CHINA - Withdraws Liquidity

The Reflation Party Is Ending As China Withdraws Market Liquidity For First Time In Eight Months 02-19-13 Zero Hedge

Since institutional memories are short, it is time to remind readers that it was the threat, and subsequent reality, of China overheating in the spring and summer of 2011 (when record high food prices sent the entire North African region in a state of coordinated revolt and gradually moved far east), when even the Great firewall of China could not block news of frequent break outs of localized violence from hungry and angry mobs, that halted and broke the spine of the great reflation trade then (and yes, 2013 has so far been a carbon copy replica of 2011 as we summarized in "It's Deja Vu, All Over Again: This Time Is... Completely The Same").

Furthermore, as only Zero Hedge forecast back in mid-2012, when ever other commentator was shouting over the rooftops that an RRR or interest rate cut out of Beijing was imminent, the PBOC would be the last to stimulate the market with monetary easing as it was well-aware that an entire developed world reflating at the same time would hit none other than China the fastest as the hot money flew straight into Shanghai. Just as it did in 2011. So instead China proceeded to engage in a series of daily reverse repos, or ultra-short term liquidity injections that prevented the advent of wholesale inflation: after all the Fed, the BOJ, the ECB and soon, the BOE, were doing it for them. And the last thing the country with the highest allotment of CPI, or book inflation, to food and energy can afford, is to let foreign central banks dictate its price level. After all, it has more than enough of its own.

Well, the Chinese New Year celebration is now over, the Year of the Snake is here, and those following the Shanghai Composite have lots to hiss about, as two out of two trading days have printed in the red. But a far bigger concern to not only those long the SHCOMP, but the "Great Reflation Trade - ver. 2013", is that just as two years ago, China appears set to pull out first, as once again inflation rears its ugly head. And where the PBOC goes, everyone else grudgingly has to follow: after all without China there is no marginal growth driver to the world economy.

End result: China's reverse repos, or liquidity providing operations, have ended after month of daily injections, and the first outright repo, or liquidity draining operation, just took place after eight months of dormancy.

From the WSJ:

Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.

The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.

The People's Bank of China used a liquidity-draining tool in the interbank market that enables the central bank to borrow money from commercial lenders. It withdrew 30 billion yuan ($4.81 billion) by offering 28-day repurchase agreements, alternatively known as repos. The PBOC hadn't offered repos since June.

"The central bank is trying to send a message that it will not tolerate too-easy liquidity conditions," Dariusz Kowalczyk, a senior economist at Crédit Agricole, ACA.FR +0.22% wrote in a research note.

The central bank had pumped a record amount of cash into the interbank market ahead of the weeklong Lunar New Year holiday, which ended Friday. The break typically spurs increased spending for gifts and travel, and shuts down financial markets.

Also pumping cash into the system have been overseas investors, as the economy picks up steam and expectations of yuan appreciation grow. The central bank and financial institutions bought a net 134.6 billion yuan of foreign currency in December, almost double the 73.6 billion yuan in November, according to Wall Street Journal calculations based on official data.

"The PBOC's move Tuesday was also likely triggered by an increase in capital flows into China and worries about inflation," said Yang Weixiao, a senior fixed-income analyst at Lianxun Securities.

How perceptive.

The next question is how soon until the PBOC makes a courtesy call to the Fed, the ECB, and all other central banks, and politely requests that they shut it all down. Because while there may be slack elsewhere, China will no longer absorb the same systemic excess liquidity that has pushed gas prices to the highest level on this day in history, at the fastest pace in years.

Finally, for those wondering just what signal gold was waiting for to surge in the same parabolic fashion as it did in 2011, the answer is: this. Because unless the PBOC can get inflation under control, and this time it means getting one more central bank to cooperate with the BOJ now acting on behalf of Goldman's open-ended easing paradigm, the locals will hardly be preserving their purchasing power by warehousing pork and rice...

GLOBAL MACRO - The Endgame

The Global Endgame in Fourteen Points 02-15-13 OfTwoMinds Charles Hugh Smith

An over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

I have endeavored to lay out the global endgame in four recent entries:

• Is This the Terminal Phase of Global Capitalism 1.0? (February 8, 2021)
• Note to Fed: Giving the Banks Free Money Won't Make Us Hire More Workers (February 11, 2021)
• Cheap, Abundant Credit Creates a Low-Return, Bubble-Prone World (February 12, 2021)
• Europe Is Not "Fixed": Two Charts (February 13, 2021)

For those seeking a summary, here is the global endgame in fourteen points:

1. In the initial "boost phase" of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.

Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.

3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

In other words, financialization is untethered from the real economy of producing goods and services.

4. Initially, financialization generates enormous profits as credit and leverage are extended first to the creditworthy borrowers and then to marginal borrowers.

5. The rapid expansion of credit and leverage far outpace the expansion of productive assets. Fast-expanding debt-money (i.e. borrowed money) must chase a limited pool of productive assets/income streams, inflating asset bubbles.

6. These asset bubbles create phantom collateral which is then leveraged into even greater credit expansion. The housing bubble and home-equity extraction are prime examples of theis dynamic.

7. The speculative credit-based bubble implodes, revealing the collateral as phantom and removing the foundation of future borrowing. Borrowers' assets vanish but their debt remains to be paid.

8. Since financialization extended credit to marginal borrowers (households, enterprises, governments), much of the outstanding debt is impaired: it cannot and will not be paid back. That leaves the lenders and their enabling Central Banks/States three choices:

A. The debt must be paid with vastly depreciated currency to preserve the appearance that it has been paid back.

B. The debt must be refinanced to preserve the illusion that it can and will be paid back at some later date.

C. The debt must be renounced, written down or written off and any remaining collateral liquidated.

9. Since wages have long been stagnant and the bubble-era debt must still be serviced, there is little non-speculative surplus income to drive more consumption.

10. In a desperate attempt to rekindle another cycle of credit/collateral expansion, Central Banks lower the yield on cash capital (savings) to near-zero and unleash wave after wave of essentially "free money" credit into the banking sector.

11. Since wages remain stagnant and creditworthy borrowers are scarce, banks have few places to make safe loans. The lower-risk strategy is to use the central bank funds to speculate in "risk-on" assets such as stocks, corporate bonds and real estate.

12. In a low-growth economy burdened with overcapacity in virtually every sector, all this debt-money is once again chasing a limited pool of productive assets/income streams.

13. This drives returns to near-zero while at the same time increasing the risk that the resulting asset bubbles will once again implode.

14. As a result, total credit owed remain high even as wages remain stagnant, along with the rest of the real economy. Credit growth falls, along with the velocity of money, as the central bank-issued credit (and the gains from the latest central-bank inflated asset bubbles) pools up in investment banks, hedge funds and corporations.

The net result: an over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

Here are three charts that illustrate #14:

1. Eurozone credit since the inception of the euro. This is roughly equivalent to TCMDO (Total Credit Market Debt Owed) in the U.S.
2. Eurozone credit growth
3. Money velocity in the U.S.

That is the endgame in three charts. Checkmate, game over.

FIAT CURRENCY COLLAPSE - The Fiat Failure - NWO Linkage

Prepared or not - it is coming 02-18-13 PRAVDA Jim Jones, New Zealnd

We are talking about nothing more substantial than monopoly money being used for international trade.  Put a US Dollar bill alongside a Monopoly bill and I say to you that the only difference between them is people's faith in the US Dollar Bill. As soon as that faith is shattered, either by planned devaluation or people becoming aware and a panic run, the dollar will be as worthless as the monopoly money.

So concerned am I about the impending collapse and the turmoil and trouble that will follow it, that I feel a Don Quixote desire to spread this warning and spare as many as I can from the heartache that will follow.  To be truthful, however, I feel as John The Baptist, shouting in the wilderness "Make straight the way of the Lord".

Too many will not look at events and facts and take the time to dispassionately evaluate them, preferring instead to fall back on predetermined conditioning as to the accepted order of things and what they have been told to believe. Do you remember the 60's [I do], the wave of political unrest and questioning and protesting? There were debates on TV [when is the last time you saw a proper debate like they used to air?], protesters were given air time and the Vietnam war was stopped by political protest.

....

WAR

While under our capitalistic model, greed propelled growth and growth spawned waste. [Just check out our land-fills sometime].  In capitalism, a company has to either grow or die.  Like fish in the sea, the bigger ones swallow the smaller ones and so get bigger.  Companies gain political pressure, eventually becoming duopolies and monopolies capable of controlling economies and nations.  These captains of industry work together to steer a nation in the direction which furthers their growth and profit, regardless of the social cost of such manoeuvring.

To maximise this headlong stampede to growth and wealth, there can be no better vehicle than war - war is the ultimate waste of human endeavour, life and natural resources. 

GOLD

The obstacle to this growth is the creation of capital - if pegged to a standard [say gold] then the expenditure is finite - it will match what you have in gold reserves.  The FED skilfully and cleverly removed the Dollar, and subsequently other world currencies, from the gold standard; introduced worthless fiat money which they could mint to their heart's content.  This coupled with the debt society and the path was set to exponential national debt.  Totally, unrealistic debt which a country could never hope to repay.

All the time however, gold has been horded and stolen. When a person "buys gold" they don't get the gold they have bought - rather they get a piece of paper to say that they own a certain amount of gold.  I call these "monopoly vouchers".  Gold that was supposedly secured and held by the FED has transpired to be imaginary.  Consider the episode whereby the FED refused an audit on the German gold being held - and agreed a delivery time of 7 years (yes, they will take seven years) to return to Germany what is rightfully theirs.  Any reasonable person would ask, why was the gold not repatriated on demand?  Surely if you own it and ask for it back, it is not unreasonable to expect immediate delivery? The most obvious answer is that it simply is not there.

The FED has engaged in fractional gold trading as they have done with fiat money.  They have sold more than they hold and what is more, any full audit of the total certificates of gold held will show that it is more than known world gold reserves.

There was one hope only - that of wrestling power off the FED - to separate the FED from the control of money. 

Executive Order 11110 AMENDMENT OF EXECUTIVE ORDER NO. 10289

John F. Kennedy The White House, June 4, 1963.

By challenging the power of the FED and returning currency control to the government, J F Kennedy sealed his own fate - call it coincidence that both he and Lincoln met the same fate for similar actions. 

With unlimited powers to print money and charge the government for it - the FED could feather the pocket of any corporation, government, NGO and individual that they desired. The concept that "everyone has a price" made it a simple matter for them to influence world events further emphasising the passage of Scripture;

For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows. 1 Tim 6:10.

Although Executive Order 11110 has never been repealed [nor any other president tried to effect it] there reached a point very quickly, whereby it could not be executed as there simply was insufficient bullion to pay for the national debt. [Besides no president with the intestinal fortitude to challenge the FED].

Currently, there are some states talking about the introduction of their own currency, based on bullion. [Virginia is one, Utah is following suite].  Creating in effect, a dual economy - hold this thought as we will return to it later.

EURO

The New World Order [NWO] had tried to pre-empt this situation previously by the introduction of what was hoped to become a one World Currency - the Euro. [Or at least a currency to take over when the FED dollar crashed]. The actions of the central banks were firmly behind this move to take the sovereignty of nations by controlling the money supply.  However, the move was a unmitigated disaster - just ask the PIGS group! The French are no better - they had to start a war against Libya to prevent Gaddafi withdrawing his Euro from French banks and establishing his Gold Dinar for Africa.  French banks are teetering on the brink of collapse now, the demand for capital to be returned - capital that the banks do not have because of fractional banking -  would have seen the bankruptcy of France.  So once again a nation went to war for the banks.

The one currency cannot work - Greece can attest to that! They cannot compete against cheap imports from say Germany, while their exports are too small in revenue to meet their debt.  By having to pay the same currency as Germany - they will never get out of the problem and continued increased loans, is just heaping coals upon the fire.  If Greece had it's own currency, then it could devalue against the German currency [Euro] and so make further imports from Germany less attractive and exports from Greece, more attractive.  Do you think the IMF masters would ever agree to that?  No, they are too greedy and concerned for the worthless value of the loans that they have already advanced.

CHINA

One thing I have noticed however, the Chinese people are not fools - they are astute businessmen. I have seen several reports of commentators visiting China and commenting on the number of new, modern cities that are built but not habited. Some have laughed at the situation and others have simply marvelled in wonderment at the purpose of these cities.  I have an opinion as to the purpose of these cities and it goes like this.

China has been caught out holding vast sums of FED currency - after all, someone had to collect the money that was being printed.  Some time ago, China came to the conclusion that this currency was actually worthless and they would not be able to redeem it in the future. The solution was to spend is as quickly as they could on tangible assets and resources. China has been buying up resources from around the world at an alarming rate -  this buying spree has actually increased commodities prices much faster than any rise previously. The payment for all this resources going to China was worthless dollars.  Not only that, but China has been on a buying spree purchasing farms and infrastructure around the world; I know that from events in New Zealand whereby China has taken a very keen interest in our dairy and beef farms - buying up one of the largest farms in New Zealand.  The building of cities for future use is but an extension of this "prepper's" mentality.  The divesting of US currency for something of value - spend it while you can and while it is still being accepted. [Similar to the concept I proposed in my previous article].

Whatever, someone is going to be left holding monopoly money; there is just so much of it out there and it has generated so much world debt.  The eventual collapse of this currency will cause major ramifications for people and nations around the world.

Go back to my earlier comment about alternative currency based on bullion. The only escape for America is a drastic move; a move that would require courage and secrecy to carry out.

SOLUTION

The American national debt is based on FED currency, whereas if Executive Order 11110 was enacted and currency minted by the government backed by bullion and guaranteed by the government in bullion was minted and distributed, the government would have it's own money with which to trade and maintain industry and public order.  The debt having been effected in FED dollars, needs to be repaid in FED currency.  The government could in effect, walk away from the debt and leave the FED holding it.  In effect, the worthless FED currency can be dropped over night and with it all debt abolished that is based on that currency.  All who are holding FED currency are holding fire fodder.  The international ramifications of this are immense - what are the chances of this happening? Can it be done so secretly that the FED does not step in to kill it off before it is born?  Or is the FED so arrogant that they are prepared to have the FED dollar fall into oblivion?

'SUPER' CURRENCY

Some countries I feel, recognise this; countries such as Russia, China and Japan and this is partly behind the move to use their own currencies for trade between each other and the move to establish a "super currency" [proposed by Russia] for international trade. In doing so, they will lessen their exposure to the risk of holding FED currency and wrestle sovereign control of their currency from the NWO.  Whatever the result, we are in for a period of austerity and responsible growth - expect a revaluation of all things that you own.

The questions to ask are; when will this happen - not if; and where will the International Travellers go when the FED collapses?

OMF - Overt Monetary Financing

Helicopters Can Be dangerous 02-17-13 Financial Times Gavyn Davies

The FT recently called for a serious debate on the idea that budget deficits should be permanently monetised by the central banks. So far the most prominent response from an active policy maker has come from Lord Adair Turner, the outgoing Chairman of the UK Financial Services Authority, and a former candidate to become Governor of the Bank of England [1].

Lord Turner is under no illusion that his discussion of this policy option will open him to ridicule or worse in some quarters. He expects to be called a “dangerous man”, which is a strange description for this typically cerebral product of McKinsey. Yet he considers this risk worthwhile because he believes there should be a rational comparison between OMF or overt monetary finance (a less inflammatory term than the usual “helicopter money”) and the quantitative easing favoured by today’s central bankers.

In public, central bankers like Ben Bernanke, Mark Carney and of course the entire ECB remain firmly opposed to this idea. But it is probably being implemented in Japan, and I have been surprised (and worried) at the willingness of mainstream central bankers in the US and the UK to contemplate the option in private. This blog serves as a reminder of the serious dangers involved.

The Difference Between OMF and QE

If implemented as stated, there is little difference between QE and OMF in the short run, but a very large difference in the long run.

Both policies involve the purchase of government debt by central banks to finance budget deficits, using newly created bank reserves to finance the purchases [2]. The key difference is that in the case of QE, the bonds are (in theory) only parked temporarily at the central bank, while under OMF the purchases are never intended to be reversed. This means that the increase in the monetary base is temporary in the case of QE, and permanent in the case of OMF.

A second difference is that, in the Turner version of OMF, there is also a deliberate rise in the budget deficit, compared to what otherwise would have happened. This means that the policy requires co-operation between the fiscal and monetary authorities, while QE is built around the proposition that the two policies are determined at arms length.

In theory, QE involves no increase in the budget deficit, only a different form of financing for a given deficit. However, the Turner version is not the only possible formulation of OMF. It is possible to leave the budget deficit unchanged in both cases and simply focus on the difference between financing methods.

Under OMF, the ultimate link between budget deficits and public debt is broken. (Money does not count as debt.) In contrast, this link is maintained under QE, because eventually the private sector needs to repurchase the bonds held by the central banks.

This means that the private sector must assume that its savings will one day be tapped to fund budget deficits under QE, while savings will never be tapped under OMF. The breakage of the link between the government’s decision to run a budget deficit, and the public’s willingness to finance deficits at acceptable interest rates, removes the critical discipline which markets impose on governments. You do not have to be a fan of Machiavelli to believe that this might end badly.

Because it does not tap private savings, OMF financing will be much more expansionary than QE on a dollar-for-dollar basis. Supporters of OMF, like Lord Turner, see this as an advantage, and say that it means that the medicine would need to be applied in much smaller doses than QE. The possibility of introducing OMF in small doses, controlled by the central banks, is seductive: supporters argue that not all roads necessarily lead to Zimbabwe.

Intellectual Antecedents

Lord Turner argues that permanent money financing of deficits has an impressive intellectual lineage, including Chicago economists Milton Friedman and Henry Simons. However, it is more normally associated with the work of Abba Lerner, a radical economist who departed the LSE for the US in 1937 and gained notoriety by arguing that the financing of budget deficits should be determined only by the impact it has on inflation and interest rates, with no a priori preference for bond financing over monetary creation as the normally preferred method. Lerner’s writings, which are sometimes regarded as more Keynesian than Keynes himself [3], have inspired the school of modern monetary theory which thrives nowadays on the web.

However, today’s leading Keynesians like Paul Krugman differ from the MMT school, because they believe that in the long run, once the economy has escaped from its current liquidity trap, the monetary base must be brought back to normal, following a period of QE, in order to prevent inflation rising. Furthermore, they tend to believe that the stimulative effect of budgetary policy is measured, to a first approximation, by the size of the budget deficit, and not by the form in which it is financed. Finally, they do not worry much about the stock of public debt, or about Ricardian equivalence, so they are not attracted by financing methods which create money in order to hold public debt down.

Inflation Expectations

The traditional concern of central bankers is, of course, that the permanent monetisation of budget deficits will lead to an unhinging of inflation expectations. That is not exactly an original objection, but it cannot be swept under the carpet.

Lord Turner responds as follows. He believes that all forms of monetary or fiscal stimulus, conventional or unconventional, work by increasing nominal demand in the economy. Once demand is increased, the split between higher prices and higher real output is determined separately, according to whether there is enough spare capacity to allow real output to expand in line with the extra demand. The particular method used to increase demand is independent of how inflation responds to the monetary stimulus.

Turner prefers to choose a method which he knows will be successful in boosting demand, rather than worrying about the different inflationary consequences of different methods, because he does not allow much role for inflation expectations to be affected differently by OMF compared to QE. But there is the rub.

In both monetarist and new Keynesian models of the economy, permanent monetisation will eventually produce higher inflation [4], although “eventually” may refer to a very long time indeed. It is much more likely that inflation expectations could rise markedly under permanent monetisation and, in my view, that is not a price worth paying for (perhaps temporarily) higher output.

Conclusion

Does that mean that no-one should ever contemplate using permanent monetisation? Well, never is a long time, encompassing many possible scenarios. Adair Turner and Martin Wolf make a very convincing case that Japan cannot find any other way out of the public debt trap into which it has fallen, except default or deep recession. Japan needs actively to raise inflation expectations. But neither the US nor the UK are anywhere there yet.

—————————————————————————————–

Footnotes

[1] Lord Turner’s analysis can be found in a detailed speech here, or in an interview with the FT here. Martin Wolf provides a sympathetic response here.

[2] The central bank does not have to buy bonds in the open market; it could also credit the government’s bank account in exchange for treasury bills, allowing the government to pay cheques directly to the public.

[3] A really interesting short article on the relationship between Keynes and Lerner, written by David Colander in 1984, explains that Keynes adjusted the public statements of his views so that they would be more acceptable to the political establishment. Lerner, in contrast, followed the logic of Keynesian economics remorselessly to the final destination. Some people may think this is what is happening today with helicopter money. Lerner’s most influential articles on this topic from the 1940s are here and here.

[4] Printing money by central banks is called seigniorage. In theory, there is a “safe” amount of seigniorage which any central bank can do without causing inflation, since the public’s demand for the monetary base will grow in line with nominal GDP. This has led to suggestions that the central bank can print money today up to the limit of its future “safe” limit of seigniorage, without causing inflation. This suggestion requires a more detailed discussion at a later date, but in my opinion it does not prevent inflation expectations from rising if OMF is introduced.

CURRENCY WARS - Who Will Devalue - Where there is Limited Asset Value

What Warren Buffett Doesn’t Understand About Investing 02-18-13 Tim Price of Sovereign Man blog, via ZH

“Price is what you pay; value is what you get.”
– Warren Buffett

Warren Buffett’s aphorism has been rightly celebrated. But to be a true value investor, it helps to have values.

Courtesy of near-zero interest rates and global competitive currency debauchery, it is increasingly difficult to assess the value of anything, as denominated in units of anything else.

To put it another way, the business of investing rationally becomes problematic when a significant number of market participants are pursuing maximum nominal returns without a second thought as to the real (inflation-adjusted) value of those returns.

Hedge fund manager Kyle Bass alluded to this problem recently when he pointed out that the Zimbabwean stock market had been the last decade’s best performer, but that owning the entire index would only buy you three eggs.

It is not just Zimbabwe. Markets everywhere, in just about everything, have now decoupled not just from their underlying economies but from reality.

There are signs that Buffett himself has decoupled from the value investing philosophy that made him the world’s most successful investor. Berkshire Hathaway is paying almost 20 percent more than Heinz stock’s all-time high in the deal announced last week, and the equivalent of 21 times 2013 earnings as opposed to the 16 times multiple which is the last decade’s average.

Say what you like about the business, but Buffett has not bought it cheaply.

To us, the more intriguing aspect to Warren Buffett is that he gives every indication of not understanding money. As he says, gold “gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Note that phrase: “It has no utility”. But utility, usefulness, purpose, value comes down to context. Context is everything. As Adam Fergusson bleakly put it in his moving account of Weimar Inflation in ‘When Money Dies’,

“In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano. A prostitute in the family was better than an infant corpse; theft was preferable to starvation; warmth was finer than honour, clothing more essential than democracy, food more needed than freedom.”

Buffett is chained to a rock of convention. He is hardwired to pursue money and he is very good at that pursuit. But he is not well programmed to consider the relative utility of money or its attributes as a lasting store of value.

Since 2000, the price of gold has outperformed the price of Berkshire Hathaway stock by over 300%. No particular surprise, then, that he should hate the stuff.

Likewise, many investors are losing faith in gold on the basis that its price in US dollars has recently declined. Context is everything. Express the price of gold in another currency, the Japanese Yen, and gold looks relatively buoyant:

So it comes down to what sort of money you want. And in an environment of competitive currency devaulation, it’s an important choice to make.

In making that decision, this helpful chart is used by fund managers at Stratton Street Capital to help assess sovereign credit quality. They suggest, and we believe, that it also has merit in assessing likely currency movements too.

In a global deleveraging that is likely to persist for some years, the heavily indebted countries (the darker colors in the chart above) will desperately need to attract foreign capital to help service their heavy debt loads. And in order to do so, they will likely devalue their currencies.

But one currency it doesn’t highlight is gold. There is an increasingly disorderly currency war going on out there, and the advantage of gold is clear– they can’t print it, they can’t default on it, and there will always be demand for it.

Simply put, in the global currency wars, owning gold is like abandoning the battlefield altogether.

MARKET VALUATIONS - Even Buffett Now Agrees for first time Since 2007

The New Buffett Rule: Equities Are Overvalued 02-15-13 Zero Hedge

Based on Heinz' new best friend from Omaha's "best single measure of where valuations stand at any given momen," US equities are now over-valued for the first time since 2007. Buffett's measure - the percentage of total market cap (TMC) relative to the US GNP - as Cullen Roche indicates on Bloomberg's Chart of the Day, crossed 100% this week into stretched territory. As Gurufocus notes, this implies a mere return of around 3.3% annualized (including dividends) ove rthe folowing years - though as is clear from the chart below - the ride is extremely bumpy...

CURRENCY WARS - Rules of Engagement

Allows countries to use monetary and fiscal policy for domestic goals.  It does not sanction foreign exchange targeting.  

Importance of the G20: Not What You Think 02-17-13 Marc To Market

There was something important coming from the G20 meeting, but it is not the currency wars that have captured so many imaginations in the media and blogosphere. It was about corporate taxes, but before turning to it, let's try to put the currency statement in perspective.

CURRENCY WARS

As many recognize, the currency market is prone to being used to pursue beggar-thy-neighbor policies of competitive devaluations.  The danger is that it leads to trade wars and then shooting wars.  The rules of engagement, as they have evolved over the last quarter of a century or so, are essentially three-fold.

• First, exchange rates are not proper goals of policy.  Economic growth and price stability are the proper goals of policy.  
• Second, foreign exchange prices are best set by the market in a flexible way to help foster the adjustment process and a reduction of global disequilibrium in terms of trade and capital flows.  
• Third, while avoiding excess volatility, currency prices ought to reflect underlying economic fundamentals and avoid chronic exchange rate misalignments.   On those rare occasions when action, is needed, it should be coordinated and not unilateral.  

The G20 statement, like the G7 statement earlier in the week, restated these longstanding principles.  That members agree not to target exchange rates for competitive purposes was a pointed reminder to Japanese officials to refrain from talking about bilateral exchange rate targets.  And indeed, over the past couple of weeks, Japanese officials have changed their rhetoric and have not talked about specific dollar-yen rates.  

Rarely in stories about currency wars has China been cited.  Yet, it is an indicated co-conspirator, as it were.  The G20 reference to moving more rapidly toward market determined exchange rates  and the importance of avoiding persistent misalignments was clearly addressed to China, and some other East Asian and Middle East countries. 

The rules of engagement allow and encourage countries to pursue monetary and fiscal policies directed at domestic goals.  For several years Japan has been encouraged to reflate its economy.  That it appears to be doing so is not problem.  No one in the G7 or the G20 have objected to that.  The criticism levied against Japanese officials is when they try to manage the currency, suggesting certain targets, and/or overt attempts by the government to undermine what is seen as the independence of the central bank.

It also means that the (unconventional) easing of monetary policy by the Federal Reserve is also not an act of (currency) war.  Leaving aside the occasional comment by Brazil's finance minister and a rare comment by a Chinese official, few in positions of responsibility accuse the US of engaging in a competitive devaluation.  

The referees of the rules of engagement as it were, like the IMF, the G20 and the G7 generally agree that although the risks may be there, the conditions and practices now do not meet the threshold of competitive devaluations, a currency war or trade war.  We expect the rhetoric in the traditional and social media about currency wars will die down in the coming period. 

The currency wars have been over-hyped.  There is less there than meets the eye.  The rules of engagement allow for countries to use monetary and fiscal policy for domestic goals.  It does not sanction foreign exchange targeting.  

Overhaul of International Corporate Tax Practices

The focus on currency wars distracts from other and arguably more important issues.  Much of coverage of the G20 statement focused on the foreign exchange market, but has missed what is likely an even more important story.

The G20 have begun a process that could lead to the largest overhaul of international corporate tax practices since the 1920s.  The combination of the fiscal pressures at home and the increased importance of intellectual property (e.g., royalties, licensing fees) and questionable transfer pricing corporate practices has elicited a response.  

The official goal is to develop measures to stop tax arbitrage--the shifting of profits from home countries in order to pay lower taxes elsewhere.  A recent OECD study found multinational companies were increasingly booking profits in different countries from where they were generated in order to avoid taxes.

The role of intangibles, like intellectual property rights, services and brands have grown in importance but are difficult to value.  International royalty and license fee payments paid to different subsidiaries within the same business group have soared.  The growing volume of e-commerce also raises issues of the proper tax jurisdiction that are not handled well by the current tax rules.  

This comes even as OECD government have cut statutory corporate tax rates from an average of 32.6% in 2000 to 25.4% in 2011.  The effective tax rate, which is what corporations actually pay, is often much lower due to assorted deductions and allowances.

Recent reports showing that a number of large well-known global companies, such as Starbucks, Apple, Google, Amazon used complicated inter-company transaction to reduce their tax liabilities has helped spur official action.   The big accounting firms are also being called out for the assistance they provide in helping businesses avoid taxes.

Essentially, the OECD has called for, and the G20 appears to have signed off on, a new effort to modernize the international tax architecture, which could be ready in the next couple of years.  Three committees have been established and more from them will likely be heard around the July G20 meeting.  

The UK will head up a committee to look at transfer prices and the sales to subsidiaries to shift profits from high to low tax jurisdictions.  It is illegal, for example, to structure a particular transaction for the purpose of skirting the law (it is sometimes referred to as "kiting").  For example, it is unlawful for one to withdraw $5000 twice instead of withdrawing $10,000 once in order to avoid reporting requirements.  Can the same principle apply to businesses? 

Germany will head up a committee that investigates way in which companies have reduced the tax base in the accounting of income and assets.  France and the US will lead the third committee, looking at e-commerce in particular, and the proper tax jurisdictions. 

The Obama Administration has been wrestling with the same issue.  Once we get past the sequester and the continuing resolution (authorizes government spending even without a budget), look for corporate tax reform to become more salient.  The fact that it will come after the other events, gives Obama some leverage with the business community, even when it came to the fiscal cliff.  

It is ironic that Obama, who has been accused of being a socialist, is on record of favoring corporate tax reform that include a cut in the top corporate rate to 28% from 35%.  More important than the loopholes he wants to close to pay for the tax cut, is how overseas earnings should be taxed. 

Currently, the US taxes corporate profits earned abroad only when it is repatriated--brought back to the US.  Last month, the nonpartisan Congressional Research Service reported that US-based companies are increasingly shifting profits to tax havens such as Bermuda and Switzerland.  Senator Sanders (VT) has introduced legislation to end the current tax deferral and force companies to pay taxes on their foreign earnings.  Some studies suggest that the higher levels of cash  US corporations are holding is partly a function of these tax avoidance efforts.

At the end of last year, Obama expressed some sympathy for some form of territorial system, which taxes domestic not foreign income.  It could exempt offshore corporate profits from US taxes, seemingly shifting the stance of the 2012 election campaign.  Currently, France, the Netherlands, Belgium and Hong Kong employ a territorial tax system. 

The real news from the G20 meeting is the formal beginning of a process that could very well lead the largest substantial change in international corporate tax system in almost a century.  

THE CURRENCY WAR GAME - "I rebalance my economy, you competitively devalue"

There's a Feeling of Instability Bubbling Up 02-18-13 WSJ

Failure by the G-20 to take a more aggressive stance on monetary easing could help intensify currency wars.

There's a back to the future feel about the global economy right now. The only question is back to what future? The obvious answer considering the events of the past week is

The 1970s. There are plenty of echoes in the world today of the

• currency instability,
• rising inflation,
• rising unemployment and
• political uncertainty that marked that troubled decade.

Over the weekend, finance ministers and central-bank governors from the Group of 20 industrialized nations tried to play down fears of new currency wars that have been spooking markets since last month's election of a new Japanese government. The

Bank of England recently became the latest central bank to relax its inflation-fighting credentials by formally abandoning its long-standing objective of returning inflation to its 2% target within two years.

Meanwhile European gross domestic product shrank by more than forecast in the fourth quarter, creating fresh uncertainty over when the recession will end.

But it doesn't take much of a leap of imagination to see shadows of a very different decade: as in the early Noughties, the dominant dynamic in the markets today is a desperate search for yield that is fueling potential asset bubbles across global markets. Just as the U.S. Federal Reserve loosened monetary policy in the aftermath of the dotcom crash, central banks have been again flooding the world with easy money to try to pull the global economy out of its current malaise. And as in the past decade, there is evidence that all this liquidity is leading to asset-price inflation even as consumer-price inflation remains low, with concerns about bubbles in assets as varied as Swiss, Canadian and London real estate, emerging-market equities and the European corporate-credit market.

At the same time, some believe Warren Buffett's proposed $28 billion takeover of Heinz may mark the start of a new giant leveraged buyout boom. On this analysis, the seeds of the next financial crisis may be being sown before the current one is over.

So which decade will the current one resemble? The reality is that talk of 1970s-style currency wars looks premature. True, the G-20 statement designed to cool anxieties was bland and unconvincing; it acknowledged that "excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability" and it committed governments to "refrain from competitive devaluation."

That still leaves ample scope for further devaluations so long as they happen to be:

the serendipitous byproduct of domestic monetary policy pursued for domestic reasons rather than efforts to "target our exchange rates for competitive purposes."

Indeed, the global currency debate is full of humbug.

The U.S. was the first country to be accused of waging currency war, when Brazil objected to the Federal Reserve's second round of quantitative easing in 2011, which was widely seen as a naked attempt to drive down the dollar.

The new Japanese government may now claim that its promise of a massive monetary and fiscal stimulus is solely designed to boost the domestic economy but it has made little secret of its desire to see a weaker yen.

Similarly, Bank of England Governor Mervyn King has been open in his view that a further devaluation of sterling, on top of the 20% depreciation since the start of the global financial crisis is needed to further rebalance the economy—even while warning that other countries risk triggering competitive depreciations.

In fact, Mr. King could be said to have coined a new irregular verb: "I rebalance my economy, you competitively devalue, he has started a currency war."

Even so, there are good reasons to believe that talk of currency wars is, for the moment, just talk. First, it is hard to argue that any advanced economy has so far secured a significant competitive advantage via its exchange rate. Even after Japan's near-20% devaluation this year, the yen is still trading within its long-term range, having been significantly overvalued over the past few years as it attracted safe-haven flows in response to the euro crisis. Similarly, the recent rise in the euro is hardly conducive to growth and has caused some anxiety in some European capitals, but the currency is still within its long-term range against the dollar.

The exception is the U.K., which has somehow escaped international censure despite the biggest depreciation of any major currency—perhaps because it has apparently derived so little benefit from it.

Besides, it's hard these days to win a currency war. So long as global consumer-price inflation is low, estimates of spare capacity are high and central banks are willing to "look through" short-term inflation spikes, every country has access to the chief weapon needed to fight the war—ultraloose domestic monetary policy. Indeed, the yen's previous rise partly reflects the Bank of Japan's reluctance to expand its balance sheet as much as the Fed, BOE, or the European Central Bank. At the same time, the global prohibition on competitive devaluations appears asymmetric; countries that have intervened to prevent their currencies rising, such as Switzerland, have so far escaped censure. Goldman Sachs GS -0.60%argues this de-facto global stand-off over currencies represents an unofficial Global Exchange Rate Mechanism.

POLITCAL REACTION KEY

But if the price of avoiding currency wars is even looser monetary policy, this brings risks of a different kind. How policy makers respond to possible new asset-price bubbles will be crucial in determining whether the rest of this decade is a replay of the '70s, the Noughties or something more benign.

On this score, perhaps the most interesting development last week was the Swiss National Bank's SNBN.EB +1.67%decision to impose extra capital requirements on Swiss banks' exposures to the domestic mortgage market. This was one of the first attempts by a central bank to try out the big new idea of the postcrisis world: macro-prudential regulation. Whether it succeeds in cooling an over-heating market remains to be seen.

Nor is it clear how ready other central banks are to use these new powers. After all, central banks have so far largely welcomed rising asset prices as a sign of restored confidence and view low yields as creating an incentive for investment.

In the absence of domestic political support, it would take a brave policy maker to argue that soaring asset prices risk creating a new debt-fueled misallocation of capital and threaten to pull away the punch bowl. But perhaps they're made of sterner stuff these days.

CURRENCY WARS - Not Good for US$ and US Equities

There Is A Winner In The Currency War 02-17-13 Zero Hedge

With the G-20 (and G-7) concluding with what appears to be a slap on the wrist and a wink-and-a-nod to Japan, it seems the game of competitive devaluation will continue. Much pixel and ink has been spilled the 'potential' winners and losers in such an evolving game, but as Bloomberg notes, there has been one winner in the last 10 years each time the world has fretted over "currency wars". As fear (and actuality) of currency wars flares, the USD has borne the brunt of the buying. From 2004's JPYtervention to Mantega's 2010 comments and each time in between, when competitive devaluation is on the world's lips, then the USD is implicitly bid as the currency du jour is offered to any and every willing carry trade riderthere is. The trouble is - for the lowly US investor - each time the USD is bid, so the US equity market has hit an FX-translated earnings hump and fallen back. So while talking heads will exaggerate the nominal performance of Japanese and British equity markets as their currencies free-fall, perhaps the US investor should be careful what they wish for.

As the world's reserve currency, the effect of a devaluation of a non-reserve currency (i.e. everything else) is implicitly to put upward buying pressure on the USD...

and each time the "currency war" flare has occurred, this USD strength has led to notable US equity weakness...

so perhaps, all those 'interventionist' hopers should be a little more nervous about the apparent decoupling of the US market - as its rotation unwinds...

Charts: Bloomberg

AUTHORITARIAN CONTROL - Apathy leads to the Inevitability of It Happening

Why Don't People See 02-18-13 Monty Pelerin's World via ZH

I meet people that still believe that the world is fine. They believe things like:

• The US government has plenty of money.
• Government cares for its citizens.
• The economy cannot crash.
• We are not in a recession (Depression).
• The lives of their children will be better than their own.
• The government can continue to print money to fund promises they cannot afford.

Despite these untenable beliefs, these are not stupid people. Many are professionals who do quite well — doctors, lawyers, dentists, college professors, etc. They are not  zombies, our walking dead, have no idea about what is happening around them no less the way things work in an economy, society or the world. It is our educated who should care yet seem to be oblivious to what lies ahead.

The ignorance and/or lack of concern of this group is perplexing and maddening. They are certainly capable of understanding. It is also in their interests to comprehend, as they are the ones who will lose the most. How does one open their eyes? What can they be shown to arouse them from their ignorance?

Sadly, I don’t have answers to these frustrating questions. It is not that others have not presented the information as much as these people refuse to acknowledge the implications. Are they all too busy? Are they idiot savants who are geniuses in their fields but not very smart away from it? Warnings come from many sources and from many different perspectives, yet they do not seem to penetrate the minds of those most capable of effecting change.

From a self-interest standpoint, this productive group should be the most concerned. After all, they are ground zero for the Socialist schemes that are destroying society. They are the ones that will be crushed in the redistribution dreams of our political class. Will they awaken too late? Or, will many of them just withdraw their productivity by retiring early, emigrating, etc.?

I don’t have answers to these questions, but I do know that this professional class is about to become prey for our predatory State. And, when that happens, they will hurt but not nearly as much as the rest of us.