Personal Finance

Why the Left Misunderstands Income Inequality

Posted by Azizonomics

on Friday, 20 April 2012 09:39

By Azizonomics

There is a widely-held notion on the political left that the key economic problem that our civilisation faces is income inequality.

To wit:

America emerged from the Great Depression and the Second World War with a much more equal distribution of income than it had in the 1920s; our society became middle-class in a way it hadn’t been before. This new, more equal society persisted for 30 years. But then we began pulling apart, with huge income gains for those with already high incomes. As the Congressional Budget Office has documented, the 1 percent — the group implicitly singled out in the slogan “We are the 99 percent” — saw its real income nearly quadruple between 1979 and 2007, dwarfing the very modest gains of ordinary Americans. Other evidence shows that within the 1 percent, the richest 0.1 percent and the richest 0.01 percent saw even larger gains.

By 2007, America was about as unequal as it had been on the eve of the Great Depression — and sure enough, just after hitting this milestone, we plunged into the worst slump since the Depression. This probably wasn’t a coincidence, although economists are still working on trying to understand the linkages between inequality and vulnerability to economic crisis.

I mostly agree that income inequality is a huge problem, although I believe that it is a symptom of a wider malaise. But income inequality is an important symptom of that wider malaise.

Here’s the key chart:


However it is just as important, perhaps more important to identify the causes of the income inequality.

I have my own pet theory:

The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. A shrinking share has gone to wage labour.



Gold & Precious Metals

China Buying Gold At Discount

Posted by Will Bancroft

on Friday, 20 April 2012 08:06


China has been trying to diversify her foreign exchange reserves for some time. We are all familiar with the figures released by the likes of the World Gold Council about Chinese gold investment demand, as well as statistics showing official gold imports through Hong Kong into the Chinese mainland. Chinese reserves contain only 2% gold, compared to nearly 10% for India and Russia, and figures in the 70th percentile for developed nations such as the USA and Germany.

China is getting out of paper and into gold as fast as she can, because she simply doesn't have enough of old yella'. Any effort to internationalise the RMB will not work until it is a trusted enough currency. One of the key ways to achieve trust is larger gold reserves.

It is not just the PBOC that is on the gold rush, since opening up the domestic gold market individuals are also allowed to invest in gold. The Chinese still have a limited range of savings and investment options open to them (one of the reasons why so much money flowed into their property bubble), and gold continues to shine when other investment options (especially the Chinese stock market) are being questioned.

Gold above ground

However the physical gold market is not a deep and liquid market like the U.S. Treasury market. Therefore China is not able to rebalance her portfolio out of sovereign debt quickly without causing the gold price to "gap up" whilst sending ripples through the gold market.

The Chinese authorities have even urged caution about taking up the IMF's remaining gold. In early 2010 a senior official from the China Gold Association was quoted by Reuters: "It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility."

China knows that she must tread carefully in the physical gold market, for fear of her bidding power sending the price upwards before she has been able to accumulate enough gold in the PBOC's coffers. China does not want to be chasing the gold price.

For this reason she is very happy to watch current weakness whilst apparently keeping bids in the market at the $1,500, $1,550, and $1,600 level.

Nonetheless China is accumulating physical gold, often via her Sovereign Wealth Funds, and other proxies, so that her bids are not open for all to see. Large above ground inventories of physical bullion are difficult to find outside of central bank vaults (even when they do keep it inside their own borders), or even at a smaller scale the ETFs, and COMEX inventories.



Stocks & Equities

Facebook Snaps a $1-Billion Photo

Posted by Alex Daley- Casey Research

on Friday, 20 April 2012 07:36

By Alex Daley, Chief Technology Investment Strategist

"What made Instagram worth $1 billion to Facebook?"

When asked this question recently, I responded with an immediate, "Nothing."

I'm not usually so terse or emphatic with my answers, as any longtime reader knows. But in this case, there really was nothing inherently valuable inside Instagram that made them worth the unbelievable sum Facebook agreed to pay. Yet they did it anyway. Clearly, there's something missing from a traditional valuation analysis here.

That missing piece is what Instagram could have become in the hands of a competitor or even on its own, had Facebook not gone ahead with the marriage. Nearing its IPO, Facebook was willing to overpay in order to quash any potential risks that Instagram posed, both to the company's reputation and its content stream.

Instagram by the Numbers

On the surface, Instagram might look like small potatoes. It has only one product: an application for smartphones that can take square, Polaroid-style throwback images, run them through a few cool filters to make them look snazzy, and share them with other users. Even though it has some sharing capability built into its own app, the overwhelming majority of photos are instead posted to Facebook (or Twitter or Posterous or other social network) with the app's simple integration.

There is no magical computer science involved. The app – minus some intricacies that allowed it to scale to millions of users without buckling under its own weight – is simple enough that most any solid mobile developer could have thrown it together. This is not to dismiss the hard work the twelve-person company put into it – I am sure many late nights were spent on the finer details, squashing bugs, and the like – but it's not exactly a fighter-jet simulator or climatology model. Facebook obviously didn't want the company for its cutting-edge patents, code, or other intellectual property.

So maybe it had to do with the user base? True, the application is insanely popular, having been downloaded more than 30 million times according to the App Store statistics from Apple, and another 5 million on Android. (Of course, Apple and Google have it in their best interests to overcount those users, by including updates, reinstalls, upgraded phones, etc. But it is the best proxy we have, and we can reasonably assume Instagram still had tens of millions of users.) Plus, it was named "application of the year" by Apple for 2011, which was bound to further boost its appeal and draw in new users.

But Facebook already counts 850 million registered users, according to its most recent press releases. Even adding 30 million to that number would cause barely a ripple. And given that the most popular use of the application is to upload to your existing Facebook account, we doubt that it will bring many, if any, new users to Facebook. This was not about adding instant market share.

Nor did the two-year-old Instagram bring much in the way of revenue to the table. In fact, the company has no revenue stream at all; it was living off of $7 million in venture capital funds it managed to raise on the back of its early success, having garnered 1.75 million downloads just four months after its launch. (The product, by the way, was built on just $500,000 in seed funding pre-launch.)

No revenue, little money in the bank… you might think a company like that would come cheap. That instead, Facebook believed it justified a $1-billion pricetag tells us that Facebook values the company for something more than Instagram's application, audience, or earnings.




Gold & Precious Metals

Jim Rogers On When To Buy Gold, Chinese Bubbles And Fake Good News

Posted by Drew Voros

on Thursday, 19 April 2012 12:53

Written by Drew Voros

Legendary commodity investor offers a wide-ranging view of investment topics, in his own irascible manner.

When Jim Rogers talks, investors listen, although they might be surprised to hear what the contrarian has to say. Rogers, who may be the world’s best-known commodity investor with his Rogers International Commodity Index and best-selling books, including “Hot Commodities,” is also known for swimming against investment currents and traditional thinking. HAI Managing Editor Drew Voros spoke with Rogers from his home in Singapore about gold and how he ignores the metal’s traditional fundamentals; his concerns about “fracking”; the myth of the Chinese real estate bubble; as well as what he calls “fake” good news emanating from dozens of countries facing major elections that he says are masking economic realities.

HardAssetsInvestor: As a resident of Singapore, I wanted to know if you had any insight into the country scrapping its 7 percent goods and service tax on gold. What are some of the intentions behind that?

Jim Rogers: Well, they would like to become a bullion trading center as the other places are becoming: London, Hong Kong, etc. It’s impossible to do that with a 7 percent goods and service tax on precious metals. It doesn’t expire until October, but they’re now in the process of figuring out what to do next. The country is already a trading center in a variety of things.

HAI: Do you think that will motivate some physically backed ETFs to start storing their metals there? Is that something that could happen?

Rogers: Could happen. Of course anything could happen; I don’t know what will happen. They’re still in the process of drawing up the laws. But Singapore is an obvious place for ETFs, especially for Asia because it’s completely liquid, completely trustworthy and completely neutral. Singapore has many advantages that other markets do not have in Asia.

HAI: Have your feelings about gold changed much in the last week since we’ve had the U.S. jobs report, as well as some of the euro debt problems re-emerging? We’re seeing a little bump in gold.

Rogers: I barely pay attention to the stuff you’re talking about. It really doesn’t change my view … as if you think some government statistics — which are wrong at late — would affect anything in my investment world. No, I don’t even know or pay attention to such things.

Read the rest of the Interview HERE

HAI JimRogers1


Energy & Commodities

Those wretched crude oil speculators

Posted by Jack Crooks

on Thursday, 19 April 2012 10:33

“There is no life I know to compare with pure imagination. Living there, you'll be free if you truly wish to be.”

- Willy Wonka

Chock another one up to the “let’s look like we’re doing something” category ...

Hypothetical scenario:

Suppose all 5th grade teachers at a given elementary school give their students ample amounts of candy before recess each day. This sugar high has led to wilder children on the playground. It has also emboldened the kids to act more dangerously as their risk-taking is near perfectly correlation with their classroom popularity. Taken together, the now rowdier mob of children has led to an increased number of serious injuries on the playground. And pretend for a moment that the rest of the student body is responsible for the hospital bills of these injured 5th graders. And pretend that prior to the teacher’s decision to sugar-up her students before recess the rate of injury was insubstantial. What might they do to mitigate the increased cost the public must pay for the hospital bill?

Easy. Lower the heights of the playground equipment and pay new playground police to monitor the situation closely. But don’t alter the pre-recess candy supply (maybe even increase the supply if the kids begin to look sluggish now that the playground equipment isn’t as inviting ...)

President Obama is talking tough – he’s going to crack down on the problem that’s driving gasoline prices beyond tolerable levels. He’s going to crack down on those wretched speculators.

Obama is urging the CFTC use its clout to get tougher on those trading in the crude oil futures market. Specifically, he wants to see higher margin rates per contract and wants them to enact some form of position limits to mitigate any abnormally large long positions that could serve to manipulate crude prices higher.

Ted Butler would be proud. [If you don’t know Ted, he’s been all over the CME and COMEX and the regulators to rain down on such large short positions that are allegedly manipulating precious metals’ prices lower. It will be interesting to see if this do-something attitude being applied to the crude oil market will translate to the precious metals et al.]

All that said, here’s a short list often used on a day-to-day basis to explain the fluctuation in crude oil prices:

    Geopolitical risk (e.g. what might result from butting heads with Iran)

    Supply/demand changes (e.g. falling energy consumption in the US or depletion of existing well output rates or Saudis pumping overtime or supertankers running out of gas or ...)

    Inflation hedge (e.g. hold real assets in case prices soar as a result of the declining purchasing power of the US dollar—the currency in which most commodities are priced)

    Broad-market risk appetite (e.g. commodities moving in line with “risk assets” driven by growth opimtimism)

Let me say this: speculation is a necessary and natural form of price discovery in the markets. It is this price discovery that sends signals to all market players, financial and real. The pricing system is the core of the market system and what makes capitalism the best and more efficient way to structure an economy. Period! End of story.

Yet politicos,  through the ages, have attacked speculators as devious manipulators who are the cause of all ills economic. There is nothing new here; it’s the same tired scapegoat rhetoric.

Granted, there are speculative premiums embedded in prices; that is a fact and will not change as long as you have actively traded markets. Sometimes these premiums will be out of line, and those betting the wrong way will be punished by Mr. Market. But over time the real supply/demand dynamics will rule the day.  Not speculation.  Though I am not a big believer in so-called equilibrium, I do believe prices will trend toward some supply and demand equilibrium over the longer term. It’s true for oil, wheat, corn and every actively traded commodity.  It has always been that way.   This doesn’t mean markets or market mechanisms are perfect.  They are not.  And it doesn’t mean market efficiency can’t be improved.  It doesn’t mean politically-protected con-artists—read Jon Corzine—should not be thrown in jail forever.


Down here in Florida we are represented in the Senate by Republican Marco Rubio and Democrat Bill Nelson. Marco is good, but not perfect. Bill isn’t so good. In fact, he recently delivered the government’s preferred approach to crude speculators in an interview with CNN where he promised these recently proposed efforts were not “political”. He then passed around a YouTube link to that interview. Here is the interview with Mr. Nelson if you can sit through it without a barf-bag at your side: http://youtu.be/Rz3kysPnudU

I felt compelled to write him.

To Read The Rest CLICK HERE



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