We Are In QE Forever -- Famed Economist

I have never heard of this economist, but he does provide some intriguing insights...... albeit he sounds more Austrian and I understand my assessment is biased.

The Ludwig Von Mises Legend

Via the Mises Institute. Yes, the video is a bit old but the content remains relevant.

Price/Volume Diffusion Index Turns Up But.....

Yes, as I stated earlier, I think the S&P 500 will move higher and trade to, at least the 1,776 level. Not only has this potential move been confirmed technically and via the demand dynamics on the upswing, but also by a turn up in the Price/Volume Diffusion Index... shown below

Price/Volume Diffusion Index

I had thought that the recent stall out in the measure suggested that it would turn lower. My thesis was blown out of the water with the increase in price on an expansion in total volume. All together, I think the market is going higher in the short-term.

However, all is not right in the country of Denmark. The summation index, not shown, is showing weakening momentum trends, as the slope of the summation index has turned down.

Slope of the Summation Index

This suggests to me that the underlying strength is weakening. Stay nimble.

Debt Ceiling Not Over, Fed Could Increase QE -- For Pete's Sake

Kitco's Pete Hug discusses the implications of higher government debt (which ballooned by more than $300 billion yesterday), no chance of QE until at least March of 2014, and a lower dollar. The latter of which, by the way, that has broken the 52-week low.

Why Obamacare Will Make America Less Productive

So as marginal employees are pushed into part-time work and as labor demand is reduced on increased costs, the unemployment rate may continue to decrease with a reduction in the labor supply. 

Via Economic Policy Blog and By Veronique de Rugy

Washington's shutdown is over and the debt ceiling has once again been raised, yet the long-term budgetary and economic outlook is no more certain that it was before Congress struck a deal.

Adding to the uncertainty is the implementation of President Obama's health care law, also known as Obamacare. Let's look specifically at the potential impact of Obamacare on the supply and demand of labor.

On the demand side, the health care law requires employers with more than 50 workers to provide health insurance to all full-time employees (defines a full-time job as 30 hours or more per week) or pay a $2,000 penalty per worker.

Sign Up for the Politics Today newsletter!
In that sense, the law increases the cost of current and future employees. It also gives businesses an incentive to hire more part-time workers to avoid the costs of providing health insurance or paying the penalty for full-time employees.

There is increasing evidence that this is already happening. Employers ranging from companies such as Walmart and Forever 21 to community colleges in Virginia have already started increasing their share of part-time employees rather than full-time ones.

Obamacare’s tax increases will have a negative impact on labor’s supply side, as well. University of Chicago economist Casey Mulligan has done a significant amount of research on this issue.

In his August piece in the New York Times about health-care inflation and the arithmetic of labor taxes, he wrote:

“The Affordable Care Act also creates explicit taxes on employers, subsidies for layoffs and various implicit taxes on employees with many of the same economic characteristics as taxes on employers.”.

In addition to the tax, the law also provides more subsidies to low-income families, and adds “four significant, permanent, implicit unemployment assistance programs, plus various implicit subsidies for underemployment.”

In a National Bureau of Economic Research paper published in August, Mulligan calculated the combined effect of higher taxes and more generous subsidies.

He found that it will have an important depressing impact on American’s incentive to work, and hence, on our labor supply. In other words, Obamacare will contract the labor market.

Read the rest here.

High Volume High- Oct. 17 Trading Day Edition

The high volume list of names is starting to confirm the market's move.

Volume Off the High- Oct 17 Trading Day Edition

Some bigger names getting walloped on poor earnings.

PepsiCo's Not So Disruptive Disruptive Innovation

I was reading the below excerpt from the article found here after the jump and I think it highlights one of the key aspects of the over and miss use of the word innovation. The excerpt from Elaine Watson of the Food Navigator site details comments from PepsiCo's CEO.

PepsiCo's CEO goes further and states.

The articles seems to imply the CEO's definition of disruptive innovation is to change the formula of the Pepsi. Really? It may be early in anything out yet, but it appears like PepsiCo's CEO really needs to look up the definition of disruptive innovation. At the very least, she needs to stop throwing the mindless business euphemisms around to sound more 'ahead-of-curve' or if she was aligning all the 'ducks-in-a-row'. 

All joking aside, I think this is a great example of corporate speak and the the misuse of the phrase disruptive innovation. For remainders, disruptive innovation is a product or service that draws non-consumers of entrant product into the market, through either process, form, and/or price point. A change in the formula is not disruptive. If anything, a formula change is a sustaining innovation. More so, a change in the formula more than likely reflects PepsiCo's response to new entrants into the market and the entrants ability to capture market by competing across value lines that PepsiCo was unwilling or unable to compete. If any anything, PepsiCo is the established competitor being disruptive.

Trading Strategy Points to Rationale for Currency Wars

Just think about the below in regards tot he dollar breaking below the 52-week low.

Via Soberlook

Looking for a simple way to outperform the market on your international equity index portfolio? Here is a simple algorithm from JPMorgan (warning: do not try this at home). Select two countries with the worst performing currencies (against USD) over the past 4 months and go long equity indices of those two countries. Now select the two best performing currencies and short the indices of those countries (to the extent that's possible). Repeat the exercise once a month. If you back-test this simple strategy, you get the following excess returns.

Source: JPMorgan

Hard to believe, right? Obviously there is friction in shorting equities of certain countries and the "actual returns may vary". Nevertheless this is telling us that currencies drive equity returns for many nations.

The explanation seems to be tied to exports. Exporters' shares and firms that support them, such as developers, raw materials firms, banks, etc.  perform better when a nation's currency is weak. The opposite holds true as well - strong currencies make exports more expensive, creating drag on revenue. This simple strategy therefore points to the rationale for "currency wars". Want a stronger stock market in the next few months, weaken your currency. You may end up with other problems, such as inflation, but the stock market should do well.

Take India for example. After the rupee took a massive beating this summer (see post), inflation has picked up and the economy has slowed.

Source: Econoday

Yet SENSEX, the broadly watched stock market index, is now at a 3-year high.

SoberLook.com

A Push to the Highs and Further- Price/Volume Heat Map for 10/17 Trading Day

Let me just this out of the way. I remain a bear. I think the economy remains weaker than most suppose, margins remains highly elevated and prone to a reversion, and everything remains manipulated due to the Fed's primer pumping. That said, I am not short this market. Given the signs of strength we are seeing on the demand side and the technical backdrop, I would not be surprised if the S&P 500 moves to new highs, probably into a range around 1,776 area.

Looking at yesterday's market, equity prices gained with the S&P 500 gaining in value by about 70 basis points. This is in conjunction with all sectors gaining in price and a large increase in demand, demand that gained across the board. Outside of the technical backdrop, I think the increase in demand as prices move to or close to highs suggests that higher prices are in the offing. Although I am bearish, I try to be pragmatic when the evidence suggests it.

Incorporating Right-Brain Thinking into your Investment Process

I tend to be contrarian in my thinking will typically zig when others zag. However, the below article reminds me that I need to step into what the market knows when I am contrarian or just invert my thinking. In any event, every investor should- to use the sports analogy- just go back to blocking tackling.

By Tim Heitman and presented at Investing 501

The following article is the first part of a series designed to help investors develop their own investment process and increase the efficiency of dealing with the daily deluge of investment ideas that are now available to investors, thanks to the internet. 

A long time ago when I was trying to learn how to draw and paint (note: unless childlike stick figures become immensely popular I failed, which is why I became a photographer), I read a book called Drawing on the Right Side of the Brain by Betty Edwards. The idea of the book was to help a person tap on the strengths of the right side of the brain and “deepen your artistic perception” when engaging in creative endeavors. Athletes and musicians often talk about “being in the zone” and from personal experience as an investment analyst, a drummer,  and a professional sports photographer, I can tell you that you can put your brain in either a “right brain” or “left brain” thinking mode. One of the first exercises in Edward’s book is to look at a picture and draw it.  More than likely it will look “ok” but the perspective and other things may not look just right. The author then tells the reader to turn the picture upside down and draw it again. You would be amazed at how much closer to the original the second drawing looks than the first attempt. Why is that? Edwards explains that since the brain doesn’t recognize the upside down drawing as an object, the brain switches to the right side and allows the artist to “see it”  more in the abstract and not a preconceived recognizable image, which makes it easier to “draw” the lines more accurately. Since successful analysts incorporate the ability to think in non-linear, non-analytic ways; being able to tap into those aspects of the right side of the brain is very important. This idea can be thought of as “inversion.”

“Man Muss Immer Umkehren” – Carl Gustav Jacob Jacobi

 The idea of using inversion to solve problems is not a new one. Carl Jacobi was a German mathematician who lived in the early to mid-1800’s. He believed that finding the solution to many difficult mathematical problems could be achieved if the problem was expressed in the inverse. For those who are curious, here is an example of one of those problems. Of course, most investors are more familiar with the English translation of the quote above, “invert, always invert” which was made famous by Charlie Munger.

It is no coincidence that these words of wisdom are often cited as “pure genius” and is an extremely valuable insight to being a successful investor. Munger suggests that investors use the same technique for breaking free from the left side of the brain thinking and into the more creative right side of the brain that Betty Edwards does, which is to turn the “image upside down.” This type of thinking also helps investors, to borrow from Templeton Fund’s advertising campaign, “see today what others see eventually.” This idea is also similar to the concept of “second level thinking” discussed in Howard Marks’ book, The Most Important Thing. (See our review of the book here and a comment on second level thinking.) When the idea comes from our own thought process, it is easier to put our brain into “right side mode” and focus our initial analysis in a more productive way. For example, if we are looking at potential investment ideas from a list of low price to book companies, then our focus most likely will start on the balance sheet. If we are starting with a list of low enterprise value to revenue companies, however, then we may start with historical margins or revenue growth rates. From the beginning, we have a process and are mentally focused on what we are trying to analyze and why. We also generally know what we should be looking for in terms of risks. However, when the idea is presented to us from an outside source (newsletter, investor conference, blog, etc.), we are more likely to just “see” it as it is, rather than in a more objective, “right-brained” way. It is much more difficult to have a conviction in an idea derived from an outside source as strong as one an investor analyzes from start to finish, no matter how thorough the original source’s research was. Each person’s analytical process is different, so the conclusions made by one person are not always going to be the same as another’s, even with the exact same information.

There are numerous websites and bloggers (Seeking Alpha, Valuewalk, Marketfolly, etc.) that aggregate and distribute investment presentations from most of the value investor conferences and from respected bloggers and authors. Activist shareholder filings (13Ds) and “guru” portfolios are carefully monitored and there are even mutual funds and ETFs that invest exclusively in these ideas. Judging by the media frenzy and stock price movements that surround the disclosure of an idea at one of these conferences, we feel that too many investors (professional and non-professional alike) are just “buying or selling the news” and are taking the investment recommendation at face value. We think increased access to investment ideas and information from the internet has actually weakened the quality of the analytical process used in making investment decisions. This may seem counter-intuitive, but we believe it to be true. We think that putting your thinking into “right-brain” mode will improve your analytical process and help separate great ideas from good or even bad ideas.

So how would someone put our brain into “right-side” mode when we see an idea from other source? The first this you can do is to develop the opposing view and try and “kill” the idea. By doing this you are “inverting” the idea from the start. For example, if an investment thesis is premised on investors over estimating a liquidity risk event (in other words overly discounting the valuation of the company due to a default risk, which happened to lots of companies in 2008-2009), the analyst should try and see what would actually cause a covenant violation or what the maturity dates are of the debt that could be trigger points and the company’s option at that point. This puts the analyst in a mode to prove to himself that this is not a risk and not to just accept the opinion of another. After all, apparently there are a large number of investors that do believe it is a real risk otherwise the stock may not be priced where it is. Changes in margin assumptions and revenue growth rates are also common themes in investment ideas. Once again, the analyst should look at historical rates for the company and try to understand the dynamics of why margins or revenue growth is different from those and make some of his own assumptions.  Question every part of the investment thesis of the idea that has come to you from an outside source and try to come up with a few more. Reading the risk section and the footnotes of SEC filings is another great way to get into the “right-brain” mode. It takes you away from the bias of the analyst and puts things into analytical terms. Ironically, this brings you temporally out of “right-brain” mode so you can have a “clean-slate” when you start thinking about the investment thesis. You are outside looking in and have separated your initial connection with the idea.

By approaching the investment idea from this “inverted” view, an investor has a better understanding of the merits and strengths and omissions of the original idea. It also allows the investor to rearrange the idea into his set of priorities for investing. For example, perhaps the original idea put more emphasis on revenue growth and less on free cash flow. But you may place a higher emphasis on the later. This will help the analyst become even more comfortable with the idea because it is now is structured more along the lines of their thinking process and it is easier to “own” the idea now. In a later post I am going to talk about why we passed on a stock idea we saw at an investor conference. The idea is sound, will probably work out, but we just didn’t feel a high enough conviction with the idea. And this is in spite of the fact that we were able to eliminate our initial biggest risk to the idea!!!!  But using “right-brain” thinking we became less comfortable with what most investors take for granted as a “given” in the investment thesis. Not they we are right and the others are “wrong”, we just are choosing to “take” this pitch for now. Perhaps we will be “caught looking” and miss a great opportunity. But it is a long season.

Set The Record Straight On Yellen's Record

Schiff discusses Yellen's actual record versus the narrative put forth by the media. Granted, the media misreporting and changing history to push an agenda is a problem on to itself. However, if Yellen is more of a dove than Bernanke, what does that say about the pace of money printing? gold prices?

On Those Tapering Prospects......

Yes, it is not going to happen, at least in the foreseeable future.

As Zerohedge reports....

Just out from Fed "hawk" Dick Fisher:

• FISHER: FISCAL SHENANIGANS HAVE `SWAMPED' QE TAPER PROSPECTS
• FISHER: HARD TO NOW ARGUE TO CHANGE COURSE OF MONETARY POLICY
• FISHER HAS FAVORED TAPERING FED MONTHLY BOND PURCHASES
• U.S. FED'S FISHER REPEATS BEST TO 'STAY THE COURSE' ON BOND BUYING AT OCTOBER FOMC MEETING

The rest of the article can be found after the jump above. So one of the Fed's hawks is now talking down the prospects that the Fed will pull back on their bond buying, money printing program. It as if we will float from one crisis to the next and the Fed will continue to find excuses not to pull back on their 'efforts'.

Volume Off the High- Oct. 16 Trading Day Edition

Although it is earnings season, a larger number of volume off the highs names suggests some underlying weakness to earnings, the equity markets, the economy, or all of the above. SWK's shares precipitously after cutting earnings guidance, citing weakness in the security business. Unless it is a market share event, maybe we will see more once IR/Allegion reports results, this does not bode well for either construction or the retail sales.

High Volume High- Oct. 16 Trading Day Edition

Would have thought there would have been more names....

Pushing Toward the Highs- Price/Volume Heat Map for Oct. 16 Trading Day

As I have stated, once the drag of the debt ceiling/budget debate abated that you would see an increase in demand. This happened in spades in yesterday's trading, as the S&P 500 gained about 140 basis points in value with all sectors gaining, some even by 200 basis points or more. That said and now that the budget wranglings have been pushed to February 7th, nothing like agreeing to agree later, investors and traders can now focus on earnings and the economy, the latter of which remains weak. Looking to earnings, the third quarter earnings season remains young, but we have seen some big names post some unimpressive results- such as IBM, Ebay, Stanley Works and a number of smaller industrial names to name a few.

Turning to yesterday's price/volume heat map, supply was non-existent for the most part. Demand dominated the day with all sectors and the market as a whole showing considerable demand dynamics. What did you expect considering the uncertainty of the debt ceiling, finalized in the 11th hour, is no more..... at least until February.

9 Facts On Money You May Have Missed

via Washingtonblog.com

China Invented Every Form of Money

China:

• Invented every single major form of currency, including paper money and fiat currency not backed by any tangible commodities

• Seized gold six centuries before Franklin Roosevelt, in order to prop up its fiat currency and prevent runaway inflation

Debt Forgiveness Is The Basis of Modern Civilization

Religions were founded on the concept of debt forgiveness.
For example, Matthew 6:12 says:

And forgive us our debts, as we forgive our debtors.

Periodic times of debt forgiveness – or debt “jubilees” – were a basic part of the early Jewish and Christian religions, as well as Babylonian culture.
David Graeber, author of “Debt: The First 5,000 Years” told Democracy Now:

If you look at the history of world religions, of social movements what you find is for much of world history what is sacred is not debt, but the ability to make debt disappear to forgive it and that’s where concepts of redemption originally come from.

Ambrose Evans-Pritchard wrote in 2009:

In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Indeed, the first recorded word for “freedom” in any human language is the word for freedom from debt.
(Moreover, there is a long-standing legal principle that people should not have to repay their government’s debt to the extent that it is incurred to launch aggressive wars or to oppress the people … what is called “odious debt”).

The Real Reason Money Was Created?

Everyone was taught that money was invented to replace the messy business of barter. It’s hard work walking my cow all the way to your village to trade for firewood … and then carrying all of that firewood back home. And what if no one wants my cow?
But economist Charles Goodhart – a former member of the Bank of England’s Monetary Policy Committee – anthropologist David Graeber, and other experts on the history of money say that this is a myth.  (Bloomberg has written on this issue.)  Instead, they say that money was invented to finance war, and to keep score while armies went about pillaging and looting.
(We’re not vouching for their theory, or saying that money is inherently bad.  We just think it’s interesting that there are alternatives to the “cumbersome barter” theory.)

Lifespan of Currencies

The average life expectancy for a fiat currency is less than 40 years.

But what about “reserve currencies”, like the U.S. dollar?

JP Morgan noted last year that “reserve currencies” have a limited shelf-life:

As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns.
Will the dollar last as long as Spain, France or Britain’s reserve currencies?  It’s impossible to know.
But given that the dollar’s reserve status has been slipping away for many years – and that the European Union (the world’s largest economy) has now entered into a currency swap agreement with China – the dollar’s reign may only have a couple of years left.

Big Banks Are Not Really In the Banking Business

Everyone thinks of banks as holding our deposits safe, and extending loans based upon the amount of deposits they hold in their vaults.
This is no longer true.
The big banks currently do very little traditional banking. Most of their business is from financial speculation (which, sadly, metastasizes into manipulation and criminal behavior).
For example, less than 10% of Bank of America’s assets come from traditional banking deposits.
Time Magazine gave some historical perspective in 1993:

What would happen to the U.S. economy if all its commercial banks suddenly closed their doors? Throughout most of American history, the answer would have been a disaster of epic proportions, akin to the Depression wrought by the chain-reaction bank failures in the early 1930s. But [today] the startling answer is that a shutdown by banks might be far from cataclysmic.
***
Who really needs banks these days? Hardly anyone, it turns out. While banks once dominated business lending, today nearly 80% of all such loans come from nonbank lenders like life insurers, brokerage firms and finance companies. Banks used to be the only source of money in town. Now businesses and individuals can write checks on their insurance companies, get a loan from a pension fund, and deposit paychecks in a money-market account with a brokerage firm. “It is possible for banks to die and still have a vibrant economy,” says Edward Furash, a Washington banks consultant.

Indeed, even though the taxpayers have thrown trillions of dollars at the “too big to fail” banks, they largely stopped loaning to Main street … and it was only the smaller banks that kept making loans.

Inequality Today In America Is Worse than In Ancient Slave-Owning Societies

Inequality is much worse than you think …
Indeed, inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America.

Quantitative Easing Hurts the Economy

81.5% of all money created through quantitative easing is sitting there gathering dust … instead of helping the economy.
Indeed, quantitative easing actually hurts the economy, Main Street, and the average American.

Yes, The U.S. Has Defaulted

It is widely stated that the U.S. government has never defaulted.  In reality, the U.S. has partially or fully defaulted on numerous occasions.

How Money Is Really Created

Banks create money out of thin air, without regard to whether or not they have deposits on hand.
This sounds like an outrageous statement … but the Federal Reserve has said as much.
For example, a 1960s Chicago Federal Reserve Bank booklet entitled “Modern Money Mechanics” said:

[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.

Economist Steve Keen notes:

As long as 4 decades ago, the actual situation was put very simply by the then Senior Vice President, Federal Reserve Bank of New York, Alan Holmes. Holmes explained why the then faddish Monetarist policy of controlling inflation by controlling the growth of Base Money had failed, saying that it suffered from “a naive assumption” that:

The banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt. (Alan R. Holmes, 1969, p. 73; emphasis added)

Moreover:
(1) William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said in a speech in July 2009:

Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference.

(2) On February 10, 2010, Ben Bernanke proposed the elimination of all reserve requirements:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Under the current fractional reserve banking system, banks can loan out many times reserves. But even that system is being turned into a virtually infinite printing press for banks.

Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has also admitted in writing that banks create credit out of thin air.

Steve Keen points out that 2 Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true:

The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.
Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

Kydland and Prescott observed at the end of their paper that:
Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.

In other words, if the conventional view that excess reserves (stemming either from customer deposits or government infusions of money) lead to increased lending were correct, then Kydland and Prescott would have found that credit is extended by the banks (i.e. loaned out to customers) after the banks received infusions of money from the government. Instead, they found that the extension of credit preceded the receipt of government monies.

Indeed, Keen says that 25 years of research proves that creation of debt by banks precedes creation of government money, and that debt money is created first and precedes creation of credit money.
This angle of the banking system has actually been discussed for many years by leading experts:
“The process by which banks create money is so simple that the mind is repelled.”
- Economist John Kenneth Galbraith

“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.“

- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”

-Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964)
“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented.”

- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s.
“Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created — brand new money.”

- Graham Towers, Governor of the Bank of Canada from 1935 to 1955.
Additionally, in First National Bank v. Daly (often referred to as the “Credit River” case) the court found that the bank created money “out of thin air”:

[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.

The court also held:

The money and credit first came into existence when they [the bank] created it.

(Here’s the case file).
Justice courts are just local courts, and not as powerful or prestigious as state supreme courts, for example. And it was not a judge, but a justice of the peace who made the decision.
But what is important is that the president of the First National Bank of Montgomery apparently admitted that his bank created money by simply making an entry in its book ….

Moreover, although it is counter-intuitive, virtually all money is actually created as debt. For example, in a hearing held on September 30, 1941 in the House Committee on Banking and Currency, then-Chairman of the Federal Reserve (Mariner S. Eccles) said:

That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.

Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, said:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.

(Former Fed chairman Alan Greenspan was so worried that the U.S. would pay off it’s debt – causing the fed to “lose control of monetary policy” – that he suggested tax cuts for the wealthy for the purpose of increasing the debt.)

There is a growing movement to give the power to create money and credit back to the government, so that the people can save many billions of dollars in interest payments to the big banks.
But the giant banks are close to negotiating a secret trade treaty which would allow them to keep their monopoly on money creation.

Money 3.0: How Bitcoins May Change the Global Economy- National Geographic

via National Geographic

After the feds seized and shuttered Silk Road, an online marketplace for illegal drugs, earlier this month, some technology experts started sounding the death knell for Bitcoin, Silk Road's international currency of choice. Instead, we may soon see Bitcoin's real value.

Invented in 2008, Bitcoin is not the first attempt at an all-digital, cryptographically based currency. Others have existed in one form or another for nearly fifty years, but have either failed to take off or dramatically crashed and burned. Bitcoin is the first cryptocurrency with the deep structure, wide adoption, and trading momentum to achieve escape velocity.

In practice, Bitcoin blends credit cards' ease of digital transfer with the relative anonymity of a cash handoff. Like all currencies, the problems it poses are both practical and metaphysical; like cash or credit, Bitcoin is somehow both more and less real than the goods it is traded for.

Until now, the most well-known of these goods have been illegal drugs, like those on Silk Road. But the drug marketplace's shutdown gives Bitcoin a chance to gain some much-needed legitimacy. "It's a watershed moment for Bitcoin," Marco Santori, the chairman of the regulatory-affairs committee of the Bitcoin Foundation, told The New Yorker. "Bitcoin's PR problem, with which it has struggled for the last year or so, is being addressed in a very direct way."

Bitcoin's future potential was a hot topic this week at emTech, an MIT conference on emerging technologies. In a panel hosted by MIT Technology Review's Tom Simonite, MIT economist David Johnson and BitPay CEO Stephen Pair discussed Bitcoin's complex relationship with paper currencies, credit, and state authority.

Johnson noted that buyers and sellers, banks and governments all care deeply about what money is used for. Money's use carries associations of value, which in turn helps establish whether a currency, a payment form, and a social model for transactions are legitimate. "It's hard to bring any of them on board if the money is associated with behaviors consumers are troubled by," Johnson said at emTech.

"The key to the legitimacy of the system for all of these parties is to establish that people using the system are acting legally and responsibly."

In turn, Pair denied that Silk Road's association with Bitcoin would prove fatal to the cryptocurrency. "Silk Road used a lot of technologies. First, it used the Internet. It also used Tor [a network using "onion routing" relays to conceal a user's location identity] for anonymity. And then it used Bitcoin for payments," said Pair. Silk Road's shutdown "shows that just because you use Bitcoin doesn't mean you can evade law enforcement."

If until now, Bitcoin has been a notorious outlier, this is its chance to redefine itself as a mainstream contender.

What is Bitcoin For?

If it's not to move drugs or launder money, what is Bitcoin for?

Let's assume that the Silk Road arrests halt or at least slow Bitcoin's use at the fringes of the law, at least until those actors tighten up and regroup (and law enforcement does the same). Let's further stipulate that the number of people interested in Bitcoin as an academic exercise or as an ideological argument about fiat currencies has (like the total number of Bitcoins itself) a hard upper limit.

Pair and Johnson both argue that Bitcoin still has tremendous potential doing what it was built to do: transfer money from person to person without stopping for national borders or rent-seeking middlemen. Those people can be investors, merchants, and even migrant workers, all participating in one of the largest, strangest, but most elegant exchanges the world has ever seen.

Bitcoin's Origins

Bitcoin's invention is attributed to Satoshi Nakamoto, a pseudonym for a person or group who, apart from a 2008 paper introducing Bitcoin, have remained anonymous and absent, a virtual author.

Bitcoin is backed by no government, and its value isn't rooted in precious metals. Instead, it's distributed across the entire network of users, its roots in complex digital mathematics. Bitcoin supporters say that this makes the currency immune to manipulation by politicians or oligarchs seeking to move its value up or down for politics or profit.

"Bitcoin's integrity is guaranteed by the rules of math and the laws of physics," Pair says. Such rhetoric is common in the world of digital currency, where reverence for Bitcoin has succeeded gold for many hard-money enthusiasts. They've entered into an uneasy and unusual alliance with anarcho-technologists who distrust government authority and believe in the power of distributed networks and open-source software.

With governments' financial and credit troubles in turn causing major problems for their currencies, global investors are looking for something firmer than the promise of a central bank. In September, Tyler and Cameron Winklevoss—Facebook bridesmaids turned Bitcoin entrepreneurs—touted the digital currency as a solution to the world's troubled currency markets. "It's Gold 2.0," Tyler Winklevoss said.

Like gold or other precious metals used as specie, Bitcoins are scarce. But their scarcity is algorithmic, as opposed to natural or accidental.

New Bitcoins are added only by being "mined," in the high-tech equivalent of a land rush. Computers on the Bitcoin network race to solve increasingly complicated mathematical problems. The first to do so has its solution verified by the other nodes on the network. Once verified, the Bitcoin can be traded using Bitcoin's wallet software.

Bitcoin mining guarantees a fixed rate of inflation (relative to itself). It roots the value of Bitcoins in the work needed to solve the puzzle. And the decentralized proof-of-work consensus protocol guards against fraud and counterfeit.

In Pair's words, Bitcoin "commoditized the process of securing the network." All the work done by financial centers and payment systems to detect fraud or counterfeit for traditional currency and credit markets is done all along the network according to the peer-to-peer protocols for Bitcoin. And the costs of that work are likewise distributed throughout the system, paid for through Bitcoin mining. This is what lets Bitcoins be traded and exchanged without huge fees.

There are a little over 11.78 million bitcoins in circulation, with a total capitalization of 1.6 billion USD, and typically somewhere between 50,000 and 70,000 bitcoin transactions each day. As more and more computers participate in bitcoin mining—daily unique bitcoin addresses reached a high of over 100,000 this summer—and the mathematical problems needed to earn new bitcoins have grown more complicated, the average operating margin for miners has plummeted. Mining has switched from being a frontier gold rush to a relatively mainstream, industrial-grade operation.

Digital Currency's Future

Today, essentially every digital transaction and every international transaction involves a use of one form or another of virtual currency or credit.

Transaction and exchange fees, taxes, and payment delays exist to provide short-term credit, guard against counterfeit, excessive withdrawals and other kinds of fraud, and to extract income. Bitcoin is designed to provide the same security guarantees and convenience of credit, while foregoing its extra processing times and fees.

You settle with Bitcoin immediately, just like cash. Unlike a credit card exchange, where your credit card number and security information are handed over completely for any transaction, a transfer is authorized only to pay a specific amount.

In principle, Bitcoin's independence makes it more stable than traditional currencies like dollars or euros. In reality, its value has fluctuated wildly over its four-year-existence.

Today, the price of one Bitcoin has stabilized at about $140 US; it briefly dipped down to $121 USD after Silk Road's shutdown, but quickly rallied back. But just a year ago, the price of a Bitcoin seemed stable at about $12 USD. Those are some wild swings.

The exchange values matter, both to people who mine or invest in Bitcoins and to users who want to use them for everyday goods and services, which are usually denominated in local currency. (Local currency is also used to pay taxes, which Bitcoin transactions sometimes try to avoid.)

But what Bitcoin also does is make digital payments possible for people who not only don't have PayPal, but don't have a functioning credit system. In many parts of Africa, Latin America, and south Asia, most people have no access to credit or digital payments; with Bitcoin, that infrastructure comes for free.

Pair's company, BitPay, converts Bitcoins back and forth into various local currencies without charging a transaction fee. (Instead, it charges a flat monthly rate.) Its clients include hosting companies, computer and electronic equipment companies, and companies that sell internationally.

"With Bitcoin, you can take an international payment with no risk of credit card fraud," says Pair. "We sometimes forget that there are many countries where you can't take a credit card payment. Those countries become isolated from the rest of the Internet economy... For many of these countries, if this payment system works, if the U.S. and Congress can support and tolerate a reputable, well-paid industry, this will be a big connector to the world economy."

The area with the biggest potential for Bitcoin worldwide is probably international remittances: money sent home by workers living abroad. Currently, this money has to be handled by several intermediaries: banks, wire services, and currency exchanges all take their cut. A recent report by Businessweek noted that the average fee for remittances was 9 percent of the money transferred, with conversion to cash often costing an extra 5 percent. Western Union's profit margins are enormous for an intermediary, nearly 16 percent, and most of its costs are devoted to the technologies moving money from one place to another, guaranteeing the legitimacy of the transfer. In short, Western Union spends and earns billions to do what Bitcoin does for free.

Instead of Western Union, migrant workers (or businesses operating on their behalf) could use Bitcoin to send payments from one country to another through email, without worry of fraud or needing to support an elaborate exchange or credit market.

It would be real-time, immediate settlement at a fraction of the cost. In ten years, instead of international drugs, Bitcoin could act as a genuine lingua franca for international work.

"The vast majority of the planet don't even own a bank account," Bitcoin evangelist Jonathan Mohan tells PBS Newshour. "And it's my contention that—and a lot of people think this—that, just as in Africa, they didn't go to phones. They went directly to cell phones, that, in the same sort of adoption curve, in these developing nations, you're not going to see them start getting bank accounts. You're going to see them just going straight to Bitcoins, because if you own a Bitcoin address, you have a bank account on your phone that you can interact on the global stage with."

There are still real problems. Johnson thinks that Bitcoin has yet to suffer its first genuine crisis of legitimacy, and its proponents haven't developed a political strategy to reassure wary states and investors that the currency can play nice. And the rhetoric of many Bitcoin proponents assumes a sophisticated understanding of its underlying technology that is far from widespread, especially among the world's poor.

Investors and miners can debate the nuances of different cryptographic schema, but for most of us, money is ultimately an article of faith.

Money 3.0

It seems inevitable that money, already virtual, will only become more so as we shift into a digital economy.

"Money has become data," Ben Milne, founder of Dwolla, a real-time payments company, said at emTech. "There needs to be an infrastructure that allows people to exchange whatever they have for whatever they want, that confirms who they are, and confirms that the transaction is legitimate."

He notes that while today, credit cards handle trillions of dollars in transactions, ACH's virtual transfers where no physical money changes hands handle tens of trillions. If digital companies or currencies can make these transactions more secure, more efficient, and more immediate, that can unlock value for everyone, even some of the companies that currently benefit from the high barrier of entry to traditional banking.

And Bitcoin can still affect the world economy even if it does not become a currency that everyone uses or understands. "If Bitcoin becomes widespread, respected, and legitimate, that pressures everyone—all the central banks and banking companies—to bring down those costs in order to stay competitive," Johnson says. "Or everyone could just use Bitcoin," adds Pair.