Why a Debt Default Would Be Wonderful

Why a Debt Default Would Be Wonderful

by Tom Mullen

Recently by Tom Mullen: Can Ron Paul Really Be Right About Everything?

 

   

While it is likely that the two parties in Congress will reach a deal before the August 2 deadline, I can’t help reflecting on how wonderful it would be if they didn’t. While Congressman Ron Paul has correctly pointed out that the government has already defaulted at least three different times in its history, and continues to default every time it prints new money, it is not quite the same as an “on-the-books” failure to make a timely payment. That is exactly what America needs.

Politicians, mainstream economists, and the media tell us that a U.S. government debt default would be catastrophic. Treasury bonds would be downgraded, interest rates would soar, and the massive government spending that has supposedly fueled the present (jobless) recovery would be severely curtailed, plunging the U.S. and possibly the world back into a deep recession.

Perhaps that is true. However, a debt default by the federal government would still be a blessing to American society for several reasons.

First, one must remember that all government spending represents a redistribution of wealth (what we regular folks call “stealing”). The government forcibly confiscates money from those who have earned it and spends it for the benefit of someone else. The most insidious way that the government does this is by borrowing. When it borrows, it is confiscating money from people in the future – some of whom are not even born yet – to hand out to their special interest supporters today. To the extent that it would prevent or decrease this, a default would result in a more just society.

However, even if one doesn’t care about justice or property rights, a default would help correct the very malinvestment that has caused the crisis in the first place. As I’ve said before, the entire U.S. economy is really one, huge bubble of misallocated resources, caused by at least a century of government intervention. Most people recognize that the government’s backing of mortgages, together with monetary inflation by the Federal Reserve, were the primary causes of the housing bubble. However, most people fail to recognize this same dynamic in almost every sector of the economy.

The government also backs student loans for people to go to college. Just like it did to the housing industry, this has inflated the price of higher education far beyond what could be supported by real demand. That in turn has led to the creation of millions of jobs in the education sector that only exist because the government redistributes wealth to back those loans. When the government funds are no longer there, the price of education will plummet, just as housing prices did. All of those people will be out of work.

Healthcare is another sector with all of the same intervention-related problems. Government subsidy creates artificial demand, inflating the price and driving the misallocation of resources to the healthcare sector. The industry is not forced to innovate in terms of delivering its services in more efficient ways because the customers are forced to buy its products (if you doubt this, just withhold the Medicare portion of your payroll taxes and see what happens). This also directs employees into the healthcare sector that would not be supported by natural market forces. When the government can no longer subsidize it, the bubble will pop, just like housing and education. Again, massive unemployment for misallocated human resources.

Banking, research, agriculture, energy, automobile manufacturing – there is not one sector that anyone can name where government is not overriding the voluntary transactions that market participants would otherwise engage in. Wherever the government is spending taxpayer money, it is overriding the choice that the taxpayer would have made if he had been allowed to keep his money and spend it as he pleased. As F.A. Hayek pointed out in The Road to Serfdom, the government has never and can never make better choices than millions of market participants acting in their own self-interest. They simply lack the information necessary to do so.

So, wherever the government is spending money to try to boost some aggregate statistic, it is making the problem bigger, not smaller. If government spending is creating jobs, they are not real jobs. A real job is a voluntary contract between a buyer of services (an employer) and a seller of services (an employee). If that job is created because of government spending, then a third party is introduced into the transaction who is not acting voluntarily. Government-created jobs force taxpayers to purchase services from employees because it is not profitable for the employers in that sector to purchase them. Forcing taxpayers to purchase them doesn’t make those jobs any more profitable. It just depletes the capital available to create profitable jobs elsewhere.

The prospect of perhaps tens of millions more people unemployed may seem frightening, but that day is coming regardless of what politicians do in Washington. Economic laws are like the laws of nature. They will assert themselves in the end. Any job that requires the government to borrow more money to subsidize it is also a job that depends upon the lenders continuing to lend. As we have seen in recent Treasury bond auctions, those days are coming to an end. Raising the statutory debt ceiling only allows more phony jobs to be created, setting up more employees for the painful correction.

However, the most important reason that a debt default will be beneficial is a philosophic one. It will force a complete paradigm shift in the way Americans think about the role of government. For at least a century, there has been no area of life that some special interest has not appealed to government to manage or subsidize. From the way we conduct commerce to the way we make personal decisions on food or healthcare to the way we coexist with our neighbors in other countries, nothing has been off limits. Complacency about our liberty has been one reason. The other has been the perception of infinite financial resources. The great wealth that the United States generated in its freest period provided a tax base and borrowing collateral that has always been perceived as unlimited. A debt default would shatter that foolish perception.

The default would be a bucket of cold water in the faces of a drowsy and compliant populace. It would wake people up to the reality that Thomas Paine was aware of over 200 years ago, when he wrote that government “is at best, a necessary evil.” People would realize that the government doesn’t “have our back,” other than to stick a gun in it to loot our liberty and wealth. We would no longer hear that horrid refrain from media pundits after some new government incursion or heist: “Well, the government had to do something.” Instead, we would hear the resigned chorus, “Well, the government couldn’t do anything.” And perhaps, in some glorious, enlightened future, “The government shouldn’t do anything.”

Reprinted with permission from Tom Mullen's blog.

July 30, 2011

Tom Mullen [send him mail] is a writer, musician, and business consultant. In January 2009, he published his first book, A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. Visit his website.

Copyright © 2011 Tom Mullen

 
 
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Published in: on July 31, 2011 at 1:18 pm  Leave a Comment  

What is a dollar?

 
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Published in: on July 31, 2011 at 1:05 pm  Leave a Comment  

TIP OF THE WEEK – Read the “Mystery of Banking” if you plan to invest

Read Rothbard's The Mystery of Banking
Jason Brizic
July 29th, 2011
 
You must read Murray Rothbard's The Mystery of Banking if you are going to invest your hard earned capital in markets tossed around by the Federal Reserve.  Gary North explains below.  You will never read a Wall Street Journal the same again after reading this book.  The is part of taking the "red pill" of Austrian economics.  Ignore it at your own financial peril.
 
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My 1995 Foreword to Rothbard's The Mystery of Banking
Gary Noirth

July 29, 2011

In 1995, I turned over the publishing rights to Murray Rothbard's 1983 book, The Mystery of Banking, to the Mises Institute. I thought that the Institute would do a good job in promoting it. I was correct.

Now that the Mises Institute publishes it online for free, I know it will be widely read. But the new edition does not have my original Foreword. I thought you might like to read it.

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You have in your hands a unique academic treatise on money and banking, a book which combines erudition, clarity of expression, economic theory, monetary theory, economic history, and an appropriate dose of conspiracy theory. Anyone who attempts to explain the mystery of banking–a deliberately contrived mystery in many ways–apart from all of these aspects has not done justice to the topic. But, then again, this is an area in which justice has always been regarded as a liability. The moral account of central banking has been overdrawn since 1694: "insufficient funds."1

I am happy to see The Mystery of Banking back in print. I had negotiated with Dr. Rothbard in 1988 to re-publish it through my newsletter publishing company, but both of us got bogged down in other matters. I dithered. I am sure that the Mises Institute will do a much better job than I would have in getting the book into the hands of those who will be able to make good use of it.

I want you to know why I had intended to re-publish this book. It is the only money and banking textbook I have read which forthrightly identifies the process of central banking as both immoral and economically destructive. It identifies fractional reserve banking as a form of embezzlement. While Dr. Rothbard made the moral case against fractional reserve banking in his wonderful little book, What Has Government Done to Our Money? (1964), as far as I am aware, The Mystery of Banking was the first time that this moral insight was applied in a textbook on money and banking.

Perhaps it is unfair to the author to call this book a textbook. Textbooks are traditional expositions that have been carefully crafted to produce a near-paralytic boredom–"chloroform in print," as Mark Twain once categorized a particular religious treatise. Textbooks are written to sell to tens of thousands of students in college classes taught by professors of widely varying viewpoints.

Textbook manuscripts are screened by committees of conventional representatives of an academic guild. While a textbook may not be analogous to the traditional definition of a camel–a horse designed by a committee–it almost always resembles a taxidermist's version of a horse: lifeless and stuffed. The academically captive readers of a textbook, like the taxidermist's horse, can be easily identified through their glassy-eyed stare. Above all, a textbook must appear to be morally neutral. So, The Mystery of Banking is not really a textbook. It is a monograph.

Those of us who have ever had to sit through a conventional college class on money and banking have been the victims of what I regard—and Dr. Rothbard regards—as an immoral propaganda effort. Despite the rhetoric of value-free economics that is so common in economics classrooms, the reality is very different. By means of the seemingly innocuous analytical device known in money and banking classes as the T-account, the student is morally disarmed. The purchase of a debt instrument–generally a national government's debt instrument–by the central bank must be balanced in the T-account by a liability to the bank: a unit of money. It all looks so innocuous: a government's liability is offset by a bank's liability. It seems to be a mere technical transaction–one in which no moral issue is involved. But what seems to be the case is not the case, and no economist has been more forthright about this than Murray Rothbard.

The purchase of government debt by a central bank in a fractional reserve banking system is the basis of an unsuspected transfer of wealth that is inescapable in a world of monetary exchange. Through the purchase of debt by a bank, fiat money is injected into the economy. Wealth then moves to those market participants who gain early access to this newly created fiat money. Who loses? Those who gain access to this fiat money later in the process, after the market effects of the increase of money have rippled through the economy. In a period of price inflation, which is itself the product of prior monetary inflation, this wealth transfer severely penalizes those who trust the integrity–the language of morality again–of the government's currency and save it in the form of various monetary accounts. Meanwhile, the process benefits those who distrust the currency unit and who immediately buy goods and services before prices rise even further. Ultimately, as Ludwig von Mises showed, this process of central bank credit expansion ends in one of two ways: (1) the crack-up boom–the destruction of both monetary order and economic productivity in a wave of mass inflation–or (2) a deflationary contraction in which men, businesses, and banks go bankrupt when the expected increase of fiat money does not occur.

What the textbooks do not explain or even admit is this: the expansion of fiat money through the fractional reserve banking system launches the boom-bust business cycle—the process explained so well in chapter 20 of Mises's classic treatise, Human Action (1949). Dr. Rothbard applied Mises's theoretical insight to American economic history in his own classic but neglected monograph, America's Great Depression (1963). In The Mystery of Banking, he explains this process by employing traditional analytical categories and terminology.

There have been a few good books on the historical background of the Federal Reserve System. Elgin Groseclose's book, Fifty Years of Managed Money (1966), comes to mind. There have been a few good books on the moral foundations of specie-based money and the immorality of inflation. Groseclose's Money and Man (1961), an extension of Money: The Human Conflict (1935), comes to mind. But until The Mystery of Banking, there was no introduction to money and banking which explained the process by means of traditional textbook categories, and which also showed how theft by embezzlement is inherent in the fractional reserve banking process. I would not recommend that any student enroll in a money and banking course who has not read this book at least twice. Of course, had I thought that there was even the slightest chance that such students would heed my advice, I never would have relinquished the rights to re-publish this book.

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1. P.G.M. Dickson. The Financial Revolution in England: A Study in the Development of Public Credit, 1688–1756 (New York: St. Martin's, 1967); John Brewer, The Sinews of Power: War, Money and the English State, 1688–1783 (New York: Knopf, 1988).

2. The historian Paul Johnson rediscovered America's Great Depression and relied on it in his account of the origins of the Great Depression. See his widely acclaimed book, Modern Times (New York: Harper & Row, 1983), pp. 233–37. He was the first prominent historian to accept Rothbard's thesis.

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Published in: on July 29, 2011 at 7:05 pm  Leave a Comment  

AGNC reports 2nd quarter earnings. Warning: Dividend payout ratio over 100%.

 American Capital Agency Corp. reported 2nd quarter earnings today.  I will provide analysis tomorrow.  The dividend payout ratio is over 100% ($1.40 dividend / $1.36 net earnings).  That isn't good news.  I wouldn't buy this over-leveraged mortgage REIT.  Here are the highlights. 

(RTTNews) – American Capital Agency Corp. (AGNC: News ) reported net income for the second-quarter of $177.8 million or $1.36 per share, compared to $36.86 million or $1.23 million in the comparable quarter last year.

Net-interest income for the second quarter rose to $200.9 million from $33.2 million a year ago, while total other loss was $6.1 million, compared to a total other income of $7.7 million in the prior year quarter.

Further, the company's board of directors declared a second quarter dividend of $1.40 per share payable on July 27, 2011, to stockholders of record as of June 23, 2011.

 
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Published in: on July 27, 2011 at 2:17 pm  Leave a Comment  

Analysis of Safe Bulkers (SB) 2nd Quarter Results

Safe Bulkers (SB) reported 2nd quarter financial results on Thursday July 21st, 2011.  Their board of directors declared a continuation of the $0.15 quarterly dividend.

http://bit.ly/SB2Q2011report 

The dividend is payable on or about August 31st, 2011 to shareholders of record at the close of trading of Safe Bulkers common stock on the NYSE on August 24th, 2011. Safe Bulkers has paid a $0.15 quarterly dividend since it’s 2008 public offering.  They haven’t established themselves as dividend growers, but the dividend yield of 8.3% is tremendous ($0.60 annual dividend / $7.21 share price).

Safe Bulkers dividend is still safe even in this horrible drybulk shipping market brought on by the global recession created by Keynesian central bank monetary expansion.  SB earned $0.27 per share this quarter and paid a $0.15 dividend.  The dividend payout ratio rose to 55.5% from 38.7% in 2010.  I don’t like to see the dividend payout ratio to rise unless the dividend is increased.  But this increase in the dividend payout wouldn’t worry me until it approaches 90%.  SB paid the same $0.60 annual dividend while earning an adjusted $1.55 in 2010.  The company conducted a 5 million share equity offering since 2010, so the $1.73 2010 EPS needed to be adjusted downward.

This year’s annual earnings are on pace to be the lowest in the history of the company.  Safe Bulkers has earned an average of $1.90 per share over the past five years (adjusted for changes in capitalization due to share increases).  SB earned $0.41 in the first quarter of 2011.  It earned $0.27 this quarter.  Some faceless, nameless analysts expected earnings of $0.37 per share according to Reuters financial website.  Therefore, the financial press considered this quarter a earnings miss.  Let’s assume that SB only earns 90% of it’s 2nd quarter earnings in the 3rd and 4th quarters.    With these conservative assumptions the company would earn $1.16 per share.  This would bring the six year average EPS (adjusted) down to $1.84.  Safe Bulkers remains an extreme value stock trading at 3.92 average earnings including my hypothetical earnings estimates for the remainder of the year.  Consider buying SB below $22.08 per share (12 times average adjusted earnings).  Consider selling SB above $36.80 (20 times average adjusted earnings).  This high dividend stock is so cheap compared to other stocks!!

Coca-Cola (KO) trades at around 26 times average earnings.
Pfizer (PFE) trades at around 18.2 times average earnings.
Proctor & Gamble (PG) trades at around 16 times average earnings.

Safe Bulkers has 16 ships in it’s operational fleet.  The fleet’s average age is 4.4 years.  There are another 11 that will be added to the fleet over the next three years.  The company’s average time charter equivalent (TCE) rate (think of as revenue per ship per day) was $27,921 in this quarter.  Estimated 2011 revenue = 16 ships x 361 operational days (99%) x $28,000 TCE = $160 million.  Only 23% of the fleet is rented out on the abysmal spot dry bulk market characterized by the Baltic Dry Index.  So only a small portion of SB’s revenues are affected by the current market. Their fleet is contracted out at 59% in 2012 including the new ships joining the fleet.  If you are considering a purchase of Safe Bulkers, then you must monitor the Baltic Dry Index weekly (note: the BDI has taken a huge hit in the past three years due to the massive drop in the capesize rental prices.  Capesizes are the biggest ships.  SB owns very few of them, so the BDI can lose a larger percentage than SB’s TCE in the same amount of time.)

Balance sheet (improving slightly)
Shareholder equity increased by $65.6 million.  Nearly $40 million of the additional equity came from the equity offering.

Companies with current ratios above 2.0 and a quick ratio above 1.0 are usually financially sound.  They have enough current assets to cover their current liabilities more the twice over.  The quick ratio measures cash on hand divided by current liabilities.  SB’s current ratio dropped from 2.0 to 0.62 and their quick ratio dropped from 1.9 to 0.5.  The company’s current ratio and quick ratio decreased due to spending money on advances to shipyards building their new ships.  These ratios should increase back to excellent levels once the new ships start producing revenues.

Conclusion: Safe Bulkers earnings miss will create an opportunity for high dividend stock investors who have done there homework to buy this excellent company at a low price.

Disclosure: I don’t own Safe Bulkers, but I would like to.
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Published in: on July 25, 2011 at 12:45 pm  Leave a Comment  

Beware of Fake Gold Standards

Counterfeit Gold Standards

by Gary North

Recently by Gary North: Good News on Taxes

 
   

There is abundant evidence that a well designed, well managed, gold standard is better adapted than a monetary standard managed at the discretion of elite civil servants to maintain price stability and strong economic growth. ~ Ralph Benko

Mr. Benko supports the creation of a government-designed, government-run, and government-enforced gold standard. I do not. This is because there is abundant evidence that such a gold standard always turns into the central-bank fiat money standard that Keynesian economists and monetarist economists insist is the only possible way to maintain long-term economic growth. Fiat money is dishonest money.

Economists want dishonest money. So do politicians. So do central bankers. So do commercial bankers. If you want to know what honest money is, I have written a book on this. You can download it for free.

While I have no doubt that the jerry-rigged gold exchange standard that was cobbled together by government bureaucrats and central bankers at the Genoa conference of 1922 was better than Richard Nixon’s fiat money monstrosity that has plagued the world for 39 years and 11 months, it was a pseudo-gold standard from the beginning. It was not a full gold-coin standard under which anyone could exchange a nation’s currency at a fixed rate for gold coins of a fixed weight and fineness.

The full gold-coin standard that prevailed in the second half of the nineteenth century was itself a doomed experiment. It turned into the fiat money standard (1914), which became the gold exchange standard (1922), which became the Bretton Woods standard (1944), which became today’s fiat money standard (1971). Why? Because the full gold-coin standard relied on government promises. “Yes, we guarantee that we will exchange our currency for gold. You can trust us.” It was not a 100% gold standard. It was a 100% trust your national government standard.

In August 1914, European governments that entered the war broke their monetary promises, confiscated the gold that was on deposit in commercial banks, turned this gold over to their respective central banks, which then inflated to fund World War I. It was the biggest bank heist in history. There was no resistance by the public.

The gold exchange standard of 1922 was Europe’s attempt to maintain the trappings of the pre-war gold coin standard, but without full redeemability. It was a central bankers’ gold standard among themselves. It was never intended to be a gold standard for the masses.

That was the problem. It was a gold standard for the elite of elites: the central bankers. It blocked out the secondary elite, namely, government civil servants.

DON’T TRUST, DO VERIFY

Ronald Reagan was famous for his slogan governing nuclear disarmament: “Trust, but verify.” When dealing with central bankers, it should be, “Don’t trust, do verify.” Central bankers are far less trustworthy than Soviet bureaucrats were at their most duplicitous. They have outlasted the Soviet bureaucrats. They got a free ride until Ron Paul’s 32 years of warnings finally gained traction during the central bank-created financial crisis of 2008.

Any time that you see someone in an Establishment media outlet suggest that we need a return to a gold standard, look carefully at the details of his proposition. Does it involve the reintroduction of gold coins by the national mint? If there is legally guaranteed rate of exchange between the national currency and these gold coins, meaning full redeemability? Can anyone go to his local bank and exchange money in his bank account for gold coins? That would get us back to 1914.

Yet even that gold standard would be fake. Why? Because no one is being charged for a service: storing the gold coins. Any time you find a valuable service being offered for free by any bank, you can be sure that there is a ringer somewhere in the arrangement. The bank is luring you into a deal by means of a promise that cannot be met under all circumstances. In this case, it is free gold coin storage. Somewhere in the bank’s operations there is a liability against the gold coins – a liability superior to any depositor’s claim.

In 1914 in Europe, this liability was to the central banks. The central banks in turn were under the authority of the governments. So, there were two sets of superior claims. A mere citizen, let alone a resident alien, did not have priority. The courts did not enforce his legal claim to full redeemability of the national currency.

The average citizen today has no understanding of either the logic or the operations of a gold coin standard. Neither does the average Ph.D. in economics. Certain topics are not explored in detail by economics departments. One is central banking. Another is the gold coin standard. Central banking is never discussed in terms of the economic logic of cartels, which are government-licensed operations against the public interest. The only textbook-level analysis of fractional reserve banking that does this is Murray Rothbard’s The Mystery of Banking (1983), which was not aimed at a college market, and which has not been adopted by colleges.

MUNDELL’S PSEUDO-GOLD STANDARD

Benko is a disciple of Nobel Prize-winning economist Robert Mundell. Mundell is an advocate of a pseudo-gold standard: central banks only. The peons – the likes of you and me – are not supposed to become a part of this Old Boy Network.

I have been reading Mundell since the early 1970s. I recall speaking at a conference sponsored by the Committee for Monetary Research and Education in 1973 or 1974, where Mundell had spoken before I did, i.e., had read an academic paper to non-economists. In my speech, I described what I was being paid to deliver my lecture: “All the beer I can drink, plus an English-language translation of Dr. Mundell’s lecture.” This got a laugh.

Benko cited Mundell verbatim . . . or so it seemed. This is one of Dr. Mundell’s more coherent statements. This was from an interview on Bloomberg television on May 25.

Pimm Fox: You’ve written about the role of gold in the world economy, Professor Mundell. Do you think that we’re going to see any kind of return to the gold standard?

Mundell: [T]here could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks.

The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So if you had not just the United States but the United States and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.

Benko skipped over Mundell’s crucial sentence, which preceded what Benko cited: “Nothing like the gold standard that existed before 1914. But there could be a kind of Bretton Wood type of. . . .” This was deliberate on Benko’s part. In academia, when you drop someone’s words, you are expected to add three periods, called ellipses. They look like this: “. . .” This lets the reader know that you have dropped something.

Benko did not deem it important that his readers see the crucial admission that Mundell made. Mundell has made this admission for 40 years: “Nothing like the gold standard that existed before 1914.” He got his Nobel Prize because of this admission. Nobody who has advocated or has even suggested the possibility of a return to the pre-1914 gold coin standard has ever won a Nobel Prize.

Benko waxed eloquent about Mundell.

Mundell is the world’s most distinguished living economist. He is a Nobel Economics Laureate. He was the primary source of the original supply-side manifesto, “The Mundell-Laffer Hypothesis,” which led to the low-tax-rate, strong-dollar policy at the heart of Reaganomics. He has acted as a privy counselor to the Chinese government (which in appreciation has named a university for him). Mundell’s guidance, of course, is one of the reasons why mainland China has had 30+ years of uninterrupted double-digit economic growth. Mundell’s work also laid the foundation for the common European currency, the euro.

First, James Buchanan is the most distinguished living Nobel laureate, if we are talking about free market economists.

Second, Mundell had nothing to do with the strong-dollar policy of the Reagan years. Paul Volcker did, beginning in the fall of 1979, when he took over as Federal Reserve Board Chairman, replacing the incomparably incompetent G. William Miller, who had lasted only 18 months, the shortest term on record. Volcker’s policy of tighter money caused the 1980 recession, which let Reagan win in November. He maintained that policy until Friday, August 13, 1982, when the Mexican government threatened to nationalize foreign banks. On Monday, August 16, the Federal Reserve started to inflate. Mundell had nothing to do with any of this.

Third, the Chinese central bank has had the most inflationary monetary policy of any major nation, inflating M2 at close to 20% per annum for at least a decade. The currency is in no way tied to gold.

Fourth, the euro is a disaster.

Benko is a well-meaning advocate of a fake gold standard. No one in the financial world pays any attention to him, any more than the world’s economists have ever paid any attention to Mundell’s call for a pseudo-gold standard.

The point of a gold standard is to limit central banks. It restricts their ability to inflate. It limits their authority over monetary policy. Central bankers do not want limitations on their authority. They are forced to accept some degree of government authority for brief periods during financial crises – crises that central bank policies have created – but they will never voluntarily surrender to the masses their authority over monetary manipulation, meaning central planning.

The entire economics profession, except for the Austrian School, believes in central banking and fractional reserve commercial banking. This means that economists favor a cartel. In universities, they assign a textbook with a chapter on cartels which argues that cartels are profit-seeking, government-licensed, oligopolies that act against the public interest. But textbooks never extend this analysis to central banks and commercial banks. I have said this before, but it bears repeating. Fractional reserve banking and central banking get a free ride from academic economists. They also get a free ride from financial journalists.

Economists call for their favorite pseudo-market, government-administered limitation on this or that aspect of banking. But they do not call for 100% reserve banking, as Rothbard did. They do not call for free banking, as Ludwig von Mises did.

Why not? Because they do not trust the free market to maintain a money supply limited only by mining expenses and voluntary contracts. They give lip service to free market competition, but not at the center of every economy, the money supply. Here, they want final government authority and central bank administrative authority. They believe in people with badges and guns as reliable central planners.

The gold coin standard removes final economic authority from people with badges and guns and turns it over to the masses.

GOLD IS THE HAMMER

In this life, there are nails and hammers. The battle over final economic authority is the battle over the monetary system, for money is the central institution in a division-of-labor economy. Thus, the battle is over who holds the hammer.

Bankers and politicians refuse to turn final authority over to the masses. The elite wishes to retain power over scarce resources. This can be accomplished only through their power over the money supply.

Gold is the ultimate hammer, because it has long been the favored money commodity. It cannot be easily counterfeited. It is expensive to mine. It is easily divisible. It has high value in relation to weight and volume. It is widely recognized. So, it has historic value – not intrinsic value, which no asset has, but historic value. It has easily predictable value.

Gold coins allow little people to hold the hammer. Through the market process, individuals exercise their choices. They determine market value through a system of auctions. The free market is a gigantic auction.

Gold coins keep the auction honest. No one can legally print money to gain influence in the auction. No one can easily counterfeit his way into great wealth, outbidding others.

Central bankers want to direct the auction. So do politicians. So do commercial bankers. All three elite groups have an incentive to keep gold coins out of the auction process. Gold coins keep the auction honest, and elites maintain their power through dishonesty – above all, dishonest money. They fear honest money.

Gold is described by ignorant journalists as the money of plutocrats. Fiat money Greenbackers like Ellen Brown agree. (On Ellen Brown’s fiat money utopianism, click here.) This reverses the truth. Fiat money is the money of the elites, the plutocrats of all ages. The gold coin standard is the economy of the masses.

Gold coins are mini-hammers. These coins, along with legal IOUs to coins, transfer enormous authority to the masses. The little guy with gold coins or IOUs to gold coins has a veto over the easy money, big-spending, power-centralizing schemes of the government’s central planners and their profit-seeking allies, the counterfeiters: fractional reserve banks.

CONCLUSION

There is chatter on the fringes of the Establishment about the reintroduction of a gold standard. The gold standard they promote is not the pre-World War I gold coin standard. That standard drastically reduced government power over money, but it was always a compromise with government power. The governments of Europe revoked that standard when the war began. They played around with a government-run, central bank-run version in 1922: the gold exchange standard. The final revocations of the gold coin standard took place in 1931, when England went off the gold coin standard, and 1933, when the United States did.

There are gold coins and counterfeit gold coins. Similarly, there are gold standards and counterfeit gold standards. When dealing with gold coins or theories of a gold standard, I suggest that you adopt a slogan from 1950s advertising: “Accept no substitutes!”

Here is the real thing: a free market standard without any government involvement – no mint, no central bank, no legal tender laws, no printing presses, no warehouse receipts, no “free” storage. Just this: laws against fraud and laws enforcing contracts. That system will produce a gold coin standard for large transactions and a silver coin standard for smaller ones. The users can decide what they want to use as money. The ruling elites will no longer be allowed to counterfeit, confiscate, or manipulate money.

When an economist who defends this system wins the Nobel Prize on the basis of his defense, we will know that our deliverance draweth nigh. If the prize is awarded in gold coins, we have entered the Golden Age.

July 23, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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Published in: on July 23, 2011 at 9:47 am  Leave a Comment  

TIP OF THE WEEK – Create a Stock Market Watchlist

Create a Stock Market Watchlist Using Morningstar.com
July 22, 2011
Jason Brizic
 
You can use Morningstar.com to create a watchlist for your stocks to buy near the next stock market panic.
 
After you've researched your first batch of companies (read my articles, the public filings, and visited company Web sites), it's time to set up a watch list. How do you do this? Fortunately, Morningstar offers these services for free:

1. Go to the Morningstar.com and click on the tab labeled "Portfolio."
2. In the Portfolio Manager window, under "Create a Portfolio," click "New Portfolio."
3. You'll see a box labeled "Step 1." It's automatically set up to build a watch list, so click "Continue."
4. Pick a name for your portfolio, or just call it "watch list." Then, plug in the ticker symbols of the companies you want to watch. Click "Done."
5. In the following window, you'll see a list of updates, alerts, and tips that Morningstar will send you daily for the companies in your watch list. Click "Done" again.
6. Now you have a watch list that you can visit anytime by clicking the Portfolio tab on Morningstar.com.

By creating a watch list, you'll be able to keep tabs on company news and easily find stock price information. Among other things, you can set alerts to notify you when a stock price has met or exceeded a particular threshold. Thus, your watch list will eventually become an integral tool in helping you make buy and sell decisions, stay organized, and keep informed.
 
Published in: on July 22, 2011 at 10:04 pm  Leave a Comment  

Safe Bulkers (SB) reports 2nd quarter 2011 financial results

Safe Bulkers (SB) announced its 2nd quarter 2011 financial results earlier today.  The earnings miss will probably drop the stock price a bit, but that is good news for those of us who want to buy below $7.00 per share.  The dividend is still safe.  I haven't examined the balance sheet yet for changes.
 
Here are the highlights from the beginning of the press release:

press release

July 21, 2011, 4:05 p.m. EDT

Safe Bulkers, Inc. Reports Second Quarter and First Half 2011 Results and Declares Quarterly Dividend

ATHENS, GREECE, Jul 21, 2011 (MARKETWIRE via COMTEX) — Safe Bulkers, Inc. (the "Company") /quotes/zigman/512899/quotes/nls/sb SB -1.18% , an international provider of marine drybulk transportation services, announced today its unaudited financial results for the three and six months periods ended June 30, 2011. The Company's Board of Directors also declared a quarterly dividend of $0.15 per share for the second quarter of 2011.

Summary of Second Quarter 2011 Results

 

— Net revenue for the second quarter of 2011 increased by 1% to $41.2 million from $40.6 million during the same period in 2010.
— Net income for the second quarter of 2011 decreased by 22% to $19.1million from $24.4 million during the same period in 2010. Adjusted net income(1) for the second quarter of 2011 decreased by 7% to $25.5 million from $27.4 million during the same period in 2010.
— EBITDA(2) for the second quarter of 2011 decreased by 14% to $25.5 million from $29.8 million during the same period in 2010. Adjusted EBITDA(1) for the second quarter of 2011 decreased by 3% to $31.9 million from $32.9 million during the same period in 2010.
— Earnings per share ("EPS") for the second quarter of 2011 of $0.27, calculated based on a weighted average number of shares of 70,116,022, compared to $0.37 in the second quarter of 2010, calculated based on a weighted average number of shares of 65,870,573. Adjusted EPS(1) for the second quarter of 2011 of $0.36, calculated based on a weighted average number of shares of 70,116,022, compared to $0.42 in the second quarter of 2010, calculated based on a weighted average number of shares of 65,870,573.
— The Company's Board of Directors declared a dividend of $0.15 per share for the second quarter of 2011.

You can read the full press release here: http://bit.ly/SB2Q2011report 

I will perform some analysis on these results soon, but nothing shocking is in the highlights.

 
Disclosure: I don't own Safe Bulkers, but I would like to purchase it below $7.00 per share.

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Published in: on July 22, 2011 at 12:09 am  Leave a Comment  

Should you buy, sell, or hold Terra Nitrogen (TNH) at today’s 52 week high?

Terra Nitrogen (TNH) hit a new 52 week high today of $157.00 per share.  This fertilizer company has skyrocketed since April 2011.  I'll bet you're wondering if you should you buy, sell, or hold TNH shares at $157.00?  You should hold them if you own them because TNH is only trading at 15.7 times the company's five year average adjusted earnings of $9.97 per share.  Sit back and collect the dividend until the shares climb to 20 times average earnings which would be $199.40 per share.
 
 
Terra Nitrogen is not a high dividend stock right now due to the huge stock price advance since July 2010.  The company is paying a $1.36 quarterly dividend per share.  There was a special dividend last quarter that is confusing all the online dividend yield calculations.  The dividend yield is closer to 3.4% when the special dividend is removed.  That is still a good dividend compared to the pathetic S&P 500 average of around 2%.
 
If you don't own Terra Nitrogen, then consider buying it when it drops back to the $90 – $119 range.  The stock would be trading at 12 times its five year average earnings when the price is at $119.  At $90 TNH would sport a dividend yield of 6% if it keeps its $1.36 quarterly dividend in place.  The dividend is fairly safe.  In the 1st quarter of 2011 TNH earned $3.60 per share and paid out $1.36 in dividends.  That is a low 37.7% dividend payout ratio.  Let's look at this even more cautiously: assume for a moment that the company only earns its five year average in earnings – $9.97 per share.  The dividend payout ratio at the end of 2011 would only climb to 54.5% ($5.44 annual dividend / $9.97 average annual earnings).
 
Terra Nitrogen has a strong balance sheet.  It has $252.1 million in current assets (most of that is cash and cash equivalents) and only $55.5 million in current liabilities.
 

CONSOLIDATED BALANCE SHEETS

March 31, December 31,
2011 2010
(in millions, except for units)
ASSETS
Current assets:
Cash and cash equivalents $ 221.7 $ 124.8
Demand deposits with affiliate 10.7 6.1
Accounts receivable, net 1.2

33.4
Inventories, net 16.7 27.6
Prepaid expenses and other current assets 1.8 1.2
Total current assets 252.1 193.1
Property, plant and equipment, net 82.6 83.2
Plant turnaround, net 11.9 13.4
Other assets 6.8 7.0
Total assets $ 353.4 $ 296.7
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 22.0 $ 24.3
Customer advances 33.1 61.2
Other current liabilities 0.4 0.8
Total current liabilities 55.5 86.3
Noncurrent liabilities 0.7 0.4
Partners' capital:
Limited partners' interests, 18,501,576 Common Units
authorized, issued and outstanding 250.0 208.5
Limited partners' interests, 184,072 Class B Common Units
authorized, issued and outstanding 1.4 0.6
General partners' interest 45.8 0.9
Total partners' capital 297.2 210.0
Total liabilities and partners' capital $ 353.4 $ 296.7
 
To read the other articles I've written on Terra Nitrogen click here: http://www.myhighdividendstocks.com/category/high-dividend-stocks/terra-nitrogen
 
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Published in: on July 21, 2011 at 12:44 am  Leave a Comment  

Safe Bulkers (SB) edges closer to a value buy opportunity

The Baltic Dry Index tracks the spot market dry bulk shipping rental rates.  The BDI has barely recovered from its January 2011 bottom.

http://bloom.bg/BDI_moves_lower

Traders/investors use the BDI as a barometer of global trade.  A lower BDI equates to a double dip recession in their minds.  Further erosion of the spot market will cause investors to sell dry bulk shipping stocks.  This will provide an opportunity to buy high dividend stocks like Safe Bulkers (SB) at a lower price.

Image003

http://bit.ly/BDI2yearChart

Consider buying Safe Bulkers at or below $7.00.  Most of Safe Bulkers 16 ships are not contracted in the spot market.  They are in long term contracts between $20,000 and $30,000 per day.

Image005

http://bit.ly/SB2yearChart

Please follow this link if you want to read my analysis in support of Safe Bulkers as a best dividend stock: http://bit.ly/SafeBulkers  Those articles cover its dividend record, earnings power, and its balance sheet.

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Published in: on July 19, 2011 at 2:20 pm  Leave a Comment