Tag Archives: economics

Economist Richard Duncan: Civilization May Not Survive ‘Death Spiral’

By Terry Weiss | From Money Morning

Richard Duncan, formerly of the World Bank and chief economist at Blackhorse Asset Mgmt., says America’s $16 trillion federal debt has escalated into a “death spiral, “as he told CNBC.

And it could result in a depression so severe that he doesn’t “think our civilization could survive it.”

And Duncan is not alone in warning that the U.S. economy may go into a “death spiral.”

Since the recession, noted economists including Laurence Kotlikoff, a former member of President Reagan’s Council of Economic Advisers, have come to similar conclusions.

Kotlikoff estimates the true fiscal gap is $211 trillion when unfunded entitlements like Social Security and Medicare are included.

However, while the debt crisis numbers are well known to most Americans, the economy hasn’t suffered a major correction for almost 4 years.

So the questions remain: Is the threat of collapse for real? And if so, when?

A team of scientists, economists, and geopolitical analysts believes they have proof that the threat is indeed real – and the danger imminent.

One member of this team, Chris Martenson, a pathologist and former VP of a Fortune 300 company, explains their findings:

“We found an identical pattern in our debt, total credit market, and money supply that guarantees they’re going to fail. This pattern is nearly the same as in any pyramid scheme, one that escalates exponentially fast before it collapses. Governments around the globe are chiefly responsible.

“And what’s really disturbing about these findings is that the pattern isn’t limited to our economy. We found the same catastrophic pattern in our energy, food, and water systems as well.”

According to Martenson: “These systems could all implode at the same time. Food, water, energy, money. Everything.”

Another member of this team, Keith Fitz-Gerald, the president of The Fitz-Gerald Group, went on to explain their discoveries.

“What this pattern represents is a dangerous countdown clock that’s quickly approaching zero. And when it does, the resulting chaos is going to crush Americans,” Fitz-Gerald says.

Dr. Kent Moors, an adviser to 16 world governments on energy issues as well as a member of two U.S. State Department task forces on energy also voiced concerns over what he and his colleagues uncovered.

“Most frightening of all is how this exact same pattern keeps appearing in virtually every system critical to our society and way of life,” Dr. Moors stated.

The work of this team garnered such attention, they were brought in front of the United Nations, UK Parliament, and numerous Fortune 500 companies to share much of their findings. Click on the short video above to see a sample.

“It’s a pattern that’s hard to see unless you understand the way a catastrophe like this gains traction,” Dr. Moors says. “At first, it’s almost impossible to perceive. Everything looks fine, just like in every pyramid scheme. Yet the insidious growth of the virus keeps doubling in size, over and over again – in shorter and shorter periods of time – until it hits unsustainable levels. And it collapses the system.”

Martenson points to the U.S. total credit market debt as an example of this unnerving pattern.

“For 30 years – from the 1940s through the 1970s – our total credit market debt was moderate and entirely reasonable,” he says. “But then in seven years, from 1970 to 1977, it quickly doubled. And then it doubled again in seven more years. Then five years to double a third time. And then it doubled two more times after that.

“Where we were sitting at a total credit market debt that was 158% larger than our GDP in the early 1940s… By 2011 that figure was 357%.”

Dr. Moors warns this type of unsustainable road to collapse can be seen today in our energy, food and water production. All are tightly connected and contributing to the economic disaster that lies directly ahead.

Editor’s note: Germany’s military held a secret investigation into this unsustainable pattern and concluded it could lead to “political instability and extremism.” Details here

According to polls, the average American is sensing danger. A recent survey found that 61% of Americans believe a catastrophe is looming – yet only 15% feel prepared for such a deeply troubling event.

Fitz-Gerald says people should take steps to protect themselves from what is happening. “The amount of risky financial derivatives floating around the globe is as much as 20 times size of the entire GDP of the world,” he says. “It’s unsustainable and impossible to unwind in any kind of orderly way.”

Moreover, he adds: “People can also forget that the FDIC can only cover a fraction of US bank deposits. It’s a false sense of security. Just like state pensions, which could be suspended at any time. A collapse could wipe out these programs. Entitlements like Social Security and Medicare are already bankrupt and simply being propped up.”

We can see the strain on society already.

In two years, Congress won’t have any money for transportation, reports the Washington Post. Cities like Trenton, NJ have layed off one-third of their police force due to budget cuts. And other cities like Colorado Springs, CO removed one-third of streetlights, trashcans, and bus routes, reports CNN.

Fitz-Gerald also warns of a period of devastating inflation. A recent survey, reports USA Today, notes that in the coming years it could take $150,000 a year in household income for a family to afford basic living expenses – and maybe go out to a movie.

Right now, in fact, “52% of Americans feel they barely have enough to afford the basics.”

“If our research is right,” says Fitz-Gerald, “Americans will have to make some tough choices on how they’ll go about surviving when basic necessities become nearly unaffordable and the economy becomes dangerously unstable.”

“People need to begin to make preparations with their investments, retirement savings, and personal finances before it’s too late,” says Fitz-Gerald.

This article was originally posted at http://moneymorning.com/ob/economist-richard-duncan-civilization-may-not-survive-death-spiral/

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

Euro Crisis Brings World to Brink of Depression

By Darrell Delamaide | From Marketwatch.com | On Monday, July 24th, 2012

Europe is a tinderbox waiting for a spark.

The financial volatility in Europe may have created a situation that is now beyond the capacity of policy makers to control or curb.

When an accomplished fixer like Pascal Lamy, the head of the World Trade Organization and the longtime chief of staff for former European Commission President Jacques Delors, describes the situation in Europe as “difficult, very difficult, very difficult, very difficult,” you know it is time to run for cover.

The Great Depression was worsened by bank runs.

The crisis has now gone well beyond the prospect of breaking up the euro to the threat of a full-fledged financial and economic collapse in Europe that could plunge the world into a second Great Depression.

Few Americans are aware that a worldwide banking crisis started by cascading bank failures in Austria and Germany was one of the major causes of that earlier Depression.

It was in the summer of 1931 that the collapse of Creditanstalt in Vienna forced one of Germany’s big banks, Danatbank, to fail, leading to a credit crisis that prompted bank holidays around the world and exacerbating an already severe economic crisis.

The spark in the current crisis could come from a bank failure, and not necessarily in Spain. It could be a bank in Italy — or Austria, or Germany. German banks are notoriously undercapitalized and poorly supervised and have created a number of mini-crises in the past few decades since the collapse of the Herstatt Bank in 1974.

German economist Fabian Lindner drew the parallel to 1931 in an op-ed last fall when he compared his country’s intransigence toward southern Europe now to the misguided harshness of the U.S. and France toward Germany in the earlier crisis.

Hough: Now is the time to buy Spain

Spain has led headlines following its surging bond yields but investors who plunk money into a broad basket of Spanish shares today could see average returns of 20% a year over the next several years. Jack Hough discusses on Markets Hub.

“Both the German public and politicians should learn from history,” Lindner wrote in a commentary for Die Zeit that was also published in The Guardian. “Solidarity with the crisis countries is in Germany’s long-run interest. The German government should stop abusing its power to dictate economic decline to other nations. The alternative is economic stagnation and increased tensions between European nations.”

The situation has deteriorated since Lindner hoped in vain for some enlightenment on the German side. Instead, German Chancellor Angela Merkel and Bundesbank President Jens Weidmann have held to the prescription Lindner saw leading to disaster: “Germany and the German central bankers demand drastic austerity and only give piecemeal and insufficient help in return — too little, too late.”

The latest austerity measures in Spain, approved by the national Parliament last week even as the economy continues to contract, has led to new riots in the streets, pushing the yields on Spanish bonds above the 7% level deemed manageable, and increasing the likelihood of contagion to Italy.

Meanwhile, German Economics Minister Philipp Roesler whistles in the wind, saying the possibility of a Greek exit from the euro has “lost its horror,” and German Finance Minister Wolfgang Schaueble says Greece must try harder to meet its austerity commitments.

The problem, meine Herren, is not poor little Greece, long since written off by a smug German officialdom. The problem is the growing possibility of defaults in Spain and Italy that will lead to bank failures across the continent and incalculable consequences.

Paul Krugman quipped at the beginning of the current crisis that someone will be able to write a sequel to Liaquat Ahamed’s Pulitzer Prize-winning book, “Lords of Finance” — which chronicles how the four leading central bankers of that era plunged the world into the Great Depression with their wrong-headed policies — and call it “Lords of Finance: The Next Generation.”

The target of Krugman’s barb was Jean-Claude Trichet, then president of the European Central Bank. But his successor, Mario Draghi, has proven equally clueless in his public statements and actions.

Federal Reserve Chairman Ben Bernanke, an avowed admirer of Ahamed’s book, has nonetheless been relatively timid in recent months, keeping his distance from the European crisis and failing to make a convincing case for the Fed’s inaction in following its own mandate to promote employment in the U.S.

History is not likely to be any kinder to Bernanke and his cohorts than to the European policy makers who collectively have not been equal to the task.

The worst may still be averted but the challenge is indeed very, very, very difficult, and it is hard to see at this point where salvation could come from.

The article was originally posted at http://www.marketwatch.com/story/euro-crisis-brings-world-to-brink-of-depression-2012-07-24

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

Former Hedge Funder Presents A Terrifying Vision Of The End Game

By By Max Nisen | From BusinessInsider.com | On Jun 1, 2012

Everyday, we hear some pretty grim predictions about the markets and the economy.  But this is one of the more comprehensive and most gloomy outlooks we’ve ever seen.

Raoul Pal expects a series of sovereign defaults, the “biggest banking crisis in world history”, and asserts that we don’t have many options to stop it.

Pal previously co-managed the GLG Global Macro Fund. He is also a Goldman Sachs alum. He currently writes for The Global Macro Investor, a research publication for large and institutional investors.

A note on the presentation; the last slide is not meant to suggest that we’re going back to the economic activity of 3000 years ago. It refers to the 3000 year old trade links between the nations along the Indian Ocean, which Mr. Pal believes will be the center of world’s opportunities. Just like the West 50 years ago, they have “…low debts, high savings and a young population”.

Here is a link to the presentation: http://www.businessinsider.com/raoul-pal-the-end-game-2012-6#-1

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

Spain To Sell Bonds To Pay For Bankia Bailout

By David Roman & Jeffrey T. Lewis | From MarketWatch.com | On Wednesday, May 30th, 2012

MADRID (MarketWatch) — Spain’s government on Wednesday clarified its rescue plans for Bankia SA (BKIA.MC), saying it will pay for the EUR19 billion ($23.6 billion) bailout with cash raised through an auction of treasury bonds.

Finance Minister Luis De Guindos denied reports that the European Central Bank rejected a plan to fund the ailing lender directly with bonds it could exchange for cash from the ECB.

For their part, ECB officials signaled they would oppose any attempt to fund Bankia via the central bank’s lending facilities, according to people familiar with the situation. The ECB said Spain’s government hasn’t contacted it about the Bankia rescue.

Spain is coming to the aid of Bankia, its third-largest lender by assets, at a time when its finances are stretched to their breaking point and the government is desperately trying to ward off an international bailout.

Spain’s own bank bailout fund has only about EUR9 billion left. The country has seen its borrowing costs soar and demand fall in recent auctions. Spanish bond yields have reached levels close to those experienced by the likes of Ireland and Portugal before they requested bailouts.

De Guindos also said Spain’s banks will be asked to set aside EUR84 billion to cover potential losses on real estate this year and that this money can be raised via results, asset sales or from investors.

“Bankia is not the start of the problems. What the government is doing is accelerating the process of fixing Spain’s banking sector,” de Guindos said.

This article was originally posted at http://www.marketwatch.com/story/spain-to-sell-bonds-to-pay-for-bankia-bailout-2012-05-30-7103103

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

World Economy Update For Friday, April 13, 2012

LONDON (MarketWatch)—Spanish stocks plunged to a three-year low on Friday, leading European stock markets lower, while disappointing growth data from China also slashed the buying appetite of investors. Shares dipped deeper into negative territory in afternoon trade after a surprise decline in U.S. consumer sentiment.

The Stoxx Europe 600 index sank 1.6% to 253.11, leaving it set to break a two-day winning streak.

The Spanish IBEX 35 tumbled 3.9% to 7,222.80, a level not seen since March 2009, after data showed Spanish banks sharply increased borrowing from the European Central Bank, underscoring the sector’s dependence on central-bank liquidity.

Bearishness is back in mode among investors, as U.S. and Chinese economic data pose questions about growth. Google, J.P. Morgan Chase and Wells Fargo all trade lower following financial results.

The IMF is raising its forecasts for global growth from levels it expected in January, but there is still a “high degree of instability” in the world economy, Managing Director Christine Lagarde says in an interview with the WSJ’s David Wessel.

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

Real Short Stories Of A Nation In Decline

From ChrisMartenson.com |  Daily Digest 3/14

L.A. school board to consider millions of dollars in budget cuts

The Los Angeles Board of Education is expected to vote Tuesday on a worst-case $6-billion budget that would eliminate thousands of jobs, close all of the district’s adult schools and eliminate some after-school and arts programs, among a slew of other reductions.

The budget plan could change, and even if it is approved by the school board, a final version of the budget most likely is months away. But the nation’s second-largest school system is under pressure to pare more than $390 million from the budget for next year.

National Weather Service Facing Possible Budget Cuts

The National Weather Service is facing a different kind of storm. It’s not a hurricane or tornado, but instead a proposed budget cut of $39 million dollars. The government agency that issues daily forecasts, in addition to severe weather warnings, could have their budget cut by as much as four percent.

More than 800,000 Oregonians received food stamp benefits in January

More than 800,000 Oregonians relied on food stamps to put meals on the family table in January, the highest number ever. A report released Monday by the Oregon Department of Human Services shows 800,785 people –or 22 percent of Oregonians –received help in January from the state-federal Supplemental Nutrition Assistance Program. That reflected a 5.9 percent increase from January 2011.

Fed holds rates, says inflation rise is temporary

The Federal Reserve on Tuesday kept its interest rate target between 0% and 0.25% — as it has since Dec. 2008 — as the central bank said a rise in oil and gasoline prices will only “temporarily” push up inflation. Inflation will then run at or below the rate most consistent with its dual mandate, the central bank said. The Fed also maintained its Operation Twist program of shifting short-term bonds into longer-dated securities and reiterated the need to keep rates exceptionally low through at least 2014.

This series of articles was originally posted at http://www.chrismartenson.com/blog/daily-digest-314-dot-looking-borrow-more-austerity-needed-greece-spain-looks-cut-health-educati

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

Rickards: Double-Dip Recession Likely And So Is Depression

By Forrest Jones | From http://www.moneynews.com | On February 29th, 2012

Despite improving economic indicators, the U.S. economy remains at risk for a double-dip recession, which would indicate the country is likely mired in depression, says James Rickards, a hedge fund manager and the author of “Currency Wars: The Making of the Next Global Crisis.”

Unemployment rates and initial jobless claims are falling, growth rates are up and so are stock prices.

That doesn’t mean the country is out of the woods by any means.

Most of those indicators are lagging indicators, meaning they were illustrating conditions improving at the end of the last recession, and they were never really that strong in the first place and some appear to be cooling what little growth they’ve recovered.

A look ahead paints a different picture, as technically, the U.S. is likely in an upward correction before double-dipping into back into a recession — classically known as a depression.

“The Great Depression featured a double-dip of its own. Within the start and end dates of the Great Depression, there were two recessions, 1929 to 1933, and 1937 to 1938,” Rickards writes in a U.S. News & World Report column.

In a typical recession marked by a cooling in the business cycle, the economy contracts and then bounces back at a solid pace.

Not so in a depression.

“Recessions inside a depression are completely different phenomena than typical business and credit cycle recessions. They are the result of behavioral shifts in a larger wave of deflation and deleveraging,” Rickards says, which is what the economy is experiencing today.

Furthermore, a look back at the Great Depression shows that while fiscal and monetary policies may have caused it, policy uncertainty made it last so long.

“As FDR skittered among price supports, gold confiscation, court packing, and other ad hoc remedies, business executives waited on the sidelines until some consistency and certainty in policy developed,” Rickards writes.

“This situation is also the same today. Will the Bush tax cuts expire or not? Will Obamacare be upheld in the courts or not? Will payroll tax cuts and unemployment benefits be extended? Is corporate tax reform coming? This list goes on with the same effect as in the 1930s.”

Some say ousting President Barack Obama from the White House could seriously speed up recovery but ending such uncertainty.

“These are unknowns and if he were out and they [Bush Tax Cuts] were to remain intact, and investors and people would know what the future was going to be you’d have a boom. It would be a tremendous boom,” if Obama weren’t re-elected, trader, commodities expert, and index developer Victor Sperandeo tells Newsmax TV.

With Obama gone, businesses would take advantage of low interest rates and high liquidity levels and invest and grow again.

“Investors and businessmen would start to really become aggressive if Obama lost the next election, and they would start to use that money and borrow more of it instead of saying ‘I want to see what’s going to happen,” trader, commodities expert, and index developer Victor Sperandeo tells Newsmax.TV.

© Moneynews. All rights reserved.

This article was originally posted at http://www.moneynews.com/StreetTalk/Rickards-Double-Dip-Recession/2012/02/29/id/430918

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

S&P Declares Greek ‘Selective Default’ After Bailout

From BBC News Business | February 28, 2012

Rating agency Standard & Poor’s has classified Greek debt as in “selective default” following the deal it made with creditors to reduce its debts.

S&P says the terms of that deal triggered the latest downgrade. Greek debt already had a “junk” grade rating from the agency.

Separately, the European Central Bank said it was suspending the eligibility of Greek bonds as collateral for loans to commercial banks.

It said this would run until mid-March.

The ECB explained that by the middle of next month it would start to accept the bonds again, because a programme for eurozone nations to provide supplementary collateral to insure the ECB against losses is due to come into effect.

‘No impact’

Banks and other financial firms are being asked by Greece’s government to take a 53.5% loss on their Greek sovereign bonds.

The plan was agreed by the Greek parliament last week, and, if backed by Greece’s creditors, it would wipe out 107bn euros (£90bn; $142bn) of the country’s debt.

S&P said that when the debt exchange was complete it would assess Greece again and possibly raise its rating.

The Greek government said S&P’s move had been expected and added it would not hurt the banking industry.

“This rating does not have any impact on the Greek banking system since any likely effect on liquidity has already been dealt with by the Bank of Greece,” the finance ministry said in a statement.

Last week, rival credit rating agency Fitch also downgraded Greece’s debt.

This article was originally posted at http://www.bbc.co.uk/news/business-17187068

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About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

Bob Janjuah: “…I Have No Meaningful Insights To Offer”

From zerohedge.com| by Tyler Durden | February 12, 2012

Bob Janjuah

Bob Janjuah

Bob Janjuah is back.

Bob’s World: Monetary Anarchy

Since my last note from early January I have spent the last few weeks assessing data and price action, as well as spending a lot of time talking to clients and trying to analyse the words and deeds of policymakers. In no particular order, my takeaways are as follows:

1 – Greece (and the whole eurozone story) continues to lurch about, seemingly perpetually, from Farce to Tragedy. Policy seems to be focused on protecting and preserving vested interests, with little consideration given to the dreadful conditions the people of Greece and other “peripherals” are being forced to live with. However, it seems that eurozone leaders may be about to pour even more taxpayer money down into the black hole that is Greece, primarily to help the banks in Europe, at the expense of perhaps a decade of suffering by the Greek populace. For my part, I am now consigning the Greece/Peripherals/Eurozone story to the box marked “self-serving political debacle” and from here on in I will simplify Europe as follows: Until, and unless, Germany signs up to full fiscal union, a eurozone breakup is likely. And depending on how long we can continue to “kick the can” down the road in order to protect the eurozone banks, the eurozone will be consigned to an extended period of weak growth, which in turn means ever decreasing debt sustainability. Ultimately this means that the end game will simply be more devastating for us all the longer we are forced to wait. Investors should be fully aware that “home” bias amongst real money investors is now “off the charts”. This is not a good development for the eurozone, unless of course our leaders are preparing for break up, or at least considering it as a viable option.

2 – I am staggered at how easily the concepts of Democracy and the Rule of Law – two of the pillars of the modern world – have been brushed aside in the interests of political expediency. This is not just a eurozone phenomenon but of course the removal of elected governments and the instalment of “insider” technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think this kind of development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being pushed on us by our leaders will – if allowed to persist and fester – end with consequences which are way beyond anything the printing presses of our central banks could ever hope to contain. Communism failed badly. Why then are we arguably trying to resurrect a version of it, particularly in Europe? Are the banks so powerful that we are all beholden to them and the biggest nonsense of all – that defaults should never happen (unless said defaults are trivial or largely meaningless)?

3 – More broadly, with Mr Draghi now in situ, it is clear that I misread and misunderstood two things. First, I am simply stunned that our  policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being “told” to double up on these same policy decisions. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people. Well now, if you listen to the latest from Bernanke and Draghi, it seems that the only solution they can offer up  is to yet again misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again “greedy” enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now “richer”. When – as they do by definition – these bubbles burst, those who have been suckered in will realise that their “wealth” is instead an illusion, which in turn will be replaced by default risk.

Secondly, I have clearly underestimated the ‘market’s’ willingness, nay desperation, to go along with this ultimately ruinous policy path. Personally, I think this is extremely worrying – the number of clients who tell me that they know they are being forced into playing a game that will end in disaster, but who feel they have to play along and who hope they will get out before it turns, is a depressingly familiar old tale. Some such folks hang onto the idea that Draghi/LTRO changed the asymmetry of risk from deeply negative to positive. Yet even these folks know that printing more money/more liquidity/more debt/more leverage is not a viable solution to our ills, and in fact will mean true supply side reform and the search for true competiveness and sustainable growth will be further cast aside, as the focus will be on the “easy gains” to be made in markets.

4 – Assuming that we are in yet another liquidity fuelled rally courtesy of Bernanke and Draghi, then there are some key things to remember. First, such rallies can last days, weeks, months, perhaps we could even extend into 2013. And – to give a proxy guide – the S&P could end up in the high 1500s again if this current binge lasts into 2013. The problem with such liquidity fuelled set-ups is that they can last longer and get bigger than any reasonable logic would dictate. The issue here is not what central bankers say – it now seems clear that Bernanke and Draghi will say whatever it takes to keep the market supplied with ample liquidity – but what they can do. In this respect one either believes that central bankers can do whatever they like whenever they like, or one believes there are limits. I think there are limits to what Bernanke and Draghi can do, and once we hit those limits these bubbles will burst, with increasingly greater consequences the longer we are forced to wait. Do I know when we may hit these limits? I hope that it is sooner rather than later, but I have no real conviction.

Secondly, when looking for where the bubbles may be, realise this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere – in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices – you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market.

Third, when this bubble bursts, I don’t think there is an easy way out. Who will be the bail-out provider? We already have extraordinarily weak and fragile government balance sheets, ditto banking balance sheets and consumer balance sheets. The big cap corporate balance sheet is sound, but it already worries about how bad the real economy hit will be when the next bubble bursts. As such, the corporate sector – which has a huge degree of “control” over the political classes – will keeps its powder dry until asset prices fall to clearing levels. When this happens they will be the biggest buyer of truly cheap assets in town, but not before then. The really dangerous thing about this next bubble is that it will likely ruin current central bank credibility, as their balance sheet expansion, accumulating ever more “toxic” assets, is at the centre of the current cycle. As a result, the central bank decision-making function is now (increasingly) deeply compromised, if not utterly at odds with its own raison d’être. This of course means that if/when the current cycle implodes, central banks which have seen explosive balance sheet growth will add to the problems, rather than being able to act as credible lenders of last resort. A resulting consequence is that we will, at that point, usher in a new era of central banking and policy settings, where the key will be to regain a semblance of credibility and independence. This will be good news. But we will likely have to go through the “bust” first.

5 – I am not well equipped to navigate bubbles where tactical views and secular views are all thrown into the melting pot together, where there is no visibility, where – as one client put it to me recently – we have Monetary Anarchy running riot, where the elastic band between the ‘real’ economy and the current liquidity-fuelled markets is stretched further and further beyond credulity, and where history tells us that policymakers will happily stand by whilst bubbles are being pumped up, and hope that they are onto their next job before it all comes tumbling down. It seems that the 07/08/09 part of this crisis has resulted in zero lessons learned. In fact it is much worse than that as we are instead being asked to double up on a strategy which I fear will end in failure. As such, clearly my outlook in my last note needs to be re-assessed in terms of the latest developments. Whilst equity market levels are still within the tolerance limits set out in this previous note, my timing is clearly being “stretched”. Unfortunately for me, and as warned in the prior note, if my outlook set out therein is proven to be wrong, it is because I am overly cautious. I say “unfortunately” because the longer we have to wait for the “final” resolution to the global financial crisis, the bigger and more devastating the final leg lower will be. I have an extremely high level of conviction on this point.

6 – So, in terms of markets, be warned. My personal recommendation is to sit in Gold and non-financial high quality corporate credit and blue-chip big cap non-financial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears. Real assets are relatively attractive. But I am going to wait for this current central bank bubble to burst before going all in. I may be waiting 5 days, 5 weeks, 5 months, perhaps 5 quarters. It all depends on when and how our central bank leaders are exposed as lacking credibility and/or lacking the mandates to keep pumping liquidity into the system. The end of the bubble will be sign posted by either monetary anarchy creating major real economy inflation or by a deflationary credit collapse (if they run out of pumping “mandates”). The end game is incredibly binary in my view, but in between it is pretty much a random walk. Either way, “bonds are toast” in any secular timeframe (due either to huge inflationary pressures, or due to a deflationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a secular basis.

My colleague Kevin Gaynor has a more nuanced view and he feels that we may well avoid the bubble outcome, as political hurdles, political changes, growth and earnings data will all very quickly undermine central bankers and their bubble vision. For all our (long term) sakes, I hope I am wrong when it comes to fearing another round of liquidity-fuelled bubbles, and that he is right that “good sense? will prevail soon.

I will continue to use the Dow/Gold charts to continue to guide me going forward. The USD price of an ounce of gold and the Dow will, I believe, converge at/around 1, at some point over the next 2 years or so. I have extremely high conviction on this. What I am not sure on is whether we converge at 7000+/-, or at 14000+/-. Because I do believe that even Bernanke and Draghi cannot do as they wish and that there are some limits to the recklessness of policymakers, I still lean towards a deflationary resolution at/about 7000 in the next year or two. Pretty vague, I know, buts it’s the best I can do right now, and what is clear is that, in the world I fear ahead, gold is a winner either way – remember, gold is a great (monetary) inflation hedge, and in a deflationary credit collapse gold works as a store of value/wealth as it carries zero credit risk.

As a “credit” guy at heart I see more likelihood in a deflationary credit (i.e., a “real”) collapse rather than a real economy inflationary (nominal) collapse. Either way however, what is clear is that if Bernanke and Draghi are allowed to continue on their current policy path for much longer, then whatever the final outcome will be, it will likely leave a deep scar on us for decades. Which on a ten-year timeframe may not be such a bad thing as it should kill off monetarism and usher in a new era of monetary and fiscal prudence? In the near term, LTRO2 at month-end is the next clear focus for markets, more so than Greece. If LTRO2 is USD1trn or more, the market will take that as a signal to load on more leverage, more risk and more ‘carry’. If LTRO2 is in the order of USD250bn to USD500bn, Risk Off will be the order of the day as markets will start to fear that central bankers are having to reign back-in their current policies, and that as a result we face another period where central bankers and policymakers fall back behind the curve. LTRO1 clearly took policymakers from behind to ahead of the curve, but this is an extremely fluid situation, where doing nothing is, in reality, the same as going backwards. As the skew of expectations is to a large LTRO2, a LTRO2 take-up in between these ranges is likely to be viewed with neutrality/mild disappointment.

This article was originally posted at http://www.zerohedge.com/news/bob-janjuah-markets-are-so-rigged-policy-makers-i-have-no-meaningful-insights-offer

PG
About The Author: RSOP is the co-founder & Executive Editor of Radical Survivalism Webzine, as well as a Family Preparedness Consultant with nearly five years of personal experience in the self-reliance game. RSOP's many preparedness roles within his own group include team mechanic, head of security, electrician, and project designer/engineer.

The Federal Reserve’s Explicit Goal: Devalue The Dollar 33%

From http://www.businessinsider.com | February 15th, 2012

The Federal Reserve Open Market Committee (FOMC) has made it official: After its latest two day meeting, it announced its goal to devalue the dollar by 33 percent over the next 20 years. The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.

An increase in the price level of 2 percent in any one year is barely noticeable. Under a gold standard, such an increase was uncommon, but not unknown. The difference is that when the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. A dollar 20 years hence was still worth a dollar.

But, an increase of 2 percent a year over a period of 20 years will lead to a 50 percent increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.

The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of Americans’ hard earned savings over the next 4 years.

Why target an annual 2 percent decline in the dollar’s value instead of price stability? Here is the Fed’s answer:

“The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling — a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.”

In other words, a gradual destruction of the dollar’s value is the best the FOMC can do.

Here’s why: First, the Fed believes that manipulation of interest rates and the value of the dollar can reduce unemployment rates.

The results of the past 40 years say the opposite.

The Fed’s finger prints in the form of monetary manipulation are all over the dozen financial crises and spikes in unemployment we have experienced since abandoning the gold standard in 1971. The financial crisis of 2008, caused in no small part by the Fed’s efforts to stimulate the economy by keeping interest rates too low for, as it turned out, way too long is but the latest example of the Fed failing to fulfill its mandate to achieve either price stability or full employment.

The Fed’s most recent experience with Quantitative Easing also belies the entire notion that monetary manipulation can spur the economy. Between November 2010 and June 2011, the Fed tried to spur economic growth by purchasing $600 billion in Treasury securities, flooding the banking system with reserves and keeping interest rates low. In response the economy, which had been growing at a 3.4 percent annual rate, slowed to a 1 percent annual rate in the first half of 2011. Once the Fed stopped supplying all of that liquidity, economic growth in the second half of the year accelerated to a 2.3 percent annual rate.

Second, the Fed does not use real time indicators of the price level. Instead, it views inflation through the rear view mirror of the trailing increases in the PCE. And, even when it had evidence of rising inflation — as it did in the first quarter of last year — it chose to temporize, betting that the spike in inflation would prove temporary.

This spike in inflation did prove temporary, as Fed Chairman Bernanke predicted at the time, but not for the reasons — a slack economy — that he cited. Instead, the growing debt crisis in Europe led to a massive shift in deposits out of the euro and into the dollar — an event totally out of the Fed’s control. Yet, this increase in the demand for dollars was far more important than any action taken by the Fed because it increased the value of the dollar and produced a slowdown in the inflation rate.

What we are left with is a trial and error monetary system that depends on the best judgment of 19 men and women who meet every six weeks around a big table at the Federal Reserve in Washington. At the end of a day and a half of discussions, 11 of them vote on what to do next. The error the members of the FOMC fear most when they vote is deflation. So, they have built in a 2 percent margin of error.

Given the crudeness of the tools the FOMC uses to set monetary policy, allowing for such a margin of error is no doubt prudent. For example, when the economy slowed in the first half of last year, inflation picked up, accelerating to a 6.1 percent annual rate during the second quarter. And, when the economic growth accelerated in the second half, inflation slowed. These results are the precise opposite of what the Fed’s playbook says are supposed to happen.

The best the Fed can do — an average debauch in the dollar’s value of 2 percent a year while producing recurring financial crises and a more cyclical economy — is demonstrably inferior to the results produced by the classical gold standard. Here’s just one example. The largest gold discovery of modern times set off the 1849 California gold rush and increased the supply of gold in the world faster than the increase in the output of goods and services. The price level in the US did increase by12.4 percent over the next 8 years. That translates into an average of just 1.5 percent a year. The gold standard at its worst was better than the best the Fed now promises to do with the paper dollar.

The Fed’s best is hardly good enough. The time has arrived for the American people to demand something far better — a dollar as good as gold.

Regards,

Charles Kadlec, for The Daily Reckoning

The Federal Reserve’s Explicit Goal: Devalue the Dollar 33 percent originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

PG
About The Author: Erica M. is the Managing Editor of Radical Survivalism Magazine.