The Bubble in Paper Money

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Posted by Bill Bonner: Diary of a Rogue Economist

on Wednesday, 10 April 2013 13:59

US stocks are still going up. Gold is still dillydallying.

Gold is waiting to see what happens. Japan and the US are pumping up the monetary base – fast. But collectively, their balance sheets actually contracted by $415 billion in the first quarter – led by a $370 billion decline in the ECB's balance sheet.

Result: slightly less paper money in the developed economies... and a slightly lower gold price. Seems logical. Seems sensible.

You see, since the start of the secular bull market in gold, there has been a nearly perfect correlation between the gold price and the rate of balance sheet expansion (akamoney printing) at the Fed, the ECB, the Bank of England and the Bank of Japan.

You can see clearly it in this chart courtesy of our friends at the Sprott Group.


According to Sprott, for every extra $1 trillion in collective balance sheet expansion by these central banks, gold has risen $210 per ounce.

Gold is the world's alternative money. It and bitcoins. New supply of paper money is expanding rapidly. New supplies of gold and bitcoins are much more stable.

But many mainstream pundits are sure the end of the secular bull market in gold is at hand.

Who knows? Maybe they're right.

But it seems more likely that when the Japanese get their presses running hot, the price of gold will resume its upward climb.

Like the Fed in the 1970s, central banks in the high-debt, low-growth developed economies have decided that inflation is the solution to low growth and high unemployment.

Unless something happens to stop them, they'll probably keep increasing the money supply. And the price of gold will continue to correlate to the rate of increase in the monetary base of the developed world's major central banks.

Doing the Damnedest Things

But we're still laughing at the Japanese... and at Ben Bernanke... and at economists and central bankers everywhere.

And at ourselves! We all do the damnedest things.

Remember the dot-com bubble? People thought they could rich by buying companies with no earnings... no assets... and no business plan that had ever been tested. They invested hundreds of billions of dollars in these companies.

And when we pointed out to them at the time in our Daily Reckoning e-letter that the whole thing was loony, they said we "didn't get it."

As it turned out, we were happy not to get it.

And remember the US housing bubble? People thought they could get rich by buying houses. They thought that some magic force was making houses more and more valuable... and that all they had to do was to buy the biggest, most expensive house they could afford and "flip" it for a outsized profit.

Again, we didn't get it. How could an inanimate object that needed constant maintenance and attention increase your wealth? Houses were consumer items, not capital investments.

And again, it turned out that not getting it was a big advantage.

So you're probably wondering... what is it that we don't get now?

We'll tell you. We don't get how printing money can make people wealthier. It never did in the past. Instead, it just led to higher inflation, bankruptcies, riots, revolutions... and disappointment.

Not that we have a closed mind about it. If someone could explain how printing up pieces of paper makes us more prosperous, we'd be all for it.

We'd want more of it. Heck, if one or two trillion new dollars or yen or euro makes you wealthier, why not print up 10 quazillion?

Wait a minute. Didn't Argentina try that in the 1980s? Didn't Brazil give it a whirl in the 1990s... and Zimbabwe in the 2000s?

We don't remember any of them getting richer. Instead, they got poorer.

So what's the magic that Ben Bernanke and the Japanese have discovered? What's the secret?

There may be one. Anything's possible. But what is it?

Until we get a good answer... we're going to keep laughing.





Remember the "Flash Crash"? Three Years Later, We're Still Not Protected...

High-frequency trades -- automatic buy and sell orders made by computers every minute -- now make up over 50% of the trades on the stock market.

Yet the SEC hasn't completely figured out how to track and regulate those trades.

It's just now building a system to monitor the companies behind these rapid trading computers.

But guess who's setting up the system for the government watchdog?

One of the largest high-frequency trading firms in the business.

Talk about the fox guarding the henhouse. The SEC doesn't have a clue.

You need to protect yourself before a market catastrophe hits. This video shows you everything you need to know.



A Date Which Will Live in Yenfamy

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Posted by John Mauldin: Mauldin Economics

on Tuesday, 09 April 2013 07:04

Unknown-1"All serious poker players try to minimize their tells, obviously. There are a couple ways to go about this. One is the robotic approach: where your face becomes a mask and your voice a monotone, at least while the hand is being played.... The other is the manic method, where you affect a whole bunch of tics, twitches, and expressions, and mix them up with a river of insane babble. The idea is to overwhelm your opponents with clues, so they can't sort out what's going on. This approach can be effective, but for normal people it's hard to pull off. (If you've spent part of your life in an institution, this method may come naturally.)"Dan Harrington, Harrington on Hold 'Em, Volume 1: Expert Strategy for No Limit Tournaments

"It's desirable that foreign exchange rates reflect fundamentals." – Haruhiko Kuroda

"You got to know when to hold 'em, know when to fold 'em,

Know when to walk away, know when to run.

You never count your money when you're sittin' at the table.

There'll be time enough for countin' when the dealin's done." – Kenny Rogers, The Gambler


Putin: Russia May Profit from Cyprus Crisis
97% of Spain's Social Security Pensions Are Invested in Spanish Government Debt
Down and Out in Paris
North Korea Readies Missile Launch as Fears of a Covert Cyberwar Grow
Egypt's Descent into Chaos
Six Years of Low Interest Rates in Search of Some Growth
Rehn: Big Bank Depositors Could Bear Cost of Bank Failure
Is Divorcing an Abusive Spouse Ever Too Expensive?
Helicopter QE Will Never Be Reversed
Contagion Starts Small
Things That Make You Go Hmmm...

......read it all HERE





Time to Leave the Casino (and Buy Gold)

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Posted by Bill Bonner: Diary of a Rogue Economist

on Monday, 08 April 2013 10:37

On Friday, the Bank of Japan hit the markets with a zany announcement. It said it was going to double the country's monetary base! From Reuters:

The Bank of Japan unleashed the world's most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.

New Governor Haruhiko Kuroda committed the BoJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation.

The policy was viewed as a radical gamble to boost growth and lift inflation expectations and is unmatched in scope even by the US Federal Reserve's own quantitative easing program.

Will it work? Will it put some life into the Japanese economy?

Nomura Research Institute chief economist and expert on Japan's "balance sheet recession" Richard Koo says no.

Koo says this kind of monetary stimulus won't do the trick. Because businesses and households are still rebuilding their balance sheets and paying down debt. The Japanese feds may make more money and credit available, but the real economy won't take it. Instead, the money will just pour into the (speculative) stock market.

The yen fell on the announcement. And Japanese stocks shot up. But the US stock market was unimpressed. The Dow fell 40 points on Friday.

Desperation and Lunacy

What to make of it? The world's third largest economy. A jolt of money printing unprecedented in world history. And the Fed, BoE and ECB all following along.

The BoJ says it just wants to get inflation to 2%. It says it will buy bonds with fiat money that didn't exist previously... and keep buying... until inflation reaches 2%.

Then what? Well, we guess it will stop.

And then what?

Then it will have an economy that has come to expect 70 billion yen in new money every month. And an economy with a monetary base (the "stock" from which the "soup" of money supply is made) maybe twice what it is today.

We don't know what that will mean for Japan. Will the asset prices collapse again when the money printing stops?

Will the economy pick up... the banks begin to lend again... and consumers go on a spending binge?

Or will investors all over the world dump their yen, eager to get out of the Japanese paper money before inflation levels get out of control?

We don't know. But neither do the Japanese feds. As Reuters describes it above, it is a "radical gamble."

People make radical gambles now and then. Businessmen might take a chance now and then. Gamblers might go for long odds. Lovers might hope to get lucky.

Traditionally, central banks do not make "radical gambles." They tend to eschew gambles of any kind, even of the most respectable and bourgeois sort.

Central banks are meant to be stolid and boring. Spiders should be able to weave their webs in front of their vaults and remain unmolested. Central bankers are not supposed to call press conferences. (They not supposed to have anything to say in the first place.) And all requests -- whether for bailouts, interviews or lunch -- should be answered with an unyielding "no."

For a central bank to make a "radical gamble" bespeaks desperation and lunacy.

How this gamble will pay off, we don't know. We simply note most of the world's major central bankers are putting their money on the same color... and as the wheel spins... we urge dear readers to leave the casino.

Neither in yen, euros, pounds nor in dollars should we be. For when the dust finally settles on this wild riot of radical gambles by central bankers, gold will be the "last man standing."




Why Obama's Liberal Agenda Could Lead to Civil War

Sometime in the next 12 months, President Obama will weigh in on an issue that could destroy the future prosperity of the United States in order to please his radical liberal supporters.

He has the power to issue an executive order that could cripple an industry of critical importance to national security and prosperity.

His supporters will cheer him. He might even win another Nobel Prize.

If the situation plays out as I expect, one specific part of the country will not stand for it... and it could take up arms and fight back against the federal government.

That's right... I believe a Civil War is coming to the United States, sometime in the next 12 months.

Don't believe me?

Watch this video presentation and learn the truth about this shocking situation.



Competitive Easing Madness; Japan to Double Monetary Base; Yen Plunges

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Posted by Mish's Global Economic Trend Analysis

on Friday, 05 April 2013 03:11

Escape Velocity

Central bankers have gone totally mad. The stunning news of today is a new pledge by Japan to double its monetary base in two years as the Bank of Japan Unveils Aggressive Easing.

The Bank of Japan will aim to double the monetary base over two years through the aggressive purchase of long-term bonds, in a dramatic shift aimed at ridding Japan of the deflation that has dogged the country for almost two decades.

Haruhiko Kuroda on Thursday announced his arrival as central bank governor with a “new phase of monetary easing”, a move that comes after Prime Minister Shinzo Abe told the bank to target a 2 per cent rate of inflation.

“We can’t escape deflation with the incremental approach that’s been taken until now,” Mr Kuroda said after the announcement. “We need to use every means available.”

“I am confident that all the policies we need to achieve 2 per cent inflation in around two years are now in place,” he said.

Yen Plunges

As one might expect on such a surprise announcement, the Yen had a spectacular plunge.

Screen shot 2013-04-05 at 3.02.30 AM

Draghi Signals More Easing

Bloomberg reports German Yields Fall to 8-Month Low as Draghi Signals More Easing

German government bonds rose, pushing 10-year yields to the lowest since August, after European Central Bank President Mario Draghi signaled further stimulus is possible should economic conditions deteriorate.

French and Austrian 10-year yields fell to records as Draghi said monetary policy will “remain accommodative for as long as needed” to boost growth. Spanish and Italian bonds pared gains as the ECB president said the central bank won’t immediately implement measures to ease funding strains for smaller companies.

Fed Uncertainty Principle

This is all in accordance with the Fed Uncertainty Principle corollary three.

Corollary Number Three:

Don't expect the Fed [central banks in general] to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Japan is eventually going to achieve "escape velocity" on deflation, and I assure you Japanese citizens will not like the results when it happens.

When the Japanese bond market finally reacts to this inane policy, there is going to be a global currency crisis.

Mike "Mish" Shedlock




Gold’s Paper Price “Doesn’t Mean Anything”

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Posted by John Rubino - DollarCollapse.com

on Thursday, 04 April 2013 07:23


In this week’s talk with National Numismatics’ Tom Cloud, he explains why the reported price of gold is not the real price.

DollarCollapse: Hi Tom. It’s been a brutal couple of weeks in precious metals. Last time we talked you said that gold could fall to $1,540. Your prediction is close to coming true today, with gold below $1,560. What are your charts saying now?

Tom Cloud: There’s serious support at $1,540, but if that doesn’t hold the next major support level is $1,380. I don’t see it going this low for a variety of reasons, but it is possible because when you have an asset that’s gone up for 12 straight years you need a pullback to shake out the weak hands.

DC: You mentioned that there are a variety of reasons that a drop into the $1,300s is unlikely. Could you give us some of them?

TC: First, China is still an aggressive buyer. It’s trying to build its gold reserves up to US levels (though who knows whether the US really has what it claims) and is a long way from that point, so presumably it would use a big correction to buy even more, which would moderate the drop.

From there the list is all over the place. Obama and Netanyahu [Israel’s Prime Minister] just met to discuss Iran’s nuclear weapons program. It’s highly unlikely that they’ll allow Iran to deploy nukes, so there could be more trouble in the Middle East soon.

The US kicked the debt ceiling thing down the road until September and now we’re just printing money with no restraint. This is functionally the same thing as raising the debt ceiling; they just didn’t call it that. You’re talking $300-$400 billion of new debt in the next five months, and historically the gold price has tracked the debt ceiling.

And finally then there’s seasonality. Historically the last four months of the year have accounted for 2/3 of each year’s profits. So the further we get into 2013 the more support precious metals prices are likely to see.

DC: What about the latest European banking crisis?

TC: Cyprus is potentially huge. The Laiki bank just announced that they’ll take 80% of their largest depositors’ money, while the Bank of Cyprus’ large depositors will lose 50%. This sends a message to people with uninsured deposits everywhere, and a large number of my calls this week have been people moving money out of banks and into precious metals because they were over the [deposit insurance] limit. But it’s not just large depositors who should worry. The FDIC only has capital equal to 5% of deposits. So if there’s a run on US banks even small depositors could see a haircut. This makes physical precious metals look relatively attractive.

DC: You’d think this would send gold through the roof…

TC: Part of the reason that it hasn’t yet is that the dollar benefits from turmoil in the eurozone banking system, and a strong dollar equals a lower gold price. But that’s not sustainable. Two of my biggest clients are exporters who say their business is off because the US goods they’re selling are getting more expensive as the dollar goes up. So a strong dollar also means a weak economy, which the government can’t accept.

DC: Is your order flow reflecting the weakness in metals prices?

TC: Just the opposite. Nobody’s selling and big customers are buying. We’re doing about 35 fewer sales per week but are selling more metal because the average order is a lot bigger. Meanwhile, premiums are rising and delays are lengthening. It takes two weeks or more to fill orders for silver maple leafs and a lot of other coins. Outside of the fall of 2008 and the spring of 1980 I’ve never seen physical supplies this tight.

DC: How can tight physical supplies co-exist with falling prices?

TC: There’s a disconnect between the paper and physical precious metals markets. The big banks control the reported price by shorting in the futures markets. But this doesn’t mean anything. The growing shortage of physical shows that there are more buyers than sellers at the artificial paper price.

For more information or to place an order, call 800-247-2812 or email Tom Cloud attgcloud@bellsouth.net. Mention DollarCollapse.com for free shipping and insurance.


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