Why is Putin stockpiling gold?

He’s probably afraid of Draghi’s policies?

Or got long gold in his personal account, has his CB run it up for him to sell?

No telling!

Why is Putin stockpiling gold?

By Brett Arends

September 5 (WSJ) — I can’t imagine it means anything cheerful that Vladimir Putin, the Russian czar, is stockpiling gold as fast as he can get his hands on it.

According to the World Gold Council, Russia has more than doubled its gold reserves in the past five years. Putin has taken advantage of the financial crisis to build the world’s fifth-biggest gold pile in a handful of years, and is buying about half a billion dollars’ worth every month.

It emerged last month that financial gurus George Soros and John Paulson had also increased their bullion exposure, but it’s Putin that’s really caught my eye.

No one else in the world plays global power politics as ruthlessly as Russia’s chilling strongman, the man who effectively stole a Super Bowl ring from Bob Kraft, the owner of the New England Patriots, when they met in Russia some years ago.

Putin’s moves may matter to your finances, because there are two ways to look at gold.

On the one hand, it’s an investment that by most modern standards seems to make no sense. It generates no cash flow and serves no practical purpose. Warren Buffett has pointed out that we dig it out of one hole in the ground only to stick it in another, and anyone watching this from Mars would be very confused.

You can forget claims that it’s “real” money. There’s no such thing. Money is just an accounting device, a way of keeping track of how much each of us produces and consumes. Gold is a shiny and somewhat tacky looking metal that is malleable, durable and heavy. A recent research paper by Duke University’s Campbell Harvey and co-author Claude Erb raised serious questions about most of the arguments in favor of gold as an investment.

But there’s another way to look at gold: As the most liquid reserve in times of turmoil, or worse.

The big story of our era is not that the Spanish government is broke, nor is it that Paul Ryan apparently feels the need to embellish his running record. It’s that the United States, which has dominated the world’s economy for several lifetimes, is in relative decline.

As was first reported here in April of last year, according to International Monetary Fund calculations, the U.S. is on track to lose its status as the world’s biggest economy—when measured in real, purchasing-power terms—to China by 2017.

We will soon be the first people in two hundred years to live in a world not dominated by either Pax Americana or Pax Britannica. This sort of changing of the guard has never been peaceful. The declines of the Spanish, French and British empires were all accompanied by conflict. The decline of British hegemony was a leading cause of the First and Second World Wars.

What will happen as the U.S. loses its pre-eminence?

Maybe this will turn out better than similar episodes in the past. Maybe the Chinese will embrace an open society and the rule of law. If you believe that, there is probably no reason to hold any gold.

Cliff on ECB

Over 6 weeks ago we distributed the attached Eurosystem Solutions paper.

It described the unique non-standard measures being used for by the Eurosystem and ECB to address bank solvency and national solvency issues and the movement towards a real solution involving the ECB.

Now the ECB has announced what is very close to the real solution: unlimited bond purchases.

Regardless of conditionality, or even in spite of conditionality, this is the crossing of the line into the notion that there is an entity that can credit accounts in Euro in unlimited amounts.

While conditionality is the apparent necessary circumstance, and it’s likely national authorities will play along, these ECB purchases will have to take place regardless of conditionality. If Spain says they can’t comply, is the ECB going to let them default? The ECB has done all this to avoid Spanish default.

The best case is for the markets to recognize the ECB backstop and so regular purchases aren’t very necessary. There will be lots of movement towards coordination of budgets and banking supervision.

But the ECB line has been crossed.

Sixteen years after our AVM/III July 1996 Bretton Woods conference that identified the severe credit problems with the looming Maastrict rules (1/1/99), and eleven years after Warren’s famous paper on the potential European credit crisis “The Rites of Passage” we are finally seeing the necessary repair to the EMU.

There still remain political obstacles, court challenges and the like, but the imperatives to avoid a complete collapse of the Euro financial system have driven virtually all the important constituents to this necessary path of solution.

August Payrolls-Stall Speed


Karim writes:

Very poor job data with a gain of only 96k and a net revision of -41k. Somewhat offsetting is the 0.2% drop in the unemployment rate from 8.3 to 8.1% (which along with April 2012 is the lowest since January 2009). The biggest swing (and miss) was manufacturing employment, which shifted from a gain of 23k to a fall of 15k, indicating that global economic weakness is affecting U.S. exporters. Indicators of domestic demand fared better as trade swung from a gain of 11k to 29k jobs, finance from -2k to +7k, and leisure/hospitality from 28k to 34k.
 
Though August payroll data is typically revised higher, the data affirms the notion the economy is hovering around or just below trend growth of 2-2.5%.
 
The data increases the chances of QE3, unsterilized and possibly open-ended purchases of Agency MBS and USTs, but I still think later in the year. An open-ended program likely requires a consensus Fed economic forecast, which is still a work-in-progress. Next week’s FOMC meeting will be contentious, and a close call, however.
 
Other data highlights:

  • The drop in the unemployment rate came as a result of a drop in the participation rate from 63.7% to 63.5% (labor force fell by 368k).
  • The U6 measure improved from 15% to 14.7%, but the median duration of unemployment rose from 16.7 weeks to 18 weeks.
  • Average hourly earnings were unchanged and aggregate hours gained 0.1%, a weakish combination for personal income.
  • The diffusion index dropped from 54.3 to 50.2

Some interesting charts from SMR:

Over the past 20 years August payrolls have been revised upward between the 1st and 3rd release on 16 occasions.

The magnitude of the August payroll revisions over the past 10 years has far exceeded any other month of the year. Over this period the August reading has been revised upward by an average of 62,000, in contrast to the next largest month (November) at +27,600.

1996 Washington Post article

This was written by Michael Johns. I saw him on C-Span, contacted him, and have been in touch ever since. Michael is a conservative, and one of the Tea Party founders. As you can see below, however, he too recognized the very wrong and counter agenda turn taken by the Republicans (and then the Tea Party) when they embraced deficit reduction and the balanced budget amendment for its own sake. He wrote this most prescient article in 1996 if I recall correctly, which was published in the Washington Post:

A Balanced Budget Is Not the Answer

by Michael Johns

In its political toughness with the Clinton White House in recent months, the Republican leadership in Congress has elevated balanced-budget proposals to the top of America’s political agenda. Although at least nominal political differences exist over the means to arrive at this objective, the embrace of a seven-year balanced-budget goal by both Republican congressional leaders and President Clinton represents the most significant shift in the economic thinking of the political elite in perhaps two decades. The concept of balanced budgets has long existed as a weapon in mainstream political rhetoric, but only since the 1994 elections has this rhetoric run the significant possibility of becoming political reality.

Yet before such a goal is uniformly embraced and enacted as policy, Congress and Clinton should pause to reflect on whether such an objective deserves its place at the pinnacle of our economic objectives. Upon such reflection, there is good reason to believe that it does not.

There is, for instance, no historical data that would demonstrate that a balanced budget enhances gross domestic product (GDP) or any other indicator of economic productivity. Balanced budget advocates have long contended that the absence of a balanced budget opens the door to a “crowding-out effect? on interest rates, whereby government borrowing actually closes out private borrowing, thus raising interest rates on private credit and slowing the economy. Contrary to this, however, some of the most profound drops in interest rates and expansions in economic growth have occurred at moments when the deficit has been on the rise (witness, for instance, the interest-rate drop and economic growth that largely characterized the eight-year Reagan administration period).

Nor is there any particular evidence demonstrating that our current budget deficit is necessarily at the root of any particular economic problem that a balanced budget would correct. True, the balanced budget is a convenient political means for cutting the substantial waste and even fraud that exists in federal expenditures, but there is no reason to believe that this could not be accomplished short of wedding our nation’s policy leaders to a squarely balanced budget in every fiscal year.

BALANCED BUDGETS BEHIND

DEPRESSIONS

Perhaps most convincingly, America does have some previous experience with balanced-budget efforts, and it is cause not for celebration but considerable alarm. Without exception, on six consecutive occasions from 1817 until 1930 when government cut spending considerably without simultaneously seeking to stimulate the economy with equally deep tax cuts or other fiscal stimuli, depressions arose. The correlation is a shocking 100 percent. Balanced-budget efforts in America have always preceded national depressions.

So why are we doing this? It is reasonably apparent, on close examination, that the balanced-budget debate, rather than seeking the advancement of any specific macroeconomic goal is more a convenient means by advocates for accomplishing other political objectives that otherwise might be less sellable. On one hand, for instance, many congressional Republicans see the balanced budget as a political vehicle for enacting sweeping cuts in federal spending that, without the political cover of a balanced budget, likely would be significantly more difficult to sell to the American people.

On the other hand, many Democrats, including President Clinton, appear to see the balanced budget as a far-off and thus somewhat meaningless objective; even if Clinton were reelected, the current proposals would not force him to balance even one budget in a second term. Perhaps because of this, he has seen little imperative in resisting the plan. In January, one senior Clinton aide conceded that the administration’s endorsement of a balanced budget was just “a public relations game.”

Also not considered by many Republicans is the fact that some Democrats may even see the balanced budget as a means for providing political cover for eventually increasing the tax burden on the American people, even though such fiscal steps have been universally discredited over the past two decades. Nonetheless, if maintaining balance in the federal budget is the nation’s top economic priority, the balanced budget could likely be used over time to justify enhancing federal revenue through larger tax demands on both private citizens and businesses. Short of this, congressional Democrats will almost certainly use the balanced-budget restrictions as justification for resisting any Republican-sponsored tax cuts.

For Republicans and fiscal conservatives, this raises the question of whether the political cover for spending cuts that accompanies a balanced budget is worth the risk of providing Democrats and fiscal liberals with the same level of future political cover for raising taxes. The answer is that it most probably is not.

Of course, the political sentiments that have advanced the balanced budget cannot be thrown aside. Congressional conservatives are largely correct in their bid to eradicate wasteful government spending and to transfer from the public sector to the private sector those responsibilities that would more appropriately be handled outside of government. Yet cutting wasteful spending does not necessarily require embracing a balanced budget. Under a fiscally conservative president, such steps could be taken through enacting a line- item veto. Short of this, Congress could use the widespread support for smaller government to cut spending and taxes simultaneously, without operating on the premise that a precise budget balance is necessarily the most pressing priority.

Perhaps the most compelling reason to resist a balanced budget, however, is the fact that, politics aside, there simply is no reason to believe that a balanced budget will provide any economic stimulus to the economy, and there are at least a few reasons to suspect that it may do great harm. In addition to the absence of any historical data in the United States or elsewhere in the world that demonstrate any connection between balanced budgets and sustained economic growth, there is no reason to believe that America’s budget deficit is necessarily at the root of any current macroeconomic dilemmas. A comparison of budget deficits as a percentage of GDPs reveals that Americas budget deficit is reasonable, even low, compared with that of other industrial nations.

DEFICIT REDUCTION MEANS ECONOMIC DOWNTURNS

Additionally, a close look at the relationship between deficits and economic growth in countries around the world reveals that deficit-reduction measures are often followed by downturns in economic growth. Conversely, increases in deficits often accompany economic upturns. In Great Britain, for instance, a reduction in debt from 1989 to 1991 from roughly 44 percent of GDP to 34 percent also witnessed a reduction in GDP during this period from O percent to negative 4 percent. Since 1991, Britain’s public debt has increased to roughly 52 percent of GDP, and economic growth also has risen dramatically to 5 percent GDP in 1995. What such examples demonstrate is that, contrary to the conventional wisdom of balanced budget advocates, there simply is no reason to believe that a balanced budget will enhance economic growth or prosperity, and there is, in fact, good reason to believe that it may do harm.

All of this raises the question of whether congressional Republicans, in their emphatic embrace of balanced budgets, may now be playing the wrong political card with the Clinton White House. Instead of elevating the balanced budget to the top of the Republican agenda, why not more aggressively challenge Clinton to cut or eliminate the federal tax on capital gains or reduce the marginal rates of federal taxes, two steps that almost unquestionably would spur economic growth?

Of course, congressional Republicans, particularly many freshmen, support such goals enthusiastically. But perhaps surprisingly, the Republican leadership in Congress has not chosen any of these as the primary issue of confrontation with President Clinton; instead they have chosen the balanced budget, even though the president has at least verbally endorsed such an objective.

Responding to this criticism from House Republican freshmen. House Speaker Newt Gingrich has made it clear that the objective of a balanced budget surpasses any other progrowth initiatives. “They have two highly competitive desires: to balance the budget and a tax cut,” Gingrich was quoted as saying about Republican freshmen in January. “At some point, you’ve got to say, ‘O.K., which has precedence?’ And I think in the end, balancing the budget does.”

But just as relevant as the politics that drives the balanced-budget crusade is the fact that, while politically and rhetorically advantageous at the moment, the case for elevating a balanced budget to the top of our economic priorities is also based on a significant oversight or distortion of several critical historical economic facts.

The 100 percent correlation between previous balanced-budget efforts and national depressions, for starters, needs to be explored further by those who would again lead America down this path. It is likely not coincidental, either, that another, opposite correlation also exists. Periods of significant and sustained economic growth in this country have occurred nearly always in times when the deficit was on the rise.

ADJUST ECONOMIC THINKING

Why might this be the case? Warren Mosler, the director of economic analysis at the investment firm Adams, Viner, and Mosler, offers up a possible answer in his book Soft Currency Economics. According to Mosler, American policymakers have not yet adjusted their thinking about monetary and fiscal policy to a post-gold-standard era.

In this new era, the common notion that government requires private money to pursue its spending is no longer true. Under the current fiat currency system it is the economy that needs government money to pay taxes. So under this scenario, if the government taxed American citizens and businesses $1.3 trillion and then, in the extreme case, spent none of it, a depression would inevitably follow in the frantic attempt to liquidate assets.

None of this, of course, is necessarily an endorsement of deficit spending. But Congress and the White House should ponder at what point the benefits of spending cuts exceed the cost. There is good reason to believe that spending cuts can serve a useful purpose in controlling inflation. But with inflation under control, as it is currently, there is equally compelling evidence that further spending cuts without matching tax cuts will prove recessionary and ultimately depressionary in their macroeconomic impact.

“But we need to balance the budget for our children and grandchildren,” comes the reply from the hard-core balanced-budget advocates on the left and right of the political spectrum. Well actually, there is no significant reason to believe that future generations will necessarily be unfairly burdened with a running deficit. The primary obligation of government is to provide future generations with a growing economic climate and sufficient economic infrastructure to compete effectively in an increasingly competitive global market. Surely if a balanced budget proves depressionary, government is not serving this larger purpose.

Nor is there any reason to believe, as some balanced-budget advocates contend, that future generations will be forced to pay back any lingering deficit. For one thing, in real terms, this would be virtually impossible; the GDP of future generations -all the goods and services offered up by that generation-belong to that generation and cannot possibly be passed backward through time to pay past debts. With a gold-standard, there was a price to pay; gold could be removed from the national supply to cover deficits. But under America’s current fiat currency system, a deficit really is nothing more than accounting.

WHAT ABOUT SAVINGS?

How about a deficit’s impact on savings? Some balanced-budget advocates contend that deficits eat into savings, thereby endangering the economic health of the nation. This, for instance, is largely the belief of the current Federal Reserve Board, including its chairman, Alan Greenspan. Yet this thinking overlooks the obvious. Real savings is more properly measured by real invest meet. If the effect of spending cuts without substantial accompanying tax cuts is to depress such investment, a balanced budget actually would impact savings, in a negative manner.

Beyond the economic ramifications, the embrace or rejection of these seldom-mentioned facts by American leaders will also likely have significant political ramifications. A political leader whose message is one of growth, expansion, and opportunity, for instance, will likely have a great chance at winning the hearts and minds of the American people, much like Ronald Reagan did with his powerful promises of economic expansion in 1980. Distressingly for Clinton’s reelection prospects, however, it appears that the White House is largely rejecting such a message.

This past January, for instance, Clinton’s chief economic adviser, Joseph Stiglitz, echoing administration sentiments, warned that the country’s current economic growth average of 2.5 percent is about the best that Washington can expect. He rejected the findings of Jack Kemp’s Commission on Economic Growth and Tax Reform that predicted that flat tax reform would likely double the country’s economic growth. Clinton’s message, as such, appears to be to convince the American people that there are inherent limits to their dreams and possibilitiesthat we ought to adjust ourselves to a less-than-perfect economic climate.

To Clinton’s political benefit, however, it does not appear that congressional Republicans have, at least in the minds of many Americans, clearly defined a progrowth economic agenda for the country either. Of course, many Republicans have championed such policies, but at least in part because of their ongoing obsession with a balanced budget that is based on a message of fear and frugality, this message has not resonated to the extent many Republicans may have hoped.

Yet there exists within some political (mostly Republican) circles great hopes that this message may still win the day. Echoing these sentiments, New York investment banker Felix Rohatyn, a leading candidate to fill a prominent Federal Reserve vacancy, observed in a New York Times op-ed piece last November that “the vast majority of the business community believes [the current economic growth rate] to be far short of our economy’s real capacity for noninflationary growth, as well as being inadequate to meet the nation’s private and public investment needs.”

Spurring growth and rejecting the ill-placed fears of some of our nation’s most hardened balanced-budget advocates represents perhaps the best hope for America’s economic advancement. But getting there will require a new look at some economic facts that, while currently not the focus of our political culture, require pressing attention.

Michael Johns served in the Bush administration as a speechwriter at the White House and U.S. Department of Commerce and previously as a policy aide to former New Jersey Gov. Thomas Kean. He is now a public-policy analyst and consultant based in Arlington, Virginia.

Gold Near 6-Month High, Ahead of ECB Meeting

Looks to me like the central bankers are worried the outcome will be inflationary, or worse. Seems when gold goes up it turns out it was central bank buying of one sort or another.
For all practical purposes they have an unlimited budget to buy gold. It falls under what I call off balance sheet deficit spending. The central bankers buy in their own currency, paying for it with a credit to the account of the seller’s bank they enter on their own books. The gold is accounted for as the asset and the (new) funds credited the liability, no questions asked, no budget rules involved.