Early Week Reading List

After spending much of the day yesterday walking around London until my toes were nearly bleeding, I've taken a few hours off from sightseeing to catch up on a little reading. Below are some of the better articles I thought worth passing along:

Chasing the Shadow of Money - Tyler Durden of Zero Hedge

I've got to say that Zero Hedge has taken the unequivocal top spot on my reading list. Typically his posts are shorter and more pointed, but in this one he takes to task a topic I've been dancing around for the last year. He starts with Frederich Hayek's reference to "shadow money" and goes on to explain in detail, how it so massively outstrips any other conventional measure of our money supply. He concludes that even though the government attempts to replace the contraction in this "private shadow money" with "public shadow money" are having some effect, it does not come close to making up the difference. He also concludes that the need to hold higher cash reserves (and the drop in velocity that is its inverse) will eventually doom any attempts at reflation.

Coincidentally, Prices and Production by Hayek is one of about 15 major titles on my summer reading list awaiting my arrival in Vancouver.

Asia Will Author Its Own Destruction if it Triggers a Crisis Over US Bonds - Ambrose Evans-Pritchard of the Daily Telegraph

I normally find myself in agreement with AEP, who is asking the relevant question in the Asian savings of US treasuries fiasco, "Who ultimately holds a gun to the head of whom?" It would seem rational that China and Japan, with trillions in US Treasuries, hold the advantage here. But I don't think it is quite that simple. Both countries have maintained illegitimate export economies based on suppressed currencies. If either or both were to tactically sell all their holdings, an obvious outcome would be the total destruction of their export economy and the productive capacity that has been built to support it. As Evans-Pritchard points out, the resultant unemployment, already a problem, would turn into a political nightmare for the characteristically paranoid Asian governments.

"If you owe your banker a few thousand pounds, you have a problem. If you owe your banker a few million pounds, your banker has a problem." - Keynes paraphrase

A Populist Interpretation of the Latest Boom/Bust Cycle - Ed Harrison of Credit Writedowns via Naked Capitalism

This post is primarily a rerun of a March 2008 article. In it, Harrison attempts to find the line between free-markets and political populist interventionism. Like many commentators, Harrison seems to do a fine job in finding the problems and injustices of our current social construct. But he fails in the same area as many others seem to. That is, he glosses over the effect that populist interventionism has played in bringing about the adverse qualities we have experienced from "capitalism." He falls into the trap that socialists and other big government proponents have laid out in response to this crisis. They claim that everything is the fault of poor regulation and a greedy cabal of sociopathic bankers.

I don't deny that there are sociopathic bankers and poor regulation at the center of this crisis. But I see them as symptoms of far different diseases than are commonly put forth. I'll touch on a few before I head out for tea with the Queen:

1. Regulation. It is not a lack of regulation that was the problem. It was the current construct of regulation that created implicit government guarantees behind anything that was under the watchful eye of regulators. With such impossible guarantees in hand, bankers took this as a license to print money (literally) without regard to the risks that it would normally have. Bankers knew that regulators (like the FDIC, OTS, OCC and Fed) would not let any large institution fail. So they went balls to the wall. They did whatever possible to ensure they were big enough to be considered "too big to fail." Absent regulation? Banks would have been smaller and would have taken less risks knowing that their institution could collapse if they were irresponsible. There would have been failures. But they would have been smaller and more manageable.

2. Manipulation by the Central Banks It should go without saying that interest rates, held too low for too long, will cause asset prices to rise unnaturally. Even this is acknowledged by most now - that the Fed does not know or cannot know what the real rate of interest should be. But it is not just the wrong interest rate that is the problem. It is a mandated positive rate of inflation that central banks target that breeds problems. This guaranteed positive rate of inflation encourages people to speculate wildly on the next bubble and to avoid saving money for risk of losing their purchasing power. This is what is really behind the "greedy" characteristic of people that are being persecuted. There can be no satisfaction with one's wealth knowing that over 25 years one will lose a minimum of half their purchasing power solely via inflation. To summarize, central banks cause a society of degraded values via its inflationary policies.

3. Legal Tender Laws. Another patently anti free-market characteristic of the previous boom/bust cycle has been the government's forceful insistence on using their currency, and nothing else, as a medium of exchange. By forcing regular people to use one currency, while (as Tyler Durden pointed out above) allowing the banks to, at a whim, create their own forms of "just as good as cash" fiduciary media, the government essentially does the job of widening the rich/poor gap all by themselves. Those who are able to put themselves first in line at the trough of newly minted "money" get rich to absurd degrees. Those that get it further down the line become increasingly dependent on the rising asset prices it creates, rather than increases in productivity and rising wages which result. And those that get it even further down the line, see everything they need rising in price, while their wages are perpetually stuck in the last decade. Poverty inevitably results.

There are many more, but Harrison, like many others before him, lacks the ability to see the relationship between cause and effect.

Cheerio.

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