Investment Rarities Incorporated
History |  Q & A  |  Endorsements  |  Portfolios  | Flatware | Gold Coins  |  Silver Coins  |  Contact |  Home


Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

..Read More »

The Best of Jim Cook Archive

Best of Bill Buckler
December 30, 2008
archive print

Say's Law Of Markets:

Jean Baptiste Say's Law, or Say's Law of Markets, is simple. It says this: "The supply of each producer creates his demand for the supplies of other producers." Say's statement has often been shortened to this: "Supply creates it own demand". Note that there is no mention of any money or credit in his statement. The conceptional precision and elegance of his statement is that it works at all the levels of economics from plain barter to the most sophisticated levels of exchange. It lauds the real producers.

Jean Baptiste Say was a Classical Liberal in political terms and a Capitalist economist in economic terms. He understood that to improve the economic lives of all men and women first and foremost required an increase in their capital goods, the economic tools which produce the consumer goods. He saw only a free market with assured individual property rights as the means with which to reach that human goal.

Capitalism is about capital, pure and simple. It is not about consumption. That is what America forgot.

Now, the US is sliding into a fast steepening economic recession which, due to the enormous deflation in the US financial system, shows all the signs of turning into a full-scale deep deflationary depression.

VALID Definitions Are Intellectual Bodyguards:

The only valid economic definition of credit is: Present goods for future goods. This definition isolates valid credit transactions to those people or businesses who can produce present economic goods or services. Services are a second order of economic goods dependent upon the existence of the former. Consumers have no part in any of this since they produce neither economic goods nor render services.

It follows with the inescapable rigour of logic that the free market in any civil society is an area where the producers of economic goods and services meet to trade and exchange what they have produced to the extent to which they have been productive. Say's law of markets states that they can in turn exchange the goods they have produced for the economic goods of other producers or services to mutual advantage.

The Disturbing Element - Credit Without Production:

A disturbing element can creep into the free market if there are people who can show up with valid means of monetary payment which they have borrowed. For a while, such people can acquire new additional economic goods beyond what they have produced. To the producers in the market, this process can and does make it look as if the market is improving if a lot

of people show up to buy with money they have borrowed. In fact, of course, no more economic goods have been produced than before but the demand for them has certainly increased. A valid user of credit knows in advance that he is able to service the loans out of his current and future production. A valid user of credit also knows that he can eventually repay the principal sums owed out of his current and future production, at the cost of consuming less.

Such valid users of credit are in full compliance with the definition of credit as well as Say's market law.

Consumer Loans Are An Economic Contradiction in Terms:

The real economic problem arrives after monetary loans have been extended to consumers. As buyers of the present economic goods in the market, they have no problems. They look like any other customer. The problem arrives when the future becomes the present. At that point, these consumers show that they have no present goods in hand with which the repay their earlier loans. The goods they bought earlier have been consumed. Strictly speaking, a consumer good is CONSUMED, after which it no longer exists. The producers of the good now discover that they cannot be repaid. They are in the position of having lent a car for a year and, when the year is up, discovering that the borrower of the car cannot pay for it.

The car is a year older with extra miles on it. It needs new tires, servicing and some maintenance and repairs. But there is no money with which to do that. Obviously, this is a version of capital consumption.

Lord Keynes And Say's Law:

In his intentionally muddled treatise published in 1936, the main claim to intellectual fame of Lord Keynes was the assertion that he had overturned Say's law of markets. He did no such thing. He merely ridiculed Say's law with aspersions and wit. He never laid a glove on it directly. Then, he walked away.

Keynes also proceeded to switch the classical definition of inflation from being an increase in the stock of money in circulation to being an increase in prices. By this method, he destroyed the clear observation of any inflationary increases in the quantity of money in circulation or any increases in the amount of credit issued as loans. Finally, he wilfully misidentified the cause of the high unemployment in the 1930s, claiming it was a case of insufficient demand. The door was then opened for government to supply this sudden and now missing demand with endless borrowing and deficit spending. Governments across the West had all done this - engaged in huge deficit spending since about 1931 - but they felt guilty about it because that was in contradiction to Classical Economics. Keynes "validated" what they had been doing for years. The deficit spending governments hailed Keynes as the greatest economist in the world.

The Forgotten Economic Connection:

What is totally overlooked today is that the producer and the consumer are in fact the same person acting in two ways.

They are not two people, one producing and the other consuming a large part of what the producing person has produced. The producer and the consumer are the same person acting in two different economic guises - first as a producer and then as a consumer. If such a person is also a monetary saver, he or she is one of the benefactors of mankind. Savers leave their own unconsumed economic goods out in the economy. These unconsumed economic goods are the feedstock for the capital that is in the economy and needed for its maintenance and ongoing upkeep. If savings (unconsumed economic goods) exceed these levels, they are the economic seed grain for further expansion and extension of the total stock of productive capital, leading to a higher output of new consumer goods later.

Broken Economic Links:

The central fallacy today is that additional issuances of credit can act as an economic substitute for the savings which have NOT been made. All attempts to increase credit issuance by lowering interest rates are futile. The lower the interest rates on offer, the more potential savers there are who don't save because they see the effort as being futile. As a consequence, voluntary monetary savings shrink. Without the savings, there is often not enough unconsumed economic goods left in the economy for basic upkeep of the capital stock. And an expansion or extension of the total stock of capital is impossible.

That is why the Fed's 0.00 and 0.25 percent official interest rate policy is fatal. It is economically fatal because it will lower US savers' deposit rates so low that any incentive to

save will be killed nationwide.

The US Consumer Society:

Such is the situation in the US today where the Fed calmly reports that consumption is now 71 percent of the US economy on a GDP basis! But it gets worse, because "GDP" data is fatally flawed. The costs of all governments - federal, state and local - rationally should be taken out of the remaining 29 percent. Governments are consumers, consuming a part of what the private civil economy produces. The civil economy is left with trying to sustain itself on what is left over after governments have taken theirs.

All Good Economic Reasoning Starts From Barter:

Solid rumours out of President-elect Obama's transition team now point towards a "stimulus" package of spending initiatives amounting to at least $US 850 Billion and perhaps as much as $US 1 TRILLION.

The entire Obama package is, of course, to be added to the US federal budget deficit, the huge sums have to be borrowed before they can be spent. In fact, deficit spending is a semantic and intellectual fraud. In a barter economy, the "concept" would amount to the local ruler inviting the entire tribe to a party to eat a herd of "negative cows" - cows which are literally not even there. In fact, economically, only plain errors in reasoning allow this modern fallacy to exist. Spending - ANY spending - can only take a portion of economic goods out of the present supply of economic goods.

Once taken out and consumed, these economic goods are no longer here, but the money which was borrowed by government in order to get these goods certainly IS here. It is circulating through the economy, as are all the new debts.

Deficit spending leads to over-consumption of the economic goods which government chooses to acquire while increasing the quantity of money in circulation and adding to the amount of government debt which people in the private economy will have to pay for later in higher taxes. An official spending cut would have the opposite effect because it would leave more goods in private hands with which to rebuild.

In the US economy, it is all but over. The consumers have consumed most of the producers and the ones who remain are now too few and too undercapitalised. That is why the US Dollar is not worth saving.



Nothing demonstrates better the current state of the US economy than its international deficits on trade and current account. The US current account deficit amounts to 4.8 percent of gross domestic product. This means that the US economy has to be funded by the rest of the world to that extent by new loans.

The US trade deficit, which accounts for most of the current account imbalance, narrowed to $US 176.5 Billion in the third quarter from $US 180.1 Billion the previous three months. This means that the US economy cannot supply itself by means of its own internal physical output so must cover this output gap by importing $US 706 Billion worth of foreign made goods. Historically, it is worthwhile to record that in 1961, President Kennedy lamented the fact that the US had been in a trade deficit for all of the preceding decade – since 1950. This trade deficit has remained - and grown - ever since.

The World's Number One Debtor Nation:

Trade deficits cause external debts to pile up. As such foreign debts climb, the interest payments due also add to these debts. That is why the US current account deficit is now climbing faster than the trade deficit. In 1985, the US economy passed a watershed. In that year, the US became a debtor nation.

On the latest IMF figures, the US owes the rest of the world about $US 14 TRILLION in net debts. With this hanging over its head, the US faces the prospect of trying to gain foreign funds for its "triple deficits" - the trade, current account and federal budget deficits. Even by official numbers, the US budget deficit for 2008-09 is predicted to be more than $US 1 TRILLION! In this situation, the US is now offering the lowest rate of interest of any Western nation. Finding willing lenders will not be easy.

The Attempted Restart Of A US Credit Expansion Flames Out:

The debt inundated American public no longer wants to play this economic game. Lower interest rates are not enticing them to borrow more. With the entire US financial sector in shock at the losses already on their books, they are not playing the game either. They are raising credit conditions and lending less.

The latest facts show this. US consumer credit fell $US 6.4 Billion in August and another $US 3.5 Billion in October, according to Fed data. The August fall was the biggest in the

past 65 years.

California Screaming - Louder:

The median price of a southern California home dropped to $US 285,000 in November. The November median sales price was down 34.5 percent from the same month a year ago and 43.6 percent from the peak of $US 505,000 set in several months of 2007, according to San Diego-based MDA DataQuick.

This is a stark effect of a full-scale classical deflation. It is the effect caused by one or very few houses sold at MUCH lower prices, breaking the valuations of hundreds or thousands of other houses, many not even on the market. As a result, huge numbers of houses are "under water", the mortgages leaning against them being higher than the valuation on the house. The great US deflation is destroying the net worth of millions of Americans and US medium and small businesses. On the latest data which The Privateer has in hand, the US deflation is accelerating! This is a second stage deflation moving towards its third and final stage, a process which The Privateer has analysed and explained in recent issues.

US auto sales plunged 37 percent in November to a seasonally adjusted annual rate of 10.2 million, the lowest level in 26 years, according to Autodata Corp. General Motors said on December 12 that it will close 30 plants for at least part of next quarter, cutting production by 250,000 vehicles. This is the crash….

The Fatal "Bookends":

2001 was the first year of George W Bush's first term as President. About all that is remembered about that year today is 9/11. But the event which had far greater long-term consequences than has 9/11 was the unprecedented series of official rate cuts undertaken by the Greenspan Federal

Reserve over the course of 2001. The Fed Funds rate began 2001 at 6.50 percent. Eleven rate cuts later, it ended the year at 1.75 percent. To that point, this was the biggest one-year rate cutting frenzy in Fed history.

2008 has been the last year of George W Bush's second term as President. The Bernanke Federal Reserve has cut official rates seven times, reducing the Fed Funds rate from 4.25 percent to - ZERO. What the Greenspan Fed began, the Bernanke Fed has finished. There is NO Fed Funds rate left!

What happened between those two "watershed" years was the final debt-based credit orgy of the global fiat money era. World stock markets were rescued from their near death experience and soared to one last bubble high late in 2007. A global housing bubble was created and expanded to grotesque proportions. With that came the explosion of "collateralised debt obligations" of all descriptions all stapled together into "investments" and sold around the world. US federal government deficits exploded. US trade deficits exploded – to which were added a current account deficit. Corporate and "consumer" debt reached totally unsustainable levels. The global financial system became literally choked with paper.

In short, over the period between 2001 and 2008, the world reached and then passed the limits to credit expansion. The evidence for this contention is abundant. The entire global credit crunch supports it. But the definitive evidence is the stark contrast between the consequences of the great Greenspan rate lowering orgy of 2001 and the Bernanke rate lowering orgy of 2008.

Thanks mainly to a MASSIVE increase in US Dollar "reserves" sopped up by the rest of the world in general and by Asia and CHINA in particular, the credit expansion fuelled by the 2001 rate cuts "worked". Global stock markets rebounded in early 2003, fuelled by "cheap money" and by the US invasion and occupation of Iraq and Afghanistan. On top of that, there was the global housing blow-off fuelled by the eradication of any vestige of concern for the creditworthiness of the borrowers. And on top of it all was laid a huge expansion of the US triple deficits - budget, trade and current account.

The entire edifice began to crumble when the "collateral foundation" gave way beneath it beginning in early 2007. That led to the freeze in the issuance of derivatives based mainly on the mortgage paper which had been issued to fuel the housing boom. That led to the banking freeze. By the end of last year, the US Dollar was plumbing historic lows while the Bernanke Fed frantically lowered rates.

Now, the Bernanke Fed has completed the process. It has not stopped, as did the Greenspan Fed, at a Fed Funds rate of 1.00 percent. It has gone to ZERO. Monetary "policy" is no longer operable in the US.

A Year Of Two Halves:

For the first half of 2008, the bailout packages kept getting bigger and so did the rate cuts by all the world's major central banks. Every new problem was met by throwing more (credit) money at it. None of the financial entities deemed too big to fail were allowed to fail. They were merged with other entities, or they were taken over with the government brokering (and financing) the deal, or they were simply bailed out. To the vast majority of hapless onlookers, the lenders and borrowers of last resort - the central banks and Treasuries of the major nations, seemed to be functioning as they were supposed to.

The result of all this was a mass exodus into real goods – the most basic real goods there are - commodities. The prices – all of them internationally expressed in US Dollars - soared. Basic foodstuffs soared. The cost of basic building materials like lumber and steel soared. Metals prices soared. Oil prices went into the stratosphere.

That came to an abrupt end - and reversal - in the second half of the year. There were two catalysts for this. The first came in mid July when US Treasury Secretary Paulson announced a joint Treasury/Fed bailout of the two biggest US "Government Sponsored Enterprises" (GSEs) - Fannie Mae and Freddie Mac. Coupled with that was an emergency raising of the Treasury's debt limit, taking it above $US 10 TRILLION for the first time. This led to an abrupt turn in global attitudes towards debt. Seeing the bailout plan as proof that debt levels were becoming unsustainable, a rush to "deleverage" - to reduce the amount of debt to the greatest extent possible - took over.

The second catalyst was the decision by the Fed and the Treasury in September NOT to bail out Lehman Brothers. On September 15, 2008, having no choice, the firm filed for Chapter 11 bankruptcy. This shocked global financial markets to the core. After a rising crescendo of financial bailouts that had been building for over a year, the US monetary "authorities" had failed in their "last resort" capacity.

The global "deleveraging" instantly and hugely intensified. Since most of the debt being paid down or off was denominated in US Dollars, the demand for Dollars soared and so did the trade-weighted US Dollar index (USDX). Global stock markets collapsed. Commodity prices, which had already been tumbling, went into free fall. Frantic US repatriation of capital added further fuel to the rise of the US Dollar.

Trust in monetary officials and in governments and central banks was sorely shaken. Governments all over the world had to issue blanket guarantees on bank deposits of ANY size to prevent customers storming the counters to get their "money" out. And, with the stark evidence that at least one bank was NOT "too big to fail", US "consumers" started to curtail their borrowing.

The final result of all this has been a worldwide stampede into the ONLY financial asset left that most people still think cannot fail. And that is, of course, government debt paper. Consider this December 18 quote from one of the primary dealers in Treasury debt paper: "Nobody is comfortable owning anything but Treasuries right now. If you're looking for something in history to compare this to, there's nothing."

Indeed there isn't. Over the past month, the price of Treasury bonds on the secondary markets has exploded upwards to an extent and with a velocity never before seen. Right across the curve, yields are at all time lows. The yield on three-month paper has actually gone "negative" recently, meaning that any holder is actually paying the Treasury for the "privilege" of holding its debt paper. Three-month yields hit 0.01 percent for the first time on November 21 and have hardly budged since.

As the year comes to a close, we have literally reached the point of no return. There is no return on Treasury debt paper. There is no return on official US central bank interest rates. There is nowhere to go but up for Treasury yields and nowhere to go but DOWN for the US Dollar. The Dollar has started on that road already. Treasury yields are sure to follow.

Nowhere To Go - But Back To MONEY:

The latest US Fed "flow of funds" report states that over the past year, the rest of the world (ROW) has increased their holdings of US financial assets by $US 1.224 TRILLION to $US 16.772 TRILLION. On the surface, this is a huge increase. But take a second look at the numbers. The increase over the past year is 7.87 percent. Now consider this. The same Fed "flow of funds" report states that over the past three years, the ROW holdings of US financial assets have increased by more than 50 percent. Clearly, the accumulation of US financial assets by the ROW is slowing down.

Nor is this increase by the ROW anything like big enough to absorb what is being produced by the US. The Fed report goes on to state that over the third calendar quarter of 2008, total US "non-financial" credit increased by $US 2.348 TRILLION. US federal government borrowing accounted for $US 2.079 TRILLION or 88.5 percent of that total! US credit expansion, such as it is, is now almost entirely government driven. If anything is crystal clear, it should be that the pace at which the US government is creating new credit is TOTALLY unsustainable.

With the US Dollar literally not worth saving and US Treasury debt paper literally not worth holding, the disastrous experiment with credit based paper has all but run its course.

Recent Events:

Two weeks ago, we reported on the fantastic upside explosion in the secondary market for US Treasury debt paper. That explosion has continued. If anything, it has accelerated, fuelled by the anticipation of the "last Fed rate cut". With the cut to ZERO now accomplished, we have reached the end of the line.

Two weeks ago, the $US Dollar index (USDX) was hovering at 87.19, not much more than a point below the multi-year high it had set as recently as November 21. By December 17, the day after the Fed cut rates to zero, the USDX had plummeted all the way down to an intraday low of 79.50 on the spot futures market. As already stated in this issue, the post July 2008 US Dollar rally has ended over the past two weeks. The bubble in the US Treasury markets stands ready to evaporate. The only question is when that will take place. If it survives this year, it will not survive very long into 2009.

Ó 2008 – The Privateer

(reproduced with permission)


Delivery via email

Trial: 5 issues (once only)

Six-Month: 12 issues

Annual: 25 issues

Two-Year: 50 issues

Subscribe at