Friday, April 11, 2008

Market and societal fragility

It's time for the end of week wrap up of news and commentary, good and bad, unfortunately there is little good to mention.

This article by Llewellny Rockwell of the Ludwig von Mises Institute is a decent look at the issue of rising inflation.

Also Paul Volker the last capable Fed Chairman that reigned in the inflation of the 1980s has been speaking out on today's issues. Volker has recently been vocal on America's need to curb consumption to a level that meets their production and his disagreement with the Fed's involvement in the Bear Stearns bail out. His critique of today's financial engineering perhaps says it all.

a demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.

The wagons are certainly forming a circle as other learned people are poping out of the woodwork to blame Greenspan and Bernanke for today's mess.

Now I have no doubt that U.S. monetary policy is certainly a key to the current dilemma, but there is also enough guilt around to blame Government overspending, reckless banks, hedge funds, and the absolutely moronic people who believed they deserved a caviar house on pop tart budget.

There are more and more analysts admitting that as distaste full as the Bear Stearns deal was, failure to intervene could have brought a system wide crash. The question is how many Bear Stearns are there waiting to go off? Will someone get to them and intervene before their contagion brings it all down?

These fears and the obvious inflationary means being used to cushion the U.S. economy is oh so bullish for metals that I implore you to ignore claims that Silver and Gold have peaked and the bull is over.

The biggest story for the last two weeks has to be rice, with major exporting nations adding taxes or outright bans on exports in order to enlarge local supplies and keep prices down. Inflation and shortages have driven prices to the breaking point for many people in poorer countries, all you have to do is google food riots and you'll see how wide spread this issue is, this has the potential to bring down governments.

One of last weeks comments mentioned the withdraw of trucking services as a trigger that could cause shortages and riots even here in the affluent west. It only took a little looking to find facebook, myspace and news articles referencing a grass roots call for a truckers strike over fuel prices.

Many truckers have signed to haulage contracts that do not account for today's high fuel prices. This leaves them making runs with no profit, attempting to break or renegotiate legal contracts. This can't go on indefinitely and truckers will go out of business if they can't pass the fuel prices along. With today's just in time delivery system and the small volume of warehousing done today, cities only have a couple of days of food on the store shelves at at time. A prolonged strike could cause unrest.

This protest is targeted around May 3rd at this point and may or may not succeed but eventually enough truckers will hear the call and out of pure self preservation take action.

This also links into a couple of articles I read in the New Scientist this month dealing with the fragility of civilization. The premise is that a combination of factors like just in time delivery, interdependancy of systems and high numbers or irreplaceable specialists allows smaller disturbances to shake society more than would have been possible in a simpler age.

Example, during the SARS outbreaks lack of warehousing and just in time delivery cleared out surgical mask manufactures and stretched supplies of oxygen for ventilators. This was a minor event in the big scheme of things a big event would have made hospitals ineffective.

A medical scare like that of 1918 flu would still allow society to keep supplying the basics by curbing less important activities if it only caused absenteeism up to 25%, Models show however that real absenteeism might be as high as 50%. So how does society "keep it together" if essential workers suffer high rates of infection or simply withdraw their services out of fear.

What if refineries shut down, or public transit, ambulance crews don't show up? What if some specially through a statistical fluke gets virtually wiped out in a pandemic, who does whatever they used to do? Who can train their replacements. The inter connectivity of modern life actually transmits these shocks rather than isolating them. The image of cutting off the limb to save the body is no longer possible, if one area suffers or collapses we could all suffer or collapse, much like the financial contagion we are all fearfully watching.

If the theory of peak oil leading to peak food is correct there will be both die offs and a return of labour to the land so people's labour can offset the work done by hydrocarbons. As this happens our current level of job specialization will change, some specialties may be left to wither and our technical level will fall. Certainly an interesting yet depressing discussion.

If you can't rationalize more silver at this time, buy seeds, water purification products, stockpile a little extra food, convince gullible friends to join you in buying a vacant hobby farm so you can all "Camp and Party". The time for frivolous plasma screens and $50k cars is over, get a head start and start preparing for the future.

Thursday, April 10, 2008

Fed Looks for Hyperinflation tools

Man I hate when I post to the wrong blog, this was up elsewhere yesterday in a much more timely manner

The Federal Reserve, having used up most of it's own reserves comprised of Treasuries in making recent loans to the banking industry is looking for new creative ways of loaning or injecting more money than it has, as explained in this Wall street Journal article

As the articles explains the FED could just create money but since that would drive down short term interest rates to the mat, something they are not quite desperate enough yet to try.

The other options include having the treasury create excess treasuries and depositing them at the fed creating extra reserves they can use to plug the dikes, changing laws to encourage larger deposits to the Fed by banks, allowing the FED to directly hold Mortgage Backed Securities, or letting the FED directly issue it's own debt.

Should the Fed ever get the power to create it's own debt without the assistance of the Treasury the U.S. government will for all intensive purposes be neutered and powerless to control their own destiny. Control of the currency is the ultimate power and obligation of any state, but the U.S. Gov through the creation of the FED, recent calls for more FED powers and possibility that they will soon be able to create their own debt are working towards the total corproatization the Nation and a loss of sovereignty to a consortium of bankers.

Each one of these options is variation of the "Print ourselves out of trouble" model which will further fan inflation. If you are having second thoughts about metal investing this alone should show you the desperate state the U.S. economy and the dollar find itself.
With M3 already in the mid teens we should be looking 25% by election time if the FED gets it way. So what is the established number for hyperinflation I've seen a couple of definitions?

Monday, April 07, 2008

Why Silver and Gold are better than fiat money, a cautionary tale

While I feel bad for the fellow in this story, I still laughed when I found out that termites had eaten all his fiat money and investment papers. This is an extreme example of why Silver and Gold are much better stores of wealth than mere paper which can be destroyed in fire, flood, and apparently by infestation.

This is also an warning to know your bank, know the limit of safety deposit box liabilities and perhaps that tightly wrapping your documents in tin foil is a better use than wrapping your head.

In a fire your metals may melt, may trickle away but they still have a hell of a lot better chance of surviving than paper.