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Gold and silver rallied back from the
bear raid yesterday.
The correlation between metals and stocks is still troubling, but it does
provide a ready hedge to bullion positions. This suggests that the metals are
rising with liquidity and expectations of money printing, and that short term
reductions in liquidity will drive the price lower.
Speaking of gold and money, here is a recent video interview with Jim Grant and Jim Rickards, in which they discuss these topics and others.
It is well worth a look, although I admire him greatly, I fear Jim Grant
makes a stand on somewhat shaky ground when he calls out Paul Krugman to explain how monetary and fiscal policy worked
with regard to 'the depression of 1920-21' and compares it to the current US
economy.
Jim forgets to mention that a significant driver for that particular slump
was the end of World War I, the return of the soldiers from overseas,
and the adjustment from a wartime to a peace time
economy.
There is also the little detail that Europe had been ravaged, but the US
infrastructure and industrial machine was untouched,
and only in need of retooling. The US needed a strong currency to control
inflation, and the Fed's primary task was to manage money supply in the face
of a naturally growing aggregate demand and rising incomes in the post-war
period.
Krugman might be tempted to have some fun with that
example and the prescription that raising interest rates now and tightening
money supply is the right thing to do. Far from comparable, the situation is
almost the opposite! The US is now a net debtor and importer of goods, and domestic demand is slack due to a stagnant
median wage.
Yes, the Fed was overly accomodative in the 1920's
as can be shown in the last chart in this blog, but the discussion is much
more complex than time allows.
Rickards is on case with his discussion of the
mispricing of the gold standard back then, and with regard to the SDR as a
possible successor to the dollar, although he likens it too much to the US
dollar, and says that the IMF has a printing press. He ignores the fact that
the SDR is tied to an external standard, in this case a basket of currencies.
And there is a contentious discussion amongst the trade powers with regard to
the change in that basket. China and Russia are lobbying for other currencies
and gold and silver to be included.
So it is a bit glib to suggest that the IMF can print SDR's at will. They
*could* do that at some point, but not under the current system. That change
in the composition of the SDR could be a key development in the currency war.
Speaking of Currency Wars, it is the title of Rickards
new book, and I am waiting patiently for my copy to arrive.
In the meanwhile I started reading Jack Kennedy by Chris Matthews. It
is very well written. Matthews is a natural story-teller, and he offers a
fresh view of Kennedy based on first person information from JFK's friends,
colleagues, and family.
It is a delight to read so far. It is a little light on 'scholarship' for
some tastes, but it rings true, and includes an enormous amount of primary
source interviews. It is insightful, a unique perspective, and a great read.
It answers the question, "Who was Jack Kennedy,
and what was he like?" I am thoroughly enjoying it. Matthews hit this
one out of the park.
The situation with MF Global is an absolute disgrace. I am spending quite a
bit of time looking into it, and will try to keep you apprised of any
developments.
 
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