Let’s not war, shall we?

Global geopolitical situation appears to be deteriorating with crises multiplying from month to month. From the Western perspective, it looks as though one evil tyrant after another unleash violence against their own citizens or assault their human rights or sin against democracy or do something bad and we, the good guys just have to go and set things straight. Next thing you know, half the world is either in or on the verge of armed conflict. If only bad people could be removed from power and good guys installed there; if only we could make the world safe for democracy once and for all… Then all would be well.

Sadly, we’ve been here before. This year we “celebrate” the centennial of the outbreak of WWI which was fought to make the world safe for democracy.

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Stimulating economic growth (QE2) didn’t work. Now what?

In December, I asserted that we’re inevitably heading into a prolonged period of high inflation. I also asserted that stimulus spending won’t reignite economic growth because we’ve simply passed the point where marginal productivity of debt has turned negative. Namely, each Dollar of new debt generates negative economic growth.

Five months and nearly $600 billion later, we’re nearing the end of the Federal Reserve’s second round of quantitative easing, and the results – even with various government agencies sloppy book cooking – are dismal:

Deflationary gap and the West’s march to war

(another long post, but it’s important, please bear with me…)

Although I studied economics at the university, I don’t recall coming across the subject of deflationary gap. The textbooks I still have don’t mention it, and a search on the internet yielded close to nothing on the subject. Wikipedia doesn’t even have an entry for deflationary gap. Answers.com provides a single vague sentence about it.

That’s strange, for we’re talking about a systemic flaw of the capitalist economic system that predictably corrodes the democratic framework of the society and leads to the rise of fascism and military conflagration. In his book “Tragedy and Hope,” (by far the most fascinating history book I’ve ever read – for an introduction, check this link) Carrol Quigley devotes much space to deflationary gap as he meticulously traces the events leading to last century’s two world wars. He considers the deflationary gap as “the key to twentieth century economic crisis and one of the three central cores of the whole tragedy of the twentieth century”.

About Bernanke’s 100% confidence…

On 5th December 2010, Fed Chairman Ben Bernanke gave an interview to 60 minutes. The whole thing seemed like a choreographed show, but this exchange with 60 minutes’ interviewer Scott Pelley took me aback:

Scott Pelley: “You have what degree of confidence in your ability to control this?”
Bernanke: “One hundred percent.”

Inflation might decimate your wealth

In February this year, we wrote that the sovereign debt crisis, pervasive in the developed world, was “certain to lead at some point to a prolonged period of inflation.” We are now in the early stages of that period and an acceleration of inflation is now virtually certain. Unless investors move aggressively to protect their wealth, they are likely to lose 50% or more of their wealth’s purchasing power in the coming years.

Economy, market manipulation and inflation

Commodity and capital market behaviour seems to be diverging ever further from any notion of rationality. Increasingly, participants are suspecting foul play and manipulation by powerful interests as a possible explanation for this. Such allegations are nothing new, but of late, much evidence has surfaced substantiating the suspicions. The tricky bit is figuring out who is doing this and to what ends. While some hedge funds got caught manipulating prices, I believe that the chief culprits are the NY Federal Reserve and its too-big-to-fail owners. As to their objectives,

So you’re determined: you’ll invest with the stars only

These days, the alternative investments market seems like a star managers’ seller’s market: everyone wants to invest with the stars and hardly a penny finds its way toward lesser managers. Quality, no quality, performance or no performance – either you’re big and famous, or you don’t exist as far as the world’s “sophisticated” investors are concerned.

Japan: a harbinger of (bad) things to come?

Large and gathering imbalances brewing in the Japanese economy threaten to generate a tsunami-like fallout that could soak most of the global economy. This might give rise to the next crisis of unforeseeable proportions.

False sense of security

The Japanese experience has provided comfort to western policy-makers, supposedly proving that governments can spend and borrow for as long as they like. Japan has run deficits for years and has seen its debt burden explode, yet it has also seen its long-term borrowing costs decline. But these benign conditions are likely to come to a head.

US debt dumping: sign of panic or an act of war?

Although the US economy is now showing definite symptoms of deflation, the risk of a rapid decline in the US dollar, a rise in interest rates and high inflation remain considerable. To address these risks, investors should allocate a portion of their assets to funds trading financial and commodity futures which stand to benefit from major price dislocations in the future.