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Europe's Mexican Standoff

All's fine until someone blinks
Tuesday, November 20, 2012, 3:08 AM

Executive Summary

  • Germany is unlikely to break solidarity with the rest of the Eurozone while Merkel remains in charge. But she may not last as long as she'd like.
  • France's economy is deteriorating at an alarming rate.
  • Most of France's "stability" to date is due to inflows of money fleeing Spain and Italy. That will stop soon – and then what?
  • The UK is suffering from many of the same ills as the U.S. However, its banks are too dependent on Eurozone debt for it to take drastic counter-measures, and so it is handcuffed to the future of the Continent.
  • All is well as long as no one defaults or no one leaves the Eurozone. With each player's position deteriorating, how long can the status quo last?

If you have not yet read Europe Is Now Sinking Fast, available free to all readers, please click here to read it first.

In previous articles, I have given Peak Prosperity's enrolled members the lowdown on the weak Eurozone governments and looked at the crisis from Germany’s point of view. With respect to Germany, all that can be added is that her political elite is still frozen in inaction and show no signs of snapping out of it. Mrs Merkel, particularly, is still pursuing the out-of-date Euroland ideal. It is as if she has decided that she has no alternative. Come what may, it will have to succeed in the end, and she is not going to be the one who calls “uncle.”

I don’t know how these things work in Germany, but in the UK there comes a point where “the men in grey suits” metaphorically tap the leader on the shoulder and politely instruct him or her to resign. It happened to Mrs Thatcher, and unless she has a change of heart, it could happen to Mrs Merkel before next November’s German elections. And when that happens, the withdrawal of Germany from the euro can be expected to begin.

In this article we will update the deteriorating situation in two other key players on Europe's chessboard: France and the United Kingdom. And we'll reveal why the current system is like a Mexican standoff: Everything is stable until someone makes a move. Then all hell breaks loose... » Read more

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Unrealistic Expectations

Too many want too much
Friday, November 16, 2012, 3:24 PM

Mish and I were unable to connect this week, so here's what was on my mind for that podcast.

One of the fundamental aspects of life today is that so many people are unable or unwilling to understand the nature of the predicament, which leads to all sorts of understandable, but unproductive, outbursts.

Put simply, people don't want their stuff to go away.  This is perfectly normal and understandable; the only problem is that a lot of people's expectations are entirely unrealistic and were formed during a period of time when they were, individually or collectively as a nation, living well beyond their means.

Cutting back is hard, and necessary, and it seems that many people are unwilling to entertain either the prospect of having less or the inevitability of the coming decline in living standards... » Read more

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Why the Fed Will Fight to the End

'It's the assets, stupid'
Wednesday, November 14, 2012, 6:29 PM

Given the choice between accepting the risk of future inflation and dealing with the immediate and destructive consequences of deflation now, our fiscal and monetary authorities will always choose inflation.  At least if 800 years of history and the last four years are any guide.

If I had to boil the whole thing down to one trite statement suitable for an election campaign, it might be, It’s the assets, stupid.

Here’s why. » Read more

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Why Gold & the Dollar May Both Rise from Here

An important possibility to consider
Tuesday, November 13, 2012, 11:05 AM

Executive Summary

  • Triffin's Paradox leads to four principal conclusions that indicate why the U.S. dollar may well continue to strengthen from here
  • Why the euro's troubles have been good for the price of gold
  • Why the dollar can strengthen despite the United States' wishes
  • Why the future may well see the price of both gold and the U.S. dollar rise

If you have not yet read Part I: Gold & the Dollar are Less Correlated then Everyone Thinks, available free to all readers, please click here to read it first.

In Part I, we examined the commonly offered correlations between the dollar, gold, interest rates, and the monetary base, and found no consistent correlations between any of these and the domestic economy.  Clearly, the trade-weighted value of the dollar and the value of gold have at best marginal impact on the domestic economy. 

Perhaps the dollar’s primary impact is on the international economy, as suggested by Triffin’s Paradox, which begins with the premise that the needs of the global trading community are different from the needs of domestic policy makers.

Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status.  As the U.S. monetary base expanded while gold remained artificially pegged at $35 an ounce, roughly half of America’s gold reserves were shipped overseas before the policy was jettisoned.

Here is the Wikipedia entry on Triffin’s Paradox:

The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)

The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.

This leads to some startling conclusions that many have great difficulty accepting... » Read more

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Off the Cuff: Awaking with a Whopper Hangover

Reality can be cruel
Friday, November 9, 2012, 1:06 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • Post-Election Plunge
    • Why are the markets selling off so hard?
  • The Return of the EuroCrisis
    • It worsened while we ignored it.
  • The Fiscal Cliff
    • Will we drive off it? And at what speed?
  • Gold's Resurgence
    • Showing strength as investors demand safety

America awoke on Wednesday with the Presidential election finally over and talk from the re-elected incumbent of moving 'forward' again. » Read more

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Four More Years

Predicting a global recession in 2013
Thursday, November 8, 2012, 11:51 AM

Obama has been re-elected. Given the hyperbole and highly emotional rhetoric of the election, it is hard to imagine that the U.S. is anything but slightly more divided than before, with the gaps and divisions widening more and more as time goes on.

The real tragedy in this story is that virtually none of the really big and important issues were even touched in this election cycle. One party pointed to how much they managed to increase military spending while the other promised to exceed even that. One side said they'd promote even faster drilling and extraction of our dwindling energy reserves and the other promised they could do it even faster. Both said they wanted more growth and more jobs and more, more, more. » Read more

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Image by NASA, Flickr Creative Commons

Off the Cuff: Forces of Nature

Man can only hold them back for so long
Thursday, November 1, 2012, 6:17 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • Behind the Bogus Jobs Numbers
    • Overestimates in the hundreds of thousands
  • The Massive Cost of Hurricane Sandy
    • The indirect costs are as concerning as the direct ones
  • Oh...Canada
    • No longer immune to the ills of its trading partners
  • The Fallible Fed
    • Out of arrows at this point?

The carnage of Hurricane Sandy provided a distraction this week from the election spectacle. Expect only a few more weeks of juiced-up numbers (e.g., jobs) and economic claptrap (the rebuilding from Sandy will be an economic boon and increase GDP!) before the unavoidable sinks in: There is no more carpet left to sweep things under. Recession is claiming nearly all of the G7 countries, the $20+ billion cleanup price tag from Sandy will be a sucker-punch to the already-toddering U.S. economy, and our leaders – irrespective of who wins the Presidential elections this month – are out of options. The forces of nature have been at bay long enough – and will now exert themselves, with prejudice.

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Reducing Your Exposure to Oil Prices

Get the global shift to the powergrid working in your favor
Tuesday, October 30, 2012, 11:23 AM

Executive Summary

  • How to cut household exposure to oil prices
  • Spending is shifting from road to rail transport. You need to get out in front of this.
  • How to take advantage of the energy arbitrage that rail transport will offer in future years
  • Important case studies of what's to come
  • The big change ahead (and the argument for optimism)

If you have not yet read Part I: Getting On The Train, available free to all readers, please click here to read it first.

Portland, Oregon is a city well known internationally for its commitment to sustainability. Over the years, the downtown area has been wisely restored into a very pedestrian-friendly streetscape. And while Portland continues to have problems – mainly a weak economy that could benefit from greater diversification – the city continues to attract people from all over the world who are looking for a better place to ride out some of the problems now facing developed economies.

Over the past year, since moving to Portland myself, I've had a chance to do some accounting of how much I've reduced my own exposure to oil. Let me first say that getting oil out of the household budget was not my only reason for moving to Portland. However, as someone who started looking at these issues 10-15 years ago, the prospect of greatly reducing my oil consumption was a key factor in my decision to relocate.

Now, while it's true that reduced oil consumption is more common for everybody living here in Portland, the other important element (and this will seem obvious) is that living in other cities and regions typically means a greatly increased exposure to oil. So while the cost of food, medical care, and many goods is just as expensive here in Portland as elsewhere, it is now rather sobering to consider the burden of high oil prices in other regions from my new vantage point – especially given that oil has found a new equilibrium price around $100 a barrel.

By moving to Portland, we completely shifted the core of our energy consumption to natural gas and also electricity, which in the Pacific Northwest is largely sourced through hydropower. Electricity rates in the Pacific Northwest are either the lowest or among the lowest in the United States. Also, because of the rich offerings in public transportation choices, we were able to drop one of two cars. But there's more... » Read more

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Understanding the Economic Impact of Peak Government

Unpopular choices; no winners
Monday, October 29, 2012, 7:46 PM

Executive Summary

  • The U.S. is less prepared for contraction than the U.S.S.R. was
  • The pressure to print money and the spectre of runaway inflation
  • What we must learn from the Japan example (the U.S. is unlikely to tread a similar path)
  • Why you must expect and prepare for the rules to change

If you have not yet read Part I: Anticipating the Devolution of Big Government, available free to all readers, please click here to read it first.

In Part I, we surveyed the four critical dynamics that will lead to the devolution of Peak Government: massive borrowing, institutionalized mal-investment, erosion of trust in government, and diminishing returns on public debt.  In Part II, we consider how the devolution of Peak Government may play out in the real world.

We are indebted to author Dmitry Orlov for examining how apparently stable global empires can suddenly destabilize, much to the surprise of everyone involved.  Orlov experienced the collapse of the Soviet Union first hand, and in his book Reinventing Collapse, he contends that America is actually less prepared than the former U.S.S.R. to weather the collapse of Central State institutions.

As I noted in my first series on Peak Government, this does not mean government ceases to exist; what it does mean is that government shrinks and assumes a different role in society and the economy.

Though there are many obvious differences between the former U.S.S.R. and the U.S., Orlov’s primary point is that complex, apparently stable governments can destabilize rather quickly once invisible “tipping points” are reached... » Read more

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Off the Cuff: On the Knife's Edge

Options are running out across the board
Thursday, October 25, 2012, 11:11 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris discuss:

  • Phony employment
    • More workers being hired to do less work more poorly
  • Phony hopium
    • Despite QE3, over half the companies reporting Q3 earnings are under analyst expectations
  • Germany entering recession
    • The EU's only functioning economic engine is sputtering
  • Japan on the knife's edge
    • Between crushing deflation and currency destruction
  • Time for our politicians to clarify our priorities
    • What are we not going to do?

As we enter the fall and the upcoming elections, we find the status quo is becoming less and less sustainable on many fronts.

[Short summary tonight due to WS game 2. With all respect to Bob and Jim H -- Go Giants!!]