My High Dividend Stocks Blog http://myhighdividendstocks.posterous.com Most recent posts at My High Dividend Stocks Blog posterous.com Thu, 10 Feb 2011 15:22:43 -0800 How the Fed Fuels Unemployment. http://myhighdividendstocks.posterous.com/how-the-fed-fuels-unemployment http://myhighdividendstocks.posterous.com/how-the-fed-fuels-unemployment

Read this excellent, short article on how the Federal Reserve policies fuel unemployment past and present.  A basic understanding of Austrian economics can save you thousands of dollars by preventing you from being hoodwinked by the Fed and its shills in the financial press organizations (CNBC, Wall Street Journal, etc).

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How the Fed Fuels Unemployment

by Thomas J. DiLorenzo
by Thomas J. DiLorenzo
Recently by Thomas DiLorenzo: Another Court Historian’s False Tariff History

Testimony of Dr. Thomas DiLorenzo
Professor of Economics, Loyola University Maryland
Committee on Financial Services, Subcommittee on Domestic Monetary Policy and Technology
Wednesday, February 9, 2011
2128 Rayburn House Office Building

Mr. Chairman and members of the committee, I thank you for the opportunity to address the issue of today’s hearing: "Can Monetary Policy Really Create Jobs?" Since I am an academic economist, you will not be surprised to learn that I believe that the correct answer to this question is: "yes and no." Monetary policy under the direction of the Federal Reserve has a history of creating and destroying jobs. The reason for this is that the Fed, like all other central banks, has always been a generator of boom-and-bust cycles in the economy. Why this is so is explained in three classic treatises in economics: Theory of Money and Credit by Ludwig von Mises, and two treatises by Nobel laureate economist F.A. Hayek: Monetary Theory and the Trade Cycle and Prices and Production. Hayek was awarded the Nobel Prize in Economic Science in 1974 for this work. I will summarize the essence of this theory of the business cycle as plainly as I can.

When the Fed expands the money supply excessively it not only is prone to creating price inflation, but it also sows the seeds of recession or depression by artificially lowering interest rates, which can ignite a false or unsustainable "boom" period. Lower interest rates induce people to consume more and save less. But increased savings and the subsequent business investment that it finances is what fuels economic growth and job creation.

Lowered interest rates and wider availability of credit caused by the Fed’s expansionary monetary policy causes businesses to invest more in (mostly long-term) capital projects (primarily real estate in the latest boom-and-bust cycle), and there is an accompanying expansion of employment in those industries. But since the lower interest rates are caused by the Fed’s expansion of the money supply and not an increase in savings by the public (i.e., by the free market), businesses that have invested in long-term capital projects eventually discover that there is not enough consumer demand to justify their investments. (The reduced savings in the past means consumer demand is weaker in the future). This is when the "bust" occurs.

The economic damage done by the boom-and-bust policies of the Fed occur in the boom period when resources are misallocated in the ways described here. The "bust" period is actually a necessary cure for the economic miscalculations that have occurred, as businesses liquidate their unsound investments and begin to make decisions on realistic, market-based interest rates. Prices and wages must return to reality as well.

Government policies that bail out businesses that have made these bad investment decisions will only delay or prohibit economic recovery while encouraging more of such behavior in the future (the "moral hazard problem"). This is how short recessions can be turned into seemingly endless ones. Worse yet is for the Fed to create even more monetary inflation, rather than allowing the necessary economic adjustments to take place, which will eventually set off another boom-and-bust cycle.

As applied to today’s economic situation, it is obvious that the artificially low interest rates caused by the policies of the Greenspan Fed created an unsustainable boom in the housing market. Thousands of new jobs were in fact created – and then destroyed – giving an updated meaning to Joseph Schumpeter’s phrase "creative destruction." Many Americans who obtained jobs and pursued careers in housing construction and related industries realized that those jobs and careers were not sustainable after all; they were fooled by the Fed’s low interest rate policies. Thus, the Fed was not only responsible for causing the massive unemployment that we endure today, but also a great amount of what economists call "mismatch" unemployment. The skills that people in these industries developed were no longer in demand; they lost their jobs; and now they must retool and re-educate themselves.

The Fed has been generating boom-and-bust cycles from its inception in January of 1914. Total bank deposits more than doubled from 1914 to 1920 (partly because the Fed financed part of the American involvement in World War I) and created a false boom that turned to a bust with the Depression of 1920. GDP fell by 24% from 1920–1921, and the number of unemployed more than doubled, from 2.1 million to 4.9 million (See Richard Vedder and Lowell Galloway, Out of Work: Unemployment and Government in Twentieth-Century America). This was a more severe economic decline than was the first year of the Great Depression.

In America’s Great Depression economist Murray N. Rothbard demonstrated that, once again, it was the excessively expansionary monetary policy of the Fed – and of other central banks – that caused yet another boom-and-bust cycle that spawned the Great Depression. It was not the Fed’s subsequent restrictive monetary policy of 1929–1932 that was the problem, as Milton Friedman and others have argued, but its previous expansion. The Fed was therefore guilty of contributing greatly to the massive unemployment of the Great Depression.

In summary, the Fed’s monetary policies tend to create temporary and unsustainable increases in employment while being the very engine of recession and depression that creates a much greater degree of job destruction and unemployment.

February 10, 2011

Thomas J. DiLorenzo [send him mail] is professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe and How Capitalism Saved America. His latest book is Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution – And What It Means for America Today.

Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

The Best of Thomas DiLorenzo at LRC

Thomas DiLorenzo Archives at Mises.org

Here is the link to the original article: http://www.lewrockwell.com/dilorenzo/dilorenzo200.html

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Thu, 10 Feb 2011 12:20:31 -0800 Would you like to make 44% on your investment with no downside risk? Let me explain. http://myhighdividendstocks.posterous.com/would-you-like-to-make-44-on-your-investment http://myhighdividendstocks.posterous.com/would-you-like-to-make-44-on-your-investment

Would you like to make 44% on your investment with no downside risk?  No, I’m not talking about an extremely high dividend stock.  I’m talking about nickels.

The lowly five cent nickel in your spare change is actually worth 7.3 cents today due to the nickel and copper metal content.  That equates to 144% of face value (hence the 44% gain).  The US government is planning on changing the composition of the nickel to make its metal content less than five cents.  They are doing this because it costs those knuckleheads nine cents to mint a nickel coin.  The nickel remained unchanged since 1946.  The old copper pennies are worth nearly 300% of face value, but they comprise only about 15% of the penny population.  You have to spend time and effort to separate them from the zinc pennies.  Every nickel in that $2 roll is exactly the same.

Visit the website www.coinflation.com to see the current metal value of various American coins.  It even shows you the calculation for the curious members of our readers.

I ask for nickel rolls whenever I break a $5 or $10 bill.  Most young cashiers will immediately fork over one or two rolls.  I accumulate about $20 nickels each month without going out of my way to acquire them.

I recommend that you accumulate a couple hundred dollars in these coins as part of your emergency cash savings.  They can easily be converted back into cash at a bank if you keep them in their paper rolls in the event you need to use the emergency money.  Otherwise, just let them sit there and hedge against inflation as the Federal Reserve inflates the money supply like crazy.  If a deflation occurs, then they will never fall below their face value.  There is no risk.  What are you waiting for?  Take two dollars out your pocket and ask a cashier at the grocery store or the bank inside Wal-Mart for a roll of nickels.

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The Nitty Gritty on Nickels

James Wesley, Rawles

As I've mentioned before in SurvivalBlog, U.S. Five cent pieces ("Nickels") should be considered a long-term hedge on inflation. I recently had a gent e-mail me, asking how he could eventually “cash in” on his cache of Nickels. He asked: "Are we to melt them down, or sell them to a collector? How does one obtain their true 7.4 cents [base metal content] value?" My response: Don't expect to cash in for several years. I anticipate that there won't be a large scale speculative market in Nickels until their base metal value ("melt value") exceeds twice their face value ("2X Face"), or perhaps 3X face.

Once the price of Nickels hits 4X face value, speculators will probably be willing to pay for shipping. By the way, I also predict that it will be then that the ubiquitous Priority Mail Flat Rate Box will come into play, with dealers mailing Nickels in $300 face value increments. The U.S. Postal Service may someday regret their decision to transition to "Flat Rate" boxes for Priority Mail with a 70 pound limit.

Once the price of Nickels hits 5X face there will surely be published "bid/ask" quotations for $100, $300, and $500 face value quantities, just as has been the norm for pre-1965 U.S. 90% silver coinage since the early 1970s. (Those coins are typically sold in a $1,000 face value Bag (weighing about $55 pounds), or a "Half bag" (containing $500 face value.) Soon after the current Nickels are dropped from circulation, we will see $300 face value boxes of Nickels put up for competitive bidding, on eBay.

An Aside: Nickel Logistics

Nickels are heavy! Storing and transporting them can be a challenge.

I've done some tests:

$300 face value (150 rolls @$2 face value per roll) fit easily fit in a standard U.S. Postal Service Medium Flat Rate Box, and that weighs about 68 pounds.) They can be mailed from coast to coast for less than $25. Doing so will take a bit of reinforcement. Given enough wraps of strapping tape, a corrugated box will securely transport $300 worth of Nickels.

The standard USGI .30 caliber ammo can works perfectly for storing rolls of Nickels at home. Each can will hold $180 face value (90 rolls of $2 each) of Nickels. The larger .50 caliber cans also work, but when full of coins they are too heavy to carry easily.

Legalities

Since late 2006 it has been illegal in the U.S. to melt or to export Pennies or Nickels. But it is reasonable to assume that this restriction will be dropped after these coins have been purged from circulation. They will soon be replaced with either silver-flashed zinc slugs, or tokens stamped out of stainless steel. (The planned composition has not yet been announced.)

By 2015, when the new pseudo-Nickels are in full circulation, we will look back fondly on the days when we could walk up to our local bank teller and ask for "$20 in Nickels in Rolls", and have genuine Nickels cheerfully handed to us, at their face value.

Death, Taxes, and Inflation

It has been said that "the only two things that are certain in life are death and taxes." I'd like to nominate "inflation" as an addition to that phrase. For the past 100 years, we've been gradually robbed of our purchasing power through the hidden form of taxation called inflation. Currency inflation explains why gold coins and silver coins had to be dropped by the U.S. Mint in the 1930s and 1960s, respectively. Ditto for 100% copper Pennies, back in 1981. (The ones that have been produced since then are copper-flashed zinc slugs, but even the base metal value of those is now slightly greater than their face value.)

Inflation marches on and on. Inflation will inevitably be the impetus for a change in the composition of the lowly Nickel. Each Nickel presently has about 7.3 cents in base metal ("melt") value, and they cost the Mint more than 9 cents each to make. You don't need a doctorate in Economics to conclude that the U.S. Mint cannot continue minting Nickels that are 75% copper and 25% nickel--at least not much longer.

Without Later Regrets

Don't miss out on the opportunity to hedge on inflation with Nickels. Just like the folks who failed to acquire silver dimes and quarters in the early 1960s, you will kick yourself if you fail to stock up on Nickels. Do so before they are debased and the older issue is quickly snatched out of circulation. The handwriting is on the wall, folks. Stop dawdling, and go to the bank and trade some of your paper FRNs for something tangible.

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Tue, 08 Feb 2011 09:52:28 -0800 QE2 and Its Effects: Treasury Bond Rates Rise http://myhighdividendstocks.posterous.com/qe2-and-its-effects-treasury-bond-rates-rise http://myhighdividendstocks.posterous.com/qe2-and-its-effects-treasury-bond-rates-rise

Treasury bond rates are rising.  The graph below clearly indicates this.  The bond investors do not believe Federal Reserve chairman Ben Bernanke’s bullcrap.  That’s why rates are rising.  They are wising up.  Rising rate indicate that some bond investors are shuffling their feet quietly toward the exit.  There will be a panic at some point.  They all think they can get out of the burning building in time.  The burning building is the bond market.  Not all of them will.

On a related note, American Capital Agency Corp. (AGNC) reports 4Q2010 earnings this afternoon.  I’m curious to see how their net interest rate spread holds up.  Notice that short term rates have barely moved since the Federal Reserve started to implement QE2.  Check back later this afternoon for my blog on AGNC earnings.

QE2 and Its Effects: Treasury Bond Rates Rise

Gary North

Feb. 7, 2011

Here is what the Federal Open Market Committee announced on November 3, 2010.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm

Here is what has happened to bond rates since then.

Image001

  

Image003

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

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Wed, 26 Jan 2011 12:37:27 -0800 Don't Trust the Inflation Numbers http://myhighdividendstocks.posterous.com/dont-trust-the-inflation-numbers http://myhighdividendstocks.posterous.com/dont-trust-the-inflation-numbers

Don’t trust the government reported price inflation numbers otherwise known as the consumer price index (CPI).  The government’s Bureau of Labor Statistics under-reports the true price increases that we all experience as we buy food, shelter, energy, healthcare, entertainment, and transportation.  I wrote about this in greater detail in August of 2010:

http://bit.ly/riggedCPI

You might be asking yourself why would the BLS change their methodology for computing the CPI?  The reason is simple.  The two largest federal welfare programs: Social Insecurity and Medicare would go broke dozen of years earlier without the rigging of the CPI.  It is in every president’s and congress’ best personal best interest to delay the day of reckoning.  Rigging the CPI helps to kick the can.

The Federal Reserve and the monetary base

There will be massive price inflation caused by all the money that the Federal Reserve has created out-of-thin-air since late 2008.  The Wall Street Journal author does not understand the mechanics of money creation.  The Federal Reserve creates the money and buys assets (usually US government debt like they are doing now with QE2).  This expands the FED’s balance sheet and adds money to the monetary base.  Prices don’t go up until the monetary base gets transformed into money that actually goes into people’s bank accounts. 

The fractional-reserve banking process in a nutshell

The banks receive the freshly printed dollars or digital dollars in their accounts for the US government debts that they sold to the Federal Reserve.  The banks can then lend almost all of the money they received from the FED – OR – they can choose to not lend it.  They have chosen to lend very little of it.  They call the money above the legal reserve requirement the  “excess reserves”.  The banks are holding over a trillion dollars as excess reserves.  When banks lend they create new money.  For example, if the legal reserve requirement was set at 10% (it is much lower than this), then Bank A that received a $1,000 deposit from a customer would be allowed to lend $900 and would have to keep $100 as reserve.  The person who received the $900 loan from Bank A would deposit $900 into his checking account at Bank B until he was ready to spend the loan money.  Bank B could loan $810 to someone else while keeping $90 (10%) as legal reserves.  This is how money is created.  A $1,000 increase in the monetary base multiplies many times through this process.  The M1 money supply increases.  Prices increase.

If the banks lent that money in a manner like they did in 2006, then prices would roughly double in a relatively short time.  Keep this in mind as you read the WSJ article below.

Economy by Brett Arends (Author Archive)

Don't Trust the Inflation Numbers

A surprising number of people on Wall Street will tell you not to worry too much about inflation.

After all, they'll say, just look at the numbers. The inflation picture is incredibly benign. In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low rate. And when you strip out volatile food and energy costs, they'll say, it's even lower—a meager 0.8%.

It doesn't stop there. Many economists will point out that wages are also rising by less than 2% a year. With so many people still out of work, goes the line, labor costs are going to stay low for a long time too. So what's the worry?

Clearly, a lot of investors agree. Inflation-protected government bonds, which people would buy to protect themselves if they were worried, have fallen in price in the past couple of months. Gold, another inflation hedge, is down. Ten-year Treasury bonds yield less—3.3%—than they did when President Eisenhower left office.

It's crazy. There is plenty to worry about. As you battle to manage your family's finances, be aware that there are three reasons why inflation needs to be on your radar screen.

• First, the official inflation numbers should be taken with a fistful of salt.

Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It's taken place under presidents of both parties. Each change in methodology has come with plausible-sounding justifications. But, as if by magic, each change has had the effect of flattering the numbers. Funny, that.

According to one rogue economist, John Williams at Shadow Government Statistics , if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%.

Mr. Williams is just one voice. But it makes sense to treat the government numbers with skepticism.

Under the official calculations, if steak prices boom, the government just assumes you buy cheaper hamburger instead. Presto—no inflation!

Or consider the case of Apple ( AAPL: 344.46*, +3.06, +0.89% ) computers. We all know Macs are expensive. And we know Apple doesn't discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?

Ha. Not according Uncle Sam. Using a piece of chicanery called "hedonics," Uncle Sam calls this a price cut. His reasoning? You're getting more for the money. Today's $999 Mac is lighter, fancier and faster than last year's $999 Mac. So the government calculates that the "real" price has actually fallen.

How's that work in the real world? Try it. Go into your local Apple store and ask for 50% off thanks to hedonics. (If you do, please, please video the exchange and put in YouTube. We could all use a good laugh.)

Instead, the government is worrying about deflation, partly because of all the "cheap" MacBooks out there.

• The second reason to treat the official inflation figures with some mistrust is that they look backward. They register what just happened, not what's about to happen next.

OK, so the prices of many things haven't risen. Yet. But if the laws of economics mean anything, they will have to. Why? Because costs are rising.

Economists need to stop focusing just on labor costs. The world has plenty of surplus labor. But look at raw materials. Around the world prices are skyrocketing, from copper to cocoa. The United Nations Food Price Index has just hit a new record high. Oil's back near $90 a gallon. Wheat prices have nearly doubled since last summer.

Soaring food prices helped spark the revolution in Tunisia. According to Alex Bos, commodities analyst at Macquarie Securities in London, other governments—especially in North Africa—have responded with panic buying of foodstuffs.

Algeria alone, he says, has bought about 1.5 million tons of wheat this month—maybe triple its usual amount. Saudi Arabia is rushing to build up grain supplies. Corn supplies are as tight as they were back in the inflationary 1970s.

Sooner or later this is going to show up in your supermarket, or at the mall, in higher prices.

Just ask McDonald's ( MCD: 75.40*, -0.08, -0.10% ) . Or paints and plastics giant DuPont ( DD: 50.36*, +1.32, +2.69% ) . Or Kleenex and Huggies maker Kimberly-Clark ( KMB: 65.21*, -0.40, -0.60% ) . Or 3M ( MMM: 89.18*, +0.68, +0.76% ) . Or Coach ( COH: 54.61*, +1.52, +2.86% ) . These companies, and many others, have warned in recent days that they're getting squeezed by rising costs. They'll either eat the costs, which will hit the stock, or pass them on. How is this not inflation?

• The third reason to be mistrustful of the inflation picture? Simple. Economics.

We are flooding the world with extra dollars. The Fed simply invents as many as it likes. In the past couple of years, to try to keep the economy out of a tailspin, it has more than doubled the size of the so-called monetary base.

A dollar bill has no intrinsic value. Dollars are only "worth" something because you can exchange them for a haircut, or a pair of shoes, or a book from Amazon.com ( AMZN: 175.63*, -1.07, -0.60% ) . So if you drastically increase the number of dollars without a commensurate increase in the number of goods and services, each dollar must, by definition, be worth less. That's another way of describing inflation.

So far, this inflation seems to have shown up in the unlikeliest of places. It's like Whac-A-Mole. The price of vintage wines has skyrocketed 57% in the past year, according to the Liv-ex Fine Wine 50 Index . Real estate prices across China are in a bubble. So long as the Chinese tie themselves to the U.S. dollar, they are importing our inflation. But, once again, one wonders how this can be called benign.

Is inflation certain? I'm wary of any predictions. Casey Stengel once said, "Never make predictions, especially about the future." Mr. Stengel would have lasted three days as a Wall Street analyst. But he won five World Series in a row, and he knew a thing or two.

Maybe inflation really will stay tame. But I'm not counting on it. I'm not buying the conventional wisdom, and neither should you.

Published January 26, 2011

Read more: ROI: Don't Trust the Inflation Numbers - SmartMoney.com http://www.smartmoney.com/investing/economy/roi-dont-trust-the-inflation-numbers-1296052731208/#ixzz1CAwwqdMx

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Sat, 22 Jan 2011 11:28:07 -0800 The Surprising Price of Wheat http://myhighdividendstocks.posterous.com/the-surprising-price-of-wheat http://myhighdividendstocks.posterous.com/the-surprising-price-of-wheat

The Surprising Price of Wheat

leadimage

01/20/11 Tampa, Florida – I was intrigued by the title of the essay “The Cheapest Thing on Earth” by Nathan Lewis here at The Daily Reckoning.

I was interested because I thought that such a tasty trivia tidbit could come in handy, like this morning when I could have used it as a distraction when my kids were calling me “cheap” because I wouldn’t open up my wallet and give them another king’s ransom for some new dumb reason; I forget what, but there was a lot of crying and wailing about it, whatever it was.

This is where I could have said, to throw them off, “Cheap? What do you know about cheap? Do you know what is the cheapest thing on earth? Huh? Do ya? Huh? Do ya? Yes or no?!”

Instead of providing me with the answer, he starts off with a pop quiz! Damn!

And when I say “pop” quiz, I mean exactly that, as he says, “Quick: name an asset, publicly traded, that is the cheapest in a hundred years.” Pop!

I, of course, had no idea, and instead of admitting it, I quickly read ahead, hoping to immediately find the answer, only to be surprised when he taunted me. “Houses?” he asks. “Nope. Stocks? I don’t think so. Commercial real estate? Bonds?”

By this time I was pretty peeved, and getting bored, too, as I was sure that if it was, indeed, none-of-the-above, then this was going to devolve into something about investing in something obscure, the significance of which would elude me even if you explained it to me over and over again, in a company I never heard of, and, probably, in a country I never heard of, either.

Just before I gave up reading in disgust, he dared to taunt me one more time, the bastard! “Not too many, are there?” he asks.

At this final insult, my mind screamed, “Damn you! Damn you to hell! Tell me now, or I will fire off a flaming email that will be both highly insulting and vaguely threatening!”

I could almost hear his cruel, mocking laughter as he rudely called my bluff, and further insulted me and my false bravado with, “Now here’s a tougher one. Name an asset that is near the lowest price in all of human history.”

Arrgghhh! In all of human history? By this time I am angry and distraught, mostly angry, that somebody was exposing my stupidity and ignorance!

Suddenly, I am gasping for air and screaming that if he doesn’t tell me the answer pretty soon, I am going to start hearing those voices in my head again, and (now that you mention it) if I listen really closely, I can almost hear them already, way off in the distance, screaming to be heard and obeyed.

And we all remember how it turned out the LAST time that happened.

Obviously intimidated by the sudden revelation of the strange, powerful forces he is unleashing, he quickly announces, “The answer is: wheat”!!

I admit that I personally put those two final exclamation points at the end of his sentence as an emphasis, both to indicate surprise and to remind you that there are surely significant ramifications of this “price of wheat” thing, the horrors of which I never allow myself to even think, except during sleep, and then hopefully only when I am dreaming of being with some beautiful young thing, and maybe with some of her friends, too, who are all naked and sweaty and grunting and heaving and writhing around in some surreal bacchanalia of some kind, where the only interruption is the masses of people outside wailing and crying that “The price of food is up so much that we are burning things and looting grocery stores in mindless anger and desperation, and we are looking for the Fabulous Mogambo Seer (FMS) to pledge our undying allegiance and love because he predicted that this inflationary hell is Exactly What Would Happen (EWWH) when the stupid Federal Reserve kept creating more and more fiat money, creating astonishing amounts of money, creating outrageous amounts of money, creating So Much Freaking Money (SMFM) for so, so long that We’re Freaking Doomed (WFD)!”

I can reliably report, thanks to these dreams, that the sound of people starving to death is a real “mood killer,” perhaps on a par with the horror that wheat is now at the highest price ever, even going back to Biblical times, which is probably why those old Bible-era people were always “breaking bread,” and eating unleavened wheat crackers, and consuming miscellaneous cheap wheat products instead of having, you know, a few tasty tacos or maybe a pizza once in awhile, which I figure must have been because they were very expensive or something, which is why you never hear of anybody eating them.

Anyway, I immediately used this new information-as-icebreaker at the supermarket, and told the cashier, as she rang up my groceries, “I’ll bet you don’t know that wheat is at its lowest price in recorded history, but climbing fast because the horrid Federal Reserve is still creating So Freaking Much Money (SFMM) that the terrifying, heartbreaking misery and suffering of inflation in the prices of subsistence prices of items, like wheat, is guaranteed! Guaranteed, I tells ya!”

She just dragged my frozen burrito across her laser scanner, the irritating “beep!” noise only underscoring her complete lack of interest.

I went on, helpfully adding that they also said, “Actually, the entire agriculture complex, including corn, beef, pork and beans could fit this description.”

Again the lonely “beep!” as she listlessly ran my bag of Oreo Double Stuf cookies through the beam, her face never changing, not even to make the time pass with idle conversation about, for example, how much she adores cute old guys who buy such delicious cookies, or how my eyes twinkle so charmingly, or even to say how she noticed I kept looking at her boobs. You know; anything.

Giving up, I took my groceries in hand and parted without giving anyone my usual advice, which is to “Buy gold and silver right now, using whatever money you can glean from your stupid little job, because inflation is going to eat us alive, and a weird, distorted economy will make it even more hellish, all thanks to the horrid Federal Reserve continuing to create so much excess money. And buying gold and silver is so easy that a bunch of bored, underpaid worker-bees in a low-margin business like you can do it! In fact, it’s so easy that even morons say, ‘Whee! This investing stuff is easy!’”

The Mogambo Guru
for The Daily Reckoning

Author Image for The Mogambo Guru

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning , and other fine publications.

Read more: The Surprising Price of Wheat http://dailyreckoning.com/the-surprising-price-of-wheat/#ixzz1BnH5UDUA

 
Wheatprice chart, 2000-2009
 
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Wed, 19 Jan 2011 11:30:38 -0800 Home price drops exceed Great Depression: Zillow http://myhighdividendstocks.posterous.com/home-price-drops-exceed-great-depression-zill http://myhighdividendstocks.posterous.com/home-price-drops-exceed-great-depression-zill

The price of houses will continue to decline due to excess inventory and high unemployment.  There are millions of foreclosed homes that the banks are keeping off the market.  They are known as the shadow inventory.  I’ve seen some articles put the number of homes in the “shadow inventory” close to 7 million homes.  That is literally years of inventory.

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Unemployment was really at 16.7% in December 2010 (the U-6 number  http://www.bls.gov/news.release/empsit.t15.htm ).  And it is not going to improve until the commercial banks increase lending to small businesses.

Unfortunately, that lending will create rising prices in all goods through the fractional-reserve banking process.  This is what happens when the Federal Reserve doubles the monetary base.  It will lead to huge price increases once the commercial bankers increase lending.

This article from Reuters confirms what we know in our heads.  But the newspapers and the TV news coverage tries to cover these facts up.  They avoid comparisons with the Great Depression because they are taught to believe the great Keynesian lie of consumer spending is the only way to grow the economy.

Lower home prices due to increased foreclosures would further erode the value of mortgage backed securities in the market.  That would make the agency securities on American Capital Agency Corp’s (AGNC’s) balance sheet worth less.  This would also hurt their sale price.  All this should hurt AGNC’s earnings.

However, if the FED buys more MBS after the point they previously said they were going to stop, then things change.  If the FED continues to purchase mortgage backed securities from Fannie and Freddie to bailout the big banks that still have MBS’s on their balance sheets, then this would increase their price in the market due to the increased artificial demand.  AGNC might have to pay more to buy its next batch of agency securities and the risk increases of a collapse in market value of MBS’s if the FED decides to sell some of its MBSs.  They would be propping up the MBS market for a bigger bust later.

Home price drops exceed Great Depression: Zillow

NEW YORK | Tue Jan 11, 2011 8:40am EST

NEW YORK (Reuters) - Home prices fell for the 53rd consecutive month in November, taking the decline past that of the Great Depression for the first time in the prolonged housing slump, according to Zillow.

Home prices have fallen 26 percent since their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928 and 1933, the housing data company said in a report on Monday. Prices fell 0.8 percent over the month.

It is a dubious milestone for the U.S. housing market which has failed to gain much traction despite a host of government programs to reduce delinquencies and encourage demand with temporary tax credits and lower interest rates. Many economists expect further price drops, even if there are some anecdotal signs of growing demand, such as in pending home sales data.

"For the next six to nine months, the larger factors affecting the housing market that will produce more home price declines will be the excess inventory of homes, high negative equity and foreclosure rates, and weakened demand due to elevated employment, Stan Humphries, Zillow's chief economist, said in a blog post.

Declines are accelerating, and it will take a while before falling unemployment and other signs of economic improvement support the market, Zillow said.

Home prices fell at a 0.78 percent pace in November, the fastest since February 2009, the company said.

(Reporting by Al Yoon, Editing by Kenneth Barry)

http://www.reuters.com/article/idUSTRE70961E20110111

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Thu, 13 Jan 2011 15:35:11 -0800 Austrian Economics Aids the High Dividend Stock Investor Through the Market Minefield. http://myhighdividendstocks.posterous.com/austrian-economics-aids-the-high-dividend-sto http://myhighdividendstocks.posterous.com/austrian-economics-aids-the-high-dividend-sto

Investors accept the past record of companies as a basis for judging the future.  The stock analyst must be on the lookout for indicators to the contrary.  Most economists, stock analysts, mutual fund managers, hedge fund managers, and pension chief investment officers are schooled in Keynesian economics.  They can’t see the stock and bond market troubles ahead.  This is why they didn’t forecast the housing bubble and the subsequent stock market crash of late 2008.

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The ability to see what is coming is of inestimable value, but it cannot be expected to be part of the analyst’s innate abilities.  You should expect him to show a moderate degree of foresight which springs from logic and experience intelligently pondered.  Do not expect this from a Keynesian or Chicago school (supply-side) trained analyst.  Those economic theories are full of contradictions and will lead investors astray in the central bank induced boom-bust cycles.

Analysis of the future should be penetrating rather than prophetic.  Austrian economics is penetrating; Keynesian and Chicago school economics are prophetic.

There are many high dividend stocks that speculators overlook due to irregular or a downward earnings trend.  A penetrating analyst can pick out a company that will remain in business and can be counted on to earn about as much as before in good times (boom) and bad (bust).  A company in a prominent position in its industry with a strong balance sheet and selling at a deep discount can be bought with a very small chance of ultimate loss.  And it might very likely double during the next central bank engineered boom.

This type of reasoning does not lay emphasis on accurately predicting the industry’s future trends, but rather on reaching general conclusions that the company will continue to do business pretty much as before.

This is how private business purchases and investments are made.  This is also a conservative approach that allows for a liberal margin of safety in case of error or disappointment.  It runs considerably less risk of confusion between “confidence in the future” and mere speculative enthusiasm exhibited by most investors.

There were immense buying opportunities for high dividend stocks with earning power and strong balance sheets during late 2008 and the first quarter of 2009.  Don’t worry.  You haven’t missed your opportunity to scoop up great high dividend stocks at bargain prices.

There will be new buying opportunities in the next few years due to the insanity of nation, state, and local government deficit spending along with unprecedented counterfeiting by the central bankers worldwide.  All governments and central bankers are following the delusions of John Maynard Keynes.  Some are more delusional than others (e.g. the Federal Reserve and the US government).  Keynesian actions are characterized by massive money printing, to fund government deficit spending, on any so-called shovel ready projects, to build out the crumbling infrastructure, and to put people back to work digging holes while others fill them in, along with artificially lower interest rates that discourage savings.

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Mon, 10 Jan 2011 18:39:03 -0800 Volcker Leaves the Obama Team http://myhighdividendstocks.posterous.com/volcker-leaves-the-obama-team http://myhighdividendstocks.posterous.com/volcker-leaves-the-obama-team Bill Bonner reports that former Federal Reserve chairman Paul Volcker has left the Obama economic advisory team (www.dailyreckoning.com). This means that there is no dissenting opinion to Ben Bernanke's money printing and historic low interest rate madness. Don't get me wrong. Massive double digit price increases are on there way in the next couple of years regardless of Volker's presence. Volker could have dampened the eagerness to print more fiat dollars once price inflation reaches double digits. Imagine the public outcry when gasoline reaches $6.00 per gallon. Perhaps we haven't seen the last of Mr. Volker.

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Prepare for massive price inflation that makes the late 1970's look like a great time. Ignore warnings of deflation until the Federal Reserve abandons quantitative easing and they refuse to buy Treasuries. High dividend stocks can help you stay ahead of the price increases. Subscribe to www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

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Thu, 06 Jan 2011 12:41:59 -0800 Are You Confused About the Prospects of Hyperinflation, Massive Inflation, and/or Deflation? http://myhighdividendstocks.posterous.com/are-you-confused-about-the-prospects-of-hyper http://myhighdividendstocks.posterous.com/are-you-confused-about-the-prospects-of-hyper

Yesterday’s blog post “How the Stock Market and the Economy Really Work” http://bit.ly/edAgNT shined light on the little reported fact that the stock market indices and the economic GDP numbers go up with the increase in the money supply.  Today’s post covers what is going on right now with the US money supply.

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The past and future actions of the Federal Reserve will affect every investor and saver.  Pay attention to the central bankers actions and plan your high dividend stock investments accordingly.

Rockwell interviews Jorg Guido Hülsmann.

Quantitative easing is designed to bail out the federal debt, but it may presage Weimar.Dr. Hulsmann discusses the evils of central banking and fractional reserves, the blessings of deflation, and how Austrian economists are making vast progress.

Enjoy this excellent audio interview.  http://bit.ly/gcroyR

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Wed, 05 Jan 2011 13:38:44 -0800 How the Stock Market and Economy Really Work http://myhighdividendstocks.posterous.com/how-the-stock-market-and-economy-really-work http://myhighdividendstocks.posterous.com/how-the-stock-market-and-economy-really-work

This essay could save you tens of thousands of dollars.  It is a MUST READ article.  You will learn how the stock market and the economy really work.  Spend a little time reading it to save yourself thousands of dollars by watching some very key economic numbers. 

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* * * * *

How the Stock Market and Economy Really Work

Mises Daily: Wednesday, September 01, 2010 by Kel Kelly

Image001

"A growing economy consists of prices falling, not rising."

The stock market does not work the way most people think. A commonly held belief — on Main Street as well as on Wall Street — is that a stock-market boom is the reflection of a progressing economy: as the economy improves, companies make more money, and their stock value rises in accordance with the increase in their intrinsic value. A major assumption underlying this belief is that consumer confidence and consequent consumer spending are drivers of economic growth.

A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to inflation, rising oil prices, high interest rates, etc., or for no reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.

This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but is substantially misconceived because it is based on faulty finance and economic theory.

In fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.

Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending), our focus here will be only on why they are able to rise in a sustained fashion over the longer term.

The Fundamental Source of All Rising Prices

For perspective, let's put stock prices aside for a moment and make sure first to understand how aggregate consumer prices rise. In short, overall prices can rise only if the quantity of money in the economy increases faster than the quantity of goods and services. (In economically retrogressing countries, prices can rise when the supply of goods diminishes while the supply of money remains the same, or even rises.)

When the supply of goods and services rises faster than the supply of money — as happened during most of the 1800s — the unit price of each good or service falls, since a given supply of money has to buy, or "cover," an increasing supply of goods or services. George Reisman offers us the critical formula for the derivation of economy-wide prices:[1]

Image002

In this formula, price (P) is determined by demand (D) divided by supply (S). The formula shows us that it is mathematically impossible for aggregate prices to rise by any means other than (1) increasing demand, or (2) decreasing supply; i.e., by either more money being spent to buy goods, or fewer goods being sold in the economy.

In our developed economy, the supply of goods is not decreasing, or at least not at enough of a pace to raise prices at the usual rate of 3–4 percent per year; prices are rising due to more money entering the marketplace.

The same price formula noted above can equally be applied to asset prices — stocks, bonds, commodities, houses, oil, fine art, etc. It also pertains to corporate revenues and profits. As Fritz Machlup states:

It is impossible for the profits of all or of the majority of enterprises to rise without an increase in the effective monetary circulation (through the creation of new credit or dishoarding).[2]

To return to our focus on the stock market in particular, it should be seen now that the market cannot continually rise on a sustained basis without more money — specifically bank credit — flowing into it.

There are other ways the market could go higher, but their effects are temporary. For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.

The same applies to reduced tax rates. These would be temporary effects resulting in a finite and terminal increase in stock prices. Money coming off the "sidelines" could also lift the market, but once all sideline money was inserted into the market, there would be no more funds with which to bid prices higher. The only source of ongoing fuel that could propel the market — any asset market — higher is new and additional bank credit. As Machlup writes,

If it were not for the elasticity of bank credit … a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and current amortization allowances is fairly inelastic.… Only if the credit organization of the banks (by means of inflationary credit) or large-scale dishoarding by the public make the supply of loanable funds highly elastic, can a lasting boom develop.… A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases.[3] (Emphasis added.)

The last line in the quote helps to reveal that neither population growth nor consumer sentiment alone can drive stock prices higher. Whatever the population, it is using a finite quantity of money; whatever the sentiment, it must be accompanied by the public's ability to add additional funds to the market in order to drive it higher.[4]

Understanding that the flow of recently created money is the driving force of rising asset markets has numerous implications. The rest of this article addresses some of these implications.

The Link between the Economy and the Stock Market

The primary link between the stock market and the economy — in the aggregate — is that an increase in money and credit pushes up both GDP and the stock market simultaneously.

A progressing economy is one in which more goods are being produced over time. It is real "stuff," not money per se, which represents real wealth. The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that, if goods are produced at a faster rate than money, prices will fall. With a constant supply of money, wages would remain the same while prices fell, because the supply of goods would increase while the supply of workers would not. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario, if productivity and output are increasing, goods get cheaper in real terms.

Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).

This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.[5] Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.

"Consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate."

The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together (or a stock index) could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.

In an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or drift slightly lower[6] — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.

Under these circumstances, capital gains (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.

The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.

Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodeling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.

Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.

This is not to say that a link does not exist between the money that companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalization as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.

Forced Investing

As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts.

"An improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise."

The fact that we have to save for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.

To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed. The whole system of inflation is solely for the purpose of theft and wealth redistribution. In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.

The Fundamentals are Not the Fundamentals

If it is, then, primarily newly printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.

For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.

Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.[7] Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-nloss statements (i.e., income statements).

Since these costs are recognized on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).

"With more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing."

Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.

In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).

Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.[8] During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.

It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.

A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.

In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.

(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)[9]

Asset Inflation versus Consumer Price Inflation

Newly printed money can affect asset prices more than consumer prices. Most people think that the Federal Reserve has done a good job of preventing inflation over the last twenty-plus years. The reality is that it has created a tremendous amount of money, but that the money has disproportionately flowed into financial markets instead of into the real economy, where it would have otherwise created drastically more price inflation.

There are two main reasons for this channeling of money into financial assets. The first is changes in the financial system in the mid and late 1980s, when an explosive growth of domestic credit channels outside of traditional bank lending opened up in the financial markets. The second is changes in the US trade deficit in the late 1980s, wherein it became larger, and export receipts received by foreigners were increasingly recycled by foreign central banks into US asset markets.[10] As financial economist Peter Warburton states,

a diversification of the credit process has shifted the centre of gravity away from conventional bank lending. The ascendancy of financial markets and the proliferation of domestic credit channels outside the [traditional] monetary system have greatly diminished the linkages between … credit expansion and price inflation in the large western economies. The impressive reduction of inflation is a dangerous illusion; it has been obtained largely by substituting one set of serious problems for another.[11]

And, as bond-fund guru Bill Gross said,

what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into US Treasury and mortgage markets at subsidized yields.… This foreign repatriation produced artificially low yields.… There is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually.[12]

This insight into the explanation for a lack of price inflation in recent decades should also show that the massive amount of reserves the Fed created in 2008 and 2009 — in response to the recession — might not lead to quite the wild consumer-price inflation everyone expects when it eventually leaves the banking system but instead to wild asset price inflation.

One effect of the new money flowing disproportionately into asset prices is that the Fed cannot "grow the economy" as much as it used to, since more of the new money created in the banking system flows into asset prices rather than into GDP. Since it is commonly thought that creating money is necessary for a growing economy, and since it is believed that the Fed creates real demand (instead of only monetary demand), the Fed pumps more and more money into the economy in order to "grow it."

That also means that more money — relative to the size of the economy — "leaks" out into asset prices than used to be the case. The result is not only exploding asset prices in the United States, such as the NASDAQ and housing-market bubbles but also in other countries throughout the world, as new money makes its way into asset markets of foreign countries.[13]

A second effect of more new money being channeled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalization as a percentage of GDP (figure 1).

Figure 1: The Size of the Stock Market Relative to GDP

Image003

Source: Thechartstore.com

The changes in these valuation indicators I have shown above reveal that the fundamental links between company earnings and their stock-market valuation can be altered merely by money flows originating from the central bank.

Can Government Spending Revive the Stock Market and the Economy?

The answer is yes and no. Government spending does not restore any real demand, only nominal monetary demand. Monetary demand is completely unrelated to the real economy, i.e., real production, the creation of goods and services, the rise in real wages, and the ability to consume real things — as opposed to a calculated GDP number.

Government spending harms the economy and forestalls its healing. The thought that stimulus spending, i.e., taking money from the productive sector (a de-accumulation of capital) and using it to consume existing consumer goods or using it to direct capital goods toward unprofitable uses, could in turn create new net real wealth — real goods and services — is preposterous.

What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing. Broken economies suffer from a misallocation of resources consequent upon prior government interventions and can therefore be healed only by allowing the economy's natural balance to be restored. Falling prices and lack of government and consumer spending are part of this process.

Given that government spending cannot help the real economy, can it help the specific indicator called GDP? Yes it can. Since GDP is mostly a measure of inflation, if banks are willing to lend and borrowers are willing to borrow, then the newly created money that the government is spending will make its way through the economy. As banks lend the new money once they receive it, the money multiplier will kick in and the money supply will increase, which will raise GDP.

$25 $20

"What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing."

As for the idea that government spending helps the stock market, the analysis is a bit more complicated. Government spending per se cannot help the stock market, since little, if any, of the money spent will find its way into financial markets. But the creation of money that occurs when the central bank (indirectly) purchases new government debt can certainly raise the stock market. If new money created by the central bank is loaned out through banks, much of it will end up in the stock market and other financial markets, pushing prices higher.

Summary

The most important economic and financial indicator in today's inflationary world is money supply. Trying to anticipate stock-market and GDP movements by analyzing traditional economic and financial indicators can lead to incorrect forecasts. To rely on these "fundamentals" is to largely ignore the specific economic forces that most significantly affect those same fundamentals — most notably the changes in the money supply. Therefore, following monetary indicators would be the best insight into future stock prices and GDP growth.

Kel Kelly has spent over 13 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe and in the online editions of CNN, Forbes, BusinessWeek, and the Wall Street Journal. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta. Send him mail. See Kel Kelly's article archives.

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Notes

[1] See G. Reisman, Capitalism: A Treatise on Economics (1996), p.897, for a fuller demonstration. Most of the insights in this paper are derived from the high-level principles laid out by Reisman. For additional related insights on this topic, see Reisman, "The Stock Market, Profits, and Credit Expansion," "The Anatomy of Deflation," and "Monetary Reform."

[2] F. Machlup, The Stock Market, Credit, and Capital Formation (1940), p. 90.

[3] Ibid., pp. 92, 78.

[4] For a holistic view in simple mathematical terms of how the price of all items in an economy may or may not rise, depending on the quantity of money, see K. Kelly, The Case for Legalizing Capitalism (2010), pp 132–133.

[5] Price increases are supposedly adjusted for, but "deflators" don't fully deflate. Proof of this is the very fact that even though rising prices have allegedly been accounted for by a price deflator, prices still rise (real GDP still increases). Without an increase in the quantity of money, such a rise would be mathematically impossible.

[6] To gain an understanding of earning interest (dividends in this case) while prices fall, see Thorsten Polleit's "Free Money Against 'Inflation Bias'."

[7] Most funds are borrowed from banks for the purpose of business investment; only a small amount is borrowed for the purpose of consumption. Even borrowing for long-term consumer consumption, such as for housing or automobiles, is a minority of total borrowing from banks.

[8] The other main reason for this, if the country is poor, is the fact that there is a lack of capital: the more capital, the lower the rate of profit will be, and vice versa (though it can never go to zero).

[9]Any reader who is interested in exploring and poking holes in this theory with me should feel free to contact me to discuss.

[10]This recycling is what Mises's friend, the French economist Jacques Reuff, called "a childish game in which, after each round, winners return their marbles to the losers" (as cited by Richard Duncan, The Dollar Crisis (2003), p. 23).

[11] P. Warburton, Debt and Delusion: Central Bank Follies that Threaten Economic Disaster (2005), p. 35.

[12] William H. Gross, "100 Bottles of Beer on the Wall."

[13] It's not actually American dollars (both paper bills and bank accounts) that make their way around the world, as most dollars must remain in the United States. But for most dollars received by foreign exporters, foreign central banks create additional local currency in order to maintain exchange rates. This new foreign currency — along with more whose creation stems from "coordinated" monetary policies between countries — pushes up asset prices in foreign countries in unison with domestic asset prices.

* * * * *

You can read the original here: http://mises.org/daily/4654       

Be seeing you!

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Thu, 30 Dec 2010 18:15:23 -0800 Why Gold has been Money and will be Money Again http://myhighdividendstocks.posterous.com/why-gold-has-been-money-and-will-be-money-aga http://myhighdividendstocks.posterous.com/why-gold-has-been-money-and-will-be-money-aga
I'm a fan of physical gold coins.  They should comprise at least 5-30% of you non-house net worth.  Too bad there are no high dividend gold stocks.  Please enjoy this short article on why gold has historically been money.  
 
 
Every central bank in the word is inflating its money supply.  Some are inflating faster than others.  The US central bank, the Federal Reserve, is leading the way with QE2 and its massive inflation of late 2008.  The Bank of Japan is barely inflating.  That is why the Yen is stregthening versus the Dollar.
 
Enjoy the article and please click on the Google Ads to let me know you like the contents of this blog.
 
Happy New Year and be seeing you!
 
 

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Mon, 27 Dec 2010 11:23:36 -0800 Why You Shouldn't Trust the Core CPI Numbers http://myhighdividendstocks.posterous.com/why-you-shouldnt-trust-the-core-cpi-numbers http://myhighdividendstocks.posterous.com/why-you-shouldnt-trust-the-core-cpi-numbers

This article from The Daily Reckoning’s Addison Wiggin is spot on.  The CPI numbers are rigged to keep Social Security and Medicare solvent a few extra years.  This is why your high dividend stock portfolio must generate at least a 6% - 10% return to beat the real price inflation caused by the FED’s counterfeiting.

Please click on the Google Ads if you like the content of this blog.  I’m using the results from those ads to evaluate the reader growth rate and financial viability of this blog.

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Why You Shouldn’t Trust the Core CPI Numbers

12/15/10 Baltimore, Maryland – Consumer prices rose 0.1% in November…and less than a percent over the past year. If you strip out food and energy – which government number crunchers do, because those prices are allegedly “volatile” – you still get a 0.1% increase.

That’s the “core” CPI, and that’s what the monetary mandarins at the Federal Reserve care about when drafting plans to buy Treasuries, control interest rates, goose employment numbers, order pizza, drink wine, play Xbox 360 or any of the myriad other things they do during their FOMC meetings.

As a group, they can’t be pleased with the number. Over the last year, despite trillions of dollars in government stimulus and quantitative easing, core CPI has risen a scant 0.8% – far below the Fed’s “sweet spot” of 1.6-2.0%.

But whom are we kidding? Even the “headline” figure, the one including food and energy, is suspect.

Our friends at Casey Research put out this chart a couple months ago. The column in the far right – CPI-U – is actually lower now than it was then, all those other columns notwithstanding:

Image001

How does the government pull this off? We ask constant readers to indulge our newer ones as we revisit three of the most common tools the statisticians use…

  • Substitution. If steak becomes more expensive, and you buy hamburger instead, then the Bureau of Labor Statistics reasons your cost of beef has stayed the same – no inflation!
  • Hedonics. If the 2011 model of a car costs more than the 2010 model, but it also comes with more standard equipment, the BLS reasons you’re still getting the same value for your money – no inflation!
  • Geometric weighting. Nothing fancy here: If the price of something goes up, the BLS simply makes it count for less in the CPI relative to everything else. If the price comes down, it counts for more. Voila!

These changes started with the last round of Social Security “reform” under the auspices of Alan Greenspan in the early ’80s. The idea was that if CPI were lower, Uncle Sam could pay out less in Social Security benefits.

You can see the end result over time maintained by our friend John Williams of Shadow Government Statistics. Mr. Williams calculates economic numbers the way they did back in the Carter era. The “official” CPI number is in red. The shadow stat is in blue:

Image002

In the meantime, the Federal Reserve statement issued after yesterday’s meeting amounted to, “steady as she goes” on the ill-fated QE2. The Fed, looking at current “official” CPI numbers, sees “deflation”…

And so the plan to goose the system with $875 billion in Treasury purchases that started last month will continue to at least double the official rate from whence it sat while they were kibitzing over bagels before the meeting began yesterday morning.

Sooner or later, reality is going to catch up to the gamed statistics. Indeed, “an inflationary outbreak is very likely,” says Chris Mayer, editor of Mayer’s Special Situations.

History is on our side.

“The dollar has done nothing more reliably than lose its value over time,” Chris points out. “I think the future will be no different. People who worry about deflation – that, somehow, the dollars in our pocket will actually buy more in the years ahead, not less – will not only be wrong. They will be broke.

“Writer Jason Zweig points out that ‘Since 1960, 69% of the world’s market-oriented economies have suffered at least one year in which inflation ran at an annualized rate of 25% or more. On average, those inflationary periods destroyed 53% of an investor’s purchasing power.’

“That is why I believe that being prepared for inflation is the most important investment decision we have to face in the coming decade. If you aren’t prepared, then the consequence is a mean hit to your wealth.”

Addison Wiggin
for The Daily Reckoning

Read more: Why You Shouldn't Trust the Core CPI Numbers http://dailyreckoning.com/why-you-shouldnt-trust-the-core-cpi-numbers/#ixzz19LBybZFb

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Fri, 05 Nov 2010 18:40:44 -0700 How can the Federal Reserve be audited? http://myhighdividendstocks.posterous.com/how-can-the-federal-reserve-be-audited http://myhighdividendstocks.posterous.com/how-can-the-federal-reserve-be-audited
How can the Federal Reserve be audited?
 
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Central bankers hate the free market.  They want do not want the market to determine the rate of interest and they do not want to allow currency exchange rates to float.
 
Be seeing you!

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Wed, 29 Sep 2010 22:27:38 -0700 Be Very Afraid: The 'Experts' Are Running the Economy http://myhighdividendstocks.posterous.com/be-very-afraid-the-experts-are-running-the-ec http://myhighdividendstocks.posterous.com/be-very-afraid-the-experts-are-running-the-ec

Be Very Afraid: The 'Experts' Are Running the Economy
by Thomas E. Woods, Jr.

Recently by Thomas E. Woods, Jr.: Some Americans Distrust Authority

When Young Americans for Liberty at Indiana University first invited me to speak last year, the group ran into resistance from the university administration. Having consulted the economics department, the relevant university office declared that I was "uncredentialed," and that perhaps a professor from IU’s economics faculty could give a nice lecture instead. I was uncredentialed, presumably, because my education at Harvard and Columbia was in history, not economics.

The student group refused to take this lying down, and made such a stink in the local media, pointing to my bio and the reception of my book Meltdown – including the friendly coverage it received from mainstream outlets like Barron’s, CBS.com, and UPI – that the university not only reversed its stance but even partially funded my appearance, which took place on September 21 of this year.

 
The Indiana Daily Student (circulation 15,500) offered me a 600-word guest column in the wake of my appearance. Here’s what I wrote, which they published verbatim (complete with a comments section). ~ Tom Woods

 
The free market did not cause the financial crisis, and the Elmer’s glue and Scotch tape our wise leaders have applied to the economy are only prolonging the agony. That’s the thesis of my 2009 New York Times bestseller, Meltdown.

That’s not a popular thing to say in Bloomington, I learned several months ago.

When Young Americans for Liberty at IU hit a bureaucratic stone wall in trying to invite me to campus – a problem I can’t say I’ve run into at any other university – the local media took notice. But it was the comment sections that were a particular hoot. It was as though I had insulted Stalin in the old Soviet Union. Who does this idiot think he is? How dare he speak of our wise overlords that way! Why, they’re just looking out for the good of the people! And so on, as if I’d stumbled into some kind of cliché competition.

Then, when the university reversed itself and even helped fund my appearance, the comments switched to, "If I had time, I’d go over there and set this guy straight!" Uh-huh. The large crowd that came to hear me a couple weeks ago couldn’t have been friendlier.

What I explained at IU was that asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.

 
But thanks to the Federal Reserve System (or simply the "Fed"), which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?

 
It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)

None of this has anything to do with the free market.

Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?

The point of being in college is to learn how to think beyond clichés. Forget the quacks who told us, cluelessly, that everything was fine with the economy in 2007. Look instead to modern spokesmen of the Austrian School like Peter Schiff, Ron Paul, and Jim Grant. You know, the people who, unlike your professors (who, by the way, tried to keep a dissident voice from speaking on campus), predicted the recent crash to a T.

Want to know what really happened to the economy, and why your job prospects are so bleak? Watch Peter Schiff’s YouTube "Why the Meltdown Should Have Surprised No One." That’s the first step toward becoming the independent thinker that four years at IU are supposed to make of you.
 

September 30, 2010

Thomas E. Woods, Jr. holds a bachelor's degree in history from Harvard and his master's, M.Phil., and Ph.D. from Columbia University. He is the author of ten books, including the just-released Nullification: How to Resist Federal Tyranny in the 21st Century, and the New York Times bestsellers Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, and The Politically Incorrect Guide to American History. Visit his website and blog, follow him on Twitter and Facebook, and subscribe to his YouTube Channel.

Copyright © 2010 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

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Tue, 24 Aug 2010 18:32:32 -0700 Fannie and Freddie http://myhighdividendstocks.posterous.com/fannie-and-freddie http://myhighdividendstocks.posterous.com/fannie-and-freddie

August 24th, 2010

You can listen to this article on your smart phone or computer.  This is perfect for drive time. 

We have been analyzing American Agency Capital Corp. (AGNC) for the past few articles at www.myhighdividendstocks.com .  AGNC purchases mortgage-backed securities and collateral debt obligations from Fannie Mae and Freddie Mac.  So we must understand what Fannie and Freddie are and how the make/lose money.  For those of you who don’t know – Fannie and Freddie are government sponsored enterprises.  That means they have special privileges that other corporations don’t.  They buy mortgages in the secondary market, repackage them into securitized products, and guarantee the principal and interest payments on those securitized products.  They are colossal failures and have to be subsidized by the federal government almost yearly to keep operating.  Ron Paul spoke before the House Financial Services Committee years before the housing crisis and the financial crisis.  He understands that government intervention in markets distorts the allocation of capital in those markets.  The mortgage market is no exception.  This is a concise explanation of how the markets are distorted by congress’ subsidies to Fannie and Freddie.  AGNC’s dependence on Fannie, Freddie, and Congress is a huge risk that you must understand before investing in this stock yielding 20%.

This article appeared on www.LewRockwell.com way back in September 2003

Fannie and Freddie

by Rep. Ron Paul, MD
by Rep. Ron Paul, MD

Ron Paul in the House Financial Services Committee, September 10, 2003

Mr. Chairman, thank you for holding this hearing on the Treasury Department's views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize their debt through the Federal Reserve. This provision gives the GSEs a source of liquidity unavailable to their competitors.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today's hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

Dr. Ron Paul is a Republican member of Congress from Texas.

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Thu, 19 Aug 2010 17:42:20 -0700 High Dividend Stocks - Safeguarding against the loss of purchasing power http://myhighdividendstocks.posterous.com/high-dividend-stocks-safeguarding-against-the http://myhighdividendstocks.posterous.com/high-dividend-stocks-safeguarding-against-the Why are you contemplating investing in high dividend stocks?  I consider high dividend stocks those yielding over 6%.  One reason could be that you want your dividends to outpace so-called "inflation".

What metric best measures the loss of your money's purchasing power at the hands of the Federal Reserve?

If you ask people at work and on the street how much prices go per year on average, then you are likely to get the answer 3-4% per year from 80% of them.

As horrendous as annual consumer price increases of 3-4% are...the story doesn't end there.  You've had this nagging feeling your whole adult life that the prices you pay for shelter, food, energy, healthcare, utilities, and entertainment add up to a whole lot more that 3-4%.  Well, you were right and a gentleman named John Williams over at www.shadowstats.com can confirm you hunches with actual numbers (http://www.shadowstats.com/alternate_data/inflation-charts).

You see, the consumer price index (CPI) is a collossal lie to put off the day of reckoning for Social Security, Medicare, and a myriad of pensions.  These ponzi schemes and underfunded pensions go broke faster when consumer prices rise.  Past presidential administrations convinced the Bureau of Labor Statistics to modify the methods of computing the CPI in order to kick the bankrupcy can beyond their presidency.  You can read about how they changed the computations at ShadowStats.com.

The bottom line is that actual real life consumer price increases are several percentage points above what the government reports.  Right now, according to ShadowStats.com the rate of consumer price increases of a representative sample of goods is about 8%.

Media_httpwwwshadowst_fbhwe

Now do you understand why I think you need to investing in high dividend stocks yielding more than 6% with earning power and strong balance sheets.  The earning power and strong balance sheets ensure the dividend and provides an opportunity for capital appreciation in the market price in your stock.

There will be many choice stocks yielding over 6% when this bear market rally finally fizziles.  Be patient, save your capital, and get ready to buy when everyone else is fearful (think of the fear below the March 2009 lows).

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