The End of Dollar Hegemony

Texas Congressman Ron Paul, an expert on monetary policy, addressed congress on February 16, 2006 with an excellent speech on the inevitable failure of current U.S. Monetary Policy. For anyone trying to understand how we've gotten into this rarely acknowledged "economic mess", this is a MUST READ!

HON. RON PAUL OF TEXAS
Before the U.S. House of Representatives

February 15, 2006

The End of Dollar Hegemony

A hundred years ago it was called “dollar diplomacy.” After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, our dollar dominance is coming to an end.

It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.

First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.

Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin-- always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.

This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.

That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations-- those with powerful armies and gold-- strived only for empire and easy fortunes to support welfare at home, those nations failed.

Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: “He who prints the money makes the rules”-- at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.

Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people-- just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.

When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules-- rules no longer written by those who ran the now defunct printing press.

“Dollar Diplomacy,” a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of “Dollar Diplomacy.” The significance of Roosevelt’s change was that our intervention now could be justified by the mere “appearance” that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government “obligation” to protect our commercial interests from Europeans.

This new policy came on the heels of the “gunboat” diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the “dollar diplomacy” of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar “diplomacy” became dollar “hegemony” in the second half of the 20th century.

This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.

Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress-- while benefiting the special interests that influence government.

Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.

The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question-- until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.

It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.

Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”

Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.

Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money-- i.e. the dollar system-- to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.

In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.

Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.

Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.

Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to—all to solve the problems artificially created by deeply flawed monetary and economic systems.

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony-- it’s dominance as the world reserve currency-- is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources-- we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.

Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.

Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system-- like Iraq, Iran and Venezuela-- become targets of our plans for regime change.

Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.

But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.

It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.

The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.

But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.

Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.

And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.

Cancelled Home Orders - Bubble Pricking Time?

CNN has a report on new home cancellations. Has the tide finally turned? Has the full effect of stimulous, exotic loans, and interest rate manipulation, finally been exhausted. Regional pain is inevitable in the U.S., if not the broader markets. The question is whether or not the mythical "soft landing" is still possible...Sorry just kidding. It's Friday afternoon and I needed to inject some humour into an otherwise depressing article.

Cancelled home orders: Latest bubble prick?

Experts say jump in cancelled orders for new homes is latest sign of how investors inflated the real estate market recently, and how the market is due for a downturn.

By Chris Isidore, CNNMoney.com senior writer
February 24, 2006: 2:49 PM EST

NEW YORK (CNNMoney.com) - Home builders are growing concerned about an increasing number of cancelled new home orders, which experts say could be a sign of an underlying weakness in the recent run in home prices.

Specifically, the cancelled orders could be the latest warning sign that buyers who were turning to real estate as an investment, rather than for their own housing needs, are shifting out of real estate. And that could mean that in many hot markets, the air is about to come out of over-inflated real home prices overall.

A survey recently conducted by the National Association of Home Builders of its members found one in 5 reporting more cancellations than six months ago, with 4 percent of the overall group saying the increase in cancellations has been significant.

"When you start to see cancellations, you really get worried," said David Seiders, chief economist for the trade group.

Typically, a downturn in a local economy -- particularly its job market -- can cause a drop in real estate prices and an increase in home order cancellations.

But the trade group's survey found only 15 percent citing job losses by buyers as a cause for the cancellations. The survey, which allowed the builders to cite more than one cause for cancellations, found 45 percent saying it was due to a buyer's inability to sell their existing home and a third citing the buyers not being able to qualify for financing at a time of rising mortgage rates.

But Seiders and others say a big concern is a factor not cited on the survey, the fear that cancellations are being driven by real estate investors who were ordering new homes with the intention of selling them quickly in a hot real estate market. And Seiders said many of the 72 percent of those surveyed not yet reporting an increase in cancellations are already worried.

Experts believe that the home buyer intending to live in a home is reluctant to cancel an order, even if the market seems to have softened. But an investor-buyer who more closely follows the local real estate market is more likely to cancel an order, even if they lose some deposit money, if they believe that the local market prices have fallen enough that walking away is more cost effective than buying and selling the home.

The flight of investor-buyers from the housing market and the increased cancellations could therefore push real estate prices lower in different markets.

"If you've overbuilt the market and sales get cancelled, you have to do something with the homes," said Seiders. "The incentives we're seeing builders offering are clearly designed to support prices and stop cancellations."

Thursday, luxury home builder Toll Brothers warned that it is seeing investors bail on some markets, and supply now greatly exceeding demand in some cases. Besides the increased cancellations, new signed contracts fell 21 percent compared to a year earlier.

"Speculative demand has ceased and speculators are now putting their homes back on the market. The result has been more supply than demand in some regions," said the company's earnings statement. "Markets such as metro Washington, D.C., which are sound economically and showing healthy job growth, will need to work through their excess supply before the imbalance once again tips in our favor.

Toll Brothers Chairman and CEO Robert Toll said the company's cancellation rate came to 8.8 percent of orders in the most recent quarter, up from a historic level of only 5 to 6 percent.

"At 8.8 percent we hope it's plateaued now," he said in response to a question during the company's analyst call.

And home builders stock analyst Alex Barron of JMP Securities said that Toll Brothers actually has much lower cancellation rates than the industry as a whole. He said some other smaller, privately-held builders have more lax rules about the amount of money a buyer must put down, and how easy it is for them to get the money back if they do cancel.

"They don't have a standard practice; the less money they ask, the higher cancellation rates," said Barron. "I would say for most builders, it's at least 25 percent today."

Barron also is concerned about the impact that investor-buyers could have on the new home market, and the real estate market as a whole.

"I would say that probably for publicly-traded builders, at least 10 to 15 percent of orders were from investor-buyers," he said. "Those are the people driving up the cancellation rates. This (the increase in cancellations) is another warning sign. I think it's something we'll have to deal with for the next two to three quarters until the market stabilizes."

Yet Another Game in Town?

With the opening of the Iranian Oil Bourse only a few weeks away, Norway has come forward with the idea to establish an energy exchange where products would be traded in Euros. According to an article at NRK.no that was translated by energybulletin.net Bourse director Sven Arild Andersen said already in December that it would be advantageous to trade oil in Euros.

He sees such a venture as a strong competitor to the International Petroleum Exchange (IPE) situated in London.

From the article:

Bourse Director Sven Arild Andersen is fed up with Norwegian oil having to be traded in London and wants to have a commodities and energy bourse in Norway.
The Bourse Director believes that Norway already has the prerequisites for building up a Norwegian or Scandinavian energy bourse.
"This would in such case compete with the bourse in London. Why not have the ambition to outcompete the British petroleum bourse," says Sven Arild Andersen.
"Here, you could trade crude oil, natural gas contracts and establish derivatives for these products."
"In addition, we must set up a larger financial industry around this, as important in other large markets and employ many people. And which are important for the competencies that are needed beyond the extraction itself of oil and gas," says Andersen.
Andersen in of the opinion that Norwegian oil must be traded in Euros, which can be advantageous for international customers.
"We have performed market studies and both Russia, which is a large oil exporter, as well as the countries of the Middle East have large parts of their economies in Euros. They would be able to view such a bourse as a contribution to balancing their economies in a better manner than at present, where their products are traded solely in dollars," says Andersen.
The Bourse Director holds out the Scandinavian power bourse, Nordpool, as an example of how a successful bourse is constructed. And he believes that this ought to be included in a Norwegian or Scandinavian energy bourse.
"We currently have the leading power bourse in Europe. It is large, well-respected and efficient. Nordpool would be natural to consider as being important in the establishment of an oil and energy bourse," says
Andersen.
The plans have been discussed for years, but have never gone past the stage of being just talk.
"We must get large Norwegian players onboard such as Statoil and Hydro, and even though the interest has been there, nobody has taken it further with great enthusiasm.
"There is now talk of a fish bourse in Norway and there certainly is no doubt as to whether we thus aren't in a position to build an energy bourse that would be much, much larger and for which we possess significant requisite competence to get up and running."

Stay Tuned! Things are getting interesting.

Retirement Age 85?

It looks like some alternative solutions to the growing Social Security crisis, are being considered. We don't have enough money to support the new wave of retirees? You have two choices: Cut benefits or extend the retirement age. By using the, "We're all going to be living longer" excuse, they can delay making payments to most retirees for a lot longer. As a financial planner, I'm amazed at how many clients in their 40s worry about collecting a pension in their 60s. "I hope that I live that long", is a common statement. Wait until they hear what the government may soon be cooking up!

The following article is a "scientific" report that supports the notion of a public that lives longer and can retire later. Watch for the government to attach themselves to reports like these, in the years to come.

Retirement age 'should reach 85'
By Paul Rincon
BBC News science reporter, St Lo

The age of retirement should be raised to 85 by 2050 because of trends in life expectancy, a US biologist has said.
Shripad Tuljapurkar of Stanford University says anti-ageing advances could raise life expectancy by a year each year over the next two decades.

That will put a strain on economies around the world if current retirement ages are maintained, he warned.

He also told a science meeting in St Louis that 50-year or 75-year mortgages may not be unusual in the future.

Dr Tuljapurkar was speaking at the American Association for the Advancement of Science annual meeting in the Missouri city.

"People are going to do things they didn't get round to in their working lives. Current institutions are really not equipped at the moment to deal with such long lives," Dr Tuljapurkar said.

"We are going to have to plan a lot more carefully, which people are not very good at."

Lifestyle trends

The Stanford researcher has been looking at relationships between historical trends in ageing, population growth and economic activity.

Based on this, he came up with a scenario in which anti-ageing technologies will increase the most common age of death by one year per year between 2010 and 2030.

Dr Tuljapurkar then applied this scenario to four countries: the US, China, Sweden and India.

In the US the cost of social security and medical care would almost double if people retired at 65

He found that his projected trends in life expectancy would have profound effects on the economy, lifestyle and population demographics.

"It might be possible to go through two mortgages, for example, or even have 50-year or 75-year mortgages," Dr Tuljapurkar explained.

In the US, the cost of social security and medical care would almost double if people retired at 65 under Tuljapurkar's scenario.

But an increase in the retirement age to 85 would bring costs down to today's levels.

However these trends would also create a "permanent underclass" of countries where opportunities for increased life expectancy were not the same as in the industrialised world.

"We can't even get retrovirals to some countries now," he told journalists.

The Unpleasant Truth About Inflation

I just discovered an excellent article by Barry Ritholz that was originally posted on RealMoney.com back in October, 2005. It repeats many of the general themes that I have discussed in this blog but it is really effective in tying together the threat of inflation in the current U.S. economy. More importantly, it discusses why most people don't see the threat due to manipulated government statistics that mask the true inflation inherent in the economy:

The Unpleasant Truth About Inflation

By Barry Ritholtz
RealMoney.com Contributor
10/23/2005 10:27 AM EDT

As recent debate on the pages of this Web site has shown, there is a divergence of inflation views. There's plenty of misinformation and spin out there, too.

I believe the economy is experiencing robust inflation, and has been for some time. While energy certainly is a part of that -- crude oil has run from $25 to as high as $70 -- inflation is not just confined to energy.

What Is Inflation?
Inflation is the rate of increase in general prices of all goods and services. It also can be described as a decrease in the purchasing power of money.

Regardless of your definition, inflation occurs when goods and services cost you more than they did previously. As this happens, your money becomes worth less than before.

How Is Inflation Measured?
The Bureau of Labor Statistics uses a basket of goods and services to measure inflation from both the consumer (CPI) and producer (PPI) perspectives. The basket includes: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services, including tobacco, haircuts and other personal services.

I have been critical of the way this basket is constructed and measured. First, it does not adequately reflect how people in the real world experience price increases. Second, permutations, substitutions and hedonic adjustments further distance CPI from the real world. In several categories, the BLS massages the data beyond any correlation to reality.

Torture data long enough, and it will confess to anything you want it to.

The So-Called Core
Speaking of torture, the CPI core is a measure of inflation with food and energy removed. By taking out the more volatile elements, economists ostensibly avoid having a single outlying month disrupt an orderly data series.

More numerically literate observers might think a simple moving average would do the same thing. It would reveal when prices are rising, while smoothing the impact of one-time price spikes. Yet this is not how most economists report CPI. One has to wonder why they have been reporting inflation data excluding energy 48 months into a robust move upward in oil prices. That hardly looks like removing a one-time "outlier."

The CPI ex energy measure is misleading, as it makes inflation appear far more benign than it really is. But don't think it's just energy; lots of other items have also risen in price.

The CRB Index, for example, has been in a strong uptrend since October 2001. Yet despite all these rising prices, the core CPI rate has remained remarkably stable.



In addition to energy and other commodities, education expenses have outpaced median inflation, as have health care costs.

But the biggest factor not reflected in the CPI basket is the cost of housing. Home prices have gone up dramatically -- the National Association of Realtors' Housing Affordability Index is now at 14-year lows. But you cannot tell that from the CPI.

Doctoring the Data
While commodities and education are being undercounted, housing actually lowers inflation readings. Tony Crescenzi addressed this relationship earlier this year in an article called "How Housing's Surge Is Suppressing CPI."

The way BLS accounts for housing expenses is an oddity that creates all sorts of problems. Before 1983, CPI measured housing inflation by looking at what it actually cost to own a home: house prices, mortgage rates, property taxes, even maintenance. After 1983, BLS changed the housing component, using the concept of "owner's equivalent rent." It's a measure of what homeowners could get for their homes if they rented them. It accounts for 23% of the overall CPI and about 30% of core prices, according to BLS.

Since the housing market began soaring, rental properties have languished. Vacancy rates rose, and rents came down in price. This had the surreal effect of pushing CPI measures down. At exactly the time housing became extremely expensive, the BLS measure of this component made inflation appear to be going lower.

What happens to the CPI inflation if we back out this absurdity? Tim Iacono, host of the blog The Mess That Greenspan Made, did the number crunching. As the chart below shows, if we revert back to the pre-1983 measure of housing costs, the core CPI spikes to a more realistic 5.3%.

Click here for larger image.



The CPI's miscalculation is even worse than you might imagine. As utility costs go up, inflation is further under-reported in the CPI (core or headline). Why? BLS perversely removes the value of any landlord-provide utilities in its calculation of owner's equivalent rent.

And you wondered why I mock the Labor Department's statistical methodology. Talk about adding insult to injury.

What Makes Inflation So Bad?
The impact of inflation is clearly negative on the broader economy. It hurts the credibility of the Federal Reserve, whose primary goals include price stability; undermines the dollar's buying power and appeal to foreigners (as a debtor nation, we don't want that); and provides yet another disincentive for Americans to save because cash loses its value over time when inflation is ascendant.

Inflation is also a problem because various federal programs (including Social Security, Veterans Benefits, Medicaid) have cost-of-living adjustments built into them. As inflation -- as measured by CPI -- goes higher, the payments increase, putting an increasing burden on the federal deficit.

But inflation's effect on corporate profitability and equities is particularly pernicious.

Inflation Raises Corporate Borrowing Costs: As these expenses increase, the extra price paid to borrow comes right off of the bottom line.

Inflation Squeezes Margins: As producer prices go up, companies often have the Hobson's choice of either raising prices -- and risk losing sales -- or eating the higher costs. If they cannot pass thru wholesale price increases, margins get squeezed, hurting earnings.

Competition for Capital: As rates rise, bonds become increasingly more attractive. Better yields, no-risk, tax-free Treasuries pull money away from the stock market; this is one of the biggest dangers to equity investors. Watch the flow of funds away from equity mutual funds. Ultimately, this can lead to lower prices.

Recessions: Inflation causes the Fed to tighten, and often at the same time, rising energy prices crimp consumers. A recent study by Merrill Lynch's David Rosenberg noted that when the Fed tightens and oil prices rise, GDP typically contracts. When all three factors coincide, that does not bode well for the macro economy and equities.

Conclusion
It is crucial for investors to have a realistic understanding of how robust inflation is. Doing so early reveals investment opportunities that those who focus on the core CPI have missed. In particular, oil, commodities and gold have been attractive investments overlooked by the "no inflation" crowd.

Now, as the Fed rate tightening cycle goes from being accommodative to neutral and beyond, the risk to domestic equity holders increases. I have been advising clients that as we come to the end of 2005, they should be getting increasingly defensive. In addition to owning gold, they should be looking to increase their exposure overseas.

Those who live in a synthetic reality -- seasonally adjusted, hedonically altered -- will confront the unpleasant reality of the real universe. Ignoring inflationary data in the CPI won't make it go away. All that accomplishes is to shift the focus away from precisely where it should be: on the part of CPI that has been rapidly increasing in price.

Those who fail to grasp this will pay a heavy price for their self-imposed ignorance.

How Much Money is "Out There"

The U.S. Government decided to stop publishing their M3 numbers as of March 2006. While almost nobody blinked or made any noise about this decision, investors should be aware of the importance of Money Supply Numbers M1, M2, & M3.

The New York Fed gives the following definitions for the three money supply measures:

"The Federal Reserve publishes weekly and monthly data on three money supply measures -- M1, M2, and M3 -- as well as data on the total amount of debt of the nonfinancial sectors of the U.S. economy... The money supply measures reflect the different degrees of liquidity -- or spendability - that different types of money have.

The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written.

M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.

M3 includes M2 plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada."

So what?

Expanding the Money Supply is an inflationary policy. The U.S. Dollar is backed by nothing other than the Government itself. The Gold reserves that backed currencies was eliminated in 1971 and now we are faced with the prospect of threats to the stability of this fiat currency. The article on Greenspan's Legacy - Part $ addresses the problems with fiat currencies in greater detail.

The Federal Reserve has stated that they would save money by not publishing M3 numbers. The money they will save is miniscule in consideration of the total U.S. Budget for 2006 and the excuse is lame. What is more likely is that increased international scrutiny on the M3 number will drive up long term interest rates as investors start to worry about the risk premium inherent in holding U.S. debt.

As of December, 2005, the M1, M2, and M3 numbers were as follows:

M1 = $1.397 Trillion
M2 = $6.718 Trillion
M3 = $10.216 Trillion

I don't blame the Fed for not publishing this number anymore. With a massive budget and trade deficit that has no apparent end in sight, they may need to keep the printing presses running 24/7 to keep this economy going. Since nobody will really know what's going on, the eventual massive pain that will be felt in the U.S. economy can be delayed for awhile longer.

Greenspan's Legacy - Part 3

Tim Iacono's excellent review of Greenspan's Legacy continues with a focus on the culture of debt that has been created on Greenspan's watch. It's pretty amazing how the current generation has embraced debt unlike any other since the Great Depression. You would think that all the stories told by parents and grandparents, that lived through tougher times, would resonate with the current generation of "up to the eyeballs in debt" consumers. Apparently not! How will this all end? That remains to be seen.

Sin #3 - Fostering a Culture of Debt

Over the last two decades, departing Federal Reserve Chairman Alan Greenspan has affected many people in many ways. Few people understand the impact he has had on their lives - how he has helped transform a culture.

After eighteen years as the world's most powerful central banker, he has changed the way people think about money, credit, and most importantly, he has changed the way people view debt.

Debt, a pariah to generations following the Great Depression, has been embraced by recent generations.

Recent generations, that is, who are now far enough removed from the tragedy of the 1930s that history's lessons of excess credit and debt have been forgotten. Debt, always a tempting seductress, has been raised to new levels of respectability under the tutelage of Mr. Greenspan.

Many, emboldened by rising asset prices, have completely lost what had been for centuries a largely uninterrupted natural aversion to borrowing money.

Benjamin Franklin and Adam Smith abhorred debt.

Changing Attitudes

Today, borrowing against equity in real estate occurs at rates never seen before. Mortgage equity withdrawal was unheard of generations ago - a second mortgage was the last recourse for a family in trouble.

Today it is routine.

Septuagenarians shake their heads as they see young people living lifestyles which don't square with what they know of their incomes and expenses. Debt it seems has not taught any hard lessons lately - debt has become too friendly, too tame, and too forgiving.

Nowhere is the cultural change more apparent than on television - a constant din of pitchmen offering new and innovative ways of extending credit to ordinary people.

"I'm up to my eyeballs in debt" one ad begins, as if that condition is somehow funny.

In a truly disturbing symbol of how times have changed, the once mighty General Motors now hawks home equity loans and EZ cash-out refinancing through its Ditech.com subsidiary - the only GM group that has been consistently profitable in recent years.

A once dynamic and innovative economy has become increasingly dependent on borrowing money to fund consumer spending. This spending, in turn, produces economic growth and most accept this condition as just another reality - another fact of life.

With a zero savings rate, Americans borrow and spend paying little heed to the mounting debt or the implications for the future. As long as asset prices rise faster than debt, household balance sheets don't seem to matter, and bills never really come due.

Someday, maybe soon, the accumulating debt will matter.

Household Balance Sheets

The magnitude of the new debt over the last two decades is evident when looking at household liabilities over this period. Household debt gently rose during the 1990s until the bursting of the stock market bubble necessitated massive monetary stimulus from the Fed.

The stimulus came in the form of multi-generational lows in interest rates which, when combined with a largely unregulated mortgage lending industry, ignited a housing boom the likes of which the world has never seen.














That's a lot of mortgage debt - over eight trillion dollars in all. In the last three years alone, nearly three trillion dollars of new mortgage credit has been extended - first mortgages, second mortgages, home equity loans, and lines of credit.

Some dismiss concerns of too much debt by pointing to the bottom line.

Debt, they say, is not a problem because household balance sheets are the best they've ever been. Today, household net worth does look impressive - against a meager 12 trillion dollars in debt stands a hefty 64 trillion dollars in assets.














A closer look at net worth, however, shows that while liabilities have marched steadily upward, assets can go up or down. Not down by much, at least not in this chart, but down nonetheless.

A closer look at how different types of assets have behaved during the first half of the decade shows a neat handoff between equities and real estate. Stocks had run their course, interest rates were slashed to forty-year lows, and housing markets across the land began to boom.

One rapidly rising asset class having exhausted itself, another asset class began to rise rapidly, easing the pain that, historically, would have been expected.

A crisis had been averted. In fact, many would say that the cure worked better than could possibly have been expected, given the circumstances.

In the last few years, with soaring property values, household net worth has now hit all time highs despite the trillions of dollars in new mortgage debt. More debt, it seems had not only saved the day, but ushered in a new era of prosperity and rising living standards.

Ordinary people are now wealthier than ever before, and the effects of more credit and debt have confirmed what many had come to conclude over the years - debt is good.

The cultural transformation is now complete.

A Good Time

But as Alan Greenspan prepares to exit the stage, leaving behind mountains of debt, where does that leave us? With all this new debt and prosperity comes a potential problem.

What happens if real estate assets suffer the same fate as equities did a few years ago? Or, what if real estate values simply go flat for an extended period of time?

Since debt lingers long after assets lose their glow, how might the bottom line look then? How might the culture change as a result? Warren Buffet famously said some time ago, "Give me a trillion dollars and I'll show you a good time too!".

Was this Alan Greenspan's motive all along?

With almost nine trillion dollars of new household debt created during his years at the Federal Reserve, and having changed the way the entire Anglo-Saxon world views debt, is this all that Alan Greenspan ever really wanted?

To show everyone a good time?