Alan's Finance Blog

Credit Crisis: Are We Set Up for The Perfect Storm?

Robert Prechter discusses what’s backing your dollars
January 26, 2012

By Elliott Wave International

In this video clip, taken from Robert Prechter’s interview with The Mind of Money, Prechter and host Douglass Lodmell discuss “real” money vs the FIAT money system, and what is backing your dollars under our current system. Enjoy this 4-minute clip and then watch Prechter’s full 45-minute interview here >>

Watch the full 45-minute interview FREE Get even more valuable insights as Mind of Money host Douglass Lodmell interviews Elliott Wave International’s President, Robert Prechter, about how to keep your money safe, the deflation versus inflation debate, and many more topics that are critical to your financial future. Start watching the free 45-minute interview now >>

Wall Street’s Best Bet for Crisis-Beating Returns

By: Adrian Ash, BullionVault

So how did the top US mutual funds stack up vs. the gold price since 2007…?

PAST PERFORMANCE is no guide to the future. But if you don’t study history, just what will you track instead?

December 2011 marked the fifth anniversary of the end of Ownit Mortgage Solutions – a small lender in the big scheme, but “maybe the canary in the coalmine,” according to one mortgage-backed security manager back at the end of 2006.

Let’s hope he found a new career in short order. Because come March 2007, tittle-tattle claimed that distress was spreading from the subprime collapse to US and Eurozone hedge funds. In July, news leaked and then broke of the collapse of two hedge funds at Bear Stearns, and the permanent emergency had begun.

What fun lay ahead! With the gold price at just $650 per ounce too! Silver was knocking around $13 the ounce. Together, that’s made for quite the track record since…

The Top US Fund Managers: Annualized Returns in Per Cent

1. US Dollar precious metals prices from the LBMA, periods ending 30/12/2011.

2. Fund count by BullionVault, using Lipper data via WSJ Online.

3. Single-best fund, best return & average return of all mutual funds taken from MorningStar.

USAA Precious Metals & Minerals you probably know. Co-manager Mark Johnson stepped down last month, leaving Dan Denbow to continue running the single-best performing US mutual of the last 10 years. Other big precious-metal miner funds pack the list of 11 mutuals to outperform silver and the gold price.

GVPIX you might expect to know too, what with it delivering 44% returns in calendar-year 2011. ProFunds US Government Plus led a bunch of long Treasury-bond portfolios. The old Lehman’s TLT tracker returned 34% – who needed active management, let alone risk, last year?

But the stand-out fund over both the last 3 and the last 5 years? The only mutual to beat gold for US investors since the eve of this crisis is Oceanstone. Don’t feel hard cheated if you’ve never heard of it. Apparently it’s got less than $15 million in assets, even though the minimum investment is $3,000. Its stellar 5- and 3-year records include a ridiculous 264% made in 2009, just from doing what it does – seeking value in common stocks on the NYSE.

Yes, it can be done. And yes, it could be done too. US investors really could beat gold since the alarm bells rang out at the turn of 2007. Because out of the 7,500 separate funds available – with 22,000 shares classes to choose from – one fund managed it. Just like 7 funds (go on, count ‘em) managed to beat silver since the turn of 2009, and fully 11 separate US mutual funds managed to beat silver since the start of 2002.

Adrian Ash

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

What Happened in 2011 – What’s up for 2012?

By Euro Pacific Capital Research

2011 began as a year with much promise for investors. After losing nearly 40% in 2008, the S&P 500 gained nearly 20% in 2009 and 13% in 2010. These results convinced many that a long steady recovery from 2008 was ongoing. The first six weeks of 2011, which saw a healthy 6% gain in the S&P 500, seemed to confirm this expectation. Most attributed the stock gains to an overriding belief that the Great Recession was finally winding down. But then a new chapter set in. Click here to access full report >>

As the first quarter ended, major events such as the cascading Arab Spring and the magnitude 9.0 earthquake, tsunami, and nuclear disaster in Japan, initiated a round of major volatility. The Japanese stock market lost 19% in 5 business days. But these political and climactic events were not enough to shake confidence. Even the Japanese market recovered, rallying 13% by the end of March (Bloomberg, 2011). It took the lingering concern over unsustainable debt to turn the market on its ear.

In the first half of the year, investors still did not appreciate the magnitude of the sovereign debt problems in Europe and the United States. With fear taking a back seat, by May the S&P was up 8.4% on the year (Bloomberg, 2011), which turned out to be the high water mark of 2011. But the second half of the year saw both the slow motion train wreck of European sovereign debt negotiations and the comic charade in Washington over extension of the debt ceiling. The resulting uncertainty regarding the euro and a downgrade of US debt returned substantial amounts of fear into the marketplace. In September the Federal Reserve’s Open Market Committee sent markets lower still when it failed to explicitly extend quantitative easing. Since then, amid a general realization that the lackluster statistics were not a temporary blip, stock market performance has been sideways and highly volatile. Foreign markets finished down on the year, but it was the volatility that left investors shell shocked. Should we expect more of the same in 2012?

While the initial boost of the unprecedented monetary stimulus that was injected into markets in 2008, 2009, and 2010 had an unquestionably positive effect on stock prices, it did not engender sustainable real growth. In our view, the developed world simply can’t grow encumbered with such excess debt. Consumers and business are trying to lay the foundation for future growth by continuing to deleverage. Yet at the same time, governments are counteracting the deleveraging in the private sector with large fiscal deficits and printed money. Total leverage therefore is not decreasing and deflationary forces have not been allowed to take hold.

With the monetary skids so generously greased, we think it unlikely markets will crash as they did in 2008, at least in the short run. On the other hand, we don’t see any catalyst for a runaway rally either. In our view maintaining a large cash position, however tempting, is unwise given that negative real interest rates will consistently erode purchasing power. But until a solution is found for the European debt crisis, heightened volatility is likely. Aggressive corrections will likely be met by equally aggressive market rallies as monetary stimulus remains extremely accomodative. As long as governments are willing to coordinate world-wide liquidity injections, they will likely have the ability to kick the can down the road for the immediate future. There is much evidence to conclude that this level of coordination is increasing.

Our expected inflation in asset prices runs counter to the prevailing negative sentiment. Short interest on the New York Stock Exchange is near record levels not seen since 2009 (Bloomberg, 2011). Economists have almost cut their 2012 real GDP growth estimates for the G10 in half over the course of 2011 (Bloomberg, 2011).

The next round of quantitative easing won’t necessarily be triggered by lower asset prices or sustained high unemployment. It could come simply as a way of financing the 2012 US deficit. In 2011 the Fed bought approximately $720 billion of US Treasury securities (Bloomberg, 2011), in essence financing 59% of the US deficit with printed money. We should expect the same with this year’s similarly ugly projected deficit. More easing from the Fed should be a positive for commodities, stocks and foreign currencies.

While most pundits view the most recent summit of European leaders a failure, the measures they did introduce seem likely to put a lid on solvency risk for some time. The fundamentals aren’t fixed, but in our opinion policy makers in Europe have bought themselves some time. Hopes are high that the US is immune from the troubles the world faces, yet in our opinion it is part of the cause. We expect that analysts will likely reduce their American growth estimates to an equal level with their international peers. As a result we expect US stocks to underperform international stocks in 2012.

This all lends itself to a volatile, but nearly flat trend for stocks and bonds in 2012. Fundamentals don’t yet support a run-up, but easy money may put a floor underneath assets over the short run. Unless the situation were to change, we believe aggressive dips in stock markets represent buying opportunities. We tend to think bonds will underperform equities in 2012, given their dramatic outperforming in 2011.

Euro Pacific remains underweight the Euro, Yen, Pound and Dollar. We seek to invest in securities that have minimal exposure to these regions both in our equity and bond portfolios. We continue to believe that by focusing on countries with the strongest fundamentals, we will outperform our peers over the long run.

Merk Commentary: Perils of Celebrity Central Banking

Axel Merk, Portfolio Manager, Merk Funds

January 6, 2012

Axel Merk January 6, 2012

Swiss National Bank (SNB) President Philipp Hildebrand finds himself in the hot seat. SNB rules prohibit his family from trading based on non-public monetary and foreign exchange intentions of the SNB (c.f. §4). His wife netted a 60,000 Swiss franc profit buying, then selling U.S. dollars, all within a month; her husband’s intervention in the currency market was mostly responsible for the gain. Arguably, she traded to make a profit, publicly explaining, “what motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap”. In instructing her account manager, however, she emailed that her motivation was to manage the share of US dollars in their asset mix as part of a long-term investment allocation (c.f. Hildebrand statement).

The court of public opinion might be more damaging than the legal process in a country with a tightly knit elite that favors consensus over controversy. Relevant for policy makers and investors alike is that this episode highlights the vulnerability of what we call celebrity central banking. That is, central banking that heavily relies on the persona rather than underlying policy. In Switzerland, the 2009 attempt to peg the Swiss franc to the Euro was mostly driven by Hildebrand; similarly, last year’s introduction of a ceiling for the Swiss franc versus the euro is again mostly attributed to Hildebrand. The 2009 peg was given up after it proved too expensive. The 2010 intervention has, so far, held. But it is entirely dependent on the market believing that the SNB will do “whatever it takes” to keep the Swiss franc from rising.

If the Swiss were asked whether they would like to adopt the euro, the popular vote would almost certainly be an overwhelming “NO”. Despite this, an unelected official seemingly single-handedly moves the currency at his whim. Arguments about deflation and competitiveness are given; with an unemployment rate of only 3.1%, the argument might have as many holes as Swiss cheese. Importantly, should the market doubt Hildebrand’s conviction, the peg-rate policy may turn out to be amazingly expensive – in 2010, the last time the SNB had aborted its intervention and all those euros purchased had fallen in value, the central bank reported tens of billions in losses. The Swiss public may sympathize with the buzzword “competitiveness”, but understands losses of that magnitude for tiny Switzerland is a lot of money.

In the U.S., we face similar challenges. Federal Reserve (Fed) policy appears all too dependent on Fed Chair Bernanke rather than what central banking should be about: the preservation of purchasing power. We hear the latest whim on what trick might work to boost the economy, disguised in the name of transparency.

What the Fed and the SNB have in common is that they are both run by celebrities. Bernanke has appeared on “60 Minutes”; Hildebrand is also learning what it means to be in the media limelight. Policy makers only have themselves to blame with the market’s obsession with their personas. If they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out. Instead, we may have capital chase the next perceived move of policy makers, leading to capital misallocation, greater volatility, and ultimately more intervention; a self-reinforcing cycle. The public has a high price to pay for modern celebrity central banking.

We would not be surprised to see the Swiss franc rise against the euro as Hildebrand’s position may be weakened. Similarly, in the U.S., should credibility in Bernanke’s policy erode, it may have negative implications for the U.S. dollar.

Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds

Why 2012 looks to be even ROUGHER than 2011!

by Mike Larson

Welcome to 2012! I trust you had an enjoyable holiday season like I did … and that you’re just as ready as I am to make this your most profitable year ever.

So what am I expecting?

In a nutshell, an even MORE tumultuous year than 2011. I say that because many of the problems that hammered markets in 2011 haven’t gone away. They’ve gotten even worse — and the list of NEW problems is getting ever longer.

Why You Still Need to
Worry about Europe!

Last year, I said repeatedly that Europe’s purported debt problem “fixes” would fail. That was clearly on target. I also told you that I believed the global economy would slow broadly. We’ve gotten plenty of evidence that’s the case in Europe, South America, and Asia. Though the U.S. has admittedly fared a bit better than expected.

I also told you that many stocks would struggle …

That was certainly what played out, with the Dow plunging by 2,000 points in late summer. A late rally did save us from an even worse year-end result. But the S&P 500 still only managed to finish 2011 within four one-hundredths of a point from where it closed in 2010. If that’s what the Wall Street pundits consider a good year, I’d hate to see a bad one!

So what will the next 12 months hold?

Well, in Europe, I’m expecting things to get much worse. We’ve seen policymakers over there throw everything but the kitchen sink at this crisis …

They created two large bailout funds — the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM). They engineered a second Greek bailout when the first one failed. They poured money into sinking bond markets in Italy and Spain.

And in their grand finale for the year, they launched a massive Longer Term Refinancing Operation (LTRO), propping up 523 European banks with 489 billion euros (about $650 billion) in 3-year loans.

But the underlying problem still remains: European banks and European countries simply owe too much money to too many creditors, and they have neither the capital nor the income to sustain their debts.

Banks are redepositing LTRO cash with the ECB.

That’s why most banks are taking all that LTRO money and parking it right back at the ECB rather than making new loans to European companies or other European banks! Indeed, an all-time record 453 billion euros were parked at the ECB’s deposit facility earlier this week — showing the money is not circulating through the economy as policymakers hoped!

Meanwhile, a key manufacturing index in Europe just registered 46.9 in December. That was the fifth month in a row below the 50 level, the dividing line between economic expansions and contractions. The message? That much of Europe is mired in recession.

At the same time, we just learned that the leaders of Germany and France are set to hold yet another “fix Europe” summit soon. That will come in advance of yet another gathering of all 27 European Union leaders later in January. If things were really “fixed” over there, would we really need meeting after meeting after meeting? Of course not!

It Ain’t Just Europe Folks!

If Europe were the only problem out there, you might be able to shrug it off like Wall Street traders tried to do late last year and in the first day of trading in 2012. But it’s not. I also believe that …

* The emerging markets that led us out of the wilderness after the 2008-2009 downturn will NOT be able to do so again. That’s because their own economies are slowing sharply, and because countries like China are facing serious real estate problems akin to what we faced previously here.

* The dollar could rally in the coming months as the euro continues to sink into the abyss. That would be negative for contra-dollar assets, and asset prices overall. After all, the last time the dollar surged, it forced investors worldwide to close out so-called “carry trades.” All the assets that those highly leveraged trades funded — stocks, high-risk bonds, commodities, and so on — tanked as a result.

Bickering politicians can’t agree on how to fix the nation’s deficits.

* The domestic economy is still hamstrung by an anemic housing market, a relatively lackluster job market, weak income growth, and more. Meanwhile, the risk of yet another downgrade to the U.S.’s sovereign debt rating is rising rapidly thanks to political gridlock in Washington, a continuing surge in the U.S. debt load (to just past $15 trillion), and the $1 trillion-plus annual budget deficits we continue to run.

Until next time,

Mike

Ron Paul – Beware the Coming Bailouts of Europe

The economic establishment in this country has come to the conclusion that it is not a matter of “if” the United States must intervene in the bailout of the euro, but simply a question of “when” and “how”. Newspaper articles and editorials are full of assertions that the breakup of the euro would result in a worldwide depression, and that economic assistance to Europe is the only way to stave off this calamity. These assertions are yet again more scare-mongering, just as we witnessed during the depths of the 2008 financial crisis. After just a decade of the euro, people have forgotten that Europe functioned for centuries without a common currency.

The real cause of economic depression is loose monetary policy: the creation of money and credit out of thin air and the monetization of government debt by a central bank. This inflationary monetary policy is the cause of every boom and bust, yet it is precisely what political and economic elites both in Europe and the United States are prescribing as a resolution for the present crisis. The drastic next step being discussed is a multi-trillion dollar bailout of Europe by the European Central Bank, aided by the IMF and the Federal Reserve.

The euro was built on an unstable foundation. Its creators attempted to establish a dollar-like currency for Europe, while forgetting that it took nearly two centuries for the dollar to devolve from a defined unit of silver to a completely unbacked fiat currency note. The euro had no such history and from the outset was a purely fiat system, thus it is not surprising to followers of Austrian economics that it barely survived a decade and is now completely collapsing. Europe’s economic depression is the result of the euro’s very structure, a fiat money system that allowed member governments to spend themselves into oblivion and expect that someone else would pick up the tab.

A bailout of European banks by the European Central Bank and the Federal Reserve will exacerbate the crisis rather than alleviate it. What is needed is for bad debts to be liquidated. Banks that invested in sovereign debt need to take their losses rather than socializing those losses and prolonging the process of adjusting their balance sheets to reflect reality. If this was done, the correction would be painful, but quick, like tearing off a large band-aid, but this is necessary to get back on solid economic footing.  Until the correction takes place there can be no recovery. Bailing out profligate European governments will only ensure that no correction will take place.

A multi-trillion dollar European aid package cannot be undertaken by Europe alone, and will require IMF and Federal Reserve involvement. The Federal Reserve already has pumped trillions of dollars into the US economy with nothing to show for it. Just considering Fed involvement in Europe is ludicrous. The US economy is in horrible shape precisely because of too much government debt and too much money creation and the European economy is destined to flounder for the same reasons. We have an unsustainable amount of debt here at home; it is hardly fair to US taxpayers to take on Europe’s debt as well. That will only ensure an accelerated erosion of the dollar and a lower standard of living for all Americans.

Ron Paul – US Congressman

What Is Backing Your Deposits in the Bank?

By Elliott Wave International

Is the bank really the safest place to keep your money? Robert Prechter joins the Mind of Money host Douglass Lodmell to discuss what backs bank deposits and how you can keep your hard-earned money safe.

We invite you to watch the interview below. Then read Robert Prechter’s free report, Discover the Top 100 Safest U.S. Banks.

What is the best course of action to safeguard your money? Read our free 10-page report, Discover the Top 100 Safest U.S. Banks, to learn: The 5 major conditions at many banks that pose a danger to your money. The top two safest banks in your state. Bob Prechter’s recommendations for finding a safe bank. And more! Download your free report, Discover the Top 100 Safest U.S. Banks, now.

The Light Bulb Moment for the Eurozone

EWI’s free EU debt report sheds some light on what’s in store

By Elliott Wave International

How many European bankers does it take to change a light bulb? That’s a joke in search of an answer, but EWI’s European analyst Brian Whitmer explained five months ago that the “light bulb moment” was coming — that’s the time when most people would clearly recognize the severity of the European debt crisis. He offered this spot-on analysis back in July 2011, before the larger world came to know recently how bad things really are in the eurozone.

This chart shows how markets in Greece, Ireland and Portugal have behaved over the past five years, including the bailouts. Whitmer says that the turmoil in Greece is due mostly to both social mood and Greek markets having plummeted for more than a year and a half, while the larger EU stock markets have levitated. Once they turn down, he forecasts that what you saw in Greece will be replayed in the eurozone.

To help his subscribers see the light and get the full picture, he compared EU member nations under financial scrutiny to those that are usually viewed as being safe — and showed that they weren’t as safe as most people thought.

Specifically, Whitmer warned that the debt per person in Greece looked eerily similar to the debt per person in highly regarded countries, such as Germany and France — and even to non-eurozone countries, such as the United Kingdom.

In 2010, Britain proposed a five-year, 25% budget reduction that affects nearly every area of the government. While it sounds like a drastic measure, it has played out differently during the past year. According to member of European Parliament Daniel Hannan, statistics show that not only is government spending and borrowing significantly higher than this time last year, but taxes, too, are way up. Whitmer notes that the budget cuts rely heavily on the future and lack near-term bite.

Why has the worst of Europe’s violence taken place on the streets of Athens rather than London? Athenians did not suddenly grow more violent in 2011. What has changed since 2007 is their stock market. Whitmer’s words of advice: “…should your country’s stock market begin to look like Greece’s, watch out. Trouble will be on the way.”

*****

European Financial Forecast Editor Brian Whitmer has covered Europe’s debt crisis since March 2010 — and his forecasts kept subscribers ahead of the downward spiral every step of the way. Read more of his analysis in our free report, “The European Debt Crisis and Your Investments.”

View your free report.

Free Report The European Debt Crisis and Your Investments Continue reading more articles like this one by Brian Whitmer in our European Debt Crisis report. This free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years. Download your free report now.

He Chose Well

By: Paul Tustain

David Cameron was today forced in Brussels to choose between the free market and the vanities of overreaching politicians…

TODAY is a very sad day. We believe that the markets are telling us that there is a horrible abscess in Europe, and that the Euro is the pus. We believe that fuelled by injustice, the infection of nationalism will now tear Europe apart – making outright enemies of Germany and Greece, France and Italy, the Netherlands and Spain.

Our European friends are today irritated by Britain’s refusal to come to their drunken party. Not for the first time we are the odd man out, and being pointed at by the shallowest politician in Europe. It’s OK. We can live with a little name-calling for the moment, and we look forward to quietly rebuilding our friendships with every one of you in the future. We hope it will be soon.

You are right. Our financial system contributed – in part – to the mess we are in. But you are wrong as to the reason and the solution. What happened is that over a period of years the political classes in London, New York and the smaller financial centres of Europe worked together to hold down the cost of credit. Ever since 2001 they suppressed the will of the market for higher interest rates. They did this to foster the ‘feel-good factor’ and to get themselves re-elected. It was the irresponsible and self-serving policy of elected representatives all over the western world, and it is without any doubt the root cause of the explosion of credit which we now have to pay for.

The result of the explosion of credit was an enormous pile of cash accumulated at the banks of the world. It represented the savings of an older generation, and there was far too much of it. It was lent very unwisely. That happens. It’s life. And usually it means the creditors lose their money and gain some wisdom.

Only this time some of the creditors – particularly Germany and France – don’t want to lose their money. They want to force two or three generations of Greeks, Irish, Portuguese, Italians, Spanish and Belgians to pay, pay, pay. Germany and France lent to your father, yet you become the indentured slave.

That should never be how bad money-lending is resolved. The lender should take the hit when the borrower cannot repay; it helps to focus his mind before he lends. In Britain we got rid of inter-generational debt servitude 200 years ago, and it is not progress to return to it.

As it happens in Britain we have the same deep insolvency problem to resolve, but it is going to be resolved in a different way. Our government is going to have to print to eliminate the debt – just watch. There is going to be a storm and Sterling will be murdered. Interest rates are going to climb sharply as world markets demand the return of their rightful position as the setters of the cost of money. Those rate hikes and concomitant inflation are going to eliminate twenty five years of savings, and twenty five years of a silly, credit-fuelled house price bubble. By the time it ends the creditors will have paid in full. Houses will be again affordable by anyone with a half decent job. Retirement at 55 will have been consigned to the dustbin. Student loans will have inflated to irrelevance, and Britain will again be a great deal fairer than it currently is.

In Europe you will doubtless laugh quietly as this storm hits us. But you will have no reason to make war on us, and you won’t want to, because your strength will be all used up making war on each other. We do not believe that 1,000 years of carefully constructed and often hard fought mutual independence should be sacrificed on the altar of a bad monetary union. We do not believe the people of Europe will want it when nationalist tensions materialise. We think that Europe’s political class is making a monumental error in order to hold on to something which carries their political credibility. We think they will fail and that Europe will suffer dreadfully for it.

It is a black day, because contrary to your belief we love Europe. We also love our free market and the way it exposes the vanities of overreaching politicians. Today you forced David Cameron to choose between the two, and he chose well.

Paul Tustain

Director

Settlement-systems specialist Paul Tustain launched BullionVault in 2005 to make the security and cost-efficiencies of the professional wholesale gold market available to private investors. Designed specifically to meet his own gold ownership needs as a risk-averse investor, BullionVault now cares for some $1.5 billion of client gold property, all of it privately owned in the client’s choice of low-cost, market-accredited facilities in London, New York or Zurich.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Catfish, Your Savings & Japan’s Gold Coin Giveaway

Don’t be greedy, or a giant catfish might force you to spew out your savings…

UNLIKE us – who are so smart today – ancient folk in ancient times used to believe the oddest things about how the world worked.

The Japanese, for instance, long thought that earthquakes were caused by a giant catfish, shuffling and shifting whenever the great god of Kashima forgot to keep his foot on a heavy stone which held the beast down, deep beneath the coast of Honshu. Honoring the Kashima shrine, some 80 miles north-east of what was then Edo (modern-day Tokyo) was therefore a good idea. Because tectonic upheaval, causing death and destruction, was a sign that the god was neglecting his duty.

November 1855 saw Kashima skip town, or so legend soon had it, leaving the god of fishing in charge of the stone and the catfish. What a mistake! The Great Ansei Earthquake killed 7,000 people at a stroke, and many more in the days and weeks after.

But it wasn’t all bad…

“Don’t be greedy!” one of the laborers urges his mates in this popular print, Mr.Moneybags launches forth his ship of treasure. “You’ll regret it if you save this money and an earthquake comes.

“Better go and spend it at the brothels and keep it circulating.”

The Kashima shrine itself was damaged in March 2011′s catastrophe. But the poor idiots of old-time Japan would still find a silver lining. Although some of the hundreds of namazu-e (catfish pictures) from 19th-century Japan show the beast captured and beaten – or even committing hare-kiri to say sorry – he also became a folk hero to laborers and shopkeepers, because he forced the wealthy to spend money on repairs and rebuilding.

Think of it as a divine take on Bastiat’s “broken windows” parable. Knocking things down is good for society (or so society says), since the glazier is paid and then spends that money in turn. Earthquakes are great for production, because they force cash out of locked chests into the pockets of carpenters, plasterers, bricklayers and masons – just the right type to keep it circulating again.

“For Edo residents,” one scholar explains, “the earthquake of 1855 was an act of yonaoshi, or ‘world rectification’.” In print after print, catfish shake or squeeze wealthy old hoarders who vomit or shit out gold coins, quickly scooped up by dancing laborers eager to spend it on booze, noodles and trips to what’s now known as Soap Land.

“Like typhoon-season floods and dry-season fires,” notes another 2011 look back, “earthquakes and tsunamis were understood as corrections of temporary imbalances in the vital force perpetually flowing through the world (known in Japanese as ki and in Chinese as qi). Periodic eruptions of natural violence released pent-up force and kept both nature and human society healthy by renewing them…Confucian philosophers as well as ordinary people believed that the economy followed the same principles. Just as ki flowed continuously in nature, money should be kept moving in the economy too, not allowed to stagnate and foster greed. For this reason, many people viewed capital accumulation distrustfully. Nature, they believed, censured it.”

Could anyone hold such a medieval view of economics today? Not outside a central bank or university, you might think. But greed is central to our depression’s mythology. From there, the attack on capital accumulation can’t be far off. And it’s ironic that to help keep money moving after the terrible earthquake and tsunami which hit Honshu this spring, Tokyo is now offering gold coins to investors buying its reconstruction financing bonds. On the minimum ¥10 million investment ($150,000) needed to qualify, however, Japan’s reconstruction bonds pay 0.05% per year without the coin, and a barely less miserly 0.3% with it if gold stays at today’s prices by the end of 2014. So the net effect is still to shake down Mr.Moneybags – otherwise known as Japan’s diligent household savers today.

Anyone calling this special half-ounce commemorative gold coin an “incentive” might sound like they need to raise money themselves to buy a calculator. But it’s not the first promotional effort tied to Japanese government bonds. Word reaches us here at BullionVault that special flyers – posted by door-drop in Tokyo – have recently been advertising government debt straight through the mailbox. As for coupons and premia, the Nomura brokerage is already offering its retail clients free shopping vouchers if they buy JGBs and lend to the government, too.

“The wealth of the realm belongs to the realm,” wrote Confucian scholar and advisor Yamaga Soko – who also developed the Samurai code of chivalry, bushido – in the mid-17th century. “It is not the wealth of a single person. Well should it circulate.”

Now compare and contrast French politician and essayist Claude Frédéric Bastiat writing 200 years later. “What would become of the glaziers, if nobody ever broke windows?” he asked in his famous parable of 1850, paraphrasing the “vulgar” mob who applaud the shards of glass on the street. Yet it is the shopkeeper needing to get his window fixed, “the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause…who is always kept in the shade…who shows us how absurd it is to think we see a profit in an act of destruction.” It is also the tradesman who stands for the capitalist, the diligent drudge minding his business. Shaken down like old Tokyo’s Moneybags, he can only watch in horror as his money – his treasure – is launched forth to common approval.

Here in the early 21st century, Occupy Wall Street think they know just who to choke with a catfish. “Hey, Paulson, you can’t hide, we can see your greedy side!” chanted the self-declared 99% at the hedge-fund manager in October, little caring that his fund has halved in value in 2011-to-date. The echo-chamber of TV news and financial blogs reckons the entire system is run by greedy bastards anyway. No doubt they’re right, but even before the crisis blew up, Fed chairman Ben Bernanke long ago blamed Asia’s savings glut for building imbalances in the global economy.

So how to shake cash from the hoarders? A Tobin tax on financial transactions looks a good start, even though retirement savers will end up paying, of course, as their pension-fund managers pass on the cost. Capping bank dividends only hurts savers again, because their income depends on such yields. Setting interest rates at zero aims to scare (or at least hurt) them for not spending money today. So too does printing more money, as Japan’s modern-day Moneybags know only too well.

“Your key financial asset, your medium of exchange – money – is also a savings vehicle (a store of value) and a safe asset (a unit of account),” explains Berkeley professor Brad DeLong. So “if an excess demand for financial assets is seen to cause a collapse in production and employment” – especially money hoarded in money, rather than being spent on new windows and brothels – “then it would seem immediate and obvious that generating an excess supply of financial assets would cause a revival.”

Immediate and obvious like a giant catfish making the rich puke gold coins, perhaps. Forcing a revival of spending by flooding the market with cash still hasn’t worked in Japan, but it has led to door-drops and vouchers to try and find new loans for the State. And further to DeLong’s proposal, our key financial asset and means of exchange is now something else, too: money is first and foremost a credit, held on deposit rather than hoarded in sock drawers at home. And being a credit, rather than tangible property, the vast bulk of money today is already out of the savers’ control.

Today’s Mr.Moneybags is by definition a lender. Indeed, his money’s already been lent out with gusto. The old miser has no choice; cash on deposit is owed to him, he does not own anything inside the bank’s vaults. On the bank’s balance-sheet, his savings are deemed “liabilities”, while on the other side of the ledger sit the banks’ “assets” – the loans it has made, using Moneybags’ cash. If the old miser (aka retiree or saver) withdraws all his cash, some debtor somewhere must repay their loan. And debt forgiveness is already being talked up – whether for governments in Europe or over-spent US consumers.

So blame greedy hoarders if you like. Just watch for the mob gathered round your broken windows, ready to choke you with a metaphorical catfish.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.