CPI: 3.6 Annual Rate

The Labor Department reported that consumer prices surged 0.5 percent last month paced by higher energy costs and overall prices are now 3.6 percent higher than a year ago.

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Lew Rockwell on the Gold Standard, the Fed, and Economic Recovery

Cartoon: Unemployment

A Gold Standard Is Unthinkable No More

MARTIN HUTCHINSON and JOHN FOLEY write in the WSJ:

Fiat money has worked well since Richard Nixon ended the dollar’s peg to gold 40 years ago this week, but this latest recession must gnaw at believers. If years of ultra-cheap cash give rise to serious inflation or an accelerated retreat of the American currency, the gold standard, however erratic and deflationary, could start to appeal again.

The arrangement born at Bretton Woods and used for nearly three decades was not a true gold standard, as it was entirely intergovernmental and the private holding of gold was illegal in America. It thus lacked the virtue of independence from political meddling, failed to provide anti-inflationary benefits and collapsed once its American sponsors no longer controlled the world economy.

The true gold standard, in which gold coins circulated freely as legal tender, was started in Britain in 1717 and lasted for just under 200 years, interrupted only during the Napoleonic wars.

Compared with an ideal, stable and noninflationary monetary system, free from influence by elected officials, the gold standard has two flaws. The metal’s supply is erratic. It can soar unexpectedly with new discoveries, thus causing currency values to fluctuate. Conversely, new deposits tend to be found slowly, making a gold standard excessively deflationary when population growth is rapid. That is what
contributed to the standard’s breakdown after 1900.

World population growth is now declining after its annual peak of 2.2 percent in the early 1960s. By 2030, it is forecast to fall below the 0.72 percent rate of 1900. That would make a gold standard practicable and not too deflationary.

That doesn’t make it any more likely that central bankers would embrace it, despite advocacy from critics of quantitative easing and the Federal Reserve like Steve Forbes and Ron Paul. For one thing, it would drastically undercut the banks’ influence.

But further chipping at the dollar’s credibility, further downgrades of United States credit or other harmful results from years of very low interest rates could bring more people around to the idea of a new reserve currency. A return to the gold standard remains unlikely, but it’s no longer unthinkable.

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Are People Starting to Understand?

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Cartoon: The Job Market

40th Anniversary of the Closing of the Gold Window

• The Nixon Shock -Bloomberg/BusinessWeek

• The Nixon Shock Heard ‘Round the World – WSJ

• Nixon’s not-so-happy gold legacy 40 years on – Mineweb

• Nixon Showed What Not to Do in an Economic Crisis – Bloomberg

• August 15, 1971: President Nixon’s Golden Error – Real Clear Markets

• August 15, 1971: A Date Which Has Lived In Infamy – Forbes

• We are now paying for abandoning the gold standard – Telegraph

• Road to downgrade began 40 years ago – Des Moines Register

• Gold Standard or Nixon Standard – Lew Rockwell

• Gold-standard debate back, 40 years after Nixon – MarketWatch

• Gold Standard: Forty Years Gone — And Good Riddance – WSJ

• Nixon’s Colossal Monetary Error: The Verdict 40 Years Later – Forbes

• 50-Fold Gain for Gold Price 40 Years After Gold Standard Ends – Bullion Vault

• Fiat Money: The Root Cause Of Our Financial Disaster – Forbes

• Forty Years of Paper Money – WSJ

Obamamonics

Actually, Obamanomics already has failed. It didn’t work for Hoover and Roosevelt. It didn’t work for Bush. It isn’t working in Europe. And now it’s failing for Obama.

It doesn’t matter what you call it or when the policies are imposed, expanding the size and scope of government is bad for prosperity. So the real question is when will the establishment press finally admit that Obamanomics has failed?

The unemployment numbers released today certainly will not be easy to spin. Here’s the chart I periodically update, showing the actual unemployment rate compared to what the White House claimed would happen if we flushed $800 billion down the Washington rathole.

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Recession Measures

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July Employment Numbers

The unemployment rate decreased to 9.1% (red line).

The Labor Force Participation Rate declined to 63.9% in July (blue line). This is the percentage of the working age population in the labor force. This is a new cycle low - and the lowest participation rate since the early '80s.

The Employment-Population ratio declined to 58.1% in July (black line). This is also at a new cycle low and the lowest since the early '80s.

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Marc Faber on the Economy

Marc Faber the Swiss fund manager and Gloom Boom & Doom editor spoke Tuesday about the Fed's decision to keep interest rates low for a prolonged period of time and the prospects of QE3. He says the Treasury market is a gigantic bubble and long-dated T-bonds are the short of the century. Faber suggests that sometimes the best the Fed can do for markets is to do nothing!...

Faber, who predicted the stock market crash in 1987, turned bearish shortly before the 2007-2009 bear market and called the 2009 lows, believes the markets will now test the July 2010 lows for the S&P 500 at 1,010 and "after that we'll get a QE3 announcement."...

What can the Fed do to support the economy?

"The best they could do for markets would be to collectively resign," Faber suggested.

"Everybody in the world has become a Keynesian, everybody thinks the government should do this and that, the Fed should do this, the Treasury should do that.....I think sometimes the best is to do...nothing!

Reiterating his views on the prospects for another asset purchase program, Faber asked: "What has QE1 and QE2 done for the labor market? Nothing at all, and nothing for the housing market."

"It [QE] has lifted stocks and it created wider wealth inequality in the sense that people who own assets have done well and people who are in the lower income recipient groups are getting hurt from rising energy and food prices," he added.

read the entire article

Cost of Government Day

read the full report

Sheldon Richman on Social Cooperation

Richman writes:

It is through cooperation and the division of labor that we all can live better lives. Naturally, he laid great stress on the need for peace. The absence of peace is the breakdown of that vital cooperation. This put Mises squarely in the pacifistic
classical-liberal tradition as exemplified by Richard Cobden, John Bright, Frédéric Bastiat, Herbert Spencer, and William Graham Sumner. Mises writes
in Liberalism:

The liberal critique of the argument in favor of war is fundamentally different from that of the humanitarians. It starts from the premise that not war, but peace, is the father of all things. What alone enables mankind to advance and distinguishes man from the animals is social cooperation. It is labor alone that is productive: it creates wealth and therewith lays the outward foundations for the inward flowering of man. War only destroys; it cannot create. War, carnage, destruction, and devastation we have in common with the predatory beasts of the jungle; constructive labor is our distinctively human characteristic. The liberal abhors war, not, like the humanitarian, in spite of the fact that it has beneficial consequences, but because it has only harmful ones...

We’re all grappling with an uncertain future. Social cooperation unquestionably makes that task easier than if we attempted to go it alone. That’s why individuals formed mutual-aid (fraternal) organizations. Besides camaraderie, these groups provided what the welfare state feebly and coercively provides today: islands of relative security in a sea of uncertainty.

If people support the welfare state, don’t be puzzled. It’s because they cannot see a better voluntarist alternative. That’s where libertarians come in.

We libertarians might have an easier time persuading others if we emphasized that freedom produces ever-more innovative ways to cooperate for mutual benefit and that when government dominates life, social cooperation is imperiled.

read the entire essay

Retail Sales: July 2011

The Commerce Department reported(.pdf) that, after the slowest three months of spending in almost a year, Americans pulled out their wallets again in July and pushed retail sales up by 0.5 percent in gains that were broad-based. Paced by gasoline station sales that rose 24 percent, overall sales were up 8.5 percent on a year-over-year basis in a data series adjusted for seasonal variations, but not inflation.

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Cartoon: Stock Market Swings

Cartoon: Gold Prices

Cartoon: Unemployment

Cartoon: The Economy and Obama

Cartoon: The Economy

Bob Murphy Destroys Krugman (and Keynes)

according to Krugman, the economy is stuck in a rut because (a) the federal government has been unwilling to run large enough budget deficits, while (b) the Federal Reserve has been unwilling to create enough new money...

Look again at the two charts above. Anyone with common sense will admit that the last two years have seen unprecedented budget deficits and monetary expansion. Krugman is correct; that hasn't been working at all. It's time to let the free market end this agony and bring us genuine recovery.

read the essay

Lew Rockwell on the Economic Crisis

Rockwell writes:

Of course, the whole theory that the government can stimulate through control and robbery is wrong and counterproductive. It only ends up rewarding government and its friends while the rest of us suffer. If we ever get out of this depression, it will be because government is forced to stop this nonsense, and the economy really stimulated by taking a meat axe to the planning-spending-inflating apparatus.

read the entire essay

The Dollar

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Cartoon: Lobbyists and Corruption

Fed Holds Rates Steady

Well, it looks like it’s one down, three to go for the Federal Reserve as, today, they promised to keep short-term interest rates freakishly low for at least the next two years (and possibly much longer) while holding in reserve three other options – changing their mix of assets to lower long term rates (which doesn’t appear to be necessary at the moment), spurring banks to lend by paying less on excess reserves, and, of course, the big kahuna of about a trillion dollars more in Treasury purchases, otherwise known as “QE3″.

By promising to keep rates low “at least through mid-2013″ in the policy statement released earlier today, the central bank assured the nation’s big banks of continuing to make big profits for the next two years on the interest rate spreads.

Of course, this will continue to punish the nation’s savers who, for the foreseeable future, will be looking at rates of one percent or less for certificates of deposit.

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Bill Bonner on the Economy and Gold

Bonner writes:

Still, we’ll stick with gold. Gold has gone up too. But for completely different reasons. You buy US Treasuries when you have faith in the system and the people running it. You buy gold when you don’t.

T-notes have gone up because the lumpeninvestoriat seeks to protect itself from natural market forces. It looks for safety in the world’s ersatz reserve currency – the dollar. As Alan Greenspan said, the US won’t default. It can always print more dollars!

Gold has gone up because smart people know that there is only one money they can really trust. There is only one currency that won’t disappear. And there is only one financial reserve that will hold up to a real crisis.

That is gold. Gold is back on its throne – as the world’s One True Money. Wise governments, wise investors, and wise families are buying it to protect themselves from the jackasses who run the world’s money system.

A few days ago, Ben Bernanke was asked about gold. Ron Paul asked him if he considered it money. ‘No,’ he said. Gold was just a commodity. Like bauxite or guano.

But now commodities are tumbling. If gold were just a commodity, it should be going down with copper and lead. Instead it is soaring.

Why is that, Ben?

Ha, ha, ha…so you see…the financial world is fun again. Yes, England is smoking from riots. Europe is on the edge of a complete financial meltdown. And America is sinking into depression. But we can still laugh at the morons who rule us. We can guffaw and snicker at the people who are supposed to know what they are doing. We can curl up in spasms of mirth at the knuckleheads who run the world’s financial institutions…

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Wealth Effect

You might expect Fed chief Ben Bernanke to laud QE2 because of its effect on stock prices: Easy money fuels the “wealth effect”… people feel flush as their brokerage accounts grow… and then go out and spend money.

Of course, it’s a dopey notion — based on the idea that consumption grows the economy, not savings and production. But it is what it is.

At yesterday’s close, the S&P 500 is only 70 points away from where the whole QE2 process started nearly a year ago — when Bernanke winked and said it was all but a done deal during his annual speech in Jackson Hole, Wyo.

When Bernanke indicated during his first news conference on April 27, 2011 that QE2 would wind down as scheduled at the end of June, the market topped two days later. The market then entered a holding pattern until the circus over the debt ceiling concluded… then, well, the last week of July through this morning tells the rest of the story.

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Fear Gauge

n the wake of “Great S&P Downgrade” volatility in the stock market as measured by the VIX — the volume of S&P 500 index options — jumped 50% yesterday.

The market’s “fear gauge” closed out the day at 48...

Going back to its inception in 1993, there are only five other episodes in which the VIX topped 45:

• September 1998: Russian default
• October 1998: Long-Term Capital Management (LTCM) implosion
• August 2002: WorldCom collapse
• September 2008: Lehman Bros. bankruptcy and ensuing Panic of ’08
• May 2010: The incestuous “flash crash.”

In four of five of these spooky episodes, you could have done very nicely for yourself buying the Dow 30 as soon as the VIX topped 45… and holding those shares for a year. The blue chips picked up between 1,500-2,500 points each time.

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Cartoon: The Economy

The S & P 500 and Federal Reserve Intervention

If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke's speech at the Fed's 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November, namely, the second round of quantitative easing, aka QE2.

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Illusion of Wealth

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.

Ludwig von Mises, Causes of the Economic Crisis, 1931

Gold Recent Run

Gold reached a new intraday high of $1,782.50 per ounce in electronic trading before backing down to $1,746.20. That's an increase of $33, or about 2%, compared to its Monday close. On Monday, gold broke $1,700 for the first time...

Gold is also still far from its true peak, when adjusted for inflation. The metal hit its real record on Jan. 21, 1980, when it rose to $825.50 an ounce. Adjusted for inflation to 2011 dollars, that translates to an all-time record of $2,261.33 an ounce.

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Gold v Dollar

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Greenspan is Pro-Printing Press

Former Federal Reserve Chairman, Alan Greenspan, appeared on MSNBC's meet the Press where he made a shockingly blatant statement that is sure to make its way around the 'Net at lightning speed.

What makes this ironic, is that many free-market and Austrian economists believe Greenspan's policy of taking interest rates to historic lows at the Fed were responsible for the subprime mortgage and credit crises and the bubble in the real estate and stock markets which culminated in the 2008 market meltdown and real estate crash. In fact, Time Magazine placed him 3rd on a list of 25 people to blame for the financial crisis, and this is probably so.

While Greenspan has spent much of his time since the crisis attempting to rewrite history and his participation in the worst economic downturn since the Great Depression, mainstream media appearances such as this one will not liekly do much to help his efforts.

In this MSNBC interview, Greenspan was asked, "Are US Treasury bonds still safe to invest in?" You have to listen to his answer to believe it. Greenspan sits there and utters a single sentence that basically says what no dollar-debt holder wants to hear: We will devalue your debt into the ground by cranking up the printing presses.

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Government Spending and Budget Cuts

There has been a lot of political effort and focus on the debt issue, and that is an improvement. So how big is the current change? Congress could only get a small down payment on cuts into legislation immediately. The Congressional Budget Office (CBO) scored the cuts as $917 billion over 10 years. To get more cuts, a Joint Select Committee is tasked with coming up with another $1200 billion more. If they fail, automatic cuts of $1500 billion are planned.

10 year cuts now: $917 B
Joint Committee: $1,200 B
Total: $2,117 B

So the total will be closer to $2.1 to 2.4 trillion, or 5% of expenditures. That is not enough with a current deficit at 40 % of expenditures. Compared to the projected expenditures of $45.8 trillion over this time frame, the effects will be small. A chart of the size of the initial cuts in blue compared to the projected expenditures in red puts the relative size in perspective:

The conclusion is that the best the government could do in making cuts is not enough to change the story that we will be spending more than we can afford, and that the scenario of dollar depreciation and gold rise will continue.

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Hayek v Keynes Debate

link to podcast

How The Debt Plan Works

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AAA-rating Gone

Late Friday, the United States was booted out of a prestigious group of countries that boast a spotless credit rating.

Now only 15 countries (and the very small Isle of Man) hold the triple-A rating from both Standard & Poor's and Moody's...

The United States for example, has seen its dollar become the world's No. 1 reserve currency because its bonds are held in such high regard by investors. They're backed by the "full faith and credit of the U.S. government" -- which until now, has never seriously been called into question.

On Friday, S&P downgraded the United States to AA+, an investment grade level just one notch below triple-A. It marked the first time the world's largest economy has been downgraded, since Moody's first gave the country a credit rating in 1917.

S&P cited estimates that U.S. government debt would balloon to 79% of the size of the entire U.S. economy by 2015, and 85% by 2021 -- a level S&P says is consistent with AA+ rated countries.

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July Unemployment 9.1%

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July Unemployment 9.1%

The Labor Department reported that U.S. nonfarm payrolls rose 117,000 in July, the private sector adding 154,000 new jobs, and employment gains in May and June were revised upward by a combined 56,000. The jobless rate fell from 9.2 percent to 9.1 percent, however, this was largely the result of 193,000 people dropping out of the labor force.

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Peter Schiff on the Economy

Schiff thinks the U.S. is headed not just for a recession but rather a full-blown depression. On the upside, he believes the coming economic situation will look familiar.

"The Depression [in the wake of the financial crisis] was temporarily interrupted by a bunch of stimulus which ultimately weakened the economy further," says Schiff. He adds the government's likely knee-jerk response of stimulating is, "probably going to be the fatal dose, the lethal dose" prior to "a complete economic collapse."

Which is precisely why Schiff wasn't among those expecting a debt deal relief rally last Monday morning. The attention paid to the deal was a "massive victory for propaganda that would have done Goebbels proud" (yes, this Goebbels). Schiff believes the real crisis wasn't the debt ceiling but spending and debt, both of which were effectively worsened by the deal.

"The reckless thing to do was to raise the debt ceiling" he says. Exacerbating matters Schiff thinks the ceiling is going to have to be raised yet again before President Obama leaves office. Not that the chance for DC to spend more freely will help the economy. "The reason we can't grow the economy is because the government is in the way... There's no jobs because there's no recovery."

By way of a cheery goodbye Schiff concludes, "We're on a collision course for disaster. All we can do, all your viewers can do is brace for impact...Buy gold. Buy silver... Get as far away as you can from U.S. currency and the U.S. economy."

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Budget Deal

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Credit Rating

Debt Ceiling Deal

The Department of Federal Efficiency

Ron Paul on the Budget

Ron Paul writes:

In reality, bringing our fiscal house into order is not that complicated or excruciatingly painful at all. If we simply kept spending at current levels, by their definition of cuts that would save nearly $400 billion in the next few years, versus the $25 billion the Budget Control Act claims to cut. It would only take us five years to cut $1 trillion in Washington math just by holding the line on spending. That is hardly austere or catastrophic.

A balanced budget is similarly simple and within reach if Washington had just a tiny amount of fiscal common sense. Our revenues currently stand at approximately $2.2 trillion a year and are likely to remain stagnant as the recession continues. Our outlays are $3.7 trillion and projected to grow every year. Yet we only have to go back to 2004 for federal outlays of $2.2 trillion, and the government was far from small that year. If we simply referred to that year’s spending levels, which would hardly do us fear, we would have a balanced budget right now. If we held the line on spending and the economy actually did grow as estimated, the budget would balance on its own by 2015 with no cuts whatsoever...

In Washington terms a simple freeze in spending would be a much bigger cut than any plan being discussed. If politicians simply cannot bear to implement actual cuts to actual spending, just freezing the budget would give the economy the best chance to catch its breath, recover and grow.

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Don't Worry About Defense Cuts

The United States could substantially cut its defense budget and still spend more money on our military than every country that even plausibly threatens us combined. Can someone explain why that isn't enough?

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GDP Revisions

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Income inequality and Income Mobility

Thomas Sowell writes:

"Only by focusing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a "problem" for which a "solution" is necessary. They have created a powerful vision of "classes" with "disparities" and "inequities" in income, caused by "barriers" created by "society." But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the "barriers" assumed by many, if not most, of the intelligentsia."

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The Debt Issue

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