Mish's Global Economic Trend Analysis |
- Governor Brown Admits the Obvious "We Have Lived Beyond Our Means"; Brown Agrees to Vast Overhaul of the California's Pension System; Unions Howl Over Obvious Truth
- Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation
- Investment Conference Featuring John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike "Mish" Shedlock, Chris Martenson
| Posted: 29 Aug 2012 07:19 PM PDT In a long-overdue moment, governor Jerry Brown has finally admitted the obvious, the state's pension system is broke and California Has "Lived Beyond Our Means". Unions of course are howling at that obvious admission. Please consider California leaders strike public pension reform deal California Governor Jerry Brown and lawmakers have reached a deal to raise public employees' retirement ages, have them pay more into their pension accounts, and cap retirement payments in a vast overhaul of the state's pension system that he says will save $30 billion.Labor Did Not Have Input That my friends is precisely the way it should be. Labor does not deserve any input and collective bargaining by public unions needs to go the way of dinosaurs. There is no public benefit to public unions, so there is no need for them. All public unions do is raise costs. The goal of public unions is to do no work for mammoth wages and benefits. No one in their right mind would willingly take input from such a group. Beacon of Light in Ocean of Darkness The key sentence from Governor Brown stands out like a beacon of light in an ocean of darkness. In case you missed it, here it is: "This is just one in a series of countermeasures that will be required over the next decade." Precisely. Brown's proposal is not the end of what needs to happen, it is the beginning of the beginning of what needs to happen. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation Posted: 29 Aug 2012 10:09 AM PDT According to Forbes, economist Sandeep Jaitly was forced to resign from his position at the Gold Standard Institute after expressing his views with Max Keiser. Said Phillip Barton, president of GSI "Lest there be any misunderstanding, the views expressed by Sandeep Jaitly in his interview with Max Keiser are not the views of The Gold Standard Institute. To the contrary, we strongly disagree with those views. .... Sandeep Jaitly has resigned from his position as Senior Research Fellow with the Institute and we sincerely thank him for his past contributions." Let's Tune Into Max You can read the interview at Keiser Report: Frankenmarkets and Austrian Economics. What appears to have gotten Sandeep in trouble is his criticism that Mises made "too many mistakes". However, Sandeep did say, "He [Mises] was certainly the greatest economists of the twentieth century. It's just that he made a slight, few errors of observation. That's all." Errors in Observation When it comes to errors in observation, Sandeep has made a few of his own. For example consider these statements from the interview: "What I want to make very clear Max is that you don't need marginal quantitative easing from here for asset prices to start escalating. You only need what has already been printed to start spinning more quickly. And once things start spinning, nothing can slow it down." Interestingly, the first sentence is true. However, the following sentences show Sandeep fails to understand the role of attitudes as well as the fundamental nature of credit in a credit-based economy. The statements imply that printed money may come spinning into the economy at any time causing massive inflation the Fed could not stop. There are two errors in such an analysis. The first error is that banks do not lend from excess reserves. Rather, banks lend, on two conditions, both of which need to be true.
By credit-worthy I mean "lending rates are high enough, or assets strong enough for banks to believe they will make a profit commensurate with risk". Clearly banks made serious mistakes in the housing bubble in regards to the credit-worthiness of borrowers (primarily based on belief that home prices would not fall), however, both conditions were met. Sure, banks can start lending again at any time (which is why Sandeep's first sentence regarding no need for further QE to ignite a credit boom is true in isolation). However, the idea that excess reserves are about to come spinning into the economy at any moment is fatally flawed. For a complete rebuttal to Sandeep's mistaken observation, please see Can Bernanke Force Banks to Lend by Halting Interest on Excess Reserves? Attitudes Have Changed Note how much attitudes have changed. Banks are not lending now out of rightful fear of more losses. Very few Austrian economists seem to understand the nature and role of attitudes and credit in boom and bust cycles. Most woodenly stick to views that excess reserves will come pouring into the economy 10 times over causing massive inflation. Careful observation would suggest the economy does not act as prevailing Austrian theory believes it does. Unfortunately, this is why many Austrians have looked ridiculously silly vs. Paul Krugman when it comes to inflation predictions. This is by no means a defense of Bernanke or Krugman, as Bernanke has created other very serious problems and economic distortions of all sorts. Moreover, Fed policies and deficit spending have indeed created boom-bust cycles of ever-increasing amplitude. Indeed, the policies espoused by Bernanke, forever bailing out banks whenever they have gotten in trouble is one of the factors driving money and assets to the 1% vs. the 99%. Clearly, those on fixed income have been destroyed by Bernanke's policies. Bernanke Translated For a short, yet thorough trashing of Bernanke's defense of his policies, please see Mish Translation of Bernanke's Statements on the Treasury Carry Trade and the Tax on Savers. The only way to fix the problem is to end fractional reserve lending and return to sound money. On this point the Austrians are 100% correct. Spinning Out of Control? The second error in observation Sandeep makes is belief that "once things start spinning, nothing can slow it down." That is ridiculous. The Fed could easily rein in inflation by the simple matter of hiking interest rates. Whether or not the Fed would do so is certainly debatable. However, please be aware that the Fed in and of itself cannot cause hyperinflation without purposely trying to do so, and perhaps not even then. Fed Cannot Realistically Cause Hyperinflation The Fed cannot force banks to lend. Nor can the Fed force consumers and businesses to borrow. In a credit-based economy that is what matters most. Once again, my observation is Austrian economists in general have failed to observe this crucial point. Bear in mind that the Total Credit Market Debt Owed is over $50 trillion! From that aspect, the idea that $1.5 trillion in excess reserves is going to come spinning into the economy causing inflation the Fed cannot stop, is simply ridiculous. Sure, in theory, the Fed could print $100 trillion and agree to pay 4% interest on excess reserves, but the Fed is not out to destroy the banking system. Interestingly, if interest on excess reserves was zero, it is debatable whether printing $100 trillion would do much of anything at all other than perhaps cause a brief asset bubble and subsequent crash. I actually doubt it would spur lending or hiring and once again, careful observers will note lending and credit are what matters most. Practical Restraints Remember, the Fed is beholden to bankers. Moreover, the Fed does not want to wreck the system because to do so would wreck the banks and the Fed's power along with it. In a nutshell, hyperinflation fears caused by the Fed are silly. Hyperinflation fears caused by Congress giving away money are more realistic in theory. However, such odds are still extremely low because Congress would not give enough money away in the first place. With a total credit market exceeding $50 trillion, $1 trillion deficits would not cause hyperinflation for a long, long time. That said, a global currency crisis at some point in the future is unavoidable if countries keep on the path they are on. Deficit spending and competitive currency debasement globally for the sole benefit of banks and the wealthy (the 1%) is simply not sustainable. Something has to give somewhere, and it will, most likely in multiple places, at a very inopportune time. Addendum: Max Keiser reports that Professor Antal Fekete Supports Sandeep Jaitly, with Fekete stating "truth can be approximated only through debate and that at no point was GSI envisaged as a 'thought police'". For a brilliant trashing of an article in The Atlantic against the gold standard, please see Pater Tenebrarum's article The Atlantic Weighs In on the Gold Standard Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 29 Aug 2012 12:08 AM PDT I am pleased to announce an economic conference in Sonoma, California on April 5, 2013 featuring some of the best economic thinkers and speakers in the world including...
Sonoma is in "Wine Country", west of the Napa Valley and slightly north of San Francisco. If you like the idea of enjoying great weather, excellent food and wine, plus inside access to many of today's best economic minds – all together in one of the most beautiful places in the world – this conference will likely interest you. Reservations and Details For reservations and details please click on Wine Country Conference. The list of speakers includes select economic forecasters that I respect most. The group includes experts on China, monetary policy, and investment opportunities in a shrinking-yield world. These minds have never all been in the same place at the same time before, so I cannot tell you how excited I am for us all to be together. Net Proceeds to Charity Net proceeds from this event go to an extremely worthy cause: funding research for ALS, more commonly known as Lou Gehrig's disease. Matching $100,000 Grant From Hussman Foundation From now until the start of the conference on April 5, 2013, the John P. Hussman Foundation will generously match $1,000 of each conference registration fee as well as match any donations made to the Les Turner ALS Foundation, up to a total of $100,000. Book Your Conference Reservations Now There will be presentations and panels throughout the conference, as well as ample time to meet the speakers during breaks and mixers. Please book your reservations now. There is a nice discount for those who book early. The total number of reservations is limited to 200. Donations and Raffle Tickets Matching donations continue up to April 5th but raffle tickets are not included in that match. For those not familiar with the raffle, it is something I organized in honor of my wife Joanne, who passed away on May 16, 2012 from ALS. If you missed it, please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs In response to the above article, donations have come in from 40 countries around the globe! See link for details. Raffle Ticket Entries are split 50-50 with ticket buyers in a drawing to be held November 8 (a change from my original posting date of November 15). Ticket sales end September 27, but you can still make a donation at any time. Checks To make a cash donation by check or money order, please send a check or money order to Lacey Wood Mish Campaign Les Turner ALS Foundation 5550 W. Touhy Avenue, Suite 302 Skokie, IL 60077 847.679.3311 (Main) Any questions, please call the above number. Credit Card You can make a donation or purchase raffle tickets by credit card on the Les Turner ALS Site. Some people emailed they did not like entering the information fields required. However, the purpose is only to ensure the foundation knows how to get in touch with raffle winners! People move, phone numbers change, and email addresses change. It's as simple as that. Thanks! Thanks in advance to all who attend the conference, make a donation, or purchase a raffle ticket. Money will be used for ALS research, a very worthwhile cause. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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