Foundation for Economic Growth - Newsletter

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Last Updated: Aug 15th, 2008 - 11:26:43

Newsletters : 2007 Newsletters : 22 June 2007
Thought for the Day

John Succo, a hedge fund manager, addressed a letter to the New York Times, explaining:

“The Federal Reserve creates credit through its open market operations like REPOS and coupon passes. If the Fed wants to inject liquidity (credit) into the system, they simply call up large broker dealers and buy some of their bonds with credit they create out of thin air (this expands their balance sheet). The dealer then passes this credit on to “the market” by making loans to mortgage companies or margin accounts or whatever. Because each layer of lender is only required to keep marginal capital on hand, a $1 billion REPO done by the Fed eventually creates as much as $100 billion in new credit to the consumer.

“That credit creates the liquidity for additional consumption in the U.S., but these days we are buying our stuff from China (other countries too but we will just say China to make it easy). When a Chinese company receives dollars in trade, this normally would drive up U.S. interest rates: the company goes to the central bank of China to exchange Yuan for dollars; the central bank of China would normally sell those dollars into the currency market for Yuan thus driving up U.S. interest rates. But in our world of today these dollars are being sterilized: the central bank of China prints the Yuan to give to the company and takes the dollars and buys U.S. securities.

“It is not the excess savings of Chinese investors that are buying U.S. securities. It is central banks creating credit themselves to buy those securities. The tick data that measure foreign inflows of money does not distinguish between private investors and central banks going through brokers to buy U.S. securities. We believe that as much as 90% of foreign money buying U.S. securities (not just Treasury bonds, but corporate bonds, mortgages, and yes, stocks) is not private investment, but central banks.

“In order for other central banks like China’s to print the Yuan necessary, they too must create credit. Public debt in Asian countries is expanding as a result and creating worries: this is why Thailand came out essentially raising margin requirements to reduce speculation that is occurring as a result. Notice how they were quickly slapped down by their trading partners who do not want to rock the boat at this time.

“This situation is very unstable in the long run. The Federal Reserves’ balance sheet this year alone has expanded by $30 billion in this way and created $3.5 trillion of new credit in the U.S.

Public debt around the world is growing exponentially and total debt in the U.S. now stands at nearly 3.6 times GDP (in 1929 it was 2.8 times).

“My hedge fund’s position is the opposite of the carry trade you mention. There is coming (timing is unclear where it may be tomorrow or may be years away) a massive correction in debt and derivatives whose magnitude is only growing with time.”

It could be tomorrow. It could be years away. But it will be eventually. And the more complacent people are, the more they will suffer when it does come.


Jun 22, 2007, 15:23

 Newsletters : 2007 Newsletters : 22 June 2007
Carry Over

The present situation for New Zealand's currency cannot carry on for ever. The question is, "When will it stop?"

Time may be running out for the carry trade.


Jun 19, 2007, 09:43

 Newsletters : 2007 Newsletters : 22 June 2007
Asia's Golden Age

We have been following the story of how to get growth into our economy for four years now and the search has introduced many new ideas and some disturbing thoughts. It seems clear now that we are in the midst of a period of strong inflation as are many other countries. Our government is setting up a parliamentary select committee to determine the causes of inflation.

From our studies it is clear that the cause of inflation is loose monetary policy.

As Milton Friedman says, "Inflation is always and everywhere a monetary phenomenon. To control inflation, you need to control the money supply."

Unfortunately politicians are driven to get elected "next time" and this political imperative leads them to interfere in the money supply with a view to giving the population a "little bit" of inflation which should make people feel wealthier and therefore happier. And besides, increasing the money supply by 10% gives "free" money to the government and the population won't even recognise that they have been subject to a 10% tax. The government gets to spend the 10% immediately and gets full value but after a year or two the money has circulated around the economy so that the money is worth maybe 10% less than previously.

Those of you looking to buy a house will see this effect.

It is no good saving up for the deposit because each of the past 7 years you would need an extra 10% just to stay even. This forces people to buy immediately, pay the higher interest on the larger amount and hope they can pay down their loan from their earnings.

So government interference in the money supply causes strange things to happen.

The only way to stop the government interfering in the money supply is to have the money supply backed by an equivalent amount of gold. At this point we do not need a Reserve Bank and the ordinary commercial banks issue currency to the extent that they have gold in their vaults.

Inflation in the world then will equate to the increase in gold supply which is around 2% per annum. Increases in productivity will then show up as greater purchasing power for the dollar and people will be able to buy more goods for their very stable incomes.

Then instead of houses continually moving beyond the reach of ordinary people they will become more and more affordable as productivity increases the purchasing power of the "gold" dollar.

Unfortunately politicians are unlikely to give away their power to manipulate the currency.

However gold is seen as a very important way of retaining wealth by a significant portion of the world population - in India and China. These people are not stupid and they have seen many centuries of money of various sorts come and go and they know the power of gold. Now that they are becoming wealthier they are keeping that store of wealth in the form of gold.

This increasing demand for gold from our Eastern cousins will put more and more pressure on Western Central and Bullion bankers and other gold manipulators. We are in for interesting times. Maybe we will eventually get back to the point where we can say that our money is as good as gold. I hope so. Meanwhile, as my old Granny told me, "Property is as safe as houses."


Jun 13, 2007, 11:08

 Newsletters : 2007 Newsletters : 22 June 2007
Oil Shys Away From Detrimental Dollar.

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. If you’re inclined to read more, you’ll find the whole Mogambo here:
The High Price of Low Intelligence
http://dailyreckoning.com/Writers/Mogambo/DREssays/MG061307.html

It is a sad fact to face, but the dollar’s buying power is decreasing as the global demand for oil is increasing. And so we turn to the Mogambo - hiding in his ultra-fortified bunker - for a full assessment of how “Freaking Doomed!” we really are. Read on...


Jun 10, 2007, 12:47

Can we fix it?