Last Updated: Oct 22nd, 2010 - 15:35:08 Newsletters : 2007 Newsletters : 17 August 2007 Thought for the Day Having set out to discover how we could improve our economic growth rate we discover that all is not well with the world of money. Our money no longer has any value within itself but rests on people's belief in its constant value. We have further discovered that Central Bankers believe that a little inflation is a good thing so they increase the supply of money which makes people feel good as their pay packets rise and their houses become worth more dollars. Unfortunately our Central Bankers around the Western world are printing a bit too much money at around 12% to 15% and this leads the banks and other "money" organisations to undertake more risky adventures with new forms of debt. After all the money issued by the Central Bank is debt and the commercial banks pass it on as debt and the next echelon use this debt creatively to sell leveraged debt all sliced and diced up with clever mathematics calculating risks and sold around the world as high earning debt obligations. This is all predicted from Austrian Economic theory. We also know from this theory that this debt will unwind at some stage and the money that was made from thin air will vanish back to thin air. Bear Sterns discovered this when they pumped US$1.6bn into two of their hedge funds which then proceeded to become valueless. They couldn't sell them. Billions of dollars disappearing as predicted. This happens when we have a fiat currency controlled by Central Banks. You may have noticed that these same banks have a solution to this problem - print more money and lend it to those who can't manage their debt obligations. The solution is the same as the cause of the problem! If this new increase in money supply has the effect of stopping the panic, the Central Banks will feel vindicated and the boom and bust waves will continue. If they don't manage too well then there are hard times for many people. Interestingly Western economies are now forming only around half the world's money action. The BRICs (Brazil, Russia, India and China) have now expanded to comparable size. China is expanding its money supply by 20%, India is expanding its money supply by 24% and Russia is going bananas expanding at 51%. We are living in interesting times! Aug 16, 2007, 11:36 Newsletters : 2007 Newsletters : 17 August 2007 Hey Brother, Can You Spare $38 Billion? We have mentioned problems with the subprime market for housing mortgages in the past and it now looks as if those problems have come back to haunt us. A bad loan - no matter how cleverly it is repackaged and on-sold around the world - is still a bad loan. Aug 14, 2007, 13:13 Newsletters : 2007 Newsletters : 17 August 2007 A Spike Through The Heart At the heart of recent money market events lies mutual mistrust. Fears are rife that money loaned might be not returned, particularly if borrowers are exposed to losses in America's mortgage markets. Banks are left trying to guess which of their number might follow in the footsteps of IKB Deutsche Industriebank, a German lender that has had to be rescued from imprudent bets on asset-backed securities. Fear, uncertainty and doubt. Can panic be far behind? Aug 14, 2007, 13:07 Newsletters : 2007 Newsletters : 17 August 2007 The Morning After The Open-ended Bailout We have gone from analysing what is needed to induce economic growth in our economy to thinking about the world economy and how fiat money works. The unfortunate fact is that after any boom comes a bust. The way that politicians and Central Banks solve the bust is to provide more "liquidity", that is to print money and lend it out at a low rate to banks that are having a "run" on their resources. But didn't this cause the problem in the first place? Aug 13, 2007, 11:23 Newsletters : 2007 Newsletters : 17 August 2007 The Dollar Under Siege "[U]nder the placid surface there are disturbing trends: huge imbalances, disequilibria, risks - call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it. . . We are skating on thin ice." - Paul Volcker, Former Chairman of the Federal Reserve "[W]e live in a globalized environment and in a country which has enormous fiscal and external deficits. So you have to figure out some way - which I have not done I might add - to protect yourself if we should have a real currency problem here." - Robert Rubin, Former Treasury Secretary [ Visit Website ] Aug 8, 2007, 11:12 Newsletters : 2007 Newsletters : 17 August 2007 China Threatens 'Nuclear Option' of Dollar Sales. The American Congress are warming up to impose sanctions against China for allegedly manipulating its currency. However the Chinese have now made a few threats of their own. Our Misesian theory of economics shows that after every boom comes a bust and that as long as we have a fiat currency this cycle cannot be stopped until the currency becomes worthless. We can say that we will have a bust. The unfortunate problem is that we cannot say just when the bust will occur. The reason for this is that it can be triggered off by something that politicians do and we cannot predict political action. The Americans are in a weak economic position thanks to previous political action and the Chinese are starting to feel their strength. What will the Chinese do? When will they do it? Aug 8, 2007, 10:23 Newsletters : 2007 Newsletters : 17 August 2007 America’s Beggar-Thy-Neighbor Policy Fred Sheehan returns to discuss the recent attempts by “weaker minds in the U.S. Senate” to force China to revalue its currency. Apparently, this has happened before! The U.S. tried to force a de facto revaluation of China’s silver-backed currency in the early 1930s by a concerted effort to jack up the silver price. Did that forced revaluation turn out well? Jul 16, 2007, 11:34