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Top 10 at 10: ‘Gold like stone money from Island of Yap’; A 2 tier Australia; Tighter lending but bigger bonuses; Dilbert
November 10th, 2009Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please email your suggestions for Wednesday’s Top 10 at 10. House prices fell 40% in the U.S and that’s before the US dollar fell too. How expensive does that make our houses?
1. 6,000 year old bubble – LSE Professor William Buiter taks aim at gold bugs in this entertaining FT.com column. He declares gold a fiat commodity and akin to the stone money of the Island of Yap.
In a world with multiple fiat moneys, the zero value of money equilibrium lurks for each of the fiat currencies, including gold. Admittedly, as regards gold, so far so good. Gold has positive value. It has had positive value for nigh-on 6000 years. That must make it the longest-lasting bubble in human history.
I don’t want to argue with a 6000-year old bubble. It may well be good for another 6000 years. Its value may go from $1,100 per fine ounce to $1,500 or $5,000 for all I know. But I would not invest more than a sliver of my wealth into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.
2. Two tier Australia – Former Zurich Chief Economist David Hale is a close observer of Australia’s role in the global economy. Peter Martin at The Age has a nice interview with Hale that includes a prediction of a two tier Australian economy where hot demand for commodities boosts Queensland and Western Australia, but forces the RBA to boost its cash rate, hurting the mortgage belts in Sydney and Melbourne. An interesting point for those wanting a single Trans-Tasman currency or thinking of moving to the Lucky country.
Hale also relays some very hawkish comments from the RBA. Here’s a taste.
”I was at conference last week that the Federal Reserve had out at Santa Barbara, California, with all the Asian central banks. Ric Battellino, your Reserve Bank deputy-governor, was there. He was quite emphatic about the need to get your money market yields from what’s now 3.5 per cent to 4 per cent as quickly as possible.
”He regards 3 per cent as exceptionally low, a truly emergency setting. Now that things are OK, they can’t stay there – they have to go to what the bank regards as a cyclically adjusted number for a moderate Australian economy.That’s 4 per cent. If growth gets really strong, they might go back to 6 per cent.”
Mr Hale expects exceptionally strong growth, and another two-Australias scenario with Queensland, Western Australia, and in his mind South Australia, benefiting at Sydney and Melbourne’s expense.
3. Hail Ludwig – This opinion piece from Mark Spitznagel in the Wall St Journal is a timely reminder of the warnings of economist Ludwig von Mises, who highlighted in the 1920s the danger of artificially low interest rates and government intervention. It all seems incredibly familiar in this day and age. HT Gertraud via email.
Mises’s ideas on business cycles were spelled out in his 1912 tome “Theorie des Geldes und der Umlaufsmittel” (“The Theory of Money and Credit”). Not surprisingly few people noticed, as it was published only in German and wasn’t exactly a beach read at that.
Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.
Government-imposed expansion of bank credit distorts our “time preferences,” or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide.
This causes temporarily higher employment, wages and consumption. Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash.
Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.
4. Squid equals shark – Goldman Sachs is known for its blue-bloodedness, but not many know it has been involved in the sleaziest of sub prime lending in the United States. Greg Gordon from McLatchy Newspapers reports on how a couple called the Beckers have just beaten Goldman in a court case over sub prime lending. HT Iain Parker via email. Rob Stock and Emma Page at the Sunday Star Times have also reported on what’s happening with mortgagee sales here. The banks are becoming more aggressive.
Goldman spent years buying hundreds of thousands of subprime mortgages, many of them from some of the more unsavory lenders in the business, and packaging them into high-yield bonds. Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks such as the Beckers.
The couple alleges that Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman’s then-Chief Executive Henry Paulson — later U.S. Treasury secretary — in 2003.
Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman.
In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.
5. Money, money, everywhere – But not a drop to drink. The WSJ reports that US banks again tightened lending standards in the September quarter despite being loaded up with cash from Ben Bernanke’s helicopter.
The Zombies continue to stagger towards stagnation while the investment bankers are set to receive a record US$30 billion in bonuses this year as they use the Fed’s guarantee and near zero interest rates to play on the stock market and debt market casinos. When are American taxpayers and the 30 million plus unemployed and underemployed going to revolt?
“Wall Street is beginning to resemble Clark Gable as Rhett Butler in the film ‘Gone With the Wind’: ‘Quite frankly, my dear, I don’t give a damn,’” Paul Hodgson, a senior research associate on compensation at the Portland, Maine-based Corporate Library, said in an e-mail.
“It doesn’t seem as if even political threat, disastrous PR, envy, rising unemployment rates and home repossessions is enough to get any of these people to refuse the bonuses they have ‘earned.’”
6. Technically insolvent – Here’s a gold bug’s view of the coming commercial real estate debacle in US banking. It includes some good detail from ‘The Golden Truth’ blog on the problems at Bank of America.
A good friend on mine works for a real estate consulting firm in NYC. One of his deals is evaluating a client’s investment in an insolvent commercial property. The deal has $110 million bank loan funded by Bank of America. My friend said the property is worth $30-40 million.
What I found interesting, and which confirms that banks are not even close to marking their assets properly, is that my buddy said that B of A is carrying the loan on its books at the full $110 million. I just did a “drive-by” on B of A’s latest 10-Q. It has $2.1 trillion in assets, not including cash. It is reporting $257 billion of shareholder equity. Now, BAC is over-marking the above-referenced asset by 70%.
Assume across all of its assets, BAC is being generous in its marks by only 10%. This exercise implies that a true mark-to-market of BAC’s balance sheet would wipe out BAC’s shareholder equity. Is this unrealistic? I think, if anything, my analysis errs in the favor of BAC. Why? BAC has $159 billion of home equity loans on its books. We know that, in general, most home equity loans are probably worth nothing. Let’s say BAC’s are worth 50 cents on the dollar (this is generous). That adjustment alone would reduce BAC’s book value by nearly $80 billion. The bank has a loan loss reserve of 3.8% of its $914 billion in loans.
But the charge-off ratios for residential mortgages and credit cards (not including commercial r/e) was 4.73% in the latest quarter for mortgages and 12.9% for credit cards. Clearly, BAC is unequivocally under-reserving for the purposes of managing earnings and mainting its vital capital ratios. And we know that the banks are undeniably stretching out their declarations of delinquencies, defaults and charge-offs.
7. On the way to Mt Kosciusko – Perma bear and Australian housing crash forecaster Steve Keen has lost his bet with Macquarie Bank economist Rory Robertson about prices falling 20% over there. They only fell 3.8% so Keen is about to walk up Mt Kosciusko to fulfill his side of the bet. But Keen hasn’t quite given up yet, as he explains that this is largely because of the government’s first home lenders boost. His charts are ominous.
The main factor behind the revival of the bubble is what is formally known as the First Home Owners Boost (FHOB), but what is more accurately described as the First Home Vendors Boost. As at the end of September–the date of the latest ABS house price data–171,000 applicants had received this $7,000 bribe.
Since many are couples, more than 1 percent of Australia’s population has leapt into the property market pool at the behest of a government stimulus. So how has a mere $1.2 billion injection of government money driven the average house price up by 8% in six months? By the “magic” of leverage: the typical First Home Buyer (FHB) took that $7,000 to the bank and leveraged it up to another $40-50,000, which then was handed over to the First Home Vendor (FHV) as cold, hard cash. The FHV then took that extra $40-50,000 and leveraged it to an additional $200,000-$250,000, which meant that that new place which had been just out of reach prior to the FHOB was now well within range.
Competing with other lucky recipients of government and bank largesse, he drove up the price of that middle to upper tier house by an additional $100,000 or more. The aggregate impact of this government enticement into private debt was that Australian households reversed the deleveraging process that had begun in late 2008, and as a result the mortgage debt to GDP ratio, which had been falling, began to rise once more.
The FHOB has led to Australians taking on an additional $50 billion of mortgage debt. That “demand” factor, far more than any other, is why I’ve lost the second half of Rory’s bet with me.
8. Kill the CDS – Renowned hedge fund manager David Einhorn has called for the destruction of the Credit Default Swap market, the FT.com reports. This is an insider saying this and his critiques are devastating. HT Yves Smith at Naked Capitalism.
David Einhorn, founder of Greenlight Capital, was one of the earliest and most prescient users of credit default swaps. Now he is calling for these instruments, in effect a form of insurance on individual firms (or governments) that pays out when the institution defaults or restructures, to be banned.
“I think that trying to make safer credit default swaps is like trying to make safer asbestos,” he writes in a recent letter to investors, adding that CDSs create “large, correlated and asymmetrical risks” having “scared the authorities into spending hundreds of billions of taxpayer money to prevent speculators who made bad bets from having to pay”.
CDSs are “anti-social”, he goes on, because those who buy credit insurance often have an incentive to see companies fail. Rather than merely hedging their risks, they are actively hoping to profit from the demise of a target company. This strategy became prevalent in recent years and remains so, as holders of these so-called “basis packages” buy both the debt itself and protection on that debt through CDSs, meaning they receive compensation if the company defaults or restructures.
These investors “have an incentive to use their position as bondholders to force bankruptcy, triggering payments on their CDS rather than negotiate out of court restructurings or covenant amendments with their creditors”, Mr Einhorn says.
9. Withholding tax – California is so desperate for cash it has changed the withholding tax rules to collect an extra US$2 billion, the LAtimes.com reports. HT Gertraud via email.
Desperate to close a $26-billion deficit hole, Gov. Arnold Schwarzenegger proposed and the Legislature passed a speedup in personal income tax withholding starting Nov. 1. The withholding increased by 10%, generating a projected $1.7-billion revenue bump in the current fiscal year.
Additionally, starting in 2010, taxpayers required to make quarterly estimated payments will be told to send in 70% during the first half of the calendar year. The state figures to make $250 million off that during the current fiscal year. So all told, it’s a $2-billion one-time boost in personal income tax revenue. And don’t be distracted by words such as “liability” and “refund.”
10. For no relevant reason – This is a video of a flock of birds in Denmark. Sort of cool in a shapeshifty sort of way.
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November 10th, 2009 at 10:51 am
I love how when ever Gold goes up all the so called experts tell us its in a bubble.
Of Course those same experts never called the housing market or the DOW or the US dollar a bubble. I wonder why?
November 10th, 2009 at 11:10 am
David – of course gold does not really ‘go up’. It is the fiat currencies against which it is compared that go down.
The establishment hates gold simply because it exposes the fact that the ‘fiat money emperor’ has no clothes – and that most of his much vaunted ‘gains’ in stocks and housing are simply reflections of monies falling purchasing power over time.
The strength of gold is not in some ‘magical power’ or mystery. It is the fact that it best fulfills the criteria for money laid down by Aristotle and that it cannot be willed into existence by politicians and the bankers who command them.
November 10th, 2009 at 11:24 am
Thanks for the Aussie housing update. I see what happens there as the big wobbler for us here.
We are an outer colony of Aussie after all.
November 10th, 2009 at 11:26 am
Malcolm, completely agree. That is a great piece by Buiter though. As he rightly concludes, just becase gold has no (or I would prefer to say little) intrinsic value, that doesn’t mean it might not go to $2000, $5000 or beyond, so it may be “rational” to hold it. The trick, as always, will be getting out while the getting out is good. Still in an inflationary environment it might be better to hold something that actually pays a dividend and represents a claim on future cashflows rather than a claim on a shiny piece of metal.
November 10th, 2009 at 11:43 am
Gold, Gold Gold, everybody should have at least 10% of his assets in Gold.
Imagine a situation where nobody takes paper money anymore (it happens in time of war and hyperinflation….imagine China during 1900’s and Zimbabwee now) how else can you exchange goods and services ?? Anybody who says Gold is an imaginary bubble is either a Liar or a fool. Buying Gold is like buying insurance ….just in case your paper money turns into real paper !!…at the rate all the goverments of the world are printing and pumping (the latest G20 meeting) this is going to happen sooner than later.
Over the medium and long term, all western economies is going to face stagflation as emerging economies bid up commodities and resources with real savings while developed economies keep printing paper money to pay for them. NZ will be no different. The Kiwi $ right now is in the clutch of “carry trades” arbitrage and risk trading, sooner or later this is going to implode ….then we will have higher and higher interest rates caused by imported price inflation while business assets crash from higher servicing cost of debt…..
November 10th, 2009 at 11:49 am
kin, I agree, but I can’t imagine a situation where governments would allow people to exchange gold coins at the supermarket. They would expropriate gold before they let that happen, which is why Marc Faber recommends holding your gold in Switzerland or Singapore.
November 10th, 2009 at 11:51 am
http://www.guardian.co.uk/environment/2009/nov/09/peak-oil-international-energy-agency
More support to the peak-oilers out there.
November 10th, 2009 at 12:32 pm
Good reference Sam_M. I was just blogging about a certain Prof, attatched to the IEA, who gave us a talk last week, complete with the IEA’s ‘Slide7′ from last November.
Looks like the pidgies are coming home to roost. For those who don’t know, the IEA always just took ‘demand’, then projected ’supply’ to match it. It then sold the ’supply’ data to guvmints – folk like Brownlee. What a lurk!
Last year, they did a survey – their first. They used 800 fields, an interesting number coincidentally the same as a ‘peak-oiler’s prior study.
It didn’t match their ‘predictions’ (smoke and mirrors are like that sometimes) so they constructed a graph – Slide 7. It has a big red area, starting from nothing currently, and widening exponentially over the next couple of decades. The red area is called ‘yet to be discovered oil”.
Now, discoveries peaked (sharply) in 1964. They’ve done nothing but decrease since – a long global trend. Hardly noisy data, and you can google image the graph – just go ‘Global oil discoveries’
That red area is therefore totally unjustified, and interestingly, it is hand-pixelled in! It seems not to follow a bezier/fairing line, and the undulations don’t print through from below – as layer-cake graphs should.
There’s a word for that! I hope Brownlee cancels the cheque…
November 10th, 2009 at 12:55 pm
Yes the chickens are coming home to roost at the IEA.
I have been cogitating for some time whether NZ urgently needs to form a State oil company to take control over our oil resources and plan their extraction in a strategic manner (our resources are not insignificant – small but useful discoveries are being made in the Taranaki basin and there are other prospective basins all around NZ). I am generally against state interference in such areas but oil will become a vastly important commodity as peak oil pans out. State oil companies are not simply the preserve of command economies – Norway has a very effective national operator, and profits from their oil industry are invested in a long term fund for the nation.
At present the NZ model for oil extraction is very similar to that seen in other market economies, with some local champions (NZOG, Origin, Todd) and overseas operations, mainly Aussie (eg AWE). Royalties are paid to the Treasury etc. But rather as in the UK, oil is produced in NZ fields at the fastest rate it can be whenever these companies find it. The UK is now facing the fact in a peakoil world this approach has been a strategic disaster – their production is plunging, they are now net oil importers, and most of their oil was sold off cheaply in the 1980s and 1990s at less than $25 a barrel. Oil revenue in the UK was wasted over a 20 year period in simply propping up a vast and bloated welfare state.
November 10th, 2009 at 1:00 pm
@Powerdown…new IEA report tomorrow? wonder what its going to say…
Brownlee et al have been happy to write cheques because the info agrees with what they want it to say….there are going to be some upset ppl….
regards
November 10th, 2009 at 1:07 pm
Buiter says “I would not invest more than a sliver of my wealth into something without intrinsic value”. He is implying that gold can be valuable or not without any reference to who it is good or bad for. ‘By attempting to say gold has no value regardless of context undercuts how we decide if an object is of value. Value is relational. To exist, it needs a valuer and a goal. We say that water is good because it is necessary to live. Too much water, in the form of a flood, can kill us. Water in that context is not valuable. But according to intrinsic value, it would still be, or water wouldn’t be valuable ever’. (excerpt from importanceofphilosophy.com)
Those pieces of paper or polymer in your wallet are much more useless than gold since their lifespan is limited as are their uses. Gold can be used in industrial applications and in artwork.
I am sure that he does not really mean to say that his assets are all tangible. I am sure he has stock certificates, bonds, and currency – all of which can become just as worthless as he claims gold could be. Except that gold would either have to be replaced by a substitute form of matter or have huge new reserves located to become obsolete. Politicians printing more polymer/paper or corporations raiding their treasuries can more quickly and easily debase the value in his paper (meaning that paper holds no intrinsic value either!).
Justin
November 10th, 2009 at 1:35 pm
I am surprised at this from Buiter. He generally talks sense.
November 10th, 2009 at 1:44 pm
This is a fasinatiing piece…markets are rational and self-balancing….yeah right.
http://www.debtdeflation.com/blogs/2009/11/06/my-per-capita-talk-on-debt/
November 10th, 2009 at 1:45 pm
Do we know how much oil we export – I hear its a signficant amount of our exports
November 10th, 2009 at 1:50 pm
Duggie: we export some but its too good a quality to process here, I think it fetches a premium and we then buy the cheap stuff as our refinery plant is built to refine the “cwap” cheaply.
If we were sensible we’d cap the wells….
regards
November 10th, 2009 at 1:54 pm
The deficits of the States are only getting worse. They are already falling behind the current fiscal year budgets and next year looks very bad (200 billion+). They have no choice but to raise taxes even and make cutbacks (since they balance their budgets). The taxes (excise sales etc) will likely hurt the poor the most. I see it as the tipping point to a drop in consumption and a slide backwards. This and the news of tightened lending standards and mounting evidence that the broth death model is overstating the recovery make the situation look very bad. Then there is the baby boomer problem. ugly.
November 10th, 2009 at 2:06 pm
Not fair. We’re only ugly ‘cos we.re getting on a bit…
November 10th, 2009 at 2:17 pm
Most of our oil produced in the Taranaki is sweet light crude which is priced at a premium to Tapis (the Singapore benchmark) – it is, as Steven said, mainly exported for refining abroad (another situation which needs to be looked at closely – is this the best strategy for NZ?).
Production surged as the Tui oilfield came online about 2 years ago (and it made a measurable difference to our balance of payments) – however in common with many such fields this Tui is a rapid depleter and hit its peak not long after extraction began – it will still produce meaningful amounts however over the next 10 years or so. It is highly likely that development of secondary wells in the Tui complex will boost production again in the next 2 years.
Other Taranaki fields are coming online as we speak – the Maari field will yield at least as many barrels as Tui stage 1 (around 50million) and again will produce over 10 years or so. Kupe (primarily as a gas field) will also produce significant amounts of condensate (effectively light oil) when that comes on stream next month (again with a life of 10-15 years).
Taranaki prospects such as Albacore and Hoki (which will be drilled in the next 4 months) might well contain 100m barrels each – and there are significant other leads as well.
The Taranaki offshore basin is our most closely studied offshore basin – but there several other very promising basins, foremost amongst which is the Great Southern Basin (where test drilling may start in the next 2 years). It is believed genuine ‘elephant’ fields (500m barrels plus) may be found down there.
Much promise – but given peakoil is now finally starting to become mainstream thought why arent we starting to look at our oil resources in a more strategic manner?
November 10th, 2009 at 2:24 pm
Birth/Death Model, Lew, or the Dead Soup model!
November 10th, 2009 at 3:02 pm
I had read recently that post-Tui coming on stream, that the value of NZ oil exported was worth 70% of what we imported.
November 10th, 2009 at 3:03 pm
Thanks for the link Sam.
You could of course substitute ‘NZ’ for ‘British’/'UK’ in the article.
Both are do-nothing member govts that use the fudged IEA figures to justify doing nothing whatsoever to prepare their countries for the consequences of declining oil production. The IEA says that we’ll be fine, so we’ll just borrow more to spend billions on new roading projects. And let our railways run down ever further.
The IEA really needs to come under more scrutiny. One day we will look back and see how disastrous was NZ govt’s reliance on the IEA’s baseless prognostications.
November 10th, 2009 at 3:10 pm
Reply 19 to Willem’s article
Quote:
19. The biggest message from this article is the continued arrogance of economists and the frightening state of how little they actually understand about the way things work, their lack of humility, and worst, the fact they don’t (Krugman’s relentless attack on macro an exception) seem to have any clue about said ignorance, so as to give us hope they may ameliorate the situation.
What Mr. Buiter is essentially saying is that “by my economic reckoning, gold should have no value. So by conclusion, everyone for the last 6000 years who has for whatever reason imbued it with value is wrong.”
This is close to faith-based religion. “I don’t care how little evidence there is for [pick the religious belief], I’m right and everyone else is wrong.”
Now far be it from me to claim a complete or even small understanding of where gold gets its value. If I had to take a stab at it, I’d say its value simply comes from the fact that people give it value, and what gives value is not what Mr. Buiter and his ilk think SHOULD give value, but rather what ever to a given person DOES give value. For example, if to an individual having a few gold bars around makes him more confident about his financial situation and hence sleep better at night, that represents real value.
I do know one thing. If I had a theory, and the entire history of humanity provided not a single instance of evidence for it, I think I would stop looking at the entirety of humanity as being in error and start looking at myself.
Posted by: RN
November 10th, 2009 at 3:15 pm
I got to sample some of that Tui crude down at my local surf break when the spilled some a while back. I’m obviously not an expert in grading oil, but I wouldn’t have called it either light or sweet.
November 10th, 2009 at 3:21 pm
“why arent we starting to look at our oil resources in a more strategic manner?”
Because our Pollies cant think in a strategic manner…I think the King Of Saudi said when asked about opening up additional new oil fields, “no leave it in the ground our grandchildren will need it” (paraphrase). I dont think we in the west think strategically….like I said if it was me I’d cap the wells….I’s also get biofuel plants going from waste tallow(?) that was proposed to the then Labour Govn last year or the year before. So while I cant blame Brownlee on that one its clear he is no better, he’s a plonker IMHO…
November 10th, 2009 at 3:36 pm
Re #10
For anyone who is interested or who is just as sad as me and has a fascination with this stuff:
http://findarticles.com/p/articles/mi_m1200/is_n11_v137/ai_8843467/
November 10th, 2009 at 3:39 pm
@Steve N: Gold (or paper) money is a proxy for energy….gold itself is almost valueless…its not used for much except odd computer parts. Its considered valuable because of the relative rarity and hence effort/energy needed to extract it…so really I can go somewhere with gold and buy something useful like food or petrol….so its a “holder” of value which is swapped for energy.
If you had to get gold out of the ground in order to get food to eat, and they are of equal value, then ultimately does it make sense to dig for gold or grow food? really the answer has to be grow food, food has a real value…any excess food is (could be) used to get gold, to store value for future use in a sensible world anyway. To me this is why economists etc have lost the plot….they think money is valuable…its only valuable if there is something to buy with it….example Japan said (last year?) that it only grew 36% of the food it needed and it had to turn that around and get to at least 43%…..then consider that India (and Vietnam?) as excess producers of rice stopped shipping grain abroad…So where would Japan e even if it had gold? India was keeping the rice to feed its people so all the gold would make no difference, Japan couldn’t buy food….
So this is where I think Buiter is coming from, its how I think of it anyway.
regards
November 10th, 2009 at 3:44 pm
Taken to an extreme , if we are parched in Sturt’s Stoney Desert , and you have a bar of gold . But I have a litre of water . Who is the richer of the two of us ? …….. Now back to reality , in a world of 6 billion people , why do we not respect our water supply more than we do !
November 10th, 2009 at 3:44 pm
@Trev: Thanks, interesting….so two sad individuals…
;]
regards
November 10th, 2009 at 3:46 pm
Steve @ 3:10,
I think you (or the respondent you quoted) is overthinking it a bit. Buiter’s choice of title was perhaps poor, if intentionally controversial. All he is really saying (I think) is that people shouldn’t think gold is so different from any other currency, because the only difference really is it’s relative scarcity. At times (like these) that is a crucial difference – other times, less so.
Don’t forget money is supposed to have 2 purposes, to be a store of wealth and a medium of exchange. Gold does the store of wealth thing well, but it’s not so good as a medium of exchange. Moving off the gold standard has probably on balance made for faster growth, albeit in a boom-bust fashion. Keeping the money supply “right” is a tough balancing act, one that should probably be left to the market rather than the central banks.
November 10th, 2009 at 3:47 pm
@RT: The guy with the bar of gold, you use it as a weapon to kill the other one, that way you get water and get to eat him…uh…..need some matches and wood though…raw human sounds a bit OTT…..hmmm I wonder if Jerry Brownlee would crisp well…..there has to be some use for him….
;]
regards
November 10th, 2009 at 3:47 pm
Andy H, I’m assuming (without having any figures in front of me right now) that we wouldn’t be self sufficient even after those additional fields have been brought into production? We’d still be a net importer even at peak production rates??
IIRC isn’t our total consumption is something like 50mb / year??
November 10th, 2009 at 3:47 pm
Well put Hamish.
Nice info Any.
steven, NZ government sorting out biofuel plants? Tell him hes dreaming.
November 10th, 2009 at 3:56 pm
To expatiate my point , we are blessed in NZ with relatively reliable rainfall pattern . A glut of water in the far north , and the western coasts . How to harness this for a thirsty world , and to put gold into our pockets . ” Green Industries ” ?
November 10th, 2009 at 4:07 pm
Trev @ 3:36pm
Reminds me (another “sad individual”) of this quote from money manager Jeffrey Epstein:
“The behavior of termites, together with ants and bees, is a precursor to trust because they have an extraordinary ability to form relationships and sophisticated social structures based on mutual altruism even though individually they are fundamentally dumb. Money itself is a derivative of trust. If we can figure out how termites come together, then we may be able to better understand the underlying principles of market behavior — and make big money.”
November 10th, 2009 at 4:12 pm
@DC: I think of gold as relatively better than paper…gold probably is a good medium of exchange except when your economy is based on debt…and constantly growing debt….the Steve Keen bit on debt is well worth watching IMHO, especially at the end….its very stark….IMHO, especially on the time scales….he’s talking decades to correct…
November 10th, 2009 at 4:14 pm
@RT We grow food, but climate is changing so some areas of NZ get dryer, some wetter…then shipping it wont be economic…oil will cost too much…
regards
November 10th, 2009 at 4:14 pm
Matt – as of 2007 consumption in NZ was 156,000 barrels a day = 57m barrels a year
When Tui was going full blast I believe our total production was about 60,000 barrels a day (22m barrels a year) – it has since fallen back as Tui has faltered but with Maari etc coming on stream soon it will jump again – back to the range 20-30m barrels a year I would imagine.
Crown minerals have more details.
Graphically you can see the Tui effect here:
http://www.transitiontowns.org.nz/node/246
Its likely that NZ production will bounce up and down as the Taranaki fields come on stream – so far they have all been rapid depleters.
If prospects such as Albacore and Hoki are proved – it is entirely possible that we can get close to being net exporters for a time.
But the whole point is – oil is so valuable that we should be thinking very carefully as to what our optimum strategy should be. Particularly when off shore fields like this deplete so quickly – should production be maxed out (as now) or preserved, or slowly rationed?
November 10th, 2009 at 4:15 pm
@Luke: hence no strategic thought…Govn’s job is to engineer stability and security over time.
regards
November 10th, 2009 at 5:28 pm
Sam, powerdownkiwi, Andy H, etc
Chris Martenson (who Bernard sometimes links to for his brilliant financial analysis) has posted today on the Guardian article, calling it “explosive”, and referring to the implications as “enormous”.
http://www.chrismartenson.com/blog/its-really-bad-oil-reserves-intentionally-overstated/31155
November 10th, 2009 at 5:31 pm
The problem with ‘pollies is the 3 to 6 year window – they don’t think far enough ahead to be strategic, and 60% of us suckers voted for tax cuts…. which suggests we’re not much brighter on average.
November 10th, 2009 at 5:32 pm
@Steven. Government should provide health, education, law and justice. Leave the engineering of biofuel plants to the engineers.
No NZ government can engineer stability and security in 3 years. Our system is set up for lack of strategic thought. Singapore-style is not the answer. Have you been? Nice, but immensely boring unless you are 35 and earn 100k. ‘Progress’ at the expense of… whats that word… culture?
At least our lack of direction keeps NZ interesting (including conversations on this blog).
Personal solution: remove yourself from the daily monetary system as much as possible… http://www.earthship.net/
November 10th, 2009 at 5:33 pm
I see Hanover investors continue to get screwed – returns to investors now down to 70c in the $:
http://www.stuff.co.nz/business/3049482/Hanover-investors-face-lower-returns
History shows us that as time passes these projected returns get cut progressively. Should have called in the receivers………..
November 10th, 2009 at 5:38 pm
Great news YT. I might include oil and gas with my copper and gold. Can’t say I’m surprised at the suggestion the govts have been lying, it’s what they do best most often. Sure looks like the markets have woken up to the demise of the Dollar, finally!
Wonder how high the Kiwi will fly. Goodbye export lead recovery, right Alan? Oh look, all the immigrants are heading somewhere else…good.
November 10th, 2009 at 5:41 pm
Andy, thanks for that… agreed though a strategy is needed.
Personally I am of the view our reserves should be preserved, and then only used for core / critical services and functions when other sources of supply are disrupted. Thought needs to be given to mitigating the risk of unreliable or unavailable future supply. And then, only using our reserves carefully to help transition the country to a low energy low (or even zero) growth economy.
However I would also argue that we should have already started on that transition.
November 10th, 2009 at 5:49 pm
Ooooops, ratepayers face massive bills in Auckland, North Shore, Waitakere, Tauranga, Wellington and Christchurch, to fix the leaky rotting Rubarb homes. Well done those professional builders and professional architects and gifted council inspectors and brilliant manufacturers of crud cladding and sellers of shit wood and let’s not leave out the greatest bloody morons of the lot…the fatheaded politicians who made a stupendous cock up of the regulations from the get go. Take a bow all of you.
November 10th, 2009 at 6:10 pm
Yeah – I was biulding at the time, but I did upgrades of old villas. The thought that struck me then, was that they’d gotten arrogant enough to forget that rain falls, and quite often in a downward direction.
November 10th, 2009 at 6:10 pm
No need to put the wood down Wally.
November 10th, 2009 at 6:11 pm
Wally – do you think this leaky home business will culminate in councils facing a situation of effective insolvency, with prime assets then having to be sold off at cents on the dollar? Such assets would be very attractive, because they generate an effective income via rates – which people are forced to pay largely irrespective of their financial/business circumstances.
I have often thought that people do not believe a ‘Weimar’ style debt repudiation would be a risk in countries like New Zealand because we don’t face ‘Versailles’ like reparations. However, we face massive other liabilities – that we cannot realistically pay – and it would be fascinating to know how just one of these (leaky buildings) shapes up in terms of dollars?
November 10th, 2009 at 6:16 pm
Malcolm
Did you see on the news the shock and horror. Our food prices are up %42 in 10 years. I dont get it, what do people expect when we have inflation at over %3 and it keeps compounding? If it was less then our inflation figures would not be credible. In the next decade expect similar results but expect the China effect to suppress wages.
November 10th, 2009 at 7:09 pm
Always smell a rat when percentages, long timeframes, and eventual big numbers are used. It’s not done to impart information. It’s done to spin, scare or stir…
November 10th, 2009 at 7:31 pm
This NZ Energy Quarterly Report has a good summary of energy in NZ.
http://www.med.govt.nz/energy/nzeq/
This goes in to everything in more detail.
http://www.med.govt.nz/energy/data/
November 10th, 2009 at 7:44 pm
Malcolm: spot on with gold. Equities are overbought, the correction I thought would happen in October has shifted to March. Mauldin expects capital to shift into Treasuries when the panic starts, with a strengthening of the USD and a drop in the gold price. What do you think? I recon, buy now and hang on to it. But if it dips for a season I’d be kicking myself.
November 10th, 2009 at 9:05 pm
Doug, although I closely monitor the price of gold – because I write about it – my main interest in the metal is via the view that it will be ‘re-monetized’ in due course. In consequence, I tend to see the aquision of the yellow metal as more a ‘capital building’ exercise than an ‘investment’ per se. Above everything I want to see an end to our system of debt servitude that is doing so much damage in so many ways to New Zealand and elsewhere.
What is interesting (and a potential trap for gold ‘investors’) is that the price per ounce can be moving one way in $US terms – whilst it does the opposite in $NZ terms. There was a tendency to this late last year, with a ‘lackluster’ performamce from the yellow metal against the greenback but a very marked advance against the Kiwi. What appears to have caused this was general asset weakness with the sharemarket collapse which, of course, put an upward ’squeeze’ on the $US – presumably as people liquidated everything they could get their hands on (which required disproportionate settlement in the American currency). I assume this is why Mr Pretcher is of the view that the $US will, contrary to popular opinion, undergo something of a renaissance because deflation has not gone away and people are going to need money – ie US Dollars.
I am certainly of the view that the financial pathology is deeply deflationary. After decades of lunatic credit expansion I don’t really see how it can be anything else! Yet I would suggest this is the very environment in which hyperinflation is possible, because the reaction to the deflationary trend is for governments to ‘counter-stimulate’. In effect, it was this – taken to grotesque excess – that delivered the Weimar disaster in Germany. Within that I think you can argue that the Weimar Hyperinflation was actually a form of ‘deflation’ since – although exploding – the money supply was arguably shrinking in terms of the growing number of Marks needed for the simplest transaction. This led Adolf Hitler to observe the irony of people starving – whilst their coat pockets were stuffed with billions in useless paper notes!
I genuinely have no idea what is going to happen, but I incline to the view that our current fiat money system has an appointment with history. If Mr Pretcher and other ‘irredeemable deflationists’ are right then I guess economic forces will overwhelm attempts at stimulus, sharemarkets will get pounded, and gold will probably fall (certainly in $US terms). However, if deflation is ‘redeemable’ into the nightmare of hyperinflation then sharemarkets could boom to unimaginable levels (as happened in Weimar Germany) and gold will presumably follow suit. Ahead of monetary reform in late 1923 a single troy ounce of gold had risen to some 87 trillion Marks. Question is, would it have bought you any more goods or services than an ounce at around 300 Marks in 1919?
In sum, unless we are soothsayers, I think it is very difficult to pick the price of gold – especially in the short term. When the price is going up all manner of commentators seem to appear declaring this is the big one! Then, if disappointment follows, things quieten down. Moreover, never forget, the conditions in which the gold price goes to the moon are not ones in which you would wish to live. The old maxim “about putting some money into gold – and hoping like mad you have made a mistake” – contains considerable wisdom in my view.
November 10th, 2009 at 9:42 pm
@Luke: I think it was a private business that wanted to set up a small or pilot plant using NZ’s excess talow to make bio-fuel….they went back to the UK after I assume the Labour govn wouldnt give them ’something” ie a tax break or some such…short sighted IMHO…once the plant is on NZ soil, its here….we have security of its output…
regards
November 10th, 2009 at 9:52 pm
“In sum, unless we are soothsayers, I think it is very difficult to pick the price of”…..anything….IMHO…
All I can see is three un-savoury roads……inflation, stagflation or deflation….I still dont know which of the three we will see….or maybe all three but in what order….and the time span….but I dont see 1 year….then all will be well….I think that’s fantasy….
regards
November 11th, 2009 at 8:01 am
Luke…go to…http://www.consumerbuild.org.nz/publish/leaky/leaky-timber.php
You also ought to research to learn who it was that pushed for the 1995 change to the building code…and who was stupid enough to allow it…these are the guilty fools.
November 11th, 2009 at 8:10 am
Malcolm: Thanks for that. Indeed it was Robert Prechter that is making the call for a stronger USD. I don’t think holding gold for the sake of it is what I have in mind. The stuff is just too difficult to break down or secure. Rather, I foresee a collapse of most current national fiat currencies and the introduction of a new global fiat currency – loosely based on a basket of currencies, gold, and perhaps even oil or carbon credits. To me gold is not so much an investment as a barometer of the value of everything else, and a safe place to wait out volatility, after which it can be used as collateral or exchanged for hard assets. The danger of a type of FDR confiscation is all too likely. But in the end I agree; predictions as to market movement are near impossible given the opaque happenings involving shadow banks and dark pools.
November 11th, 2009 at 8:20 am
My pick is a new currency based on energy. Or at least a tagging of existing $ to energy.
Why?
Because you can’t do anything – and I mean anything – without it, and it’s going to be the the linchpin scarcity.
We’ve never been there – yet – but it’s absolute essentialness will knock gold into a cocked hat.
No $ charge for the prediction , just post your kilojoules to Box 123……..
November 11th, 2009 at 8:38 am
RE: “Robert Prechter” I dont see how the USD can be strong or get stronger myself, I do think a depression is now the most likely scenario though……I also dont think the markets can be predicated using “wave” theories (this suggests rationality which I fail to believe at least at this moment in time) so anyone who subscribes to these isnt someone Im going to take at face value….I guess its possible that the USD will go stronger relative to most other currencies but its a Q of who has the steepest death dive I guess….I hope NZ stays sane and just rides this out as best it can….taking risks and/or spending to kick start growth I think isnt a starter yet….
I do find it interesting that those with “intelligence” (or maybe a track record in predicting accurately would be a better way of putting it) seem to be all pretty much negative? or really negative….?
regards
November 11th, 2009 at 10:49 am
on the leaky building thing, why is Hardy’s nearly always included in the first sweep of the net, yet at the pointy end they seem to have extracted themselves?
November 11th, 2009 at 12:31 pm
Steven: There is a direct inverse relationship between the dollar and equities. Karl Denninger posted something on this today. http://market-ticker.denninger.net/archives/1611-FedSpeak-Translation-There-Is-No-Recovery.html
Prechter talks about it in this interview on KingWorldNews. http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2009/8/27_Robert_Prechter.html
Hey pal. I know this is nuts.
November 11th, 2009 at 1:19 pm
Steven, I’ve never really understood the Eliot Wave Theory but, as a historian, there is no doubt that ‘cycles’ seem to exist. Think back to the Bible – with a period of ‘lean’ following a period of ‘plenty’. I think what Mr Pretcher is pointing out is that in a depression people need cash in order to settle debts and buy necessities etc – yet in such circumstances cash is scarce. In consequence its relative value tends to rise. Within this I believe the point has been made that most of the ‘monetary expansion’ of recent years has been by way of instruments of credit – not banknotes. Credit can of course implode/cease and I guess it is in this scenario that tangible ‘money’ becomes more valuable due to its relative scarcity. Whilst, theoretically, the authorities can compensate by monetizing everyones debts it is not clear that this can be done in practice. Hence the conundrum! Do we get outright deflation or hyperinflation. Unfortunately, not having a crystal ball, I don’t know!!!
Powerdownkiwi – it is interesting to note, that when measured against gold, the price of oil has not really moved since December 1945. Gold will not be “knocked into a cocked hat” by energy scarcity – it will simply offer a more reliable mechanism for measuring the true price progress of said energy than paper money – which is always under the command of vested interests. My ’suspicion’ about the coming energy ‘crisis’ is that it actually has more to do with an anticipation of western governments that they are going to have to try and monetize their debts some time hence – thus destroying their currencies. This will leave country’s like Britain struggling to afford oil and gas from places like Russia – because the purchasing power of the national currency will have been weakened and, perhaps, destroyed. From a political perspective it is rather better to ‘dress’ these things in some campaign to save the world than to admit that your country is a basket case that can no longer sit at the top table.
November 11th, 2009 at 1:25 pm
Found this out today on “The Age ”
MICHAEL HUDSON
November 11, 2009
“HIGHER land and house prices typically lead to an increased supply of housing. Yet at the peak of Australia’s perennial housing affordability crisis, the Housing Industry Association declared that there would be a 13 per cent fall in housing starts this calendar year, compounding last year’s 18 per cent fall.
In light of massive rezonings in Victoria and improved planning bureaucracy in many states, this can only be seen as a warning that property insiders expect there to be a price crash”…..and what’s the bet we are in for the same in Noddyland.
November 11th, 2009 at 1:35 pm
And of course I agree with you, Wally. I have the same aura (?) about me in my wider family as I am sure Steve Keen and Bernard Hickey do in theirs! But let’s not forget that Michael Hudson was trotted around Australia for talks supporting Dr. Keen’s views, so there could be a wider agenda in his comments, here
November 11th, 2009 at 1:51 pm
Maybe we should all head for Coober Pedy Harriet! No building regs there. Reports on collapsing property would take on a whole new meaning. When the sprogs start demanding extra space just reward them with a pick for xmas.
November 11th, 2009 at 2:00 pm
The Speaker is really putting the screws on Hone…demanding Hone pay back $1000…Haaaaarrrrrrrrrrhaahaahhaa. That’ll have Hone in a Hone st fit of laughter.
November 11th, 2009 at 2:04 pm
Malcolm: Ditto.
November 11th, 2009 at 2:39 pm
When I first started buying physical gold it was around US$450/oz. I recall the pronouncements made against owning gold back then were very similar to those Buiter espouses. One thing has advanced substantially in the interim – and its not the quality of the anti-gold arguements.
November 12th, 2009 at 7:18 pm
Amazing (or maybe not so amazing given the current administration) that the thieves and incompetents that got us into this mess have been given the money and authority to pass judgement on those businesses that are suffering because of them. i’d wager that most of the interest free loans go to their friends and family.
business loans
November 12th, 2009 at 7:33 pm
A good read on gold by Martin Armstrong at Nats blog, Its on Scibd Unfortunately.
http://economicedge.blogspot.com/
March 13th, 2010 at 10:54 pm
Here’s the problem. Traders are in control of your money. If they make money (no matter how) they get a nice huge gargantuan bonus. If they don’t perform, they are fired, there is no middle ground. This is the state of the banking culture and the root of all our problems. It can be expressed with one word: greed!