Thursday, September 8, 2011

The Jobs Act

Three weeks ago in Gold Corrects: What Next? I wrote:

With QE3 on temporary hold, I believe the next form of stimulus is going to come from the White House. Obama's approval ratings are plunging by the hour, and he knows he is on the clock to try and artificially boost our economy (like painting the exterior of a rotting house) before the 2012 elections.

The new program will be titled something like: "The Job Creation Recovery Act." He will increase spending in the short term in exchange for massive cuts out in the future. He will try to have most of the cuts to occur past 2016 (after his potential second term).

Tonight he gave a speech announcing the "The Job Act." (I was off by a few words but I like my title better) 

The Job Act will increase spending by 450 billion dollars right away.  The money will be given directly to construction workers, teachers, veterans, and the unemployed.  It will be given indirectly to American workers in the form of additional tax cuts.

Obama spent 2 minutes of his long speech explaining how it will be paid for. (My favorite part of course) In summary:

Obama first reminded us that he cut $1 trillion in spending over the next decade back in July. (cuts that will come "later")  He then told us that back in July he asked democrats and republicans together to come up with another $1.5 trillion in spending over the next decade.  He said he will now ask them to now come up with $1.95 trillion in spending cuts over the next decade.

Instead of $1.5 trillion in imaginary spending cuts, we now have $1.95 trillion.

He said that social security and medicare need reform because we cannot afford either.  After applause we waited to hear his plan for how he will attack both issues.  He decided not to discuss it and moved on.

The truth is that the increase in spending announced tonight will be paid for.  The United States does have a plan.

He was behind the curtain during the speech so you couldn't see his face, but those looking for the actual solution need look no further.

Record Low Mortgage Rates

Mortgage rates this morning reached an all time record low at 4.12% for a 30 year mortgage.

With home prices still about 30% over valued and unemployment surging, who would possibly consider lending their money at record interest rates for 30 years?

The US Government.  Who now lends or guarantees close to 100% of the new mortgage loans in America.

The same government who pays for these mortgages by borrowing money in the form of US treasury bonds.  The same bonds which are also hitting all time record low rates.

The investment world, laughing at those silly enough to purchase dot com stocks in 2000 and condos in Miami in 2005, is now fully invested in US government debt.  They are sitting on an atomic bomb ready to explode.

Greek 1 year government bonds are closing in on 100% interest as the confidence backstopping the artificial market collapsed.  The same is coming soon for America whose balance sheet is almost identical, only with a few more zero's.

2 Minute Economic Review

A quick 2 minute review on why we have bubbles, busts, and chaos repeatedly in the financial markets.

It is not the response to the bust that creates a crisis, it the preceding artificial boom created by mal-investments due to governments and central banks intervening in the free market.

For an in depth primer for those new to Austrian economics (real economics) I always recommend Economics In One Lesson, which has just been re-released.

Tuesday, September 6, 2011

How Big Is Africa?

Pretty amazing visual.  Click for larger view.

Switzerland Pegs - Devalues

This morning the Central Bank of Switzerland announced that they would be pegging their currency to the Euro.  They will not let its value appreciate above 1.20 Euros.

This is perhaps the second biggest news event of the year (behind the announcement that the ECB would begin purchasing toxic sovereign debt which I discussed a few weeks ago in The ECB Announced The Final QE)

Why is this so important?  Before we get there, let's discuss how and why this came about.

For decades the Swiss Franc has been considered the golden standard for how to treat a currency.  They do not run massive deficits and they have always pledged monetary control.

During the recent collapse of the European Union (Greece, Portugal, Ireland, Italy, Spain) over the past 18 months, citizens of those countries have removed their savings deposits from local banks and transferred them into Switzerland accounts.  They have done this in fear of a banking collapse, which is a well grounded decision.

The Swiss banking system is in excellent shape, and at the same time investors have felt great about holding Swiss currency.  This has proven to be an excellent investment decision over the past 12 months as the Swiss franc has appreciated greatly against the Euro (and almost every currency in the world).

There is a problem, however, that has been building.  Switzerland export companies have begun to lose a serious competitive advantage as the value of their currency has risen dramatically.  It now costs more to purchase goods from Switzerland than for example Germany, another heavily dependent export economy.

This morning the Swiss central bank took action and have pledged to halt the rise.  This means that they will print and purchase assets outside of Switzerland to devalue their own currency

They have tied an anchor to the sinking European Union.

This is the exact same technique the Chinese have employed with the United States.  By pegging their currency to ours at a fixed exchange rate they must import the inflation that our central bank exports.

The same is coming for the people of Switzerland.  As the European sovereign debt continues to implode, the European Central Bank will be forced to print an enormous amount of money to purchase the toxic debt.  The Swiss Central Bank will then be forced to mirror this action.

The ramifications for this are enormous.  Last night there were two safe havens from the global money printing and currency devaluation taking place around the world:

1. Gold
2. The Swiss Franc

This morning there is now only one.  We are moving into the next stage of the global financial crisis: currency wars.  It is an excellent time to look again at the graphic that displays where we've come and exactly how it will play out ahead of us.

Stay focused.  Things are changing rapidly now.