of the “surge” is due to the change in crtieria to just needing to have Obamacare in one’s checkout cart. Either way, even if one believes the propaganda, and it is unclear why anyone would after the endless barrage of lies in the past 5 years, “while the pace of enrollments increased this month, sign-ups are still well below early projections.”

A far bigger problem beyond simple propaganda is that once again just like with jobs, it is a quality not quantity issue something which central-planning regimes everywhere are unable to grasp – as reported before, if only older, treatment “troubled” individuals sign up and younger Americans skip the healthcare experiment, the outcome would be even worse than if Obamacare had not been unleashed as the Ponzi Scheme (by definition) is critically reliant on younger payors who don’t extract more from the system than they put in, at least not early on. Then again, what is central-planning without propaganda:

Some of the state exchanges are seeing the pace of enrollment pick up daily. California has been out in front; the state’s enrollments have grown steadily in November and now account for nearly half of all health law sign-ups. The state has had its strongest two weeks of enrollment this month.

 

“We’re seeing much larger numbers than we expected,” Covered California Executive Director Peter Lee told reporters this week.

Sure you are. Because since actions still speak louder than propaganda, we can only assume that the resignation of the official charged with launching Hawaii’s troubled ObamaCare insurance exchange will resign next month, according to multiple reports. From The Hill:

Coral Andrews, the executive directo
r of Hawaii Health Connector, is the first marketplace director to leave her post since Oct. 1, when the exchanges launched.  The Hawaii Health Connector went live on Oct. 15 due to software problems and had only enrolled 257 people in its first month of operation, according to the Honolulu Star Advertiser.

 

Andrews will reportedly depart on Dec. 6 and be replaced on an interim basis by Tom Matsuda, who headed up ObamaCare’s implementation in the state. “I am honored to have been a part of implementing part of the Affordable Care Act for the people of Hawaii,” Andrews said in a statement.

Expect increasingly more resignations as the Obamacare “surge” continues.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mJ9XdCjMUws/story01.htm Tyler Durden