Tues Post #2: Peter Schiff on Bernanke's recent public lectures

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"A little is alright" - the danger of inflation

Earlier this week US Federal Reserve Chairman Ben Bernanke uttered this infamous phrase about inflation:

"A little is alright"

This blog has talked about the dangers of inflation before.  And just like interest rates, the idea that inflation could rear it's ugly head again is considered insanity by villagers on the Edge of the Rainforest.

But Bernanke has a different message, "a little is all right." Or at least that’s what he said when asked about the evidence of inflation in the U.S. recovery.

This is a change for Bernanke. In the past he has simply said he  doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

Bloomberg picked up on Bernanke's shift from 'subdued' to 'a little is alright' message and made some good points.

Looking back at history, inflation has a way of coming about suddenly and, once it does, can be very difficult to stop.

The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. 

Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

“Sudden” has happened to us before. 

In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1% for 1915 to 7% in 1916 to 17% in 1917. 

To returning vets, that felt awful sudden.

History has other examples. In 1945, all seemed well: Inflation was 2%, at least officially. Within two years that level hit 14%.

All appeared calm in 1972, too, before inflation jumped to 11% by 1974, and stayed high for the rest of the decade, diminishing the quality of life for everyone.

As central banks around the world massively increase the money supply (the true definition of inflation - it just takes several years to see it reflected in prices), we are told not to worry by Bernanke.

First he told us it isn't there.

Now he is telling us a little is a good thing.

Why will this time be any different?

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Part 4 delayed, Jim Rogers says Bernanke is lying

Part 4 of our 'History of Central Banks' is delayed.

In the meantime some great comments from Jim Rogers on CNBC who says US Federal Reserve Chairman Ben Bernanke is lying to us, QE 3 is underway as we speak.

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Friday Post #2: Much ado about nothing?

The much anticipated meeting of the Federal Open Market Committee (FMOC)  put off a lengthy discussion of the easing options available to the US Federal Reserve until the next FMOC meeting late next month.

“The Fed has a range of tools that could be used to provide additional monetary stimulus,” Chairman Ben Bernanke said.

These options were discussed in August and “we will continue to consider these and other pertinent issues...at our meeting in September.”

Bernanke announced that the Fed had decided to expand its September meeting to two days – Sept. 20 and 21 – to review the pros and cons of further easing. 

“The Fed is not prepared to act at this point, but kept a bias to ease in place,” said Peter Hooper, chief economist at Deutsche Bank.  

Many Fed watchers had expected at least a discussion of the options in today’s speech. Financial markets have been waiting for the speech to hear Bernake’s views on whether he thinks the economy will avoid a double-dip recession and what steps he might be willing to take to stave off a possible severe downturn.

But Bernanke refrained, saying it was unclear how recent stock market weakness, debt-ceiling negotiations and the European debt crisis had impacted the economy.

“It is difficult to judge by how much these developments have affected economic activity thus far, but it seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth,” Bernanke said.

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Tomorrow's Jackson Hole Speech

The financial world eagerly awaits Ben Bernanke, the Federal Reserve's chairman, when he speaks Friday at the Fed's annual symposium in Jackson Hole, Wyoming.

We first made this post back on July 13th, 2011 and we are reprinting it today.

Whether the Federal Reserve likes it or not, its unprecedented monetary polices over the last few years have conditioned the financial markets to expect a helping hand when the going gets tough.

With the stock market mired in a month-long slump and both the U.S. and euro zone economies in danger of sliding into recession, investors are bracing for a possible repeat of last year's performance, when Bernanke hinted the Fed would act if conditions deteriorated.

Two months later, the central bank began pumping $600 billion into the financial system through direct purchases of Treasury debt, a second round of stimulus that markets dubbed "QE2."

So there has been considerable debate about whether or not there will be a third round of Quantitative Easing by the US Federal Reserve.

Back in July US Federal Reserve Chairman Ben Bernanke appeared before Congress and here is how the appearance was reported:

• While the Federal Reserve believes that the temporary shocks holding down economic activity will pass, the central bank is examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases, dubbed QE3, Fed chairman Ben Bernanke said Wednesday in remarks prepared for the House Financial Services Committee. Bernanke discussed three approaches to further easing in his prepared remarks. One option, Bernanke said, would be for the Fed to provide more "explicit guidance" to the pledge that rates will stay low for "an extended period." Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to "increase the average maturity of our holdings." Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, "thereby putting downward pressure on short-term rates more generally." Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten.

You get a sense of how desperate things are getting when Bernanke starts talking about "several untested means to stimulate growth."

This phrase is important as it hearlds what is coming.

The weakening economy and upward pressure on interest rates due to oversupply will cause further Fed intervention, even if it isn’t called QE3.

At his post-Federal Open Market Committee (FOMC) press briefing in July, Bernanke indicated that if job growth falls below 80,000 per month, the Fed would likely intervene again. Well... job growth has now been below 80,000 for three consecutive months.

So what will Bernanke do?

Back in July Forbes took a look back at some of Bernanke's speeches and believes they have pieced together what is coming.

On November 21, 2002, Ben Bernanke gave a talk before the National Economists Club of Washington, D.C. entitled ‘Deflation: Making Sure ‘It’ Doesn’t Happen Here’.

In that 2002 talk, Bernanke ostensibly outlined all of the tools available to the Fed if the overnight (Fed Funds) rate hit zero. At the time of the speech, deflation wasn’t expected in the foreseeable future, so he would have no reason not to outline all the tools he could think of. Here are the 7 options Bernanke suggested and a look at each one:

• #1: Expand the scale of asset purchases;
• #2: Expand the menu of assets the Fed buys.

Both QE1 and QE2 used these tools. In QE1, the Fed purchased non-traditional assets for its portfolio, including mortgage backed securities (MBS) and derivatives. In both QE1 and QE2, the “scale” of asset purchases was dramatically increased.

• #3: A commitment to holding the overnight rate at zero for some specified period.

This tool is currently in practice with the Fed’s “extended period” language in the Federal Open Market Committee (FOMC) minutes.

• #4: Announcement of explicit ceilings on longer-maturity Treasury debt.

This isn’t new. The Fed did this in the 1940s and a version of it again in the 1960s. During a period of approximately 10 years ending with the Federal Reserve-Treasury Accord of 1951, the Fed “pegged” the long-term Treasury bond yield at 2.5%. And, during the Kennedy Administration, the Fed sold T-bills and purchased an equal amount of longer dated T-Notes in order to reduce long-term rates. Bernanke believes that the announced policy of pegging will cause arbitrageurs to keep yields near the announced peg, especially if the Fed intervenes several times to prove its commitment.

• #5: Directly influencing the yields on privately issued securities.

Bernanke said, "If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."  Think GM, Chrysler, AIG.

• #6: Purchase foreign government debt.

The Fed would do this, Bernanke explains, to influence the market for foreign exchange, i.e., to weaken the dollar. He points to the dollar devaluation of 1933-34 as an “effective weapon against deflation”. “The devaluation and the rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly … The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.” (While this is true, a mere two years later, after the withdrawal of government stimulus, a second severe recession began, one that would last until the U.S. geared up for World War II. And the 1937 slump in stocks was one of the largest on record.)

• #7: Tax cuts accommodated by a program of open market purchases.

“A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money”, he said in the speech. (Hence his nickname – Helicopter Ben.) The extension of the Bush tax cuts along with the reduction in the social security payroll tax is a recent example of this policy.

These 7 tools are non-traditional, and Bernanke admits that by using them, the Fed “will be operating in less familiar territory” and will “introduce uncertainty in the size and timing of the economy’s response to policy actions”.

Nevertheless, Bernanke says, “a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition … A central bank … retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is zero.”

Today, any objective economist will tell you that, despite all of the monetary and fiscal stimulus, aggregate demand and economic activity has been minimally impacted. At the July post-FOMC press briefing, Bernanke admitted that he has no explanation as to why the economy has remained “soft”. Nevertheless, as stated above, in an election cycle, the Fed would be expected to do “something”.

Of the seven available tools, #1 appears to have been taken off the table, and #3 is presently employed. Tools #5 and #7 have been used, and may be employed again. #5 was heavily used in the financial crisis (GM, Chrysler, AIG), and #7 requires the cooperation of Congress (tax cuts).

The Fed said that it won’t reduce the size of its balance sheet in the near future, holding it steady like a rock, but will invest or roll any maturities or payoffs back into the market. Hence, the Fed has already embarked upon a policy of what we will call Rock ‘N Roll. As part of Rock ‘N Roll, we also expect the Fed to change the composition of its balance sheet to attempt to impact yields on private sector bonds (#5).

Over the past 2 years, Fed actions appear to have had little impact on aggregate demand. In 2002, when he outlined these non-traditional tools, Bernanke said he had no idea of the magnitude of their effectiveness.

Bernanke is now fully into speculation  mode when it comes to trying to 'fix' the economy.

This isn't a man implementing sound economic principles... rather what we now have is a sorcerer's apprentice practicing his craft.

He is experimenting... with no idea of what will - or won't - work.

Last month John Embry, Chief Investment Strategist at Sprott Asset Management, made an astute observation:

• What’s been fascinating, and what was unappreciated by me in the early stages, was the enormous number of derivatives that have been created in the financial system. Because of the derivatives they’ve been able to keep this thing going for infinitely longer than any rational mind would have thought possible. You’ve been able to create leverage to the extent that you’ve never seen before and this is why I think the bubbles were able to get stretched out and last as long as they did. Because the balloon was blown up so much, I just think the aftermath in its finale is going to be extraordinarily unpleasant.”

Warren Buffet called derivatives "financial weapons of mass destruction" and as the economy continues to unwind, we are seeing just how accurate this description is.

The Federal Reserve has no real game plan for how to deal with it all.

Which is why so many believe the flight to Gold and Silver will only intensify from this point onward.

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Tuesday Post #2: While we wait for the Federal Reserve

Update (8:30 am PDT): ECB intervenes in last minutes of Euro Market Trading as Italy closes red once again. Global markets stabilizing after authorities worldwide pull out all stops to stem bloody tide. Greece and South Korea follow Italy and ban short-selling of equities. Brazilian Finance Minister Mantega says G-20 prepared to take action to calm the global crisis.

This current crisis in the stock markets was sparked when Congress raised the debt ceiling without making significant spending cuts (not with Standard and Poor's downgrade as a result of that action).

Once again, the politicians kicked the can down the road, and avoided make the hard decisions that need to be made.

Constantly this blog talks about the 2008 Financial Crisis and the fact that most people do not fully understand the depth and breadth of the financial earthquake that shook the world in the fall of 2008.

The fact of the matter is that we have not left the recession that was triggered by that crisis. 

From March 2009 to July 2011, the Dow Jones had surged more than 90% on the assumption that the economic crisis was a thing of the past.

But it wasn't. The reality is that the massive monetary stimulus pumped into the markets via QE1 and QE2 only resulted in the illusion of health while creating a depreciated currency, crushing debt, cost-push inflation and a moribund private sector.

Respected figures like Warren Buffett and Alan Greenspan are now saying that S&P was wrong in their downgrade because the Fed can simply print money indefinitely to avoid default.

They are right. But any country can print money to pay its bills if those bills are in the form of the currency that country issues.  It's the value of its currency that determines its credit rating.

Money-printing creates the illusion of solvency for the United States but devalues the currency while  creating a global tidal wave of inflation.

And many foreign governments are wary of hurting their export industries by allowing the dollar to fall too quickly. So they print money too.  They print to keep pace with the US Federal Reserve. Only intervention by the Japanese and Swiss central banks has prevented their respective currencies from soaring much higher against the US dollar.

This race to debase is about to intensify as we await this mornings meeting of the Federal Reserve.

It worth noting that since the release of the horrendous GDP numbers last week, which clearly showed the economy is NOT recovering, the DOW has lost 1,432 points.

Can Ben do anything but print at this point?

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Bernanke dismisses Gold as "Tradition!" (3rd Thursday Post)

Ron Paul: "Why do central banks hold it if it's not money?"

Ben Bernanke:  "Well, it's tradition. Long-term tradition."

(click on images to enlarge)

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All that glitters...

Quick post to start off the day, the first of possibly several for Thursday.

The Sovereign Debt situation has sent Gold surging to new record nominal highs at $1,594.45 per ounce and Silver has leapt another 3% to over $39 per ounce after yesterday’s 6% rise.

Gold is now targeting $1600 per ounce and Silver has surged 9% in 24 hours as the US dollar plummets in value.

Yesterday's debate between US Federal Reserve Chairman, Ben Bernanke, and US Presidential candidate Ron Paul at the U.S. House Banking Committee session is the big news today.

Ron. Paul asked about the collapse in the value of the dollar by almost 50% in the past three years to less than a 1,580th of an ounce of gold. From their exchange:

Ron Paul: “When you wake up in the morning, do you care about the price of gold?”

Ben Bernanke: “Well, I pay attention to the price of gold. But I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as protection against of what we call tail risks, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis then they have gold as a protection.”

Ron Paul: "Do you think gold is money?"

Ben Bernanke:  "No. It's a precious metal."

Ron Paul: "Even if it's been money for 6,000 years? Somebody reversed that and eliminated that economic law?"

Ben Bernanke:  "Well, you know, it's an asset. Would you say treasury bills are money? I don't think they're money either, but they're a financial asset."
Ron Paul: "Why do central banks hold it if it's not money?"

Ben Bernanke:  "Well, it's a form of reserves."

Ron Paul: "Why don't they hold diamonds?"

Ben Bernanke:  "Well, it's tradition. Long-term tradition."

Ron Paul: "Some people still think it's money."

What's interesting here is that the Federal Reserve Chairman just admitted that gold is “protection” against “tail risks” and “really, really bad outcomes”. 

Gold is not a fringe asset and is becoming a core part of a properly diversified portfolio which is an important safe haven asset and indeed currency.

While Bernanke made a feeble denial of this, note that he placed Gold on the same level of US Treasury Bills as an "asset" instead of some form of 'barbarous relic'.

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QE3? What Bernanke had to say...

So there has been considerable debate about whether or not there will be a third round of Quantitative Easing by the US Federal Reserve and whether or not Silver and Gold will be moving higher in value as a result.

Well... today US Federal Reserve Chairman Ben Bernanke appeared before Congress and here is how the appearance was reported:

• While the Federal Reserve believes that the temporary shocks holding down economic activity will pass, the central bank is examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases, dubbed QE3, Fed chairman Ben Bernanke said Wednesday in remarks prepared for the House Financial Services Committee. Bernanke discussed three approaches to further easing in his prepared remarks. One option, Bernanke said, would be for the Fed to provide more "explicit guidance" to the pledge that rates will stay low for "an extended period." Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to "increase the average maturity of our holdings." Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, "thereby putting downward pressure on short-term rates more generally." Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten.

You get a sense of how desperate things are getting when Bernanke starts talking about "several untested means to stimulate growth."

This phrase is important as it hearlds what is coming.

The weakening economy and upward pressure on interest rates due to oversupply will cause further Fed intervention, even if it isn’t called QE3.

At his post-Federal Open Market Committee (FOMC) press briefing, Bernanke indicated that if job growth falls below 80,000 per month, the Fed would likely intervene again. Well... job growth has now been below 80,000 for two consecutive months.

So what will Bernanke do?

Forbes took a look back at some of Bernanke's speeches and believes they have pieced together what is coming.

On November 21, 2002, Ben Bernanke gave a talk before the National Economists Club of Washington, D.C. entitled ‘Deflation: Making Sure ‘It’ Doesn’t Happen Here’.

In that talk, Bernanke ostensibly outlined all of the tools available to the Fed if the overnight (Fed Funds) rate hit zero. At the time of the speech, deflation wasn’t expected in the foreseeable future, so he would have no reason not to outline all the tools he could think of. Here is what he suggested:

• #1: Expand the scale of asset purchases;
• #2: Expand the menu of assets the Fed buys.

Both QE1 and QE2 used these tools. In QE1, the Fed purchased non-traditional assets for its portfolio, including mortgage backed securities (MBS) and derivatives. In both QE1 and QE2, the “scale” of asset purchases was dramatically increased.

• #3: A commitment to holding the overnight rate at zero for some specified period.

This tool is currently in practice with the Fed’s “extended period” language in the Federal Open Market Committee (FOMC) minutes.

• #4: Announcement of explicit ceilings on longer-maturity Treasury debt.

This isn’t new. The Fed did this in the 1940s and a version of it again in the 1960s. During a period of approximately 10 years ending with the Federal Reserve-Treasury Accord of 1951, the Fed “pegged” the long-term Treasury bond yield at 2.5%. And, during the Kennedy Administration, the Fed sold T-bills and purchased an equal amount of longer dated T-Notes in order to reduce long-term rates. Bernanke believes that the announced policy of pegging will cause arbitrageurs to keep yields near the announced peg, especially if the Fed intervenes several times to prove its commitment.

• #5: Directly influencing the yields on privately issued securities.

Bernanke said, "If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."  Think GM, Chrysler, AIG.

• #6: Purchase foreign government debt.

The Fed would do this, Bernanke explains, to influence the market for foreign exchange, i.e., to weaken the dollar. He points to the dollar devaluation of 1933-34 as an “effective weapon against deflation”. “The devaluation and the rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly … The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.” (While this is true, a mere two years later, after the withdrawal of government stimulus, a second severe recession began, one that would last until the U.S. geared up for World War II. And the 1937 slump in stocks was one of the largest on record.)

• #7: Tax cuts accommodated by a program of open market purchases.

“A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money”, he said in the speech. (Hence his nickname – Helicopter Ben.) The extension of the Bush tax cuts along with the reduction in the social security payroll tax is a recent example of this policy.

These 7 tools are non-traditional, and Bernanke admits that by using them, the Fed “will be operating in less familiar territory” and will “introduce uncertainty in the size and timing of the economy’s response to policy actions”.

Nevertheless, Bernanke says, “a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition … A central bank … retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is zero.”

Today, any objective economist will tell you that, despite all of the monetary and fiscal stimulus, aggregate demand and economic activity has been minimally impacted. At the July post-FOMC press briefing, Bernanke admitted that he has no explanation as to why the economy has remained “soft”. Nevertheless, as stated above, in an election cycle, the Fed would be expected to do “something”.

Of the seven available tools, #1 appears to have been taken off the table, and #3 is presently employed. Tools #5 and #7 have been used, and may be employed again. #5 was heavily used in the financial crisis (GM, Chrysler, AIG), and #7 requires the cooperation of Congress (tax cuts).

The Fed said that it won’t reduce the size of its balance sheet in the near future, holding it steady like a rock, but will invest or roll any maturities or payoffs back into the market. Hence, the Fed has already embarked upon a policy of what we will call Rock ‘N Roll. As part of Rock ‘N Roll, we also expect the Fed to change the composition of its balance sheet to attempt to impact yields on private sector bonds (#5).

Over the past 2 years, Fed actions appear to have had little impact on aggregate demand. In 2002, when he outlined these non-traditional tools, Bernanke said he had no idea of the magnitude of their effectiveness.

Bernanke is now fully into speculation  mode when it comes to trying to 'fix' the economy.

This isn't a man implementing sound economic principles... rather what we now have is a sorcerer's apprentice practicing his craft.

He is experimenting... with no idea of what will - or won't - work.

The reaction from Silver and Gold today were predictable. Gold hit new all-time highs and Silver was up over $2 per ounce at one point.

John Embry, Chief Investment Strategist at Sprott Asset Management, was commenting on the move today and noted something we had posted about in our past two posts:

• What’s been fascinating, and what was unappreciated by me in the early stages, was the enormous number of derivatives that have been created in the financial system. Because of the derivatives they’ve been able to keep this thing going for infinitely longer than any rational mind would have thought possible. You’ve been able to create leverage to the extent that you’ve never seen before and this is why I think the bubbles were able to get stretched out and last as long as they did. Because the balloon was blown up so much, I just think the aftermath in its finale is going to be extraordinarily unpleasant.”

Warren Buffet called derivatives "financial weapons of mass destruction" and as the economy continues to unwind, we are seeing this play out in spades.

The Federal Reserve has no real game plan for how to deal with it all.

And the flight to Gold and Silver will only intensify from this point onward.

==================

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Is Bernanke preparing to seriously devalue the US dollar vs Gold?

Yesterday we wrote about how the large commercial shorts in Gold and Silver - the largest, best funded and presumably the best informed traders of gold and silver futures on the planet - complete a historic one-week drop in their net short positioning for Gold and Silver futures traded in New York on the COMEX division of the CME.

This accelerates a pattern undertaken when the price of Silver was hammered down by 35% at the start of May.

This all plays out as QE2 is coming to an end and the Federal Reserve announces there are no plans for QE3.

Nobody reasonably believes there will be no form of QE3, but many pundits have speculated that there will be a break between QE2 and QE 3.  And during that time those same pundits expect the stock market - and commodities - to take a big hit.

So why are the commercial shorts bailing?

There are a great many people who believe they know what's coming next from the Federal Reserve.  They say Ben Bernanke has already told us.

As a Princeton professor in the 1990s, Ben Bernanke lectured Japanese officials for mishandling their economy. Then, in 1999, Bernanke took Japanese officials to task for failing to get their economy moving.

If you go back to that time, it had been 10 years since Japan's stock market peaked in 1989. The decade between 1989 and 1999 had been devastating (and eerily similar to what is happening in the US now).

Japan's property bubble popped in 1991. After that it averaged annual growth of just 0.7%. Its national government debt has soared to more than 200% of its national output. And during seven of those 10 years its consumer prices fell.

All this happened even though the Bank of Japan has held short-term interest rates at or near zero and had taken other stimulative steps such as buying government bonds and short-term corporate debt.

As Japan failed to pull itself out of it's malaise, Bernanke spoke from his ivory tower lectern:

• "Among the more important monetary-policy mistakes (of Japan) were... the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously... What more could the BOJ do? Isn’t Japan stuck in what Keynes called a “liquidity trap”? I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan."

Bernanke listed his recommendations, most of which he has also applied in the United States as Federal Reserve Chairman.  And as those policies have failed to take traction (viewed as sweet vindication by those Japanese officials he lampooned), Bernanke isn't done with his 1999 recommendations.

• "Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take - namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing."

Many pundits believe that QE3 is going to come in a different form from what we have seen already.

In  1932, Roosevelt proceeded to the next step: currency devaluation vs. gold to promote monetary easing.

Bernanke has staked his entire reputation on being the great student of the Depression.  In his 1999 speech he said:

• "But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment - in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done. Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan."

Is currency devaluation vs Gold Bernanke's plan for QE3? Is Bernanke preparing to "try anything that isn't absolutley guaranteed to work" including allowing Gold to rise substanially vs the US dollar?

Is that why the commercial shorts - who work in tandem with the Federal Reserve to suppress Gold and Silver to support the US dollar - are now bailing on their shorts at a historic pace?

Interesting times indeed.

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Real Estate, debt, interest rates, monetary policy, and gold/silver - Part 1

The title of today's post is a snapshot of what this blog talks about virtually every day.

For months I have ruminated about a post that ties them all together, that shows the concerns about Real Estate and how they are tied to debt, which is tied to interest rates, which has been heavily manipulated by monetary policy, which begets the strong interest in gold/silver I talk about.

Yesterday I read another great post by the blogger Gonzalo Lira. And he has articulated a number of pertinent points which I am going to borrow on for this post.

As I have said repeatedly, we still do not fully appreciate - nor do we fully comprehend - the depth and breadth of the financial earthquake that hit us in September, 2008.

The problems that triggered that collapse, and government attempts to manage it, are merely the latest acts in a play that really got underway almost 30 years ago.

As Lira notes, you can clearly see that specific policies were implemented, decisions made and actions taken which set us on the path that brought us to where we are today.

And while some will argue that it was the very invention of the Federal Reserve back in the early 20th century that set us on the current path we are on, a serious look at the policies, decisions and actions carried out in our own lifetimes gives us a clear picture about the path we are on.

It starts in 1975 when the US Congress consistently fails to deliver a balanced budget. This is followed by the US Federal Reserve giving both the U.S. economy and the Federal government a massive subsidy by way of its artificially low interest rates, starting in 1987.

Begining in 1975, the United States has had an uninterrupted string of yearly deficits as the American Federal government has routinely spent more money than it has brought in.

Deficit spending satisfied the ideologies of both sides of the economic divide:

• For the economic Right, cutting taxes satisfied its notion that more money in the hands of the citizenry and corporations guarantees greater economic growth.
• For the economic Left, more government spending every year satisfied its notion that more money spent by the government guarantees greater economic growth.

And since 1975, both sides of the political divide have failed to resolve the US fiscal incoherence.

The economic Right wanted lower taxes. The economic Left wanted more fiscal spending. Rather than thrash out their differences and come to a compromise, they resorted to the national credit card: rather than either/or — it’s been both. Both lower taxes and higher Federal government spending — bought and paid for with fiscal debt.

And as each year passed, the Americans have resorted to issuing Treasury bonds to cover the difference. As a result the overall debt has became greater and greater.

It has become so great that total fiscal debt that exceeds 100% of GDP. Yearly deficits for the next five years will exceed 10% of GDP each year.

The US Government has been able to get away with this deficit year after year because of the cheap interest rates it has had to pay for its debt.

Enter the Federal Reserve.

The price of a good is the intersection of its supply and its demand — this is Economics 101. Money is a good like any other — and like any good, it has a price: Its interest rate. Ordinarily, the price of money is fixed by suppliers of credit—that is, banks. They create money via credit—and they sell this money to their customers, the price of this sale being the interest rate that they charge.

Starting in 1987, the Federal Reserve went beyond its mandate of price stability and full employment, and instead went into the business of goosing along the economy.

In other words, it focused on mindless growth — and focused specifically on the blunt, club-like metric of GDP growth — and goosed along the economy in order to raise that mindless metric.

It did this by usurping the role of banks, and providing cheap money by way of low interest rates; low interests rates carried out with the explicit aim of gaming the GDP.

The economy slowing down?

Cut interest rates.

Momentary market panic?

Flood the market with liquidity.

The economy (as measured strictly by GDP) slowing down again?

Cut interest rates some more.

GDP booming?

Very very very slowly and predictably raise rates — then cut ‘em again the instant the GDP looks like it’s starting to slow down.

This was, in a nutshell, what Federal Reserve Chairman Alan Greenspan did during his tenure: he subsidized money for the sake of gaming a single metric, the GDP.

Everyone knew it.

There was even a name for it: The Greenspan Put.

For such an avowed free-marketeer Greenspan was, in reality nothing of the sort. Rather than allow the market to dictate the price of money, he subsidized it like a Socialist Pricing Board. And just like a Soviet apparatchik of old, Greenspan focused on one number — GDP — irrespective of all the other subtle qualifiers that define a healthy economy.

The distortive effects that Greenspan’s money subsidy brought to the US economy are clear to all... serial bubbles. There was:

• the Dot-com bubble,
• the Tech bubble,
• the Bio-Tech bubble,
• the Collateralized Debt Obligation bubble,
• the Real Estate bubble,
• and now the Treasuries bubble

All of these serial bubbles have been blown by the Federal Reserve’s relentless subsidy of the price of money.

Now of course, if you are using the subsidized price of money to goose along an economy, there comes a moment when it doesn’t work anymore.

Enter Ben Bernanke. His Zero Interest Rate Policy (ZIRP) and Quantitative Easing 1, QE lite and QE2 are the perverted policies he has had to pursue in order to keep up the Greenspan Put.

All of The Bernank’s recent policies are aimed at shoring up the “growth” that the U.S. economy has experienced over the last 24 years.

But as Lira points out, that “growth” isn't real. It's steroid-induced bubble muscle. An illusion.

If you measure gross GDP adjusted for inflation, which has been Greenspan’s sole metric, there has been "growth".

However, if measured by median and average wages, per capita incomes adjusted for purchasing power, or any other such metric that measures the well-being of the average, and the below-average,citizen, there has been no growth whatsoever.

People are less well off. The middle class in the United States has shrunk drastically. Sure, the average income might be higher, but that’s the distortive effect you get from having tremendous, inorganic wealth disparities.

It’s not merely that the disparity between the wealthy and the rest of the population is obscene — the disparity skews the results. Remove the top 15% of the population, and the average income in the United States drops below Slovenia’s.

Furthermore the sort of growth the American economy would have experienced since 1987 without this money subsidy would likely have been very different from the growth we have actually experienced.

The growth we have experienced has been speculative. Cheap (ie. subsidized) money that Greenspan made available was set to chase returns via trading, not production.

Had money been expensive, yields that beat savings would have been harder to come by and thereby encouraged savings instead of speculation.

Expensive money would have also kept banks from the insane speculation of the real estate markets: On the one hand, expensive money would have kept low quality buyers from access to credit, and on the other, expensive money would have dissuaded banks from expanding their businesses into riskier territories, in order to reap higher returns.

In other words, risk would have been accurately priced.

In other words, there wouldn’t have been a Global Financial Crisis.

Now, obviously, it’s a fool’s game to try to go back over the 24 years since Greenspan took office and try to deduce what would have been the organic price of money without his and Bernanke’s subsidy.

But clearly, had the Greenspan Put never existed, there would likely have been less growth than has been had.

Would there have been less money for venture capital and the financing of new businesses? Yes, no question. Would those new businesses therefore never have existed? Again, yes.

However: How many ridiculous, fairy-tale businesses would have been financed, as happened during the various bubbles of the last 24 years?

Very few. Capital would have been much more efficiently allocated in a world where there was no subsidy on money. It would have been too expensive for the economy to throw away capital on clearly nonsensical businesses.

Would the solid businesses have gotten financing? The ones that actually did something for the economy, like Google, Ebay, and so on?

Clearly, it would have been tougher for them, and their growth would have been slower — but just as clearly, they would indeed have gotten financing, because they are obviously good businesses.

Anyway, even if many good businesses would have failed to raise financing in a world of more expensive credit, the good outweighs the bad: There would not have been any serial bubbles.

But most importantly... the US Federal government would not have had access to cheap financing. And it is the cheap financing which encouraged the accumulation of back-breaking debt.

Had Greenspan not subsidized money, it would have been far too expensive for the US Federal government to continue increasing its yearly deficits, and adding to the national debt.

A fiscal day of reckoning would have happened a lot sooner and therefore would have been a lot less painful.

It would have been bad (all days of reckoning are bad), but it wouldn’t have been mind-crunchingly destructive as the coming crisis will be.

We are in a world where first Greenspan, and now Bernanke, have keep money at absurdly, unsustainably low prices. The US Federal government was allowed to balloon its fiscal debt to monumental proportions: over 100% of GDP, with future yearly deficits in the +10% of GDP range as far as the eye can see.

The Federal Reserve’s subsidized money has postponed the day of reckoning, insofar as the Federal government debt is concerned. And it is making that day of reckoning much worse than it needed to be.

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We are much closer to total destruction than you think!

Did that headline catch your attention?

They aren't my words. That was how CNBC summarized someone who has far more intimate knowledge of the financial system than any blogger.

But we'll come back to that.

First off let's focus on interest rates here at home.

As you know, Canadian banks hiked interest rates this week. On the heels of those rate hikes comes Finance Minister Jim Flaherty with a warning that there are even more rate hikes coming.

• "The recent increase by a couple of the banks is exactly what we expected. And more increases should be coming. We're likely to see higher interest rates as we go forward because interest rates are still very low."

Almost makes quote of the day: "Interest rates are still very low."

That's 'very' low as in, rates are going to go way higher.

The big news story though was occurring south of the border.

As I have said over and over again, we still do not understand - nor do we appreciate - the full depth and breadth of the financial earthquate that hit us in September of 2008.

Yesterday US Federal Reserve Chairman reinforced that point in testimony before the US Congress.

And for all you out there who think the crisis is over and has past, Bernanke's comments are stunning.

Warning that America's fiscal health has deteriorated appreciably since the onset of the financial crisis and the recession, Bernanke told Congress that the US is much closer to total destruction than you think.

CNBC reported the story here.

Said Bernanke:

• "The unsustainable trajectories of deficits and debt that the Congressional Budget Office outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis."

Bernanke is telling Congress what Greenspan was telling us last year.

At some point the Bond market is going to force the issue on America and when it happens, the US Federal Reserve won't be able to stop it.

So for all of you who continue to believe that the government will never let interest rates go up like they did in the 1970s, not only are you ignoring the blogosphere... now it's Flaherty and Bernanke telling you what's coming.

Still not convinced?

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Schiff on Bernanke and debt ceiling warning

Peter Schiff discussing Ben Bernanke's warning to Republicans to raise the debt ceiling.

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On the topic of Quantitative Easing

Yesterday I talked about a trend that will continue next year: currency induced cost-push inflation.

Today I would like to talk about another trend you will see continue into next year: Quantitative Easing.

For almost 20 years now, the US Federal Reserve has been able to prevent market forces from correcting our economic imbalances by inexorably pushing rates lower.

This happened in 1991, 2001, and most notably in 2008.

These easing campaigns succeeded in boosting the economy in the short term by greatly increasing the amount of debt held by both the private and public sectors.

Each successful round was been enacted to prevent/delay the repercussions from the earlier effort.

The dot-com bubble was created. When it burst, rates were lowered to stimulate and created the housing bubble. When the housing bubble burst in the US, the Federal Reserve lowered interest rates to practically zero.

At this point, rates can go no lower.

So when that stimulus failed, the Federal Reserve has decided to bring on the heavy artillery in the form of “Quantitative Easing,” or as it is known in the vernacular, “printing money to buy government debt.”

By its own words, the Federal Reserve has said the goal of quantitative easing (QE) is to lower long-term interest rates. It is hoped that this will achieve what low short-term rates had not: an increase in stock and real estate prices, a rise in household wealth, and consequently greater consumer spending, economic growth, and job creation.

As the year winds down, it appears the Fed’s plan has backfired.

So far the selling pressure on long-term bonds is overwhelming the Fed’s buying pressure. Spiking rates (which move inversely to price) are powerful evidence that the bond bubble may be ready to burst. The Federal Reserve has thrown everything but the kitchen sink at the bond market to force yields lower, yet they have risen anyway.

Meanwhile the economy sputters, real estate continues it's downward slide in America and unemployment is not dropping.

Compounding the issue is a new Republican dominated congress which has come to power on the back of an austerity movement.

The US Federal Reserve is the only option to stimulate the economy right now.

One of the biggest obstacles facing that US economy will be the individual US States.

The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. State tax collections, adjusted for inflation, are now 12% below pre-recession levels, while the need for state-funded services has not declined.

As a result, even after making very deep spending cuts over the last two years, states continue to face large budget gaps.

At least 46 states struggled to close shortfalls when adopting budgets for the current fiscal year. These came on top of the large shortfalls that 48 states faced in fiscal years 2009 and 2010. (for your information, the 2011 tax year began July 1 in most states)

States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs.

And if the State financial picture is bad, it pales in comparison to the municipal financial picture. Major American cities are in deep financial trouble.

There is no painless way out of this situation at this point.

Bernanke and the Federal Reserve are caught between the Scylla of deflation - which would liquidate the inefficient part of the economy - and the Charybdis of inflation.

A crystal ball is not required to see which the US Federal Reserve will choose in 2011.

Ben Bernanke has a PH.D in economics and his entire reputation is wrapped around be an expert on the Great Depression. He is an academic, and academics are very predictable.

When you go through graduate school you have to write a doctoral thesis, which will start your real career. Usually those thesis - if they are successful - lead to books and then more writings that branch off of the original thesis. Creative minds, and there is a difference between being imaginative and smart, then investigate new avenues of thought throughout their careers and come up with innovative theories and groundbreaking research.

That's what 'academic' life is all about.

Most of these 'academics' then spend the rest of their career circling around the theories behind their doctoral thesis. They remain anchored to it and don't deviate for the rest of their lives.

They can't.

Their entire professional reputation is wrapped around that thesis, it is their life's 'work'.

That is essence of Bernanke. He wrote a thesis claiming that the Great Depression happened because the Federal Reserve didn't lower interest rates fast enough after the stock market topped out in 1929 and because they failed to provide enough liquidity (printing of money) is the years after the crash.

There will be no deviation from this 'thesis'.

Bernanke has chosen the Charybdis of inflation - the whirlpool.

Quantitative Easing has only just begun.

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Ben Bernanke meet Jon Stewart

In case you didn't see it, Jon Stewart offered his observations on US Federal Reserve Chairman Ben Bernanke's Sunday interview with 60 Minutes.

I can't embed the clip, but you can watch by clicking here.

Bernanke said on Sunday that "one myth that is out there is that we are doing is printing money. We're not printing money."

Bernanke made this statement in response to the Fed's actions of creating money out of thin air and buying government bonds.

Stewart juxtaposes Ben's latest 60 Minutes interview against another 60 Minutes interview the Chairman gave just 21 months ago when he was justifying buying corporate assets from the banks.

• Bernanke: "To lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed, so it's much more akin, although not exactly the same, it's much more akin to printing money than it is to borrowing."
  
  Interviewer: "You've been printing money then?"
  
  Bernanke: "Well... effectively and we need to do that"

So, as Stewart notes, the difference was that then the Fed was creating money out of thin air to buy corporate assets and now it's buying government bonds.

How is it that you were printing money then, but now you're not?

Stewart observes, "I guess Bernanke was looking at the average age of the 60 Minutes viewer and betting that anyone who saw him last year is dead now."

While humorous, it does expose something that many critics are sharply focusing on: Bernanke came on national TV and lied to the American people.

In fact, as Michael Pento of Euro Pacific Captial writes, Bernanke came out and told 2 big lies.

• Lie #1 - The Fed isn’t printing money. Bernanke stated: “The amount of currency in circulation is not changing…the money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.” Given that it is the Treasury Department’s Bureau of Engraving and Printing, not the Fed, that actually prints paper money, his statement is technically correct while substantively false. However, Bernanke is buying bank assets with Fed credit. With such an arrangement, printing becomes unnecessary.
  
  According to gentle Ben, credit created to buy something should not be considered money and has no affect on asset prices? But if that’s true, why is he concentrating his buying in the middle of the Treasury yield curve. His stated purpose is to boost bond prices and lower yields in order to stimulate borrowing and aggregate demand. So pushing up bond prices is an act of inflation. Bernanke similarly contradicts himself by saying that he isn’t creating inflation, while at the same time claiming that his easing campaign is designed to boost asset prices to combat the phantom of deflation.
  
  And by the way, the Fed is causing money supply to increase significantly. The compounded annual growth rate of M2 is over 7% in the last quarter. Apparently in the eyes of the Chairman, a 7% annualized increase in the broad money supply isn’t considered significant.
  
  Lie #2- Bernanke is “100 % confident” that, when necessary, the Fed can control inflation and reverse its accommodative monetary policy. He stated, “We’ve been very, very clear that we will not allow inflation to rise above 2 percent. We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.” He failed to mention that the Fed doesn’t have the will to drain money from the system, without which all tools are useless. The Fed has consistently demonstrated its unwillingness to take the appropriate actions when necessary. In claiming he is 100% confident in his ability to control inflation, Mr. Bernanke ignores the record that during his tenure he has misdiagnosed the economy.
  
  In June of 2006, Bernanke culminated his inflation fighting efforts by raising the Fed Funds target rate to 5.25%, after CPI inflation reached 4.2%. But that interest rate was enough to help burst the housing bubble and to spark an international credit crisis. Bernanke was completely unaware that the Fed actions had created an economy that had become completely addicted to artificially-produced low interest rates and inflation.
  
  Shortly after the collapse of the real estate market and the ensuing truncated deflationary-depression, Bernanke took interest rates to near zero percent. But if the Fed was ever really serious about unwinding excessive leverage, the time had clearly arrived. Instead, the U.S. economy has become more addicted to free money than at any other time in our history.
  
  Commodity prices are soaring once again and the real estate market, banking sector, and the overall economy cling precariously on the arm of government induced bailouts and low interest rates. Even worse, our government has massively increased its level of debt, which now stands at just below $14 trillion. Once the rate of inflation eclipses the Fed’s 2% target rate, which appears likely, how then will the Fed raise rates to contain it? Could the economy then withstand an increase in the cost of home ownership? Most importantly, when will Mr. Bernanke find it politically tenable to dramatically increase debt service payments for the Federal government? In truth, there is never a convenient time to have a severe recession or a depression. Unfortunately, reality can be extremely inconvenient.
  
  Bernanke was accurate in saying that the economy is not expanding at a sustainable pace. Of course, his prescription was the same as it always is; print more money in the misguided belief that inflation will lead to growth. As such, he indicated that it’s possible that the Fed may actually expand bond purchases beyond the $600 billion announced last month. (Remember that the $600 billion comes after the $1.7 trillion that has already been printed, which failed to produce anything much beyond a weaker dollar). Therefore, the country can look forward to yet more inflation, continued anemic GDP growth, a poorer citizenry, and a vastly lower standard of living.

All of this is followed by news that US Treasuries have suffered their biggest sell off since the collapse of Lehman Bros (see reprint of Financial Times story on this blog).

Thus when QE is supposed to be lowering interest rates, they are rising.

This dynamic is the one which all the R/E shills in the Village on the Edge of the Rainforest remain oblivious/ignorant to.

Bernanke can say he will keep interest rates low for years to come. But the market vigilantes have the ultimate say.

I've posted on this blog numerous times the fears stated by former Federal Reserve Chairman Greenspan that this could happen.

Dramatically higher interest rates are coming. It's only a matter of time.

And when they come, as Bank of Canada Governor Mark Carney has been warning for months now, you don't want to be holding debt of any significance that you can't service at interest rates at the historic norm (8.25% or higher).

People mock the Bears because the collapse has not come yet and anyone who has bought in the last 7 years is way ahead than if they had listened to the Bears.

But unless they cash in on that equity now, hardly any of those buyers will survive what is coming.

Which is why two and a half years ago I became a staunch real estate bear and highly advocate liquidating debt, eschewing debt accumulation and investing to prepare for what is coming.

Regrettably few will appreciate the advice until it is too late.

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