Tinchos' market letter - All Comments

re: My two cents on Free Banking: Why Austrians fail at pitching it and how it could be fixed

Tincho Sibileau — Thu, 19 Nov 2009 13:42:48 GMT

Hugolp: Thanks. I will check Rothbard's book.

The transition to free banking is not a repudiation of FRNs and it would not affect China the way you mention. As loans mature and banks can no longer relend but at a 100% reserve (no leverage), the clearinghouse would exchange the notes for gold. It would be very gradual, taking at least 20 years, for a lot of pension assets in credit are long duration.

The impact on gold would not be too big either. The US govt. would tax US citizens in the new gold-backed currency. And that convertible currency would be accepted, of course, by a happy China, to cancel outstanding Treasuries in their Central Bank. Interestingly enough, China's reserves would actually also end up being backed by gold.

re: My two cents on Free Banking: Why Austrians fail at pitching it and how it could be fixed

hugolp — Thu, 19 Nov 2009 12:48:55 GMT

As for the clearing house issue you may want to check the Suffolk Bank, a clearing house tha operated in the first half of the XIX century. You can find the its history at Murray Rothbard "History of money and banking in the USA ..." by Murray Rothbard, starting at page 115.

As for China, it would be the perfect move for the USA, as it would de facto repudiate all the debt. In reality the USA owns China FRN. If FRN go worthless, then repaying the debt is very easy.

re: My two cents on Free Banking: Why Austrians fail at pitching it and how it could be fixed

Robert Koller — Wed, 18 Nov 2009 22:44:03 GMT

Hi I saw a similar idea as you mention in point one at the CFA Institute, although I guess it is a step below your level: www.cfapubs.org/.../faj.v65.n6.7

re: A View from the Trenches, November 17th, 2009: "The Ponzi way"

Tincho Sibileau — Tue, 17 Nov 2009 19:00:00 GMT

Please, note that I was not referring to the debt management of the US Treasury. Here, we are talking about capital of the US financial system. The scheme is a bit more complex and way more dangerous, because it is affecting the private sector more directly.

The Treasury issued debt to inject capital to banks. The capital was deposited in the Reserves account. Now part of those reserves are used to write a check that pays for a premium to buy insurance from the Treasury, which if it ever has to honor it, it will have to issue more debt!

On top of it, loans are made by the banking system, that uses that capital to leverage their investments.

One thing is to know fiscal deficits are unsustainable. You can manage it by cutting costs or raising taxes. Those who still lend to the govt. know what they are getting into.

Another is to infect the whole economic system with leverage that is printed out of nowhere. Those who deposit their monies in US banks or lend to US banks do not necessarily know what they are getting into, nor can they do anything about it (capital ratios are nowadays imposed by Basel II, arbitrarily).

If you think gold is the solution...then you must buy physical gold and store it under your matress. Because there is no reason gold certificates will not be confiscated too...

re: A View from the Trenches, November 17th, 2009: "The Ponzi way"

DD5 — Tue, 17 Nov 2009 15:38:56 GMT

US government debt, to my knowledge, has always been handled in this way. Hasn’t it? There has not been a budget surplus in decades, so effectively, all debt is repaid with more debt. It's a Ponzi scheme from start to finish.

re: A View from the Trenches, October 29th, 2009: "What are we correcting?"

Adam Knott — Thu, 29 Oct 2009 03:13:56 GMT

Thanks for the great quote from Mises.

re: A View from theTrenches, August 31st, 2009: What keeps the rally going?

Tincho Sibileau — Tue, 01 Sep 2009 01:56:25 GMT

Bogart, I agree with you. However, something entirely new is happening these days, something that not even Ludwig Von Mises in his "Human Action" ever imagined: Central banks are coordinating their money supply rates. I am shortly going to fully elaborate on this. For the time being, think of the Walrasian method. If you're familiar with it, you will know that it is an undetermined system, with relative prices only and without a medium of exchange. Although as Mises well pointed it out, this method is flawed, it fits very well the foreign exchange markets (cross rates), where exchange rates are only determined in relative terms. If central banks get away with leaving the system UNDETERMINED, they will avoid a financial collapse. To leave the system undertermined, they need to exterminate any chance of a common denominator (for instance, the price of gold) out of the equation, which implies that they need to succeed in subsidizing their respective fiscal deficits. This is what Canada and China are doing for the US, for instance. And this is what France did not for England, in the 1930's.

re: A View from theTrenches, August 31st, 2009: What keeps the rally going?

Bogart — Tue, 01 Sep 2009 01:29:45 GMT

As long as the government/central bank continues to give money away and mess with pricing system of future purchases, then there will be booms and busts in the financial markets as investors, capital seekers and speculators get incorrect signals about the value of future production.

What is really bad about this is that the clowns running the central bank really believe that by giving capital seekers an incentive to engage in longer term project that this is good for the economy.

re: A View from theTrenches, August 31st, 2009: What keeps the rally going?

Tincho Sibileau — Mon, 31 Aug 2009 17:13:49 GMT

Markets are absolutely driven by political economy, through incremental government intervention. This creates volatility that is not related to the general productivity of economies, but to the vicisitudes of politicians. Along the same line, liquidity is totally dependent on central banks' intervention. Therefore, investments should be placed on highly liquid instruments, to be able to exit as soon as things (political) go bad. As you might have read from my blogs, I am constructive of the markets, at least in the short term, as the non-neutral effect of money expansion (an Austrian concept), has not fully unfolded. Therefore, long index investing, both in credit and equities, should make sense. I don't like commodities, particularly gold, and do not feel there is a good rationale for sovereign risk (i.e. Treasuries).

re: A View from theTrenches, August 31st, 2009: What keeps the rally going?

Jonathan M. F. Catalán — Mon, 31 Aug 2009 05:22:54 GMT

I've been following your blog posts for quite a while. I have a friend who received a fairly large inheritance from his deceased father. He put an undisclosed (I don't know the amount; although, I know that it's relatively large) amount of money in the stockmarket, and of course he has made a large sum of it back. He is not an Austrian, so he does not share my opinions on inflation and the business cycle, but he does listen to me (he is also a graduate in economics and mathematics).

I'm afraid that he may lose a lot of the money he has invested. What would you suggest me to tell him? I'm aware that this might come off as a stupid question. :P