The Daily Reckoning November 9th


The Bagel Ban

Because New York has solved all its other post-superstorm Sandy problems, Mayor Michael Bloomberg has banned food donations to the homeless.

“I can’t give you something that’s a supplement to the food you already have? Sorry that’s wrong,” says Glenn Richter, who gathered surplus bagels from a synagogue to drop off at a city-run homeless shelter.


Sorry, no-go. The city has no way to examine the salt, fat and fiber content of donated food.

Achtung: Verboten!“My father lived to 97,” Richter tells WCBS-TV “my grandfather lived to 97, and they all enjoyed it, and somehow, we’re being told that this is no good and I think there is a degree of management that becomes micromanagement, and when you cross that line simply, what you’re doing is wrong.”

What’s the city worried about? Lawsuits? From homeless people who’ve been displaced by the superstorm? Over fat and salt content in the food?

They don’t accept donations “for the things that we run,” Mayor Bloomberg told puzzled reporters, “because of all sorts of safety reasons, we just have a policy, it is my understanding, of not taking donations.”

When reminded it was his minions who put this rule in place only recently, he upped the ante: “If they did [accept food] in the past, they shouldn’t have done it and we shouldn’t have accepted it.”

Let them eat cake, indeed. But only a vegan, unsalted, sugar-free cake, apparently… good lord.

Addison Wiggin

The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.

The Bagel Ban appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Down the Debt Drain

The US has too much debt. This is no longer a controversial statement. Some may believe other problems are more urgent, or that we need to grow our way out rather than slash spending. But even the most spendthrift pundits acknowledge that the debt-to-GDP ratio of the US must decrease if we are to have a stable, prosperous economy.

The private sector has reacted to this over-indebted reality as you would expect: by deleveraging. Since 2008, households and businesses have extinguished 67% of their debt when measured against GDP. Some paid debt down purposefully, and others defaulted. For our purposes, it doesn’t matter how the debt went away. Only that it did.

Meanwhile, the government has done the exact opposite. It has upped its own borrowing by 52% of GDP since 2008.


As a result of these countervailing forces, the aggregate debt-to-GDP ratio has declined only slightly since 2008. Had the government not stepped in, the US economy would be well on its way to a sustainable debt path. Instead, it has shed a paltry 15% of GDP. In other words, government borrowing largely offset private deleveraging.

Total US Debt-GDP

Why, in a country that so desperately needs deleveraging, would the government do such a thing?

The typical response is that such a quick and drastic drop in debt would have flung the US into a depression. That’s probably true, as far as it goes. There’s no denying that debt growth correlates strongly with GDP.

But it’s only half the story. And the other half is more important.

Filling the debt gap with just any borrowing doesn’t cut it. In order for debt to aid in economic growth, it needs to be productive. Borrowing for the sake of borrowing is worse than ineffective — it’s destructive. Debt itself is neither good nor bad. It depends on what the borrower uses the money for.

Consider a businessman who borrows money to invest in a new project. If his endeavor is successful, it generates enough income to service the debt and return a profit. His income rises more than his debt. Viewed from a macro perspective, GDP rises faster than debt, and so the debt-to-GDP ratio declines. Paradoxically, he actually reduced the debt-to-GDP ratio by taking on debt. This is good debt.

Then there’s unproductive debt, which is bad. And in times of over-indebtedness, it’s really bad. Think your neighbor buying a TV on credit. He now has more debt with no additional income. He has added to debt, but not productivity. This is bad debt.

The government is the undisputed champion of creating bad debt. Borrowing to spend on weapons, relics (the post office), and losers (Solyndra) does not produce wealth. Even if you argue that some of these expenditures are necessary, they are certainly not productive, in the sense that they add only to the debt side of the ledger without even the prospect of producing income.

That’s the fatal flaw of the government stepping in to fill the borrowing gap. Government debt is dead weight. It is a detriment without a corresponding benefit. And even worse, it crowds out private investment, accomplishing the exact opposite of its alleged goal of spurring growth.

The borrowing gap should be filled either with productive debt or not at all. Private businesses are indeed beginning to grow credit, albeit very slowly. That’s a good sign, especially for equities — a factor that is shifting the balance between stocks and bonds that investors should have in their portfolios. But glance up at the chart one more time. Government borrowing has metastasized to the point that it consumes a third of all debt in the US, leaving private borrowing precious little room to grow.

All debt is not created equal. If the debt doesn’t produce growth, it’s a waste at best, and a destruction of wealth at worst.


Dan Steinhart,
for The Daily Reckoning

Down the Debt Drain appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

There’s Still a Case for Gold

Thirty years after its first publication in 1982, The Case for Gold remains remarkably timely. The Case for Gold is the minority report of the U.S. Gold Commission and lays out a thorough and comprehensive defense of sound money. Today, The Case for Gold remains a timeless piece of scholarship, offering successive generations both a prescient warning and a path to sound currency and a stable U.S. dollar.

When Lewis Lehrman and I submitted this minority report, it had been 10 years since Richard Nixon, by executive fiat, ended the last vestiges of the gold standard. Those intervening 10 years should have shown us again what all of human history teaches: When a nation adopts paper (which can be printed without limit) as the basis of its monetary system, the results cannot be good for the people. The elites and the government can fare pretty well for a time, but the people suffer in the end. Paper money experiments, usually adopted as temporary expedients, do not end well for anyone.

The 1970s was a decade of economic malaise, resulting from the U.S. government’s decades-long loose monetary policy. Outflows of gold throughout the 1960s led to President Nixon’s decision to close the gold window in 1971, severing the final link between the dollar and gold. The next several years witnessed the emergence of stagflation, as both inflation rates and unemployment rates rose in unison. Inflation rates soared into double digits by the end of the decade, while unemployment rates continued to rise, peaking at nearly 11% in the early 1980s. It was against this economic backdrop that the call came to establish the U.S. Gold Commission.

In 1980, Sen. Jesse Helms introduced an amendment to a Senate bill, and I introduced a similar amendment in the House, calling for the establishment of a commission to examine the use of gold in the monetary system. Although the legislation establishing the commission was signed into law by President Carter, his loss in the 1980 presidential election meant that President Reagan — a public supporter of the gold standard — would be responsible for appointing many members of the commission. While President Reagan was sympathetic to the gold standard, he did nothing to restrain the anti-gold members of his administration. As a result, the Gold Commission was packed with establishment supporters of fiat money and the Fed. Thus, the deck was stacked against the pro-gold forces from the outset.


Despite the commission’s ultimate endorsement of the fiat paper money system, the commission’s work resulted in positive developments: the eventual adoption of legislation to authorize the minting of gold coins by the United States Mint and the publication of the commission’s minority report as The Case for Gold. And the intellectual case for gold put forth in the commission’s minority report provided the underpinnings for the continued drive toward a restoration of sound money.

Most of the historical research in The Case for Gold was undertaken by the eminent Austrian School economist Murray Rothbard. Rothbard was the leading scholar in America’s monetary history. His work makes it is only too clear that government intervention into monetary affairs is at the root of all economic crises. The Case for Gold explains the numerous interventions, the disastrous effects of those interventions, and the steps needed to free the markets in order for gold to return to its rightful place as the ultimate commodity money.

We predicted in this report that without substantive change, the nation would experience continued economic hard times, economic cycles, dollar depreciation, government growth, and the continued diminution of human liberty. Despite periodic illusions of rising prosperity that turned out to be false booms, this prediction turned out to be indisputably true.

Since that time, nothing has worked to restrain government growth. We’ve lost a decade of economic gain in the 1990s, average Americans have less disposable income than anytime since the 1970s, and the dollar has fallen in value by 82% since 1971. Median income has risen only 12% in real terms in that entire period. The 1982 dollar is now worth 42 cents. A $1 trillion government debt of those days is now a $16 trillion government debt. The banking system is broken. Taxpayers and savers are being looted daily at unprecedented levels to sustain a system of zombie banks, bad debt, high unemployment, low business creation, and bankrupt government. This is why many young people today despair for their future.

It could have been different. Back in those days, we could have, as a nation, embraced sound money and spared ourselves all this suffering. The means to make a change were right there, but the political will was lacking. Paper money makes life too easy for those who want to extend their rule over society. It lets leviathan out of its cage. It removes all discipline from the federal government that state governments, businesses, and households deal with every day.

How to make a change? In this report from 1982, we suggested many different paths to reform: competitive currencies, repeal of legal tender, redefining the dollar as a certain unit of gold, juridical changes that enforce the monetary clauses of the Constitution as they read in plain language, the application of standard free-enterprise competition to the banking industry, and more.

Any one of these reforms would have been an excellent step. Instituting all of them would have restored sound money and spared us the grueling and continuing economic problems that are slowly killing the American dream today.

Today, in light of technological developments, we can add more paths. The rise of digital networks could enable unprecedented monetary entrepreneurship, with digital currencies and new payment systems, as well as new banking and lending structures that bring together consumers and producers in genuine market relationships. But it turns out that such development is seriously hobbled by regulations and monopolization. Simply put, free enterprise in money and banking is illegal. At a time when digital economics are revolutionizing all sectors, money and banking seem forever stuck in the analog age and the errors of the past.

I did my best during my presidential campaign and with my book End the Fed to make money a public issue, a topic on the table. I sought to break the silence. The political class largely ignored what I was saying. As this economic reality becomes more evident, however, the political tides begin to change as well.

Not since The Case for Gold’s initial publication in the early 1980s has discussion of gold been so widespread among the punditry class and within the financial press. Investment in gold is no longer the domain of long-derided “gold bugs,” but rather an integral inflation hedge for ordinary investors ravaged by the decline in their purchasing power. The Republican Party recently embraced a gold commission in its party platform. No less than Forbes magazine has called for serious consideration of a gold standard. And even former Federal Reserve governors are beginning to question the wisdom of the Federal Reserve’s monopoly on currency creation and are calling for a free market in money.

I’m thrilled today that the young generation has become excited about the topic. They now see that the Fed is more than another Washington bureaucracy. They see it as a threat to their future. As a result, it is not unusual for Fed employees to look out their windows and see groups of protesters on the sidewalks. This is all to the good. There is also serious pressure on the Fed to be more public about its operations. Its power no longer goes unquestioned.

The Fed’s paper money system is the major source of economic suffering today. It is the reason that Congress can’t control its spending. It’s why it can fund wars and the police state. The paper money monopoly distorts economic signals and causes booms and busts. It robs the American people with the insidious tax called inflation. We must never forget that the Fed has the massive power it does only because of paper money. If it were restrained by a gold standard or monetary competition, the Fed would be a menace, but not a mortal threat. As it is, the Fed, and, by extension, the government itself, holds our entire economic future hostage.

The most conspicuous policy of today that harms the middle class is the Fed’s “zero interest rate policy.” The idea here is to inspire lending and give the economy a boost. It has done nothing of the sort. Instead, it acts as a method by which the Fed is permitted to pay a rate of return on bank deposits in an environment that is risk-free for the industry.

Banks are now in the unprecedented position of ignoring their customers (both depositors and would-be borrowers) and still enjoying a high rate of return on their balance sheets sustained by Fed-created money and an unlimited guarantee on deposits courtesy of federal deposit insurance. This is several steps beyond the old “too big to fail” doctrine and one or two steps shy of total nationalization.

These are the types of extremes that the Fed has pursued to sustain an unworkable system. This is a predictable trajectory: from paper money to total government control. Each new step away from free-market money creates new problems that seem to cry out for more intervention, which creates more problems, and so on until the entire system unravels. And this is precisely what we are seeing.

The risks are very high for the middle class. The incredible bust of 2008 might turn out to be just a warm-up. Another, even worse meltdown threatens because rather than face reality, the Fed papered over problems. As a result, hyperinflation is a real possibility, and it is not possible for the Fed to simply pull a lever to stop it once it starts. Bank runs will continue to threaten. The dollar will continue to lose its purchasing power. Government will continue to grow.

But now with “zero interest rate” policies, we are seeing something else. It is no longer possible to make money through saving money in the normal way that economic structures would provide in a normal market. Saving is no longer rewarded with even a normal rate of return. To be sure, the insiders find ways to make money regardless through risky and far-flung techniques. It is the middle class — the people who live honestly and work hard to provide for themselves — who are being harmed.

How much more evidence do we need? A failed system has proven itself a failure too many times. I will once again issue this challenge: Reform the monetary system or strangle the future of freedom itself. This is the choice we face. It is not too late. And such reform has never been easier. The government should permit free enterprise a role in the management of money. Let the entrepreneurs take over where the Fed failed.

In an ideal world, we would see the dollar made good as gold. This would be the first action of a responsible Congress and president. But even without reforming the dollar, it should be legal for producers and consumers to migrate to other market-based systems of money and banking.

The need for reform has never been more urgent. I’m pleased that a revived Laissez Faire Books, an institution I depended on to provide literature in my early years in Congress, is bringing out a new edition of The Case for Gold to teach money and banking to a new generation and to show the path forward.

The case for reform is fundamentally the same today as it was when it was first published. The principles never change. Freedom and sound money are inseparable. Money must be returned to the people to manage and be taken away from the government and its planning apparatus at the central bank. Socialism works in no area of life. Freedom works in every area.

Ron Paul

Original article posted on Laissez-Faire Today

There’s Still a Case for Gold appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

All Cashed Up

US corporations are sitting on more cash than at any point since World War II.

That’s without including banks. I’m only talking about nonfinancial corporations — the ones that sell goods and services and make the economy go.

Those businesses hold $1.4 trillion. In absolute terms, that’s the most ever. In relative terms, it’s the most since World War II.

Corporate Cash

As investors, we can infer quite a bit from corporations’ inability (or unwillingness) to deploy their cash.


For one, it indicates that businesses have assumed a very defensive stance.

Cash, of course, is a buffer against uncertainty — the uncertainty that business slows for any reason. Management wants a healthy cash reserve with which to pay the bills and remain liquid should anything unexpected happen. I think we can all agree that this is prudent, and a good business practice.

But $1.4 trillion? That tells me that businesses are not just a little jittery about the future. They’re prepared for an apocalypse.

Think about this, it’s important:

If these businesses could conjure up even the most marginal of projects to earn a meager 1% return, they would generate $14 billion profit. Instead, they’re sitting on the cash and earning near zero for a guaranteed after-inflation loss.

It’s a bad omen that corporate management would forego a collective $14b per year. Clearly, by their judgment, the risk of investing in new projects outweighs the reward — the exact opposite of the conditions needed to produce healthy economic growth.

That’s the bad news. But here’s the good, if paradoxical, news:

Even with all of this corporate slack, earnings and profit margins are very healthy, and stocks have performed quite well. Case in point, the S&P 500 is up 15% YTD.

Why the disconnect?

Well, the rising margins and earnings are easy to explain: corporations have cut costs over the past few years, becoming leaner and more efficient. This also partially explains higher stock prices.

But I think there’s another contributing factor to rising stock prices: the downright terrible outlook for bonds. Our analysis of stocks vs. bonds indicates that stocks are by far the better investment today.

The overriding reason is simple: at near zero interest rates, bonds offer almost no upside and catastrophic downside.

Simply by virtue of not being bonds, stocks have done well.

Back to that pile of corporate cash. There’s no question that it’s a waste today. But today’s waste is tomorrow’s potential.

Corporations aren’t going to sit on that cash forever. Eventually conditions will be such that they’ll either want to or have to invest in new projects.

Perhaps inflation will be the catalyst — corporations can tolerate losing 1.7% per year today. But if the inflation rate heats up to, say, 4%, you can bet that corps will be scrambling to deploy that now idle cash into whatever mediocre projects they can rustle up.

When that happens, they have $1.4 trillion in cash ready to go. No need to negotiate a loan. No need to issue equity to raise funds. They have all the fuel they need. The gas tank is full.

So while the economy has plenty of problems, and stocks are a far better bet than bonds, lack of cash is not one of them.

Companies are ready to invest and grow. They just need an economic and political environment conducive to doing so.


Dan Steinhart,
for The Daily Reckoning

All Cashed Up appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Like Gold? You’ll Love This Silver Company

Much like the late comedian Rodney Dangerfield, silver gets no respect.

“Silver is the red-headed step child of the metals desk,” one prominent Wall Street commodity strategist once told me. And he was right, of course. Why, after all, would anyone want to buy silver when gold is so easy to get your hands on these days?
Don’t answer that question just yet…

There’s a difference between thinking about silver as an investor and thinking about the metal as a trader. Today, I want to give you some insight on what a trader sees in silver this month.

To traders, silver can basically be summed up in a single sentence: “Silver is high risk gold.” In other words, when gold moves, silver tends to move the same way – only bigger. If you like gold, then, you should love silver.

From a technical standpoint, even if you don’t really care about gold, you should like silver a lot right now. Here’s why:

The chart above is a daily chart of the iShares Silver Trust (NYSE:SLV), the go-to exchange traded fund (ETF) for folks who want to own silver without actually “owning” silver. SLV takes the money it manages and uses it to buy silver bars that are stored in vaults under London. Not surprisingly, it does a good job tracking the moves of the metal itself.

Taking a look at the chart, it’s clear that silver has had some challenges lately. Silver prices are off considerably from their highs back in late September, but while prices are down, this metal is far from out. That’s because SLV hit support right at $30 late last week.

When you think support, think “buyers”. SLV’s decline got stopped at $30 support because $30 is a price below which there is a glut of demand for silver. In other words, it’s a place where buyers are more eager to buy the metal than sellers are to sell. A bounce off of support is a big positive for silver prices right now because it makes a reversal higher look much more likely.

A couple of other factors add some extra evidence towards a bounce in silver.
First, $30 isn’t just an important psychological number for buyers – it’s also a 50% retracement from the high SLV made in late September to the low it made way back in June. After a big rally, it’s very common for stocks to correct (that is, give back some of those gains before making their next leg up), and when they do, 50% is typically a very reliable retracement level that’s been observed by traders.

Silver’s “momentum” (measured by 14-day RSI, the little graph at the top of the chart above) is another important indicator for silver. While momentum had been dropping for the last several months, it just broke its downtrend this week. And because momentum is a leading indicator of price, that bodes well for silver buyers.

So, does that mean that you should buy SLV? Sure, you could. But SLV isn’t the best silver trade out there right now. For that, we’ve got to look at the miners:


This chart shows the Global X Silver Miners ETF (NYSE:SIL), an ETF that tracks a basket of silver mining firms. Even at a quick glance comparing the chart above with the chart of SLV, it’s pretty clear that the miners are a lot stronger.

Both started rallying in July, but the miners ETF rallied more steeply than SLV did. And while both topped out in late September, the miners corrected sideways while the metal corrected lower.

Clearly, then, if we think that the metal looks ready to bounce higher, the miners should make an even bigger corresponding move. But if we get a little bit more specific, I think we can still do one better…

Take a look at this chart below of Silver Wheaton (NYSE:SLW):

Silver Wheaton is a $14 billion silver mining stock that’s been following the same script we’ve been seeing in the silver metal and the silver mining ETFs: it rallied in the middle of June, topped out at the end of September, and it’s been correcting ever since. But in Silver Wheaton’s case, it hasn’t just been correcting sideways – it’s actually been making higher lows for the past couple of months.

In technical parlance, SLW is making a price pattern called an ascending triangle. Essentially, as shares bounce in between that horizontal resistance level up at $41 and the uptrending support level that connects those lows, it’s getting squeezed closer and closer to a breakout above that $41 price level where selling pressure has been concentrated in the past.

A breakout above $41 is a solid buy signal for Silver Wheaton…

And the relative strength line (at the bottom of the chart above) shows just how much better this miner has been performing than the metal itself. The line compares moves in SLW with moves in the silver metal ETF. As you can see, it’s been in an uptrend for a while now – that means that any dollar gained in the ETF is translating into increasingly bigger gains in Wheaton.

Remember, though, silver stocks tend to be volatile – if you decide SLW is worth buying above $41, make sure you’ve got a stop loss in place…

Happy trading,

Jonas Elmerraji, CMT

Original article posted on Daily Resource Hunter

Like Gold? You’ll Love This Silver Company appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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