MIKE

Posts Tagged ‘Bush’

by Bud Conrad
October 17, 2011
Casey Research

Foreign central banks buy US Treasury and Agency debt through accounts at the Federal Reserve, where it is held in custody. Without these central banks buying our debt, the US federal government would have to find a new source of funds or the result could be higher interest rates. Looking at the data on a monthly basis (and then multiplied by 12 to give the annual rate), here is the dramatic picture of how foreign central-bank purchases of our debt have shifted, from buying $500 billion to selling off $1 trillion. At this rate of selling over several months, interest rates would go higher – if other things were equal. Of course, things are not equal because the Fed has been forcing rates lower with its massive QE2 and other programs. QE 2 was $600 billion over nine months, or an annualized rate of $800 billion per year. Since foreigners are selling off our government debt, Fed purchases of government debt are even more necessary.

(Click on image to enlarge)

Here are the data on the amount of Treasuries purchased in the last quarter of the year at an annualized rate: Foreigners have decreased their holdings for the first time since 2007.

(Click on image to enlarge)

Here’s another chart worth considering. This is a comparison to the ten-year Treasury, with the purchases of Treasuries inverted.

(Click on image to enlarge)

In my latest article in The Casey Report on interest rates, I discuss the above chart and cover the broader issues driving interest rates.

What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for “currency manipulation” which will bring mandatory tariffs. China’s opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China’s reaction to some of those anticipated policies. We can’t tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn’t matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed’s ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.

[Whether this shift is temporary or a long-term reversal remains to be seen – but the end of the US dollar as the world’s reserve currency is all but certain. How can one prepare for such a life-changing move? Listen to the audio recordings of the recently held Casey Research/Sprott Summit, When Money Dies, to gain insights and actionable advice from experts including Adam Fergusson and Doug Casey on how you can not just survive what’s coming, but thrive. Order your set today.]

Additional Links and Reads

Banking Corporatism in 1912 (Ludwig von Mises Institute)

The Mises Institute dug up a great cartoon from 1912, representing what would happen to the US with the creation of a central bank. The picture says it all. That’s essentially what did happen.

Kinder Morgan to Buy El Paso for $21.1 Billion (Bloomberg)

In the biggest energy transaction of the year thus far, Kinder Morgan purchased El Paso Corp. to form the country’s largest national gas pipeline network. The natural gas market is an interesting beast. On the one hand, natural gas prices are dirt cheap. On the other, they can’t say low forever, but as Doug Casey says just because something is inevitable doesn’t mean that it’s imminent. There are some who have given up on investing in natural gas, while others are willing to put big bucks into it.

What I find interesting about the whole field is that involves so much hard science. Whether the general economy will go up or down is the realm of economics – not exactly a science. And of course, the economy will affect oil and gas prices, but natural gas requires making estimates of scientific facts. How much gas is left in the ground? What are the well decline rates? How damaging are fracking chemicals? While in economics we can argue back and forth without getting anywhere, these questions will have clear answers in the future. Someone will be right, and someone will be wrong.

Seven in Ten College Grads Are Employed Full Time for Employer (Gallup)

The second table of results from this poll, copied below, showed some particularly noteworthy findings which I’ve discussed before.  This table represents only workers and the unemployed who are searching for a job. At the top of the unemployment pile are workers aged 18 to 29 with 14% unemployment and 30% underemployment. That’s pretty crazy – only 56% are working full time. And of those 56%, how many do you think actually have a good, career-track job versus something like flipping burgers?

This relates to today’s intro. If one graduated college in 1998, one could get a job at Goldman Sachs. Graduate ten years later, and one will be lucky to find a position as an assistant accounting clerk with the exact same qualifications.

Read the entire article HERE.

By Robert Scheer
OpEdNews
June 1, 2011 at 14:18:58

What was Timothy Geithner thinking back in 2008 when, as president of the New York Fed, he decided to give Goldman Sachs a $30 billion interest-free loan as part of an $80 billion secret float to favored banks? The sordid details of that program were finally made public this week in response to a court order for a Freedom of Information Act release, thanks to a Bloomberg News lawsuit. Sorry, my bad: It wasn’t an interest-free loan; make that .01 percent that Goldman paid to borrow taxpayer money when ordinary folks who missed a few credit card payments in order to finance their mortgages were being slapped with interest rates of more than 25 percent.

One wonders if Barack Obama was fully aware of Geithner’s deceitful performance at the New York Fed when he appointed him treasury secretary in the incoming administration. The president was probably ignorant of this particular giveaway, as were key members of Congress. “I wasn’t aware of this program until now,” Barney Frank, D-Mass., who at the time chaired the House Financial Services Committee, admitted in referring to Geithner’s “single-tranche open-market operations” program. And there was no language in the Dodd-Frank law supposedly reining in the banks that compelled the Fed to reveal the existence of this program.

It was merely one small part of that reckless policy of throwing mad money at the banks while ignoring the plight of homeowners whom the banks had swindled, a plan pursued by both the Bush and the Obama administrations that set the stage for the current slide into a double-dip recession. On Tuesday it was reported that home values have continued an eight-month decline back to their lowest point since the recession began. With housing in deep trouble there can be no rebound of consumer confidence or job creation, and the first-quarter growth rate was an anemic 1.8 percent even as Wall Street profits and bonuses flourished. Wages are stagnant, unemployment claims have recently risen and, as The Wall Street Journal headlined on Tuesday, “Economists Downgrade Prospects for Growth.” That same edition of the Journal reported that 44.6 million Americans now survive on food stamps, an 11 percent increase in that misery index over the past year, while Geithner’s friends at Goldman are doing quite well.

Actually, Goldman wasn’t even a bank and was therefore ineligible for those massive government handouts until Geithner helped gain approval for the instant conversion of Goldman from an investment house to a commercial bank. Goldman was granted that status, and with it access to the Fed’s lending, soon after the privilege had been denied to the fellow investment bank Lehman Brothers (the $30 billion mentioned above was in addition to the $43.5 billion Goldman borrowed from other Fed programs). Although Lehman was allowed to go belly up, Geithner engineered the massive bailout of AIG, a move that turned out to be a cover for passing money to AIG’s clients, including the aforementioned Goldman Sachs. The man’s intentions were clear, even if all the secret details were not, when Obama picked him to be his point man in salvaging an economy that Geithner had done much to wreck.

Geithner’s priorities were all too obvious from his days in the Clinton administration’s Treasury Department when he worked first under former Goldman honcho Robert Rubin and then Lawrence Summers, who took six-figure speaking fees from Goldman and other banks while he was an adviser to candidate Obama. It was the recommendation of Rubin and Summers that landed Geithner the job as president of the New York Fed, where he faithfully followed the policy lead of Goldman-CEO-turned-Treasury-Secretary Henry Paulson.

It was back then and is now accurate to speak, as a New York Times headline once put it, of U.S. politics dominated by “The Guys From “Government Sachs’ “–but on an international scale. From the crisis in Greece, where Goldman manufactured toxic tax-based derivatives with abandon, to its betting against the success of the mortgage-based derivatives that Goldman designed and sold to others, the company was nothing short of a massive wrecking ball in the international economy.

Oh yes, what did Goldman do with that taxpayer money it borrowed back in 2008? It needed the money to cover the lousy bets of its Fixed Income, Currencies and Commodities trading unit, which had lost $320 million. Typical of the Goldman dealings in that arena was the $1.3 billion solicited from Col. Moammar Gadhafi’s Libya sovereign wealth fund, which according to a report in Tuesday’s Wall Street Journal lost 98 percent of its value and almost cost some Goldman executives doing business in Tripoli their lives.

But they survived, as the guys from Goldman always do. With the general “no banker left behind” program pursued by Geithner under both George W. Bush and Obama, the theory was that saving the banks would save the country. The first part worked out brilliantly, but the second act never occurred.

Read the entire article HERE.

by Dean Henderson
June 1, 2011
Contributor to Global Research

(Part one of a four-part series)

The Four Horsemen of Banking (Bank of America, JP Morgan Chase, Citigroup and Wells Fargo) own the Four Horsemen of Oil (Exxon Mobil, Royal Dutch/Shell, BP Amoco and Chevron Texaco); in tandem with Deutsche Bank, BNP, Barclays and other European old money behemoths. But their monopoly over the global economy does not end at the edge of the oil patch.

According to company 10K filings to the SEC, the Four Horsemen of Banking are among the top ten stock holders of virtually every Fortune 500 corporation.[1]

So who then are the stockholders in these money center banks?

This information is guarded much more closely. My queries to bank regulatory agencies regarding stock ownership in the top 25 US bank holding companies were given Freedom of Information Act status, before being denied on “national security” grounds. This is rather ironic, since many of the bank’s stockholders reside in Europe.

Buffet, Schwarzenegger and Rothschild

One important repository for the wealth of the global oligarchy that owns these bank holding companies is US Trust Corporation – founded in 1853 and now owned by Bank of America. A recent US Trust Corporate Director and Honorary Trustee was Walter Rothschild. Other directors included Daniel Davison of JP Morgan Chase, Richard Tucker of Exxon Mobil, Daniel Roberts of Citigroup and Marshall Schwartz of Morgan Stanley. [2]

J. W. McCallister, an oil industry insider with House of Saud connections, wrote in The Grim Reaper that information he acquired from Saudi bankers cited 80% ownership of the New York Federal Reserve Bank- by far the most powerful Fed branch- by just eight families, four of which reside in the US. They are the Goldman Sachs, Rockefellers, Lehmans and Kuhn Loebs of New York; the Rothschilds of Paris and London; the Warburgs of Hamburg; the Lazards of Paris; and the Israel Moses Seifs of Rome.

CPA Thomas D. Schauf corroborates McCallister’s claims, adding that ten banks control all twelve Federal Reserve Bank branches. He names N.M. Rothschild of London, Rothschild Bank of Berlin, Warburg Bank of Hamburg, Warburg Bank of Amsterdam, Lehman Brothers of New York, Lazard Brothers of Paris, Kuhn Loeb Bank of New York, Israel Moses Seif Bank of Italy, Goldman Sachs of New York and JP Morgan Chase Bank of New York. Schauf lists William Rockefeller, Paul Warburg, Jacob Schiff and James Stillman as individuals who own large shares of the Fed. [3] The Schiffs are insiders at Kuhn Loeb. The Stillmans are Citigroup insiders, who married into the Rockefeller clan at the turn of the century.

Eustace Mullins came to the same conclusions in his book The Secrets of the Federal Reserve, in which he displays charts connecting the Fed and its member banks to the families of Rothschild, Warburg, Rockefeller and the others. [4]

The control that these banking families exert over the global economy cannot be overstated and is quite intentionally shrouded in secrecy. Their corporate media arm is quick to discredit any information exposing this private central banking cartel as “conspiracy theory”. Yet the facts remain.

The House of Morgan

The Federal Reserve Bank was born in 1913, the same year US banking scion J. Pierpont Morgan died and the Rockefeller Foundation was formed. The House of Morgan presided over American finance from the corner of Wall Street and Broad, acting as quasi-US central bank since 1838, when George Peabody founded it in London.

Peabody was a business associate of the Rothschilds. In 1952 Fed researcher Eustace Mullins put forth the supposition that the Morgans were nothing more than Rothschild agents. Mullins wrote that the Rothschilds, “…preferred to operate anonymously in the US behind the facade of J.P. Morgan & Company”. [5]

Author Gabriel Kolko stated, “Morgan’s activities in 1895-1896 in selling US gold bonds in Europe were based on an alliance with the House of Rothschild.” [6]

The Morgan financial octopus wrapped its tentacles quickly around the globe. Morgan Grenfell operated in London. Morgan et Ce ruled Paris. The Rothschild’s Lambert cousins set up Drexel & Company in Philadelphia.

The House of Morgan catered to the Astors, DuPonts, Guggenheims, Vanderbilts and Rockefellers. It financed the launch of AT&T, General Motors, General Electric and DuPont. Like the London-based Rothschild and Barings banks, Morgan became part of the power structure in many countries.

By 1890 the House of Morgan was lending to Egypt’s central bank, financing Russian railroads, floating Brazilian provincial government bonds and funding Argentine public works projects. A recession in 1893 enhanced Morgan’s power. That year Morgan saved the US government from a bank panic, forming a syndicate to prop up government reserves with a shipment of $62 million worth of Rothschild gold. [7]

Morgan was the driving force behind Western expansion in the US, financing and controlling West-bound railroads through voting trusts. In 1879 Cornelius Vanderbilt’s Morgan-financed New York Central Railroad gave preferential shipping rates to John D. Rockefeller’s budding Standard Oil monopoly, cementing the Rockefeller/Morgan relationship.

The House of Morgan now fell under Rothschild and Rockefeller family control. A New York Herald headline read, “Railroad Kings Form Gigantic Trust”. J. Pierpont Morgan, who once stated, “Competition is a sin”, now opined gleefully, “Think of it. All competing railroad traffic west of St. Louis placed in the control of about thirty men.”[8]

Morgan and Edward Harriman’s banker Kuhn Loeb held a monopoly over the railroads, while banking dynasties Lehman, Goldman Sachs and Lazard joined the Rockefellers in controlling the US industrial base. [9]

In 1903 Banker’s Trust was set up by the Eight Families. Benjamin Strong of Banker’s Trust was the first Governor of the New York Federal Reserve Bank. The 1913 creation of the Fed fused the power of the Eight Families to the military and diplomatic might of the US government. If their overseas loans went unpaid, the oligarchs could now deploy US Marines to collect the debts. Morgan, Chase and Citibank formed an international lending syndicate.

The House of Morgan was cozy with the British House of Windsor and the Italian House of Savoy. The Kuhn Loebs, Warburgs, Lehmans, Lazards, Israel Moses Seifs and Goldman Sachs also had close ties to European royalty. By 1895 Morgan controlled the flow of gold in and out of the US. The first American wave of mergers was in its infancy and was being promoted by the bankers. In 1897 there were sixty-nine industrial mergers. By 1899 there were twelve-hundred. In 1904 John Moody – founder of Moody’s Investor Services – said it was impossible to talk of Rockefeller and Morgan interests as separate. [10]

Public distrust of the combine spread. Many considered them traitors working for European old money. Rockefeller’s Standard Oil, Andrew Carnegie’s US Steel and Edward Harriman’s railroads were all financed by banker Jacob Schiff at Kuhn Loeb, who worked closely with the European Rothschilds.

Several Western states banned the bankers. Populist preacher William Jennings Bryan was thrice the Democratic nominee for President from 1896 -1908. The central theme of his anti-imperialist campaign was that America was falling into a trap of “financial servitude to British capital”. Teddy Roosevelt defeated Bryan in 1908, but was forced by this spreading populist wildfire to enact the Sherman Anti-Trust Act. He then went after the Standard Oil Trust.

In 1912 the Pujo hearings were held, addressing concentration of power on Wall Street. That same year Mrs. Edward Harriman sold her substantial shares in New York’s Guaranty Trust Bank to J.P. Morgan, creating Morgan Guaranty Trust. Judge Louis Brandeis convinced President Woodrow Wilson to call for an end to interlocking board directorates. In 1914 the Clayton Anti-Trust Act was passed.

Jack Morgan – J. Pierpont’s son and successor – responded by calling on Morgan clients Remington and Winchester to increase arms production. He argued that the US needed to enter WWI. Goaded by the Carnegie Foundation and other oligarchy fronts, Wilson accommodated. As Charles Tansill wrote in America Goes to War, “Even before the clash of arms, the French firm of Rothschild Freres cabled to Morgan & Company in New York suggesting the flotation of a loan of $100 million, a substantial part of which was to be left in the US to pay for French purchases of American goods.”

The House of Morgan financed half the US war effort, while receiving commissions for lining up contractors like GE, Du Pont, US Steel, Kennecott and ASARCO. All were Morgan clients. Morgan also financed the British Boer War in South Africa and the Franco-Prussian War. The 1919 Paris Peace Conference was presided over by Morgan, which led both German and Allied reconstruction efforts. [11]

In the 1930’s populism resurfaced in America after Goldman Sachs, Lehman Bank and others profited from the Crash of 1929. [12] House Banking Committee Chairman Louis McFadden (D-NY) said of the Great Depression, “It was no accident. It was a carefully contrived occurrence…The international bankers sought to bring about a condition of despair here so they might emerge as rulers of us all”.

Sen. Gerald Nye (D-ND) chaired a munitions investigation in 1936. Nye concluded that the House of Morgan had plunged the US into WWI to protect loans and create a booming arms industry. Nye later produced a document titled The Next War, which cynically referred to “the old goddess of democracy trick”, through which Japan could be used to lure the US into WWII.

In 1937 Interior Secretary Harold Ickes warned of the influence of “America’s 60 Families”. Historian Ferdinand Lundberg later penned a book of the exact same title. Supreme Court Justice William O. Douglas decried, “Morgan influence…the most pernicious one in industry and finance today.”

Jack Morgan responded by nudging the US towards WWII. Morgan had close relations with the Iwasaki and Dan families – Japan’s two wealthiest clans – who have owned Mitsubishi and Mitsui, respectively, since the companies emerged from 17th Century shogunates. When Japan invaded Manchuria, slaughtering Chinese peasants at Nanking, Morgan downplayed the incident. Morgan also had close relations with Italian fascist Benito Mussolini, while German Nazi Dr. Hjalmer Schacht was a Morgan Bank liaison during WWII. After the war Morgan representatives met with Schacht at the Bank of International Settlements (BIS) in Basel, Switzerland. [13]

The House of Rockefeller

BIS is the most powerful bank in the world, a global central bank for the Eight Families who control the private central banks of almost all Western and developing nations. The first President of BIS was Rockefeller banker Gates McGarrah- an official at Chase Manhattan and the Federal Reserve. McGarrah was the grandfather of former CIA director Richard Helms. The Rockefellers- like the Morgans- had close ties to London. David Icke writes in Children of the Matrix, that the Rockefellers and Morgans were just “gofers” for the European Rothschilds. [14]

BIS is owned by the Federal Reserve, Bank of England, Bank of Italy, Bank of Canada, Swiss National Bank, Nederlandsche Bank, Bundesbank and Bank of France.

Historian Carroll Quigley wrote in his epic book Tragedy and Hope that BIS was part of a plan, “to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole…to be controlled in a feudalistic fashion by the central banks of the world acting in concert by secret agreements.”

The US government had a historical distrust of BIS, lobbying unsuccessfully for its demise at the 1944 post-WWII Bretton Woods Conference. Instead the Eight Families’ power was exacerbated, with the Bretton Woods creation of the IMF and the World Bank. The US Federal Reserve only took shares in BIS in September 1994. [15]

BIS holds at least 10% of monetary reserves for at least 80 of the world’s central banks, the IMF and other multilateral institutions. It serves as financial agent for international agreements, collects information on the global economy and serves as lender of last resort to prevent global financial collapse.

BIS promotes an agenda of monopoly capitalist fascism. It gave a bridge loan to Hungary in the 1990’s to ensure privatization of that country’s economy. It served as conduit for Eight Families funding of Adolf Hitler- led by the Warburg’s J. Henry Schroeder and Mendelsohn Bank of Amsterdam. Many researchers assert that BIS is at the nadir of global drug money laundering. [16]

It is no coincidence that BIS is headquartered in Switzerland, favorite hiding place for the wealth of the global aristocracy and headquarters for the P-2 Italian Freemason’s Alpina Lodge and Nazi International. Other institutions which the Eight Families control include the World Economic Forum, the International Monetary Conference and the World Trade Organization.

Bretton Woods was a boon to the Eight Families. The IMF and World Bank were central to this “new world order”. In 1944 the first World Bank bonds were floated by Morgan Stanley and First Boston. The French Lazard family became more involved in House of Morgan interests. Lazard Freres- France’s biggest investment bank- is owned by the Lazard and David-Weill families- old Genoese banking scions represented by Michelle Davive. A recent Chairman and CEO of Citigroup was Sanford Weill.

In 1968 Morgan Guaranty launched Euro-Clear, a Brussels-based bank clearing system for Eurodollar securities. It was the first such automated endeavor. Some took to calling Euro-Clear “The Beast”. Brussels serves as headquarters for the new European Central Bank and for NATO. In 1973 Morgan officials met secretly in Bermuda to illegally resurrect the old House of Morgan, twenty years before Glass Steagal Act was repealed. Morgan and the Rockefellers provided the financial backing for Merrill Lynch, boosting it into the Big 5 of US investment banking. Merrill is now part of Bank of America.

John D. Rockefeller used his oil wealth to acquire Equitable Trust, which had gobbled up several large banks and corporations by the 1920’s. The Great Depression helped consolidate Rockefeller’s power. His Chase Bank merged with Kuhn Loeb’s Manhattan Bank to form Chase Manhattan, cementing a long-time family relationship. The Kuhn-Loeb’s had financed – along with Rothschilds – Rockefeller’s quest to become king of the oil patch. National City Bank of Cleveland provided John D. with the money needed to embark upon his monopolization of the US oil industry. The bank was identified in Congressional hearings as being one of three Rothschild-owned banks in the US during the 1870’s, when Rockefeller first incorporated as Standard Oil of Ohio. [17]

One Rockefeller Standard Oil partner was Edward Harkness, whose family came to control Chemical Bank. Another was James Stillman, whose family controlled Manufacturers Hanover Trust. Both banks have merged under the JP Morgan Chase umbrella. Two of James Stillman’s daughters married two of William Rockefeller’s sons. The two families control a big chunk of Citigroup as well. [18]

In the insurance business, the Rockefellers control Metropolitan Life, Equitable Life, Prudential and New York Life. Rockefeller banks control 25% of all assets of the 50 largest US commercial banks and 30% of all assets of the 50 largest insurance companies. [19] Insurance companies- the first in the US was launched by Freemasons through their Woodman’s of America- play a key role in the Bermuda drug money shuffle.

Companies under Rockefeller control include Exxon Mobil, Chevron Texaco, BP Amoco, Marathon Oil, Freeport McMoran, Quaker Oats, ASARCO, United, Delta, Northwest, ITT, International Harvester, Xerox, Boeing, Westinghouse, Hewlett-Packard, Honeywell, International Paper, Pfizer, Motorola, Monsanto, Union Carbide and General Foods.

The Rockefeller Foundation has close financial ties to both Ford and Carnegie Foundations. Other family philanthropic endeavors include Rockefeller Brothers Fund, Rockefeller Institute for Medical Research, General Education Board, Rockefeller University and the University of Chicago- which churns out a steady stream of far right economists as apologists for international capital, including Milton Friedman.

The family owns 30 Rockefeller Plaza, where the national Christmas tree is lighted every year, and Rockefeller Center. David Rockefeller was instrumental in the construction of the World Trade Center towers. The main Rockefeller family home is a hulking complex in upstate New York known as Pocantico Hills. They also own a 32-room 5th Avenue duplex in Manhattan, a mansion in Washington, DC, Monte Sacro Ranch in Venezuela, coffee plantations in Ecuador, several farms in Brazil, an estate at Seal Harbor, Maine and resorts in the Caribbean, Hawaii and Puerto Rico. [20]

The Dulles and Rockefeller families are cousins. Allen Dulles created the CIA, assisted the Nazis, covered up the Kennedy hit from his Warren Commission perch and struck a deal with the Muslim Brotherhood to create mind-controlled assassins. [21]

Brother John Foster Dulles presided over the phony Goldman Sachs trusts before the 1929 stock market crash and helped his brother overthrow governments in Iran and Guatemala. Both were Skull & Bones, Council on Foreign Relations (CFR) insiders and 33rd Degree Masons. [22]

The Rockefellers were instrumental in forming the depopulation-oriented Club of Rome at their family estate in Bellagio, Italy. Their Pocantico Hills estate gave birth to the Trilateral Commission. The family is a major funder of the eugenics movement which spawned Hitler, human cloning and the current DNA obsession in US scientific circles.

John Rockefeller Jr. headed the Population Council until his death. [23] His namesake son is a Senator from West Virginia. Brother Winthrop Rockefeller was Lieutenant Governor of Arkansas and remains the most powerful man in that state. In an October 1975 interview with Playboy magazine, Vice-President Nelson Rockefeller- who was also Governor of New York- articulated his family’s patronizing worldview, “I am a great believer in planning- economic, social, political, military, total world planning.”

But of all the Rockefeller brothers, it is Trilateral Commission (TC) founder and Chase Manhattan Chairman David who has spearheaded the family’s fascist agenda on a global scale. He defended the Shah of Iran, the South African apartheid regime and the Chilean Pinochet junta. He was the biggest financier of the CFR, the TC and (during the Vietnam War) the Committee for an Effective and Durable Peace in Asia- a contract bonanza for those who made their living off the conflict.

Nixon asked him to be Secretary of Treasury, but Rockefeller declined the job, knowing his power was much greater at the helm of the Chase. Author Gary Allen writes in The Rockefeller File that in 1973, “David Rockefeller met with twenty-seven heads of state, including the rulers of Russia and Red China.”

Following the 1975 Nugan Hand Bank/CIA coup against Australian Prime Minister Gough Whitlam, his British Crown-appointed successor Malcolm Fraser sped to the US, where he met with President Gerald Ford after conferring with David Rockefeller. [24]

Next Week: Part II: Freemasons & The Bank of the United States

Read the entire article HERE.

by Puru Saxena
Editor and Founder at Money Matters and Puru Saxena Limited
05/27/2011
Financial Sense

Over the past few weeks, we have spent a lot of time digging into the macro data pertaining to the world’s developed economies. After careful analysis, our research has convinced us that quantitative easing (money creation out of thin air) will not end anytime soon.

In fact, we believe that quantitative easing will only end when there is a run on one, or some of the world’s major currencies. Remember, the world is governed by short-sighted politicians and as long as the policymakers continue to ‘kick the can down the road’, quantitative easing (destruction of the purchasing power of money) cannot and will not end.

Figure 1 captures the state of the American currency. It shows that the US Dollar Index has recently broken below an important support level and is currently in free-fall. Furthermore, it is notable that the US Dollar’s downtrend commenced last summer when the Federal Reserve announced the second round of quantitative easing. Now, the Federal Reserve may continue to argue that its quantitative easing program is not inflationary but the market clearly does not like the dilution of the existing money stock.

Figure 1: Is this really the world’s reserve currency?

It is notable that since the credit crisis in 2008, the Federal Reserve has created over US$2 trillion new dollars via its various programs. Some of this newly created money was spent on buying dubious mortgage backed securities from the banks at inflated prices. More recently, a large percentage of the money was lent directly to the US government. In fact, PIMCO believes that since last summer, approximately 70% of newly issued US Treasury securities have been bought by the Federal Reserve!

With the latest round of quantitative easing ending in June, the market is now waiting for the Federal Reserve’s next move. However, if a recent Bloomberg news release is any guide, the central bank plans to continue lending money to the US government (by purchasing additional US Treasury securities from the proceeds of the maturing mortgage backed securities).

So, based on the Federal Reserve’s intentions, it should be clear to everyone that Mr. Bernanke will keep financing the American government’s deficit. Given the fact that foreign demand for US Treasury securities is waning and China has been a net seller for four consecutive months, it is hardly surprising that the Federal Reserve has stepped up as the lender of last resort. After all, Mr. Bernanke knows full well that if he stops lending money to the US government, interest rates will rise significantly which in turn will exert tremendous pressure on the American public. If interest rates surge anytime soon, millions of indebted Americans may default on their debt; thereby bankrupting the American financial institutions.

More importantly, rising interest rates will also exert tremendous pressure on the American government. It is noteworthy that America’s federal debt has already climbed to US$14.2 trillion and every one percentage point increase in the cost of capital will cost an extra US$142 billion annually in interest payments alone. Therefore, if short-term interest rates moved up to even 4%, the American government’s annual interest expense will rise by a staggering US$568 billion. Furthermore, when you consider the fact that the American government’s 2011 revenue is expected to be in the region of US$2.3 trillion, you begin to realise that America has a problem on its hands. The reality is plain and simple – America cannot afford higher interest rates.

Thus, in order to keep short-term interest rates artificially low, the Federal Reserve will have to continue with its policy of creating new dollars and lending them to the American government. Our assessment suggests that if the American stock market wavers in the summer, the Federal Reserve will promptly announce another round of quantitative easing. The truth is that once a heavily indebted nation has embarked on a zero interest rate policy, it is very difficult to remove the punch bowl.

To complicate matters even further, the American government continues to spend way more than its revenue permits and this year, its budget deficit will come in at US$1.4 trillion or 10% of America’s GDP! If the White House spends US$1.4 trillion more than its tax receipts in 2011, then it will have to borrow this money from somewhere; thereby adding to the nation’s federal debt. It goes without saying that at record low interest rates, America’s foreign friends are not too keen on lending money to Mr. Obama’s administration. Therefore, it is inevitable that the Federal Reserve will continue to provide cheap funding.
Unfortunately, there is no such thing as a free lunch and the Federal Reserve’s mindless money creation will have dire consequences. If the central bank continues to create new dollars out of thin air and finance Mr. Obama’s deficit spending, the end game will be a severe decline in the value of the American Dollar.

Under ‘normal’ circumstances, if America was the only guilty party, its currency would have collapsed against other major currencies (which it has to a certain extent). However, in today’s ‘modern’ day and age, most of the developed countries are in the same sinking boat, thus it is very difficult to forecast which currencies will emerge as the winners.

Consider Europe’s financial health. Defying logic, the Euro area’s debt has increased over the past 3 years. When the house of cards collapsed in 2008, any sane person would have expected debt deleveraging to occur. However, the genius of European ‘bailouts’ and ‘stimulus’ has managed to achieve just the opposite – Euro area’s federal debt has now climbed to 85.3% of GDP! Finally, as far as Japan’s developed economy goes, its federal debt has surged to almost 200% of GDP!

Although federal debt to GDP is a popular yardstick often used by economists to measure a nation’s pulse, a US based hedge fund firm (Hayman Capital) argues that it may be better to compare the debt overhang in each nation with the government’s revenue. In this respect, Figure 2 does a good job of summarising the predicament of the developed world. As you can see, Japan tops this infamous list and its federal debt is over 1900% of the government’s annual revenue. Note that America’s debt burden is very similar to Greece – yet its government debt securities enjoy the highest credit rating!

Figure 2: Government debt to revenue ratio (2010)

Look. As long as the politicians refuse to restructure debt and continue to run large deficits with artificially suppressed interest rates, the purchasing power of all currencies will plummet over the years ahead. The unintended consequence of pursuing reckless monetary and fiscal policies will be extreme inflation and a currency crisis.

Perhaps this is the reason why one of the Chinese officials recently opined that China must reduce its foreign exchange reserves by an astonishing 65% to US$ 1 trillion. Interestingly, only a couple of days later, the Chinese media reported that its policymakers are in the process of setting up investment funds specifically to acquire precious metals and energy.

As it turns out, the Chinese are not alone in understanding the true impact of money creation and deficit spending. Ironically, in an article published in 1966, Mr. Greenspan (who later became one of the biggest money printers in history) had the following to say about deficit spending:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Given the ridiculous debt overhang in the developed world, the ongoing deficit spending programs, artificially low interest rates and the endless quantitative easing, we believe there is a genuine risk of very high inflation.

Accordingly, from an investment standpoint, we have allocated a reasonable portion of our managed capital to precious metals. If our assessment proves to be correct and the price of gold and silver sky-rockets over the next 2-3 years, our directional bets will produce very large gains.

Read the entire article HERE.

Rolling Stones Matt Taibbi

The fact that those responsible for the recent economic crisis have not been held accountable is setting a very dangerous trend, believes investigative journalist Matt Taibbi, author and contributing editor to Rolling Stone magazine.

By Rebecca Christie and Ian Katz
May 17, 2011 7:39 PM GMT-0700
Bloomberg

U.S. Treasury Secretary Timothy F. Geithner said the International Monetary Fund needs to formally name an interim leader after Dominique Strauss-Kahn’s jailing, as pressure rose on the fund’s managing director to resign.

“It’s important that the board of the IMF formally put in place for an interim period somebody to act as managing director,” Geithner said at an event in New York yesterday. Austrian Finance Minister Maria Fekter said earlier that Strauss-Kahn “risks damaging the IMF” and her Spanish counterpart said he should “use his best judgment.”

Any resignation by Strauss-Kahn, who has been jailed on charges of sexual assault that he denies, is likely to spark calls by emerging market nations for an end to Europe’s tradition of naming the IMF chief. Bank of Korea Governor Kim Choong Soo said today that he hopes a candidate from an emerging economy will take the post.

“There’s been a gradual shift of economic power and representation to emerging markets but institutions like the IMF and the World Bank are still centered heavily in the West,” said Joseph Tan, Singapore-based chief economist for Asia at Credit Suisse Private Bank. At the same time, “this episode may not be enough to shift that balance of power to emerging markets,” he said.
Brazil’s Take

Brazilian Finance Minister Guido Mantega said that while Brazil would like to see a merit-based system used to select the IMF chief, Strauss-Kahn has been an ally of Brazil and other emerging markets seeking greater representation at the Washington-based lender.

“I am rooting so that this situation resolves itself in a positive way for him,” Mantega said in an interview yesterday on Globo television.

Strauss-Kahn, 62, is accused of attacking a housekeeper at a midtown Manhattan hotel and forcing her to perform sex acts. He denies the charges. Strauss-Kahn was arrested May 14 and ordered held without bail by Manhattan Criminal Court Judge Melissa Jackson this week, after prosecutors said he was a flight risk. The next court date is May 20.

Fekter said “he must consider what needs to be done,” speaking to reporters in Brussels yesterday.

“There’s a lot going on in the world,” especially in Europe, and “you want the IMF to have the capacity to be helpful in that context,” Geithner said. Strauss-Kahn currently is “obviously not in a position” to run the organization, he said.

The Treasury chief, who previously worked at the IMF, also said that John Lipsky, the IMF’s acting managing director who had been the No. 2 official, is competent and capable.

Read the entire article HERE.

Submitted by Tyler Durden
05/16/2011 09:45 -0400
ZeroHedge

It’s official: the US credit card has officially been maxed out, just as we predicted on Wednesday, and througout Q1 and Q2. The United States is expected to reach the legal limit on its debt later on Monday and will start dipping into federal retirement funds to give the country more room to borrow, a Treasury official said. As Reuters reports further, The U.S. Treasury will settle $72 billion in maturing bonds on Monday, which will push the country right up against its $14.294 trillion borrowing cap, the official said. To all those who thought only the insolvent government of Ireland will plunder pension funds, our condolences.

Full release (no pun intended):

As US Reaches Debt Limit, Geithner Implements Additional Extraordinary Measures to Allow Continued Funding of Government Obligations

Today, the United States has reached the statutory debt limit. Secretary Geithner sent the following letter to Congress this morning alerting them to actions that have be taken to create additional headroom under the debt limit so that Treasury can continue funding obligations made by Congresses past and present. The Secretary declared a “debt issuance suspension period” for the Civil Service Retirement and Disability Fund, permitting Treasury to redeem a portion of existing Treasury securities held by that fund as investments and suspend issuance of new Treasury securities to that fund as investments. He also suspended the daily reinvestment of Treasury securities held as investments by the Government Securities Investment Fund of the Federal Employees’ Retirement System Thrift Savings Plan. For more information on these measures, please read this FAQ.

Last Friday, Secretary Geithner also responded to an inquiry from Senator Bennet regarding the fiscal and economic consequences of failing to increase the debt limit. That letter can be found here.

Secretary Geithner continues to urge Congress to raise the debt limit in a timely manner in order to uphold the full faith and credit of the United States.

The Honorable Harry Reid
Democratic Leader
United States Senate
Washington, DC 20510

Dear Mr. Leader:

I am writing to notify you, as required under 5 U.S.C. § 8348(l)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the portion of the Civil Service Retirement and Disability Fund (“CSRDF”) not immediately required to pay beneficiaries. For purposes of this statute, I have determined that a “debt issuance suspension period” will begin today, May 16, 2011, and last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted. During this “debt issuance suspension period,” the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as authorized by law.

In addition, I am notifying you, as required under 5 U.S.C. § 8438(h)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System in interest-bearing securities of the United States, beginning today, May 16, 2011. The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit.

Each of these actions has been taken in the past by my predecessors during previous debt limit impasses. By law, the CSRDF and G Funds will be made whole once the debt limit is increased. Federal retirees and employees will be unaffected by these actions.

I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens. I again urge Congress to act to increase the statutory debt limit as soon as possible.

Sincerely,

Timothy F. Geithner

Identical letter sent to:

The Honorable John A. Boehner, Speaker of the House
The Honorable Nancy Pelosi, House Democratic Leader
The Honorable Mitch McConnell, Senate Republican Leader

cc: The Honorable Dave Camp, Chairman, House Committee on Ways and Means
The Honorable Sander M. Levin, Ranking Member, House Committee on Ways and Means
The Honorable Max Baucus, Chairman, Senate Committee on Finance
The Honorable Orrin Hatch, Ranking Member, Senate Committee on Finance
All other Members of the 112th Congress

Read the entire article HERE.

By Rachelle Younglai
WASHINGTON | Sat May 14, 2011 5:52pm EDT
REUTERS

A divided Congress has run out of time to raise the debt limit before Monday’s deadline, forcing Geithner into an emergency reallocation of funds so the government can meet its obligations, including payments to Treasury bondholders.

Those measures are only expected to give the government until August 2 before it will start defaulting on payments including those on Treasury debt, an event that could trigger chaos in world financial markets.

“A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment,” Geithner said in a letter, dated Friday, to Democratic Senator Michael Bennet.

The Obama administration and lawmakers are battling over how to curb the mounting U.S. debt, with Republicans refusing to increase the debt limit without deep spending cuts.

In some of his most stark language to lawmakers so far, Geithner said a default or missed payments would not only increase borrowing costs for the U.S. government but also for average Americans, businesses and local governments.

“An increase in Treasury rates would make it more costly for a family to buy a home, purchase a car or send a child to college,” he said. “It would make it more expensive for an entrepreneur to borrow money to start a new business or invest in new products and equipment.”

The world’s biggest economy is recovering only gradually after the 2007-09 financial crisis but some 13.7 million Americans are out of work and higher gasoline and food prices are threatening to slow the recovery.

If Congress does not increase the borrowing cap by August, Geithner will be forced to start choosing which payments to make first.

Missing or delaying payments on a host of obligations, including those to businesses for goods and services and bond payments to investors, would result in a massive and abrupt cut in federal spending and aggregate demand, the letter warned.

“The abrupt contraction would likely push us into a double-dip recession,” Geithner said.

The U.S. government bond market has so far remained calm about the risk of a default. But Geithner and Federal Reserve Chairman Ben Bernanke have repeatedly urged Congress to act quickly to raise the debt limit.

The U.S. government is borrowing approximately $125 billion per month. As of Thursday, the country was $38 billion below the debt ceiling.

Read the entire article HERE.

05.14.11GeithnerLetterToBennet

Chapter 84 – Bond salesmen’s propaganda that “a dollar is a dollar” should be rewritten to say “a dollar is 3¢”

Since most ordinary people, bankers, and company presidents have never studied currency theory, they swallow it hook, line, and sinker when the bond salesmen tell them, “a dollar is a dollar.” That piece of propaganda should be rewritten to say “a dollar is 3¢.” The nominal dollar is officially worth no more than 14¢ of its 1940 value, unofficially only 3¢.

If computed in 1940 constant dollars, not more than $1,380 exists of the US $46,000 per capita gross public and private debt. More than $44,628 has been destroyed by inflation. But sadly, the owners of this debt do not want to hear about it. They do not wish to know that bonds are issued by governments with the sole purpose of debasement.

To my knowledge, no government in history has paid its debts in currency equal to the purchasing power of the currency lent to them. The people always lose their money on bonds.

It angers me. Bond salesmen should be thrown into the East River.

-The above was written in 1985 by Dr. Franz Pick, in the book “The Triumph of Gold” sent to me by one of my readers. The photos are from Time Magazine.

The whole point of the deflation versus hyperinflation debate is about the denouement, the final outcome of this 100-year dollar experiment. It is about the ultimate end, and the debate has been going on ever since the 70s when the dollar was separated from gold and it became clear that there would be an end. The debate is about determining the best stance someone should take who has plenty of net worth. And I do mean PLENTY. People of modest net worth, like me, can of course participate in the debate. But then it can become confusing at times when we think about shortages or supply disruptions of necessities like food. Of course you need to look out for life’s necessities first and foremost. But beyond that, there is real value to be gained by truly understanding this debate.

I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:

There is a quote I like that comes from Le Metropole Cafe. It goes, “we will have deflation in everything we own, and inflation in everything we use”. This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. “We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars.”

My latest post on this subject was called Big Gap in Understanding Weakens Deflationist Argument in response to Rick Ackerman’s “Big Gap in Logic Weakens Hyperinflation Argument”. Rick also received responses from Jim Willie and Gonzalo Lira. Last week, with regard to Lira and Willie, Rick reported to his readers in “Rick’s Picks”:

I’ve concluded there is little to gain arguing on the one hand with a guy who turns rabid whenever someone contradicts him, even in a friendly way; and on the other, with a preening narcissist who comes to argumentation in the same state of sexual arousal that Jeffrey Dahmer must have experienced hovering over the fresh corpses of teenage boys. These guys are bad news, as lacking in civility and manners as buzzards in a scrum, and you’d do well to avoid them both. You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web.

I would first like to thank Rick Ackerman, and to also acknowledge his perspicacity in this particular regard. And because he has demonstrated such a discerning acumen in his preference for hyperinflationists (among other things), I will try, once again, to help him see the way. As our own Blondie likes to say (and I paraphrase for clarity), “you don’t own your baggage, it owns you.” Here is Rick’s baggage, in his own words:

My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.

Rick repeats what he calls “C.V. Myers’ dictum” quite often in his deflation-oriented posts: “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” I’m going to go out on a limb here and say that this dictum is Rick’s baggage, his foundational deflation premise, in a nutshell. And it leads him to his “bottom line” or his analytical conclusion:

Rick’s Picks Commenter SD1: To my knowledge, no bank has ever made provisions in their lending criteria. So to anyone subscribing to the hyperinflation theory, all I can say is there is nothing I, and millions of other North Americans, would love more than to take $250,000 of worthless, hyperinflated money that we worked a few days to make, to pay off a mortgage that would otherwise have taken twenty-five to thirty years to repay.

Rick Ackerman:That’s the bottom line, as far as I’m concerned.

In this post I will explain the flaw in Myers’ dictum. I will go into great detail as to why the missing component in the dictum is the essential (and inevitable) one. I will show how this one flaw in Rick’s premise sends his otherwise excellent analysis careening 180 degrees in the wrong direction (with regard to the subject of this post). And I will explain the proper frame of reference from which to view what I am describing. How’s that for a kick-off?

First Myers’ dictum. “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Rick: “Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit.” Me: Yes, someone will pay. But there is a third option that is missing from Myers’ dictum. “The hit” can be socialized:

“Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…”

“…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!”

(The quotes are from FOA on Hyperinflation and FOA on Currency Styling, Currency Management, Dollar Hyperinflation and End Game Scenarios respectively.)

As many of you know, I came to this debate, with no baggage and no hard opinion, in 2008. And in the “doom and gloom internet community” where I arrived there was definitely an equal helping of both deflation and inflation/hyperinflation talk. Most of it I found less than convincing (on both sides). The “deflation side” is actually bigger than you might think. Most of the peak this or peak that crowd, the majority of the survivalist community, and the Great American Collapse people are all expecting a sort of grand deflation, whether they understand the arguments or not.

If you want to think of a grand deflation as a deflating—or grand contraction—of economic activity that was previously “energized” by massive trade deficits, massive credit expansion, and the massive structural malinvestment that flows from those easy money expansions, well then I too am expecting a sort of grand deflation, in many of the same ways they are. But one thing I have learned from the writer that made the most sense to me, the writer that I found most convincing from within my “past baggage” vacuum, is that “deflationists” as a group still have a big gap in understanding.

Rick became a deflationist in the 1970s by his own account. And he certainly wasn’t alone. I wasn’t even aware of the existence of such a debate in the 1970s let alone 2007, so I can hardly add the wide perspective necessary in this debate from my own personal experience. What I can do, instead, is to share with you this excerpt from the one that spoke convincingly to me, the one that informed my developing view in 2008.

One point I hope you’ll find curious in this excerpt is that deflationists have always fixated on residential real estate. This is one of Rick Ackerman’s, almost obsessive, objections to the hyperinflation case, and it clearly has roots in his kind. This was written in 2001, just as the housing bubble was developing. My notes in [brackets]:

Somewhere in the 1970s era I was exposed to the thinking of several different deflationists. It seemed that all of their conclusions came to the same end: that dollar deflation would rule the day, no matter what. Mind you now,,,,,, most of them were split on the finer points of the issue, but for all of them; [de]flation would have its day even if prices would rise somewhat. Deflation was always the final outcome.

One of the central themes in these thoughts was concerning how this coming deflation would impact plain old residential real estate. You see, most of these guys advocated selling excess residential property because it was, sooner or later, going down for the count. Mostly because the mortgage markets would be destroyed in the deflation and nobody could buy [prices would collapse to the cash price].

– Note: The reader has to understand that these discussions were directed towards people and investors that had plenty of net worth. And I do mean Plenty! The argument wasn’t about how to survive; rather how to balance a truly conservative estate portfolio. –

As time has passed we can see several major flaws in their thinking. Flaws that cost them a bunch of credibility, if not personal money. [I want to jump in here with a quick quote from Gary North written in 2002:

"I remember in 1975 hearing C. V. Myers tell attendees at a gold conference, 'If you get this one wrong, you'll lose everything.' He was predicting deflation. He got it wrong. He didn't lose everything."

And now back to FOA] One point, that I have touched on here several times, was in understanding just how much ourselves and our economic structure would and did evolve into accepting fiat money use. Even though it was, “god forbid”, separated from gold.

In one area alone, the bond markets, investors reacted far differently than deflationists thought they would. Twenty ++ years ago [again, this was written in 2001], it was expected that just gross increases in money printing alone would be enough to crash the bond markets. Not talking about price inflation here, but money inflation and that should have started a deflationary fall in our credit markets. It almost happened, several times, but never followed through. It seemed that the market function had evolved to accept fiat inflation as a prerequisite to modern economic function. In a like comparison to today’s thinking; investors assumed that as long as we had an expanding economic stance [nominal GDP growth, credibility inflation and financial product appreciation], sourced by inflating fiat supply, price inflation would not impact long bond credibility. We saw confirmation of this over many years. We saw that our credit markets, especially long bonds, were used in spite of the price inflation threat. Indeed, there was a ready [highly liquid] market demand for bond purchases.

In hind sight, long term holders of bonds did do very well if their position was part of a balanced holding and they didn’t need to sell at bad times. Even now, dollar bonds have gained as rates are pushed lower.

Back to the thought:

This whole IMF dollar system has always been based on an expanding fiat theory that swells [nominal] GDP over time. Investors that bet on deflation coming along, after each of our bouts of inflation, were badly burned as deflation was overcome. Economic function returned, essentially because price inflation could not rout the overall market for long credit.

The flaw in all of this was in the reserve structure of our Dollar IMF money system. The fact that the world had to walk, lock step, with our money policy meant that their goods production would almost always be cheaper than ours; keeping local US price inflation under control. In other words; local US-based price inflation could not get out of hand as long as the rest of the world was willing to use their economic production to control it by selling [products cheaper than we could produce them] into our expanding fiat system.

In this, the dollar [and its securities, and their derivatives] could be inflated without end while our credit markets functioned in a non-inflationary environment.

But there is an end.

A money system like this has a definite timeline and that point is reached when the world can move away from keeping price inflation low in the US. That point is reached when Another money system comes along to challenge the dollar and, in the process, offer these other goods-producing countries a chance to buy some “lifestyle” for themselves.

At first, the show is dull as investors keep right on buying into the dollar argument above: that an expanding fiat base builds non-inflationary [nominal] growth [in both GDP and securities]. This is one reason traders still buy US long credit, not to mention chasing rising dollar exchange rates; they expect more of the last several decades of economic theory to keep right on going. It won’t.

The dollar faction saw its match early in the 90s as the Euro was taking shape. To counter this threat, as I have outlined here in several ways, they promoted derivative hedges as a way of insuring dollar dominance. These hedges, including gold derivatives, only served to leverage the entire dollar / IMF system beyond its ability to serve as a real fiat money system, today. [See (my title): Is the Fed selling Hyperinflation Insurance Backed Only by Hyperinflation?]

I mean; that our whole dollar landscape has now become just a trading asset arena: it’s now evolving away from any meaningful currency use to trade for real goods. It can head in no other direction because our local economic structure, the USA economic base, cannot possibly service even a tiny fraction of the buying power currently held in dollars worldwide.

So what does this have to do with Real estate?

Take a look at any broad section of the US; Northeast, SouthWest, etc.. If any of the deflationists were correct, their reasoning back in the late 70s and early 80s should have produced at least an average fall in Residential real estate. Can any of you find an “average” of property today, that is lower than early 80s prices?

Of course I’m not talking about the spikes in Hawaii, New York, Denver or San Francisco; those are just blips on an ever rising inflation scale. Even if they fall some from here, it isn’t part of a deflationary act playing out. Average home prices will rise all across this country no matter what the future economy holds. A super inflationary stance by the Fed means that even unemployed workers can buy a house and pay for it! Watch how this all comes about. The Dow will not be much different when seen ten years from now; a drop to 5,000 then off again, is a real possibility! [Note: The Dow dropped from 11,000 in 2001 down to 7000 and back up to 12,000 in 2011. Again, FOA wrote this ten years ago in 2001]

The same is true for anything perceived as something real: “even silver” (grin).

The difference is in the drastic ups and downs derivatives will place on all asset markets. My point is that we are on an “end time run” in fiat dollar production that will soon produce a spike in real price inflation that crushes hedge vehicles. One item alone, physical gold, because it is the main wealth asset behind the next currency system [See: RPG #1], will outrun everything by a wide margin. No matter the derivative’s hold on it!

As the Euro builds a base [which is happening right now in 2011 – see this, this, this, this, this and this], it will drive an inflationary recognition into our credit markets, then freezing up our derivative markets. That perception will fuel a complete failure of our bond markets and force the Fed to buy up any and all credit; paying in full. [Paying full price for deflating assets? Oh my, would the Fed ever do that? The deflationists never saw it coming!] If needed, Bush and congress will see to it that enough money is printed so we are paid in cash for everything! Don’t laugh, this is where we are headed.

[I must insert here the rest of the famous FOA quote from above. I affectionately call it "the front-lawn dump" and it was coined by FOA a full 18 months before Bernanke's famous "Helicopter drop" speech:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

Okay, now back to the original excerpt…] In the meantime, whether or not our economy is growing, stalling or failing, will have little or no impact on price inflation.

You see, living with real serious price inflation goes something like this:

—- “Honey, I talked to Fred again, he can’t sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that’s not so bad, we had to jump ours up three times before selling.” —-

Inflation runs crazy when a money system is forced to “print out”. We will “print out” our dollar, too. Getting there just takes time and an alternative system to cause it.

Now I do realize that it takes a certain talent to distill deep wisdom from a 10-year-old internet forum post. And I can almost hear some of you out there screaming, “but but but… house prices DID collapse… d… d… DEFLATION!” Wrong. Sorry. Residential real estate will ultimately crash to its non-leveraged cash price as credit disappears, just like the deflationists think. But that ultimate cash price, once reached, may actually be higher than today’s leveraged prices and be outrunning the availability of cash needed to clear the market! And all the while real estate will keep crashing in real terms (gold).

There is always a shortage of cash during a full-bore, in-your-face hyperinflation, which is why the printer has to keep adding zeros. His press simply cannot keep up with prices at established denominations. It is also why the first to touch the new cash (the “elite”) have a very valuable advantage. Hyperinflation is a grand competition for lifestyle retention in the face of forced austerity, just like a race! Here, look at this from the excerpt:

“Honey, I talked to Fred again, he can’t sell his house! Poor guy, he has had it up for two years now and has to raise his asking price again. No takers, yet. The last couple was just about to close but took a month too long; they almost got the cash together, too. He backed out to raise the asking price, again. Oh well, that’s not so bad, we had to jump ours up three times before selling.”

I’ll bet the deflationists were thinking in terms of deposit+loan=price, rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a reference point purely-symbolic fiat currency paradigm, the market will try to clear for the rising symbolic cash price while the hard currency price (denominated in gold) continues to drop like a stone. Deflationists do have one thing right. Real estate is not a very good investment when preparing for what’s coming. That doesn’t mean home loan debt won’t be hyperinflated away though. It most likely will be. And if you are lucky enough to catch the bottom in the reference point gold paradigm during the crisis, bless you. But it’s still a poor investment choice right now, even at 5% down, compared to putting that same cash into physical gold. More on this in a moment.

The point of sharing this FOA excerpt was that deflationists, like other groups that have established encampments cluttered with old baggage, tend to miss what is actually unfolding. And for that, you might want to start with my post The Debtors and the Savers. Understanding the balance necessary to keep the peace between these two groups is fundamental to understanding the political will behind the inevitability of both Freegold and dollar hyperinflation.

Rick seems to have a number of hang-ups when it comes to both gold and hyperinflation. His biggest is obviously real estate and the modern home mortgage. He simply cannot seem to fathom how a system designed and managed by The Power Elites could ever deliver a “windfall” to overleveraged, underwater homeowners or shady, uncouth gold bugs. And, frankly, if you don’t make the effort to understand what is actually unfolding, there’s a good chance it won’t.

To the deflationist, “a dollar is a dollar” just like it is to ordinary people, bankers, company presidents and bond salesmen in the quote at the top. And even though the dollar has already lost almost 99% of its original gold purchasing power, Rick believes The Power Elite will make sure it stays strong until you have worked off every last dollar you owe. Because someone has to pay! (He’s right about that.) And it’s not going to be “them”. (He’s mostly right about that too.)

The dollar has a long, storied past. To believe “a dollar is a dollar” is to simply ignore its history. Of course I’m not implying that deflationists are unaware of this chart:

But I am saying that they think the collapse of the dollar’s financial system will strengthen the dollar itself and make prices fall in the end. This is a funny notion when you take the totality of the dollar’s journey into consideration.

The dollar was once worth 1.555 grams of gold. Then it was reduced to .888 grams of gold. Today it is able to purchase .02 grams of gold, but only at the margin. Notice that I said “able to purchase” instead of “is worth,” and I also added “at the margin.” That’s because the dollar is not worth .02 grams of gold today. Around 60 years into its 100-year life, not unlike the human retirement age, the dollar retired to become a purely symbolic, completely worthless token. And in the big scheme of things, this “retirement from value” is not such a bad thing. Someone emailed me a question the other day and this was my reply:

Hello Mark,

I don’t see much wrong with your grasp of the subject, other than those worthless tokens are actually a good thing. What sets us apart from those monkeys is our ability to divide labor in a way that resists the second law of thermodynamics and allows us to organize our environment.

This division of labor requires us to use a medium of exchange in order to avoid the double coincidence of wants.

The question then becomes, what is better as a medium of exchange? Should it be something of value? Or is it more beneficial to the anti-entropic process for it to be something purely symbolic and worthless?

If you answered “something of value” I would ask, Why? Is it because you want to hoard that thing in the case that you produce more than you consume? And what is the net effect on man’s battle against entropy if the circulation of that valuable medium slows due to hoarding? Conversely, with a worthless medium, why not just exchange it for that same valuable thing if, in fact, you do produce more than you consume? Seems simple enough to me.

Sincerely,
FOFOA

You see, this is where we are today. We are using, as a medium of exchange, a purely symbolic, completely worthless token. The logical action, then, is to exchange surplus worthless tokens for something of value. Yet still today, most everyone hoards up purely symbolic, completely worthless tokens in the form of the debt of more tokens to be worked off and paid by someone else. In fact, globally, this debt far exceeds the ability for it to ever be paid (worked off by future labor), at least not at today’s dollar purchasing power of .02 grams of gold. And yet it will be paid by someone, just as the deflationists promise! So the question then becomes, how can an impossible debt be paid?

Answer: if it cannot be worked off by future labor, it will be worked off by past labor, the net surplus of which was erroneously stored in debt and dollars. The icing on the cake is that it is also the past labor of “someone else,” if the profits can be capitalized and the losses socialized. Precisely the process we have witnessed over the past three years, for those with eyes to see.

Rick Ackerman’s somewhat-myopic focus is on home mortgages as the lynch pin that will keep this worthless, symbolic token valuable while you toil on the chain-gang working off your debt of worthless tokens. So let’s take a look at the larger picture to gauge the strength of this pin and the stress it must endure.

Total US mortgage debt is a little over $14 trillion. That number includes you and your neighbors. Of that $14 trillion, about $6 trillion sits on the balance sheets of banks and $9 trillion has been packaged and sold to savers like pension funds. Of that $9 trillion held by savers, about $5 trillion is guaranteed by the US government.

So here’s Rick’s lynchpin that’s going to keep all of you indebted homeowners honest: $14 trillion – $5 trillion guaranteed = $9 trillion. And that $9 trillion lynchpin is so powerful because it is held by politically connected and powerful banksters and pension funds, or so they say. Now in a minute I’ll tell you why these two groups would rather have all that debt printed and the cash handed to them than to watch even 20% of you default on your mortgages. But first, let’s step back and take a wider look at what might be exerting shear stress on this supposed lynch pin.

Total worthless token debt in the US, both public and private, is around $55 trillion, four times as big as that backed by physical real estate. If we add in the government’s unfunded liabilities (which definitely apply shear stress to the dollar’s lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States. Meanwhile the US produces enough “goods and services” (loosely defined) every year to be purchased by 14 trillion of these purely symbolic tokens at their present level of purchasing power. And with a trade deficit of around $500 billion per year, it appears the US is consuming roughly 103.5% of what it produces every year, in real terms.

So in real terms, that is, in terms of the dollar’s purchasing power as it stands today, it would take, let’s see… $168T/($14T produced – $14.5T consumed)= x years… hmm… somehow it’s going to take us negative 34 years to deliver those promised dollars at today’s purchasing power. Remember I said this debt would be “worked off” in the past, without the use of a time machine I might add? Well here you go—past surplus labor foolishly stored in dollars and dollar financial instruments and their derivatives will be tendered. Of course the deflationists want you to know that we will be forced to reduce our consumption to below our production in order to pay those off. And once again, they are correct, though not in the way they think.

Reducing consumption means reducing your standard of living. Some call it austerity. But with forced austerity also comes the competition to avoid reducing your standard of living. And herein lies the inevitability of US dollar hyperinflation.

You see, those Power Elites that Rick thinks are going to support the dollar and its $169 trillion burden (excluding derivatives) simply to make sure you’ll work off your $9 trillion dollar mortgage at today’s purchasing power are the same ones that will resist personal austerity measures the most. And as all good deflationists know, you simply cannot resist the irresistible without breaking something. And what they will ultimately break in their competition to maintain lifestyle is the value of the dollar, which will actually break quite easily due to the mountainous (think: landslide) shear stress applied to it right now.

Now let’s go back to those “banksters” that, along with the politically powerful pension funds, are part of the Power Elite that are going to keep the dollar strong enough so that your mortgage isn’t hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the dollar’s debt problem, that is still sitting on the balance sheet of banks, yet gradually being absorbed and/or guaranteed by the Fed and/or the US government.

This is simple logic: Do you think they’d rather offload that debt onto the Fed’s book in exchange for full cash value? Or would they prefer to hold onto those notes while you struggle to pay them off in symbolic tokens over the next 25 years? How about this: Is it better for the health of the bank to take possession of the houses (and then have to sell them) that roughly 20% of the troubled homeowners are walking away from? A 2009 jingle mail study showed that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. That represents roughly a 10% hit to the asset side of the banks’ balance sheets. Yet the banks’ liabilities (deposits created when the loans were originated) remain, fully insured by the FDIC which has no money.

Through the magic of commercial bank double-entry bookkeeping, the banks’ balance sheets are actually not exposed to decreases in the purchasing power, or present value of purely symbolic, completely worthless token dollars. They are, however, exposed to decreases in the value of their assets and to the risk of default that flows from deflation. Deposits are nominal liabilities that remain when assets deflate. So supporting deflation would be, to a bank, like suffering a masochism fetish.

Rick thinks the banks will defend their assets by keeping the dollar strong. But that only keeps their liabilities that much harder to meet while the effects of deflation tend to shrink their assets making it even harder still. Ignoring the dollar for a moment, and the flaw in Myers’ dictum, what happens to a bank’s balance sheet if all of the loans are defaulted at the same time? Or if the asset value of all of their collateral collapsed at the same time? It would have precisely the same impact. So would a mixture of the two. The banks have and are experiencing precisely this type of squeeze. How has their “guardian angel” the Fed responded so far?

Rick Ackerman’s view of the banks’ incentive or preference to prevent (as if they had that control) hyperinflation is exactly bass ackward. A bank’s balance sheet becomes severely damaged in deflation, yet it is made whole through hyperinflation.

As for the pension funds, they hold this debt not for its value to maturity, but for its appreciation in a falling interest-rate environment and its liquidity in trade. Pension funds get in trouble when they cannot perform nominally. They hold nominal assets and make nominal promises (like 8% returns) which simply cannot be met in a deflation. However, as disastrous as hyperinflation is for pensioners (the funds’ clients), it is a Godsend for the politically-connected pension managers who were being crushed by deflation.

So once again, the incentive or preference of those who hold the note on your mortgage to prevent (as if they had that control) hyperinflation is simply not there. In fact, as I will show in a minute, there will be ample incentive for these politically connected Power Elite Giants to actually encourage the kind of printing that will take an Icelandic-style currency collapse into full-blown Zimbabwe-style wheelbarrow hyperinflation. More on this in a moment.

What you see is the result of the perspective you choose

A small-minded ant’s only interaction with Giants may be getting stepped on or sprayed with deadly poison. So from the ant’s limited perspective, this activity of killing ants is what Giants live for, what motivates them, and what they spend their time scheming and planning for. Don’t limit yourself to the ant’s perspective. If you want to find the tasty morsels left by Giants, you’ve got to start thinking like a Giant. You can read more about ants in my post Life in the Ant Farm.

In his latest of several posts on this subject, Rick Ackerman presented two responses that he found “of particular interest.” The second one is so ldo that I won’t spend much time on it. It is a comment that explains the old truism, “you can’t eat your gold.” That’s right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

And with a little understanding of how a monetary collapse actually unfolds, flipping the switch on illusions and revealing reality, you’ll find that the actual crisis itself will be relatively short-lived. My best guess is 6 months maximum—for the worst of it—beginning when the normal distribution of food abruptly stops. So transporting your wealth to the other side should be of great importance to those with significant savings. But if you are one of the ants that cannot distinguish between a monetary collapse and the myriad other problems with our civilization (i.e. you think that when the money collapses everything else goes to permanent sh-t as well—it doesn’t by the way, look at history), then you probably think we’ll be in a Mad Max wasteland for a generation or more after the dollar finally goes the way of the peso.

In that case, you should probably buy yourself a Texas ranch, a lot of guns, and a few friends to help you shoot those gunslike the Circle K Cowboys. The way I see it, the monetary collapse is going to reverse and ultimately correct many of those myriad other problems because reality will be uncovered and freed to exert its more balanced supply and demand dynamic.

But that’s enough on the Texas Rancher’s Thunderdome wasteland. The first of the two responses that Rick found “of particular interest” was an email he received from Charles Hugh Smith, the man “Of Two Minds” who is bothered by the “conviction” (or what he perceives as single-mindedness) of others, particularly hyperinflationists. He said as much in the email:

What bothers me is the widespread conviction that hyperinflation is “guaranteed.”

Smith is truly a man of two minds. He likes to stay uncommitted and agile, to trade against the crowd:

I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist. Maybe we will get hyperinflation, I don’t claim to know… This smells like a one-sided trade to me, even if it is more of a meme than a trade.

I am up on a hill with a wide view of the valley. In this post I am attempting to share the framework in which you, too, can see what I see rolling in. It is a tsunami called currency collapse coming in, following a violent financial and economic earthquake, which in our case will end in probably the most devastating hyperinflation the world has ever seen. And the more people that come to see what I see rolling in; the more people that join me safely on higher ground with a view of the valley below, the more the man of two minds likes his contrarian position in the valley below. Did you see that newish video out of Japan? The one I have in mind?

In order to share my view with you, I am going to patiently work my way through Smith’s email, correcting errors and explaining the flaws in his perspective as I go:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation?

I think we can safely define Charles Smith’s “Elites” by his own words as the Financial (Wall Street) Elites, the politically powerful (including politically connected corporations and unions/union pension funds), the “banksters robbing us blind” and “CONgress” along with all the politicians running this country into the ground; basically everyone running the Dollar International Monetary and Financial System (the $IMFS). And he asks how do “they” benefit from hyperinflation? Well, they will benefit, in the same way that those closest to the printer benefit tremendously in all hyperinflations. But more importantly, Smith’s core perspective on “the Elites” is wrong. He makes the same mistake Karl Marx made, which I explained in my post The Debtors and the Savers. [I know, this is the second time I've linked this post. It is intentional. I'll probably do it one more time as well.]

What I described in that post last July is the essential foundation to the framework for understanding why US dollar hyperinflation and Freegold are, simply, unavoidable, or to use Smith’s word, “guaranteed.” I have been accused of overconfidence in my views. But I specifically and actively limit the scope of this blog to only these two topics. I’m certainly not a know-it-all. I only describe the things that can be clearly seen, and how to ascend to that perspective.

Was the Japanese guy shooting that video up on a hill overconfident about his view of the tsunami rolling in while those still down in their houses had a more rational, balanced opinion? Perhaps they were of two minds; on the one hand, there had just been a Richter scale 9 earthquake and they lived in a tsunami warning zone. On the other hand, they were not exactly ocean-front properties and it would have to be a pretty big tsunami to bring the ocean over that levee. Surely they would hear it coming giving them plenty of time to escape. It’s all about perspective. With the proper perspective you can see things more clearly.

In The Debtors and the Savers I wrote:

Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.

And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.

Marx writes, “The history of all hitherto existing society is the history of class struggle.” He got this part right! What he got wrong was his delineation of the classes.

Marx’s classes were:

1. Labour (the proletariat or workers) – anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) – anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.

Simply put, Marx says it’s the rich versus the poor. According to Marx the rich exploit the poor to get themselves a “labor-free income”, which spawns a class struggle.

This is an attractive perspective because it requires only a cursory, superficial judgment to place someone into one of the two camps, the rich or the poor. If someone is driving a Bentley we immediately know which group they are in, right?

[…]

As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. “The easy money camp” and “the hard money camp”. History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors – “The easy money camp” likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers – “The hard money camp” likes to live within their means and save any excess for the future. They prefer hard money (or in some cases “harder” money) because it protects their savings and forces the debtors to work off their debts.

1789, the French Revolution, “the hard money camp” had been in power since 1720 when John Law’s easy money collapsed, and starting in 1789 “the easy money camp” killed “the hard money camp” and took back the power. This is the way “the easy money camp”, the Debtors, usually take power… by revolting against the hard repayment of their spending habits…

Obviously I don’t want to reprint the whole article here, which is why I linked it three times. So please go read it.

But here’s the fatal flaw in this Marxian paradigm; many of we, the modern proletariat, are savers who would prefer hard money like gold to protect our savings. It is we, the savers, that are punished by the current easy money system. That’s why I delineated the groups as the Debtors and the Savers, otherwise known as “the easy money camp” and “the hard money camp.”

And with the proper view of who Smith’s Elite CONspirators really represent—the easy money camp, the debtors, the hungry collective—the answer to his question begins to develop. It is the opposing camp, the savers, that will be most-punished by hyperinflation and it is Smith’s Elite that will profit the most during the race to spend.

If you can start to think of the administrators of the $IMFS, the “banksters”, politicians and Western Capitalists in charge of the system as being firmly entrenched in the Debtor camp, you are well on your way to a very rewarding enlightenment. I realize this is counterintuitive, and counter also to much of the baggage that accumulates while reading other “hard money” writers on the Internet, which is why I spend so much time on it. But once it clicks, you’ll be like, “OMG! WTF was I thinking?” I have conversed via email with many extremely intelligent people that have had this momentous “click”, so I am tempted to consider that I may be on to something.

So call me overconfident if that makes you feel better, but I’m not going to be wishy-washy about what I can see. I’m certainly not of two minds on this.

How will “the Elite” profit from hyperinflation? By being the first to spend the bills with new zeros added and thereby outrunning the rest of us in the race to spend and winning the competition to retain standard of living. Hyperinflation is the end result of the dollar-debt timeline, there is no other way it can end. Only the severity is a variable to be considered.

Rick Ackerman and other deflationists agree with me that the unsustainable, unstable mountain of debt must and will collapse. And they view “the Elite” as the capitalist creditors and the rest of us poor working saps as the proletariat debtors. Therefore they believe that when the debt mountain collapses, their version of “the Elite” will not print Zimbabwe-style because, even though they just took a tremendous haircut on their bonds, they want to be sure that the super-saps among us, the proletariat that are still working, will continue to service the remainder with dollars of today’s purchasing power.

This is a bass-ackward view in my opinion. The hungry collective provides ample political backing and sufficient naiveté for “the [Western] Elite” to print the full face value of their bonds and dump that worthless paper on the public’s front lawn. Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.

But the story runs deeper still. The reason I have been putting “the Elite” in quotes or referring to them as “Smith’s Elite” is because, not only does he have the delineation wrong, but he is myopically focused on only one quarter of the bigger picture.

Some of you, I know, like to think in terms of grand conspiratorial conflicts, a “Clash of the Titans” (Clash of the Elites if you will), or something like that. Well I can probably help you with that view in this “Debtors v. Savers” paradigm.

We have the West which is roughly only 25% of the world’s population, and then we have the rest of the world. And oh yes, they have their own “Elite”. You’d probably guess that “the West” represents “the debtors” in this paradigm. But you’d be wrong to assume that the rest of the world is taking “the hard money camp” stance.

It is true, we are at the end of one of the longest-running “easy money camp” regimes. And these things usually swing back to the other side. But history has taught the world that while easy money regimes end in financial collapse, hard money regimes usually end in bloodshed. And it’s usually the blood of the hard money campers that is shed. (See: the French Revolution.)

So the rest of the world has taken a different stance this time. It has been “in the works” for several decades.

Q: **Who does BIS really represent?

A: “old world, gold economy, as viewed thru modern eyes” or “way to move from US$ without war”.

Those are the words of ANOTHER from my post “The Gold Man” (not Goldman) at the BIS. The BIS truly represents “the rest of the world” from a monetary perspective. It is the “trade union” of their Central Banks. All is not as it seems on the surface.

So how do you view an “old world gold economy” through modern eyes? And how do you move there peacefully with the easy money camp? It’s quite simple actually. You let nature take its course, you support that natural course however long it takes (rather than pathologically fighting nature like the dollar system does with its obsessive-compulsive drive to control), and you don’t deprive the easy money camp of their precious fiat. It’s Freegold. It is about allowing meritocracy to rise like a Phoenix from the ashes of the dollar’s inevitable collapse. It’s not about a transfer of wealth. It is about a re-born meritocracy. The transfer of wealth that will take place is what blinds most people from seeing its inevitable approach.

More from Charles Hugh Smith via Rick’s Picks:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then [who] owns the $160T in financial wealth?

First of all, it is unclear exactly how much gold there is, but it’s probably over $8T by now, and only about 18% of it is owned by central banks, not anywhere near half. That leaves $6.6T in private hands, at today’s price.

Smith exposes his ant-like perspective in this paragraph when he implies the Giants that own the lion’s share of $160T in financial products should have already crashed the value of those financial products and exploded gold in the stampede from one to the other, if a collapse of the dollar was really on the horizon. On the contrary, you have to think like a Giant to see the best way to move your Giant wealth from one system to the next. True Giants do not panic out like ants, nor like ants imagine that Giants would. True Giants know that if they panicked out, with the weight they carry, they would end up transferring much LESS wealth into the new system.

Viewed from the Giant’s perspective, you can see that most all of that dollar value, that $160T will vanish in a flash. And when that happens, the market for paper promises of gold delivery will also collapse and vanish as physical gold gaps up (in my estimation) 40x. That’s right, $160T vanishes, and $6.6T worth of gold—in private hands—gaps up to $264T.

Oooh. Now I’ll bet I’ve got the deflationists screaming! “You can’t turn $160T into $264T in a flash during a deflationary collapse!” Au contraire, mon frère. What you see is the result of the perspective you choose. Reader “Reven” recently asked this same question, to which I replied:

It is a fallacy to compare a snapshot of gold with a snapshot of “global asset values” because it ignores the time dimension in which gold flows. Even if you are correct about everything in the world (other than gold) being worth [$160T] in 2011 constant dollars, the value of all the gold can be multiples of that amount. It is theoretically unlimited, unlike paper wealth which is self-limiting by its own objective metrics and economic ties. Paper wealth is limited to the upside but unlimited to the downside. Gold is the inverse of paper, unlimited to the upside, limited to the downside. It’s not the total stock of gold that matters, but the flow from those that already hold it.

Here are a few snippets from my post How Can We Possibly Calculate the Future Value of Gold?

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

[...]

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much “stored purchasing power” everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

[...]

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough “stock” is reassigned to “flow” to meet demand.

[...]

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more “flow gold” is moved into “stock gold”, not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

[...]

So, cutting to the chase once again, the biggest fallacy in your model is using “Total above ground gold” as your point of comparison. It’s not the stock that matters, it’s the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude.

Back to Smith. Here’s that same paragraph again. Let’s see if we can answer his questions a little more concisely now that we have a new perspective:

As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then owns the $160T in financial wealth?

Yes, they’ve bought the gold and it’s still priced at around $6.6T, at least that portion that is in private ownership. No, there will be no gold-backed currency because we aren’t going back to “hard money” because “your Elites” wouldn’t like that. No, they won’t lose all their wealth; they will gain wealth. Here are the steps as viewed, not by ants, but by Gi-ants:

Step 1: Buy up as much physical gold as you can over a couple decades without running the price and without panicking out of your paper, while the Western investor is caught up in all manner of paper including paper gold.

Step 2: Wait patiently for the inevitable financial collapse. As Rick Ackerman himself wrote, “financial collapse is not just likely, but inevitable.”

Step 3: When the collapse comes, sell that $XXXT in “financial wealth” to the printer for fresh cash at full face value in the name of “saving the system” and “survival of the country and the Western way of life.”

Step 4: Spend the new cash.

Step 5: Adjust your balance sheet from the old paradigm where it used to read $160T paper/$6.6T gold to the new paradigm where it now reads $0 paper/$264T gold. A net gain of $97.4T.
Read the entire blog post HERE.

Vice Chair Janet L. Yellen
At the Economic Club of New York
New York, New York
April 11, 2011

Good afternoon. For more than a century, the Economic Club of New York has provided an influential forum for the discussion of social, political and economic challenges facing the nation, and I appreciate very much your inviting me to speak today. My comments will focus on recent increases in commodity prices and the effects of those developments on the outlook for inflation, the economic recovery now under way, and the appropriate stance of monetary policy. Let me emphasize at the outset that these remarks reflect my own views and not those of others in the Federal Reserve System.1

Since early last summer, the prices of oil, agricultural products, and other raw materials have risen significantly. For example, the price of Brent crude oil has risen more than 70 percent and the price of corn has more than doubled; more broadly, the Commodity Research Bureau’s index of non-fuel commodity prices has risen roughly 40 percent. The imprint of these increases has become increasingly visible in overall measures of inflation. For example, inflation as measured by the price index for personal consumption expenditures (PCE) moved up to an annual rate of about 4 percent over the three months ending in February after having averaged less than 1-1/2 percent over the preceding two years. Moreover, survey data suggest that surging prices for gasoline and food have pushed up households’ near-term inflation expectations and are making consumers less confident about their economic circumstances.

Some observers have attributed the recent boom in commodity prices to the highly accommodative stance of U.S. monetary policy, including the marked expansion of the Federal Reserve’s balance sheet and the maintenance of the target federal funds rate at exceptionally low levels. Such an interpretation of recent developments naturally leads to the conclusion that the Federal Open Market Committee (FOMC) should move promptly toward firmer monetary conditions. Indeed, some have even raised the specter of a return to the high inflation of the 1970s in arguing for the urgency of monetary policy tightening.

Increases in energy and food prices are, without doubt, creating significant hardships for many people, both here in the United States and abroad. However, the implications of these increases for how the Federal Reserve should respond in terms of monetary policy must be considered very carefully. In my remarks today, I will make the case that recent developments in commodity prices can be explained largely by rising global demand and disruptions to global supply rather than by Federal Reserve policy. Moreover, empirical analysis suggests that these developments, at least thus far, are unlikely to have persistent effects on consumer inflation or to derail the recovery. Critically, so long as longer-run inflation expectations remain stable, the increases seen thus far in commodity prices and headline consumer inflation are not likely, in my view, to become embedded in the wage and price setting process and therefore are not likely to warrant any substantial shift in the stance of monetary policy. An accommodative monetary policy continues to be appropriate because unemployment remains elevated, and, even now, measures of underlying inflation are somewhat below the levels that FOMC participants judge to be consistent, over the longer run, with our statutory mandate to promote maximum employment and price stability.

While I continue to anticipate a gradual economic recovery in the context of price stability, I do recognize that further large and persistent increases in commodity prices could pose significant risks to both inflation and real activity that could necessitate a policy response. The FOMC is determined to ensure that we never again repeat the experience of the late 1960s and 1970s, when the Federal Reserve did not respond forcefully enough to rising inflation and allowed longer-term inflation expectations to drift upward. Consequently, we are paying close attention to the evolution of inflation and inflation expectations.

Sources of the Recent Rise in Commodity Prices
Let me now turn to a discussion of the sources of the recent increase in commodity prices. In my view, the run-up in the prices of crude oil, food, and other commodities we’ve seen over the past year can best be explained by the fundamentals of global supply and demand rather than by the stance of U.S. monetary policy.

In particular, a rapid pace of expansion of the emerging market economies (EMEs), which played a major role in driving up commodity prices from 2002 to 2008, appears to be the key factor driving the more recent run-up as well. Although real activity in the EMEs slowed appreciably immediately following the financial crisis, those economies resumed expanding briskly by the middle of 2009 after global financial conditions began improving, with China–which has accounted for roughly half of global growth in oil consumption over the past decade–again leading the way. By contrast, demand for commodities by the United States and other developed economies has grown very slowly; for example, in 2010 overall U.S. consumption of crude oil was lower in than in 1999 even though U.S. real gross domestic output (GDP) has risen more than 20 percent since then. On the supply side, heightened concerns about oil production in the Middle East and North Africa have recently put significant upward pressure on oil prices, while droughts in China and Russia and other weather-related supply disruptions have contributed to the jump in global food prices.

In contrast, the arguments linking the run-up in commodity prices to the stance of U.S. monetary policy do not seem to hold up to close scrutiny. In particular, some observers have pointed to dollar depreciation, speculative behavior, and international monetary linkages as key channels through which accommodative U.S. monetary policy might be exacerbating the boom in commodity markets. Let me address each of these possibilities in turn.

First, it does not seem reasonable to attribute much of the rise in commodity prices to movements in the foreign exchange value of the dollar. Since early last summer, the dollar has depreciated about 10 percent against other major currencies, and of that change, my sense is that only a limited portion should be attributed to the Federal Reserve’s initiation of a second round of securities purchases. By comparison, as I noted earlier, crude oil prices have risen more than 70 percent over the same period, and nonfuel commodity prices are up roughly 40 percent. Put another way, commodity prices have risen markedly in all major currencies, not just in terms of U.S. dollars, suggesting that the evolution of the foreign exchange value of the dollar can explain only a small fraction of those increases.

A second potential concern is that U.S. monetary policy is boosting commodity prices by reducing the cost of holding inventories or by fomenting “carry trades” and other forms of speculative behavior. But here, too, the evidence is not compelling. Price increases have been prevalent across a wide range of commodities, even those that are associated with little or no trading in futures markets. Moreover, if speculative transactions were the primary cause of rising commodity prices, we would expect to see mounting inventories of commodities as speculators hoarded such commodities, whereas in fact stocks of crude oil and agricultural products have generally been falling since last summer.2

A third concern expressed by some observers is that the exceptionally low level of U.S. interest rates has translated into excessive monetary stimulus in the EMEs. In particular, even though their economies have been expanding quite rapidly, many EMEs have been reluctant to raise their own interest rates because of concerns that higher rates could lead to further capital inflows and boost the value of their currencies. Some argue that their disinclination to tighten monetary policy has in turn resulted in economic overheating that has generated further upward pressures on commodity prices.

I do not think this explanation accounts for much of the surge in commodity prices, in part because I believe that the bulk of the rapid economic growth in EMEs mainly reflects fundamental improvements in productive capacity, as those countries become integrated into the global economy, rather than loose monetary policies. Irrespective of monetary conditions in the advanced foreign economies, it is clear that the monetary and fiscal authorities in the EMEs have a range of policy tools to address any potential for overheating in their economies if they choose to do so. Indeed, in light of the relatively high levels of resource utilization and inflationary pressures that many EMEs face at present, monetary tightening and currency appreciation might well be appropriate for those economies.

The Outlook for Consumer Prices
Turning now to the outlook for U.S. consumer prices, I anticipate that the recent surge in commodity prices will cause headline inflation to remain elevated over the next few months. However, I expect that consumer inflation will subsequently revert to an underlying trend that remains subdued, so long as increases in commodity prices moderate and longer run inflation expectations remain reasonably well-anchored.

Underlying Inflation Trends
Focusing on inflation prospects over the medium term is essential to the formulation of monetary policy because, due to lags, the medium term is the timeframe over which the FOMC’s actions can influence the economy. For this purpose, economists have constructed a variety of measures to separate underlying persistent movements in inflation from more transitory fluctuations. These measures include “core” inflation, which excludes changes in the prices of food and energy, and “trimmed mean” inflation, which exclude prices exhibiting the largest increases or decreases in any given month.

No single measure of underlying inflation is perfect, but it is notable that these measures have exhibited a remarkably consistent pattern since the onset of the recession: All show the underlying inflation rate declining markedly to a level somewhat below the rate of 2 percent or a bit less that FOMC participants consider to be consistent with the Fed’s dual mandate. For example, core PCE price inflation stood at less than 1 percent over the 12 months ending in February, down from 2-1/2 percent over the year prior to the recession. Trimmed-mean measures of inflation have also trended down over the past couple of years and are now close to 1 percent.

I want to emphasize that this focus on core and other inflation measures that may exclude recent increases in the cost of gasoline and other household essentials is not intended to downplay the importance of these items in the cost of living or to lower the bar on the definition of price stability. The Federal Reserve aims to stabilize inflation across the entire basket of goods and services that households purchase, including energy and food. Rather, we pay attention to core inflation and similar measures because, in light of the volatility of food and energy prices, core inflation has been a better forecaster of overall inflation in the medium term than overall inflation itself has been over the past 25 years.3

In my view, the marked decline in these trend measures of inflation since the intensification of the crisis largely reflects very low rates of resource utilization. Strong productivity gains have also played a role in holding down inflation because, together with low wage inflation, they have markedly restrained the rise in firms’ production costs. With resource slack likely to diminish only gradually over the next few years, it seems reasonable to anticipate that underlying inflation will remain subdued for some time, provided that longer-term inflation expectations remain well contained.

Longer-Run Inflation Expectations
In this regard, surveys and financial market data indicate that longer-run inflation expectations remain reasonably well anchored even though near-term inflation expectations have jumped in the wake of the surge in commodity prices. For example, the Thomson Reuters/ University of Michigan Survey of Consumers indicates that median inflation expectations for the coming year moved up about 1-1/4 percentage points in March, whereas the median expectation for inflation over the next 5 to 10 years increased only 1/4 percentage point. While such movements obviously bear watching, I would note that such a combination–namely, a substantial jump in near-term inflation expectations coupled with a relatively modest uptick in longer-run expectations–has often accompanied previous sharp increases in gasoline prices, and when it did, those movements were largely reversed within a few months.4

Information derived from the Treasury inflation-protected securities (TIPS) market also suggests that financial market participants’ longer-term inflation expectations remain well anchored even as the near-term outlook for inflation has shifted upward. In particular, while the carry-adjusted measure of inflation compensation for the next five years has increased about 1/4 percentage point since earlier this year, forward inflation compensation at longer horizons is roughly unchanged on net. Much of the increase in five-year inflation compensation has been associated with the surge in food and energy prices, and the level of this measure appears consistent with a normal cyclical recovery after adjusting for those effects.

Commodity Prices and Inflation
Now I would like to explain in further detail why I anticipate that recent increases in commodity prices are likely to have only transitory effects on headline inflation. The current configuration of quotes on futures contracts–which can serve as a reasonable benchmark in gauging the outlook for commodity prices–suggests that these prices will roughly stabilize near current levels or even decline in some cases. If that outcome materializes, the prices of gasoline and heating oil are likely to flatten out fairly soon, and retail food prices are likely to continue rising briskly for only a few more months. Consequently, the direct effects of the surge in commodity prices on headline consumer inflation should diminish sharply over coming months.

Over time, I anticipate that the recent surge in commodity prices will also affect the prices of a broader range of consumer goods and services that use these commodities as inputs. Many firms are seeing such costs escalate and will pass along at least part of these increased raw materials costs to their customers. Nevertheless, I expect the overall inflationary consequences of these pass-through effects to be modest and transitory, provided that longer-run inflation expectations remain well anchored. Moreover, labor costs per unit of output–the single largest component of the unit cost of producing goods and services in the business sector–are essentially unchanged since 2007, owing to both moderate wage increases and solid productivity gains. I expect that nominal wage growth and labor costs will continue to be restrained by slack in resource utilization. Indeed, it would be difficult to get a sustained increase in inflation as long as growth in nominal wages remains as low as we have seen recently.

My expectation regarding the transitory effects of commodity price shocks on consumer inflation is supported by simulation results from the FRB/US model–a macroeconometric model developed at the Federal Reserve Board and used extensively for policy analysis. Starting from a situation in which inflation is running at 2 percent and households and firms expect the FOMC to keep it there in the longer run, the model predicts that a persistent increase of $25 per barrel in the price of crude oil–that is, a rise similar to what we’ve experienced since last summer–would cause the PCE price index to rise at an annual rate of nearly 4 percent over the first two quarters following the shock. Beyond that horizon, however, total PCE inflation drops quickly to about 2-1/4 percent and then declines gradually back to its longer-run rate of 2 percent.

These fairly modest and transitory effects of an oil price shock are also consistent with the response of the U.S. economy to the dramatic run-up in commodity prices from 2002 to 2008. Indeed, while oil prices more than quadrupled over that period, measures of underlying inflation remained close to 2 percent. In my view, that outcome was crucially dependent on the stability of longer-run inflation expectations, which in turn limited the pass-through of higher production costs to consumer prices.

Risks to the Inflation Outlook
I have argued that recent commodity price shocks are likely to have only a transitory effect on inflation. But even if such a trajectory for inflation is most likely, some specific risks must be considered. First, while futures markets suggest that commodity prices will stabilize near current levels, these prices cannot be predicted with much confidence. For example, oil prices could move markedly higher or lower as a consequence of geopolitical developments, changes in production capacity, or shifts in the growth outlook of the EMEs.

In addition, the indirect effects of the commodity price surge could be amplified substantially if longer-run inflation expectations started drifting upward or if nominal wages began rising sharply as workers pressed employers to offset realized or prospective declines in their purchasing power.

Indeed, a key lesson from the experience of the late 1960s and 1970s is that the stability of longer-run inflation expectations cannot be taken for granted. At that time, the Federal Reserve’s monetary policy framework was opaque, its measures of resource utilization were flawed, and its policy actions generally followed a stop-start pattern that undermined public confidence in the Federal Reserve’s commitment to keep inflation under control. Consequently, longer-term inflation expectations became unmoored, and nominal wages and prices spiraled upward as workers sought compensation for past price increases and as firms responded to accelerating labor costs with further increases in prices. That wage-price spiral was eventually arrested by the Federal Reserve under Chairman Paul Volcker, but only at the cost of a severe recession in the early 1980s.

Since then, the Federal Reserve has remained determined to avoid those mistakes and to keep inflation low and stable. It will be important to closely monitor the state of longer-term inflation expectations to ensure that the Federal Reserve’s credibility, which has been built up over the past three decades, remains fully intact.

The Outlook for the Real Economy
Turning now to the real economy, real gross domestic product (GDP) has been rising since mid-2009 and now exceeds its level just prior to the onset of the recession. While GDP growth during late 2009 and early 2010 was largely the result of inventory restocking and fiscal stimulus, private final sales growth has picked up over the past six months–an encouraging sign. At the same time, measures of business sentiment have generally returned to pre-recession levels, factory output has been expanding apace, and the unemployment rate has dropped by a percentage point over the past few months.

Real consumer spending–which had been rising at a brisk pace in the fall–slowed somewhat around the turn of the year, and measures of consumer sentiment declined in March. Those developments may partly reflect the extent to which higher food and energy prices have sapped households’ purchasing power. More generally, however, as the improvement in the labor market deepens and broadens, households should regain some of the confidence they lost during the recession, providing an important boost to spending.

Broad Contours of the Outlook
Nonetheless, a sharp rebound in economic activity–like those that often follow deep recessions–does not appear to be in the offing. One key factor restraining the pace of recovery is the construction sector, which continues to be hampered by a considerable overhang of vacant homes and commercial properties and remains in the doldrums. In addition, spending by state and local governments seems likely to remain limited by tight budget conditions.

Moreover, while the labor market has recently shown some signs of life, job opportunities are still relatively scarce. The unemployment rate is down from its peak, but at 8.8 percent, it still remains quite elevated. And even the decline that we’ve seen to date partly reflects a drop in labor force participation, because people are counted as unemployed only if they are actively looking for work.

Some observers have argued that the high unemployment rate primarily reflects structural factors such as a longer duration of unemployment benefits and difficulties in matching available workers with vacant jobs rather than a deficiency of aggregate demand. In my view, however, the preponderance of available evidence and research suggests that these alternative structural explanations cannot account for the bulk of the rise in the unemployment rate during the recession. For example, if mismatches were of central importance, we would not expect to see high rates of unemployment across the vast majority of occupations and industries. Instead, I see weak demand for labor as the predominant explanation of why the rate of unemployment remains elevated and rates of resource utilization more generally are still well below normal levels.

Commodity Prices and the Real Economy
As I have indicated, the recent run-up in commodity prices is likely to weigh somewhat on consumer spending in coming months because it puts a painful squeeze on the pocketbooks of American households.5 In particular, higher oil prices lower American income overall because the United States is a major oil importer and hence much of the proceeds are transferred abroad. Monetary policy cannot directly alter this transfer of income abroad, which primarily reflects a change in relative prices driven by global demand and supply balances, not conditions in the United States. Thus, an increase in the price of crude oil acts like a tax on U.S. households, and like other taxes, tends to have a dampening effect on consumer spending.6

The surge in commodity prices may also dampen business spending. Higher food and energy prices should boost investment in agriculture, drilling, and mining but are likely to weigh on investment spending by firms in other sectors. Assuming these firms are unable to fully pass through higher input costs into prices, they will experience some compression in their profit margins, at least in the short run, thereby causing a decline in the marginal return on investment in most forms of equipment and structures.7 Moreover, to the extent that higher oil prices are associated with greater uncertainty about the economic outlook, businesses may decide to put off key investment decisions until that uncertainty subsides. Finally, with higher oil prices weighing on household income, weaker consumer spending could discourage business capital spending to some degree.

Fortunately, considerable evidence suggests that the effect of energy price shocks on the real economy has decreased substantially over the past several decades. During the period before the creation of the Organization of the Petroleum Exporting Countries (OPEC), cheap oil encouraged households to purchase gas-guzzling cars while firms had incentives to use energy-intensive production techniques. Consequently, when oil prices quadrupled in 1973-74, that degree of energy dependence resulted in substantial adverse effects on real economic activity. Since then, however, energy efficiency in both production and consumption has improved markedly.

Consequently, while the recent run-up in commodity prices is likely to weigh somewhat on consumer and business spending in coming months, I do not anticipate that those developments will greatly impede the economic recovery as long as these trends do not continue much further. For example, the simulation of the FRB/US model that I noted earlier indicates that a persistent increase of $25 per barrel in oil prices would reduce the level of real GDP about 1/2 percent over the first year and a bit more thereafter. The magnitude of that effect seems broadly consistent with the estimates of professional forecasters; for example, the Blue Chip consensus outlook for real GDP growth has edged down only modestly in recent months.

Monetary Policy Considerations
Let me now turn to the stance of monetary policy. As you know, monetary policy has been highly accommodative since the financial crisis intensified. In December 2008, the FOMC lowered the target federal funds rate to near zero and started to provide forward guidance concerning its likely future path. As in its statements since March 2009, the Committee reiterated last month that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” In addition, the FOMC has purchased a substantial volume of agency debt, agency mortgage-backed securities, and longer-term Treasury securities. The Committee initiated a second round of Treasury purchases last November and has indicated that it intends to complete those purchases by the end of June. My reading of the evidence is that these securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures.

I believe this accommodative policy stance is still appropriate because unemployment remains elevated, longer-run inflation expectations remain well anchored, and measures of underlying inflation are somewhat low relative to the rate of 2 percent or a bit less that Committee participants judge to be consistent over the longer term with our statutory mandate. However, there can be no question that sometime down the road, as the recovery gathers steam, it will become necessary for the FOMC to withdraw the monetary policy accommodation we have put in place. That process will involve both raising the target federal funds rate over time and gradually normalizing the size and composition of our security holdings. Importantly, we are confident that we have the tools in place to withdraw monetary stimulus, and we are prepared to use those tools when the right time comes.

Of course, there are risks to the outlook that may affect the timing and pace of monetary policy firming. In my view, however, even additional large and persistent shocks to commodity prices might not call for any substantial change in the course of monetary policy as long as inflation expectations remain well anchored and measures of underlying inflation continue to be subdued. As I noted earlier, a surge in commodity prices unavoidably impairs performance with respect to both aspects of the Federal Reserve’s dual mandate: Such shocks push up unemployment and raise inflation. A policy easing might alleviate the effects on employment but would tend to exacerbate the inflationary effects; conversely, policy firming might mitigate the rise in inflation but would contribute to an even weaker economic recovery. Under such circumstances, an appropriate balance in fulfilling our dual mandate might well call for the FOMC to leave the stance of monetary policy broadly unchanged.

That said, in light of the experience of the 1970s, it is clear that we cannot be complacent about the stability of inflation expectations, and we must be prepared to take decisive action to keep these expectations stable. For example, if a continued run-up in commodity prices appeared to be sparking a wage-price spiral, then underlying inflation could begin trending upward at an unacceptable pace. Such circumstances would clearly call for policy firming to ensure that longer-term inflation expectations remain firmly anchored.

Conclusion
In summary, the surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy. However, my colleagues and I are paying close attention to the evolution of inflation and inflation expectations, and we are prepared to act as needed to help ensure that inflation, over time, is at levels consistent with our statutory mandate.

Read the original article HERE.

By Chris Puplava
04/01/2011
Financial Sense

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”

-Sam Ewing

While most investors are familiar with the Dollar Index, it is actually a poor tool in gauging the strength of the USD given its weightings and only being a six currency basket. To truly see how the greenback is performing on a global scale one needs to look at more than six currencies and include precious metals. When one does this it is truly amazing how much the purchasing power of the USD has declined since 2009 after two rounds of quantitative easing (QE), and it is this loss of purchasing power that has the potential to at least cause another growth scare like 2010 or even a bear market.

The Biggest Loser

As I pointed out in a recent article, the USD Index has broken a three year trend line, which largely resembles a similar setup in the 1970s. When that break occurred stocks suffered in real terms and commodities went screaming higher with gold advancing more than 350% in two years. Whenever the USD Index has approached this 3-year trend line support I take a look at how it is performing versus world currencies over different time periods to see if it is beginning to strengthen and indicate a change in trend.

What you see below is the USD versus 30 world currencies and 4 precious metals over 6 different time periods. If the USD was in the process of staging an intermediate bottom you would begin to see more and more currencies and precious metals declining relative to the USD on a short term basis (1 day, 5 day, 1 month) but we simply aren’t seeing that. Shown below, only 8 currencies/metals are declining relative to the USD yesterday and over the 5 day , 1 month, and 3 month horizons, the USD is still declining against 2/3 of the currencies below.

 

Source: Bloomberg

Stepping back just a bit further in time we can see that the USD has lost a great deal of its purchasing power from a global perspective, particularly versus precious metals. Since 2009 and after two rounds of quantitative easing the USD has declined more than 75% versus palladium, 69% versus silver, and 39% versus gold. The USD has also lost a great deal of purchasing power versus commodity currencies like the Australian Dollar, Brazilian Real, and Canadian Dollar. Clearly, when looking at the USD from a global perspective, cash has been trash thanks to Helicopter Ben Bernanke and a Congress and President that have extended U.S. debt to the stratosphere.

What a Weak USD Means to You

Given the U.S. economy is now primarily a service economy by exporting its manufacturing base overseas, it is important to keep in mind that we are far more susceptible to import inflation. Thus, one of the major trend components in import inflation is the USD as commodities are priced in dollars. Shown below is the inflation rate for import prices (blue line) along side the annual rate of change in the USD Trade-Weighted Index (orange line—shown inverted for directional similarity and advanced several months). The close relationship between the USD and import price inflation could not be more clear with the recent weakness in the USD hinting at even higher import prices in the months ahead. This is certainly not going to be good news to consumers already struggling with high food and energy prices.

Source: BLS

What a Weak USD Means to Corporations

 

One of the things I argued for as to why there was still pain ahead in the middle of 2008 was the extremely high level of corporate profits relative to their normalized levels (“The Worst Is Yet to Come”). Essentially, corporate profit margins tend to reverse and move back towards the long run average, and we were still well above historical norms back in the summer of 2008—a strong reason for why I was not ready to turn bullish on the markets.

Yet again, the extreme in corporate profits is causing me to turn more cautious on the economy and stock market as the drivers that helped corporations boost their margins (shedding payrolls while sales recovered) is largely behind us as payrolls are now being added again. Additionally, while inflation was quite tame in 2009 and for most of 2010 it is picking up momentum and a weak USD ahead will only exacerbate the problem. Shown below are current corporate profits relative to normalized levels (historical average times Gross Domestic Product), which imply significant downside risk for the earnings seasons ahead. As of the end of last year, corporate profit margins were more than two standard deviations above normalized levels (see red line in second chart below), with 2007 representing the last time this occurred.

Source: BEA

Source: BEA

What a Weak USD Means to the Economy & Stock Market

The current rising inflationary pressures we are seeing are coming from the 15% decline seen in the USD Index since last summer, and further USD weakness ahead will only compound the problem. Higher inflation cuts into corporate profit margins as well as reduces consumer’s discretionary spending levels as they are forced to pay more for less. Inflation levels are leading economic indicators as it takes time for consumers to respond from ticker shock and change their spending habits, and current inflationary trends portend a decelerating shift for the economy ahead.

Seen below are three different Federal Reserve regional surveys with both the headline index and the price index for the surveys shown together, with the price index shown inverted for directional similarity and advanced owing to their leading tendencies. As you can see all three price indexes (red lines) haved moved sharply higher (lower in chart since inverted) and indicate we are likely to see lower national ISM and regional ISM numbers ahead.

Click for larger view:

Source: Bloomberg

Why is this important to you as an investor? Well, there is a strong correlation between the ISM numbers and the year-over-year rate of change in the S&P 500 as seen below. Given the price indices for regional ISM’s are forecasting lower headline ISM numbers in the months ahead, we can also expect the stock market to be at risk with flat to negative returns. That said, with QE 2 still in force the price weakness forecasted by the regional ISM price indexes may have to wait until QE 2 comes to a close in June.

Source: ISM, Standard & Poor’s

What Does it All Mean?

The last time we were in a similar scenario was late 2007 to early 2008. While I am not forecasting another crash like the one seen in late 2008, I do believe we can see the same trends. What were the characteristics of that time period? A weak USD, rising inflationary pressures, lower retail sales, lower corporate profit margins, and outperformance by commodities in general and precious metals in particular. If the USD accelerates its current decline then commodity based investments would be the most likely beneficiaries. Additionally, defensive sectors like consumer staples, health care, utilities, and telecommunications will likely outperform the more cyclical sectors such as technology, consumer discretionary, and financials.

Read the entire article HERE.