The QE Debate

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Posted by Peter Schiff - Euro Pacific Capital

on Wednesday, 05 September 2012 16:07


There is an ongoing three way debate between those who believe the Fed should do more to strengthen the recovery, those who believe that the recovery is strong enough to continue on its own, and those who believe that the economy has been so fundamentally altered by the recession that no amount of stimulus can succeed in pushing unemployment down to pre-crash levels. As usual, they all have it wrong (although some are more wrong than others).

The false conclusions are being made by the likes of bond king Bill Gross, who has suggested that the economic fundamentals have changed. They argue that a "new normal" is now in place that sets an 8% unemployment rate as a floor below which we will never fall. This is absurd. America can once again prosper if we put our trust in first principles and let the free markets work. Unfortunately, that is not happening. Government is taking an ever greater role in our economy where its efforts will continue to stifle economic growth. A close second in cluelessness comes from those who believe that we are currently on the road to a real recovery. I'm not sure what economy they are looking at, but in just about every important metric, we continue to be essentially comatose.

More accurate are the opinions of those who believe that without a more serious intervention from the Fed, which can only mean another round of quantitative easing (QE III), the current quasi-recovery will soon fade and the tides of recession will overtake us once again. They are correct. And even though this time the water will be rougher and deeper than it was four years ago, it does not mean that the Fed will do the economy any good by breaking out its heavy artillery once again.

In his widely anticipated speech at Jackson Hole last week, Fed Chairman Ben Bernanke sounded a supremely optimistic note: "It seems clear, based on this experience, that such (easing) policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred."

The simple truth however, is that our economy has a disease that all the quantitative easing in the world can't cure. And while the wrong medicine may make us appear healthier in the short term, we will continue to deteriorate beneath the surface. Not only should the Fed not provide additional QE, but it should remove the accommodation currently in place. Although these moves would most certainly send us back into recession, it would simultaneously provide a needed course correction that would put us finally on the road to a sustainable recovery.

The recession the Fed is trying so desperately to prevent must be allowed to run its course so that the economy that we have developed over the last decade, the one that is overly reliant on low interest rates, borrowing and consumer spending, can finally restructure itself into something healthier. By enabling this diseased economy to overstay its welcome, QE does more harm than good. To recover for the long haul, the market must be allowed to correct the misallocations of resources that resulted from prior stimulus. Additional stimulus inhibits this process, and exacerbates the size of the misallocations the markets must eventually correct.

In the interim, any GDP growth or employment gains that result from stimulus actually compounds the difficulty in restructuring the economy. Any jobs created as a result of cheap monetary stimulus are jobs that won't be able to survive absent that support. They will require a continual misallocation of resources in order to survive. Unfortunately, these jobs must ultimately be lost before a real recovery can actually begin.

Holding rates of interest far below market levels (which is the goal of stimulus) alters patterns of consumption, savings, and investment. Fed intervention short-circuits the market driven process that resolves misallocations. The more stimulus that is provided, the harder market forces must work to try to restore equilibrium. As the misallocations grow over time, the efficacy of monetary measures diminishes. In the end, the market will overwhelm the Fed. The only question is how long it will take.

The Fed is trying to build skyscrapers on a bad foundation. Each subsequent structure it builds not only collapses, but also weakens the foundation that much more. The result is that subsequent structures collapse at increasingly lower heights and require more effort to build. Instead of trying to build, the Fed could concentrate on repairing the underlying foundation. That might delay construction, but in the end the buildings will be much sturdier.

Because the Fed has kept interest rates too low for too long, Americans have saved too little and borrowed too much; consumed too much and produced too little; and imported too much and exported too little. Too much of our labor is devoted to the service sectors and not enough to goods production. Too much capital goes to Wall Street speculators and not enough to Main Street entrepreneurs. We built too many homes but not enough factories. We have developed too many shopping centers, and not enough natural resources. The list of Fed induced misallocations goes on.

By trying to preserve the jobs associated with this old economy, the Fed prevents the market from creating the ones we actually need. Unfortunately no one seems to understand that, and we continue to chase blindly after failed economic models. Look for such misunderstanding to be on high display this week in Charlotte as Democrats gather to call for even greater intervention to perpetuate a failed economic model. 


Peter Schiff's new book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country is now available. Order your copy today

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription.  



The World's Secret

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Posted by Before It's News

on Monday, 03 September 2012 11:32

No one truly understands just how out of hand America's finances have become. America has, in fact, run trade deficits large enough to wipe out its gold hoard under the old rules of the game - the old rules being brought back to light given the world's current financial conundrum.  
If we were to think of America's current finances under an evolved Bretton Woods system, China's redemption of US Treasury notes would be more than enough to wipe out the entire gold supply of the U.S. and more. And this is perfectly plausible if we were under the rules of Bretton Woods.   \
While this may seem extreme, this is exactly how most of the world monetary system worked up until 40 years ago. It's no wonder why the U.S Republican party recently called for a commission to look at the merits of a gold standard.  
Sixty years ago the US had over 20,000 tons of gold. But because of consistently large trade deficits, it dropped to 9000 tons. In 21 years, US gold reserves dropped 11,000 tons of gold that mostly went to a small number of export powerhouses to make up for its trade deficits.    

Fed Gives Out 16 Trillion to Banks & Corporations In Only 30 Months!

(Ed Note: The ACTUAL "Term-Adjusted" Total of these loans is apparently net ~$1.139 TRILLION, as shown in Table 9 on pages 132 and 133 (totals on 133). Regardless, the excerpts from this article below show the situation is very bad, and the accounting is being done by the the Office of Management and Budget (OMB) which shows this  Cabinet-level office loaned a Trillion plus to countries as obscure as Belgium. The OMB is the largest office within the Executive Office of the President of the United States). 

"What was revealed in the audit was so startling a bipartisan Bill to Audit the Fed passed overwhelmingly 07/25/2012 HERE:

$16,000,000,000,000.00 had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious – the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.

In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion.

The list of institutions that received the most money from the Federal Reserve can be found on page 131of the GAO Audit and are as follows.. 

Citigroup: $2.5 trillion ($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America: $1.344 trillion ($1,344,000,000,000)
Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank (Germany): $354 billion ($354,000,000,000)
UBS (Switzerland): $287 billion ($287,000,000,000)
Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)
and many many more including banks in Belgium of all places 

The first ever GAO (Government Accountability Office) audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate." Details of the overwhelming bipartisan House Vote for the Rep. Ron Paul (R-Texas) Bill to Audit the Fed HERE

.....read more HERE.



Euro Optimism: Pavlov would be proud

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Posted by Jack Crooks - Black Swan Capital

on Saturday, 01 September 2012 08:55

It’s a common lament.  The fundamental economic picture for the Eurozone single currency countries appears much worse, on a relative basis, than what we see in the United States, yet the euro currency doesn’t seem to reflect that reality.   After much reflection on this topic, I think I finally figured it out—it’s a Pavlovian reflex response!  Let me explain…

There was once a man named Pavlov.  He had a dog.  Being of the scientific bent, Pavlov decided to use his dog in an experiment.  It was a conditioned reflex experiment.  Pavlov hypothesized (which is what scientists do; investors guess as they cannot control their experiments) that if he rang a bell, then brought his dog a bowl of food, the dog would become conditioned to the bell ringing.  Pavlov’s hypothesis proved correct for as soon as he rang the bell, the dog began to salivate in expectation of the food to follow.  Thus it wasn’t the food itself that engendered the reflex, but the expectation of the food.

Insert European Central Bank, the European Union, and International Monetary Fund, collectively known as the “Troika” in place of Pavlov and “your average punter” in place of the dog and now you can understand why the euro is being supported—it is an expectation the future will be like the past. 

The last time the power of ECB market intervention on a broad scale was put on display, bond yields fell and the euro rose sharply. The catalyst was the announcement of a Long Term Refinancing Operation (LTRO) announced back in October 2011.  The LTRO was designed to provide the European banking system with a significant dose of liquidity.  It succeeded, for a while, as you can see clearly in the chart below: 

Picture 2

Below is the price action in the euro highlighted after the LTRO was announced on October 6th 2011; the euro rallied about 10 cents against the US dollar over the following two-week period:

Picture 3

So, will it be déjà vu all over again when Mr. Draghi announces bond-buying plans next week? 

Bond buying, or put another way—the transfer of wealth from richer, more productive, taxpayers in the North to less productive more corrupt taxpayers in the South, will not change the core problem at the heart of the euro, which is this: the weaker countries cannot compete against Germany when they all use the same currency.  If they try, it will mean decades of internal adjustment for the likes of Italy, Spain, Greece, and Portugal.  It will mean lurching from one crisis to another, and muddling through at best.   

For about seven years the periphery countries were able to borrow at interest rates on par with Germany. What good did that do other than allow consumers in the periphery to buy a whole lot of German made goods?

The Southern states, including Italy, Spain, and France, with the full support of the European Central Bank (ECB), now believe Germany needs the Eurozone to survive (because Germany’s growth model is one of export-dependence) and therefore will ultimately agree with the idea of making the ECB a tool for socializing risk—distributing more Northern wealth. 

But, as the Eurozone recession deepens, I suspect Germany’s political and economic incentives to keep funding the single currency project will fade in direct proportion to the country’s falling trade surplus, falling industrial order book, and rising unemployment rate; all of which are now underway. 

In short, the future may not be like the past.  If the euro has already discounted what I’ve shared here, then there is a bell ringing, and it doesn’t mean food is on the way.  It means the 600 pip rally we’ve seen in the euro from the July 24th low at 1.2041 is likely over and the long march down to par will continue in earnest. 

Picture 4

Note: If you would like more information on this publication you can contact us at info@blackswantrading.com or view our offerings at our website: www.blackswantrading.com 


Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer 



The Case: Why the US is on the brink of the greatest Depression of all time

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Posted by Wayne Allyn Root via Peter Grandich

on Thursday, 30 August 2012 09:30

"This time we are in such deep trouble. This time the results are going to be dramatically worse than 1929. In 1929 America was not $16 trillion in debt,  facing $100 trillion in unfunded liabilities,  over $360,000 in debt per citizen. In 1929, most states were not bankrupt, insolvent and dependent on federal government handouts to survive. One county owes over $108 billion in debt , the biggest part of it in unfunded government employee pensions. Today, 77,000 federal employees earn more than the governors of their states". The American Petroleum Institute reports that demand for oil in July was at the lowest level since 1995.

Why we are on the brink of the greatest

Depression of all time 


Everywhere from FoxNews.com to CNBC.com, I suddenly see commentators warning of pending doom, economic collapse, and a new Great Depression. Welcome to my club. Perhaps America's politicians and economists should have paid attention to an entrepreneur and small businessman that has been warning of economic collapse and a new Great Depression publicly for over two years. 

More importantly, none of the current commentaries mention the "why's" of this slow motion economic collapse...beyond the obvious -- mountains of deficit and debt. None of them mention the dysfunctional structure of the current U.S. economy and the massive changes in the work ethic and mindset of the average American. 

I am a successful small businessman and a patriot who loves America and always sees its greatness. I am also an optimistic, positive thinker who always sees the glass half full. 

But not this time. 

This time we are in such deep trouble, the only solution is a radical restructuring of the politicians, the economy, and the way we view personal responsibility versus government handouts. If those changes don't come then we are facing a long decline and the eventual end of America. 

This time the results are going to be dramatically worse than 1929. This time we are facing The Greatest Depression ever.

Why? Because The Great Depression had NONE of the structural, economic, and social problems, nor the massive obligations we are now facing. Read the facts:

In 1929 America was not $16 trillion in debt, plus facing over $100 trillion in unfunded liabilities. That’s over $360,000 in debt per citizen. 

In 1929, most of our states were not bankrupt, insolvent and dependent on federal government handouts to survive. One county (Cook County which includes Chicago, Illinois) now owes over $108 billion in debt (the biggest part of it in unfunded government employee pensions). 

In 1929, we did not have 21 million government employees with bloated salaries, obscene pensions, and free health care for life. Today 1 out of 5 federal employees earn over $100,000

Today, 77,000 federal employees earn more than the governors of their states

Staggering numbers of federal government employees retire at a young age with $100,000 pensions for life. 

Unfortunately on the state and local levels it’s even worse. There is now nearly $4 trillion in unfunded pension liabilities for state government employees. 

Protected by their unions and the politicians they elect, government employees are bankrupting America. In Illinois there are retired government employees making over $425,000 per year

No one could have imagined any of this in 1929. There is no possible way to pay these bills moving forward.

In 1929, Social Security, Medicare, and Medicaid didn’t exist. The federal government had no such obligations threatening to consume the entire federal budget within a few years. 

In 1929, there was no such thing as welfare, food stamps, aid to dependent children, or English as a second language programs. American’s didn’t consider it the responsibility of government to pay for breakfast and lunch for school students -- let alone for illegal immigrants at school.

Who could have imagined back in 1929 that one seventh of America's population would be on food stamps…and the federal government would ADVERTISE to encourage even more Americans to sign up for food stamps and welfare. 

Who could imagine back then that the federal government would team up with the President of Mexico to encourage Mexicans living illegally in America to sign up for food stamps

Who could have imagined back then that the president would offer not just welfare, but waivers to allow any state to opt out of requiring work to receive welfare? 

Back in 1929, who could have imagined 86 pregnant teenage girls all in one Memphis high school? 

In 1929 we had families, moral codes, and churches to prevent this kind of tragedy. Do you actually believe this is just one abnormal high school? There must be record numbers of pregnant teens all over America. They have figured out that the choice is to either work a drab, depressing job paying minimum wage, or pump out babies and have government pay your bills for decades to come. But where will the money come from? This will overwhelm the system with generations of massive debt. This is a nightmare.

In 1929, legal immigrants wanted only to work. My grandparents, who came to this country from Russia and Germany, received no government benefits. They worked day and night to provide for their family and become American citizens. It was sink or swim. My grandmother Anna Root never took a penny in welfare, even when my grandfather died and left her with no job, no money, and 7 young children. So back in 1929 immigrants cost us very little.

Today we have millions of illegal immigrants and their children collecting billions of dollars in entitlements from U.S. taxpayers. 

In one state (California) illegal aliens cost taxpayers over $10.5 billion annually just for education, health care and incarceration. Do you now understand why California is bankrupt and insolvent? This is spreading across the country. 

More dysfunction? Today new studies show that almost 20% of American children under age 18 are obese and therefore prone to suffer pre-diabetes, diabetes, or cardiovascular disease. 

Even worse, by 2020 experts predict that 52% of the adult population of America will have either pre-diabetes or diabetes. 

Do you understand the cost of diabetes? This alone will overwhelm and bankrupt America's health care system.

In 1929 we had no federal disability program. Today almost 11 million Americans are on disability. There are more citizens on the disabled rolls than the population of 39 of our 50 states. This is far worse than the welfare or unemployment rolls- which have time limits. Disability is forever. The ratio of able-bodied workers to disabled in 1967 was 41 to 1. As of June 2012 it is now 16 to 1. It is impossible to pay this bill long term.

But wait...it gets worse. Now soldiers are in on the act. Are you aware 45% of returning vets are claiming "disability" -- a number that dwarfs all prior records in the history of warfare. No nation can afford this. 

In 1929, we had an education system that was the envy of the world. Today our public schools are in shambles. We spend the most money in the world, and get among the worst results. The difference today? Teachers unions are in charge, instead of parents. Our students graduate with few skills, are qualified only for low paying manufacturing jobs that no longer exist -- they've been shipped to China and India. What will this workforce do for the rest of their lives? Live off the government dole? Who will pay for it?

In 1929 taxes were much lower. Forget the tax rates -- they were meaningless. In those days we had a cash economy, so most businesses paid little or no taxes. Sales and FICA taxes didn’t exist. Today the combined local, state, property, gas, sales, FICA and federal taxes are the highest burden in history. 


When income taxes started in 1913, the average American was untouched. Only the richest 350,000 Americans paid a 2% income tax. Today the average American works until April 12th just to pay his or her taxes. 

This stifles entrepreneurship and hinders the financial risk-taking necessary to create jobs and get out of a Great Depression.

New numbers just out for July back up my contention that disaster looms. Sales tax revenues plunged an alarming $539 million below expectations in California last month. The jobless rate rose in July in 9 out of 10 battleground states -- Iowa, Florida, Michigan, Nevada, New Hampshire, Pennsylvania, Virginia, Colorado and North Carolina all had higher unemployment (while Ohio held steady). They say bad news comes in threes. Well here's the worst news of all- the American Petroleum Institute reports that demand for oil in July was at the lowest level since 1995. These figures are alarming -- to say the least.

Do you get the picture? Our country is staring at the Greatest Depression ever. We face a  long slow decline towards the end of America -- unless we change paths and policy quickly.

The economy is crumbling. The situation is turning more hopeless by the hour. The more government gets involved, the worse it gets. Coincidence?

The solution is actually simple: dramatically cut the size, scope and power of government; cut spending; cut entitlements; cut taxes; cut government rules and regulations that smother, damage and destroy businesses, prevent startups, and kill jobs; reform Social Security, Medicare and Medicaid; reform public employee pensions; stop the wars (we can no longer afford to police the world); end or reform the Fed; end bailouts and stimulus (ask Japan about the failures of repeated stimulus); end the Democratic obsession with green energy and high speed rail (ask Spain about the waste in those two programs); encourage oil and energy exploration; encourage job creation by small business and the private sector; term limit politicians; institute school choice; and back the dollar with a gold standard. 

Or, like so many other great empires of history, America may never recover from this Greatest Depression of All Time.

US Unemployment_1910-1960

Wayne Allyn Root is a capitalist evangelist and serial entrepreneur. He is a former Libertarian vice presidential nominee. He now serves as chairman of the Libertarian National Campaign Committee. He is the best-selling author of "The Conscience of a Libertarian: Empowering the Citizen Revolution with God, Guns, Gold & Tax Cuts." For more, visit his website:www.ROOTforAmerica.com.



US dollar starts to breakdown as gold and silver surge ahead

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Posted by Arabian Money

on Monday, 27 August 2012 16:41

A head-and-shoulders pattern in the US dollar chart has broken down and it looks like a big fall is coming for the greenback (see chart below). The warning indicator is rising gold and silver prices, up three and nine per cent respectively last week, a trend that is likely to continue with some volatility.

In his latest commentary chartist Clive Maund said: ‘As we can see on the 8-month chart for the dollar index its drop last week has brought it down to a clearly defined important support level, with this sharp move towards a rising 200-day moving average creating a considerable degree of ‘compression’ that coupled with the support at the current level is likely to trigger a rebound. It looks like a head-and-shoulders top is forming in the dollar.

‘…so a likely scenario here is that we see a rebound short-term which takes the index back up towards the left shoulder high in the 83 area, and such a rebound would of course be the occasion for a reaction back in gold and silver, which should be jumped on as an opportunity to build positions further ahead of the major breakout. Here we should note that the dollar looks very weak so it might not make it as high as 83 before it turns tail and breaks down.’


Posted on 27 August 2012Categories: Banking & FinanceBond MarketsGold & SilverUS Dollar via ArabianMoney.net


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