Fitness: Be Moderate in Your Moderation!

12 June 07

“We believe in moderation in all things, including moderation.” (Mr. Chang, the Chinese guide in James Hilton’s novel, Lost Horizon, to Conway, the protagonist of the story.)

I have been thinking about the limits of moderation recently.

I have been a moderate runner on a regular basis for approaching 38 years. I am proud of my consistency, but I note that my average mile time has drifted from 7 to 7-1/2 minutes at the outset to 10 to 10-1/2 minutes now.

A 10-1/2 minute mile is no shame for a baby boomer approaching 60, but, all things being equal, I would rather still be running the 7-minute miles of my youth.

The truth is, physical changes related to aging make it very difficult to maintain a single standard of performance lifelong. I also weigh 40 pounds more that I did at age 20, when I began running. If you had strapped a 40 pound pack on my back at age 20, I would not have delivered a 7-minute mile very easily.

So, to quote another literary figure, does that mean we can only “go gentle into that good night?”

In fact, I think not.

The truth is, our bodies respond best to moderation in moderation.

What do I mean?

Well, if we were to push to our maximum level at every turn, we would face the risk of injury, and with age, possible incapacitation. So it is good to be moderate overall in a regular exercise program.

But an exercise routine of uninterrupted moderation permits the kind of slide that adds 3 minutes to the time required to complete a mile. As a 58-year-old who desires to continue feeling young as I enter senior citizenhood, I am trying to discern how it may be possible for me to be moderate in my moderation.

I have come up with two strategies so far.

The first strategy: I have begun to pepper my runs with vigorous sprints on approximately an 8-minute rotation. That is, every 8 minutes, I sprint for a “moderate” one minute, but this will move my pulse up from the 125-135 range to the 155-168 range. As they say, that is not bad for an old man.

Two years ago, I overdid the sprinting. I was doing hill training in Scottsdale, Arizona, and was pushing my heart rate into the low 170s in several-minute runs up lengthy hills in the autumn desert sun.

The problem? I developed premature ventricular contractions which lasted for several months, and ended up getting checked out medically with a Holter monitor. By the time I actually had the test (about 8 months after the fact), they were just beginning to go away of their own accord.

Don't worry, premature ventricular contractions are rarely serious, and you can have hundreds a day (which I did have for about 8 months) without being outside the normal range. However, they remain uncomfortable and disturbing.

Premature ventricular contractions are caused by the (left) ventricle contracting prior to filling fully, and thus this very powerful region of the heart muscle contracts on an inadequate amount of blood, and it feels as though one’s heart is “skipping a beat.”

So the problem is that I was not moderate in my immoderation. I pushed too hard, too soon, for too long.

This time, I decided to reduce the duration of the vigorous sprints, and so far (the past two months) it has worked fine.

I now feel much more vigorous both during and after runs, and there are several subtle benefits. For example, I enjoy a “supercharged” sensation for several hours after the run, and I didn't get that with moderate running only. It is a feeling of vigorous well-being, and I’d much rather obtain that feeling through exercise than by turning to such “artificial” highs as chemical use, risky behaviour, etc.

I also notice that regular running has become a little bit easier, and my weight is stabilizing or perhaps dropping a bit. I notice my belt fitting more loosely around my waistline even without a change in weight, and these are small clues indicating that my body is responding favourably to “moderate immoderation.”

My second strategy has actually been to reduce the duration, but not the intensity, of my weight workout.

My usual weight routine includes 30 exercises (40-45 on holidays) over a period of one hour up to two hours. The problem – when I'm busy, I can't do such a lengthy routine, so I end up doing no weight training at all for days at a time. This was not working.

So, on my wife Susan's suggestion, I pared the routine down to a core 10 exercises, plus 6 relatively undemanding supplemental strength/flexibility exercises. Now I am back to getting in three weight workouts most weeks, even when I'm working 12-14 hours a day, and most days have been like that since returning home from California in late April.

That is, as a result of being moderate in the duration of my weight training, I can maintain the intensity, and increase the frequency to the point that my total hours of exercise probably match what I was achieving through my regular routine, but I am now much more consistent. This factor probably also contributes to that comfortable feeling of my belt fitting loosely rather than snugly about my waist.

What's the next step?

I think I need to be a little bit more moderate in my hours of work, and then I can be more intense in my exercise routine, and sleep more than 5-6 hours a night on average (I'm a sound sleeper, but don't have sufficient time in a day to squeeze in more than 6 hours’ sleep when I'm busy). I think all of that would help considerably!

Obviously you'll have to find your own way to stay physically fit.

But honestly, don't believe it when the fitness gurus tell you that all you need is a daily walk. That may be a good start if you are out of shape. But if you truly desire to preserve fitness into the later years of your life, you have to include some physically demanding and immoderate exercise several times per week (but of course, only a moderate amount of such immoderate exercise!).

Have fun, and think of Shangri-La the next time you exercise!

Precious Metals Looking Up Again

1 June 2007

While precious metals - at least gold - had their fourth best month in history (in US dollar terms), precious metal mining stocks collapsed in May, particularly when denominated in Canadian dollars. Similarly, the metals themselves also fared poorly in terms of Canadian dollars.

It was an ugly month for our portfolio, making me wish I had cashed out for the month. We lost all of our 2007 gains and more, and all the losses occurred this month.

However, I am presently operating on the tsunami model. Gold and precious metal fundamentals remain extraordinary. Thus, I think we have just witnessed the tide pulling back in anticipation of an oncoming tidal wave. Almost every techinical indicator presages that gold and silver will perform outstandingly from present levels, and that is likely to propel the mining stocks, which have been in decline since May 2006.

So I will say it only once. If you aren't invested in gold and silver and the mining shares, sometime fairly soon may be the time to make your purchase. The next 12 months are likely to be very positive for precious metal investors in all asset categories, though we don't seem to have reached bottom yet....

It is worth rememebring that the tide goes to unprecedented lows before the tsunami rolls in. Right now, the tide is going out as the tsunami forms, literally taking every available drop of ocean water into it as it begins rolling its way towards the shore. This looks like a big one, so be prepared for something that may be unique and unexpected!

The Firefly/Serenity Series Revivifies Science Fiction Story-Telling in the New Millenium

21 May 2007



As I am not a television watcher, the Firefly/Serenity Series had slipped by under my radar for the past 3-4 years. Over the past week, my wife Susan and I have been ending our days with episodes from the ephemeral 2002-03 Firefly Television series. My confidence that our era can still tell science fiction stories has been restored, and special credit goes to Joss Whedon, the series' creator, for this accomplishment!

Firefly tells the story of a ragtag band of space voyageurs, and in this sense, owes its genesis in large part to the initial Star Wars series (to which Whedon attributes much of his inspiration). However, Firefly accomplishes a subtlety of execution which is seldom encountered in dramatized science fiction. Rather than say more here, let me simply share with you my Amazon.ca reviews for both Firefly (the televised series) and Serenity (the culminating cinematic episode).

Firefly - Incredible TV Fare


I am not a television watcher, and so it took me over 3 years after cancellation to discover this incredible television science fiction series. Yes, the episodes are 43 minutes in length, and thus you know that resolution is drawing near as the time winds down with each episode. But this is science fiction for television as I had never imagined it.

Firefly is classic science fiction story-telling first, and television second.

What sticks with me? When River steps barefoot onto the metal deck connecting two ships in space, I received a sensory impression of life in space as it might someday be lived. Warm give-and-take discussion over the plain wooden table in the ship's galley is only one more of perhaps hundreds of subtle touches that evoke the possibility of life in this imagined future world (set arbitrarily 500 years away).


Clearly the fiction outweighs the science (quantum gravity has clearly been solved in the "Out of Gas" episode). And there is plenty of action for those who nod off at cognitive content. But this is a creditable contribution to dramatized science fiction. The movie sequel Serenity has just been identified in a BBC poll as the best science fiction movie overall, and - at least for our era - that is certainly the case.

Move over Star Wars. This series is superior even to the original Star Wars episodes. I am not a connoisseur of televised science fiction, but it is hard to imagine how this program could be topped.

Serenity Now the Best Science Fiction Film (BBC Poll)

The BBC has just rated Serenity the best science fiction film, edging out the original Star Wars.


Why? To start, Joss Whedon has an uncannily clear vision of what he is doing. Second, he communicates this vision to his actors, who communicate it to us. Third - this film is true science fiction.

That is, it establishes an imaginable future, and illustrates how real people might live in such a future. This is not an action or suspense film in disguise. It is actually about how people might live under an imaginable set of future circumstances.


The most brilliant cinematic touches are those that make the future real, and this includes taking time to focus the camera and the story on day to day life between dramatic events. Yes, there is plenty of action for the amygdala-driven viewer, but there is also plenty of stimulus for the prefrontal cortex - for those who find thinking as well as action interesting. Classic science fiction returns to the screen - and this as the Star Wars franchise seems to be devolving and unwinding.


Perhaps with enough DVD sales, there could be a Serenity II. Buy this disc (the two-disc special edition is being released August 21, 2007).

By the way, donations to the Firefly Fan site may be made here. You can vote for Firefly here, where Firefly happens to be running second as "best television show of all time," as well as on the already-mentioned BBC poll (still open as of this posting) where Serenity is currently rated the best science fiction movie.

Yet another possible cause of global warming...

14 May 2007

According to the Economist, the Earth’s magnetic field is getting ready to flip (this happens every 500,000 years or so, but very erratically, and it has been ¾ million years since the last flip). The magnetic field is weakening by about 5% a century. This in turn weakens the magnetosphere, which shields the earth from much solar radiation. Thus, increasing solar radiation is reaching the surface of the earth.

The Economist isn't linking this to global warming, but it is an obvious correlate….

The Northern lights will sure look great in Missouri and Saudi Arabia – and ultimately at the (former) south pole…..

Do we then have to rename Antarctica to Arctica??? Does Canada become the True South, strong and free? Will Canadians go north for their winter holidays (my wife Susan excepted, as she likes to go to the Yukon in February)?

How indebted is the US?

11 May 2007

This time, with the help of Puru Saxena, I can provide more exact information on total US indebtedness.

The total value of the US stock market at the end of 2006 was $20.6 trillion dollars. The value of the total US housing stock was a similar amount. These two amounts (roughly $40 trillion) account approximately for the net worth of Americans (obviously this is a rough calculation, as there is considerable, and growing, international ownership of US assets, and Americans also own international assets).

Here is the problem - total US debt is higher still, at $48 trillion dollars, and it is rising exponentially. That is, you could use the value of the entire US stock market and every residence in the United States to make payments against US debt - and it would not cover the bill.


As we have discussed several times, the US is growing more indebted to the rest of the world at a rate exceeding $2 billion dollars per day, and this approaches $1 trillion per year.

Yes, the liquidity-fuelled economy is booming - but it is global citizens other than Americans (including Canadians) who will derive the ultimate benefit. You could argue that the United States is making the rest of the world rich. It is a dramatic finishing act for the nation which has been the primary driver of the global economy for a century or longer.

But this is the kind of place where things draw to a close, not where they begin - at least for the US economy. So long as the US dollar, now at long-term support, holds its value, the producing nations of the globe will benefit from America's largesse. And for many decades to come (3 decades in the case of long-term treasury bills), Americans will be footing the greatest part of the bill for continuing international economic growth.

Rethinking the US Dollar Index

5 May 2007

John Doody (the Gold Stock Analyst) has recently taken apart the US Dollar Index (USDX) and put it back together again.

The present USDX is not trade-weighted, and has become increasingly out of proportion to the reality of US trade over the past 24 years. It overweights the Euro Zone by a factor of three (at 57.6%), underweights Canada by almost 50% (at 9.1%), and omits China (0%) entirely.

Mr. Doody has re-calculated the index based on weights available at the Federal Reserve Board website as follows (adjusting the following figures proportionately to make 100%):

Euro area 17.6
Canada 17.5
China 15.1
Mexico 9.6
Japan 9.5
UK 4.5
Korea 3.7
Taiwan 2.5

The two indices were roughly equivalent in 1983, but have since diverged considerably.

Mr. Doody’s recalcualted index peaked in 1985 and 2002 at 139.86, and has presently fallen to 110.85.

This is in contrast to the USDX, which peaked in 1985 at 164.72, but only modestly at 120.9 in 2002, and which is now in the .80 range.

That is, the USDX has lost half its value since 1985, but the trade-weighted dollar index (based on 2006 trade weightings) has lost only 21% of its value since 1985.

Doody is in the camp of the gold bulls, but he is cautioning us to be objective in our evaluation of the declining US dollar. I think he has a valid and important point.

For more information, visit Mr. Doody's website to subscribe to his monthly newsletter.

Macroeconomics for gold investors in one chart

4 May 2007

Gary Tanashian has published a brilliant chart summarizing virtually the entire macroeconomic situation for gold investors in one place. Here it is:

The First Global Bubble

26 April 2007

Jeremy Grantham is one of our most respected global investment advisors. On April 24, 2007, Mr. Grantham published a groundbreaking article suggesting that, for the first time in the history of our planet, a global investment bubble has emerged.

You can follow the links above to learn more. However, a reader on Bill Fleckenstein's website has summarized Mr. Grantham's article for your convenience. What follows are a few excerpts and Mr. Grantham's summary:

It's Everywhere, In Everything: The First Truly Global Bubble

The necessary conditions for a bubble to form are quite simple and number only two. First, the fundamental economic conditions must look at least excellent - and near perfect is better. Second, liquidity must be generous in quantity and price: it must be easy and cheap to leverage....That these two conditions have been met now hardly needs statistical support, so widely accepted have they become.

Never before have all emerging countries outperformed the U.S. in GDP growth over a 12-month period until now, and this when the U.S. has been doing well. Not a single country anywhere - emerging or developed - out of 42 listed by The Economist grew its GDP by less than Switzerland's 2.2%!...

Bubbles, of course, are based on human behavior, and the mechanism is surprisingly simple: perfect conditions create very strong "animal spirits," reflected statistically in a low risk premium.

Widely available cheap credit offers investors the opportunity to act on their optimism. Sustained strong fundamentals and sustained easy credit go one better; they allow for continued reinforcement: the more leverage you take, the better you do; the better you do, the more leverage you take.......everyone, everywhere is reinforcing one another.

Wherever you travel you will hear it confirmed that "they don't make any more land," and that "with these growth rates and low interest rates, equity markets must keep rising," and "private equity will continue to drive the markets."

To say the least, there has never ever been anything like the uniformity of this reinforcement. The results seem quite predictable and consistent. All three major asset classes - real estate, stocks, and bonds - measure expensive compared with their histories and compared with replacement cost where it can be calculated.

The risk premium has reached a historic low everywhere...

So to recap and extend:

1. Global fundamental economic conditions are (perceived as) nearly perfect and have been for some time.

2. Availability of global credit is generous and cheap and has been for some time.

3. Animal spirits and optimism are therefore high and feed on themselves through reinforcing results and through being universally shared.

4. All global assets reflect this and are overpriced and show, probably for the first time, a negative return to risk taking.

5. The correlation in global economic fundamentals is at a new high, reflected in the steadily increasing correlation in asset price movements.

6. Global credit is more extended and more complicated than ever before so that no one is sure where all the increased risk has ended up.

7. Every bubble has always burst.

8. The bursting of the bubble will be across all countries and all assets, with the probable exception of high grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity.

9. Naturally the Fed and Fed equivalents overseas will move to contain the economic damage as the Fed did last time after the 2000 break. But the heart of the last bubble, the NASDAQ and internet stocks, still declined by almost 80% and 90%, respectively. (The heart of the bubble this time is probably private equity. In 10 years, it may well be described as the private equity bubble just as 2000 is thought of as the internet bubble. You heard it here first!)

10. What is wrong with this logic? Something I hope.

11. Of course the tricky bit, as always, is timing. Most bubbles, like internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time but dramatic in extent. My colleagues suggest that this global bubble has not yet had this phase and perhaps they are right. (A surge in money flowing into private equity might cause just such a hyperbolic phase.) In which case, pessimists or conservatives will take considerably more pain. Again?!

The Moral Implications of Excess Liquidity

25 April 2007

Excess liquidity is an economic concept that has been discussed several times on this site. Austrian Economics postulates that when the bank rate of interest is held lower than the natural rate of interest, then investment capital in an economy will become increasingly misallocated, leading to a series of relatively predicable and extremely serious economic problems.

That sounded dry and theoretical didn't it?

Let me bring that idea alive for you.

Let’s imagine you are the parent. Your child makes a poor or irresponsible choice. Rather than permitting your child to face the consequences of that choice, you provide an easy way out.

Perhaps your child wants a shiny new bicycle. You offer to share the cost, if your child will work and save to pay for half. But your child puts that off, and finds other things to do that are more interesting than working and saving. So… you buy the bicycle anyway, perhaps as a birthday or Christmas surprise. Your child has happily learned that rewards occur with little or no effort devoted to achieving them.

You have eased your expectations and rewarded your child for a level of effort that fell far below that which you originally expected.

Excess liquidity is about easing – specifically “monetary easing.” Run a Google search on that topic, and you will find considerable information about the Bank of Japan, whose post-bubble monetary easing over the past two decades has been the primary driver of global capital markets through the “Yen carry trade.” Search further, and you will find references to the US Federal Reserve Bank and to such names as Alan Greenspan and Ben Bernanke.

With any research at all, you will discover that stock markets rise when monetary easing is anticipated, and they fall when monetary restriction or tightening is anticipated.

Why is that?

Here is the shorter version (believe it or not).

About a century ago, the US government decided to take control of interest rates associated with the loaning and borrowing of money through the creation of the Federal Reserve System (sometimes referred to by its constituent parts as the Federal Reserve Bank or Board). This singular initiative took interest rates out of the control of free markets and placed them in government control.

As you may have noticed, politicians like to get re-elected. Over time, our politicians discovered that when the Federal Reserve Bank eased the supply of money by lowering interest rates, economic activity tended to increase. Jobs were created, and people felt generally prosperous. They had a magical formula for success.

When the Federal Reserve Bank lowers interest rates, the cost of borrowing drops, and private individuals and corporations will tend to borrow more money to undertake expenditures that they might not otherwise have considered prudent or affordable.

With interest rates low enough – as they were in the United States following September 11, 2001 – business projects that might have been uneconomic become marginally profitable. Why? Because the money to finance such speculative projects can be obtained almost interest free.

In fact, when you allow for the impact of inflation on the value of money, at some point it becomes cheaper to borrow money and to pay it back further in the future at very low interest rates, by using dollars that have become substantially devalued.

That is, at some point – when interest rates are low enough – banks are essentially giving money away to entrepreneurs and citizens, who may have to pay back less in real terms than they originally borrowed. (That has been true in Japan for perhaps two decades, though the Japanese economy fell into deflation, which is another story altogether. A similar situation occurred in the United States following September 11, 2001.)

When the Federal Reserve Bank initiates this process by giving away US dollars essentially for free, it is able to increase the amount of US dollars in circulation by selling treasury bonds to investors and savers (now usually foreign) who exchange their own currency for US dollars. This is referred to as increasing the US money supply. When the money supply grows faster than the production of goods and services, this leads to excess liquidity, the topic of today’s post.

OK, so far so good. But remember, we now have politicians overseeing the institution that sets the market interest rate (making our lending market controlled rather than free – an important distinction). Further, we have politicians promoting policies which increase the money supply, promoting a general environment of monetary easing.

And we have a vast populace casting their votes for politicians who make monetary conditions easy for them, rather than restrictive.

Sounds great so far, doesn't it? Who wouldn't want to make more money just by printing it? Let’s all share in the good times.

But the good times are not so good beneath the surface. In fact, a far-reaching process of decay sets in. Let’s think about that now.

Remember the child with the shiny new red bicycle?

Another year has passed, and the bicycle hasn’t been well cared for. It is now dented, rusty and clunky. The child wants another, newer, better and bigger bicycle. Once again, the indulgent parent provides the new bicycle with no expectations of the child. The old bicycle is discarded – and the cycle of easing (as it were) repeats itself.

How do you think this child, accustomed to a series of shiny new bicycles, is going to behave as an adult? I don't think you need me to advise you on this matter. We now have a spoiled and irresponsible child morphing into a self-indulgent and undisciplined adult.

And, what do you think might then be the moral implications of excess liquidity?

Let me walk you through a few of the more subtle permutations, then I'll set you free to think this through further on your own. If I achieve my goal, you will begin to see the world around you in a new light.

The following chart examines the growth of US MZM money supply (one of the better still-available measures) from 1980-2005. Is the trend apparent to you?

You are looking at growth from $1 trillion to $7 trillion US dollars in circulation during that time period.

OK, what if we go back further?

A more comprehensive measure, M3 money supply, increased from $250 billion in 1960 to almost $7 trillion in 2001 (and it has continued to balloon since then, to the extent that the US Federal Reserve Board is no longer willing to report this highly damaging statistic).


I think you're getting the picture now.

I told you that when money is given away easily, people borrow more – after all, it’s almost free! Here is what has happened to US debt as a percentage of GDP since the institution of the US Federal Reserve System in 1913:


Interestingly, in our present environment of monetary easing, US debt has never consumed a higher proportion of US GDP than it does today, including at the height of the great depression in the 1930’s.

So, you may ask, we’re still saving aren't we? In fact, the answer is no. The US savings rate actually moved into negative territory in 2004. Americans in aggregate are in fact now saving nothing at all.


You might then ask: Isn't all that liquidity making us richer? We've never lived in bigger, better houses or driven better cars than we do now, have we? We've never had more of so many things at often-declining prices?

Well, excess liquidity might cause us to feel rich, but the feeling of plenitude is driven solely by debt. That is, we are living a richer lifestyle than ever before, but we are selling our furniture for income, and burning the walls of our homes to keep warm.

The following chart shows that there is a small problem with printing money to generate wealth. US money supply in absolute terms has grown 32 times since 1959, but industrial production has increased only 4 times. That is, We have to print 16 times as many dollars to fuel twice the productive capacity of the industrial economy.


Why is printing money so ineffective in driving real economic growth?

Let’s think about that.

According to the Austrian School of economics, the core problem is that when our governments start giving money away, a cascade of vexing and inevitable problems begins to unfold.

The first and most serious is capital misallocation. In a restrictive monetary environment, it is highly risky to make new business investments as the cost of capital is high, and thus profitability must be substantial to sustain a new or expanded business. That sounds tough, doesn't it?

But here is the rub. A restrictive monetary environment provides discipline so that only well-conceived business ventures actually thrive. Half-baked and non-viable ideas flame out in the very early stages when the return on capital fails to match or exceed the cost of capital. Comparatively, far less capital is lost on fruitless or unproductive ventures.

That is, when economic conditions are tight, we have to work hard for our bicycles, and they might not necessarily be big, bright, shiny or even new. This restraint keeps us disciplined, focused and hard-working.

What exactly do I mean by capital misallocation?

Well, as we are in perhaps the greatest age of excess liquidity in world history, let me reply as follows – look around you – anywhere.

Capital misallocation is in evidence in almost everything you set your eyes upon today.

Our homes are too big, expensive to build, and expensive to operate (and many US citizens in particular cannot afford to pay for the homes they presently occupy).

Our productive capacity in almost every field of business is too great. We are producing too many computer and memory chips, too many cars, too many flat screen TVs, too many malls and shops, too many hotels and casinos, too many unnecessary luxury products, and too many consumer products generally.

Our debts have escalated to mountainous heights, and our savings have plummeted to subterranean levels.

Further, Americans can no longer afford to pay for the (unsustainable) activities of their government, the excessive investments of their corporations, or their personal consumer acquisitions.

Americans are presently borrowing 700 to 900 billion dollars per year from foreigners to finance their government, business and personal expenditures. Fortunately, because we are now producing too much of everything globally, prices have lowered, and Americans can finance this extravagant lifestyle by purchasing manufactured goods from overseas.

(By the way, Canada's situation is quite different at this juncture, though we have similar excess liquidity problems to those of the United States, because we are selling commodities as well as finished goods to the world. That is, Canada lagged while producing underpriced commodities while liquidity gradually mounted, and is now catching up again as liquidity has exploded.)

There is one small downside. The practice of relying on cheap labour overseas places us further in debt to foreigners. In fact, Americans are losing ownership of their country at a faster clip than has ever occurred in the country's history.

The United States was a net lender to the world from its inception until the rise of our present age of excess liquidity. A back of the envelope calculation indicates that Americans have already sold out about $3 trillion in ownership of their country to foreign holders of US dollar denominated securities (net external debt), and most of this transfer has occurred in the (current) first decade of the third millennium.

The United States owes the Japanese about $1 trillion, and the Chinese now over $1 trillion, and they are the two largest holders of US dollar denominated debt. Add another $1 trillion or so of US dollars in other foreign hands (including Canadian), and you will find that about 10% of the total value of all American securities (valued at $33.4 trillion in 2004), and obviously a rapidly growing percentage of all of the assets in America today, actually now belongs to non-Americans. Further, foreign holders of US debt now command over 30% of the $9 trillion US dollar money supply, and they are now adding to their investment in this United States fire sale at a rate of almost $1 trillion per year (equivalent to the annual US current account deficit).

Perhaps it is now becoming obvious that the only way Americans continue to own anything at all is by printing still more dollars, and that practice has not abated.

This is the era of monetary easing, and we all want a shiny new bicycle for every special occasion, and we will accept nothing less.

I suspect that the current trends are unsustainable, and that is why I have vocally advocated holding savings in gold and silver – as these traditional stores of wealth are preserving value while the worth of our currencies precipitously declines.

(By the way, gold and silver are advancing against every major global currency at present, so it is really a competition to determine which country will devalue its currency fastest. The United States seems the clear winner by far in that regard at the present time, due to its originally hard-won role as the largest by far of the world’s economies – unless it is compared to the European Union as a whole, which is about the same size. The Chinese economy, despite its breakneck growth and much larger population, is on less than 20% the scale of the US economy in GDP terms.)

What then are the moral implications of excess liquidity?

Let’s start at the government level.

We have a nominally “conservative” Republican government in Washington, D.C. which believes it can finance foreign wars by record levels of government debt accumulation while also cutting taxes. The Iraq war, like our transfer of assets to Japan and China, is rapidly becoming yet another trillion dollar US project.

Right or wrong, the United States simply can't afford the Iraq war… and it is not very bright, new, shiny or otherwise attractive at this point in its evolution. Similarly, we can't afford to fund the essentially non-productive US military industrial complex at its present level of full-bore operation in the background of the Iraq misadventure.

Americans have just floated their way through a classic stock speculation bubble of historic proportions in the year 2000, and the US real estate bubble began to implode in 2005. This latter speculative bubble will now be winding its way downwards for many years more, if not for decades to come.

US stocks are not worth 20 times earnings and more when one considers that their earnings are transient and of low quality (sustained primarily by record levels of consumer debt and household equity extraction). When earnings fall off a cliff, the present somewhat elevated US equity market price to earnings ratios will appear to be products of fantasy alone. They will be seen as attempting to soar in stratospheric realms with no means of ongoing propulsion.

US homes are worth no more and no less than what the next buyer will pay for them. It is no secret that there are fewer and fewer buyers every month for now very high-priced US homes, and it is virtually certain that there will be fewer buyers next year, and again the year after that.

Japanese real estate lost half its value following its bubble period, and has not recovered its value in the two subsequent decades. A similar outcome is probable for the majority of US real estate investments (there may be some exceptions, but that is not certain).

When we spend money we don't have, commodities move up in price to match the amount of money we have, accounting for the now just-beginning generational surge in commodity prices. Note how the following chart illustrates the close match between US dollar money supply growth and US dollar oil prices:


Again, the cost of what we buy rises to the level of the amount of money we have.

Thus expanding the money supply doesn't in fact make us richer at all. It redistributes wealth, and tends to do so in ultimately unfair and quite disturbing ways.

This disruptive and arbitrary redistribution leads to the core moral problems associated with excess liquidity.

When prices are stable, we are generally content with what we have.

When prices are rising – as they always do when liquidity increases – we now have to struggle to keep our share, or perhaps to get a few steps ahead of our neighbours.

It is no secret that those who struggle best for wealth when it is being redistributed are those who already possess it, and this fact accounts for the oft-noted mounting imbalance between the richest and the poorest Americans.

In an environment of monetary easing, savings accounts produce low interest rates, and inflation erodes their value often to the point of negative real returns. So people are forced by such an environment to engage in increasingly speculative activities with their hard-won income and savings.

Money becomes something to get rid of before it loses further value.

What does this redistributive environment produce?

Stock market bubbles. Real estate bubbles. Surges in gambling activity and casino construction. An increasingly unstable social and cultural environment. And increasingly irresponsible – and immoral – private citizen, government and corporate behaviour.

What do I mean by this last assertion?

Corporations have become cabals of CEOs who award themselves outrageous bonuses and stock options with little if any thought to the creation of shareholder value. Any form of deception to drive the stock price up the next notch will do. The stock market rises as the value of the US currency collapses. Equity analysis become cheerleading. There is little if any accountability anywhere in the corporate world.

Further, business now becomes a process of winning government favour and of using government contacts to constrain your competition while securing your own advantage. (Historically, this constitutes a return to the mercantile system and the ultimate decline of the free market system.) One need only speak the name “Halliburton” to illustrate this point, but Halliburton’s Iraq-based contracts are but the tip of the iceberg of an increasingly government-dependent corporate world.

From government subsidies to grow corn for ethanol production (forcing Mexican peasants to forego corn as the staple of their diet) to government bailouts of speculative investment firms (think Long Term Capital Management – who lost too massive an amount for the government to allow the losses to be absorbed by shareholders) to government subsidies for favoured business ventures of all kinds – every company is forced to find its edge with government so that it can play to win in an increasingly unlevel, distorted and ultimately surrealistic playing field.

And what of our money that is finding its way overseas to buy inexpensive manufactured products and increasingly expensive but necessary commodities?

Interestingly, the Chinese and the Japanese are deeply invested in the game of excess liquidity, and both are playing to win – with the result that they don't want to sink the US boat by selling out their excess of US dollars. Due to a shared vision of convenience, these countries remain America's paradoxical monetary allies.

But it is another story in Latin America, Africa and the Persian Gulf states, where anti-Americanism is literally being funded with US petro-dollars. America is bankrolling its own enemies by flowing excess funds to unstable oil-producing nations whose leaders and/or citizens are literally rewarded for their increasing hostility to the United States.

I have written earlier that the flow of excess oil funds into the Islamic world is in fact the primary stimulus for Islamic extremism and jihadism. When too much comes your way too easily, it is destabilizing, rather than opportunity-producing.

Those who have little or no experience of the generations of hard and exhausting work required to bring about free market growth have correspondingly little appreciation for the rewards of the free market system, including freedom itself. So the funds of the formerly free are being transferred at a rapid rate to many who do not know, appreciate or respect the hard-won prizes of social liberty or economic freedom, and this is much to our detriment.

Lastly, what of our own moral fibre in the present environment?

As has often been noted, philosophers throughout history, from as long ago as Plato’s time and before, have bemoaned the deteriorating moral standards of their youth.

Does this mean that young people in Plato’s time were no different that those in our time? Perhaps. But this begs the question, have kids always been the same in all ages?

I don't think so.

Let me posit an alternative explanation. Excess liquidity has preceded if not engendered the fall of virtually every human civilization throughout history, and as excess liquidity has weakened the fibre of the citizens of every empire, it has played a key role in the behaviour and the personal and moral standards of citizens in every generation.

(For more on this historical perspective, read Marc Faber’s Tomorrow’s Gold or Bill Bonner’s Empire of Debt.)

Let me assert that in times of monetary restraint in free market economies, the general population grows inclined towards actions that are responsible and respectful towards their fellow citizens – for in these times, the citizens of all nations require their fellow citizens to survive and prosper against ever-present adversity for the commonweal. And in such times when citizens are better behaved, their children are better behaved as well.

When monetary easing makes the flow of monetary liquidity excessive, and therefore too easy, our personal standards deteriorate. While this trend is perhaps most visible in our children – recognition of these moral changes is of greatest import for ourselves.

To return to my original example. You are again the parent (or perhaps the chairman of the Federal Reserve Board). Your child wants a shiny new bicycle (your voters – citizens and corporations – pressure you in every imaginable way for tax breaks and monetary easing). You do… what?

As you can see, the choice remains ours – to say no to easy money, and to its inevitable results: excess liquidity, excess debt accumulation, capital misallocation, ultimate economic decay and/or collapse, and, above all, inevitable associated moral compromise and decline.

Strong nations are built upon monetary discipline. Those who weaken their monetary foundations imperil the survival of their culture and civilization itself.

(Thanks are extended to the many public domain sources who have provided the charts utilized for this article.)

Iraq: You can't win when nobody is on your side

24 April 2007

Let's get back to basics on Iraq.

The Sunnis are against us. The Shiites are against us.

It is not possible to win a foreign war of hearts and minds when essentially nobody is on our side.

Only wars of conquest can be won without allies, and such victories are short-lived. Further, the American aim in the Iraq conflict was not to conquer, but to set people free. Unfortunately, for a variety of reasons, including a succession of disastrous strategic errors, this has not happened.

I think that the West had much to offer to the people of Iraq. We were not there to steal or even to secure the oil, but this has been misunderstood. Unfortunately, the people of Iraq don't appear to have seen things this way, and certainly not Mr. Bush's way.

We have not communicated well with the Iraqis, and it has cost us their support - on virtually all sides.

History teaches us that it is unwise to wage unwinnable wars. Such ventures tend to be associated with declining empires. Good intentions do not secure the peace. Allies do. Our primary failure has been that few real allies have been secured, whereas many new and bitter generational enemies have been created.

WIthout allies, we cannot win the peace. With the daily increase of our enemies, what can we do - particularly with military tools - that can possibly be effective?

Let us learn to put our efforts into cooperative ventures with those who desire our partnership.

Greg Mortenson is building schools in the autonomous mountain regions of Pakistan and Afghanistan. What he is doing works.

Let's put the kind of resources into Mr. Mortenson's work that have been expended on the Iraq War. Mr. Mortenson is creating allies by the thousands while the Iraq War is creating enemies by the thousands.

Redirecting our resources to the work of those who build relationships, such as Mr. Mortenson, is the kind of international investment that makes sense.

Winding down the ghastly military-industrial complex also makes sense. Here, I am not referring to the courageous soldiers and support personnel, who have sacrificed their lives for a noble cause, but to those who profit by promoting war when peace-building alternatives exist and remain unexplored.

Let's get better at the business of building relationships and alliances. Let's use guns less and friendship more. Let us learn to take on missions in which peace-based constructive alliances assure our success.

Let us abandon missions where our use of destructive military technologies assures that our enemies will increase and our allies will vanish.

It is time to leave Iraq to the Iraqis, and to aid the Pakistanis and the Afghans in building schools.

More about Greg Mortenson later.

Note (30 August 2008): A combination of the US troop surge and disastrous tactics on the part of Iraqi insurgents seem now to have turned the tide in the Iraq War in favour of stabilization. I admit that I was unprepared for this turn of events, but it is very pleasing now to report that my earlier pessimism appears to have been incompletely founded. Thanks to Michael Yon for being one of the first to report the favourable news - independently - from the front lines!
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