Money

Return of the Zim Dollar?

The Mail & Guardian  reports that the Zimbabwe government is in advanced stages of resurrecting the Zim dollar. I noted to clients yesterday that this shouldn’t be a major problem if the government continues to allow foreign currencies to circulate next to the Zim dollar, but that if the public don’t accept the Zim dollar as payment for goods and services, the government would have to resort to force to get people to use the currency again and ban foreign currencies. This would be very disruptive to the overall economy and could send the economy back into collapse.

Professor Steve Hanke sent two tweets about this yesterday that I thought were good and worth sharing, because I agreed with them. Prof Hanke was an advisor to the Zim government and advocated a complete dollarisation of the economy, which after implementation instantly stabilized the collapsing economy.

 

World’s Major Central Banks Reaffirm QE to Infinity in Past 12 Hours

The US Fed, Bank of Japan and ECB have all in the past 12 hours announced an extension of QE policies.

The US Fed said it will prolong its $85 billion per month printing spree.

The Bank of Japan this morning “maintained its commitment to unprecedented monetary easing.”

While news is just breaking that the ECB announced its temporary currency swap lines with other central banks will become permanent.

Coincidence that this all happened in the past 12 hours? It’s a way of debasing currencies at the same time, so the market doesn’t single out either of these currencies in a speculative attack. It would seem that these money printing announcements are being carefully coordinated and timed so these currencies weaken together.

MUST WATCH: Modern Monetary System Explained

I cannot recommend this video highly enough. It is extremely powerful as it explains step-by-step the machinations of the modern monetary system. Mike Maloney is absolutely spot on about this: the system impoverishes the working class every single day. This is why the majority of the working class in South Africa will become poorer and poorer with time, and their anger and resentment toward the ‘wealthy’ and ‘capitalists’ and ‘whites’ will grow as well. In a day, the video has already received nearly 400,000 views (and counting).

Continue reading →

SA Mining at “Breaking Point”; Major Rand Risk

The Zimbabwe dollar was set on the slippery slope to hyperinflation when foreign exchange earnings from the very important farming sector started going into rapid decline.

One can say that mining is for South Africa what farming was to Zimbabwe, which is why Gold Fields CEO Nick Holland’s comments yesterday that the South African mining’s “equity model is at breaking point” is of serious concern.

The South African economy is regressing. As higher order industries (mining, farming and manufacturing) contract while lower order sectors grow (wholesale and retail), SA is travelling on risky mountain road with a debt bubble at the end of it, and hyperinflation off the cliff-edge.

Mass Social Unrest Hits Egypt

Back in October 2012, ETM research found the countries most at risk of mass, nationwide social unrest were:

Based on monetary inflation trends over the last two years, those countries most at risk of social upheaval in the coming months are Turkey, Brazil, South Africa, Argentina and India.

Then Turkey boiled over.

Then Brazil.

South Africa has been on and off for some time, but is likely to still get worse.

On June 22, Ciaran Ryan wrote, again citing ETM research, that:

Egypt and Argentina are at extreme risk of spreading unrest. “In Egypt, poverty and food insecurity have reached staggering levels in the last few years, an issue that could lead to further social unrest and political instability in the Arab world’s most populous country,” according to the Wall Street Journal.

About 15% of Egypt’s population moved below the poverty line between 2009 and 2011, according to a recent joint report by the United Nations World Food Program. The report also found that an estimated 13.7 million people, or 17% of the country’s 82 million population, suffered from food insecurity there, compared to 14% in 2009.

Couple those underlying economic realities, devalue the Egyptian pound by 15% since the start of the year, which drives the basic cost of living sharply higher, and you have a social unrest cocktail.

Not even a month thereafter, Egypt is exploding with reports that millions of people are flooding the streets to protest the rule of Islamist president.

India is another high risk mass unrest country on our radar, and Argentina is also up there.

Wenzel On Bob Murphy’s Gloating, And My Two Cents

Just for the record, I agree almost completely with Bob Wenzel’s post, where he takes Bob Murphy to task for gloating to his ‘foes’ about the fact that US Treasury yields rose following Ben Bernanke’s statement that he might taper QE.

Bob Murphy is beating his chest because Paul Krugman and Scott Sumner have for a while been saying that the Fed does not impact long-term interest rates. Bob Murphy disagreed and said the Fed does impact long-term interest rates. After the Fed said it will stop buying Treasury bonds last week, the market has taken these long-term yields to the highest level they’ve been in a while, to which Murphy is saying to Krugman and Sumner, “see I told you so.”

Wenzel writes regarding the problem with what Murphy is doing:

As Mises, Hayek and Rothbard taught, the science of economics is a deductive science, not an empirical science. Let’s consider this possible scenario.What happens if Bernanke retracts his statement in the next few days, as he well might do through leaks to favored journalists, and interest rates continue to climb? This could happen.

Would it not be fair for Krugman and Summers to then argue that Murphy doesn’t know what the hell he is talking about, since he argued that Bernanke’s statement caused the run-up in interest rates but now that  Bernanke is hinting that there will not be any “tapering” soon and interest rates are still climbing that Murphy must have the causal factor wrong?

It is also important to note (as Wenzel kind of does) that US Treasury yields were already in a strong uptrend ahead of the Bernanke speech, suggesting something else was already driving the move (or leaked info from the Fed, but I don’t think so, seeing as the market started the move a month and a half before the statement).

Also, to add another scenario to Wenzel’s, I can foresee a situation where the Fed keeps its ‘taper’ talk going, i.e. continues to commit to scaling back QE, but that US Treasury yields start to decline despite that, as growth slows and the stock market corrects, triggering a rotation out of other assets (equities, commodities, junk bonds, EM assets, etc) into the perceived safety of US Treasuries. An economic crisis in Europe, Japan, or China could also trigger a decline of US Treasury yields, despite Bernanke maintaining the ‘taper’ stance. A combination of the two could possibly drive US Treasury yields back to levels where they were a year ago.

Then Sumner and Krugman could also say “see, the Austrians have the causal factor completely wrong!”

Readers who read this post on clb last week, and followed the link to the client report ETM published in March 2013, will note I clearly state I anticipate a rise of US long-term rates in coming months, but that I didn’t mention what the Fed would be doing in coming months as part of this analysis.

In my opinion, the fundamentals moving US Treasury markets today are due to Fed interventions and monetary distortions from months ago. The line of least resistance was already established, and because the market was already bearish, the bearish news out of the FOMC was exaggerated (and bullish news ignored).

Exclusive Interview With The Daily Bell

I did an exclusive interview with The Daily Bell last week that was published yesterday.

 

Chris Becker’s Austrian Perspective on South Africa, Gold and the Ludwig von Mises Institute

Sunday, June 23, 2013 – With Anthony Wile

Here’s a snippet.

Daily Bell: We previously interviewed South African analyst Leon Louw on South Africa, who runs the Free Market Foundation in South Africa, and we’ll ask you some of the same questions we asked him. He was remarkably positive about South Africa and its future, especially if it adopts free-market reforms. Are you similarly positive?

Chris Becker: I would be if the South African government was indeed adopting free-market reforms. But it isn’t. This government continues to introduce policies and legislation that restricts personal choice and liberty, inching the country more toward socialism than away from it. The minister of trade and industry, Rob Davies, is a sitting member of the South Africa Communist Party, while the minister of finance, Pravin Gordhan, used to be a member of the SACP. Other key ministries are littered with Communist Party members or sympathizers. The pervasive state ethos is socialist with ‘red ideals’ clearly pushing the country in that direction, which leaves me less optimistic than Mr Louw.

That said, I am positive about the fact that the ANC government is inefficient and disorganized, enabling the private sector to flourish in parallel to public utilities that can’t serve the public’s wants. We’ve seen huge growth in private education, private security and private medical industries in recent years, without which we would have seen rapidly declining living standards of South Africans. In a micro sense this inefficient and disorganized state leaves the space for quite a lot of personal liberty and allows people to get on with things outside of government control. With this strong central planning and regulatory ethos, if the government could actually follow through with its grand plans, South Africa would be a very unfree place. I call it ‘dangerous efficiency.’

…..

We talk more about South Africa and whether we are headed toward a Zimbabwe style collapse, the long-term Africa play, a gold standard for Africa, and about the Ludwig von Mises Institute SA, among many other things.

Read the full interview here. 

How a Strengthening Yuan is Helping the Chinese Economy Restructure

As I have argued before, the South African manufacturing sector needs a strengthening rand in order to encourage real savings and investment into the sector, to reverse the consumer boom that is causing manufacturing to contract. Furthermore, a strengthening rand would force existing manufacturers to improve the quality of products they produce so foreigners would want to buy them.

Kobus van der Wath, MD of The Beijing Axis, this week explained how a strengthening yuan is benefiting the Chinese manufacturing sector.

The appreciating renminbi is actually helping China’s efforts in restructuring its economy. Beijing is sending a signal that, in the future, it wants to steer clear from unsustainable low-end sectors. This will force enterprises to improve their products, invest in technological upgrades and look for new ways to compete, such as through better after-sales service, warranties and quality. Domestic and overseas capital that enters China now will probably be invested in more high-end sectors like those in Chengdu, for example — as my letter last week mentioned — where the portion of revenue put into research and development is closing in on 3%.

So essentially, by preventing the yuan from strengthening as much as it should’ve before, the Chinese government incentivised the development of low-end, low quality goods manufacturers rather than high-end high quality products as the Swiss and Germans produce. It looks like these times are changing. Expect higher quality products from China, but to pay much higher prices for them.

The Manufacturing Circle should take note.

Re: China Business Cycle Crash and Interest Rate Spike

This is what me and my colleague, Russell Lamberti, wrote to clients on March 12, 2013 regarding the Chinese business cycle:

The economy now sits with enormous malinvestments in basic infrastructure and real estate. If the monetary environment remains tight, the term structure of interest rates will correct to pre-monetary intervention levels – meaning a big shift higher of particularly short-term rates – and these malinvestments will liquidate, causing major business cycle risks in China that have the potential to become an outright crash.

Two months later, the 7-day interbank repo rate has spiked from below 3% in mid-May to 12% today. That’s the spike we were waiting for and this is about to set in motion a cascade of very negative economic consequences for China and potentially even the global economy.

China business cycle update on its way to ETM Analytics clients‘ inboxes later today.