US Exports to China and U.S. Manufacturing Employment

Interesting up-tick in exports from U.S. to China, and U.S. factory employment. Who would've thunk it.

Eric Sprott: The Fiat Money Experiment has Failed

Metals bull Eric Sprott in his monthly commentary:

All indications lead us to believe that there is now roughly an equal amount of investment flowing into silver and gold on a dollar-for-dollar basis. And although the [35:1] price ratio of silver to gold has fallen substantially since the highs of 2009, our analysis strongly suggests that this ratio must move lower to restore a fundamental balance between supply and demand. Only time will tell how much lower it will go, but we would not be surprised to see it hit single digits before settling into a more sustainable equilibrium.

What the so-called silver ‘experts’ neglect to account for in their models and projections is that the fiat money experiment has failed. And in this context, we believe the Market has assigned world reserve currency status to gold – not USD, not EUR, and not JPY. In our opinion, gold’s continued appreciation vis-à-vis every currency is assured because the great flight from fiat has only just begun.

 More here.

Who Works the Longest?

Debt: The first five thousand years

Throughout its 5000 year history, debt has always involved institutions – whether Mesopotamian sacred kingship, Mosaic jubilees, Sharia or Canon Law – that place controls on debt's potentially catastrophic social consequences. It is only in the current era, writes anthropologist David Graeber, that we have begun to see the creation of the first effective planetary administrative system largely in order to protect the interests of creditors. Article here.

Wal-Mart CEO Bill Simon expects inflation

 

U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products, the head of Wal-Mart's U.S. operations warned Wednesday. 

The world's largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors. Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate."

Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.

"Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along," Long says. "Except for fuel costs, U.S. consumers haven't seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory."

The Liquidation of Government Debt

Another interesting paper on this topic by Carmen M. Reinhart, M. Belen Sbrancia.  Link here, abstract below:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum). We describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era.

World Currencies and Inflationary Pressures

The general disclaimer, that these are my views and should not constitute financial advice applies with special force here. Below are my thoughts on how debtor and lender countries will have to deal with growing debt levels in developed countries and inflationary pressures in developing countries.

Debtor Countries
There are two types of debtor countries, those that can print money and those that can't. US and England, for example can print money and ordinarily like to print money to get out of debt. Some EU countries, like Spain can't print money and all they can do is restructure their debt and cut spending to get out of debt. This debt restructuring process is painful, Brazil and Argentina went through it in the early 80s, Japan in the late 80s. It amounts to a decade of no real GDP growth.

Creditor Countries
Creditor countries also fall into two categories. Those that have independent monetary policies and those that don't. These creditor, developing countries are also in an inflationary cycle because of lots of different reasons, but primarily because they have a lot of cash sitting around chasing a limited number of assets. Countries that are in such inflationary cycles like to tighten monetary policy to curb inflationary pressures. For example, China is in an inflationary bubble. China has about a 5½% inflation rate—actually, if you look at it month by month, it is 13% annualized—but let's call it 5½%, year over year. They also have nearly a 10% economic growth rate. And interest rates are at about 5%. So China's gross domestic product is growing at about 15% a year. When you have an economy that is growing at a 15% nominal rate, and you have a 5% interest rate, you would be nuts not to borrow and buy things with a higher return and you would be nuts to save in bank-deposit accounts.  

Applying Time to Energy Analysis

Awesome post on energy and time by Nate Hagens; excerpt below:

Is a BTU today worth more or less than a BTU ten years from now? It's seemingly an easy question. A BTU will heat one pound of water one degree whether its 2010, 2020, or 2100. And, in a world of entropy where the easiest and best quality energy sources (generally) get used up first, one unit of energy should increase in value over time, as its ability to accomplish work becomes more valuable to society as time progresses. However this is solely a physical perspective, one that ignores biology of time preference. Once humans with finite lifespans and cultures with sunk costs enter the picture, a BTU today, behaviorally, becomes worth more than one in the future. This fact has pretty big implications for biophysical analysis of energy alternatives, which will be explored below.

Net Fiscal Stimulus During Great Recession

NBER Paper: Net Fiscal Stimulus During Great Recession, turns out that U.S. was in the bottom third:

Abstract: This paper studies the patterns of fiscal stimuli in the OECD countries propagated by the global crisis. Overall, we find that the USA net fiscal stimulus was modest relative to peers, despite it being the epicenter of the crisis, and having access to relatively cheap funding of its twin deficits. The USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 countries in sample. Contrary to historical experience, emerging markets had strongly countercyclical policy during the period immediately preceding the Great Recession and the Great Recession. Many developed OECD countries had procyclical fiscal policy stance in the same periods. Federal unions, emerging markets and countries with very high GDP growth during the pre-recession period saw larger net fiscal stimulus on average than their counterparts. We also find that greater net fiscal stimulus was associated with lower flow costs of general government debt in the same or subsequent period.

A Flaw in the Model…That Defines How the World Works

World Bank Paper: A Flaw in the Model...

Abstract: The authors of this paper claim that modeling financial markets based on probability theory is a severe systematic mistake that led to the global financial crisis. They argue that the crisis was not just the result of risk managers using outdated financial data, but that the employed efficiency model—also referred to as the stochastic model—is basically flawed. In an exemplary way, the analysis proves that this model is unable to account for interactions between market participants, neglects strategic interdependences, and hence leads to erroneous solutions. The central message is that the existing efficiency model should be replaced by an approach using agent-based scenario analysis.