Murray Rothbard, 1; Jim Willie, 0.
One year ago, Jim Willie made a big mistake. He wrote off Murray Rothbard as a dolt.
He did not mention Rothbard by name. He was too smart for that. He simply dismissed Rothbard's description of how the Federal Reserve System works. Jim Willie thought he knew better.
I warned him about this. He ignored me. He dismissed me as a dolt. Lots of people have. But it is never wise to write off Murray Rothbard as a dolt.
Who is Jim Willie? He is a statistician. He has a Ph.D. He is a gold bug. He publishes a newsletter with the difficult-to-market name, The Golden Jackass.
Here is how all this started.
"THE IMMINENT COLLAPSE OF THE T-BOND MARKET!!!!"
On September 25, 2013, he made a startling announcement.
The USTreasury Bond market breakdown is in progress, all part of the general USDollar global rejection that is taking the world by storm. Of course, residents inside the US Dome do not notice, since they only perceive it as the native currency.
He said he had what amounted to inside information.
A recent event has occurred, which was brought to the table by an unexpected corner, but a reliable source, who has a banker friend. The bond market has converted into a Flash Trading arena within the bank syndicate to maintain bond prices. This is an explosive development, indicative of unsustainable sovereign bond prices kept up by round robin marked by internal sales within the Federal Reserve banks themselves.
He is legendary for his use of underlines, bold facing, italics, exclamation points, and capital letters.
He went on.
Two weeks ago, an extraordinary memo was received from a trusted colleague. It could be important in yet unknown ways. The USTBond market is broken, and the USDollar cannot be defended. The memo read as follows. "I spoke with an old banking friend of mine on Saturday who now works as an Executive Officer in the Regulatory Division of the Dallas Federal Reserve. The gist of the conversation was this. There was a panic teleconference among all of the Regional Federal Reserve banks on Thursday afternoon [Sept 5th]. The subject of this emergency teleconference was USTreasury Yields. The perilously low capital of the Federal Reserve was at issue in this meeting, and the fact that they could no longer afford to defend the USDollar at this point. All of the regional Federal Reserve Banks were ordered to unload as many USTreasurys and Mortgage Backed Securities as they could, even though they are selling at a loss, to provide immediate liquidity even at the expense of capital! Eventually, late Friday night a tranche of Treasurys was sold above market price to several Federal Reserve Member banks in order to drive down the yield! You can plainly see this sale on the 10-year USTreasury chart." Big news! Panic setting in! Unsustainable bond arena! Flash Trading has hit bonds!
This was, as Dr. Willie would put it, Big News!!!
But he was just getting warmed up.
More important, WE HAVE NOW SEEN THE BEGINNING OF FLASH TRADING ON USTREASURY BONDS!! A grand round robin closed circle selling program will be relied upon in desperation to maintain price, just like with NYSE stocks in Algorithm Trading.
On September 27, I responded to this article. I posted it on my site. I wrote the following.
I rarely see anything this obviously wrong. He has the economics of the bond market 100% backwards. The error is total. Consider this.All of the regional Federal Reserve Banks were ordered to unload as many USTreasurys and Mortgage Backed Securities as they could, even though they are selling at a loss, to provide immediate liquidity even at the expense of capital!When a central bank sells any asset on its balance sheet, this reduces liquidity. The digital money used by the buyer to purchase the asset is taken out of the economy. The sale of the asset shrinks its balance sheet. Willie is talking about regional Federal Reserve banks here. This is the bottom of the inverted pyramid of bank assets.
The sale of assets by a Federal Reserve Bank is deflationary. Anyone who has read even the most elementary materials on how central banking works should know this.
WHAT DID ROTHBARD SAY?
At this point, I decided to call in the biggest gun in my arsenal: Murray Rothbard. I continued:
An article by Murray Rothbard describes the process in detail. He concludes:If the Fed purchases any asset, therefore, it will increase the nation's money supply immediately by that amount; and, in a few weeks, by whatever multiple of that amount the banks are allowed to pyramid on top of their new reserves. If it sells any asset (again, generally U.S. government bonds), the sale will have the symmetrically reverse effect. At first, the nation's money supply will decrease by the precise amount of the sale of bonds; and in a few weeks, it will decline by a multiple, say ten times, that amount.
Usually, in gold bug circles, citing Rothbard is sufficient. But I wanted to make sure that this was not some obscure insight by Rothbard. So, I continued.
If you sell an asset, this tends to reduce its price: greater supply, same demand ===> reduced price (to get someone to buy). This is economics 1. In bonds, the lower the price, the higher the yield. They are inverse relationships. Here is a summary by Investopedia, a conventional site on basic investing.The relationship of yield to price can be summarized as follows: when price goes up, yield goes down and vice versa. Technically, you'd say the bond's price and its yield are inversely related.http://www.investopedia.com/university/bonds/bonds3.asp
The sale of bonds by the Federal Reserve banks would therefore have driven up the yield. But not according to the economics of Jim Willie.
Eventually, late Friday night a tranche of Treasurys was sold above market price to several Federal Reserve Member banks in order to drive down the yield!First, why would member banks pay the FED an above-market price? This is "buy high." This deserves an explanation. He offers none.
Second, the effect of such a sale would be to reduce the monetary base, which is a deflationary policy. What authority did these regional FED bankers possess that authorized them to counteract the FOMC's policy of QE3? When did they receive this authority?
I then drew a conclusion.
In short, Jim Willie doesn't know what he is talking about at this most basic level. He has the economics of the bond market upside-down. He has the economics of the Federal Reserve literally upside-down: regional FED banks making national monetary policy. Then he adds exclamation points to prove all this.
He uses his utterly inaccurate understanding of the bond market, plus some highly improbable inside information, to draw this conclusion:In fact, QE to Infinity will be ramped up, with double the volume of USTBond purchases in the next several months. The foreign nations will diversify out of their USTBonds held in reserve, and foreign corporations will dump outright USTBonds, in what will become the grandest vote of no confidence toward US-UK bankers in modern history. The USFed must sop up the supply. The alternatives are truly horrendous.
I then made a highly specific prediction: "My prediction: None of this will happen in the next 12 months."
The 12 months have now passed. Has there been a crisis in the 10-year T-bond market? No. Was there any sign of such a crisis a year ago? No.
Take a look at the chart for T-bond rates. They have moved up one percentage point over the last 12 months, but they are 50% of what they were in 2007. Yet there was no panic in June 2007. All of the markets were booming. Anyone who bought T-bonds that month is sitting on a fat profit. The market value of the bonds moves inversely to the interest rate (yield).
Contrary to Jim Willie, the T-bond market is alive and well.
JIM WILLIE RESPONDS
Jim Willie published a scathing attack on me on October 3, 2013.
A rebuttal is warranted. The entire analytic discussion, defense of viewpoints, exposure of corrupted markets, and intriguing human psychology regarding forecasts is covered. It might be enlightening to many folks. It might be entertaining to some. It might be tawdry to a few. Gary North sounds more like a mainstream financial apologist than a sound money advocate. His days at the Lew Rockwell Institute are over. He seems a confused man with a limited comprehension of either the financial system or market developments, who has offered a shallow dispute of the Jackass recent perspective on the USTreasury Bond market. Given his extremely unimpressive analytic ability and dim vision, with a certain blindness extended from a certain perceptual inversion, he will be referred to henceforth as Mr South. Nothing personal, just hard to respect incredibly shallow attacks with no solicitation, surely without recognition of my past correct forecast trail. South is surely a good man, just not a good analyst. His recent essay featuring the Flash Trading and other USTreasury Bond factors was an unsolicited disgraceful assault with hardly a single point of valid substance. It was an extremely unimpressive display. To be sure, High Frequency Trading, also known as Flash Trading, is not skin in the game, and not typical capital at risk. It is a blatant price control practice that produces false levitation in asset prices. The Jackass has a long history of being a team builder. Mr South is not on any team, no longer on the Rockwell team. He has chosen to strike out errantly on his own. Let this article serve as my rebuttal, which should add a good deal more light on the phony USTreasury Bond market which is not well understood for its status as being the greatest asset bubble in human history, not just modern history. It exceeds the housing & mortgage bubble that formed a decade ago, if not from volume, then from scope since it is laced throughout the entire global banking system.
Nowhere in his rebuttal did he post a link to my article. Nowhere did he quote me directly. So, none of his readers could track down my article.
I responded the same day. You can read my response here: //www.garynorth.com/public/11623.cfm
Then he upped the ante. He made these predictions.
A. Fall of the House of Saud, the end of Saudi Arabian Regime (happening)
B. Death of Petro-Dollar, the USMilitary Displaced in Persian Gulf (happening)
C. Global Dumping of USTreasury Bonds, the Return to Sender (happening)
D. Three Big Banks at Failure Risk: Barclays, Citigroup, Deutsche Bank (DB happening)
E. Split of USDollar into Domestic Version and Intact Foreign Version
F. USFed Bond Purchase Plan (QE) will Double in Volume, and not Taper
G. Arrival of Gold Trade Settlement with Intermediaries, begun in the East
H. Metamorphosis of BRICS Bank into Gold Trade Central Bank
I. Price Inflation Impact to USEconomy from Global USDollar Rejection
None of this has happened.
None of this has come close to happening.
This is the most comprehensive list of failed predictions I have ever seen. There is something awe-inspiring about it.
The man has a gift: the reverse Midas touch.
CONCLUSION
Let me re-state what I wrote a year ago, exactly as I wrote it. Jim Willie doesn't know what he is talking about at this most basic level.
Here is a rule of thumb: you can safely ignore any gold bug who shrugs off Murray Rothbard as an ignoramus regarding the Federal Reserve.
Dr. Willie had an opportunity to reverse himself. Instead, as I titled my rebuttal, "Jim Willie Digs a Deeper Hole for Himself."
My suggestion: when you're in a hole, stop digging.
Anyone can make a bad prediction. But when he makes this prediction, based on the premise that Murray Rothbard did not understand the Federal Reserve System, he is exposing himself to a very high risk of looking silly when the prediction fails to materialize.