Economics

GO PUTIN Russia Freezing Spending In Response to S&P Cut

rafifarber Economics, The Jewish Libertarian Blog , , , ,

Putin’s getting smart. It’s nice to see a head of State do something that makes sense economically. All signs point to the fact that whoever is running Russia’s economy – and it probably is not Putin – really knows what he, or should I say she, is doing. I believe it is Elvira Nabiullina who’s really running the show, and so far, she’s awesome.

First of all, despite a gigantic Ruble collapse to 78 Rubles to the dollar from 33 earlier in 2014 (we are now at 67), Russia has added to its gold supply. When your currency is in free fall, you don’t generally buy gold. You sell it in order to prop up the value of your currency. But Russia did not do that. Instead, it ate through some of its paper forex, which is to be expected. Nabiullina is intent on keeping Russia’s gold. That is huge, and very good for the Ruble long term.

Second, in response to the S&P (those geniuses who can’t predict a single economic crisis and gave Lehman a AAA rating just before it collapsed) cutting Russia’s bond rating to junk status, Putin (with Nabiullina’s advice I assume) announced a total government spending freeze.

Finance Minister Anton Siluanov announced Tuesday that the government has adopted an anti-crisis plan that will freeze the level of spending. The plan also sees the budget returning to a surplus as soon as in 2017 and the government preparing structural reforms “so that we do not burn recklessly through Russia’s sovereign reserves.”

Wow – a State actually freezing spending in response to an economic crisis instead of printing and bailing out. This is somethin’ else. I love it.

Russia may go through some turmoil until oil prices rise again, and they will, but Nabiullina, or whoever is really running the show, is setting Russia up to devour the West when its their currencies’ turn to collapse. With the ECB printing €50B a month and the US M2 money supply growing at close to 7% annually, oil will eventually turn back up.

When it does, the Russian bear will roar.  Right now its hibernating. But not for long.

For those interested in placing bets on Russia, the relevant ETF is RSX.

Housing Crash vs Oil Crash, One Systemic One Sectoral

rafifarber Economics, The Jewish Libertarian Blog , , ,

Zerohedge reporting today through Reuters that a UK bank called Standard Chartered is reporting a $4.4B loss on bad oil industry loans. You may remember Standard Chartered as the one that paid that $600 something million fine for doing business with Iran. Will this cause another systemic financial collapse? Probably not.

Systemic financial collapses usually start with one big whale going down, but for systemic monetary reasons. In 2008 it was Lehman Brothers, when the money supply was contracting after expanding fast in the 8 years prior. In 1931 it was the CreditAnstalt bank in Austria, which collapsed after the Fed could no longer inflate the money supply fast enough. Standard Chartered may be a big whale, but it’s losses do not have to do with a systemic monetary phenomenon.

The housing collapse was also a result of monetary phenomenon. The oil collapse is, however, the result of a price war between OPEC and the US, possible aided and abetted by the Obama Administration in order to punish Putin for whatever it is he supposedly did in Ukraine. Depending on how many bad oil debt is out there, which depends on how many loans were made by banks to shale companies on the assumption that oil would not collapse to $45, there could be a chain reaction of failures going down the links of oil industry loans, but in order to have a complete economic collapse, the entire money supply needs to contract.

That is not happening right now.

So we’ll see how far these bank failures go, but don’t expect it to be the trigger that lights the final meltdown just yet.

HYPERINFLATION Belarusian Madness Triggers another Weimar

rafifarber Economics, The Jewish Libertarian Blog ,

I checked out Zerohedge today, as I tend to do at least once a day, and saw the news that Belarus had a sudden 30% collapse in its currency, the Belarusian Ruble. For those who don’t know Zerohedge, it’s a good resource, but don’t take it too seriously. According to Tyler Durden, the sky falls every day. It will at some point, but we’ll all see it when it starts, and we won’t need Zerohedge to tell us it’s happening.

When the dollar falls 10% in a day, we’ll know we’re there.

Anyway, I don’t usually read full Zerohedge articles, just the snippets on the homepage to get a feel for what’s going on in wacky world of Keynesian finance. Anything especially interesting I double check at RT, which is sort of like a toned-down Zerohedge, libertarian-leaning news outlet that is favorable to Putin. I found at RT the reason for the sudden 30% drop in the Belarusian Ruble.

The national currency lost 30 percent of its value shortly after the country’s national bank introduced a 30 percent tax for individuals and businesses purchasing foreign currency. The Belarusian ruble reached 14,150 against the US dollar, and 17,400 against the euro, with the net cost of $1 amounting to 11,000 Belarusian rubles, and €1 to 14,000.

It’s really beyond words how stupid central banks are. In order to protect its currency, the central bank of Belarus instituted a 30% tax on people who want to sell it. This, they thought, would prevent people from selling the currency and stabilize its exchange rate.

Instead, what happened is that all the demand to sell the Belarusian Ruble for foreign currency translated itself into a demand to sell the Belarusian Ruble for any physical asset anybody could get their hands on in Belarus.

Electronics Store in Belarus, December 2014

You can’t legislate prices. Not wages, not exchange rates, not anything.

Why Moshe Kahlon is a Total Fake

rafifarber Economics, Israeli Politics, Likud, The Jewish Libertarian Blog , , , ,

Sometimes dirty politicians are caught at the right place at the right time, and everybody thinks they’re a hero. This is the case with Moshe Kahlon, another Likud politician who left the party to form his own Kulanu party. Others who left have been Lieberman, Bennett, Livni, and Sharon. Kahlon is a two-bit loser lacking any guts or backbone, that was shoved in the right office at exactly the right time to make one move and now people worship him.

What people think he did was introduce competition into the cellular market, thereby lowering prices. If he had done this, it would have been a good thing. Unfortunately, this is only partly true. He did allow other phone companies to exist (amazing) thereby increasing competition. But there was one caveat that nobody seems to care about that will bite everyone in the ass very soon.

They never tell you this detail in the media, because the media is stupid. But Kahlon’s “reform” goes like this. Companies have a finite amount of time to start up and get as many customer as possible. In order to enter the market they have to pay a huge deposit to the Misrad HaTikshoret or whatever department is the overlord of the phone market. And then the 4 or 5 (forget how many) companies with the most customers gets their deposit back from the overlord government department.

This, of course, encourages rock bottom prices at a loss for the phone companies because they are trying to stay alive in the race to be allowed to continue operating. My phone bill, for example, is 10 shekels a month with Golan Telecom. They are charging ridiculously low rates because the owner, Something Golan, wants to be in the running to survive and get his deposit (bribe) back from the government.

After the time limit is up, which I believe is at the end of 2015, the remaining companies will then jack up prices to higher than market rates in order to make up for their losses in trying to bag as many customers as possible within the time limit. There will STILL be a lack of supply because other companies will STILL be banned from the space and forbidden from competing with the survivors.

So much for Moshe Kahlon, who, if he had any guts, would have simply closed his department and allowed anyone to start a phone company at any time anywhere.

All a government minister has to do in order to really succeed is close his office, lock the doors, and never show up.

Unfortunately, that is not what Kahlon did.

CURRENCY COLLAPSE Russian Ruble crashes, only backing with gold will save it

rafifarber Economics, Gold and Silver, The Jewish Libertarian Blog ,

In what is the first major crash in what will likely be a series of currency collapses in the coming year, the Russian Ruble crashed another 20% today against the dollar, the euro, and even 13% against the shekel. Now is the time to buy Russian goods if you know of any good Russian equivalents to Amazon. They want your currency and will sell you stuff cheap.

If you’ve never seen a currency collapse before, this is what it looks like on paper:

Russian Rubles per USD
Russian Rubles per USD

Putin is trying to save the currency by raising interest rates, but it is doubtful that will work at this point. This is crisis of confidence in paper, and the only way to reverse it is to get rid of the paper, meaning back it with something real. Make it exchangeable for some unit of something at a fixed ratio and don’t cheat.

If Russia makes the Ruble convertible into gold – and it certainly can do this given the amount of gold Russia has been buying of late, it will stop the Ruble collapse in its tracks and reverse it.

When people stop believing in your paper, the paper returns to its intrinsic value of zero. If you turn that paper into gold, the paper becomes something. But then, of course, you cannot print anymore. If Putin wants to save his economy, he has to give up the ability to print money.

Otherwise, Russia will default again, just like it did in 1998, and Fight Club style, everyone’s savings will be entirely lost and the country will start over again.

The wonders of fiat money.

BASTARDS Karnei Shomron Taxes Residents RETROACTIVELY

rafifarber Economics, Hebrew, The Jewish Libertarian Blog , , , ,

I didn’t think I could be surprised by the AUDACITY of government officials. But this is REALLY something.

The bastard YIGAL LAHAV the mayor gangster around here has decided to tax all of us in Karnei Shomron RETROACTIVELY for the months January to October 2014 and he has the kindness of heart to allow us to pay it UP TO THREE INSTALMENTS.

Is this even LEGAL? Is there any lawyer out there who can step in and help us 7,300 people?

Any private person who DARED charge someone retroactively for services already rendered and paid for would be PUT IN PRISON.

What disgusting GALL.

Here’s the sick letter.

http://www.karneishomron.co.il/?CategoryID=430&ArticleID=1760

Universal Rent Control Coming to Israel

rafifarber Economics, The Jewish Libertarian Blog , ,

Swedish lefty economist Assar Lindbeck once said back in 1972,

“In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Assar Lindbeck, The Political Economy of the New Left (New York: Harper and Row, 1972)

Well, rent control is coming to Israel. The price control frenzy will get worse and worse as the Bank of Israel keeps printing more and more money and the inflation seeps into the consumer sector. Tzipi Livni introduced this gem of a law, teaming up with Pretty Boy Yair Lapid. Those two are the dynamic duo of destruction it seems.

From Ynet:

שר האוצר, יאיר לפיד, ושרת המשפטים, ציפי לבני, הציגו היום (ה’) את הצעת החוק שלהם לפיקוח על שוק השכרת הדירות בישראל. על פי ההצעה, החל מתחילת השנה הבאה ועד סוף שנת 2019, תחול מגבלה על יכולתו של משכיר להעלות את שכר הדירה משנה לשנה. המשכיר יוכל לקבוע באופן חופשי את שכר דירה אחת לשלוש שנים ולאחר מכן להעלותו בשיעור העלייה של מדד המחירים לצרכן בלבד.

Minister of Finance Yair Lapid and Justice Minister Tzipi Livni presented their bill today for rent controls. According to the bill, starting at the beginning of next year until the end of 2019, landlords will be prohibited from raising their rents. A landlord can freely decide what rent he will charge once every three years, and after that he can only raise it in accordance with the consumer price index.

Before I tear this apart, a short little thing on the harmfulness of price controls in general. A price is set by supply and demand. The price point is the point at which the number of sellers for a good equals the number of buyers. It is not set by greed, nor by luck, nor by generosity. Rents do not go higher because suddenly human nature changes and landlords get greedier than they once were. Landlords do not raise rents because they get greedier. They raise rents because that’s the price that buyers are willing to pay. It’s what they can get. Rents go higher because the amount of buyers at a lower price are greater than the number of sellers at that price. So the price goes up in order to equal out the buyers and sellers.

That’s it.

If your goal is to bring rents down, you can do one of two things. Lower demand, or increase supply. In order to lower demand, you would either have to kill people, expel people, or else convince them that they don’t really want a place to live and they should go forage in the Jerusalem forest instead. You’d need a really good Zen public education system to get that done.

So really, the only thing that can be done to lower rents is to increase supply. But this is the ONLY THING that the Israeli government DOES NOT WANT TO DO. They love building freezes instead.

So in their genius, loathsome Lapid and Livni propose a rent control law. What this means is that now, by arbitrary decree, the price of housing could end up being lower, by law, than the market price. What will then happen is that the number of buyers will be greater than the number of sellers at that price, and you will end up with a shortage, meaning people willing to rent at that price but unable to do so because there is no more supply.

Or even worse, in the Bronx in the 1980’s, the rent that landlords were allowed by politicians to charge renters was lower than the taxes that the politicians insisted that the landlords pay THEM. As a result, guaranteed a loss if they rented out a place, they simply abandoned their buildings and entire neighborhoods were destroyed and turned into crack houses. The picture below is of rent-controlled Bronx circa 1980.

As for the technical stupidity of this law, to base rent on the CPI index is entirely circular. The CPI depends on housing rents.

The more effective this law is, meaning the wider the spread between the price allowed and the free market price for rents, the more devastating the consequences will be. If landlords are not allowed to raise prices for three years but allowed to ask whatever price they think they can get now, they won’t take a risk of renting it out for anything below what they think they would need 3 years from now to cover their costs and maintain a profit. In other words, this law will push up rents even faster to where they would be 3 years from now assuming constant price inflation.

Batten down the hatches guys, it’s gonna get rough. How rough could it get? See below for more 1980’s Bronx.

Bronx2

 

 

 

FREE MARKET AT WORK Private Police Force Forms in Jerusalem

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Ynet is out with an article this morning about how 300 people have volunteered to be a part of a neighborhood watch group in order to spot lone wolf would-be murderers trying to plow into groups of people or hack at them with pickaxes or shoot them.

The most common objection to anarcho-capitalism is that the free market cannot produce a single, unified police force, and competing police forces would be at war with one another. But 300 people mobilizing to protect private property of their own free will is the same exact thing as a police force. The only difference is they’re not being paid. Are they going to spontaneously start shooting each other because they are not all the same police company?

Sure, sounds totally plausible, in an insane asylum.

But why shouldn’t they be paid? Why can’t a group of private businesses in Jerusalem pool their resources together to hire a few hundred people – maybe even poor homeless people who could use some money, train them in the basics of shooting a gun, and have them patrol the streets?

Why is this such a crazy idea? It’s perfectly sound and doable, much cheaper than supporting a police force, and puts money in the pockets of the poor.

Jerusalem does not need one single cop. All it needs is a cooperative populace to organize around the price system and hire some people to walk around, armed, and secure the whole city. The best guards will get raises. The worst ones will get fired. Eventually, you’d have a pretty damn good citizen’s police force protecting everyone and earning some income.

No taxes required.

PSEUDO SCIENCE What do Climate Scientists and Keynesian Economists have in common?

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As record low temperatures blast the United States for the second year in a row, the theories behind global warming look stupider by the day. There’s only so much of this freezing cold weather that global warming enthusiasts can shrug off before looking like real idiots.

What about the science behind it? It makes about as much sense as Keynesian Voodoo. Not because it doesn’t have its own system of inner logic, but because climatology and mainstream economics based on econometric equations are trying to use math in order predict the behavior of humans, which is inherently impossible.

The economy is governed by human action, which does not fit into mathematical models. Logical necessities can be deduced from given facts based on the axiom of human action and the basic observation that resources are finite, but that’s it. Beyond that, trying to predict anything with certainty is impossible, not because it’s really really hard to do and we just haven’t figured out how yet, but the nature of human action not following the cause and effect rules of physics makes it impossible intrinsically.

So where does climatology fit in? Climatology tries to measure and predict a system that is chaotic. It is governed by the Butterfly Effect, which means that the flap of a butterfly’s wings on one side of the world can cause a hurricane on the other. Given the Butterfly Effect, then kal vachomer (a fortiori), the action-movement of a human pinky in California can also create a typhoon in Australia, or create a really cold winter in the US.

So at bottom, human action governs the climate as well as the economy, be it one step more removed, which makes it even less predictable.

Sure, it sort of makes sense that carbon dioxide is a greenhouse gas and that the more greenhouse gas the hotter the planet in a positive feedback loop. But when you’re dealing with the Butterfly Effect and an entire planetary system, to simplify the global climate down to such simplistic principles is about as effective as asking your local econometrician which stocks to buy.

It’s all voodoo, pseudo science. Following the forms of science but not getting any real laws.

Here’s Richard Feynman on this issue. Love that man.

The Banksters are Worried that the Swiss Gold Initiative Will Pass

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The vote is in two weeks, November 30th, and it could be a day for the financial history books, reversing the infamy of August 15, 1971. More important than any election about which group of politicians is going to tell you what to do.

They’re starting to squirm now. The head of the Swiss National Bank, some guy named Something Jordan, was quoted as saying that the Swiss Gold Initiative would be “fatal” for the bank. Usually, this kind of jargon is hyperbole, but in this case, Something Jordan is right. If a central bank must keep something that it cannot print or its buddies cannot print as a certain percentage of its holdings, then by definition that central bank is tethered and restricted from printing beyond a certain point.

The money supply becomes stable and moves only with an increase in gold supplies, and inflation stops. The Swiss Gold Initiative only requires a 20% ratio of gold to Swiss Francs, but it doesn’t matter what the ratio is. As long as there is any requirement to hold something physical in proportion to monopoly money at a fixed percentage, the amount of paper that can in theory be printed becomes limited, and the central bank dies. Unless, of course, it cheats, as the Federal Reserve did from 1913 until 1971 when it finally defaulted on its last gold payments.

If this referendum passes, and with God’s help it will, then the first central bank in the West will go down. The Swiss Franc will shoot up like a rocket, bringing down other currencies in relation to it, and the Swiss people’s purchasing power will double, triple, who knows how high it will go. They’ll be able to buy a lot more stuff with their paper and they will notice it. Then other countries will notice it too and start demanding sound money and declare war against their respective central banks.

The snowball will be fast and furious and central banks will fall like flies. Gold and silver will move up fast and leave paper in the dust. The shot heard round the world will be fired in Switzerland, incidentally, exactly where Zionism began in 1897. I haven’t found much of a link between those two things. I just think it’s cool.

I have already discussed my investment strategy for gold in an article on TheStreet. The most leveraged way to play this is to buy way out of the money calls on GLD going out to 2016 and 2017, which will pay out 1750:1 at current prices assuming gold does what it did in 1980 by January 2016 or 2017, depending on your strike date.

That means that for every $1,000 you put into GLD 225 2016 Calls, you will get $1.75M in return if gold quintuples as it did from 1978-1980. Of course, you could also lose it all if gold does nothing by then.

But if the Swiss Gold Referendum passes, we will be in the end game, a year or two away at most.

Central banks will fall like flies. Incidentally, I swatted three flies today in my house.