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Interest in a gold economy

Imagine a society on a gold standard where the supply of gold is fixed. As the economy grows, more goods and services become available. Because the supply of money (gold) is constant, gold constantly rise in value, and prices of everything drop steadily.

Economists of today would call this "deflation", and some of them would claim that it's a Bad Thing. I don't think it would be a Bad Thing--seems perfectly natural to me--but that's not the point of this post.

Imagine further that you lent someone an ounce of gold. How much interest would you charge him?


Viva el aeromozo!

This is pretty much the greatest story ever:

A flight attendant who was arrested after arguing with a passenger on a JetBlue flight -- making a grand exit from the aircraft by grabbing some beers and pulling the emergency chute -- posted $2,500 bail and is out of jail.

Jet Blue employee Steven Slater, 38, of Belle Harbor, Queens, was arraigned Tuesday on reckless endangerment and other charges after the dramatic incident Monday afternoon. Despite the felony charges, Slater's been elevated to folk-hero status by thousands who shrugged off allegations that he endangered others and praised him for his take-this-job-and-shove-it moment.

Slater's mother, Diane, even went so far as to seem proud of her son for his outburst.

"I can understand why he snapped. I would have snapped too," Diane Slater said Tuesday after Steven pleaded not guilty to the various charges against him. "I think he just had a very small meltdown, and I think he deserve to be able to have that meltdown."

[...]

Following a heated exchange, the flight attendant told off the entire plane on the public address system, activated an emergency chute near the back of the plane and jumped down the evacuation slide and ran for it.

The Assistant District Attorney said the altercation began before the plane left Pittsburgh, when two passengers got in an argument over an oversized piece of luggage and the overhead compartments.

At the arraignment, defense attorney Howard Turman said Slater was under stress because his mother has lung cancer. Afterward, he provided reporters with a different account of what happened aboard the aircraft than the version initially offered by authorities.

Police had said Slater became angry when after a rule-breaking passenger defied requests to stay seated then accidentally hit him in the head with her luggage.

Turman said the dispute had begun earlier, when the flight was still waiting to take off from Pittsburgh, when two female passengers got into an argument over space in the overhead bins. That's when Slater was struck in the head, Turman said.

The dispute flared up again after the plane landed in New York when one of the women, who had been asked to gate-check her bag, was enraged that it wasn't immediately available.

"The woman was outraged and cursed him out a great deal," Turman said. "At some point, I think he just wanted to avoid conflict with her."

Slater asked for an apology but the irate passenger cursed him out, saying in effect "go f--k yourself" and calling him a "mo-fo," according to law enforcement source

Turman said the woman "cursed him out using the f-word both as a verb and an adjective."

Prosecutors said that at some point, Slater addressed the passengers on the intercom.

"Those of you who have shown dignity and respect these last 20 years, thanks for a great ride," he said, according to prosecutors.

Slater then activated the aircraft emergency slide on door R-2, proceeded to the chute, looked down to ensure that nobody was below it as he had been trained to do, and he deployed the device and went down it safely, his attorney said.

He also grabbed some beer from the galley before he took the plunge and then headed for the AirTrain, where other passengers from the flight reportedly saw him on the way home.

Slater was later arrested at his home in Belle Harbor by Port Authority officials. Police sources said that when authorities found Slater he seemed to be in the midst having sexual relations.

The above article is written in a manner that's ostensibly just-the-facts, but the author is clearly going for comedic effect, and cleverly pulls it off without being too obvious.


Peter Thiel's latest on the markets

There's an interview with Peter Thiel on the Business Insider website in which he provides his outlook on the global economy. (I hate it when you can't embed a video.) Briefly, he expects deflation, dislikes equities and gold, and is okay with dollars and government bonds.

Thiel is at least a hundred times smarter than me, but I think he's wrong on gold. By inference, I believe he sees gold as a commodity, not as money. Sure, in an inflation, commodities do well, and in a deflation, they do poorly while money is your best bet. However, if gold is money, then in a deflation, it will do well.

I agree that the economic system is deflating: leverage is being wrung out of the system, credit is being destroyed, risk is being punished. In such an environment, money is king. But our government is hell-bent on destroying the dollar, and people will lose faith in dollars eventually. Where do you turn when your government-decreed money is being burned? Nature's money.

I've seen some of these austerity measures that countries like Greece are taking. I'm not impressed. By extension, I don't think there are any politically feasible austerity measures that will prevent either a true US default or a default-by-proxy (hyperinflation). To prevent these things, you'd have to do something like the following:

* Abolish Social Security, or at least, raise the age of benefits to, say, 75+
* Abolish government involvement in health care including Obamacare, Medicare, Medicaid, subsidized employee-provided insurance
* Abolish the current income tax and either institute a low rate flat tax (on income) or a fair tax (on consumption)

If those things happened, I could believe real austerity was being enacted. But I'm willing to bet that none of that is politically possible, and after this brief lull is over, the Euro nation crises will be in the news once again as these milqetoast austerity measures fail.

BTW, the funniest quote from the interview is:

The model of the US economy is that we are the country that does new things. But over the past few decades, that's changed. Now we have people that do crazy things, like weigh 600 pounds. We have to get back to being the country where people do things that are new.

Things to do:

1) Write Grand Unified Theory post on Inflation vs Deflation and how pretty much everyone is wrong.
2) Respond to nobody.really's post from a month ago.


Why doesn't some country create a gold-backed currency?

The US is intent on printing money to stave off "deflation." For the moment, people all over the world still demand dollars. But the day will surely come when they no longer do.

In the meantime, why doesn't some forward-thinking government (I know, I know) buy a bunch of gold and issue a currency backed by that gold? Such a currency would, in my humble opinion, be an immediate competitor to the dollar. I would also think such a move would attract investment capital to that country.

What good is having a bunch of nations if they all act the same and issue fiat?


Monster Up Days

Monster up days in the stock market, like today, are signs of a bear market. In the past 3 months, we've had four days of >2.5% gains on the Dow.

May 10: 3.8%
May 27: 2.8%
Jun 10: 2.7%
Jul 07: 2.8%

These events restore just enough confidence periodically to engender a sense of complacency before the next leg down.


Santelli vs Liesman

Rick Santelli, who inspired the Tea Party movement, goes nuts on CNBC, especially against his usual sparring partner Steve Liesman.

While I appreciate Santelli's arguments being given a public forum, nobody, including him, is arguing as follows: "Yes, without government stimulus, unemployment might well have reached 25%, but that's the inevitable price to pay to get out of this recession, and in the long run, we would have been better off for it."


Secession Week

Secession week begins today at A Thousand Nations.


On Weigel

Dave Weigel inspired me to quit reading Hit and Run for a couple of years. His posts seemed straight out of DailyKos.

Regarding the actual outing/firing/ratfucking, I don't really have an opinion.


Hendry vs Soros

A few weeks ago, Hugh Hendry took down Jeffrey Sachs. This time, the always provocative Hendry goes after George Soros.

Among the popular bears, he's one of the few (only?) that is highly bearish on Asia.


Links

Article in The Atlantic on Paul Romer's charter cities idea.

TJIC with a nice thought experiment re: working conditions.

Swiss tell Feds to fuck off. UBS should just pull out of the US, watch its inevitable slow-motion implosion from a safe distance, and laugh all the way to the bank, so to speak. Heck, if they did that, I'd fly to Switzerland and open an account myself.

$5000 per squirrel.


A subtle change in sentiment

Perhaps it's the solstice having a subconscious effect somewhere in the recesses of human brains. Today, there was a subtle change in the collective market mood. I sold all my bullish positions and started taking shorts (via BGZ).

Disclaimer: Anyone who mimics my decisions deserves to lose all their money.


Commercial of Note


Gold news

I'm the paranoid sort, so if I said that the government would do its best to tax gold into possession or outright confiscate it, one would be excused in brushing it off. But if HSBC's top metals guy says it, one should probably pay more attention.
Speaking at the FT Silver conference in London yesterday, lead-off speaker John Levin, HSBC Bank's Managing Director, Global Metals and Trading (HSBC is one of the world's top precious metals traders and its vaults in the U.S. and Europe hold huge holdings of gold and silver bullion) recounted conversations with some of the U.S.'s top asset managers controlling massive amounts of capital asking if HSBC had the capacity in its vaults to store major gold purchases. On being told that the bank's U.S. vaults had sufficient space available he was told that they did not want their gold stored in the U.S.A. but preferably in Europe because they feared that at some stage the U.S. Administration might follow the path set by Franklin D. Roosevelt in 1933 and confiscate all U.S. gold holdings as part of the country's strategy in dealing with the nation's economic problems.
In other news, the GDX, an ETF that tracks a basket of gold mining stocks, has greatly outperformed the major indices over the last month. Click for a larger picture.

My most recent thoughts on the market involved the major indices rallying into a final rally and then entering a cyclical bear market which would take them to at least their March 2009 lows over the next 12-18 months. I thought gold, and hence, gold stocks, would follow the market down. My plan was to invest heavily in physical gold and gold miners at that time. Now, I'm no longer sure. The GDX outperformance might be a sign that some sort of decoupling between the broader market and gold is taking place. I fear I have too little exposure to gold, having bought a small amount of bullion at around $1200. I'm thinking about using a very small amount of my portfolio to buy far out-of-the-money LEAPs on GDX. Lots of risk, lots of leverage, and small total amount wagered.

Michael Pento predicts "double dip"

After 7 years, it gets harder and harder to blog new stuff, so I've resorted to blogging about stuff that interests me--because it's far easier than blogging about anything else--and what has my attention for the past few months is the global economy. We live in interesting times, for sure.

So here's Michael Pento on Bloomberg. I'm not sure the phrase "double-dip" works; only through the dint of macroeconomic statistics keeping, most of which are meaningless, can one dream the thought that the prior recession actually ended. Anyone who works for a living knows otherwise. What he's actually predicting is the worsening of Great Depression 2.0.


Janjuahmanji!

It's hard to find much wrong with Bob Janjuah's views in a recent CNBC interview. He shows all the wisdom of Hendry, with none of the ego.

The bears are lining up:

Deflationists: Hendry, Janjuah, Prechter
Inflationists: Faber, Rogers

As for me, my views most closely track those of Hendry. Excessive debt is resolved by deflation. But I think everyone (with the exception of Prechter, who is bearish on gold) is mostly correct in the larger sense.