Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Joseph Shaefer’s (http://www.stanfordwealth.com/) original review* for the sake of clarity and brevity to ensure a fast and easy read. Shaefer goes on to say:

I believe books can teach us about human nature, investing, and wealth and risk management and make us more relaxed, more confident and better investors… and as Gustave Le Bon wrote in the introduction to his little gem, ‘The Crowd: A Study of the Popular Mind’ back in 1896, “The substitution of the unconscious action of crowds for the conscious activity of individuals is one of the principal characteristics of the present age” and no truer words were ever spoken about the psychology of how people tend to invest in this “present age”!

“The Crowd” was not a book written about the stock market. Au contraire! It was written to try to understand group psychology, whether the group was a criminal organization, an electorate, a jury or a parliament. Nevertheless, understanding the group dynamics of each of those is a good practice ground for understanding the emotions and actions of one camp or another when debating a stock, an industry or a sector and “The Crowd” offers, via these other avenues, unique insights into what makes people do the things they do from within the warm incubator of like-minded individuals.

At its lowest level of over-simplification, Le Bon’s thesis is that the behavior of crowds is based on sentiment and emotion rather than intellect and research. That may seem rather obvious today since other social scientists have been agreeing with and building upon his work for over a century – but how many of us invest accordingly? Do we seek to understand the hope, fear, greed, mistakes and misinterpretations of the crowd or do we seek to find “facts” for why the market rises or falls on a given day, week, month or year?

Most of us want to know “why” the market declined today. We are satisfied when we hear the evening news: Oh, it was because Company X declared lower sales or because Company G was sued by the SEC or because Greece is not going to get a full bailout from Germany. Ah, we say – now it makes sense. Of course it went down.

Le Bon would no doubt say that it declined because there were more sellers than buyers so the price began moving downward to attract more buyers. It declined because more people became nervous, or got a wild hair from something they overheard at the giant media water cooler, or received a message on their dentures from alien life forms. It is sentiment that moves crowds, not reason – and being a member of a crowd causes one to behave differently from the way one would behave as an individual.

Le Bon saw crowds as a psychological phenomenon rather than a physical one. Individuals can form a crowd having never met or come together simply by having a common cause. This type of influence can easily be found in groups such as members of a particular occupation or calling, religious sects or even entire religions, sports teams and their fans, and so on. Then there are the crowds of advocates for the bullish camp and the bearish camp in any market.

Le Bon maintained that:
1. a crowd effectively has a mind of its own
2. individual behavior is altered by membership in the crowd – often to the point of subjugating misgivings or original thinking to the will of the crowd.

The above two concepts suggest that market agnosticism, while a very difficult path to tread, seems to offer the best hope of long-term success and, as such I heartily recommend this book to you.

*http://seekingalpha.com/article/200373-timeless-investment-classics-part-ii-understanding-the-hopes-fears-greed-of-crowds (Joseph Shaefer is author of the investment primer ‘Bringing Home the Gold’ and editor of Investor’s Edge®.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Joseph Shaefer’s (http://www.stanfordwealth.com/) original review* for the sake of clarity and brevity to ensure a fast and easy read. Shaefer goes on to say:

You may be excused for wondering what a book published 169 years ago could possibly teach you about today’s markets. Not only had CDS’s and sub-prime mortgages not been invented, but in most parts of the world stock markets themselves had not yet been invented! Never forget though, that financial markets are subject to, sometimes dependent upon, and often ruled by, the whims of human nature. Human nature is as timeless as the stories from the Bible, the Torah, the Koran, the I Ching and every other compendium handed down orally until finally set down on leather, papyrus, or paper – and no one has described the follies of humans more cogently than Charles Mackay in 1841.

‘Extraordinary Popular Delusions and the Madness of Crowds’ includes case histories–long before case histories became a standard teaching tool–of three infamous financial manias.

1. The Tulip Mania
Tulip mania was a financial bubble in the 1620s and 1630s in Holland when contract prices for tulip bulbs reached amazingly high levels before collapsing. At the height of tulip mania in February 1637, a single tulip contract sold for more than 10 times the annual income of a skilled craftsman. Then it all fell apart.

2. The Mississippi Scheme
John Law’s early 1700s Mississippi Scheme, foisted by a Scottish economist mostly upon his French neighbors, in which the “untold wealth” of “Louisiana” (what the French called America and the Caribbean) was to pay off in no time at all. The excitement was so great that he issued considerably more paper shares than there was money in the Banque Generale Privee, at that time effectively the central bank of France — which he was head of — and which was effectively the guarantor of all that paper.

3. The South Sea Company
The South Sea Company was established on the British side of The Channel about the same time. It was granted a monopoly to trade in Spain’s Central and South American colonies as part of a treaty after the War of Spanish Succession. In return, the company assumed the entire national debt England had incurred during that war. The shortcoming that no one seemed to grasp was that, as part of the treaty with Spain, the South Sea Company was allowed to send only one trading ship per year to Spain’s American colonies! Still, people in that heavily class-conscious society, from the lowest to the highest, threw money at the venture as the company employed “the most extravagant rumours” to pump the share price from 100 Pounds to 1,000 Pounds in less than a year. All lost except those within the government and the nobles who had never really paid for their shares but were invited to accept shares in exchange for the use of their august names.

The Benefit of Hindsight
You cannot understand the dot-com phenomenon or the real estate bust nearly as readily without studying how it’s all happened before. Remember, nearly $1 and ½ trillion was invested in Internet stocks by some of the savviest investors in the world. When it was all said and done, that trillion and a half had been reduced to less than $100 billion. We all lived through it although some of us were fortunate to have sidestepped it, perhaps in part because we had once read ‘Extraordinary Popular Delusions and the Madness of Crowds’.

By understanding the patterns of greed and hope, and the ready willingness of charlatans to step forward to give us what we want, we might avoid the pitfalls that inevitably follow. If you understand that when someone utters the words, “This time it’s different” you are in the end-stages of a popular mania and can extricate yourself and save your entire fortune. I’m guessing that the rank-and-file Enron employees, who sunk their entire life savings into Enron stock, wish they would have done so.

What I take for action from this re-reading of ‘Extraordinary Popular Delusions and the Madness of Crowds’ is that the “prevailing wisdom” is less about wisdom than it is the prevailing combination of hopes, fears, greed, arrogance, wishes and prayers that enough people fervently want to believe in. It is also that man is a social animal influenced by others in his social, business, personal, reading, or Internet-surfing circle – a circle he defines based upon his own biases, upbringing, prejudices, experience, and the comments and approbation or criticism from those around him.

Reality – Then and Now
1. 1929
In 1929, many years after Mackay wrote this little gem, that combination of hopes, fears, wishes and prayers that enough people fervently want to believe in led them to believe they were on a permanently high plateau from which companies could never fall.

2. 2000
In 2000, the same geist / sentiment prevailed in regards to dot-com companies. It was ‘The New Economy’, ‘A New Paradigm’, ‘The New Reality’.

3. 2006
In reality, however, it wasn’t any more than home prices, circa 2006, could never fall in San Francisco, Las Vegas, Miami or wherever the proponent of exponential growth wanted so fervently to believe in.

4. 2010
In 2010, when all those around me are investing as if there will never be another correction, retrenchment, or minor or major pullback, I am quite comfortable under-performing the market for the time being and sticking with high dividend-paying equities and bond funds with 1-3 year maximum maturities, while shorting US Treasuries.

*http://seekingalpha.com/article/196344-timeless-investment-classics-part-i-the-best-book-ever-written-about-market-psychology (Joseph Shaefer is author of the investment primer ‘Bringing Home the Gold’ and editor of Investor’s Edge®.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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In further edited excerpts from his review* of Joseph Calandro’s book “Applied Value Investing,” C.J. Maloney (http://hnn.us/blogs/4.html) goes on to say:

Joseph Calandro’s book is an attempt to “adopt the modern Graham and Dodd approach and apply it in a variety of unique and practical ways” (p. xii), Graham and Dodd being, of course, the two gentlemen who wrote the book on stock-market investing, 1934′s “Security Analysis”. He laments that many investment how-to guides “give great advice on what to do, but they do not tell you how to do it” (p. xix).

Mr. Calandro set out to remedy that shortfall and created a book that stands out from the crowd. Coming in at an easy-breezy 230 pages, the bulk of the book is devoted to the use of the Graham-Dodd methodology to analyze a number of large-scale equity investments, among them Edward Lampert’s 2004 acquisition of Sears and Warren Buffett’s GEICO and Gen Re acquisitions. It is Buffett’s investment acumen more than anyone else’s that Mr. Calandro admires. Calandro shares the man’s faith in the usefulness of the Graham-Dodd approach (which says it is possible to outperform the market over the long run) versus the “efficient market theory” (EMT, which states that you cannot).

Mr. Calandro quotes that great investor’s quip: “From a selfish point of view, Grahamites should probably endow chairs to ensure the perpetual teaching of EMT” (p. 112). Mr. Buffett has gained prominence by personifying the fact that yes, Virginia, you can beat the market in the long run. Mr. Buffett excels at taking advantage of those who deny someone like him can exist.

It’s the little things that make a life, and that amusing quote from Mr. Buffett highlights what, to me, is the surprising pleasure of this investment book — it does not read like an investment book. Mr. Calandro’s style is easy on the eyes, informative, and (unlike far too many books of its kind) does not read as if it was written by a computer.

For instance, in the chapter on the Sears acquisition, Mr. Calandro takes a few moments to give a brief background on the history of the company, humanizing the story and inserting flesh and blood in between all the net asset value calculations. As a reader you appreciate the humanization, while as a professional you value the details. For his chosen genre, Mr. Calandro plays music for the masses.

Humanizing economics is standard fare for the Austrians, and this book, being Austrian influenced, lives and breathes. Among the seven chapters it is the fifth, “Macroanalysis, Opportunity Screening, and Value Investing” where the book holds, for me, its biggest contribution to the genre: it takes the “macro” outlook as step one.

Mr. Calandro holds that “it could be easier to ‘buy during periods of pessimism and low prices’ if you understand the macroeconomic reasons behind the pessimism” (p. 110). And he takes what is mistakenly called “the macro” and explains it using the Austrian view, which is decidedly (and mistakenly called) “micro.” Since economics all starts with the individual, this approach makes perfect sense, avoids confusion, and saves time for video gaming.

Mr. Calandro laments that “the field of mainstream economics today is, in many ways, extremely troubled” (p. 227), which is a polite way of saying that all the PhD mathletes who have infested the profession haven’t the slightest idea what they are talking about. To help investors out of the bog, Calandro borrows thoughts from sources diverse, from Robert Shiller to Charles Mackay. Calandro takes the reader through the different stages of the Austrian business cycle, which he divides into eight pieces using reflexive-market theory, Austrian Business Cycle Theory, Graham-and-Dodd insights, and a mix of technical and behavioral elements (p.138).

Mr. Calandro’s university classes must be a pleasure: his explanatory style is designed, not to show you what a bright man he undoubtedly is, but to explain. He eschews showing off and, God forbid, comes down to a level at which the reader can walk away understanding where Calandro’s coming from, rather than wondering what all that math had to do with anything. At one point, he bought me back to my MBA-student days studying the NASDAQ boom through the use of “price to hits” to justify the craziness. Calandro’s use of the term fundamental substitutes gave me a laugh from memory. How many investment tomes have you read that managed that?

Mr. Calandro not only strives to teach a method to avoid the delusion, but to attempt to profit from the resultant cleaning out when the bubble bursts. “Fundamentally sound investments are often liquidated along with unprofitable ones,” thus creating opportunities that “Graham and Dodd practitioners in particular can profit from” (p.120) and this book will show you how.

*http://mises.org/daily/3991 (C.J. Maloney lives and works in New York City. He blogs for Liberty & Power on the History News Network website.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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In further edited excerpts from his review* of Mark Gilbert’s book “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” C.J. Maloney (http://hnn.us/blogs/4.html) goes on to say:

A Frenzied Trip Down Memory Lane
The book comes at you in a series of brief, loud bursts: every chapter is further divided into sub-sections such as “Be Careful What You Wish For” and “LIBOR Freezes Over.” It is a frenzied trip down memory lane, even for those of us who lived through the thick of it all. Though I personally watched a proud Lehman Brothers morph into a corpse at the speed of leverage, I found myself growing slowly appalled while reading the alphabet litany of bailout acronyms; every page was a reminder of how much I’d already forgotten.

Naturally, those of Austrian mindset will disagree with almost all of Mr. Gilbert’s conclusions about what happened before, during, and after the Great Moderation. The importance of reading books that you don’t agree with, however, exceeds that of reading those that preach to your choir. It expands your understanding of any subject to see how others look at things, and, most importantly, it grants you access to some great reads.

The best chapter is number ten, “Giants Fall”, where Mr. Gilbert recounts the collapse of Bear Stearns, Lehman, and AIG along with the Federal Reserve’s ad hoc, utterly lawless response.

A Whirlwind of Jumbled Madness
The book’s tone matches exactly the events it describes: it reads like a whirl of jumbled madness, and that’s just pitch perfect. If you were there, if you took the cab rides to eat trendy food and the jet jaunts to paradise, if you hugged your bonus tight before throwing it into the wind, you know that a whirl of jumbled madness was exactly what it all felt like.

Calling a Spade a Spade With Humour
America long ago watched Lady Liberty replace her golden torch with a dance pole, the better to crotch grind the ignorant marks and empty their pockets with lurid distractions. Mr. Gilbert, though on the other side of the pond, sniffed out the timeless insanity we reek of, noting Playboy playmate Jamie Westenhiser’s 2005 announcement that she was henceforth out of the skin trade and into real-estate sales. As Gilbert puts it, “Just as shoeshine boys … offered stock tips … before the Great Crash of 1929, a stripper signaled the top of the U.S. housing market” (p.23). Instead of Colonel Kurtz moaning, “The horror! The horror!” “Complicit” holds up, “The absurdity! The absurdity!”

When his blood is at high tide, Mr. Gilbert displays the biting wit the Brits are known for. He derides as useless “fairground hawkers” (p. 5) the mathletes who churn ever more complexity into the financial markets “every time Microsoft Corporation upgrades its Excel spreadsheet software to accommodate more cells, rows, and columns” (p. 5). All of them get manically busy just to create “an investment strategy customized to your particular paranoia and enthusiasm” (p. 35).

Echoing descriptions of how gambling gripped entire peoples during other manias, he likens the derivatives markets to “a casino … they had the whiff of a Nigerian banking scam” (p. 37).

Nothing But a Tease
As a believer in a gold standard almost all of my disagreements with Mr. Gilbert concern money. As in all speculative crazes, it is money that lay at the heart of the boom’s story and, without a lucid explanation to the reader about what exactly money is, no story of any boom is complete.

In regards to this all-important question, “Complicit” is a tease. At the book’s starting gun, Mr. Gilbert declares that “where did the money come from?” is a “key question” to answer (p. 1) and he does answer it, perfectly pointing out that “central banks [are] responsible for steering global monetary policy” (p. 46). Even more enticing, he accurately records that “there wasn’t anywhere near as much money as there seemed to be … it was all an illusion” (p. 1). Yet, despite the occasional flash of monetary skin, the book as a whole is a frigid prude. Neither “money” nor “credit” is felt important enough to even list in the book’s index.

This is odd as Mr. Gilbert is fully aware that money was the crux of the boom. He sees that while “the seeds of the global crisis were sowed in the housing market” (p. 9), the “foundations of the housing boom crumbled easily because they were made of borrowed money” (p. 11). He reminds us that it wasn’t just the housing market that got drunk on easy money, since “floods of liquidity were seeping into every part of the financial market” (p. 133). Who else besides the central bankers (who were “responsible for steering global monetary policy”) and the politicians who appointed them made all this possible (p. 115)?

Yet, unlike Gilbert’s rogues’ gallery of short-sighted bank CEOs, idiot traders, foolish investors, and spineless regulators, the central bankers and politicians who were the crazed lunatics behind the curtain get off scot-free. While the author mildly upbraids them for not taking away the punchbowl once the party started to really get out of hand, he never asks why they were serving the poison to begin with. This is all because he never asks what money is.

The Final Chapter Gives You The Finger
The last chapter gives one final tease, a brief shout toward bringing back what he calls (correctly) “a true capitalist model” to “allow the free market to dictate the price of money everywhere and anywhere.” The very thought of such freedom, though, is quickly dismissed out of hand since “the prevailing lack of trust in market rationality … might prove [it] even less popular than the current system” (p. 169).

For now, not giving money the respect it deserves leaves Mr. Gilbert offering suggestions to prevent a repeat of the boom’s effects but foregoing any attempt to remedy its monetary cause.

Mr. Gilbert’s primary policy suggestions quite naturally target his villains — the bankers — for enhanced political control (p. 163). In his eyes this comes from the very nature of banking, since “finance is just too dangerous and too important to be allowed to grow unfettered” (p. 168).

As the final chapter ages, it suddenly swerves into a disjointed segue, asking “what proportion of senior (bank) positions women occupy” and suggesting that “a government mandated quota system … might be worth trying” (p.173). Maybe the female touch will sooth market volatility.

With this chivalrous pleading on behalf of the fairer sex, Mr. Gilbert — abruptly and without a hint of premonition — brings “Complicit” to a crashing halt. I slammed the book closed, pleased with this perfect ending, though I couldn’t place exactly why I felt that way. It took a bit of thought until it finally hit me — it brought back memories of the Replacements (the seminal ’80s punk band) and their habit during live shows of deliberately goading the crowd, ending a concert by playing, for instance, “Yummy Yummy Yummy” over and again until the audience either stormed out or rioted.

Until “Complicit”, I’d never read a book, especially not one on financial markets, that ended by giving me the middle finger.

“Complicit” is a rousing, fun look back at the Great Moderation’s riotous career, filtered through the mind of someone who labored in the center of it. Ending the story the same way the boom ended for so many a greedy, blinkered little pig — abruptly and without a hint of premonition — only highlights the talent that makes “Complicit” such an enjoyable read.

*http://mises.org/daily/4133 (C.J. Maloney lives and works in New York City. He blogs for Liberty & Power on the History News Network website.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
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In further edited excerpts the original article* Robert P. Murphy (http://consultingbyrpm.com/blog) probes the issue more carefully as follows:

Does Fiat Money Cause Trade Deficits?
In his book, The Creature from Jekyll Island, G. Edward Griffin is rightfully suspicious of the American trade deficit and the U.S. dollar’s special role in the world since World War II. In his book he explains:

“When the dollar was separated entirely from gold in 1971, it ceased being the official IMF world currency and finally had to compete with other currencies.… From that point forward, its value increasingly became discounted. Nevertheless, it was still the preferred medium of exchange. Also, the U.S. was one of the safest places in the world to invest one’s money. But, to do so, one first had to convert his native currency into dollars. These facts gave the U.S. dollar greater value on international markets than it otherwise would have merited. So, in spite of the fact that the Federal Reserve was creating huge amounts of money during this time, the demand for it by foreigners was seemingly limitless. The result is that America has continued to finance its trade deficit with fiat money — counterfeit, if you will — a feat which no other nation in the world could hope to accomplish.” (Page 93)

Griffin then explains the benefits to Americans from this arrangement. After all, it’s not too shabby to import cars, clothes, and fancy electronics in exchange for green pieces of paper. Yet all is not bliss:

“There is a dark side to the exchange, however. As long as the dollar remains in high esteem as a trade currency, America can continue to spend more than it earns. But when the day arrives — as it certainly must — when the dollar tumbles and foreigners no longer want it, the free ride will be over. When that happens, hundreds of billions of dollars that are now resting in foreign countries will quickly come back to our shores as people everywhere in the world attempt to convert them into yet more real estate, factories, and tangible products.… As this flood of dollars bids up prices, we will finally experience the [price] inflation that should have been caused in years past.” (Page 94)

So far, I am largely in agreement with Griffin but then he oversteps, or at least appears to, when he concludes:

“The chickens will come home to roost but, when they do, it will not be because of the trade deficit. It will be because we were able to finance the trade deficit with fiat money created by the Federal Reserve. If it were not for that, the trade deficit could not have happened.” (Page 94)

It’s not clear whether Griffin thinks the trade deficit would have been literally zero if the United States had used gold as money throughout the 20th century, or (more likely) if Griffin merely means that in practice the trade deficit would have been much smaller.

Regardless of Griffin’s particular stance, there are definitely some members of the sound-money community who believe that trade deficits would literally be impossible if all countries were on a gold standard. That’s incorrect, as I’ll argue in the next section. After that, I will reconcile my own demonstration with Griffin’s quite valid linking of the fiat U.S. dollar with unsustainable American trade deficits.

Gold Doesn’t Prevent Trade Deficits
One quick way to see a puzzle in Griffin’s analysis above is that the reasons for the appeal of the U.S. dollar would only be enhanced by a return to gold. Griffin says that foreigners still esteemed the dollar over other currencies, and that the US was the safest place to invest money. If the Treasury or Fed credibly announced that henceforth the dollar would once again be redeemable for a fixed weight of gold, surely investors would flock to it even more so. It would be much safer to buy a government or even corporate bond issued in the United States knowing that the gold standard would restrain further dollar creation.

When economists compute the trade balance (or more accurately the current account), they don’t include the sale of financial assets. So if foreign investors want to spend more (once we convert to a common denominator) on American assets than U.S. investors want to spend on foreign assets, the trade balance is negative. The capital-account surplus is counterbalanced by a current-account deficit.

For example, suppose Americans buy $9.5 trillion in stocks, bonds, and other financial assets from outside the United States, while non-Americans acquire ownership of $10 trillion worth of stocks, bonds, and other financial assets from within the United States. This means the foreigners have on net gained $500 billion of American wealth. Surely the foreigners need to do something in return, and indeed they do: they send Americans $500 billion worth of cars, TVs, iPods, etc.

Tying the dollar to gold, or, better yet, abolishing the government’s involvement in money and banking completely, would make the United States an even stronger magnet for foreign investment. It’s possible that the absolute size of the trade deficit would fall (as we will explain in the next section), but it wouldn’t disappear.

In fact, if the US government not only returned the dollar to gold, but also eliminated the IRS and slashed its budget, it’s possible that the US trade deficit would mushroom. This would make perfect sense, as capital from around the world would flow to the new haven where its (after-tax) returns would be much higher.

In this scenario, aliens in space would see tractors, computers, factory parts, bulldozers, and crude oil flowing from all corners of the earth to the United States. If those aliens understood trade accounting, they would compute this massive net inflow of goods as an unprecedented trade deficit. But of course that is exactly what should happen if the United States (or any country) adopted free-market reforms and thereby became a much more hospitable arena for economic activity.

Trade Deficits are Unsustainable
Even though a few of Griffin’s sentences might lead one to draw faulty conclusions, nonetheless Griffin’s analysis is basically correct. All we really did in the above section was show that a large trade deficit can be consistent with a healthy, productive economy. That’s far different from saying a trade deficit is proof of a solid arrangement.

Specifically, the problem occurs because foreigners can invest in “American assets” to fuel either production or consumption. It’s true, if the US government enacted the reforms discussed above, then foreigners would invest heavily in American industry. Corporations would float new bonds and issue new stock, and with the influx of funds they could rapidly expand their operations. In terms of physical goods, we would see heavy equipment and raw materials flowing from other countries into the United States, and these inflows of capital goods would constitute a large part of the rising trade deficit.

Unfortunately, there is another possibility. If the Federal Reserve creates hundreds of billions in new dollars out of thin air, and the foreign “investors” are other central banks that gobble up the dollars because their own rules treat them as reserves, then this increase in the foreign demand for “American assets” is of a much-different character.

In particular, the low U.S. interest rates that accompany such a gusher of new dollars will encourage domestic consumption and will discourage foreigners in the private sector from investing in the United States. The rest of the world will acquire American assets all right, but they will be more heavily tilted toward debt (rather than equity in growing companies). The physical goods flowing into the United States will be consumer goods such as TVs and iPods.

Griffin is perfectly correct that this type of mushrooming trade deficit is indeed unsustainable. Unlike the importation of tractors and crude oil, the influx of consumer electronics doesn’t allow the U.S. economy to produce more in the future.

The increase in foreign claims on U.S. income streams therefore isn’t a constant or shrinking portion of the growing American pie, but rather is a growing portion of a constant pie. It can be sustainable for the absolute dollar amount of U.S. corporations’ outstanding bonds to increase over time, so long as earnings and profits increase proportionately but it is not sustainable if households and the government experience a rising debt-to-income level.

Conclusion
There is a definite connection between fiat currencies and trade deficits. Critics of the Federal Reserve are right to blame it for distorting trade flows and setting the U.S. economy up for an inflationary crash. However, a trade deficit per se is not a sign of a bad economy. Indeed the trade deficit might blossom if the U.S. ever returned to the gold standard, though it would be due to a productive net inflow of producer goods.

*http://mises.org/daily/4130 (Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism; the Study Guide to Man, Economy, and State with Power and Market; the Human Action Study Guide; and The Politically Incorrect Guide to the Great Depression and the New Deal.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

See larger image The Creature from Jekyll Island: A Second Look at the Federal Reserve (Paperback) By (author) G. Edward Griffin List Price: $24.50 USD New From: $19.21 In Stock Used from: $18.40 In Stock

We use our demographic throw-weight to skew the welfare system in our favour and above all we are squandering the natural resources of the planet. You know that Goya picture of the giant eating a naked human being? That’s us, all right – Saturn devouring his children. Words: 759

In further edited excerpts from the original book review* Boris Johnson (www.Telegraph.co.uk) goes on to say:

Or at least, that is the portrait presented by David Willetts in his new book, “The Pinch-How Baby-Boomers Took Their Children’s Future and Why They Should Give it Back”, which has been received with rapture by one and all… but I think he is wrong; or at least that he tells only a tiny fraction of the story.

No, I don’t think we baby boomers have anything much to feel guilty for. I don’t think we have treated the next generation badly. We haven’t ripped off our kids. Indeed, by comparison with our grandparents I would say we baby boomers have been, if anything, excessively tender-minded and absorbed in the upbringing of our little ones. There is every chance, moreover, that by our exertions we will leave a world considerably improved on the world we found.

We are so much richer, as a society, that an unemployed man on benefit now receives more – in real terms – than the average working wage in Macmillan’s Britain. London’s air is far cleaner, and so is the Thames; and a car travelling at top speed emits less pollution than a parked car in the 1970s, mainly because cars no longer leak. Now the question is: will baby-boomer selfishness really call a halt to this progress? Are we really likely to see an interruption of the process by which human beings have been able to become, on the whole, richer, taller, healthier, more able to take holidays and pursue hobbies and – in important respects – happier?

When British pioneers helped the birth of the first test-tube baby, Louise Brown, in 1978, the Vatican warned that it was “an event that can have very grave consequences for humanity”. As things turned out, it was an event that had very wonderful and joyous consequences for millions of people. Whatever the economic difficulties of today, it is the baby-boomer technology that is delivering and will deliver incredible improvements in the standard of life of the next generation. Who gave us email and eBay? Who gave us Amazon, Starbucks, Walmart, iPod, Prozac, BlackBerry and spreadable butter you can keep in the fridge? It was the baby boomers. Who is responsible for the tolerance and openness that has helped to break down sexism, racism and homophobia? The baby boomers, that’s who. Who ensured that you can read this article either on Finnish newsprint or with electronic technology sourced from around the world? It was us baby boomers, and our doctrines of liberal market economics.

Of course David Willetts is right to draw attention to the financial and environmental problems of the world. Yes, we still face the challenge of pollution – but then someone once predicted that horse-drawn traffic was growing at such a rate that by 1950 London’s streets would be under 10ft of manure. Where is that dung today?

Ever since Hesiod, ever since Isaiah, human beings have loved to listen to prophets of doom and they have loved to believe that theirs is a uniquely fallen and selfish generation. I don’t believe it of the baby boomers, and in any case I am sure the next generation is well up to the challenge.

Forget the prophets of doom – I’m proud to be a baby boomer. The world is a happier place thanks to my generation, and the next will look after itself.

*http://www.telegraph.co.uk/comment/columnists/borisjohnson/7395924/Forget-the-prophets-of-doom-Im-proud-to-be-a-baby-boomer.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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See larger image The Pinch: How the Baby Boomers Took Their Children's Future - And Why They Should Give it Back (Hardcover) By (author) David Willetts New From: $21.51 In Stock Used from: $19.90 In Stock

In further edited excerpts from the original book review* Michael Leon (www.veteranstoday.com) goes on to say:

In March of 2006, the world’s richest men sipped champagne in an opulent New York hotel. They were preparing to compete in a poker tournament with million-dollar stakes, but those numbers meant nothing to them. They were accustomed to risking billions.

At the card table that night was Peter Muller, an eccentric, whip-smart whiz kid who’d studied theoretical mathematics at Princeton and now managed a fabulously successful hedge fund called PDT…when he wasn’t playing his keyboard for morning commuters on the New York subway. With him was Ken Griffin, who as an undergraduate trading convertible bonds out of his Harvard dorm room had outsmarted the Wall Street pros and made money in one of the worst bear markets of all time. Now he was the tough-as-nails head of Citadel Investment Group, one of the most powerful money machines on earth. There too were Cliff Asness, the sharp-tongued, mercurial founder of the hedge fund AQR, a man as famous for his computer-smashing rages as for his brilliance, and Boaz Weinstein, chess life-master and king of the credit default swap, who while juggling $30 billion worth of positions for Deutsche Bank found time for frequent visits to Las Vegas with the famed MIT card-counting team.

On that night in 2006, these four men and their cohorts were the new kings of Wall Street. Muller, Griffin, Asness, and Weinstein were among the best and brightest of a new breed, the quants. Over the prior twenty years, this species of math whiz –technocrats who make billions not with gut calls or fundamental analysis but with formulas and high-speed computers– had usurped the testosterone-fueled, kill-or-be-killed risk-takers who’d long been the alpha males the world’s largest casino. The quants believed that a dizzying, indecipherable-to-mere-mortals cocktail of differential calculus, quantum physics, and advanced geometry held the key to reaping riches from the financial markets. And they helped create a digitized money-trading machine that could shift billions around the globe with the click of a mouse.

Few realized that night, though, that in creating this unprecedented machine, men like Muller, Griffin, Asness and Weinstein had sowed the seeds for history’s greatest financial disaster.

Drawing on unprecedented access to these four number-crunching titans, The Quants tells the inside story of what they thought and felt in the days and weeks when they helplessly watched much of their net worth vaporize – and wondered just how their mind-bending formulas and genius-level IQ’s had led them so wrong, so fast. Had their years of success been dumb luck, fool’s gold, a good run that could come to an end on any given day? What if The Truth they sought — the secret of the markets — wasn’t knowable? Worse, what if there wasn’t any Truth?

In “The Quants”, Scott Patterson tells the story not just of these men, but of Jim Simons, the reclusive founder of the most successful hedge fund in history; Aaron Brown, the quant who used his math skills to humiliate Wall Street’s old guard at their trademark game of Liar’s Poker, and years later found himself with a front-row seat to the rapid emergence of mortgage-backed securities; and gadflies and dissenters such as Paul Wilmott, Nassim Taleb, and Benoit Mandelbrot.

Warren Buffett [was so right when he said], “Beware of geeks bearing formulas.”

*http://www.veteranstoday.com/2010/03/09/the-quants-a-new-breed-of-math-whizzes-nearly-destroyed-wall-street/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
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See larger image The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It (Hardcover) By (author) Scott Patterson List Price: $27.00 USD New From: $13.97 In Stock Used from: $12.99 In Stock Release date February 2, 2010.

In further edited excerpts from the original article* Loral Langemeier (www.yourmoney.ca) goes on to say:

Scrimping and Saving is Not the Only Answer
When finances get tight, the easiest — and most reflexive — thing to do is to scrimp and save. This is the opposite of what you need to do to breathe easier. The best thing you can do when finances get tight is to focus on making more money.

Basically, there are two parts to money in your life: the money that flows in (your income) and the money that flows out (your expenses).

In my experience, most people focus too much on the money that flows out when they should put their time and energy into the money that flows in. For example, let’s say you want a new dishwasher. Many people will choose to cut back on another expense so they can afford the dishwasher. They’ll wait to fix the car, or give up the paint job on the house.

There is no need to do that. There is no need to decrease your outflow of money. That is a negative use of time, energy, and ability. It is better to be positive and focus on how to increase the inflow of money to you. An extra $500 to $1,000 a month is out there, waiting for you. Let’s get it to flow into your pockets, because $500 to $1,000 extra a month could go a long way toward getting a new dishwasher, fixing the car, and painting the house.

There is nothing sadder, to me, than watching hopeful human beings take advice to cut off their dreams and redirect their spirit to getting small.

I am here to tell you that you absolutely, positively can stay in your dreams and get bigger. I don’t know about you, but I don’t think it’s a lot of fun to restrict my life. Not that I live extravagantly, but I do like the simple pleasures: a latte, a weekend movie, new shoes now and then. These things shouldn’t give me stress and they don’t. Because when I need or want something, I generate more cash to pay for it. I don’t save for it or pay for it with a credit card. I go and make the money and it’s always easier than I think it’s going to be.

Dealing with Debt
There is so much judgment around credit card debt these days. I actually find it motivating. When I see clients with credit card debt I know they want a big life; they just don’t know how to pay for it yet. Instead of suggesting to clients that they give up their lives and focus solely on paying off that debt, I suggest they go make more money to pay off that debt.

When you realize you can make money fast, an extra $500 to $1,000 of new money every month, you will also realize you can use a lot of that new money to pay down credit card debt.

Easier said than done? If you’re making $500 to $1,000 extra a month, imagine how much easier it would be to pay off those credit cards. Once you start making this cash, fast, you will be able to direct some of that money to getting rid of your credit card debt. With the $500 to $1,000 extra a month you’ll be making, you’ll find this debt-elimination process very doable.

Soon enough you’ll be debt free and better able to start buying things you want without scrimping and saving. The best part is you will be excited and re-energized daily because you’ll be making more money, getting rid of financial problems, and acquiring the things you want to make your life easier and better.

In addition to promoting saving or scrimping, too many financial experts rely on the markets for making money. The markets, whether we’re talking about the stock market or the real estate market or any other arena where investors are subject to emotional swings and forces beyond their control, are not reliable places to make more money.

Historically, the markets have created money for some people and lost money for others but if you want a sure thing, a way to make a definite $500 to $1,000 a month, then you need to rely on one thing you can be sure of, and that is yourself.

Contrary to popular belief, that doesn’t have to be a lonely prospect. I believe strongly in creating a community of self-reliance. That is, relying on your skills and ideas while enrolling others who can support you and whom you can support in their efforts.

This country was built on self-reliance, on the backs of men and women who used their skills to make things better. This is a great country because the people who built the core of it didn’t play games or speculate. They knew what they wanted and they created it. This attitude is the American spirit, and you are going to grab a piece of the American spirit and make your life better.

*http://yourmoney.ca/saving/ContentPosting?newsitemid=cbbcd734-a72e-4ab4-b484-541bb27c416f&feedname=YOUR-MONEY-HARPER&show=False&number=0&showbyline=True&subtitle=&detect=&abc=abc&date=False

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon.

See larger image Put More Cash in Your Pocket: Turn What You Know into Dough (Paperback) By (author) Loral Langemeier List Price: $16.99 USD New From: $4.89 In Stock Used from: $4.35 In Stock Release date October 13, 2009.

Below are further edited excerpts (by Lorimer Wilson) from Harry S. Dent Jr.’s (www.hsdent.com) book ‘The Great Depression Ahead’ in which he advises, in detail, how we should deploy our assets in the 2010s based on his demographic approach to forecasting.

1. Late 2009 to mid-2010:
a) Sell commodities and commodities and energy stocks.
b) Allocate 100% to T-bills or money markets and safe currencies.

2. Mid- to late 2010:
Start to allocate to 30-year Treasury bonds only after their yield begins to spike.

3. Late 2010 to mid- 2011:
a) Allocate to 20-year corporate bonds when yields go to extremes.
b) More conservative investors should focus on AAA corporate, more aggressive investors toward BAA.
c) All investors must recognize, however, that even high-quality bonds will be in question as to their viability, given that the downturn between mid-2009 and 2012 is anticipated to be more extreme than anything we have seen since the early 1930s, mid-1970s, or early 1980s.

4. Mid-2011 to mid-2012:
Allocate to long-term municipal bonds when yields seem to be peaking (high-tax-bracket investors).

5. Mid- to late 2012:
a) Aggressive/growth investors: allocate majority into Asian stocks and lesser into U.S. multinational, technology and health care, with minor allocation in long-term corporate, Treasury, or municipal bonds.
b) Conservative investors: focus largely on 10- to 30-year Treasuries and 20-year corporate AAA bonds, with minor allocations in multinational, health-care, and Japanese stocks.

6. Late 2011 to early 2015:
Look for selected opportunities in real estate (small condos and starter homes early on; vacation and retirement homes later; trade-up homes by 2015).

7. Mid- to late 2014:
Aggressive/growth investors: allocate more to leading stock sectors such as China, India, health care, multinational, technology, and financials on a likely short-term correction between late 2013 and late 2014.

8. Early to mid-2017:
a) Sell stocks in all sectors.
b) Convert largely back into long-term bonds and, to a lesser degree, into T-bills or money markets.

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon.

See larger image The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History (Hardcover) By (author) Harry S. Dent List Price: $27.00 USD New From: $6.64 In Stock Used from: $2.83 In Stock

Further edited excerpts from the original review*Shelby Coffey III (www.WashingtonPost.com) goes on to say:

The financial system, Ferguson writes, “magnifies what we human beings are like . . . our tendency to overreact” to booms and busts, enriching the “lucky and the smart, impoverishing the unlucky and not-so-smart.” In this way, money is a mirror, and “it is not the fault of the mirror,” he notes, “if it reflects our blemishes as clearly as our beauty.”

The pleasure of reading Ferguson’s treatment comes partly from the clarity of his explanations of financial concepts but mostly from his pen portraits of the extravagantly gifted and flawed characters who have led money’s long rise. He shows us how far we have come since Mesopotamian moneylenders developed rudimentary accounting around 1,000 B.C. and the Medici created elements of modern banking in 14th- and 15th-century Florence. He also weaves a long series of manias, panics and crashes into his tale. The Medici family’s surviving papers, he notes, bear scorch marks from the vengeful reformist Savonarola, who set up a Bonfire of the Vanities to destroy sinful goods and sent the Medici packing in one of the periodic reversals of fortune to hit financial leaders over the centuries.

Ferguson sketches the rollicking career of John Law: Scottish con man, killer, genius, lover and creator, in 1719-20, of one of history’s great stock market bubbles. Law effectively took control of the French national debt, substituted paper currency for gold and sold shares in the company that controlled French Louisiana. As the shares rose in price and investors borrowed against them, the volume of paper money doubled in a year, breeding inflation, speculation and the new term “millionaire” before Law’s system collapsed. From that day on, Ferguson writes, all bubbles have followed five stages:

1) Displacement, as economic change brings a chance for extraordinary profits;
2) Euphoria, as investors take advantage of the opportunity,
3) Mania, as novices, crowds and swindlers rush in;
4) Distress, as insiders see their prospects for profit declining because of the mania and start selling; and
5) Revulsion, as all stampede for the exits.

Ferguson provides a more flattering portrayal of Nathan Rothschild, patriarch of the banking family and mastermind of empires. Nineteenth-century states needed to issue bonds to finance wars; Rothschild was at the ready. When Wellington defeated Napoleon at Waterloo, Rothschild made huge and risky bets on British bonds and secured his family’s dominance of the London market for half a century. When the Rothschilds turned down a plea to back the confederacy’s bonds, the fate of the Southern rebellion darkened irreversibly. “Money is the god of our time,” declared the German poet Heinrich Heine in 1841, “and Rothschild is his prophet.”

From recent times, Ferguson gives deft summaries of the lives of Hernando de Soto, the Peruvian champion of property rights for the poor; Milton Friedman, the apostle of monetarism, who saw the supply of money as the key to the economy; and George Soros, the hedge fund philosopher and financier of liberal causes. I found myself understanding Soros’s theory of reflexivity for the first time. (Market prices, Ferguson explains, are “reflections of the ignorance and biases, often irrational, of millions of investors . . . [which] affect market outcomes, which in turn change investors’ biases, which again affect market outcomes” — in short, reflexivity.)

Judging from the text, Ferguson finished writing The Ascent of Money in mid-2008, after the sub-prime mortgage crisis had hit but before September’s credit freeze and the subsequent plunge in stock prices. As I turned his pages about the soaring trade in complex derivatives, I wanted to cry out to Wall Street: Don’t go down that road, the bridge is out!

The shadow world of derivatives, credit-default swaps, the sales of U.S. bonds to China — all seem to bring brilliant results, until they get too big. Indeed, “Too Big to Fail” is a popular catchphrase but the follow-up question is: How do we know that whatever institution is wearing that label doesn’t harbor a hidden cesspool of putrid assets? When should we withdraw our “inscribed trust?”

In a provocative afterword, Ferguson wrestles with “creative destruction,” the benefits of allowing companies to fail and investments to sour. He doesn’t come to a definite conclusion, but he notes that viewing the financial world from an evolutionary perspective argues for weeding out what the political scientist Joseph Schumpeter called “the hopelessly unadapted” — and quickly. “The experience of Japan in the 1990s,” Ferguson comments, “stands as a warning to legislators and regulators that an entire banking sector can become a kind of economic dead hand if institutions are propped up despite underperformance, and bad debts are not written off.”

Ferguson has written an admirably illuminating book that will take its place beside such modern classics as John Train’s The Money Masters, Peter L. Bernstein’s Against the Gods, and Adam Smith’s Supermoney.

Fear, greed and folly — according to a Wall Street maxim, are always have in the market. If only you knew in which order they come, then you could make some money but past results, as investment companies sternly warn, are no guarantee of future returns.

*http://www.amazon.com/gp/product/product-description/1594201927/ref=dp_proddesc_0?ie=UTF8&n=283155&s=books

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon.

See larger image The Ascent of Money: A Financial History of the World (Hardcover) By (author) Niall Ferguson List Price: $29.95 USD New From: $14.39 In Stock Used from: $6.99 In Stock