Things That Make You Go Hmmm...

War Games

January 29, 2013

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War Games

“We live in a global economy, so you yourself cannot do something alone. You have to cooperate with your partners.”




David Lightman: What is the primary goal?

Joshua: To win the game.”





“I generally don’t know how far things go, but I can see which way they are going.”



“The fact is, currency wars are fought globally in all major financial centers at once, twenty-four hours per day, by bankers, traders, politicians and automated systems and the fate of economies and their affected citizens hang in the balance”


THINGS THAT MAKE YOU GO HMMM... ....................................................3

Pop Quiz, Hotshot! ....................................................................................19

Carney to Put Growth Top of List ...................................................................19

A Mountain of Risk .....................................................................................20

Snakes And Ladders: Investment Banking on the Brink ..........................................21

Too Early to Celebrate ECB's Balance Sheet Reduction ..........................................22

George Osborne's Austerity Plan 'Risks Lost Decade' for UK Economy .........................23

How a $91 Million Loan on the Marlins Ballpark Will Cost Miami-Dade $1.2 Billion .........24

Cleaning Up China's Secret Police Sleuthing .......................................................25

CHARTS THAT MAKE YOU GO HMMM... ..................................................28

WORDS THAT MAKE YOU GO HMMM... ...................................................32

AND FINALLY ................................................................................33

Things That Make You Go Hmmm...

“One, two, three, four, I declare a thumb war!”


I was late to the sport of Thumb Wrestling, having spent my childhood playing such games as British Bulldog (sadly, a game deemed too violent for today’s less hardy progeny); but my children, prevented from engaging in any kind of physical contact on the school playground for fear of potentially life-ending knee-scrapes (or, more likely, school-ending legal action) were ardent thumb wrestlers; and I found myself engaged in what to me were rather pointless exercises during which new rules were arbitrarily added to the game, which seemed designed solely to ensure that Dad never won. (I am still not 100% certain what the rules are surrounding the ‘sneak round-the-back-attack’, but that strategy did result in my losing handily to my daughter, Brontë, whenever combat ensued). No matter. Whenever the rhyming gauntlet was thrown down, it was on like Donkey Kong — though the need to explain that particular reference to Brontë meant that I tended to enter the battle feeling rather old and decidedly unfit for combat. My run of defeats was truly epic.

Nobody ever really wins at Thumb Wars, which makes the whole thing rather pointless; and, as it turns out, the same can be said about the subject of today’s discussion — Currency Wars — which seem to be erupting across the globe; and, as they gain in intensity, these monetary conflicts are threatening to throw a major spanner in the works of a world that, until recently, seemed to have been operating under the assumption that it was possible for multiple countries to all devalue their currencies simultaneously in order to inflate their massive debts away.

Poor, misguided fools.

There are many parts of the current financial equation that puzzle me, from investors who are happy to accept guaranteed losses in their government-bond portfolios to governments that genuinely seem to think that increasing their spending by a tiny bit less than they had intended counts as a 'spending cut'; from yield-starved souls who feel that the appropriate return for dipping one’s toe into the junk bond market is sub-6% to business owners who, in a world sloshing in trillions of freshly printed funny money, are forced to pay double-digit interest rates for access to some of the magical bounty.

But beneath it all, at the wellspring of all the disconnects and false price signals that are making investing in today’s supposedly free markets an impossible task, lies the source of my greatest consternation: central banks.

I have one simple question for those august institutions, and it is this:

Do they really think it is possible for them all to devalue their currencies against each other simultaneously and achieve anything but rampant and universal inflation at some future point in time?

Thus far, the focus on a currency war has been rather diffuse and confined to the fringes of intelligent discussion. The first shot across the bow came way back in 2010 when Guido Mantega, Brazil's finance minister, stepped up to a microphone in São Paulo and broke the central bank omerta:

'We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,' were Mantega's exact words. Simple. Accurate. Ominous. The FT takes up the story:

(FT): Mr Mantega’s comments in São Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies....

By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.

The politics of such an issue were immediately apparent:

The proliferation of countries trying to manage their exchange rates down is also making it difficult to co-ordinate the issue in global economic forums.

South Korea, the host of the upcoming G20 meeting in November, is reluctant to highlight the issue on the gathering’s agenda, also partly out of fear of offending China, its neighbour and main trading partner.

That was then, and at the time most 'policymakers' (unsurprisingly) as well as most journalists, or 'commentators' (as they are often called in such matters), opined that the term currency war overstated the extent of the hostilities. Any chance of such a conflict was ... 'contained'. You know, like that 'little subprime problem'.

The tools available for competitive devaluation begin with good old-fashioned jawboning. After all, why waste valuable reserves when markets can be scared or cajoled into a suitable reaction by a few choice words from a central banker armed with the necessary gravitas. Ain't that right, Mario?

Next up is the euphemistic process of 'intervention' in currency markets. This is, of course, aimed purely at manipulation 'stabilization'. From there, we move on to a mish-mash of interest-rate policies, capital controls, and something quite innocuously called 'quantitative easing', aka 'money printing', about which we have all heard quite a lot in recent times.

(Rant on: Incidentally, I have had enough of the whole business of trying to continually soften or find new and less-offensive phrases for just about everything that has invaded every corner of modern life. The final straw came this week when I discovered that the humble tracksuit worn by soccer players when warming up before a match is now called an 'anthem jacket'. Why? Because they happen to be wearing it as the national anthem is played. IT'S A TRACKSUIT. Please. Somebody. Make it stop. Rant off.)

Anyway, back to Currency Wars.

The 16-year period between 1995 and 2010 saw a huge shift in the world's currency reserves from West to East (a theme we will certainly return to this year), as can be seen from the chart below. During that period, emerging economies took advantage of shifting trade patterns to accumulate enormous foreign reserves, largely at the expense of their Western customers; but this explosion in their holdings can be traced back to the Fed's ridiculous 'lower for longer' approach to interest-rate policy, which persisted from the mid-1990s to ... well, I'll get back to you when I can fill in the back-end number, but suffice to say, it won't be any time soon.



Where did that explosion in reserves come from? Well, some of it came from good old-fashioned growth (remember that?). The vast majority rest? Well, that would be debt — you know, 'debt', the remedy currently being prescribed to fix the problem of too much debt? Yeah, that.

By the time July of 2011 rolled round, despite a period of relative calm, Mantega was still banging the currency war drum as he watched the Brazilian real continue to strengthen against Bernanke and Geithner's much-desired 'strong' dollar:


Source: Bloomberg

(FT): Brazil is preparing a range of additional measures to stem the damaging rise of the real as the global currency war shows no signs of ending, according to Guido Mantega, the country’s finance minister...

Mr Mantega said the Group of 20 leading economies was still a long way from achieving its goal of agreeing new guidelines for managing currencies, there were 'struggles between countries' such as the US and China, and the global currency war was 'absolutely not over'.

'Absolutely not over'. No, it wasn't. In fact, it was just getting started.

The problems for emerging markets facing concerted efforts by slowing, debt-laden economies to weaken their currencies are well-known.

Slow growth and low interest rates in advanced economies continued to put upward pressure on Brazil’s currency, Mr Mantega said, forcing the authorities to consider further intervention in currency and derivatives markets to limit overshooting.

'We always have new measures to take,' he told the FT, indicating on the sidelines of an investor conference that these would not be pre-announced, but would include market intervention.

The relative strength of their currencies is a big issue for fast-growing economies. Too strong and, though the domestic market will struggle to overheat, competitiveness is impaired. Too weak and the reverse is true, but inflation becomes a serious issue. The answer, of course, is what used to be referred to as the 'Goldilocks' outcome. This term was quite popular until the subprime crisis made fools of everyone who predicted it as the likely endgame to the clear and present dangers facing the US economy. I would, in fact, venture to suggest that the disappearance of that particular term from the punditocracy's lexicon is perhaps the one good thing to have come out of the events of 2007-8.

But, as always, I digress.

It used to be that a government would decrease the value of its currency by literally devaluing it — reducing its intrinsic value by lowering the amount of gold (or silver) from which coins were minted; but that was in a time devoid of fiat currencies and when there was extremely limited international trade, so exchange rates were of little or no importance. It was a time of hard money and gold standards.


The first great currency war occurred, coincidentally of course, during the Great Depression, when most countries abandoned the gold standard; and Britain, France, and the USA set off on a competitive devaluation process driven by sky-high unemployment (you'll stop me if any of this stuff sounds familiar, right?). As countries devalued against each other in the attempt to reinvigorate their export economies at the expense of their trading partners, nothing was really achieved (except that countless trading companies were bankrupted by wildly gyrating short-term exchange rates). This period in history is beautifully chronicled in Liaquat Ahamed's Lords of Finance (see left), a staggeringly good book from which I have often quoted in these pages. If you haven't read it, read it!

The Bretton Woods era, which ran from the end of WWII until August 15, 1971 (roughly) meant that, with gold anchoring a group of semi-fixed exchange rates, competitive devaluation was more or less negated; and, though the Plaza Accord, signed in 1985, brought about a major devaluation of the US dollar against the yen and Deutsche Mark, it necessitated the Louvre Accord two years later to halt the dollar's slide (you just gotta LOVE these bankers).

The Asian currency crisis of 1997 contained the seeds of an East vs. West currency conflict, but catastrophe was averted, despite the damage that was done to the US deficit and the seeds that were sown for a decade-long war of words between the US and China — all of which brings us right back to today and the currency war that is just getting going.

Whenever such things are talked about, it is invariably in the context of the US dollar; but the trade war I want to take a look at specifically is the one brewing in my part of the world, between two powerhouses who bear considerable enmity towards one another. No, not China and Japan (that has the makings of a war of an altogether different kind), but Korea and Japan.


The rather unfortunate-looking vehicle (left) is the Sibal — the first car ever produced in South Korea. It was developed by the Choi brothers in 1955 and was based (as you can clearly see) on the chassis of the Willy's Jeeps left behind by departing US troops — only about 50% of its parts were locally produced.

This put the Korean automobile industry about 40 years behind that of Japan, whose storied zaibatsu (conglomerates) began building in the 1910s the cars that would eventually come to dominate the world.

The other area where Japan had it over Korea was consumer electronics.

Back in the 1980s and into the 1990s, companies such as Sony, Pioneer, Hitachi, and Sharp were producing consumer electronics widely recognized as the best in the world; and alongside the likes of Toyota, Nissan, and Honda they helped Japan Inc. stand astride the world.


Back then, Korean cars and consumer electronics were, frankly, a bit of a joke.

Nobody who could afford not to would buy a Daewoo or a Hyundai car. Nobody wanted an LG television. In fact, in 1981 Samsung Electric (the forerunner to Samsung Electronics) proudly boasted that it had manufactured its 10 millionth black & white TV.

Fast forward to 2012, and the change in the landscape has been nothing short of seismic.

Sharp sits on the verge of bankruptcy, once-mighty Sony has seen its share price plummet and is now the subject of speculation as to who may buy it and Hitachi is known more for computer disk drives than consumer electronics. Meanwhile, Samsung Electronics is the only company in the world giving Apple a run for its money.

Samsung surpassed Sony in 2005 to become the world's 20th-largest brand, and by 2012 it had not only become the world's largest-selling mobile phone company (some feat in today's Apple-dominated world) but had spent a brief period in 2007 as the world's largest technology company, when it leapfrogged the then-incumbent, Hewlett-Packard.

How did all this come about? Simple:


Source: Bloomberg

As the yen strengthened due to its anchor role in the carry trade, the won weakened substantially, making Korean products far cheaper than those of their Japanese counterparts. Simultaneously, the quality of Korean cars and consumer electronics was improving dramatically, enabling Korean consumer electronics to sweep past those of Japan and their car industry to reach heights never dreamed of when the Choi brothers cobbled together the Sibal, as a look at the best-selling cars of 2012 demonstrates:

    1. Toyota Corolla (Japan)

    2. Hyundai Elantra (Korea)

    5. Kia Rio (Korea)

    8. Toyota Camry (Japan)

Having been gifted a huge headstart by Japan, South Korea is not about to allow the Japanese to claw that advantage back by standing still and letting them weaken the yen, as was made apparent by comments from South Korea's finance minister, Kim Choong-soo, in Davos this past week:

(CNBC): Basically, the level of foreign exchange has to be determined by market fundamentals in the medium to long-run. But in the short run, we all know that there are times where noises can matter, disturbances can take effect. But that's only for the short-term period," Kim told CNBC on the sidelines of the WEF in Davos.

"We all know the grave consequences of competitive devaluation efforts, which we experienced some decades ago. So I think it's time to sit together to talk about that. We live in a global economy, so you yourself cannot do something alone," Kim said. "You have to cooperate with your partners."...

Asked whether South Korea would be forced to respond to the Bank of Japan by managing the won in a more meaningful way for the country's manufacturers, Kim said: "It all depends upon how markets respond to such moves, and the markets have changed over time… our central bank will do whatever it's supposed to do to protect the high volatilities in the financial sector."

"And I'm particularly concerned about the volatilities. If changes are made too rapidly, we all know that will create uncertainties, and we have to do something to prevent that from happening," Kim added.


Source: Bloomberg

Japan's currency has been strengthening for two decades, while its competitors have been happy to sit back and let the weakening effects of that move on their own currencies continue. Now Japan has decided it needs a weaker yen, and though the move has thus far been fairly powerful, we have reached the point where the likes of Korea will step in and defend the advantage they have gained over the last twenty years. As can clearly be seen from the graph (previous page), Korea's KOSPI Index has decoupled from the Nikkei as the yen slide has picked up speed, and that is a phenomenon South Korea simply cannot allow to continue.

This is how it starts with Currency Wars.

When it comes to ammunition reserves, Japan's balance sheet dwarfs that of Korea, with almost four times the amount of foreign currency at their disposal; but they will be fighting this currency war on multiple fronts, and those reserves can quickly become exhausted.


Source: IMF

Printing money or devaluing your currency in a vacuum is one thing. Generally, you can make a difference up to the point where those against whom you are attempting to weaken push back (ask the Swiss National Bank); but once it becomes a competitive sport, all bets are off.

This past week, Japan announced that, as of January 2014, it will begin an open-ended, unlimited QE program to monetize Japanese debt (they are currently buying 36 trillion yen a month, or about $410 billion) and attempt to generate the magical 2% inflation that will decimate its bond market solve all its problems. Sadly, this does no more than allow Japan to catch up with other central bankers around the world who are already monetizing like crazy; but, purely on the basis that something is better than nothing, this change in policy has been cheered to the echo.

As we head into 2013, we find ourselves in a situation unlike any that has ever occurred in the history of global finance. The ability to simplify the complexity of that situation is something only the very brightest amongst us are able to do, and one such man is Raoul Pal of the Global Macro Investor (with whom I have recently been fortunate enough to have a fascinating dialogue). Raoul put together a very simple list which, at the time he compiled it in late December, beautifully highlighted the utter absurdity of today's central banking folly.

The list was split into sections that grouped the 38 countries that had negative or zero real rates (yes: THIRTY. EIGHT.), as well as the countries that either had explicit QE programs in place or were actively intervening in or verbally manipulating their currencies:


Source: Raoul Pal, Global Macro Investor

Now, does it seem remotely possible that all these countries can have weak currencies at the same time? Of course it isn't possible. Not without rampant inflation, it isn't. But that doesn't appear to be a problem for the central bankers of the modern world, who are confident that inflation is 'contained'. Yes, 'contained'. Is anyone paying attention, I wonder?

The competitive devaluation merry-go-round will continue, because these buffoons have left themselves no other options. A currency war will break out in earnest; because none of them will be able to generate the weaker currency they need, and that will in turn lead to several exits from the EU, because the weaker economies will need to regain control of their own currencies and not be beholden to Brussels. This is the way things go, I am afraid.

"One, two, three, four, I declare a currency war!"


There is one other important piece of Currency Wars that I want to take a look at before we wrap things up for the day, and it stems from a rather interesting recent announcement from the Bundesbank.

Last October, the Bundesbank was challenged by auditors to explain why they kept the majority of their gold overseas. They explained it rather neatly:

(ZeroHedge): The reasons for storing gold reserves with foreign partner central banks are historical... To be more specific: in October 1951 the Bank deutscher Länder, the Bundesbank’s predecessor, purchased its first gold for DM 2.5 million; that was 529 kilograms at the time. By 1956, the gold reserves had risen to DM 6.2 billion, or 1,328 tonnes; upon its foundation in 1957, the Bundesbank took over these reserves. No further gold was added until the 1970s. During that entire period, we had nothing but the best of experiences with our partners in New York, London and Paris. There was never any doubt about the security of Germany’s gold. In future, we wish to continue to keep gold at international gold trading centres so that, when push comes to shove, we can have it available as a reserve asset as soon as possible. Gold stored in your home safe is not immediately available as collateral in case you need foreign currency. Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity. Similar pound sterling liquidity could be obtained by pledging the gold that is held with the Bank of England.

So there you have it. The Bundesbank was extremely happy with holding its gold in New York (amongst other places) and saw no need to move it.

A couple of weeks later, the story surfaced again when Andreas Dobret of the Bundesbank gave a speech in front of the NY Fed's Bill Dudley:

(Zerohedge): Please let me also comment on the bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany — a discussion which is driven by irrational fears.

In this context, I wish to warn against voluntarily adding fuel to the general sense of uncertainty among the German public in times like these by conducting a “phantom debate” on the safety of our gold reserves.

The arguments raised are not really convincing. And I am glad that this is common sense for most Germans. Following the statement by the President of the Federal Court of Auditors in Germany, the discussion is now likely to come to an end — and it should do so before it causes harm to the excellent relationship between the Bundesbank and the US Fed.

Throughout these sixty years, we have never encountered the slightest problem, let alone had any doubts concerning the credibility of the Fed [ZH may, and likely will, soon provide a few historical facts which will cast some serious doubts on this claim. Very serious doubts]. And for this, Bill, I would like to thank you personally. I am also grateful for your uncomplicated cooperation in so many matters. The Bundesbank will remain the Fed’s trusted partner in future, and we will continue to take advantage of the Fed’s services by storing some of our currency reserves as gold in New York.

Pretty clear, it has to be said. No chance the Bundesbank would be repatriating their gold any time soon. Except...

On January 16, 2013, just a matter of weeks after their earlier assertions, the Bundesbank released the following statement:

By 2020, the Bundesbank intends to store half of Germany’s gold reserves in its own vaults in Germany. The other half will remain in storage at its partner central banks in New York and London. With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centres abroad within a short space of time.

The following table shows the current and the envisaged future allocation of Germany’s gold reserves across the various storage locations:


31 December 2012

31 December 2020

Frankfurt am Main



New York









To this end, the Bundesbank is planning a phased relocation of 300 tonnes of gold from New York to Frankfurt as well as an additional 374 tonnes from Paris to Frankfurt by 2020.

The withdrawal of the reserves from the storage location in Paris reflects the change in the framework conditions since the introduction of the euro.

Given that France, like Germany, also has the euro as its national currency, the Bundesbank is no longer dependent on Paris as a financial centre in which to exchange gold for an international reserve currency should the need arise. As capacity has now become available in the Bundesbank’s own vaults in Germany, the gold stocks can now be relocated from Paris to Frankfurt.

Of course, no sooner had this story hit the wires than all hell let loose as the conspiracy theorists went on the rampage. Rumours swirled around of missing gold, rehypothecation, and massive price spikes as the Fed scrambled to get delivery of Bundesbank gold long ago leased into the market; but finding out the truth about the situation will likely take considerable time.

The important point about the Bundesbank move is that it heightens another form of currency war — one that involves the only REAL currency, gold — that began in August of 2011.

As I wrote back then, when Hugo Chavez demanded his 99 tons of gold from the Bank of England:

(TTMYGH August 26, 2011): Chavez’s move this week could set in motion a chain of events whereby Central banks who store the bulk of their gold overseas in ‘safe’ locations scramble to repossess their country’s true ‘wealth’. If that happens, the most high-stakes game of musical chairs the world has ever seen will have begun.

One would imagine that a country’s gold would be stored onshore in their own vaults rather than be entrusted to a foreign power — after all, if tensions WERE to rise between the two sovereigns, amongst the first casualties would be said gold.

Based on the paper prepared for the Venezuelan Finance Ministry and Central Bank (table, page 3), Chavez is about to ask a group of Western banks to hand over some $11.1 billion in gold bullion and, despite the obvious logistical nightmare that the transportation of this bullion presents, he will be expecting it to be delivered either to the Venezuelan Central Bank vault, or that of a ‘friendly’ nation such as China or Russia. Soon.

For the longest time, conspiracy theories about the amount of gold actually held in the various depositories have abounded — in fact, we have discussed many of them in these pages over the past couple of years — but now we may finally find out just what does lie beneath, as Venezuela’s grab for their gold could potentially start a landslide of demands for delivery that could unravel a web of deceit years in the making.

Or it may not. Either way, we MIGHT just find out who was right and who was wrong and be able to put the matter to rest once and for all. To quote Vizzini, it would be ‘inconceivable’ to think for a second that central bank governors the world over are blissfully unaware of the rumours about empty vaults, massive leasing programs, and fictitious allocations held on their behalf at places like Fort Knox, the Federal Reserve, and the Bank of England; so one can reasonably imagine that quite a few of them are sitting uneasily in their chairs waiting to see what the response is to the Venezuelan demands.

Personally, if I were a central bank governor, I know I would want to be absolutely certain that my gold was (a) exactly where it was supposed to be, (b) held in the amount advertised and (c) ... well ... made of gold, ideally — as opposed to tungsten.

If there is ANY delay in repatriating Venezuela’s gold, it could potentially start a frantic scramble by central banks to claim their physical gold; and if that happens you can be assured that a fire will be lit under the gold price, the likes of which we haven’t yet seen — even as gold has appreciated from $250 to $1850 over the past 11 years.

As it turned out, of course, there was no delay in repatriating Chavez's gold (which is good), but for Germany to pull the same move takes the game to a whole new level, based on the size of their holdings. They estimate that (for unexplained reasons) it will take them 7 years to repatriate the 8% of their gold that they intend moving from the Fed, so answers on that matter will be a long time in coming — unless of course, other central banks decide that Currency Wars is a game they need to get good at.

Earlier in this piece, the chart of currency reserves demonstrated just how swiftly developing markets have been accumulating fiat currency in the last 15 years. A look at what those same central banks have been doing with their gold is highly instructive (not to mention very familiar).


Yes, emerging-country central banks are accumulating gold just as fast as they possibly can, as insurance against problems in the world of fiat currency; and those problems are liable to get bigger with each crank of the printing press.

It was Chavez's announcement that sent gold spiking to $1,900 back in September of 2011. Further announcements of similar actions in the wake of Germany's momentous decision may well have a similar effect.

But as I close this week I will leave the final word, appropriately enough, to the man whose book Currency Wars: The Makings of the Next Global Crisis is an absolute must-read on the subject — Jim Rickards:

(Yahoo): Germany made even bigger splash than Japan in the gold market recently with its surprise announcement last week that the Bundesbank would begin repatriating gold reserves held overseas. The central bank said it wanted to keep more than 50% of its gold reserves at home, up from slightly less than one-third currently. With that in mind, the Bundesbank will move all its gold reserves now held in Paris back to Germany, and reduce its reserves held in New York City.

“Germany is saying that gold is money,” says Jim Rickards... Otherwise... they would just leave the gold where it currently is stored.

And Germany isn’t alone. There’s talk that the Netherlands and Azerbaijan will also repatriate gold reserves.

China, the second largest global economy but the sixth largest holder of gold, according to the World Gold Council, is increasing its gold reserves, Rickards tells The Daily Ticker.

“If the Chinese repeat their pattern, I expect late this year or early 2014 the Chinese will announce, ‘We’ve got 3,000 tons or maybe 4,000 tons.’ That will be a shock because suddenly the world will wake up and say why is China buying all this gold?" says Rickards.

He says the reason is obvious: “Gold is the real base money.”

“In dollar terms gold hasn’t gone up that much lately, but in yen terms — with the devaluation of the yen, gold is partly a function of the currency wars,” he says.

Yes Jim, gold is very much a part of Currency Wars, and the competition is just getting started.


Before I run you through what you will find in this week's Things That Make You Go Hmmm..., a quick piece of housekeeping:

I will once again be speaking at the Cambridge House California Resource Investment Conference in Indian Wells, CA, on February 23/24th; and the line-up this year is fantastic.

Rick Rule, Greg Weldon, Frank Holmes, and Peter Schiff will all be in attendance, along with my great friends Al Korelin and John Mauldin; so if you are in the vicinity and would like to drop by and hear from any of these fine speakers, you can find all the details at the conference's website HERE

I hope to see some of you there.



This week's Things That Make You Go Hmmm... includes a look at Mark Carney's plans for the Bank of England, a trip to Sienna to hear all about the travails of the world's oldest bank, an in-depth assessment of employment prospects in the banking industry, and a stinging rebuke of George Osborne's 'Fauxsterity' programme from Jim O'Neill.

The Miami Marlins loan payment schedule looks like a pop-up fly, China's secret police seem to be a little gung-ho, and we hear why it's a little too early to celebrate the ECB's dwindling balance sheet.

Charts include Fed intervention, a UK triple-dip recession, silver investing from A to Z, and Eric Sprott's take on ignoring the obvious.

We hear from Bill Fleckenstein, Kyle Bass, and an impeccably attired Daniel Hannan; and there's even a pop quiz on the Fed's balance sheet to keep you all on your toes.

Lastly, there is an audio clip that I am still scratching my head over three weeks after I first heard it. Don't miss that!

Until next time...


Pop Quiz, Hotshot! True or false. Answers on page 27.

    1.Marketable Treasury debt exceeds the size of the U.S. economy.

    2.China owns more Treasuries than the Federal Reserve.

    3.Over the past year, China’s ownership share of Treasuries has declined.

    4.Since 1998, China’s ownership share of Treasuries has increased 10-fold.

    5.China owns more Treasuries than Japan.

    6.Excluding China and Japan, foreign investors own more Treasuries than any other group.

    7.Foreign investors own more Treasuries than domestic investors.

    8.Banks and other financial institutions own more Treasuries than the Fed.

    9.As a percentage of Treasuries outstanding, the Fed owns more Treasuries today than it did prior to the financial crisis.

    10. Over the past ten years, households’ share of Treasury ownership has been little changed.

*** Via 'MN' (Thanks!)

The new Governor of the Bank of England has signalled that he will put growth at the heart of his approach to the job and is willing to see higher inflation for longer in order to support the economy.

Mark Carney was making some of his most detailed comments since he was announced as the surprise choice for the post in November.

He said that, although price stability was central, there were “tolerances” concerning the speed with which inflation would be brought down if the economy was struggling.

At the moment inflation is running at 2.7pc, which is above the 2pc target set by the Government.

Some economists believe that the Bank of England’s loose monetary policy is contributing to inflationary pressures and have called for an increase in interest rates.

Others argue that, while the economy is flat-lining and state spending is being curtailed, a fiscal consolidation, interest rates should remain low.

“If you are coming from above [the inflation target] and you have a fiscal consolidation you might take a little longer to get back given the issues with output,” Mr Carney told the World Economic Forum in Davos.

“Once the goal is set, the central bank needs to make that determination and there needs to be an understanding of the goals set and of the tolerances that the central bank can operate in.”

Using the US as an example, Mr Carney said economies needed to be allowed to reach an “escape velocity” in which they were out of danger of slipping back into recession.

That would suggest keeping interest rates lower for longer while considering further quantitative easing, indirect provision of monetary stimulus via the financial system.

In the UK, despite some quarters of growth, the economy has regularly slipped back into negative territory.

“As the economy gains traction — within the context of price stability — the stimulus is continued to be provided entirely appropriately to ensure the US economy achieves escape velocity,” Mr Carney said.

He added that monetary levers had not been “maxed out or taken to the hilt”.

“There continue to be monetary policy options in all the major economies,” he said, while pointing out that central banks could not do the job on their own.

“There is not an ability for central banks to take all the risks out or set the seeds for a sustainable recovery.”

*** UK Daily Telegraph / link

Confused, shocked and furious. These three words pretty much sum up how shareholders of the Banca Monte dei Paschi di Siena (MPS), Italy's third largest bank and the world's oldest, felt when they gathered on January 25th. The meeting had been called to ask them to put their bank in hock to the state through a convertible bond subscribed by the government of up to €4.5 billion ($6 billion). (When the stock market closed on the day of the meeting, MPS was worth just under €3 billion.) Aimed at bringing the bank's capital ratios up to scratch, the state aid, which was approved by the shareholders, comes at an eye-watering price: MPS will pay 9% interest, and the rate will increase starting next year.

The meeting capped a bad week for Siena, the bank and its shareholders. Two days before they met, the Bank of Italy, the central bank and banking regulator, said that the true nature of some of MPS’s transactions emerged only recently, following the discovery of documents kept hidden from the supervisory authority and brought to light by the bank’s new management.

The latter had begun investigating suspect operations in October. (Digging is nearly finished: within two weeks the board, chaired since April by Alessandro Profumo, UniCredit's chief executive between 1997 and 2010, should know the effect of the dodgy operations.)

MPS had always been considered a conservative institution — solid, prudent, unadventurous and tightly linked to the city where it was founded in 1472 and still has its head offices. Hence shareholders' dismay to learn that the previous management, pushed aside a year ago at the behest of the Bank of Italy, had apparently been indulging in finance of the more risky sort — and that its bets had not panned out. At the end of September net losses for the MPS Group amounted to almost €1.7 billion. Shareholders are now wondering whether results for the full year will be worse than those of 2011 when the net loss reached almost €4.7 billion.

Shareholders are also asking why things did go so wrong. At the root of MPS’s troubles are politics, poor management and inadequate supervision. Twenty years ago, when Italy's public-sector banks were transformed into joint stock corporations, politicians in Siena were unwilling to let go. They wanted to maintain the bank's local character and keep its jobs in and around the city. Even today, the 16-member board of the Fondazione Monte dei Paschi di Siena, which owns a stake of almost 35% in the bank, is dominated by political appointees: eight are chosen by the city authorities and five by provincial authorities.

A lawyer by profession and linked to the left, which has long run the city, Giuseppe Mussari was appointed chairman of the foundation in 2001. He became the bank's chairman in 2006 and held that post until last year. In 2007 MPS’s board decided to buy Banca Antonveneta from Santander for a whopping €10 billion — a move that has since bled MPS and crippled the foundation.

Attention now focuses on what the regulator has done or not done over the past five years. Ignazio Visco, the Bank of Italy's governor, has said — rather disingenuously — that the central bank does not police banks or fight crime but is concerned with prudential supervision. He has also said that the regulator steps in when bank management seems imprudent..

*** economist / link

For decades, investment bankers have held the key to untold riches — but now they're being laid off by the tens of thousands. As the crisis forces the industry to search for a new identity, is it ready to mend its ways?

The suicide victims chose a location with symbolic significance. Last fall, only a few weeks apart, a businesswoman and a banker went to the Coq d'Argent, an upscale restaurant and hot spot in the world of London high finance, located on the top floor of a shopping complex, to end their lives.

The woman put down her purse and jumped from the restaurant's cozy rooftop terrace. The banker, an investment specialist, jumped into the building's atrium around lunchtime.

The "City," the casual term the financial center uses in reference to itself, was shocked. The suicides are the most glaring expression of an apocalyptic mood that seems to have gripped all of London. Hospitals are reporting a high incidence of patients with alcohol problems, while top restaurants are fighting for every customer.

The crisis has struck at the heart of the financial center. In 2012, banks began to downsize their investment banking activities. For years, the area had been seen as a playground for those seeking instant riches and guaranteed success, and it provided tens of thousands with sometimes exorbitant incomes.

October 30 would become a horrific day for the financial district after the Swiss bank UBS announced that it was slashing 10,000 jobs in the sector. On one morning alone, the bank's London office let hordes of bankers go. Some were intercepted at the entrance, still carrying their coffee in to-go cups, only to be shown the door a short time later with a piece of paper filled with instructions.

All he felt was hate, says a 51-year-old who was among those affected by the recent layoffs. For him and others like him, the chances of finding a new job are slim. The competition is also doing its utmost to downsize. Morgan Stanley plans to lay off 1,600 employees in the coming weeks, Lloyds is cutting as many as 15,000 jobs worldwide, and Deutsche Bank has just eliminated 1,500 jobs in its investment banking division.

An era seems to be coming to an end, the era of an industry that led us to believe that what it did was useful. In reality, though, it was lining its pockets by conducting more and more reckless transactions and involving itself in increasingly insane deals and products. Senior executives say the business is merely shrinking to a healthy level and characterize it as something like a catharsis.

As former investment bankers search for new identities, arrogance is being replaced with humility. It's important to "improve the way we operate as an organisation," Antony Jenkins, the new CEO of the major British bank Barclays, wrote in a memo to employees. Anshu Jain, co-CEO of Deutsche Bank and the former head of its investment banking division, has promised "cultural change.".

*** der spiegel / link

The ECB has been receiving praise for shrinking the Eurosystem balance sheet since last summer.

MarketWatch: — The euro notched an 11-month high versus the dollar Friday, as European banks prepared to pay back a larger-than-expected chunk of cheap, three-year loans provided by the European Central Bank.

Most of the reduction is from the MRO and LTRO loan repayments by EMU periphery banks. These were funds borrowed by banks to replace lost sources of funding, including massive losses of deposits.


But before congratulating Mr. Draghi on this achievement, it is important to note that the ECB has simply swapped a portion of its on-balance sheet exposure for an unlimited off-balance sheet commitment via the Outright Monetary Transactions program.

Consider Spain for example. Fundamentals of the stretched financial system, collapsing property values, and record unemployment have hardly changed. There is certainly no fundamental justification for the spectacular collapse in sovereign yields (chart middle), except for the fact that the ECB is committed to buy unlimited amounts of this paper should Spain request it.

Just because off-balance sheet exposure is not visible doesn't make it any less real. As a reminder of how off-balance sheet exposures can quickly appear on balance sheets, just take a look at the start of the financial crisis in 2007. Large U.S. and European financial institutions had significant off-balance sheet exposures by providing backstop guarantees to their commercial paper vehicles prior to the financial crisis. When that commercial paper could no longer be rolled, banks, particularly Citi, RBS, and Wachovia, were forced to take assets — mostly mortgage securities — onto their balance sheets. The chart below shows mortgage securities on the balance sheets of large US commercial banks. This is not a "buying spree" in late 2007 to early 2008 — it's a forced balance sheet expansion driven by commercial paper backstops.

*** sober look / LINK

George Osborne should recognise that his deficit-reduction programme is failing and change economic policy to avoid a triple-dip recession, a senior investment banker has warned.

Jim O'Neill, the chairman of Goldman Sachs Asset Management, said the chancellor's continued pursuit of austerity despite signs that the economy was stagnating, including worse-than-expected GDP figures, risked a lost decade for the British economy with low growth and increasing public debt.

Figures unveiled on Friday showed that the British economy shrank in the last quarter of 2012. If the economy shrinks again in the first quarter of 2012, Britain will be in recession for the third time since the economic crash of 2008.

The government insists that its policy of cutting expenditure is the only course available but critics insist that the absence of growth was increasing the deficit rather than cutting it.

O'Neill told the BBC: "Based on my business experience, if what you thought was not delivering what you expect to be the outcome surely you have to change what you thought a little. At a minimum, a repositioning of the stance, if not a full change."

The banker's comments echo criticism of Osborne from within his own party. Boris Johnson, the mayor of London, said government spending could trigger a virtuous cycle of spending by business, which would activate cash held by companies and create economic growth.

Ed Balls, the shadow chancellor, accused Osborne of being "asleep at the wheel" and said now was the time for a "plan B" to promote growth through cuts to VAT and spending on infrastructure.

"The longer David Cameron and George Osborne cling on to their failing plan the more long-term damage will be done. They must finally listen and act to kick start this economy," he said.

*** UK guardian / link

How can you turn $91 million into almost $1.2 billion? Buy some bonds from Miami-Dade County.

This week, the Economic Time Machine helped cover the debate over the Miami Dolphins requesting Miami-Dade hotel taxes for part of a $400 million stadium renovation. County commissioners endorsed the plan with a non-binding resolution. But they emphasized they wouldn’t approve anything close to the 2009 deal given to the Marlins, which had the county footing most of the construction bill for the new $639 million ballpark and parking complex.

Miami-Dade borrowed about $400 million in that deal by selling bonds on Wall Street. During the commission discussion on the Dolphins plan, Mayor Carlos Gimenez mentioned one set of stadium bonds worth about $90 million would cost more than $1 billion to pay back. We at the ETM thought: Can that be true? The answer: yes. See below.

The first column is the money borrowed, and the small lines show the amount of principal and interest owed each month. The soaring line is a running total of how much money Miami-Dade is scheduled to pay back for the loan. It crosses the $500 million mark in 2042, and hits $1.18 billion by the time the last payment is due 2048.


Source: Miami Herald

Miami-Dade will use hotel-tax revenue to pay off the bonds. But payments don’t kick in until 2026. Once they do, they get very costly very quickly. The first payment, for example, totals $260,000. The fifth jumps to almost $8 million and the 10th tops $20 million. Payment No. 18 brings the big hit: $118 million comes due in 2042 alone.

The high interest comes from the penalty Miami-Dade must pay in exchange for a repayment plan that lets the county delay by 15 years making it first debt-service payment to the Wall Street lenders who bought the bonds.

“It’s an expensive way to borrow money,’’ said Frank Hinton, head of the county’s bond program. “You’ve got $1.2 billion to pay back. It is a lot of money.”

*** Miami Herald / link

Wiretapping, email hacking, cell phone tracking and secret videotaping are just a few of the cloak-and-dagger techniques long employed by police in the course of criminal investigations in China.

But now, for the first time, police officers applying for permission to employ these so-called "technological investigation measures" will be subject to "rigorous" reviews, without saying by whom.

The stricter rules were written into an amendment to the Criminal Procedures Code that took effect January 1. Details were spelled out in complementary regulation documents recently released by the Ministry of Public Security, the Supreme People's Procuratorate and the People's Supreme Court.

Still waiting to be answered, however, are questions about the amendment's deeper impact. Will the rules put tighter controls on secret investigations by, for example, subjecting police to the rule of law and public scrutiny? Or has the amendment effectively given police more room to maneuver behind closed doors?

Offering a positive spin is Cheng Lei, a professor of criminal procedures at Beijing's Renmin University.

Cheng says the public is justifiably skeptical about the amendment since police for a long time shrouded their investigations in "mysticism." But the amendment, he said, effectively lifted the mystical veil by forcing police to conduct investigations within legal boundaries.

On the other hand, the amendment has raised questions about possible police abuse since it widened the scope of probes qualifying for secret investigations to include, for example, suspected bribery and other forms of official corruption.

Chen Ruihua, a law professor at Peking University, calls secret police investigations a potentially egregious violation of personal liberty and privacy unless controlled via judicial supervision. Even under the new amendment, though, police and prosecutors can launch a secret investigation without a judge's permission, leaving the door open to potential power abuse.

China's police have used secret means to chase criminal leads for decades. And during the Cultural Revolution between 1966 and 1976, authorities abused the power to conduct undercover investigations, turning it into a political tool.

Probes were more closely coordinated inside legal parameters after the National Security Law took effect in 1993, and as a result of provisions in the People's Police Law in place since 1995. These laws gave public security agencies the power to use technological sleuthing "in accord with relevant state regulations and after a rigorous approval process."

But before the latest amendment took effect, there were no "relevant state regulations," and thus no system or legal support for reviewing police applications for secret probes. These gaps left room for government agencies and the Communist Party to get involved in police investigations, said Cheng. Various national security organizations also have access to secret police work.

An effort to raise China's secret investigation practices to international standards prompted a public security ministry regulation in 2000 that says evidence gathered in secrecy cannot be admitted in court. That rule complemented a 1998 regulation that said any information gathered secretly by police could not be shared with the public.

*** CAIXIN / link


    1.False. Publicly held federal debt is 71% of GDP. Gross federal debt, however, tops 100%.

    2.False. Despite presidential campaign rhetoric, the Fed currently owns significantly more Treasuries than does China.

    3.True. China’s ownership share of Treasuries has fallen from a peak of 13.5% in Q2 2011 to 10.3% in Q3 2012.

    4.False. Tricky question. China’s ownership share of Treasuries increased 11-fold from 1998 to 2011 but has declined to roughly 8-times now.

    5.True. China has owned more Treasuries than Japan only since 2008 and maybe not for much longer. The latest TIC report shows a difference of $37 billion. But with China’s ownership flattening out and Japan’s likely to increase if the Bank of Japan buys foreign bonds, the two will likely cross this year.

    6.True. Although China and Japan own 20% of the Treasuries, all other foreign investors own 28%.

    7. False. Another tricky question. According to the flow of funds data, foreign investors own 48% of Treasuries. But the TIC data shows foreign investors own slightly more than half. Take your pick.

    8.True. Financial institutions own nearly 9 percentage points more than the Fed.

    9.False. When Bernanke mentioned at the December 12 press conference that, as a percentage of Treasuries outstanding, the Fed owns more Treasuries today than it did prior to the financial crisis, we didn’t believe it either. Puts things in a different perspective and maybe explains why the Fed isn’t so worried about the size of its balance sheet and potentially disrupting the financial markets.

    10.True. Households’ ownership share of Treasuries declined from over 20% in 1998 to little more than 7% in 2002. It’s about a point higher today.

Charts That Make You Go Hmmm...


Source: Doug Short

Pop Quiz! Without recourse to your text, your notes, or a Google search, what line item is the largest asset on Uncle Sam's balance sheet?

A) U.S. official reserve assets

B) Total mortgages

C) Taxes receivable

D) Student loans

The correct answer, as of the latest Flow of Funds report is ... student loans.

The rapid growth in student debt has been a frequent topic in the financial press. One stunning chart that caught my attention illustrated the rapid growth in federal loans to students since the onset of the great recession. Above is a chart based on data from the Flow of Funds Table L.105, which shows the federal government's assets and liabilities.

As I point out on the chart, the two callouts are for Q4 2007, the quarter in which the Great Recession began (December 2007) and the most recent quarter on record, Q3 2012. The loan balance has risen an astonishing 448 percent over that timeframe, most of which dates from after the recession.

This chart includes only federal loans to students. Private loans make up an even larger amount.

*** Doug short / link

Everything you ever wanted to know about silver but were afraid to ask...


Source: Visual Capitalist


The UK economy shrank by 0.3pc in the final three months of last year, raising the prospect of a triple dip recession, as Britain’s manufacturers suffered their worst year since the financial crisis.

The official figures were the fourth quarter of negative growth in the last five and mean that the UK flatlined for last year as a whole — posting zero growth.

The economy is smaller than it was in September 2011 and still 3.3pc below its pre-crisis peak.

Making matters worse, there was scant evidence in the data that the economy is rebalancing from consumption to manufacturing. Output by Britain’s factories fell by 1.5pc in the quarter and by 1.8pc for the year as a whole — the first annual decline since 2009.

*** UK Daily Telegraph / link

The day Lehman failed saw the launch of the most epic central bank intervention in history with the Fed guaranteeing and funding trillions worth of suddenly underwater capital. However, what Bernanke realized quickly, is that the "emergency, temporary" loans and backstops that made up the alphabet soup universe of rescue operations had one major flaw: they were "temporary" and "emergency", and as long as they remained it would be impossible to even attempt pretending that the economy was normalizing, and thus selling the illusion of recovery so needed for a "virtuous cycle" to reappear.


Which is why on November 25, 2008, Bernanke announced something that he had only hinted at for the first time three months prior at that year's Jackson Hole conference: a plan to monetize $100 billion in GSE obligations and some $500 billion in Agency MBS "over several quarters." This was the beginning of what is now known as Quantitative Easing: a program which as we have shown bypasses the traditional fractional reserve banking monetary mechanism, and instead provides commercial banks with risk-asset buying power in the form of infinitely fungible reserves.

This program has been so successful in its true intended goal — enriching its benefactors, the banks, who have managed to push the S&P to fresh five year highs (and the Russell 2000 to records) even as the economy has deteriorated to subpar growth not seen in years, in the process replacing a vibrant workforce with a part-time, gerontocratic labor pool, committing the US economy to many more years of subpar growth, that many more years of Fed interventions, a la QE, are assured (not to mention the need to monetize trillions more in US government deficits).

So how does all this look on paper?

We have compiled the data: of the 1519 total days since that fateful Tuesday in November 2008, the Fed has intervened in the stock market for a grand total of 1230 days, or a whopping 81% of the time!

*** zerohedge / link

First, while we are supposed to be in the midst of an economic recovery, about one in five Americans are on food stamps. As the chart below shows, this measure of poverty has been fairly steady for the past year. We also find it hard to reconcile this data point with the headline unemployment numbers, which seem to be improving. We prefer a more comprehensive measure of unemployment, commonly referred to as U6, which includes discouraged workers and those working part time against their will. By this measure, we see that “Total Unemployment” has come down, but remains extremely elevated at around 14% of the labour force. Moreover, food stamps and “Total Unemployment” tend to move together. If food stamps users stabilize at current highs, we believe that it is a sign that the natural unemployment rate in the U.S. economy is now significantly higher than it was pre-crisis.


Second, income inequality has been growing steadily since the mid-1980s. Figure 3 shows the share of total U.S. income earned by the middle class and the top 5% of households. As of 2011, the top 5% of households brought home over 22% of all income generated in the country, whereas the middle 20% of households (quite literally the middle class) got less than 15%. Coupled with the unemployment picture, this shows that a majority of the U.S. population has been losing ground to the most wealthy. In a society that relies on consumption for 70% of its economic activity, this certainly does not bode well for the future, since the wealthiest traditionally do not consume much of their income. To top it off, the recent “fiscal cliff deal” just reduced disposable income further by increasing payroll taxes by 2% for all those working, putting additional strain on the working class and their discretionary spending dollars.


*** Sprott / LINK

Words That Make You Go Hmmm...



MEP Daniel Hannan explains the difference between being pro-business and pro-market to the Oxford Union and makes the point that, far from being a failure of capitalism, the events of 2008 demonstrated that capitalism does, in fact, work beautfully — if the market is left alone to do its work. What an outrageous theory! (via ZeroHedge)


Just because this interview took place ten days ago doesn't mean that Fleck is any less educational to listen to. As always, he keeps things in perspective as he discusses Japan's newfound determination to weaken the yen through money printing, the impending bond market disaster, gold and silver, and the inflationary endgame that central banks are promising the world. Deflationary fears? Soooo 2012...




With Japan front and centre lately, whose brain is better to pick on the subject than Kyle Bass's?

Nobody has laid out the case for disaster in Japan better than Kyle in recent years, but the fixation with timing that pundits seem to have is always uppermost in people's minds.

A disaster is coming in Japan — it's nothing more complicated than mathematics. Kyle is right — just not yet. When that day comes, oh boy is he going to be right...


and finally...



'Broken Britain' is a soubriquet that has gained increasing validity in recent years, but a recent caller to a live phone-in show on LBC, London's news radio station, does more perhaps to highlight the change in British culture over the past two decades than a thousand drunk 'chavs' rioting in the streets of Croydon ever could.

All the dangers of a state's increasing reliance on social welfare are on display in this clip in which a man explains just how difficult it can be finding a job in today's highly unreasonable marketplace.

The answer to your first two questions after listening to it are as follows:

"Yes. The clip WAS real, and yes, he WAS being serious."



Grant Williams

Grant Williams is a portfolio and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $250 million of largely partners’ capital across multiple strategies.

The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between us and our investors.

In Q4 2012, we will be launching the Vulpes Agricultural Land Investment Company (VALIC), a globally diversified agricultural land vehicle that will provide truly diversified exposure to the agricultural sector through a global portfolio of physical farmland assets.

Grant has 26 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses.

Grant has been writing Things That Make You Go Hmmm... since 2009.

For more information on Vulpes, please visit


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A walk around the fringes of finance


By Grant Williams

29 JANUARY 2013


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Discuss This


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Feb. 2, 2013, 8:58 a.m.


Dallas Kennedy

Jan. 30, 2013, 10:26 a.m.

Very good issue this time. Always good, but this one is exceptional.

I think the number for USTs owned by the public is somewhere above 80%, not 70%.

Income inequality has been increasing in the US since the end of the 1960s, not the mid-1980s. You need a more comprehensive measure to see it, but the graph does show some of this trend. It’s closely related to the end of the gold standard and the high inflation of the 70s and the debt bubbles that first appeared in the late 80s, then took off in the mid-90s.

The key is to distinguish income and wealth inequality. The basic trend is driven by the growing gap between the college-educated and not, with unskilled and semi-skilled labor being eliminated by automation.

On top of that is a series of waves of asset bubbles that raise wealth inequality. Some of that feeds into income inequality through the asset markets, creating a handful of big winners and many, many losers, once the asset bubbles burst.