Adrian Salbuchi talking with Max Keiser about Hyperinflation of Argentina and US

Adrian Salbuchi talking with Max Keiser about Hyperinflation of Argentina and US

Why Keynesianism Doesn’t Work: Part 1

Any economic theory faces the same tests as any other scientific theory. It isn’t good enough to say well, look, it worked this time but didn’t seem to that time. A theory needs to be able to explain all the evidence: one counter-example is enough to kill a theory.

And Keynesianism, or at least the crude type that is argued over in politics today, has failed just such a test as Don Boudreaux Russ Roberts reminds us.

According to that basic set of theories about how the economy works, there should have been a huge recession in 1946/1947. In both the UK and the US: all those returning servicemen with no jobs. All that huge amount of government borrowing to pay for the war stopping, there should have been a plunge in aggregate demand and thus something between a recession and another Depression.

And yes, economists like Paul Samuelson were predicting exactly that.

According to the prescription, the two governments should have borrowed vastly more, spent more again, in order to prevent such a failure of the economy. This isn’t arcane, this is just straight simple Keynesianism.

However, that’s not what actually happened. The soldiers came home, the governments reduced the borrowing and the spending (the UK actually ran budget surpluses for several years) and yet the economy boomed. There was no recession, certainly not a depression, unemployment did not soar.

We can argue until the cows come home about whether Roosevelt’s New Deal ended the Depression (I think not, it extended it, your view may differ), whether Obamanomics will lead us out of our current difficulties (I think not) But Keynesianism as Keynesianism faces a much sterner test than this.

What happened to the 1946/7 recession? If it’s not possible to explain that absence within the confines of the theory then the theory is wrong, or at least incomplete, whatever we might say about the other two periods we love to argue about.

Tim Worstall

Dramatic shift in European view a 'big game changer'

THE GOVERNMENT has met all economic, banking and structural targets for the first six months of the year that were required as part of the international rescue package for Ireland, Minister for Finance Michael Noonan said.

The “troika” of the three international bodies – EU Commission, European Central Bank and International Monetary Fund – had yesterday morning completed their quarterly review of Ireland’s performance, he said, and concluded that the country had met all its obligations under the Memorandum of Understanding.

“We have met the fiscal targets. We have met the banking targets. We have met the structural reform targets. I am also pleased that the external partners have concluded that the Irish programme is on track, and we are making good progress.”

Mr Noonan said that notwithstanding the decision by ratings agency Moody’s to downgrade Ireland’s investment grade to junk status, the country was still aiming to fully return to the markets by 2013 in accordance with the rescue programme timetable.

He qualified this by pointing to the huge uncertainties that have beset economies and banking globally over the past two years.

“Looking forward for two years to July [2013], it’s an eternity to be looking forward, given all that has happened,” he said.

Mr Noonan was at a news conference where he and Minister for Public Expenditure and Reform Brendan Howlin gave their response to the conclusion of the review carried out by officials from the troika. Both Ministers held their final meeting with senior troika officials yesterday.

Mr Noonan emphasised European governments’ view of the extent of the issue had changed dramatically in the past week.

Portraying it as a “big game changer”, he said: “For the first time since I became a Minister, everybody around the table at Ecofin [the meeting of EU finance ministers] is seeing the problem as a European problem and a euro problem, rather than, or in addition to, the problem in individual countries.

“If there’s a heads of government meeting next week, the focus will be on that problem,” he said.

The adjustment necessary in December’s budget may be more than the €3.6 billion stipulated in the memorandum, Mr Noonan confirmed. He said it was too early to say with any certainty how much more, as there were too many variables to allow the making of an accurate assessment.

“The Government’s position is we are working towards a correction target of €3.6 billion. We regard that as a minimum. We may have to go slightly above that in a correction,” he said.

He made implicit criticism of Moody’s for the timing of its ratings downgrade for Ireland.

“There were general comments of displeasure across Europe that this decision was taken.

“It’s certainly peculiar that they would have moved to re-rate Ireland within 48 hours of the adjudication of the troika of Ireland’s programme. You’d think it was reasonable to wait until today or tomorrow to see what the troika was saying,” he said.

Moody’s rating was of marginal consequence, he added, as Ireland was currently not in the markets.

Mr Howlin said the Government’s comprehensive review of spending would be in a position in the autumn to offer budgetary choices that might provide alternatives to social welfare rate cuts or increases in income tax.

On reform of wage-setting for sectors including hospitality and security, Mr Howlin said last week’s High Court ruling that joint labour committees had no constitutional basis had fundamentally altered the situation.

Geithner Interview - the Debt Ceiling Fight (Meet the Press)

A Tim Geithner Interview, speaking on behalf of the Federal Reserve - the Debt Ceiling Fight (Meet the Press)

"The Most Important Thing We Can Do Is To Be Taking Steps To Get People Back To Work"

Geithner talking economics theory.. and what's best for Americans...

Greece Deal Constitutes Default

A French scheme involving private lenders in a second rescue package for Greece would "likely" amount to a default in the eyes of leading credit rating agency Standard & Poor's, it stated on Monday, in a blow to European efforts to avoid that assessment.

"It is our view that each of the two financing options described in the (French) proposal would likely amount to a default under our criteria," the London-based agency said in a statement.

Such a finding would precipitate a banking crisis, since the European Central Bank has warned that it would then stop accepting Greek bonds as collateral for loans to Greek private banks.

The European Union and International Monetary Fund (IMF) are currently preparing Greece's new bailout - it needs up to 120 billion euros (174 billion dollars) to remain solvent beyond 2012 - after its parliament last week approved prerequisite austerity measures.

Germany and other bailout-weary governments have insisted that the private sector share in the risk this time, unlike in the case of the first 110-billion-euro rescue package.

Under the French proposal, financial institutions would receive new Greek 30-year bonds - representing about 70 per cent of their original holdings - in lieu of debt set for repayment in the short term.

That would give Greece more time to repay its loans, taking some of the pressure off of its troubled economy. The remaining 30 per cent of the debt's value would be paid as cash when the bonds mature.

Banks and insurance companies in France and Germany are among the major investors in Greek debt.

German financial institutions also on Thursday agreed in principle with that country's government to roll over Greek debt under a formula modelled on the French plan, but modified to suit Germany.

Standard & Poor's, however, deemed that the general approach would not lower the risk of Greece going bankrupt in the future and lead investors to receive "less value" than originally promised - thus meeting its criteria for a default.

"Greece's near-term reliance on EU/IMF official financing, the government's difficulty in reducing its sizable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness," it said.

It, however, also noted that the French proposal is still being worked on and is "just one" of several approaches being considered.

"We understand that the ... proposal may change, and it is possible that it could take a form that results in a different rating outcome," Standard & Poor's said.

A spokesman for EU Economy Commissioner Olli Rehn on Monday declined to comment on the credit rating agency's findings.

EU finance ministers are expected to "clarify the outline" of the next Greek bailout when they meet on July 11, including the issue of private lenders, he said.

"The precise modalities and scale of private sector involvement... will be determined in the coming weeks," EU spokesman Amadeu Altafaj told reporters in Brussels.

"Exploratory talks have been taking place in Europe. But it's not one size fits all."

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Gold and Silver now legal tender in Utah due to Dying Dollar

Video Talking about Gold and Silver now legal tender in Utah in Salt Lake City in America, also no capital gains tax.

Gold Could Lose Glitter with End of US ‘Cheap Money’ Policy

The end of Federal Reserve emergency cash is unlikely to derail gold’s 10-year rally, but the precious metal might face a rockier road as the cheap money that had fuelled its ascent dries up, at least for now.

Fund managers have cited the threat of deflation, slower growth, a resurgent dollar and gold’s overvaluation as just a few reasons why the precious metal’s performance as a safe haven is unclear. In the past, its value tended to rise in times of economic crisis.

Since the global economic downturn, however, gold has benefited from a string of stimulus measures by central banks attempting to boost growth.

Gold prices have doubled since the 2008 crisis, but that rally may be difficult to sustain if the Fed winds down its cheap money policy. Kacper Pempel / Reuters

Bullion has more than doubled from its 2008 low at the depth of economic crisis, and is up 20% since Federal Reserve Chairman Ben Bernanke’s Jackson Hole speech last August, which marked the start of the Fed’s second round of quantitative easing.

On Thursday, the Federal Reserve ended its $600 billion bond-buying program known as QE2, for quantitative easing, because the addition of money to the monetary system effectively lowered US interest rates.

“Even with the QE ending, there is no prospect of the Fed increasing rates any time soon. We have negative US real interest rates. And gold historically did very well in a negative-real-rate environment,” said Bob Haber, chief investment officer of Haber Trilix, which manages $2 billion in assets and runs US and Canadian hedge funds.

On Friday, Gold fell below $1,480 an ounce, nearly $100 below its record high of $1,575.79 set on May 2.

Fed Chief Bernanke has yet to offer any hints of further monetary easing, or QE3. Even though the Fed is not expected to tighten money policy any time soon, gold is likely to rally if the US central bank reintroduces additional market stimulus, which US President Barack Obama called for this week to spur job growth.

“The notion of QE3 is more liquidity, which will likely be dollar-unfriendly. And it would then further run the risk of inflation,” said Mark Luschini, chief investment strategist at broker-dealer Janney Montgomery Scott.

“With that being taken off the table at least for now, it was enough to obviously impair gold prices heavily,” he said. Janney manages $54 billion in assets.

Dollar as reserve currency

A strong US dollar undermines gold’s status is as an alternative currency.

Most commodities, including oil and gold, are denominated in the greenback, which remains the world’s reserve currency, despite an uncertain US economic outlook and political tensions about raising the debt limit in the world’s largest economy.

Most investors see dollar strength limiting gold’s gains.

“If risk assets sell off, and people shun the dollar, that’s when we are in a new regime, that’s when gold’s going to take off. But, I don’t see that happening,” Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, which oversees $12.5 billion in assets.

Sherman said the threat of deflation, partly created by a European debt crisis, should drive investors toward US Treasuries and the dollar, making gold susceptible to weakness.

“Gold is somewhat of a safe haven, but it’s only a safe haven when you are worried about inflationary pressures,” he said.

Billionaire financier George Soros dumped almost his entire $800 million stake in bullion in the first quarter. Famed gold bull John Paulson remained the largest holder of the SPDR Gold Trust at the end of the first quarter.

Overvaluation?

The precious metal, which notched 10 consecutive yearly gains, has increased fivefold from just $250 an ounce in 2001. Adjusted for inflation, bullion’s all-time high was above $2,200 an ounce set in 1980.

Gold’s rally appeared to stall at the end of the second quarter, but the metal still posted a 4% gain in a quarter that saw the benchmark index of 19 commodities fall 6%.

Jason Pride, director of investment strategy at Glenmede, a wealth management firm with $20 billion in assets, said the extreme valuation of gold is hampering its ability to rise further and perform as a safe haven.

“It has simply gotten to a point now where the value of gold puts investors looking to protect their portfolios at risk simply from the valuation angle,” he said.

Bullion should still offer some protection against inflation and sovereign debt default risk due to its unique role as a global monetary vehicle, but its overvaluation is likely to constantly drag down on prices, Pride said.

“With gold having no dividend, no profit, it’s as much a visual reaction to what you think is going to be the direction of gold as anything, because there is really nothing you can point to from a fundamental standpoint that says it should be worth X or Y,” said Janney’s Luschini.

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