Who All Is Watching You?

Dear Reader,

Every few weeks I receive an email inquiring about the investment-worthiness of the Iraqi dinar. Since multiple subscribers are interested in the topic and US withdrawal from Iraq is in the news, this issue is worth mentioning. The Iraqi dinar promoters seem to push two main ideas: 1. With Iraq free of Saddam Hussein, the economy will boom and as a result the currency will strengthen; and 2. The Iraqi government will revalue the currency to pre-war levels. Instead of over a thousand dinars per dollar, the government could even set a one-to-one exchange rate – making holders of the old notes rich.

What's missing from both of these cases is an understanding of monetary policy. Either the Iraqi dinar promoters are completely ignorant of the basics of currency markets and monetary policy or they're just plain scammers. I'll let you decide.

Let's start with some common sense. If one thinks the US economy is going to boom, would the dollar be a good investment idea? Well, maybe, but it wouldn't be the best idea. Why not invest directly in the DJIA, Nasdaq, or S&P 500? Currencies and the strength of the country's economy are not perfectly correlated. Just think of the US economy in the past few years. The economy has been in a horrible rut, yet the dollar has been all over the place. Furthermore, as the stock market has plunged, the dollar has strengthened – and vice versa. Many other factors affect a currency other than the strength of the economy. If one really believes that Iraq will become a booming economy, don't buy the currency – buy a diversified portfolio of Iraqi stocks. That might be a little troublesome, but if this is really the trade of the decade in your mind, go for it.

One of the most important factors in a currency's strength is its central bank. A nation can have all the economic growth in the world, but if its central bank is printing money like crazy, the currency will still become worthless. In fact, that growth might be the result of a monetary-induced bubble. Ultimately, a bet on any currency is a bet on its central bank. While many readers are likely familiar with the political situation in Iraq, the vast majority probably don't know anything about the country's central bank. And don't think the connection to oil can save the currency either. Just think about the currency controls and over 30% inflation in Venezuela.

The second case for the Iraqi dinar isn't particularly good either. The central bank doesn't possess a magic wand that revalues the currency. This investment thesis assumes that the Iraqi central bank can just legislate a fixed exchange rate. In reality, it's a process where the central bank must contract the money supply and battle forces on the exchange market. Consider the basic logistical problem here. Currently, 1,170.50 dinars trade for a single US dollar. Suppose the central bank sets a one-to-one exchange for the dollar. What's immediately going to happen? Everyone holding dinars will want to trade them for US dollars, but who will exchange the dinars to dollars? Currency markets always require a buyer and a seller. Will major banks say, "Iraq's central bank told us that the dinar is the same as the dollar, so we are going to assume that's true"? Of course not! No one would trade dollars for dinars based on an arbitrary rate.

Is the central bank completely powerless to fix the rate? No; it can try to convince the market of the exchange rate by purchasing Iraqi dinars on the open market. If the Iraqi central bank agrees to exchange one US dollar for each dinar, market participants may believe the new exchange rate, but that's going to take a lot of convincing – meaning a ton of reserve currency from Iraq's central bank. If the central bank wants to return its currency to a one-to-one relationship with the dollar, it will have to spend billions in the currency market buying up dinars. Why the central bank would want to waste this money is extremely puzzling.

To sum this up, this is a monetary issue, yet the dinar promoters love to discuss anything but the central bank of Iraq. They're on some different planet where the strength of currencies has a perfect correlation with economic growth and where exchange rates can be set with the swish of a magic wand.

Next, Doug Hornig will discuss the growing intrusions into one's privacy from private companies to government agencies.


Who's Watching?

By Doug Hornig

These days, it seems like it's more or less everybody, doesn't it?

It's not just the government. Take the recent flap over OnStar. GM touts its emergency broadcast system as the greatest thing since the invention of the Chevy, and it rolls out accident survivors to attest to the need for the product.

Longtime critics of the nanny state take a more jaded view, swearing that it's only a matter of time before something like OnStar becomes mandated for all new vehicles. The move will be proclaimed as being "for our own good," of course. No mention will be made of how drivers will be forced to accept a live microphone that feeds whoever is manning the central listening post (and also recording the feed). Private car conversations will cease to be private.

But no one seems too bent out of shape about that. Nor has there been much protest about the change to OnStar's terms and conditions of service. Originally, all that OnStar was allowed to do was collect information on your vehicle's location during a theft recovery or when emergency services were called for. Now when one signs up, one grants OnStar the right to collect and sell personal, yet (allegedly) anonymous information from one's vehicle, including speed, location, seat belt usage, and who knows what all else.

And the thing is, once one has OnStar (six million of us do so far), one always has it. Thus, the company can continue to collect data even after the service is disconnected. In order to be cut off altogether, one has to specifically shut down the vehicle's data connection… if one knows how.

Bad as that was, even it wasn’t the last straw. What finally got consumers screaming, "Enough!"? It was OnStar's September announcement that under its newest terms and conditions, the company is allowed to gather data from former subscribers and peddle it to third parties.

That got even members of Congress up in arms and calling for an FTC investigation. OnStar backed off, and in late September OnStar backed down and removed the offending language from its contract. The potential for abuse of active users remains, however.

While private-sector surveillance is growing exponentially, the government is not going to be left behind. In fact, it's taking a giant leap forward with the beta testing of its Future Attribute Screening Technology (FAST). If that sounds really ominous, it's because it is.

Remember Minority Report? That's the 2002 film in which Tom Cruise played a futuristic cop in his department’s "Precrime" unit, which apprehends criminals before they act, based on foreknowledge provided by dedicated psychics called "Pre-Cogs." It's good, old-fashioned sci-fi fun from the pen of Philip K. Dick and the lens of Steven Spielberg.

Only it isn't fun any longer. Or sci-fi. It's real, and it's here.

No, there aren't any psychics floating in holding tanks. Yet. (As far as I know, that is.) But the Department of Homeland Security is busy working out the kinks in FAST, according to an internal document obtained under FOIA by the Electronic Privacy Information Center.

Details are still a bit sketchy, but we know that the project was initiated in late 2008, and that the tech is being tried out on volunteers selected from the general public or from among DHS employees, if not both. In any case, DHS is building a prototype "mobile screening laboratory" that will supposedly "detect cues indicative of malintent."

(Click on image to enlarge)

In other words, like Minority Report's psychics, the DHS's machines aim to pinpoint the perpetrator of a crime, but before the fact.

Says the DHS: "The FAST program is only in the preliminary stages of research and there are no plans for acquiring or deploying this type of technology at this time." They're testing it in order not to use it. Mmmm-hmmm…

DHS adds that even if the technology were put into the field, the department has no intention of storing people's personal information. Uh huh.

GM. DHS. And how about the Fed?

The Fed? Sure, I've written much about Casey Research's disagreements with Fed policy over the years. But even I was floored to learn that the central bank has hopped onto the speeding surveillance express.

On September 16, an RFP – i.e., Request for Proposal, the standard form which puts a project up for bid – was issued by the Federal Reserve Bank of New York. The RFP, filed with Fed vendors, is requesting the creation of a "Social Listening Platform" with an intended function to "gather data from various social media outlets and news sources."

The solution will be required to "monitor billions of conversations and generate text analytics based on predefined criteria." And it "must be able to gather data from the primary social media platforms – Facebook, Twitter, Blogs, Forums and YouTube," and to "handle crisis situations, continuously monitor conversations in real time, and Identify [sic] and reach out to key bloggers and influencers." It "must support content coming from different countries and geographical regions. It should also support multiple languages." Finally, it will be tasked with determin[ing] the sentiment of a speaker or writer with respect to some topic or document" and "provid[ing] sentiment analysis (positive, negative or neutral) around key conversational topics."

Wow. That's pretty comprehensive. It makes one wonder what exactly the Fed is looking for. Let them tell us. From the RFP's Introduction:

Social media platforms are changing the way organizations are communicating to the public. Conversations are happening all the time and everywhere.
There is need for the Communications Group to be timely and proactively aware of the reactions and opinions expressed by the general public as it relates to the Federal Reserve and its actions on a variety of subjects.

Awwww… they care what we think of them.

Well, that's one explanation, anyway. But actually, it's more likely that they care what we say about them. Is it difficult to envision the day when anyone who blogs, "Fiat currency must die!" gets put on a terrorist watch list? Didn't think so.

With Marshal Dillon deputizing everyone in sight like this, it just might be time to think about gettin' out of Dodge…

[Sometimes the only way to handle an alarming trend such as this is to put oneself out of its reach. Internationalizing yourself – and your wealth – was one of the topics discussed at the recently held Casey Research/Sprott Summit, When Money Dies. Audio recordings of the entire event are available now (in CD or MP3 format): get yours and start getting ready for the coming challenges.]


Additional Links and Reads

What If We Paid Off the Debt? The Secret Government Report (NPR)

One of our readers, Greg G., sent along this link. It's hilarious in so many ways. The program discusses a never-published government report from 2000 that projected the repayment of all US debt by 2012. I can't think of a worse set of assumptions. Did these authors assume the economy would keep growing at the rate of the tech bubble it was currently in? Did they assume the government wouldn't increase spending? This is just crazy stuff and shows the cluelessness of government economists at the highest levels. These authors fundamentally didn't understand the business cycle and didn't get the centuries-long trend of government growth.

Furthermore, they seem puzzled by very easy questions. What would the world do without Treasuries? Probably invest in the next-safest bonds – there are several AAA-rated countries out there. The market would figure it out. Nonetheless, it wouldn't be an earth-shattering problem. Speculating on the particular asset is pointless. Furthermore, the economists pondered, "Where would Social Security be invested other than Treasuries?" Hey, guys: you know there are these crazy things called sovereign wealth funds… right?

Treasury Eyes First New Debt Type Since TIPS (Bloomberg)

The official reports suggest that everything is fine with US Treasuries. Yields are near record lows, and in the face of uncertainty, investors are still buying them up. Nonetheless, the Treasury is exploring the possibility of issuing variable-rate Treasuries. These sorts of instruments would be particularly attractive for retail investors and funds. (The bigger institutional players essentially already create variable rates with interest-rate swaps.)

On the one hand, this could be an innocent move unrelated to the big picture. After all, when TIPS were introduced in 1997, the US did not succumb to rapid inflation. Perhaps this case is similar to the TIPS issuance. However, this variable-rate idea definitely shouldn't be ignored.

All Aboard the Beta Train As Correlation Between Hedge Fund Returns and Market Hits All-Time Record (Zero Hedge)

Zero Hedge points out that the beta between the market and hedge funds has reached one – they essentially move in the same fashion. So what's the point of buying into a hedge fund? Good question. With the funds' high fees and the near rock-bottom rates for ETFs such as SPY, there doesn't seem to be much reason to stay. I've always been skeptical of hedge funds, and here's another reason to avoid them.

That's it for today. Thank you for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor

Oct 24, 2011