Deflation with a Capital D

Posted on July 31, 2015 by MN Gordon

The Three Stooges Debunk myRAThere’s a good ole fashioned market panic taking place in the Far East.  Buyers of Chinese stocks have become scarcer than hen’s teeth.  Even the highly visible hand of the Chinese government can’t arrest the freefall.

On Monday, for example, the Shanghai Composite Index collapsed nearly 9 percent.  This was in the face of bans on selling shares and direct stock purchases by Beijing.  Shrewd individuals sold despite the government’s outright threats and demands not to.

No matter how you look at it, government efforts to prop up the market are futile.  They won’t fix the fundamental imbalances.  Market distortions and malinvestments from years of cheap credit have pushed the market out of orbit.  Total collapse is the only solution.

“The Chinese economic boom since the global financial crisis in 2008 has been fueled primarily by debt — with total debt levels surpassing the United States,” reported CNN. “Even the recent stock market boom has been driven primarily by rising debt levels to pay for stock purchases. Continue reading →

Posted in Government Debt, MN Gordon | Tagged , , , , , | 1 Comment

The Perfect Storm Bearing Down Upon Us

Posted on July 28, 2015 by MN Gordon

The barbarous relic wasn’t the only thing that got smashed last week.  Commodities did too.  On Thursday copper fell nearly 2 percent, to its lowest level since 2009.

Iron-ore prices also dropped.  Oil did too…falling below $50 a barrel.  Still, commodity prices could fall even further.

According to Morgan Stanley, the ongoing oil slump could be the worst crash in more than 45 years.  The rationale is simple to follow.  In short, at this point in an oil price decline cycle, production would have tapered back and, hence, supply would have dropped.

A reduction in supply would be the precursor to a price recovery.  Yet this time around, even though oil prices have fallen, supply has increased.  This is completely illogical.

Following the price collapse earlier this year, U.S. production has leveled off.  This is what one would expect.  But, for whatever reason, OPEC production hasn’t decreased or even been flat.  Instead, it has increased from roughly 30.5 million barrels per day in January to over 32 million barrels per day in June.  What to make of it? Continue reading →

Posted in Economy, MN Gordon | Tagged , , , , | Leave a comment

The Barbarous Relic takes a Beating

Posted on July 24, 2015 by MN Gordon

Fantasies, failings, fraud, and folderol.  These are the elusive straws we grasp for when contemplating the marvels of modern day money.  There’s little hope we’ll ever come up with a solid handful we can pull ourselves up by.

Still, we continue to mull things over like a freshman math major mulling over Fermat’s Last Theorem.  With a little luck we may eventually have a breakthrough.  Where to begin?

President Nixon’s dirty deed in 1971 is as good an entry point into the review as any.  Recall that seizing the unique opportunity of the breakdown of Bretton Woods, Tricky Dick severed the last vestiges of gold backed money and stiffed the world unconditionally.

No longer could foreign governments redeem the dollars they acquired through trade for gold.  The world’s currencies became wholly the fiat – paper money – of governments. Since then currencies have floated like anchorless buoys, rising and falling on a sea of surging currents.

Without restraint the darnedest things were made possible. Continue reading →

Posted in Inflation, MN Gordon | Tagged , , , , | Leave a comment

China’s Exercise in Futility

Posted on July 21, 2015 by MN Gordon

At the moment, it appears the Chinese government has forestalled a full stock market meltdown.  To do so, the People’s Bank of China made direct purchases of stocks trading on the Shanghai Stock Exchange.  What type of chimera is this?

Obviously, this was a desperate measure that only pushes instabilities further out on their precarious perch.  For all is not well in China.  Like the stock market, the financial and economic fundamentals of the country are also out of whack.

Beijing’s policies of mass credit creation have enticed the Middle Kingdom’s corporations to borrow gobs of money.  Corporate debt in China has run up to $16.1 trillion.  This is the largest corporate debt pile in the world…and it appears to be breaking down.

The situation Chinese businesses find themselves is the unfavorable place where debts are rising while profits are fading.  Borrowing more money to increase production only exacerbates the problem.  Companies can’t make up for profit losses with higher volume.

Making matters more difficult is the economic structure of China.  Namely, the abundance of state-owned enterprises.  These companies are notoriously inefficient. Continue reading →

Posted in Government Debt, MN Gordon | Tagged , , , , | Leave a comment