The FED Conducts a Survey, Portland Rain, and Musings on Price Formation

 10/29/2010 Portland, Oregon – Pop in your mints…

It is raining in Portland, as is the custom here this time of year.  The rain in some way, shape or fashion starts in November and continues until June.  One just gets used to it.  It is hard to explain but being wet is simply a way of life during these winter months.

The FED goes up and DOWN to the Canvas with QE2 survey

In the same way that one can wake up in Portland on any given day and expect rain, it appears that the financial markets are getting ready for winter as well.  For those of you who glance at our Key Indicators below, you may have noticed that there has been little if any great swings in the data.  Why is that?  Could it be that the financial world, after so many recent fits and starts, has begun to enter into a state of equilibrium?  Oh, fellow adventurer, how we wish that were the case!  The general agitation that makes The Mint necessary would be gone and humanity would march forward unimpeded, onward and upward.  We could simply tend our garden, as Candide concluded.

But think about it, how much further from the truth could that be?  Look at the world around you, does it make sense that equilibrium has been or could be achieved?  Ludwig Von Mises, the great Austrian Economist, when pondering final prices, postulates that what we may call a "final price" is a fiction in the real world.  You see, at any point in time a commodity, given all of the supply and demand data available, would be sold at a certain price in order to spend all of the supply and fullfill all of the demand for that commodity.  That certain price is the final price, right?  Wrong!  Von Mises, wise as he is, quickly recognizes that to understand the basis of price formation (supply and demand coming together) is to understand that it is impossible to arrive at a universal final price.   Once the price is set and someone makes a sale at that "final" price, it changes!  The nerve of those prices!  Why does it change, you ask?  (and we are glad you asked!)  Because the supply of the commodity has changed as well as the demand.  Since supply and demand data change, a NEW final price for the commodity comes forth, and so on.  This simplified answer doesn't even contemplate other changes in the data such as someone else deciding that they want the commodity who before had no use for it, or changes in production costs which could inhibit supply, the weather, etc.

Can you see now how absurd it is to assume that an economy can be centrally managed?  That prices can and should be static?  The only place this could happen is a place where life has ceased to exist.  Most of us, however, prefer life.  As a by product of this preference, we get a beautifully dynamic economy and constantly changing prices.  This, fellow adventurer, is the reality in which we live.  Do you know that the only cure for high prices is, in what seems a paradox...high and yet higher prices?

I leave you to ponder prices as we divert our attention, to the actions of the Federal Reserve.  From Bloomberg:

The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth. 

It appears that, while every eye in the investment world is on the FED, the FED is asking the bond dealers to tell it what to do!  And these folks "independently" manage our money supply?  As Jesse Ventura used to say as he witnessed a pile driver, Oh My!!!

Hold on to your hats, fellow adventurers! 

Stay Fresh!

David Mint

Key Indicators for Friday, October 29, 2010

Copper Price per Lb: $3.77
Oil Price per Barrel:  $81.93
10 Yr US Treasury Bond:  2.66%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,342
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,113
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000

Countdown to November 3rd, How much is too much?

10/28/2010 Portland, Oregon – Pop in your mints…

How much is too much?  That is the question that the world is waiting for the FED to answer at its meeting on November 3rd.  How many dollars does the world need?  When should they be supplied?

Now that we have at least a baseline understanding of what money is, can you tell me how much money the world economy needs to operate efficiently?  Does it need $15 trillion, the CIA’s estimate of the narrow money supply (M1)?  How about $54 trillion, the CIA’s rough estimate of the global broad money supply (M3)?  How about $70 trillion, the CIA’s rough estimate of world gross domestic product?  Where does the CIA get their numbers, anyway?

The CIA's Economic Data Center!

The economists at the CIA do what any other self respecting economist does, they calculate data based on what just happened and bet it will keep happening, only more, or less, or the maybe same amount if it.  Of course, there is a simple, three word answer to this extremely important question posed above.  That answer is (or should be) WE DON’T KNOW.

Let me pose another question to bring this down to a more personal level, how much bread will you need this year?  How much milk?  Or if you own a car, how much gasoline will you need?  Can you give a precise answer for any of these personal needs?  Now make these estimates for your neighbors, your town/city/country.  Now that you are planning for your neighbors, etc., we need to determine inputs. We ask the now obvious questions, how much grain do we need to plant?  How many cows need to be born?  How much crude oil do we need to drill? 

Do we dare to venture a guess, knowing that the lives of others may depend upon these answers?  In a world of scarce resources, how do you allocate them to cover everyone’s needs for the coming year?  Give up?

The point is that no individual or group of individuals is equipped to give an adequate answer to these or any other questions.  There are simply too many moving parts, unknowns, and variables which are inherent in speculation regarding the needs of the future.  Every government that has attempted central planning on a large scale has only succeeded in one thing, increasing the general misery of their constituents with often disastrous human costs.  But that does not stop them from trying!
 
After a modest amount of sober thought on the matter, it may be logical that central planning for natural resources will lead to less than optimal utilization.  However, the premise that an individual or group of individuals can determine the right amount of money and credit available is widely accepted as sound economic doctrine on a global scale!  Yikes!!!  Anyone as intelligent as yourself, dear reader, will quickly realize that money is simply another resource, one which possesses certain attributes which we have taken great pains to explain.  The problem is that money is not just any ordinary resource.  Rather, it is the very resource which either directly or indirectly affects the allocation of every other resource on the planet.

Given the documented problems or and disasters caused by attempts at large scale resource allocation, what makes us think that central planning of money would turn out any better?  Given the inherent risk that goes along with nearly every human activity, the money supply, or rather, the relative purchasing power of a unit of money, NEEDS to be stable or reliably predictable.  In order for humans to plan and coordinate their activities in a coherent fashion, the money supply cannot be subject to wild swings, swings which the use of paper and electronic currency virtually guaranty.

Did you ever wonder why there are so many seeming contradictions and things that simply don’t make sense in our modern world?  If we grasp the primary contradiction, which is the notion that the money supply can and should be centrally managed, we can at least hope to make sense of the minor contradictions we observe every day and, in the best case scenario, avoid their damaging effects.

Stay Fresh!

David Mint

Key Indicators for Thursday, October 28, 2010

Copper Price per Lb: $3.78
Oil Price per Barrel:  $82.08
10 Yr US Treasury Bond:  2.71%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,328
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,126
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000

What is Money? – Part IV

10/27/2010 Portland, Oregon – Pop in your mints…

Please follow these links to see previous episodes in this series:
What is Money? - Part I  
What is Money? – Part II  
What is Money? – Part III

So we are back to the question, what is money?  Money, dear reader, is a concept that must first be defined.  It is a set of attributes.  Once these attributes are defined, we can begin searching for something that possesses these attributes and then call that “Money.”

For money, does this fit the bill?

What are the attributes that something must possess to be used as money?  To answer this question we will paraphrase a list compiled by Jason Hommel which includes the following attributes that something must possess to meet most people’s criteria of money.  Mr. Hommel expands upon these themes extensively in his writings, which again, I highly encourage you to read at http://silverstockreport.com.  For our purposes, we will content ourselves with a simple question which should make each attribute clearly understandable:

First, it should operate as a medium of exchange.  Will other people accept this item in trade for something else?  Second, it should operate as a unit of account.  Can the item be easily divided without destroying its value?  Third, it should be a reliable store of value.  Will the item purchase the same amount of goods in ten, twenty, or three thousand years from now as it will today?  And fourth, it should be anonymous.  Can the item be freely transferred amongst parties?

Part of our present financial mess is that money has such an obvious role in society that we assume that what is currently used as money actually IS money.  However, a review of the above attributes and a peek at the quotes related yesterday from Robert H. Hemphill and John Maynard Keynes starkly illustrate that this may not be the case.  Alas, since 1971 in the United States this has not been so.

So what is money?  After reviewing the attributes above and reviewing all of known human history, we can conclude that, in an overwhelming majority of cases, precious metals, namely Gold and Silver, are best suited to serve mankind in the role of money.  As a medium of exchange, they are universally recognized.  As a unit of account, they are divisible with destroying their content.  As a store of value, Gold and Silver are not easily pulled from the ground and coined for use (they cannot be “debauched”).  And as for providing anonymity, they can be freely transferred.

Bear in mind that there is no perfect item or element that can be used as money, nor is there a specific command from God to use Gold and Silver as money, rather Gold and Silver, in all of God’s creation, have been found to be best suited to physically embody this concept of money.  The US Dollar, Euro, and all other paper currencies are merely inventions of men and, in 100% of live experiments with their use as money, they have failed catastrophically.  We are currently nearly 40 years into the largest experiment with paper money that the world has ever known.  The disaster that awaits as this experiment ends the way all the other experiments have, dating back to alchemy, simply boggles the mind.

Fortunately, we can return to using Gold and Silver as money, which, apart from merely "fitting the bill" for humanity to use as money, their use by humanity as money has numerous positive side effects for the overall well-being of every single person on the planet.   The most notable and perhaps the basis for all of the other healthy side effects is the incentive to create and conserve capital.  This phenomenon, called Capital Formation, allows mankind to prosper in ways we both currently enjoy and cannot yet imagine.

Stay Fresh!

David Mint

Key Indicators for Wednesday, October 27, 2010

Copper Price per Lb: $3.82
Oil Price per Barrel:  $82.17
10 Yr US Treasury Bond:  2.64%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,335
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,169
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000

What is Money? – Part III

10/26/2010 Portland, Oregon – Pop in your mints…

Before continuing our exploration of what is money, a quick look at the news.  For the second day in a row the news and related commentary receives and “Oh my” from your author.  From TIME’s Curious Capitalist post we get the thoughts on a recent speculation:

Will the Federal Reserve Cause a Civil War?

Fellow taxpayer, do you believe that a meeting of the FED could ignite a civil war?  Your author has his doubts.  For one, in such a conflict, who would side with the FED?  Second, a waging a war, on any scale, is not an action powerful enough to solve a problem on the scale that the FED and other world central banks have caused.  There is but one way rid society of this cancer which is delightfully and completely peaceful:  A return to the use of sound money and its corollary, free banking.

With that said, we must move on with our pondering of what is money, or as we may now rightly ask, what is “sound” money (here is a hint, it is money that cannot be created at whim!)

Please follow these links to see previous episodes in this series:
What is Money? - Part I    
What is Money? – Part II

As you can see, our quest to define money has taken us farther and perhaps troubled us further than many would have imagined.  Should this come as a surprise?  The subject of money is generally taken lightly  because to ponder it deeply is, well, troubling.  However in pondering it, we find we are in good company. 

Jesus, during his ministry, talked about money more than any other subject EXCEPT for the Kingdom of God.

Robert H. Hemphill, formerly of the, Federal Reserve Bank of Atlanta, said this about money:

"Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon."

The famous economist John Maynard Keynes made a dramatic statement about the consequences of debasing a currency (i.e. printing money) which he eloquently calls “debauching:”

"Lenin is certainly right. There is no subtler or more severe means of overturning the existing basis of society (destroy capitalism) than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose."

A great collection of famous money quotes (of which these are just two) can be found here -  http://silverstockreport.com/quotes.htm -.  For those of you who haven’t read anything by him before, Jason Hommel is perhaps the biggest Silver bull on the planet.  He has written volumes on the Silver Market, Bible Prophecy, Capitalism, Freedom, and Money.  His writings can be found at his website, which I highly encourage you to visit, is here - http://silverstockreport.com/ -.  Thank you Jason!

After having my faith in paper currency shaken in Barcelona, we moved to Portland and I landed a job.  For the first time I could remember, I actually had a surplus to save on a regular basis.  But this was 2006 and somehow I was uncomfortable about the stock market and home ownership as wise investments at the time.  I was also skeptical at the prospect of simply keeping our savings in a bank account as the image of shredded dollar bills in the jar haunted me.  What to do?  This dilemma, which is common to man, drove me to search for what is now the obvious answer.  Stay tuned.

Stay Fresh!

David Mint

Key Indicators for Tuesday, October 26, 2010

Copper Price per Lb: $3.84
Oil Price per Barrel:  $82.15
10 Yr US Treasury Bond:  2.55%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,339
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,164
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000

Conflicts of Interest at the FED? Shocking!

10/25/2010 Portland, Oregon – Pop in your mints…

Oh my, fellow taxpaying citizen, the world of finance just keeps getting stranger.  From Bloomberg:

New York Fed Faces `Inherent Conflict' in Mortgage Buybacks

You see, the FED bailed out a number of large financial institutions by trading wine in exchange for sewage.  For those of you unfamiliar with the metaphor, the jest is that when you add a spoonful of wine to a barrel of sewage, you get sewage, but when you add a spoonful of sewage to a barrel of wine, you get, well...sewage.

Does the FED's Balance Sheet contain Wine or Sewage?

In this case the wine given to banks by the FED was in the form of US Treasury bonds and/or cash.  The sewage it received from the banks was in the form of mortgage backed securities.  Apparently the New York FED is now beginning to feel queasy and has signed a letter along with other bondholders (the other notable signatory is Blackrock) demanding that Bank of America pump the stomach of the FED, Blackrock, and the other affected bondholders.  In other words, take back their faulty merchandise.

This, fellow taxpayer, is where the bizarreness of the incestuous relationship that the FED, especially its New York branch office, and the banks that it “oversees” (i.e. bails out) begins to hit a crescendo.  The FED and Blackrock want Bank of America to cough up the dough for approximately $47 billion worth of the mortgage backed securities that have gone bad, alleging that the paperwork was not in order (who can be bothered with technicalities in the world of high finance?)  However, Blackrock is the third largest shareholder of Bank of America and the Richmond branch of the FED is essentially charged with keeping Bank of America afloat.  Now the plot thickens.  The demands of Bank of America by the FED and Blackrock amount to both parties shooting themselves in the foot and making of themselves a hilarious public spectacle in the process.  Hilarious, that is, unless you are a Blackrock or B of A shareholder, or a dollar denominated bank account owner or bond-holder (in other words, a FED shareholder).

How long before it all comes unglued?  Your guess is as good as mine but in the end, just like my 1993 Isuzu Rodeo whose odometer stopped working at 142,000 miles, it will likely stay “glued” much longer than anyone expects it to until one day, without warning, it comes completely and gloriously, unglued.  In the case of the Rodeo, yours truly will be out the approximately $1,000 that he has into it.  Needless to say, the stakes in for Blackrock, Bank of America, the FED and ultimately the US Treasury and Dollar are quite a bit higher.

Fellow taxpayer, it is best to buy gold, silver, and perhaps an older Isuzu and above all, avoid drinking the sewage.  Can you say “Counter party Risk?”

More on What is Money tomorrow...

Stay Fresh!

David Mint

Key Indicators for Monday, October 25, 2010

Copper Price per Lb: $3.78
Oil Price per Barrel:  $81.77
10 Yr US Treasury Bond:  2.56%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,332
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,133
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000