2009 q2 confessions of a monetary sinner

7/27/2019 2009 Q2 Confessions of a Monetary Sinner

1/16

Nothingistabooanymore declaredSwissNationalBankPresident,JeanPierreRoth. Everythingispossiblethesedays,andcentralbankshavealmostunlimitedpossibilitiestoactinthemarkets. Thoughtheself

congratulatoryringofMonsieurRothscommentsishardtomistake,weatHaydel,BielandAssociates(HBA)find

thistobeexactlytheproblem. Nothingistabooanymore.

Anyofourfoundingfathers andnotafewclassicaleconomists wouldrecoilinhorroratourmodernexperiment

withlegaltender. But,aswestateinourcurrentNewsletter,ConfessionsofaMonetarySinner(Q22009),itreallydoesntrequireanEcon101class(letaloneaPhD!)torealizethat[w]eallliveinanupsidedownworld:Aworldwhererichnationsborrowfrompoornations;Wherethesepoornationsmustlecturetherich

nationsonthedutiesofanhonestdebtor;Wheremoney(literally)growsontrees;Wherethestudentsofthese

poornationslaughinopencontemptoftherichnationsemissaries[4]

;Wherewehave,withoutdebate,adopted

thefifthplankofKarlMarxsCommunistManifesto[5]

;Aworldwherethedominantthinkingisthatmarketsoften

failbutgovernmentsneverdo;and,ofcourse,wheretheproblemoftoomuchdebtwillbesolvedwithevenmore

debt.

Iftheseseemingparadoxestroubleyou,youarenotalone. Bywayofpreview,wefeelthatthecurrentmonetary

improvisationswill

end

in

tears.

We

therefore,

are

constantly

striving

to

protect

our

clients

from

this

(eventual)

catastrophe.WhilethereiscertainlyachorusthatwehaveavertedDepression2.0inBernankeswords,we

arentconvinced. Eachsuccessivecrisisbringswithitevermorestimulus.BywayofexampleinSeptember,

October&Novemberof1998,inreactiontotheMidAugustRussianfinancialcrisisanddefault,theFedcutrates

threetimes(to 4.75%)andorchestratedanowpiddling$3.6Billionbailout. Tenyearson,theFedhascutratesto

0%(andistryingtogolower), andthestimulussofarisalmost$30Billionnearlyeighttimesaslarge. Whatifit

works?Howmuchstimuluswillbeneededforthenextfinancialcrisis?

ConfessionsofaMonetarySinner(Q22009)istheproductofresearchandruminationsbyChristopherJ.HaydelandRickyE.Biel. Thankgoodness,wedontgoitalone.Wetherefore,havemanyintellectuallygenerous

andwellinformedfriends whohavehelpedinitscreation,andtowhomweareeternallygrateful. The

informationpresentedinthisnewslettershouldinnowaybeconsideredtheofficialopinionofAmeriprise

Financial

Services,

Inc.

or

any

of

its

affiliates.

Please

contact

Ameriprise

directly

or

visit

them

at

www.ameriprise.com tolearnoftheiropinionsonthemarketsandeconomy.

SpecialthanksforsomeofthethoughtsandgraphsinthisnewslettergoouttoJamesBianco,Dr.MarcFaber

(www.gloomboomdoom.com), RonGriess(www.thechartstore.com) ,JamesGrant(www.grantspub.com),

OutstandingInvestorsDigest(www.oid.com),Dr.CharlesKindleberger,JeremyGrantham(www.gmo.com),Steve

Malanga(www.realclearmarkets.com),andFredHickeyoftheHighTechStrategist

([email protected]). Ofcourse,anyerrorsareoursentirely.


2/16

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serviceproviders. Ifyouhaveanyquestionsregardingyourreport, pleascontactyouradvisor. Securitiesorinvestments

referencedin

the

enclosed

material

do

not

constitute

an

offer

or

recommendations

to

buy

these

securities,

nor

does

such

a

referenceconstituteanendorsementofthesesecuritiesbyAmeripriseFinancialServices,Inc.oranyaffiliatedcompanies.

Pleaseconsulttheprospectusbeforemakinganyinvestment.

AccountSummary/Valuesifapplicable: AnyaccountvaluesorsummariescontainedhereinareinadditiontoanyandallstatementsthatyoureceivefromAmeripriseFinancialServicesand/oranynonproprietarycompanies. Anysummaryof

accountvaluescontainedhereinhasbeenprovidedtoyoubyyouradvisorsChristopherJ.Haydel&RickyE.Biel.

*Adapted from Where Are the Customers Yachts, by Fred Schwed, Jr.

Contents:

I. ConfessionsofaMonetarySinnner: Theconversionofaformerbelieverin SoundMoneywhoisattemptingtograsptheimplicationsofthewholesalecoversionof seeminglyalltheworldscentralbankersand

mainstreameconomiststothe GospelofInflation. Believingthatinflationisamonetaryphenomenon,wehave

alwayslaidtheblameforitscreationatthefeetoftheCentralBankers,but,whereastheyusedtodeny

responsibilitytheynowcheerinflationaryoutcomesandconfuseinflationwithsuccessfulmonetarypolicy.

II. ThatOldTimeReligion: TheClassicalideasofsoundmoneyandwhatthecultureofinflationhasdonetooursociety.

III. LookingAhead;APreviewoftheNextCrisis: [T]hepowertodepressthemonetaryunitofvalue,isnot,toourmindsalastingsolutiontothiscrisis.Wewillcertainlyhaveupturnsinbusinessactivity,buta

lastingsolutionwillnotbeachieveduntilwehavewrittendownallbaddebts(notpostponedthedayof

reckoning),repairedourbalancesheetsandreturntoproduction,thriftandsavings.

IV:Strategy: ByobservingwhatCentralBankersandpolicymakersdo,ratherthanwhattheysay,weareclear

thattheUSDollarstrajectoryisdownward. Dittoforalltheworldscentrallyplannedandmanagedcurrencies.

Alltheworldsfiatcurrencieswilldeclineinpurchasingpoweragainstfiniteassetssuchasnaturalresources,and

inparticular,againstgold,whichalsoservesasastoreofvalue. Fiatcurrenciesdonot.

Inaddition,therecentrunupinthestockmarketaverageshasleftusfeelingthatstockpricesmayhaverisentoo

fartoo

fast;

but

with

such

massive

stimulus

these

prices

could

remain

afloat

for

some

time.

We

continue

to

look

forsafe&cheapinvestmentsandhavefoundthem:inJapan. UShighqualitystocksalsoseemcheapatleast

relativetootherareasofourstockmarket; Finally,shorttermbondfundsthatinvestaportionoftheirportfolios

informerlytoxicmortgagestructures,insomecases, represent compellinginvestmentvalues.


3/16

ConfessionsofAMonetarySinner Q22009,July30,2009 I've been condemned by traditional economists who said that printing money is responsible for inflation.

Out of the necessity to exist, to ensure my people survive, I had to find myself printi ng money. I found myself

doing extraordinary things that aren't in the textbooks. Then the IMF asked the U.S. to please print money. Ibegan to see the whole world now i n a mode of practici ng what they have been saying I shou ld not. I decided

that God had been on my side and had come to vindicate me

Dr. Gideon Gono, President of the Reserve Bank of Zimbabwe, to

Newsweek January 24, 2009

How could I have been so blind? I confess to you, my brothers & sisters, that I have been living in sin. Begging

your forgiveness, I humbly submit that I was spiritually miseducated. Even more troubling is that by my example, Imay have influenced others to sin as well. My heart limps along in the hope that the merciful Almighty will shelter

me from the storm raging in the depths of my soul.

You see, for far too many years I have found myself on the wrong side of the heavenly realm. I didnt know it. I

was lost. The invocation of Dr. Gono, above, was only the beginning of my spiritual reform. You see, I was a

monetary heretic. My apostasy included the deeply-held belief that money should be sound [1] that it should

represent a store of genuine value. It seems crazy now, I know... but I truly believed that this aside from being

honest and ethicalwould encourage thrift and savings. It might even make such sound money a sought-after

brand which could improve trade, and therefore, our relationship, with our neighbors.

Wandering in the darkness, I thought that nothing was more vital to capitalism than capital. I foolishly believed

that savings, which leads to capital formationthe building of plant, equipment, factories, etc.was the organicand sustainable way to economic growth and prosperity. In my confused state, I used to look with envy on the

natural-born savers of the world: Germany and China for example, with their savingsANDtheir factoriesANDtheir

jobs. Looking at this, I would turn an unflattering shade of green and wonder, what ever happened to Americas

savings? (see: FIGURE 4)

I used to do this silly little thought experiment: What would happen, I openly wondered, if the money supply

were literally fixed? (if the monetary veil was really transparent?) Its a bit embarrassing to think about it now,

but the answers would come pouring forth, for example, ...As production became more efficient, and less costly


4/16

(productivity increases) prices would fall, wouldnt they? and ...naturally, the purchasing-power of money would

increase over time. And the kicker, savings would be rewarded with higher (not lower) purchasing power, thus a

built-in return mechanism andincentive to save would exist. You may even have some things to add to this list.

These answers even seemed to be confirmed by history. For almost all of the 19thCenturysave an interlude with

legal tender during the Civil Warthe US dollar was backed by gold. The supply of gold is not literally fixed, as

in my thought experiment above. But with annual increases in supply of between 1-2% per year, it is the closestweve yet come to a fixed money supply.

And what happened to the price level during

that tumultuous century (Figure 1)? Why,

prices fell! With the natural exception of the

Civil War period, they declined by an

average of 0.45% per year! A 19thCentury

saver would have earned a better return, even

with a 0% interest rate, (purchasing power

increasing by 0.45% = 0.45% return all

else being the same) than one could get today

on most 6 month CDs!

My sins of the past are now clear to me.

Embracing the idea that falling prices may

representprogress (and therefore a good

thing!) is quite blasphemous, I know. But in

my defense, this was before my conversion

to the Gospel of Inflation.

Now I have seen the light! Dr. Gono and the expanding band of evangelical economists have revealed to me thatMonetary Debasement is doing the Lords work! They cite chapter & verse that falling prices are unequivocallydeflation! Now, there can be no greater sin against the Gospel of Inflation than its perceived opposite. So this evilmust be smitten! To even contemplate a falling price, whether of an asset, like real estate or stocks, or of consumer

staples, is to contemplate the face of evil. And even though falling prices might just be a boon to those suddenlyout of work, or to the retailer groaning under the crush of unsold inventory, we all must resist these temptations ofthis deflationary devil if we are to find our eternal reward. Hey, no one said it would be easy.

So we should all rejoice that our own Dr. Bernanke, his choir of Central bankers, angelic finance ministers, andsaintly world leaders have acheived a truly unique meeting of the minds. That these policy makers, among whomsuch perfect agreement is so rare, have come to a global policy consensus to save us all from damnation, mustsurely be a sign of divine intervention.

And tho this religion goes by many names, Inflation Targeting and Quantitative Easing, to pick just two, it isthe same gospel! Who needs savings , jobs, security, investment, capital and growth? We can all followZimbabwes path to salvation!

Saints & Sinners:

It only follows that if such monetary destruction is, indeed, the Lords work, Dr. Gideon Gono is a candidate forsainthood. The Vatican (to cite just one example) states that For the beatification (a step in the process towardcanonization/sainthood) of a confessor a miracle attributed to the Servant of God, verified after his death, is

necessary. Begging Dr. Gonos pardon (for I think he is still alive and Cholera-free), I submit the ZimbabweanOne Hundred Trillion Dollar Bill (above) into evidence. It is truly miraculous that so-large a number (15 zeros!) hasbeen made to represent so microscopic a claim on anything!


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But while Dr. Gono may have a comfortable lead in this race to the promised land, other prophets of inflation areclosing in fast. Who would be the Patron Saint of Central Banking? The list contains some well-known names andsome surprises. Even when the names seem elusive, like Dr. Gonos, their deeds will hopefully be remembered forgenerations to come.

One such surprise entry is the Governor of the Riksbank (Sweden) Stefan Ingves. In the closing months of 2008alone, Dr. Ingves, who naturally holds a PhD in economics, tripled the size of the Riksbanks balance sheet. Hereat home, and in spite of trulyheroicefforts, the Bank of Bernankes balance sheet only grew by 152% over the sametime frame.

If youre reading this and youre a proud American, then youll certainly agree that it would be a national disgracefor our leading central banker to fall behind the likes of Zimbabwe and Sweden! Do your part: Fall down on yourknees and pray! You can probably find succor from those whoif not saints in their own rightcertainly musthave earned the rank of Guardian Angel. Arthur Burns (Chairman of the Federal Reserve 1970-78), could certainlybe counted on for some divine inspiration.

For those who might be, say, spiritually-challenged, we can take a more pragmatic course. Like Nobel LaureatePaul Krugman, we can ask that the Fed do more. Now, considering that the Fed has already conjured intoexistence over $3.9 Trillion of newly minted bills (or the equivalent of approximately 28.9% of GDP) in just over 9months, its not exactly clear to me how much more the Fed can do. For comparison, President Herbert Hoover

pumped out 8.3% of GDP in his attempt to restore ballast to the badly listing economic ship in 1932-33[2]

. Butbeing just a recent convert to the gospel, I thought it best to seek out a more seasoned evangelist.

Well, it didnt take long for me to find just the right high priest. This saintly being operates his ministry cloaked inthe robes of respectability conferred upon him by none other than Harvard University. His name is GregoryMankiw and you should know him. Perhaps he needs no introduction. One of his greatest declarations came onFebruary 1, 2000 in the pages of the Wall Street Journal. Just 38 days before the Nasdaq collapse he proclaimedthat when you l ook at the mistakes of the 1920s & 1930s, they were clearly amateurish. It is hard to imaginethat happening againwe understand the business cyc le much better.

Professor Mankiw has recently expressed his desire to expand the canon of this gospel. His thoughts, expressed inthe Wall Street Journalof April 19, 2009, (see It May be Time for the Fed to Go Negative ) succinctly reflect themindset of the Federal Reserve and of quite a large number of mainstream economists. According to Mankiw:

With unemployment rising andwith the economy inshambles, its hard not to feelnegative about the economyright now. The answer to ourproblems, however, could wellbe negativity. But Im nottalking about attitude, Im

talking about numbers[he

means the interest rate,

Ed. Note]... What is the bestway for an economy to escapea recession?

Until recently mosteconomists relied onmonetary policy.

Recessions result from an

insufficient demand for

goods and servicesand

so, the thinking goes, our

central bank can remedy

this deficiency by cutting

interest rates. Lower

interest rates encourage

households and

businesses to borrow and

spend. More spending

means more demand for

goods and services, which

leads to greater

employment for workers

to meet that demand. [ouremphasis- Ed.]

The problem today, it seems,is that the Federal Reservehas done just about as muchinterest rate cutting as it can.Its target for the FederalFunds rate is about zero, so ithas turned to other tools ,such as buying l onger-termdebt securities, to get theeconomy going again. But theefficacy of those tools is

uncertain, and there are risksassociated with them. ..Sowhy shouldn t the Fed justkeep cutt ing interest rates?Why not lower the targetinterest rate to, say, negative3%? At that interest rate youcould borrow and spend $100and repay $97 next year. Thisopportunity would surelygenerate more borrow ing andaggregate demand.

The problem with negativeinterest rates, however, isquickly apparent. Nobodywould lend on those terms.Rather than give you r moneyto a borrower who promises anegative return, it w ould bebetter to stick the cash in yourmattress. Because holdingmoney promises a return ofexactly zero, lenders cannotoffer less. Unless, that is, we


6/16

can find a way to makeholding money less attractive.And at one of my recentHarvard seminars, a graduate

student [no doubt on his

way to being an ordained

minister himself! ed.

Note]proposed a cleverscheme to do exactly that.

Imagine that the Fed were toannounce that, a year fromtoday, it would pick a digitfrom 0 to 9 out of a hat. Allcurrency with a serial numberending in that digit would nolonger be legal tender.Suddenly, the expected returnon holding currency would benegative 10%. [S]uch a movewould f ree the Fed to cut

interst r ates below zero.People would be delighted tolend money at negative 3%,since losing 3% is better thanlosing 10%.

Of course, some people mightdecide that at those rates,they would rather spend themoneyfor example, by

buying a new car. Butbecause expanding aggregatedemand is precisely the goalof the interest rate cut, suchan incentive isnt a flaw, it is abenefit.

The idea of making moneyearn a negative return is notentirely new. In the late 19

th

Century, the Germaneconomist Silvio Gesell

[3]

argued for a tax on holdingmoney.

He [Gesell] was concernedthat during times of financialstress, poeple hoard moneyrather than lend it. JohnMaynard Keynes approvinglycited the idea of a carrying taxon money. With banks now

holding substantial excessreserves, Gesells concernabout cash hoarding suddenlyseems very modern.

If all of this seems toooutlandish (his words, notmine- Ed note!) there is amore prosaic way of obtainingnegative interest rates:

through inflation. Supposethat, looking ahead, the Fedcommits itself to producingsignificant inflation. Int thiscase, while nominal interestrates could remain at zero,real interest ratesmeasured

in purchasing powercouldbecome negative. If peoplewere confident that they couldrepay their zero-interest loansin devalued dollars, theywould have significantincentive to borrow andspend... Ben S. Bernanke, Fedchairman, is the perfectperson to make thiscommintment to higherinflation. Mr. Bernanke haslong been an advocate ofinflation targeting. In the past,advocates of inflation

targeting have stressed theneed to keep inflation fromgetting out of hand. But in thecurrent environment, the goalcould be to produce enoughinflation to ensure that the realinterest rate is sufficientlynegative....

That Old Time Religion:

Now, the casual reader of these comments could be forgiven for thinking that they were lifted from the pages of asatirical newspaper like The Onion. But no. They actually appeared in the Wall Street Journal, theof-recordnewspaper for American business. I assure you that I was also not trying to induce a MEGO moment (first used byWilliam Safire for My Eyes Glaze Over). I did so because I think youll find that there is no better discourse onthedeplorable state of economic thinking todaythan that espoused by Prof. Mankiw. There certainly may bereasons to preach the gospel of inflation, but reason (or sound economic theory) isnt one of them. The words ofProf. Mankiw, in their near-entirety (and full outlandish-ness), should, by themselves, convince any reader thatour world is not quite right.

In fact, the reader withNOeconomic training at all could come to this conclusion. After all we live in an upside-down world: A world where richnations borrow from poor nations; Where these poor nations must lecturethe rich nations on the duties of an honest debtor; Where money (literally) grows on trees; Where the students ofthese poor nations laugh in open contempt of the rich nations emissaries[4];Where we have, without debate,adopted the fifth plank of Karl Marxs Communist Manifesto [5];A world where the dominant thinking is thatmarkets often fail but governments never do; and, of course, where the problem of too much debt will be solvedwith even more debt.

Many of the inflationists sacred cows are offered up in Professor Mankiws ruminations. There is the verynecessary reference to John Maynard Keynes, without which he would certainly lack street cred. He also channelsthe thinking of a long-dead socialist in Gesell. Most clearly, he makes an attempt to (or maybe he succeeds) providea dignified veneer to the very undignified counterfeiting process of the Fed.


7/16

Economist Marc Faber tackles these very preposterous ideashead-on by declaring [I] have a far simpler solutionfor creating inflation (for which I should obtain a Nobel prize in economics) than the half-baked measures proposed byGesell, Mankiw, and his students. In order to create more demand for goods and services, which leads to greateremployment for workers to meet that demand. The government could issue to each US man, woman and child freevouchers for different goods and services, which would have a three or six months expiry date. There are 310 millionAmericans. The government could issue 310 million vouchers to be exchanged for a $500,000 home, a billion vouchers forvisits to an amusement park, a trillion vouchers each for Prozac and attendance at a sporting event, and so on. AIG and

Citigroup would be in charge of making a market in these vouchers, so if somebody didnt wish to buy a car, he couldexchange the car voucher for a cigarette voucher. But since these vouchers would have an expiry date they would unleashas huge consumption boom, which would temporarily lift the prices of everything.[6]

The discerning reader will certainly recognize that this is a far more elegant solution than those devised by ProfMankiw, but will also naturally wonder what will happen when the vouchers, and the burst of activity theyveengendered, expire together. The answer to us is just as clear: when the stimulus wears off, just as occurred in2007, demand will collapseall over again. Racking our brains at HBA, weve come up with a follow-on solutionthat we think is also simple and elegant: Have Goldman Sachs hire everyone!

In stark contrast to the modern thinking of mainstream economists is that old-time religion. Its gospel is verywell expressed by Daniel Manning, former Secretary of the Treasury (under Grover Cleveland), who wrote in 1885 :The power to raise or depress the monetary unit of value is a power to destroy mens faith in the honor of a Governmentand its laws... Their sense of betrayal, and their perception of the fact, are expressed by the non-equivalence in exchange

often disclosed between the undebased coin and the debased coin; between the coin and the promise to pay converted intolegal tender. No Executive and no Legislature is fit to be trusted with the control it involves over the earnings and savings

of the people. No earthly sovereign or servant is capable of a just exercise of such authority to impair and pervert

the obligation of contracts.( Our Emphasis- Ed.)

Just try telling that to Ben S. Bernanke. Or the President. Or Congress.

Fighting through this nightmare of mainstream economic thinking, there dawned us, a plausible reason whyapparently knowlegeable people could become inflation evangelists. In a very interesting essay by Steve Malanga,editor of Real Clear Markets (www.realclearmarkets.com), entitled Can Free Markets Survive In a SecularizedWorld? [7], he reminds us that:

The 18th Century English

cleric and theologian JohnWesley was troub led by aparadox that emerged as histeaching spread. He, like otherProtestant thinkers stretchingback to Calvin, taught that onecould honor God through hardwork and th rift. Thesubsequent burst of industryand frugality generated byWesleys message improvedthe lot of many of his working -class followers and helpedadvance capitalism inEngland. But, wherever

riches have increased, theessence of religion hasdecreased in the sameproport ion, Wesley observed,and subsequently pride andgreed are growing morecommon, he complained.

The emergence of what MaxWeber described as the

Protestant ethic representedan important point in the

evolution of capitalismbecause it combined areverence for hard work wi than emphasis on th rift andforthrightness in onesdealings with others. Wherethose virtues were mostardently practiced, marketsadvanced and societiesprospered. And, as Wesleyforesaw, what slowly followedwas a rise in materialism anda reverence of w ealth for itsown sake.

Today, we seem to be livingout Wesleys most fearedversion of the pursuit ofaffluence unencumbered byvirtue. Scam artists perpetrategiant Ponzi schemes againsttheir friends and associates.Executives arrangecompensation packages thatpay themselves handily for

failure. Ordinary people by thehundreds of thousands seek a

shortcut to riches by lying onmortgage applications.Heartless phony bailoutschemes take the last dollar ofpeople already in distress.

To survive all of thi s, it seemscapitalism needs a new doseof restraint. But absent a vastreligious revival in the West,which seems unlikely, wherewill a renewal of the virtues ofthe work ethic come from?That question becomes ever

more difficult to considerbecause as religious practicefades and our institu tionsreject traditional values, sotoo does the memory of therole that these elementsplayed in the rise ofcapitalism.


8/16

In the Church of the MiddleAges, work was something thefaithful performed to survive,not something that had avalue of its own. The mostimportant occupations werenot determined by the market,

but by church leaders: themonastic life first, followed byfarming and then crafts.Al though the Church savedwhat was left of Europesculture and economy after thefall of Rome, the continentsstandard of living barelychanged fo r 1,000 years undera worldview that wassuspicious of all butcommerce on the smallestscale.

Calvin undermined that view

by placing work in a newreligious context. Work wassomething that God willed usto do--even the rich. Theworldly success that oneachieved through hard workwas a sign that one wasperhaps a member of theelect. But the fruit s of hardlabor werent meant to bespent lavishly on oneself. TheProtestant reformers preachedthat the faithful shouldreinvest the profits of hardwork in new ventures ratherthan squander them becauseit seemed unlikely that peoplewho w ere profligate weresaved...[...]By the early 19thCentury de Tocqueville couldmarvel that Americaspreachers seemed asinterested in promotingprosperity in this worldthrough industriousness as eternal felicity in the next.Our public schools reinforcedthis message, not because itwas religious but because it

became the American way.

But Wesleys paradox hasbeen a part of this landscapeof work and prosperity, too.Secularism rose in the U.S. inthe late 19th century andpeaked in the RoaringTwenties, another age of

materialism. Then the GreatDepression and the SecondWorld War brough t a revival ofreligious observance, whichcontinued during the boomyears of the 1950s, beforeanother decline began in the1960s and continues throughtoday.

Perhaps most pointedly, thevalues of the Protestant ethicalso began to disappear fromour larger society, especiallyfrom our schoo ls, whose

principals and instructors,largely schooled in Americanuniversity educationdepartments that haveabandoned the idea that thereis a common set of Americancultural values...

The gradual disappearance ofthe Protestant ethic hasshifted the emphasis in oureconomy from work andproduction to work andconsumptionbut most of all

to consumption (see Figure 4;ed.). A culture of thrift hasbecome a culture of debt, andin the process many peoplehave blurred the line betweenthe legitimate competitiveactivity that is so essential tocapitalism and criminality.When Franklin wrote that thebailiff does not visit theworking mans house because industry pays debts, heprobably wasnt thinking ofthe no-doc, no down-payment,interest-only adjustable rate

mortgage with a balloonpayment given to someonewho conspired with his

mortgage broker to obtain aloan for which he isntqualified.

The meltdown of the

financial markets in the

last few months has leftus grappling with how we

can keep markets free

and principled at the same

time. The only debate so

far is between those who

want more government

regulation--"who want to

impose from the outside

via the regulators eye the

restraint that our

institutions once tried to

instill in us--and thosewho think that more

government will only

undermine our prosperity.

Neither side seems to be

winning the public debate

because most Americans

are probably equally as

appalled by the

shortcomings of the

markets as they are by

the prospect of more

government control ofthem.(our emphasis ed.Note)

People instinctively knowsomething is missing, just notwhat. A religious revival inAmerica seems unlikely. Is itequally as unlikely that ourinstitutions, most especiallyour schools, would once againpromote the virtues that madecapitalism thrive and Westernsocieties prosper--not justhard work, but thrift andintegrity, or what we oncecalled the Protestant ethic?

Steve Malangas article makes a number of interesting points. Perhaps none come across more strongly than thedistance that we have strayed from the very principles which bred our success. Its truly remarkable. Perhapsknowing this, the prophets of inflation, seek a return to the old time religion after all. The reason to promote thegospel of inflation is that it will ultimately lead to work, thrift and production again after a detour to (and it ishoped, through) impoverishment.


9/16

Iapologize if this cynical and over-written screedhas injured anyones religous sensibilities. Thereare, indeed many differences between the moderneconomics of inflation and true religiousobservance. Yet should we take on blind faithand faith alonethat the machinations of ourmonetary high priests will bring us to to bliss?And if so, why havent they been doing this forcenturies? Whether youre a believer or not, beclear: this thinking runs counter to all of humanhistorical experience. Paper money and ex-periments with inflation have always ended intears. What makes us different?

Where the Blame Truly Lies

At length corruption, like a general flood,Did deluge all; and avarice creeping on,Spread, like a lowe-born mist, and hid the sun.Statesmen and patriots plied alike the stocks

Peeress and butler shared alike the box;And judges jobbed, and bishoips bit the town,And mighty dukes packed cards for half-a-crown

Britain was sunk in lucres sordid charms. --Pope

Yes, its true. We are naturally obstreperous, contrarian scolds when it comes to the capricious exercise ofauthority--even more when it is so flagrantly wasteful. But it will possibly surprise you that we do harborsympathies for those in political life. After all, they have been hired to exert leadership and to be (or appear)decisive. And as a society weve elected them (or sustained them). Following Mr. Malagas article to its naturalconclusion, we can also also clearly see that the real problem is us. WEare to blame.

Not individually, of course. Yet who among us hasnt dreamed of wealth without work? Its allure is so powerfulthat it is the meat & potatoes of any advertising diet. It is surely a classic case of selling the sizzle, not the steak

(you know: I made $60,000 per year working from home only 4 hours per week!). We at HBA take special issuewith the inflationists because their gospel feeds into this thinking, promoting lucres sordid charms, in Popeswords. Weve begun to think that maybe this process is unstoppable. It just may be that in a democracy, toparaphrase Toqueville, we are inevitably bribed with our own money. And as a nation of debtors (FIGURE4) weall vote for inflation.

While assets are inflating (take your pick, commercial real estate, houses, stocks ) we all feel richer. Were moreflush and confident. We borrow more against those asset values and we spend more. Most importantly, however,we begin to trade assets rather than produce things that other people want or need. Rather than perform the hardwork of production (or improving production), more and more are seduced by the allure of trading assetsandgeneral productivity declines. Soon enough, there are far too many traders, and far too few producers (Big fleashave little fleas/That come in swarms to bite em/ And little fleas have littler fleas/ And so ad infinitum). This, inshort, is how financial servicesoriginally created to serve the capital needs of the real economyhas instead

become its demented master.


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Now, an asset is onlyworth the cash flow itgenerates for its owners. This is central to ourphilosophy at HBA and its as close to an ironlaw of economics as there is (No FreeLunch being the iron-est of economiclaws). Yet in an economy increasinglydominated by trading (and fueled by cheapcredit), there inevitably comes a point wherethe assets of the society have been bid-up &inflated to a point where the cash flow thatthe asset generates can not support the debtservice incurred in its purchase. The pricelevel of the assets (read: Value) mustberecalibrated to accord with reality. Thisnecessary process and the fallingassset/commodity prices that accompany it hasbeen interrupted time and again by theinflationists. But whether this re-calibrationhappens quickly or slowly, it happens.Inexorably.

Figure 5may even serve as a kind ofEconomists Rorschach Test. What do yousee?

Our vision at HBA may, at times, be called into question, but we clearly see the natural tendency for weightlesspaper money to be ground to dust. But we also see during credit contractions, as occurred in 1920-22 andespecially from 1929-33the tendency for the currencys purchasing power to increase (i.e. for prices to fall).These sometimes very dramatic increases in the purchasing power of money must surely have been a welcomestimulus to the 25% of workers who lost their jobs in the first stages of the Depression. Just as certainly, though,it made the real value of debts & the costs of servicing that debtmuch harder. In that way it must have alsoforced the rapid liquidation of unsupportable debts.

Ah, but beauty truly is in the eye of the beholder! Todays mainstream economists would certainly welcome thelong-term success of inflation-targeting (that grinding-to-dust-thing that we despise), but would, no doubt, recoilin horror at the rising value of money oh, sorrythe deflation during credit busts. Interestingly, they must alsoignore the economic truth that credit busts follow credit boomsits the inflation that sets up the deflation. See foryourself.

Jeremy Grantham, of investment management firm GMO (www.GMO.com), reminds us that at year end 2007:[the] National Private Asset Base (to coin a phrase) of $50 trillion supported about $25 trillion of private debt,corporate and individual. Given that almost half of us have small or no mortgages, this 50% ratio seems dangerouslyhigh. But now the asset values have fallen back to $30 trillion, whereas the debt remains at $25 trillion, give or take themiserly $1 trillion we have written down so far. If we would like the same asset coverage of 50% that we had a year ago,we could support only $15 trillion or so of total debt. The remaining $10 trillion of debt would have been stranded as thetide went out! What is worse is that credit standards have of course tightened, so newly conservative lenders now assume

the obvious: that 50% was too high, and that 40% loan to collateral value or even less wouldbe more appropriate. Asalways, now that its raining, bankers want back the umbrellas they lent us. At 40% of $30 trillion, ideal debt levels would

be $12 trillion or so, almost exactly half of where they actually are today![8]

Given this state of economic affairs, there are only three ways, Mr. Grantham suggests, by which we can exit thisdownturn and begin to grow sustainably again: 1) We can bite the bullet and drastically write-down our non-performing debts (he also recognizes this as politically unpalatable); (2) We can do ...[w]hat Japan did: let the verylong passage of time wear down debt levels as we save more and restore our consumer balance sheets

[8];or (3) We can

inflate, inflate, inflate and by doing so, reduce the real (inflation-adjusted) value of our debt (Figure 5).


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Now in the interest of full disclosure, we at HBA also think that there is a fourth possible way (heaven forbid!): Tosomehow inflate a new asset classor re-inflate the now-falling assets way back above their fair value again.(Grantham dryly concedes this fourth way when he acknowledges that After the tech bubble of 2000, Greenspanfound a second major asset class ready and waiting real estate on which to work his wicked ways.[8])

The unanimity of opinion on monetary policy, which is the most vexing aspect of the current policy debate to ourminds at HBA, is that we must avoid a repeat of the Japanese experience of the 1990s.

At HBA, we (surprise!) have a slightly different take on things. We think that we would be decidedlyLUCKYto doas WELL as the Japanese did. Just how well did the Japanese economy fare in the 1990s? To be sure, the 1990sin Japan are not called the lost decade for nothing.

Japans boom-cum-bust was a much bigger affair relative to the size of the Japanese economy than the recent USexperience. Japanese asset values (their National Asset Base), collapsed by a truly devastating 3x GDP(!), ascompared to our recent write-down of asset values by almost 1 x GDP (from US $50 Trillion to approx. $30Trillion = $20 Trillion/$14.264 Trillion 2008 US GDP). Further, after some delay, their policy response was almostexactly the same as ours.

Given these facts we feel that Japan was quite fortunate to have only misplaced a decade. For reference note also

that during the Great Depression, US assets were written down by approximately of one years GDP. So thankheaven that our experience is not as challenging as Japans was, but is also, sadly, a greater loss of perceived value

than our Great Depressions.

Looking Ahead: A Preview of the Next Crisis?

Havent you heard? The recession is over! Dr. Bernanke has, through his masterful steering of the economy,avoided Depression 2.0(his phrase). Nobel Laureate Paul Krugman has joined the choir; indeed, he never left it.However, Mr. Krugman also warns us that this may be a jobless recovery for awhile.


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So, now that the self-congratulatory headlines have been printed and the recession is over, we at HBA thought itmight be timely to engage in one of our familiar sports: the throwing of ice-water on the ticker-tape parade. It isntso much that we like to do it (really, we love a party as much as the next person), as much as the warm water we

have keeps going cold. Nothing in our minds can match the spine-chilling effect that the cover of TIME Magazine 15 February 1999(pictured here) provides. Look closely. These are the heroes thatSaved the World. They should be very familiar. After a full decade,ten long years, of reaping what The Committe to Save the Worldhas sown, they are ALL STILL HERE!(or in Greenspans casehisintellectual heirs...maybe its Groundhog Day?) Ten years on, though,it seems that our salvation was really damnation.

Mr. Obama, is this really the change we can believe in? Now ourfinancial and monetary leadership clearly meet the definition ofinsanitydoing the same thing, with the same cast of characters toboot! No doubt TIME will soon be going to press with a glowingpiece on The Committe to Save the World 2.0 and the crew of Dr.Bernanke (maybe it will include Bob Rubin and hisappointee, LarrySummers withhis appointee Timothy Geithnerif anything, theseguys are exceedingly loyal!), which tells a modern tale of near disaster,

all but averted through the courageous, forwardthinking and unorthodox actions of the Fedcaptain.

Here at home we do believe that the combination ofmassive stimulusnearly $4 Trillion of itmusthave some effect! Hey, we aredesperatelysearching for signs of a sustainable recovery, too.And it is quite possible that some form of mildrecovery takes hold certainly from the dead-silence that befell the cash registers of America lastfall. Yet we cant escape the creepy feeling that all

thats happened is that asset prices are rising again;The Fourth Way is kicking in! Who cares aboutjobs, the stock market is up! the mainstream pressseems to shout. But is this the beginning of asustainable recovery or is it just asset inflation allover again? And what will happen when thestimulus wears out? Crisis 3.0? Hopefully, wellknow before another decade lapses.

At HBA we are clear that if its trite its right,and one such hackneyed phrase reminds us thatPeople who use acrystal ball often wind up eatingground glass. And, its been true that, at times,

ground glass has come close to being a fifth majorfood group here. So our caution at venturing an opinion is, perhaps, understandable.

While it was to-be-expected that a genuinely heart-pounding ascent (the sharpest upward move since 1938) wouldoccur in the stock market given their recent heart-stopping lows, where this rally really distinguishes itself is in itsspeculative nature (Figure 6). And this rally wins the Race of the Junkiest by a long shot. We, however, cant beas cavalier as to dismiss it entirely, either. On the positive side weve thought for a while that given the delugeof stimulus combined with the runoff of a melting credit market, many boats could be lifted. And while wehave a hard time escaping the idea that the tide will recede, but we also recognize that the tide may remainhigh for some time.


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Most importantly, perhaps, is the fact that the stock market has very often presaged an upturn in the generaleconomy with an upturn of its own- often 6-9 months before signs of recovery are recognized. We also feel thatsome signs of a recovery should be evident by Q2 2010. So, could this be the real deal?

Clearly, we have been treated to a return of speculation and risk-taking like never before. Perhaps underlying this isthe belief that someone (the Fed, the US Treasury, Mr. Obama, Committee 2.0?) will be there to pick up the piecesif growth disappoints. In addition to marvelling at how far the markets have come from the ides of March (whenthere was no savior to be found!) we are clear that a colossal dose of moral hazard has been re-introduced into themarkets.

This run in the market has made some things very clear. First, that it is the nature of the markets to keep us humble.How many investors, professional and amateur alike, had just become convinced that their pile of beloved cash wasthe safest place to be? When conviction is the highest, the markets seemingly do the opposite.

Now investors many who may have partially or totally missed this rally have a new psychological battle: A vestedinterest-turned-belief that there will surely be another leg down in the markets, and with it, another opportunity toinvest at a low cost. At HBA we assign about a 40% probability to this happening. More likely to our thinkinganywayis that the market slogs along at higher nominalprices as inflation makes stocks cheaper in realterms overtime. Long suffering readers may know that we have long been suspicious of the stock market valuationsas

Jeremy Grantham recently lamented that After almost 20 years of more or less permanent overpricing of the S&P, weget 5 months of underpricing! There is no justice in life!.

Well, Jeremy, we at HBA are in agreement with you & GMO. Like you, we prefer to invest and accumulate shareswhen they are cheap. All of which means that we, like the investors who were not fully invested in the rally, aresomewhat psychologically hobbled, looking (hoping?) for cheaper prices. But as mentioned above, we are certainlywilling to concede that we may not get them. Perhaps the massive inflationary jolt er, stimulushas more or lesspermanently lifted stock prices. We may see a new inflation-adjusted low price on the S&P, but still have highernominal share prices.

Strategy:

NIPPON, INC. One area where we have found such cheap pricing, however is in Japan. It is true that we have

been on the Japan Bandwagon for some time. The equity markets of Japan have been cheap on a relative basis forawhile (i.e. compared to other developed markets like the US and Europe). Now they are cheap in an absolute sense(though, like everything else, less cheap than in March). Still the major Japanese stock market index trades atapproximately 1X book value (vs. US 2 X and Europe 1.5X). But most importantly, to say that Japanese companiestrade at book value is quite meaningful because book value in Japan generally consists of cash & depreciatedplant and equipment. Not much in the way of goodwill or other intangibles is evident, and the companiesthemselves have very low levels of debt (some are entirely debt-free!).

At HBA we are currenly exploring the best way to capture this opportunity. First Eagle Global (SGENX)andFirst Eagle Overseas (SGOVX)are two funds which have strong weightings toward Japan. We know Jean-MarieEveillard, the Senior Advisor to these funds, and more importantlyunderstand and agree with his investmentmethod & philosophy. Other funds which may provide the desired Japan exposure include the Japan EquityFund (JEQ)and the Japan Smaller Cap Fund (JOF). Many investors have learned to ignore Japan, with a 20

year bear market and a deleveraging cycle, which has only just begun here in the West. Further, Wall Streetcoverage of Japanese stocks has been severely curtailed with the recent sale of NikkoCordial, formerly owned bybanking cripple Citigroup. This has had the effect of leaving Japanese stocks unloved, underfollowed and in thebargain basement. Let it not be said that we at HBA are callous; we want to spread the love back to Japan!

Gold: Given the downward trajectory of the US Dollar, and of all the worlds paper currencies, we still favorsignificant exposure to gold. This belief finds its expression in most client portfolios in both bullionthe physicalownership of goldand investments in gold mining firms. For exposure to physical gold we have chosen the SPDRGold Trust (GLD),(where each share is representative of 1/10 oz of gold), and the Central Fund of Canada(CEF). There is a tax reason for holding two different funds which are meant to accomplish the same thing: GLD


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is technically considered a holding of bullion, which is considered under the Internal Revenue Code, as acollectible (like baseball cards, etc). Any gains on the holding of collectibles are NOT eligible for the lowercapital gains tax rates, but are, instead, taxed as ordinary income (just as short-term capital gains are). Therefore, innon-retirement accounts, we prefer to use CEF,which is technically a fund holding (and thus eligible for the lowercapital gains tax rates), rather than GLD. For retirement (or qualified accounts, as we call them) where there is nocapital gains treatment anyway, GLD serves as an appropriate holding vehicle for bullion.

To gain exposure to the gold mining sector, we have holdings in the Market Vectors Gold Miners ETF (GDX).This fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of theAMEX Gold Miners index. The fund normally invests at least 80% of its total assets in common stocks andAmerican depositary receipts (ADRs) of companies involved in the gold mining industry. In addition, we havesome concentration in Agnico Eagle Mines (AEM)because, almost uniquely among gold mining firms, they havesuccessfully been adding to reserves. AEMs new mine in Finland has been bedeviled by start-up metallurgicalissues in the Q1 2009, but seems to have improved in Q2. While recovery rates have doubled, they are still belowthe original feasibility plan. We view this as a positive sign. An additional positive, as we see it, is that the marketsare just about to exit the seasonally weak period for gold prices (Spring/early Summer), and will soon be enteringthe seasonally strong period for gold prices (Fall/Winter).

The Templeton Global Bond Fund (TPINX),has been as close to a portfolio mainstay as weve had (exceptinggold & silver, of course). TPINX is a fund which invests in foreign sovereign debt. These foreign government

bonds form one of the three legs of our anti-inflation stool (the other two being commodities led by gold/preciousmetals, and Treasury Inflation-Protected Bonds or TIPs). Led by portfolio manager Michael Hasenstab, thefundhas performed well, even in the face of last years challenges. We agree with Mr. Hasenstab that the flight toquality (read: US Treasuries) was overdone and no small measure of his great YTD performance of 8.08% (as of06/30/09) is due to his purchase early this year of low-cost emerging market debt from South Korea, Mexico, andNew Zealand. In these countries, he seems to feel that the possibility of further interest-rate cuts and deeplyundervalued currencies make their bonds attractive to own for multiple reasons. It has helped this fund in no smallmeasure that the US dollar has fallenfairly consistentlyrelative to other currencies. Here though, we arebeginning to entertain some doubts. Recently Allan Bollard, Governor of the Reserve Bank of New Zealand, saidwhat has been the modus operandi of central bankers everywhere, but hes gone the extra step of sharing thatexclusive fraternitys secret handshake with the world: [w]hat is needed, he said out loud, is for the NewZealand dollar to be persistently weak over the coming years.... The kiwis risen from 49 to 66 cents on theUS dollar. While we (and Hasenstab, no doubt) thank our lucky stars for this, we, at least, are skeptical of an

encore.

More than this, we worry that since ALL central banks are participants in this race to the bottom, we will ultimatelylose ground to other assets/investments that are far better at holding value in times of inflation. Gold andcommodities come to mind. As do low-priced equities, generally. At the present moment we feel that we are beingfairly compensated here as the US Dollar continues to weaken on a relative basis (i.e. relative to other currencies).

Another closed-end fund that was also employed last fall togive us non-dollar bond exposure is JGG, the NuveenGlobal Government Enhanced Income Fund. We arewatching and waiting, but may find more suitablealternatives soon.

Emerging Markets: Here at HBA we are still of the mind

that the lesser-developed (read: lesser-indebted) nations ofthe world will most likely spring back from this downturnwith more vigor and enthusiasm. Not weighed-down bydebt, these economies, Brazil, India, Vietnam, Singapore,Taiwan, South Korea and to a lesser extent China, Russia,Indonesiashould find their way out of the dark labrynthsooner. But as paid worriers, we have to understand the riskthat one country, namely China, poses to the growth picture.Indeed, the IMF estimates that China accounts forapproximately 74% of the growth in worldwide GDP in the


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three years to 2010. In addition, since 2005, China has been the source of 73% of the global growth in oilconsumption and 77% of the growth in coal consumption. Michael Pettis (www.mpettis.com) shares with us thatDan Rosen, of the Rhodium Group, has a very illuminating July 17 report that shows the composition of Chinesegrowth in the past decade. He shows that for the past five years net exports accounted for about 10% to 15% of

Chinese GDP growth, before collapsing to minus 41% in 2009 YTD[9].

The response to this collapse has been that the Chinese government has set higher lending quotas for banks forcingmore credit down the throat of the gorged economy. Through the June 30 period according to Michael Pettis blog,Chinas banks will have lent Rmb 7 Trillion (about $1 Trillion USD) in the first half of 2009, as compared to Rmb4.9 Trillion in all of 2008, and Rmb 3.2 Trillion in 2007. Most private reports show that significant overcapacitiesexist across a full spectrum of Chinese industries. At HBA, were just as unsure of the value of more empty officetowers as we are of the sustainability of this lending burst. But we are sure that when it endsand it willtheglobal economy will feel it. How long can a mercantilist, command-and-control economy hide current NPLs (non-performing loans) while heaping new ones on top of the unharvested crop of old ones? We have no idea, but areopen to suggestions; Operators are standing by!

This is a big risk as we see it, and are working to square our general bullishness on most emerging markets, with ourbearishness on China. In fact, the outlook for China provides a shade of bearish coloring to our outlook oncommodities as well. Suffice it to say, wed feel more comfortable investing AFTER the wheels come off the cartof Chinese bank lending...but have no idea when that will happen. When it does, it will also likely further reduceChinas lending to America (FIGURE 7), which itself is likely to further depress the US dollar and raise borrowingcosts (interest rates).

These are the biggest themes that we see developing. We have maintained our holdings of some Canadian RoyaltyTrusts, which are oil and gas producers/transporters, that are structured much like US Real Estate Investment Trusts(REITs), in that they are required by law to pass through 90% of FFO (Funds from Operations) as a dividend.Some of the names include Penn West Energy Trust (PWE), Pengrowth Energy Trust (PGH), Harvest EnergyTrust (HTE), Baytex Energy Trust (BTE) and Enerplus Resources (ERF).The Canadian Trusts, unlike their UScounterparts, however, can continue to explore for new reserves to replace lost reserves; The US Energy Trusts(SJT, BPT)will eventually become little more than dry holes. Many of these trusts (especially HTE) werenonetheless clobberedlast year as oil prices tanked, but have recovered modestly. And while the dividends inalmost all have been cut, they are still paying out at a reasonable clip. We have also invested more successfully insome other pipeline companies for the dividends they pay and, what we felt was the relative security of assets.

Atlas Pipeline Holdings (APL)and Linn Energy (LINE)were two such names. With the recent rise in their shareprices, however, we felt it was time to take some money off of the table, that is to sell these holdings. Yet, wecontinue to believe that our friendly neighbor to the north will supply much more of our energy needs than currentlyand many of these companies, some with 30-50 (or more) years of reserveswill experience some valueenhancement.

Though we maintain positions in higher-dividend stock, we have chosen to put most of the new money receivedinto the Metropolitan West Low Duration Bond Fund (MWLDX). The fund now yields a healthy 6.46%, buthas recently experienced a rise in the underlying share price of 5% as well. Last fall and early this spring themanagers of the fund decided to purchase in some of the toxic mortgage structures (CDOs, CMOs, and MBS), andwere able to do so at a significant discount (we estimate 60-65 cents-on-the-dollar from our reading of theprospectus). We think the fallSeptember through November periodwill produce some surprising opportunitiesfor us and think MWLDXa great holding place for assets in the short term.

Overall, we are convinced that the stimulus has and may continue to provided some near-term relief. Howeverthe longer-term future is far more fragile. The Obama administrations planned deficits mean that the USGovernment debt to GDP ratio will rise from approximately 45% at the start of this crisis to over 100% in less than4 years. At that point (assuming a 5-6% cost of funds)5-6% of ALL future US GDP must go servicing the debt ofthe government. This forceful headwind will certainly slow the cruising speed of the overall economy. Weshould probably get used to a new normal US GDP growth rate of 1-2% vs. the old 3-4% we had becomeaccustomed to warns Bill Gross of PIMCO funds; and we agree. This is one reason why we are searching overseasfor greener growth pastures. To our minds this may turn out to be the stimulus-fuelled last hurrah, with some(seven biblical?) lean years to follow.


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To all clients and friends of Haydel, Biel & Associates, we would like to thank you for your business and support ofour practice. With that in mind, we also invite your comments or questions regarding this newsletter. Please feelfree to contact us by phone at 626-449-8347, or email [email protected]. Thanks (in advance) alsofor any ideas you might share about how we can improve upon our service.

Warmest Regards,

Christopher Haydel

Footnotes:

[1] Sound Money was perhaps best defined by former Comptroller of the Currency A Barton Hepburn to mean [...]moneymade of (or unquestionably redeemable in) a commodity which has a stable value in the marketso f the worldindependent of fiat. Sound money as applied to coin means money wherein the commercial value of the bullion equals itscoinage value. Sound money as applied to papwer or token noney of any kind means that which is redeemable in moneywherein the commercial value of its bullion equals its coinage value.-A History of Currency in the United States (1915).

[2] James Grant , Sold To You, Uncle Sam, Grants Interest Rate Observer April 3, 2009

[3]Sylvio Gesell (1862-1930 ) was the author of Die Reformation des Munzwesens als Brucke zum Sozialen Staat (TheReformation of the nonetary System as a Bridge to a Social State). This socialist tract earned Gesell, who was a rather obscureeconomist during his lifetime, a cult following for his rather extreme ideas around land nationalization and socialism generally.

[3] Judy Sheldon Loose Money and the Roots of the Crisis, Wall Street JornalOp-Ed September, 30, 2008

[4] We believe in a strong dollar.. read Timothy Geithner, from a prepared text delivered to the studends of Peking Universityon Monday June 1, 2009. He went on Chinese assets [in the US] are very safe, and were going to make sure that we repair andreform the financial system so that we sustain confidence. This comment drew loud laughter from the audience of students inattendance.

[5] The Manifestos demands: (1) Abolition of property in land and application of all rents of land to public purposes; (2) Aheavy and progressive tax; (3) Abolition of all rights of inheritance; (4) Confiscation of the property of all emigrants and rebels;

(5) Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusivemonopoly; (6) Centralization of the means of communication and transport in the hands of the state.; (7) Estension of factoriesand instruments of producitoin owned by the state; the bringing into cultivation of waste lands, and the improvement of the soilgenerally in accordance with a common plan; (8) Equal obligation of all to work. Establishment of industrial armies, especiallyfor agriculture; (9) Combination of agriculture with manufacturing industries and the gradual abolitoin of all distinctions

between town and country by a more equable distribution of the populace over the country; (10) Free education of all children inpublic schools. Abolition of childrens factory labor in its present form. Combination of educationwith industrial production.

[6] Dr. Marc Faber , Where is the Light at the End of this Tunnel, Gloom, Boom & Doom Report, March 2009 (www.gbd.com)

[7] Steve Malanga ,Can Free Markets Survive In a Secularized World?, RealClearMarkets, January 28, 2009(http://www.realclearmarkets.com/articles/2009/01/can_free_markets_survive_in_a.html )

[8] Jeremy Grantham,Obama and the Teflon Men, and Other Storiespp 2-3, January 2009 (www.gmo.com)

[9] See Squeezing out the exporters, July 29th, 2009 by Michael Pettis (www.michaelpettis.com)

2009 q2 confessions of a monetary sinner

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