Tag: news

With Deutsche Bank quitting the price-setting panel for gold and Bafin bearing down on the manipulators, Eric Sprott provides some more color on where the manipulation in the precious metals markets is underway (and when it will end)…

Submitted by Eric Sprott of Sprott Global Resource Investments,

Introduction

As we very well know, 2013 was a difficult but also puzzling year for precious metals investors. The price of gold, silver and their related equities declined by a significant amount while demand for physical bullion from emerging markets and their Central Banks was exceptionally strong.

A common argument that has been made to explain the precipitous decline of the price of precious metals in 2013 is of investors’ disenchantment with precious metals, which had been piling up in exchange traded products as a way for investors to gain exposure to the metals. Proponents of this theory point to the large declines in the total holdings of those ETFs as evidence of investors fleeing the precious metal trade. As shown in Figure 1, the price of both gold and silver suffered very significant declines throughout 2013. Therefore, if this explanation is correct, one would expect the total ETF holdings of both metals to be lower as well.

However, this is not the case. As shown in Figure 2 gold ETFs suffered large redemptions whereas silver ETFs saw their holdings remain more or less constant throughout the year, and this without any observable change in trading patterns in the two largest ETFs; GLD and SLV (Figure 3 shows the ratio of the trading values in the ETFs over time). If redemptions are a symptom of investors’ disenchantment with precious metals as an investment, shouldn’t silver have suffered the same fate as gold? Indeed it should have, but we think the reason silver ETFs were not raided like gold was that Central Banks do not have a silver supply problem, they have a gold problem. As we have argued before, the raiding of gold ETFs is bullish for gold because it reflects an imbalance in the physical market.¹

Figure 1: Gold and Silver prices declined significantly in 2013

 Source: Bloomberg

Figure 2: ETF Holdings – Troy oz (millions)

Source: Bloomberg, tickers ETSITOTL & ETFGTOTL

In this article, we further argue that the April raid on gold and gold ETFs almost backfired by creating a tsunami of buying in India and increased demand to unsustainable levels. In May 2013 alone, Indians imported 162 tonnes² of gold in a market where monthly global mine production is about 182 tonnes. A continuation of this trend, coupled with strong buying from other Emerging Markets and their Central Banks, would have been overwhelming. But, the response was swift. We suspect that, at the behest of Western Central Banks, the Reserve Bank of India reacted by enacting, in incremental steps, restrictive measures to prevent gold imports (See Figure 4 for a timeline of the major changes made by the Indian Government).³

Figure 3: Traded Value – Ratio of SLV to GLD

Source: Bloomberg. Traded Value is calculated by taking the total trading volume for a quarter and multiplying it by the average price over that quarter. A ratio of 1 indicates that SLV traded as much, in $ terms, as GLD.

Figure 4: Efforts to Curb Indian Gold Imports

Source: Bloomberg, Economic Times 

 

Supply and Demand Imbalances: The Indian Effect 

We have already discussed at length the supply and demand imbalance in an Open Letter to the World Gold Council, asking them to revise their methodology because it grossly understates the amount of demand coming from emerging markets.⁴ Our gold supply and demand table (Table 1) reflects the latest available data (2013 Q3 in most cases). World mine production, excluding Chinese and Russian production still stands at about 2,100 tonnes a year. Chinese net imports most likely exceeded 1,700 tonnes for 2013 (81% of world mine production) and demand from the rest of the world is rather stable.⁵

The overall picture has not changed much since our last article, with the exception of Indian imports. As of the second quarter of 2013, India had cumulative net gold imports of 551 tonnes, which annualizes to 1,102 tonnes.⁶ However, Q3 data shows net imports of only 31 tonnes (for a total of 582 tonnes YTD), which annualizes to 776 tonnes. 

This incredible loss of momentum for “official” gold imports was the result of concerted actions by the Reserve Bank of India and the Indian Government. While the “official” justification for those restrictions is the large Indian current account deficit, this argument makes little sense. According to government officials, Indian’s taste for gold and the corresponding imports worsens the country’s trade balance, worsens its current account deficit and puts downward pressure on their currency, the Rupee. 

But, without going into too many details, the classification of gold as a “good” in the trade balance is at best misleading. Since gold is more of an investment vehicle and is not “consumable” per se, it should instead be accounted for in the capital account of the balance of payments instead of the current account. Indeed, Switzerland, which is a large net importer of gold, reports its trade balance “without precious metals, precious stones and gems as well as art and antiques” to reflect fact that those are “investments” rather than consumption goods.⁹ In this case, why should India be any different and report their trade data excluding gold? To us, all the fuss about gold imports by the Indian Government is a red herring.

So, without the intervention in the Indian gold market, the shortage of gold would have wreaked havoc in the market, a situation that Western Central Banks could not tolerate.

 Table 1: World Gold Supply and Demand 2013, in Tonnes
 
Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2 & Q3. Chinese mine supply comes from the China Gold Association and is up to October 2013, the annualized number is a Sprott estimate.⁸ Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q3. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Nov. 2013 and is annualized to account for the missing month. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1, Q2 & Q3 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1, Q2 & Q3. ETFs data come
s from GFMS as well.

 

Conclusion and Outlook for 2014

As demonstrated in our Open Letter to the World Gold Council, there was a large supply-demand imbalance in 2013. The evidence presented here suggests that the decline in the price of gold in mid-2013 and the subsequent raid of gold ETFs (but not silver ETFs) was engineered by Western Central Banks to help solve their physical gold supply problem. However, the resulting increase in Indian gold demand exacerbated the problem. The solution was to restrict Indians from importing gold by all means possible in order to help the Western Central Banks regain control of the gold market.

However, the rate of drain in gold ETFs cannot continue forever; at the current pace of 930 tonnes/year, there are less than two years of gold left in ETFs. Moreover, Indians have proved highly creative at finding ways around import restrictions.¹⁰ Smuggling is on the rise and will most likely increase as smugglers become more sophisticated. Overall, we believe that interest in physical gold from emerging markets will remain a driving force.

Besides, mine production is unlikely to grow, as reflected by the significant decrease in capital expenditures expected for the major gold producers (Figure 5).

Accordingly, we believe that the manipulation of gold prices by central banks, as demonstrated by the above analysis, cannot continue in 2014. Therefore, we expect substantial increases in the price of precious metals as the true shortages become obvious.

Figure 5: Capital Expenditures ($mm) – XAU Index Members
 
 Source: Bloomberg. Consensus analyst estimates are used for years 2013-2015.

 

P.S. Due to recent developments, we would also like to highlight some related media stories

Jan. 17, 2014: Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal

Jan. 17, 2014: Deutsche quits gold price-setting as regulators investigate fix (Did the regulators ask them to?)

Dec. 13, 2013: Bafin Said to Interview Deutsche Bank Staff in Gold Probe

Nov. 26, 2013: U.K., German Regulators Scrutinize Gold, Silver Pricing

Sept. 9, 2013: Sprott Thoughts: A Leaky Fix

 

1	See, for example, “Redemptions in the GLD are, oddly enough, Bullish for Gold”.
2	http://ift.tt/10ObGYg
3	See “Do the Western Central Banks have any gold left?”. Sprott Asset Management LP, Markets at a Glance May 2013.
4	See the full article at: http://ift.tt/1dy0X95
5	As a reminder, because of our methodology which uses net imports as a proxy for total demand in countries that do not re-export gold, we exclude the “total industrial demand” estimate from the GFMS to avoid double counting. Thus, we underestimate total gold demand because we do not include industrial demand from the countries other than China, India, Turkey and Thailand.
6	As reported by the UN Comtrade Statistics. We use the total dollar amount reported and average quarterly prices to infer the total amount of gold imported and exported.
7	This is calculated by taking the total consumer demand for jewellery, coins and bars for 2013 Q1 & Q2 from table 10 of the WGC’s “Gold Demand Trends” and subtracting from it demand from the individual countries we have listed in the table (China/Hong Kong, India, Turkey, Russia and Thailand).
8	http://ift.tt/1fHaBuu
9	See the Swiss Customs Administration website: http://ift.tt/1fHaDm6
10	See, for example: http://ift.tt/1fHaBKI http://ift.tt/1bhCAeP http://ift.tt/1fHaBKJ

 

via Zero Hedge http://ift.tt/LsSwmx Tyler Durden

“We are concerned about the sustainability of the Equity market rally at this stage,” warns Citi’s FX Technicals’ Tom Fitzpatrick. Between price action parallels to those seens around the peaks in 2000, the fragility of confidence, the Fed taking its “foot off the gas” and bonds now yielding considerably more than stocks, Citi adds, though we are yet to see bearish breaks, they doubt higher highs wil be sustained for long.

 

 

The price action on the S&P 500 reminds us of that seen around the highs in 2000

Starting on the left of the chart, there was a serious correction down in the S&P 500 of 22%. This was at the time of the Asia and Russia Crises

That looks very similar to the 22% correction down seen in 2011

Both of these corrections of 22% each were reversed by a bullish monthly reversal (not shown on this chart as it is a weekly chart)

From that 1998 low, the S&P 500 rallied 68% to the high in 2000. At that high the market was 14% above the 55 week moving average while we also had a large gap between the 55 week and 200 week

This time the market has rallied 72% from the 2011 high and currently the 55 week moving average stands at 1655. 14% above that level would put the S&P 500 at 1,887 which is marginally above where we trade today

We also see a large gap between the 55 and 200 week moving average similar to that seen in 2000.

So overall, from a price action perspective, the trend is mature and is as stretched as it was in 2000.

Furthermore, as previously highlighted,

• Confidence appears fragile and likely to move lower (Confidence is not dependent on the stock market but quite often the other way round)
• The Fed is taking the “foot off the gas” which has been the primary driver of this stock market rally
• Bonds yield more than equities now (The S&P 500 dividend yield is at 1.9% while the 10 year yield is currently 2.9%)

So overall, while we are yet to see bearish breaks, we are concerned here with the S&P 500 from a medium term perspective. It may well be possible for a higher high still (in 2000, the market made a marginal new high in March but then fell back), though we doubt such a development will be sustained for long

via Zero Hedge http://ift.tt/1jbIykN Tyler Durden

Submitted by Doug Casey's International Man,

(Editor's note: See here for Part 1 of this story. The following is a firsthand story of how and why a former US citizen—who kindly shared this information on condition of anonymity—decided to renounce his US citizenship. It's packed with practical advice and priceless insights into this momentous decision. Whether or not you take the ultimate step of renunciation, I believe you will find value from the author's experiences.)

By Citizen of the World

There are two forms for the applicant to fill out: DS-4079—a questionnaire about the applicant’s intentions to give up US citizenship; and DS-4081—a “Statement of Understanding” (that the applicant knows and understands the consequences of giving up US citizenship, and that doing so is irrevocable). DS-4079 is technically only for a “Relinquishment” filing, but may also be requested for a “Renunciation” filing. For a Renunciation proceeding (but not for a Relinquishment), the consular officer also prepares DS-4082, the Oath of Renunciation. The Oath is administered orally, after which the applicant as well as the consular officer signs the DS-4082.

Then the consular officer prepares a DS-4083, Certificate of Loss of Nationality (CLN). But the applicant will not be given a copy of the CLN at this time, as the application must first be approved by a State Department bureau in Washington. Embassy/consular staff were careful to remind me that my expatriation would not be finalized until these documents were reviewed in Washington—in particular my CLN, and my application was approved in Washington.

The time necessary for that State Department review process apparently has varied quite widely in recent years. Its duration may also depend at least somewhat on the embassy or consular office where one makes their expatriation application (perhaps taking longer from embassies with higher expatriation caseloads). Again, it may be useful to shop around among various embassies/consular offices which may be relatively accessible to an expatriation-seeker. The Isaac Brock website may be a very useful resource in this regard.

In my case, approval of my renunciation was fairly prompt—only about a month. As soon as the embassy or consular office receives confirmation from the State Department in Washington that the applicant’s filing has been approved, the embassy/consular office will provide the applicant an approved, sealed copy of the CLN.

For a renunciation, the effective date of expatriation is the date the Oath of Renunciation was performed; but for a relinquishment, the effective date of expatriation—as far as the State Department is concerned (but not the IRS)—is the date the “potentially expatriating act” (such as obtaining citizenship in another country) occurred. The IRS considers one’s expatriation date to be the date the applicant completes his or her filing with the embassy/consular office—provided only that that filing is subsequently approved by the State Department.

Of course, the “potentially expatriating act” may have occurred quite some time before one’s expatriation filing is made—but in such a case, it’s important for the person seeking to expatriate to avoid availing himself of any significant privileges/benefits of US citizenship, such as voting or using his or her US passport.

The State Department seems to have developed formulaic criteria for whether an applicant really intended to give up citizenship at the time they performed the “potentially expatriating act.” Even if one really did intend at the time one did the “potentially expatriating act” to give up citizenship and declares so in the application, the State Department will apparently refuse to accept that fact, if the person subsequently “continues to avail oneself” of any “significant”—whatever that means—benefits of US citizenship.

Once you’ve succeeded in expatriating, it will be important to be able to produce your CLN at various times in the future, as there will be no other official document you can offer as proof that you really did give up US citizenship. As FATCA and similar measures eventually become widespread (which unfortunately seems much more likely than not), the few remaining foreign financial institutions which have continued to accept US individuals as clients will dwindle further. So providing your CLN will likely become essential to open or even retain already existing financial accounts.

You should probably make several good copies of your CLN, including a high-resolution color scan (quite useful for online purposes). Sometimes it may be important to have some sort of notarization or other official recognition of it. You may want to do that sometime when you’re in the US, as notaries abroad tend to be a lot more expensive, less prevalent, and may refuse to even deal with documents not originating in their own country. Because loss of citizenship is irrevocable, there is logically no expiration to the CLN, so it should not matter when a copy of it is notarized. But alas, bureaucrats everywhere are not well known for their reliance on logic.

Once you’ve been notified that your expatriation application has been approved in Washington, you will be able to begin the process of applying for a visa to enter the US, if you wish to—that is, if you don’t hold a passport from a country on the US visa waiver list. Some people advise waiting for some time before applying for a visa, but there’s no formal requirement to do so.

Do keep in mind that the State Department considers that every applicant for a visitor visa to the US has the burden of proving (to the consular officials where the visa application is made) that the applicant will not try to stay illegally in the US. One might think that an expatriate, having gone to the considerable trouble of giving up citizenship, would be highly unlikely to want to stay too long in the US—but there’s no evidence that the State Department recognizes such an argument. One factor which does lend considerable support to an applicant’s (implied) assertion that they will not try to stay illegally in the US is to have “substantial ties” to another country—residency, social and/or familial ties, etc.

There’s no hard and fast requirement to apply for a US visa only at your “home”-country US embassy or consular office, but it’s generally considered better to do so. For instance, it’s likely easier to provide evidence of one’s substantial ties to that other country from within that country (and easier for the consular staff there to verify that evidence).

One very critical point to understand is that you should NEVER state that you are expatriating to avoid taxes. It could end up complicating matters if you ever intend to return to the US.

If your dossier with the US government states that you renounced for tax purposes, that information should be assumed to be readily available to any number of agencies—including those dealing with visas and immigration—and likely could be used to deny you a visa or otherwise deny entry into the US.

Although the authority to exclude a person from re-entering US on that basis is of questionable validity, and formal regulations on this have never even been proposed or implemented, State Department guidance to overseas posts does explicitly state this as a reason to reject a visa application.

The increasingly great difficulty (largely due to FATCA, FBAR, and Form 8938 reporting requirements) of trying to lead a normal life while living overseas as a US citizen is—and ought to be—reason enough for many to give up their US citizenship.

Some experts advise against giving any reason for why you’re expatriating in any of your interaction with US consular officials at any point during the expatriation process—and particularly in any of your responses on the DS-4079 Questionnaire. But these responses may be useful later on to have established that one did have substantial non-tax-avoidance reasons for expatriating. In any case, it would probably be best not to express opposition to the regime in DC too strongly or explicitly as the reason for expatriating—even if that is a major factor in one’s decision.

Do keep in mind that visa applicants are required to have a face-to-face interview with a US consular agent before a visa can be approved. The application (using form DS-160) must be completed using the State Department’s online system. The interview itself may be conducted in a more or less assembly-line manner, in a bank-teller-window-like setting. The main purpose of the interview requirement seems to be to assess the general nature of the applicant and his or her situation—and to attempt to ferret out any adverse factors for which US officials there might want to reject the application (such as lacking strong enough ties to one’s new home country, or an actual—or even fleeting—thought on the applicant’s part to remain illegally in US).

The lead time for getting the interview appointment will vary considerably by location and time of year, ranging anywhere from just one day up to several weeks, maybe even months. Consult the online appointment calendar of the embassy/consular office where you plan to submit your application and try to avoid applying during whatever peak periods may exist there.

It will probably only take a few business days after successfully completing the interview to receive your passport back with your visa. You’ll be advised at the end of the interview whether or not your application is being recommended for approval; apparently an application is very rarely rejected after a successful interview.

The parameters of any US Visitor visa you may be issued—its validity period (in years), number of entries allowed, and maximum length (in days or months) of each visit—will depend on the passport under which you apply for that visa.

It’s not very easy to locate country-specific State Department policy on these parameters, but this page on the State Department’s website has a selection box to check at least the default visa validity period and default number of entries allowed for any particular country. Unfortunately, this page has no information about the default length of stay permitted for US visa holders of a particular nationality.

(Editor’s Note: See the VisaHQ website to see what kind of visa passport holders from country X need to enter country Y while living in country Z.)

Another point to note: regardless of whether you enter the US under the visa-waiver rules or under your own visa, doing a “visa run” (a quick trip to a nearby country to reset one’s visa or visa waiver period) is not so easy. US Immigration authorities require you to perform a “substantial” departure, meaning you must go at least as far away as continental South America—no quick trips to Canada, Mexico, nor even any Central American or Caribbean country!

Without question, you’re likely to have some fairly keen feelings at least the first few times when you come back to the US as an “alien” (what a horrible word—as if people living elsewhere are some sort of suspicious or even dangerous intruders). When you come back to the US, you’re likely to be quizzed a little bit by the immigration officer (and maybe also the Customs inspector), but in the half-dozen or so times I’ve been back so far, I’ve not been given a hard time at all.

Of course, past performance is no guarantee of future results, so one will always face the risk of more hassles down the road. But given that US border authorities already claim that even US citizens have no Constitutional rights at entry points, there are risks for everyone.

I didn’t expatriate because I expected it to make my life easier overall—it has not made it easier overall (at least for me). Yes, some things are easier now: I can open financial accounts overseas and invest directly in overseas securities, many of which have become effectively off limits to US individuals.

Also, I sleep better at night, relieved to no longer be even an unwilling, passive participant in the ever-escalating wars against the growing assortment of “evils” declared by Washington. And I no longer have to worry about making an honest mistake or omission on any of the ever-increasing IRS reporting requirements. But it’s at least somewhat more difficult to travel—this depends a lot on the other passport(s) one has.

Another significant trap to be wary of is the IRS’s Substantial Presence criteria, which risks you getting sucked back into the whole US tax regime (including all the overseas reporting requirements). This occurs if you stay too long while visiting in the US. Not only must one stay in the US no more than 182 days in any one year, you must also ensure that your weighted average number of days within the US over the most recent three years isn’t too high.

There are several other ways one may be required to continue dealing with the IRS after successfully expatriating, especially if you continue to have any US-based assets. At a minimum, in the first year after expatriation, it will be necessary to file Form 8854.

If you are considered a “covered expatriate”, preparing Form 8854 (and both of its associated 1040 forms) will be at least fairly complicated, and will almost certainly require the services of one of the small number of professionals who are experienced with Form 8854 and the “mark to market exit tax.”

I’m still in the early days of my post-expatriation life—really far too soon to judge with any certainty whether I made the right decision (even according to my own thinking, let alone what anyone else thinks). But so far, I’m satisfied that I did do the right thing—for myself. The “silence implies consent” credo is very deeply ingrained in my outlook; this tends to trump the drawbacks, at least for myself. I find implied endorsement of this thinking in Nassim Taleb’s Antifragile, especially in a number of passages in chapter 22. In the end, expatriation is a momentous decision and will be unique for each person considering it—there’s no one right answer for everyone.

via Zero Hedge http://ift.tt/1ae5DDo Tyler Durden

The Ultimate Act of Freedom

By

Cognitive Dissonance

 

Which came first, the chicken or the egg? I ask not because I require an answer, but rather because I desire to ask better questions both of myself and of the world around me. Asking a question that seems to compel the questioner to chase his or her tail is not as pointless as it may seem if the query can be redirected to challenge ‘common’ knowledge or long standing beliefs.

So let me try again with a different question. Which came first, the sociopathic leadership or the seriously dysfunctional populace? I suspect the answer is both and neither.

As with most symbiotic codependent (dysfunctional) relationships, there is no Yes or No, Right or Wrong, Black or White answer. Asking which came first is missing the point since one component of the relationship cannot exist as it does now without the other, at least not for long. A better question might be…..why do we believe there is a defined cause and effect relationship that creates the present day insanity when the very nature of insanity itself requires none in order to exist?

As I have said several times before in my comments and contributing articles, insanity is the ultimate in perfection. It is self replicating, self sustaining and most importantly self affirming. Nearly all sane (or near sane) entities cease and desist wasting energy on useless or self destructive tasks once its futility or danger is obvious and affirmed, often by outside forces or authorities but occasionally by self examination which prompts self awareness.

Insanity on the other hand is its own sole and ultimate authority which in turn acts as the energy source to keep the perpetual motion insanity machine marching forward toward a parabolic blow off of self annihilation. The potentially lethal mistake we all tend to make is in believing that there is only one flavor of crazy. There are in fact seven billion variations of the base product, uniquely customized in cut, color and clarity to meet our own individual needs and perceptions. So in effect the problem is not they, those and them, but us, we and me.

A Mind of its Own

I’m certain you have seen any of a dozen variations of the comedy routine where out of the blue the comedian’s arm or hand becomes possessed and tries to choke the comedian or otherwise attack the body that the arm is attached to. Suddenly the appendage has a mind of its own and that mind is usually extremely self destructive. It can be hilarious stuff when performed well, with a classic example being Peter Sellers as Dr. Strangelove.

Of course we all know this can’t really happen. A person’s brain controls all the appendages via the central nervous system, aside from certain special conditions such as a disease of the body. So while the body’s ‘operating system’ pretty much functions independently of our conscious awareness, essentially utilizing its own firmware/software routines, we (as do all other animals) command our assorted joints and appendages with broad commands ) to suit our needs and wants.

For example we think ‘I want that over there’ or ‘I want to pick that up’ rather than thinking about moving individual muscles. Though I suppose it could be argued that we don’t even ‘think’ about these commands in the same way we think about those financial problems that have been bugging us. We just sort of see or perceive that we want to do something and the internal software routine figures out the details. Either way, the only (perceived) difference between ‘we’ and the flea is that ‘we’ are conscious, and we believe the flea is not.

Perhaps it is this ability to command our appendages that afford us our false sense of perceived independence from, and control of, the body. Yet in so many ways it is our body and not our mind/consciousness that actually controls the appendages, though not in the direct sense of the word ‘control’. We spend our entire life attending to the needs of the body; feeding, sheltering and tending to all its various needs whether physical, emotional or psychological. And yet we maintain to our dying days that ‘we’ are in control of the body, rather than at a minimum acknowledge the obvious codependency.

Codependently Dysfunctional

In so many ways the human mind and the body are engaged in a symbiotic codependent dysfunctional relationship. Dysfunctional because for as long as the conscious mind believes it is the master of its domain (when clearly it is not) the relationship is not a healthy one by any stretch of the imagination. This error of perception (actually a deliberately staged continuous deception perpetrated by external sources) is one of the reasons I often speak about looking within, of understanding our motives and dependencies in order to move deeper down the rabbit hole.

We carry this potentially fatal disconnect with us when thinking about and interacting with not just the physical world around us, but with the social order and the so called powers that be, aka ‘our’ leadership. We believe ourselves disconnected from the world around us; particularly from those who we believe ‘control’ us or who are ‘leaders’ in our world. We speak of this phenomenon by using distancing terms such as they, them and those. We consider ourselves divorced from the cause and only subject to the effect.

And yet all around us we see on a daily basis various examples of nature interconnected, of animals moving and acting as one even though they are seemingly as disconnected from each other as we perceive ourselves to be separated from one another. Watch carefully as birds flock, fish school and cattle herd. Even a stand of trees or a patch of wild flowers will communicate with each other either through interconnected root systems, pheromones or other (un)known methods or processes. But communicate they do and it is only our denial that prevents us from recognizing the same in ourselves and others in the human herd.

Choice and Free Will

That which we try to ignore, outright deny or reject out of fear controls us, oftentimes on a deeply subconscious level. This concept as it applies to ‘them’ is very difficult for most of ‘us’ to grasp, let alone accept, principally because we believe ourselves to be ‘in control’ of ourselves, but not at all in control of, or responsible for, ‘their’ actions other than possibly in the most indirect and inconsequential way. No one rain drop feels responsible for the flood, yet here comes the rain. Can you say hip waders?

Why is it that throughout history every so called leader has demanded consent (some demand more nicely than others) from the population, regardless of whether the consent is coerced, connived or freely given? Think about that carefully for a while rather than to just dismiss it off hand with any of a dozen rote responses. A symbiotic relationship, no matter how dysfunctional or self destructive, requires consent from all parties at some level to function as it does.

As ridiculous as this may sound nothing truly compels us to consent even when the ultimate violence is threatened if we do not comply, that of (extreme) distress and/or death. We can choose death, though many will argue that to choose death is irrational or insane. However as I said earlier, that which we try to ignore, outright deny or reject out of fear controls us, oftentimes on a deeply subconscious level. And the vast majority of ‘us’ ignore, deny or reject seriously contemplating ‘our’ own death, whether by natural causes or externally applied violence.

We wish to believe that we live in a cooperative society; that we participate of our own ‘free will’. And yet when we see those flashing lights in the rear view mirror or open that demand letter from the IRS or ‘Justice’ system we do not actually participate of our own ‘free will’, but simply because a threat of (ultimate) violence is implied if we do not.

Still, this is consent simply because there is/are alternative(s) available. We consistently take the softer easier way and comply, then rationalize and justify it as reasonable, rational and sane. It is important that we recognize the difference between ‘free will’ and ‘consent’ because in so many ways they are very different concepts.

Since we make the (un)(semi)(fully)conscious decision to comply in many ways we are ‘willingly’ part of the very system we rail against as predatory and abusive. While many might argue that this is all just semantics, I contend that the world would be a very different place if we had the courage to consider the always available alternative choices other than the softer easier way of complying. Please notice I said consider, not agree. One must always (seriously) consider everything even if one does not agree.

In most, but not all cases, our pain comes not in knowing what we should do, but in actually doing it. In fact most of our emotional/psychological pain springs from the cognitive dissonance of trying to ignore, deny or reject that which we know to be true and correct.

The ultimate act of freedom is to seriously consider breaking the chains that bind us. And those chains are not physical and won’t be found binding our wrists or ankles, but rather they are self imposed upon our own minds. Freedom, true freedom, can only begin when we willing choose to start down the path of personal sovereignty and total personal accountability.

 

01-17-2014

Cognitive Dissonance

via Zero Hedge http://ift.tt/1b7zbAS Cognitive Dissonance

On the heels of his less-than-optimistic presentation, DoubleLine’s Jeff Gundlach tells Europe’s Finanz und Wirtschaft “he’s concerned about the growing amount of speculation” and draws a parallel between today’s markets and the dot-com boom of the late Nineties. This excellent interview takes the themes of his recent conference call and extends them as he warns “In the over thirty years I’ve been in the financial investment industry, I don’t recall a single year where I saw the year begin with the consensus being so solidified in its thinking across virtually every asset class.” His biggest worry (for investors, as opposed to his funds), “the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds.”

 

 

Gundlah Year of the Horse

 

 

Via Finanz und Wirtschaft,

Mr. Gundlach, on Wall Street you’re well known as an influential bond investor. But you are also a connoisseur of art. What does it say about the mentality of today’s financial markets when a painting like Francis Bacon’s Triptych sells at a record auction price for more than $140 M.?
The art market is an interesting way to look at what’s happening to societal trends. On the headlines the art markets looks like it is incredibly strong. Pieces like the Triptych or the Scream of Edvard Munch are trading for huge prices. But when you move down and look at things that aren’t so iconic, the art market’s weak.

How come?
What’s really happening in the art market reflects this: The very expensive things in the world have had incredibly high price gains. Look at real estate in London, real estate in Hong Kong or penthouses in New York City. They’re up massively in value in the last few years. And then as you move down, things are much less robust in terms of price gains. So for a lot of the art that I own, my Californian paintings for example, prices are down substantially in the last ten years. They fell in 2008 and 2009 and have never recovered. It’s like an L-shape: It went down and it sits there. It’s a price point that doesn’t attract billionaires. It’s a price that attracts people who have a little bit of extra money. And those people are being squeezed tremendously by zero percent interest rates. They worry about their retirement. Rather than spend like $ 200’000 on some painting, they want to keep their money.

So what does that say about social trends?
It shows that in the middle things are nowhere near as strong. The stratification of wealth is getting more and more extreme. And then you can ask who owns the equity market? People who have a lot of money. The average middle class person owns very, very little. It doesn’t really matter if they put in a little money into the equity market and it goes up. They just don’t have enough in it.

What’s next for stocks now?
There is tremendous optimism and great belief in the equity markets. I think the stock market today is very similar to where the gold and silver markets were in March to May of 2011. They just kept going up. I remember going to meetings where people were like “Ah… I think we should buy gold and silver”. At that time Silver was at about $42 and it went to $50 but then dropped to $20. That’s how I think of the market today.

What’s your advice for investors?
I’m not interested in buying equity markets now, particularly not the ones who have done the best like the US. I feel like putting new money to work in equities today is like buying silver at $42 in the spring of 2011. It may go higher. But just like silver at $42: You’re seeing a great amount of capitulation. It does feel like an echo of the late nineties in terms of market behavior. People are saying: “I can’t see any justification for the market not going higher, everything points to the market going higher”. Well, I remember a similar mood in early 2000. At that time, an equity manager working for me said: “This is a stock market Nirvana. I have never seen better conditions for the stock market”. So I said: “That probably means that things can’t get any better”. It reminds me of a triple-A rated bond: There’s only one way for it to go: get downgraded.

What could cause such a downgrading?
What troubles me the most psychologically in the markets right now is this logic that as long as there is Quantitative Easing, stocks will go up. And if the Federal Reserve drops Quantitative Easing, stocks will go up, too, because it means the economy is strong. It makes me wonder. Fascinatingly, commodities and particularly gold peaked right about when the Fed started QE3. It’s just fascinating that commodities have been doing nothing but going down ever since the third QE-program started.

How do you explain this?
That is not a coincidence. I am convinced that there’s cause and effect. The explanation is that gold was popular when there was no confidence in stocks and there was no confidence in real estate. So gold was kind of the only game in town. Big money interests and finally, late in the game, small money interests went into gold. And then real estate bottomed right at the peak of gold. Suddenly confidence in the real estate market started to return. So money shifted from gold into real estate. I’ve seen that in my own clientele.

Isn’t it encouraging that housing is doing better now? What makes you so cautious?
What irritates me is margin debt, the money that people borrow to buy more stocks. Not surprisingly, it is extraordinary highly correlated to the stock market because it’s actually one of the main drivers of the market. It’s at an all-time high in terms of absolute level and it’s at a very high level versus GDP. That is something to be concerned about. But what really matters is when it turns down, because it goes up in a very persistent trend and when it drops that’s when you have forced liquidation because of margin calls. There is no indication of that now because margin debt is still moving higher. But people who are saying there is no speculation in the participation in the equity market have to explain how they can make that statement.

How concerned are you about new bubbles in the financial markets?
When you look at history there is quite a high correlation between bubble talk and the top of the market. Today a lot of people say that maybe there is a bubble. But more commonly, the talk is about why it’s not a bubble. So they use the word bubble and say: “But these are the reasons that there isn’t a bubble”. I just read something this morning about someone who monitors how many times the words equities and bubble are referenced in the media. And it’s like the late nineties again. So the optimism is there, the margin debt is there, the bubble talk is there.

Are these all sings for the first negative consequences of the super easy monetary policy? Even the Federal Reserve is now starting to discuss the risk of financial bubbles, as the minutes of the last FOMC meeting are showing.
Fear and greed – these are very powerful things. But the most powerful of all is need. Need to get a return. When you need it you have to take a risk. It’s like when your rent is a $1000 and you earn $500: You’re going to get evicted. So you go to Vegas and you bet on black. If you lose you’re going to get evicted which would have happened anyway. But if you win you don’t get evicted. So based on need people do things.

At least, long term interest rates are already a little bit higher than half a year ago. What’s your outlook for the bond market?
Most people, all they do is to extrapolate what has happened. So they say bonds will move to higher yields and stocks will go up. Last summer the reason interest rates went up a lot was money flows. There was forced liquidations in leveraged investments. I think that has largely played out. So I am not that afraid of the Fed scaling down its bond purchases. The markets have become a lot calmer since the initial period of fear in summer. Also, I am not so sure that tapering bond purchases is really going to be that bad for the bond market. It was one thing when the yield of the 10-year Treasury note was down at one and a half percent like in the summer. But inflation has dropped and yields are up by around one and a quarter percent point now. So the market seems to be taking it more in stride and certainly the equity market doesn’t seem to be very worried about things.

So what are interest rates going to do in 2014?
While many people think Quantitative Easing is an inflationary policy, I don’t see that at all. What I see is that the Fed has created a huge shortage of high quality investments. They are all sitting on central bank balance sheets now. And maybe there will be some sort of an event that causes demand for treasury bonds. A lot of people think that doesn’t matter because who wants them anyway with these low yields? But what if you have a need to buy them, because you’re short and money is leaving? So you must cover your short. So we could actually see one of the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds. And that’s why in my diversified bond fund I still own 20% treasuries.

What would be a harbinger for the market’s mood turning around?
The thing that I am most fascinated with – and I have done nothing with it – is Amazon. I just can’t get over how little money they make and yet how valuable the company is. The stock price never goes down. It just goes up and up and up and they never make any money. Investors are so patient with Amazon because they think it’s all going to happen. They’re constantly investing in a company that makes no money and hope that one day it will pay off. That’s their bet. I’m surprised that is has been sixteen plus years and they’re still willing to wait. As long as Amazon keeps going up, market confidence and belief in the future is in high season. If it starts going down, it means the patience has run out. And that probably means the patience has run out for the market in general.

Also, there’s a lot of optimism about Europe. What’s your take on the situation over there?
It’s really amazing how, over the last two years, the concern about the Euro and the European Union has disappeared. All ECB president Mario Draghi had to say was: “We will do whatever it takes”. My impression is that the policies that have been in place for the last couple of years are very popular among the elitists but not very popular among the average person. So I think at the upcoming elections in May it’s possible that elitists get undermined and something from a popular standpoint could kind of float up to the surface. This risk could potentially cause some sort of volatility. The European markets have been incredibly strong last summer and relatively weak recently. It just seems to me that the demographic problem in Europe is huge. You look for fear or concern but there isn’t any. It’s surprising to me how there appears to be no concern in the global investment community about the situation, particularly in France with the French banks. I don’t own any European stocks and I particularly dislike European bonds because they are really expensive versus US bonds.

How are you positioned personally against this background?
I can divide my personal wealth into three categories: Financial assets, real assets and my ownership in DoubleLine. Looking at the first two: I have about 60% of those assets in real assets like real estate, gemstones, artwork etc. So that leaves 40% that is in financial assets. Of that 40% I now have 30% in cash which leaves 70% that’s actually in assets. Of that I have 50% in DoubleLine products.

This takes us back to the art market. Where do you spot opportunities here?
I actually was participating at the most recent auction season in New York with the Triptych and all that. And it was the first season in ten years that I had bid on nothing and completely avoided it. Prices may go up a little bit further but I am not interested in being the incremental buyer at the price levels of a lot of assets today. It will probably go higher in the short therm. But who knows what the top is? The high end art market in particular is being driven by the great wealth creation in China, Russia and South America. It’s a totally different culture. These people can’t get rid of their money fast enough, they just don’t trust it. So they want to buy something that they think is real. That’s why there is huge demand for very high value: real estate, art or diamonds. Two years ago, I liked the art market, I liked the real estate market and I liked the gemstone market. I don’t dislike them now. But they have been going up a lot. Someone else can take the ride from here.

via Zero Hedge http://ift.tt/1ax6oSr Tyler Durden

On the heels of his less-than-optimistic presentation, DoubleLine’s Jeff Gundlach tells Europe’s Finanz und Wirtschaft “he’s concerned about the growing amount of speculation” and draws a parallel between today’s markets and the dot-com boom of the late Nineties. This excellent interview takes the themes of his recent conference call and extends them as he warns “In the over thirty years I’ve been in the financial investment industry, I don’t recall a single year where I saw the year begin with the consensus being so solidified in its thinking across virtually every asset class.” His biggest worry (for investors, as opposed to his funds), “the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds.”

 

 

Gundlah Year of the Horse

 

 

Via Finanz und Wirtschaft,

Mr. Gundlach, on Wall Street you’re well known as an influential bond investor. But you are also a connoisseur of art. What does it say about the mentality of today’s financial markets when a painting like Francis Bacon’s Triptych sells at a record auction price for more than $140 M.?
The art market is an interesting way to look at what’s happening to societal trends. On the headlines the art markets looks like it is incredibly strong. Pieces like the Triptych or the Scream of Edvard Munch are trading for huge prices. But when you move down and look at things that aren’t so iconic, the art market’s weak.

How come?
What’s really happening in the art market reflects this: The very expensive things in the world have had incredibly high price gains. Look at real estate in London, real estate in Hong Kong or penthouses in New York City. They’re up massively in value in the last few years. And then as you move down, things are much less robust in terms of price gains. So for a lot of the art that I own, my Californian paintings for example, prices are down substantially in the last ten years. They fell in 2008 and 2009 and have never recovered. It’s like an L-shape: It went down and it sits there. It’s a price point that doesn’t attract billionaires. It’s a price that attracts people who have a little bit of extra money. And those people are being squeezed tremendously by zero percent interest rates. They worry about their retirement. Rather than spend like $ 200’000 on some painting, they want to keep their money.

So what does that say about social trends?
It shows that in the middle things are nowhere near as strong. The stratification of wealth is getting more and more extreme. And then you can ask who owns the equity market? People who have a lot of money. The average middle class person owns very, very little. It doesn’t really matter if they put in a little money into the equity market and it goes up. They just don’t have enough in it.

What’s next for stocks now?
There is tremendous optimism and great belief in the equity markets. I think the stock market today is very similar to where the gold and silver markets were in March to May of 2011. They just kept going up. I remember going to meetings where people were like “Ah… I think we should buy gold and silver”. At that time Silver was at about $42 and it went to $50 but then dropped to $20. That’s how I think of the market today.

What’s your advice for investors?
I’m not interested in buying equity markets now, particularly not the ones who have done the best like the US. I feel like putting new money to work in equities today is like buying silver at $42 in the spring of 2011. It may go higher. But just like silver at $42: You’re seeing a great amount of capitulation. It does feel like an echo of the late nineties in terms of market behavior. People are saying: “I can’t see any justification for the market not going higher, everything points to the market going higher”. Well, I remember a similar mood in early 2000. At that time, an equity manager working for me said: “This is a stock market Nirvana. I have never seen better conditions for the stock market”. So I said: “That probably means that things can’t get any better”. It reminds me of a triple-A rated bond: There’s only one way for it to go: get downgraded.

What could cause such a downgrading?
What troubles me the most psychologically in the markets right now is this logic that as long as there is Quantitative Easing, stocks will go up. And if the Federal Reserve drops Quantitative Easing, stocks will go up, too, because it means the economy is strong. It makes me wonder. Fascinatingly, commodities and particularly gold peaked right about when the Fed started QE3. It’s just fascinating that commodities have been doing nothing but going down ever since the third QE-program started.

How do you explain this?
That is not a coincidence. I am convinced that there’s cause and effect. The explanation is that gold was popular when there was no confidence in stocks and there was no confidence in real estate. So gold was kind of the only game in town. Big money interests and finally, late in the game, small money interests went into gold. And then real estate bottomed right at the peak of gold. Suddenly confidence in the real estate market started to return. So money shifted from gold into real estate. I’ve seen that in my own clientele.

Isn’t it encouraging that housing is doing better now? What makes you so cautious?
What irritates me is margin debt, the money that people borrow to buy more stocks. Not surprisingly, it is extraordinary highly correlated to the stock market because it’s actually one of the main drivers of the market. It’s at an all-time high in terms of absolute level and it’s at a very high level versus GDP. That is something to be concerned about. But what really matters is when it turns down, because it goes up in a very persistent trend and when it drops that’s when you have forced liquidation because of margin calls. There is no indication of that now because margin debt is still moving higher. But people who are saying there is no speculation in the participation in the equity market have to explain how they can make that statement.

How concerned are you about new bubbles in the financial markets?
When you look at history there is quite a high correlation between bubble talk and the top of the market. Today a lot of people say that maybe there is a bubble. But more commonly, the talk is about why it’s not a bubble. So they use the word bubble and say: “But these are the reasons that there isn’t a bubble”. I just read something this morning about someone who monitors how many times the words equities and bubble are referenced in the media. And it’s like the late nineties
again. So the optimism is there, the margin debt is there, the bubble talk is there.

Are these all sings for the first negative consequences of the super easy monetary policy? Even the Federal Reserve is now starting to discuss the risk of financial bubbles, as the minutes of the last FOMC meeting are showing.
Fear and greed – these are very powerful things. But the most powerful of all is need. Need to get a return. When you need it you have to take a risk. It’s like when your rent is a $1000 and you earn $500: You’re going to get evicted. So you go to Vegas and you bet on black. If you lose you’re going to get evicted which would have happened anyway. But if you win you don’t get evicted. So based on need people do things.

At least, long term interest rates are already a little bit higher than half a year ago. What’s your outlook for the bond market?
Most people, all they do is to extrapolate what has happened. So they say bonds will move to higher yields and stocks will go up. Last summer the reason interest rates went up a lot was money flows. There was forced liquidations in leveraged investments. I think that has largely played out. So I am not that afraid of the Fed scaling down its bond purchases. The markets have become a lot calmer since the initial period of fear in summer. Also, I am not so sure that tapering bond purchases is really going to be that bad for the bond market. It was one thing when the yield of the 10-year Treasury note was down at one and a half percent like in the summer. But inflation has dropped and yields are up by around one and a quarter percent point now. So the market seems to be taking it more in stride and certainly the equity market doesn’t seem to be very worried about things.

So what are interest rates going to do in 2014?
While many people think Quantitative Easing is an inflationary policy, I don’t see that at all. What I see is that the Fed has created a huge shortage of high quality investments. They are all sitting on central bank balance sheets now. And maybe there will be some sort of an event that causes demand for treasury bonds. A lot of people think that doesn’t matter because who wants them anyway with these low yields? But what if you have a need to buy them, because you’re short and money is leaving? So you must cover your short. So we could actually see one of the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds. And that’s why in my diversified bond fund I still own 20% treasuries.

What would be a harbinger for the market’s mood turning around?
The thing that I am most fascinated with – and I have done nothing with it – is Amazon. I just can’t get over how little money they make and yet how valuable the company is. The stock price never goes down. It just goes up and up and up and they never make any money. Investors are so patient with Amazon because they think it’s all going to happen. They’re constantly investing in a company that makes no money and hope that one day it will pay off. That’s their bet. I’m surprised that is has been sixteen plus years and they’re still willing to wait. As long as Amazon keeps going up, market confidence and belief in the future is in high season. If it starts going down, it means the patience has run out. And that probably means the patience has run out for the market in general.

Also, there’s a lot of optimism about Europe. What’s your take on the situation over there?
It’s really amazing how, over the last two years, the concern about the Euro and the European Union has disappeared. All ECB president Mario Draghi had to say was: “We will do whatever it takes”. My impression is that the policies that have been in place for the last couple of years are very popular among the elitists but not very popular among the average person. So I think at the upcoming elections in May it’s possible that elitists get undermined and something from a popular standpoint could kind of float up to the surface. This risk could potentially cause some sort of volatility. The European markets have been incredibly strong last summer and relatively weak recently. It just seems to me that the demographic problem in Europe is huge. You look for fear or concern but there isn’t any. It’s surprising to me how there appears to be no concern in the global investment community about the situation, particularly in France with the French banks. I don’t own any European stocks and I particularly dislike European bonds because they are really expensive versus US bonds.

How are you positioned personally against this background?
I can divide my personal wealth into three categories: Financial assets, real assets and my ownership in DoubleLine. Looking at the first two: I have about 60% of those assets in real assets like real estate, gemstones, artwork etc. So that leaves 40% that is in financial assets. Of that 40% I now have 30% in cash which leaves 70% that’s actually in assets. Of that I have 50% in DoubleLine products.

This takes us back to the art market. Where do you spot opportunities here?
I actually was participating at the most recent auction season in New York with the Triptych and all that. And it was the first season in ten years that I had bid on nothing and completely avoided it. Prices may go up a little bit further but I am not interested in being the incremental buyer at the price levels of a lot of assets today. It will probably go higher in the short therm. But who knows what the top is? The high end art market in particular is being driven by the great wealth creation in China, Russia and South America. It’s a totally different culture. These people can’t get rid of their money fast enough, they just don’t trust it. So they want to buy something that they think is real. That’s why there is huge demand for very high value: real estate, art or diamonds. Two years ago, I liked the art market, I liked the real estate market and I liked the gemstone market. I don’t dislike them now. But they have been going up a lot. Someone else can take the ride from here.

via Zero Hedge http://ift.tt/1ax6oSr Tyler Durden

Submitted by Robert Murphy via The Ludwig von Mises Institute of Canada,

Over at CafeHayek, Russ Roberts is mystified at a recent Paul Krugman blog post. Concerning the debate over whether the US federal government should extend unemployment benefits, Krugman wrote on January 12:

There’s a sort of standard view on this issue, based on more or less Keynesian models. According to this view, enhanced UI actually creates jobs when the economy is depressed. Why? Because the economy suffers from an inadequate overall level of demand, and unemployment benefits put money in the hands of people likely to spend it, increasing demand.

 

You could, I suppose, muster various arguments against this proposition, or at least the wisdom of increasing UI. You might, for example, be worried about budget deficits. I’d argue against such concerns, but it would at least be a more or less comprehensible conversation.

 

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

Before continuing, let’s be clear at the rhetorical devices Krugman uses here. First, he sets it up as the “standard view” that extending unemployment benefits (in a depressed economy) will boost job growth, through Keynesian demand-side effects.

Then, Krugman racks his brains trying to figure out how somehow could possibly disagree with this “standard view.” He says “I suppose” you might worry about the larger budget deficit that this would cause. He doesn’t offer any other possible mechanism by which someone might oppose it.

Finally, Krugman says that that’s not the argument that opponents are using. Instead, they are relying on a supply-side argument, claiming that it would reduce the incentive to work if you paid people not to work. In the context, it is clear that Krugman thinks this is NOT a good objection to the “standard” Keynesian view.

Against this backdrop, then, Russ Roberts is simply astounded because we can turn to Paul Krugman’s own (recent) books to elucidate this very argument–the one that “right-wingers” such as Robert Barro are advancing, much to Krugman’s horror. For example, in the 2010 edition of Krugman’s Essentials of Economics he writes:

People respond to incentives. If unemployment becomes more attractive because of the unemployment benefit, some unemployed workers may no longer try to find a job, or may not try to find one as quickly as they would without the benefit. Ways to get around this problem are to provide unemployment benefits only for a limited time or to require recipients to prove they are actively looking for a new job.

And, in the 2009 edition of Krugman’s textbook Economics he writes: “Generous unemployment benefits can increase both structural and frictional unemployment. So government policies intended to help workers can have the undesirable side effect of raising the natural rate of unemployment.”

So we see here, that the type of supply-side argument that Barro et al. bring up is one that Krugman himself endorses. Indeed, this is literally the “standard view on the topic.”

To be sure, a Keynesian like Krugman could argue that in the middle of a big economic slump that such supply-side issues are of only minor importance, and get trumped by demand-side factors. But that’s not at all the argument Krugman is making in this latest blog post. Instead, he is making it sound like Barro et al. are grasping at straws, and not even relying on a coherent argument (such as fear of bigger deficits) when trying to oppose extension of unemployment benefits.

Krugman does this in other contexts, too. To take just one other example: He has coined the terms “confidence fairy” and “invisible bond vigilantes” to mock economists who believe that investors might worry about rising government debt levels, and consequently favor faster action on bringing down deficits even though market interest rates are quite low for US government debt. Yet back in 2003 Krugman wrote:

With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

My point in the present post isn’t to accuse Krugman of outright contradictions, or to say he’s forbidden from ever changing his mind.

Rather, my point is that Krugman frequently accuses his opponents of being stupid and/or evil, when they present a view that he himself advanced in other circumstances. His typical readers would have no idea that Krugman once worried about bond vigilantes, or that his books lay out the standard case for why generous government unemployment benefits might contribute to structural unemployment. No, Krugman has led such typical readers to believe that anyone espousing such views is either a complete idiot–immune to theory and evidence that we’ve had since the 1930s–or is a paid shill who hates poor people.

via Zero Hedge http://ift.tt/1jbf46y Tyler Durden

Submitted by Robert Murphy via The Ludwig von Mises Institute of Canada,

Over at CafeHayek, Russ Roberts is mystified at a recent Paul Krugman blog post. Concerning the debate over whether the US federal government should extend unemployment benefits, Krugman wrote on January 12:

There’s a sort of standard view on this issue, based on more or less Keynesian models. According to this view, enhanced UI actually creates jobs when the economy is depressed. Why? Because the economy suffers from an inadequate overall level of demand, and unemployment benefits put money in the hands of people likely to spend it, increasing demand.

 

You could, I suppose, muster various arguments against this proposition, or at least the wisdom of increasing UI. You might, for example, be worried about budget deficits. I’d argue against such concerns, but it would at least be a more or less comprehensible conversation.

 

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

Before continuing, let’s be clear at the rhetorical devices Krugman uses here. First, he sets it up as the “standard view” that extending unemployment benefits (in a depressed economy) will boost job growth, through Keynesian demand-side effects.

Then, Krugman racks his brains trying to figure out how somehow could possibly disagree with this “standard view.” He says “I suppose” you might worry about the larger budget deficit that this would cause. He doesn’t offer any other possible mechanism by which someone might oppose it.

Finally, Krugman says that that’s not the argument that opponents are using. Instead, they are relying on a supply-side argument, claiming that it would reduce the incentive to work if you paid people not to work. In the context, it is clear that Krugman thinks this is NOT a good objection to the “standard” Keynesian view.

Against this backdrop, then, Russ Roberts is simply astounded because we can turn to Paul Krugman’s own (recent) books to elucidate this very argument–the one that “right-wingers” such as Robert Barro are advancing, much to Krugman’s horror. For example, in the 2010 edition of Krugman’s Essentials of Economics he writes:

People respond to incentives. If unemployment becomes more attractive because of the unemployment benefit, some unemployed workers may no longer try to find a job, or may not try to find one as quickly as they would without the benefit. Ways to get around this problem are to provide unemployment benefits only for a limited time or to require recipients to prove they are actively looking for a new job.

And, in the 2009 edition of Krugman’s textbook Economics he writes: “Generous unemployment benefits can increase both structural and frictional unemployment. So government policies intended to help workers can have the undesirable side effect of raising the natural rate of unemployment.”

So we see here, that the type of supply-side argument that Barro et al. bring up is one that Krugman himself endorses. Indeed, this is literally the “standard view on the topic.”

To be sure, a Keynesian like Krugman could argue that in the middle of a big economic slump that such supply-side issues are of only minor importance, and get trumped by demand-side factors. But that’s not at all the argument Krugman is making in this latest blog post. Instead, he is making it sound like Barro et al. are grasping at straws, and not even relying on a coherent argument (such as fear of bigger deficits) when trying to oppose extension of unemployment benefits.

Krugman does this in other contexts, too. To take just one other example: He has coined the terms “confidence fairy” and “invisible bond vigilantes” to mock economists who believe that investors might worry about rising government debt levels, and consequently favor faster action on bringing down deficits even though market interest rates are quite low for US government debt. Yet back in 2003 Krugman wrote:

With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

My point in the present post isn’t to accuse Krugman of outright contradictions, or to say he’s forbidden from ever changing his mind.

Rather, my point is that Krugman frequently accuses his opponents of being stupid and/or evil, when they present a view that he himself advanced in other circumstances. His typical readers would have no idea that Krugman once worried about bond vigilantes, or that his books lay out the standard case for why generous government unemployment benefits might contribute to structural unemployment. No, Krugman has led such typical readers to believe that anyone espousing such views is either a complete idiot–immune to theory and evidence that we’ve had since the 1930s–or is a paid shill who hates poor people.

via Zero Hedge http://ift.tt/1jbf46y Tyler Durden

 

via Zero Hedge http://ift.tt/1jbf2eR George Washington