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Message: Not much one can do but, these Chaps explain where things are headed.
Be Very, Very Scared
Friday, 14 September 2012
Normandy, France – Melbourne, Australia
By Greg Canavan
From Greg Canavan in St Kilda:
--'Lost: One plot...went missing on the afternoon of 13th September 2012 in Marriner Eccles Building, Washington D.C. Please contact Ben Bernanke if found.'
--That's right, dear reader, Ben Bernanke has officially lost the plot. In a desperate attempt to boost employment in the US (or so he says), the Fed chief announced he will buy USD$40 billion in mortgage backed securities every month until the situation improves.
--In that case he'll be buying for a long time. USD$40 billion in monthly asset purchases is not that much. We know that sounds like an insane statement but in this already hugely inflated monetary world, it's not. When Bernanke fired his first shot of QE in 2009, the monthly rate of Treasury purchases was US$75 billion. This is a diminishing amount of QE.
--QE1 and 2 didn't improve the employment situation, and neither will this upcoming monetary injection. Such actions profoundly distort the functioning of a market-based economy. At times like this it is important to remember just why the US (and global) economy is in such a mess...it's because central banks held the rate of interest well below the market rate for a prolonged period of time.
--This resulted in a series of credit booms which, via the price mechanism, gave off a whole bunch of false price signals. The tech boom created huge overcapacity in telecommunications and associated industries at the turn of the century. The mortgage boom created overcapacity in housing and created millions of jobs in property and related sectors. But when the flow of credit diminished it turned out to be a false economy and the jobs disappeared.
--Every time the market tries to adjust to an economy based on some semblance of a free market price of credit (in turn based on the amount of real savings in an economy) the Fed adds to the distortions.
--So the Fed is simply giving us more of the same slop it's served up for decades...the same policies that have brought us to the brink of economic ruin. Now, as the inflated global credit structure collapses back into itself, the Fed has to run to stand still to monetise the collapsing debt structure.
--That this policy will become an economic disaster is not in doubt. History will not be kind to Bernanke and the central banking fraternity. This is an insane policy designed to enrich the bankers and help monetise ongoing US$1 trillion plus Federal deficits. (Don't forget the Fed is still monetising $45 billion per month in long term Treasury securities, as part of 'Operation Twist'.)
--But Bernanke does it all under the cloak of the 'dual mandate' and his desire to achieve maximum employment. In the press conference following the Fed statement, a reporter asked Bernanke exactly how this would benefit 'Main Street', given that the past attempts hadn't really done anything for 'the people'.
--His response was extraordinary. This guy has economic theory back-to-front. As we said, insane...plotless. Here's what he said:
'...this is a Main Street policy, because what we're about here is trying to get jobs going. We're trying to create more employment. We're trying to meet our maximum employment mandate, so that's the objective. Our tools involve - I mean, the tools we have involve affecting financial asset prices, and that's - those are the tools of monetary policy.
'There are a number of different channels - mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they'll feel more - more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they'll, you know, make a better return on that purchase. So house prices is one vehicle.
'Stock prices - many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend.
'One of the main concerns that firms have is there's not enough demand. There are not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason - their house is worth more - they're more willing to go out and spend, and that's going to provide the demand that firms need in order to be willing to hire and to invest.'
--When the Chairman of the Federal Reserve Board holds such a view about wealth creation, we're all doomed. Seriously...this is not good.
--That Bernanke has now confirmed himself as a monetary lunatic of the highest order, who deserves little or no respect, is one issue. The other is what do you do about it.
--Owning precious metals is a good place to start. Storing your hard won wealth in the ancient metal while Bernanke tries to fix things is a pretty safe bet as far as we can tell.
--But what else? Should you assume Bernanke's actions will have a positive effect on markets around the world?
--Well, the Fed's announcement certainly put a rocket under US shares last night. His promise to maintain low rates until at least 2015 and to keep rates low even if a recovery takes hold (it won't) emboldened speculators further. But wasn't all this already expected? Hasn't the market been buying in anticipation of QE3 for months?
--Yes it has. So we wouldn't get too excited about this rally just yet. If we see follow-through buying next week then we might concede the market has evolved into a higher realm of consciousness...where fundamentals don't matter and wealth creation starts not with ideas, hard work and innovation, but with higher stock prices to encourage demand for the excess of 'stuff' already on the market.
--By the Fed monetising mortgage and government debt and thereby encouraging consumption, the current broken global economic system of US excess consumption gets another lease of life. This should increase the US trade deficit and increase the flow of US dollars into the international financial system.
--It will give all those nations who don't want a stronger currency vis-a-vis the US dollar an opportunity to print more money to keep their currencies 'competitive'. This could provide another short-lived injection of credit-heroin into the addict, which in turn will result in only greater withdrawal symptoms down the track.
--And what about Australia, which doesn't 'manage' its currency? Apart from the speculative buzz, it gets no help at all from Bernanke's idiocy. So the Aussie dollar strengthens right at the time when our export sector desperately needs it to weaken...as it should given the recent collapse in bulk commodities.
--But in the Bernanke era the market never does what it 'should' - or what you would expect based on fundamental, rational analysis. Which makes it a very dangerous market indeed.
--If you're wondering what to do, our suggestion is to do nothing. Sit back and observe. See what next week brings. The market could well realise over the weekend that Bernanke is the problem, not the solution. It might look around and see a simultaneous global downturn looming, and panic in the other direction.
--The truth is no one knows what is going on. If the market were an animal it would resemble Dr Dolittle's pushmi pullyu...deteriorating economic fundamentals pushing one way and Bernanke pulling another.
--Who wins, the market or the man?
Regards,
Greg Canavan
for The Daily Reckoning Australia
The Phoney Money Mess
By Bill Bonner
What does QE really do? Nothing good...
Phoney money does not create a real economy. It creates a phoney economy. Now, this is a long discussion... if we approach it seriously. So, let's approach it some other way.
Jealousy, envy... resentment! Yes, let's act like politicians. Let's appeal to low, unworthy emotions.
Here's the latest news from Bloomberg:
Rich-Poor Gap Widens to Most Since 1967 as Income Falls
The U.S. Census Bureau figures released yesterday underscored the struggles of American families in a sputtering economic recovery. The report also showed the income gap between rich and poor people grew to the widest in more than 40 years in 2011 as the poverty rate remained at almost a two-decade high.
Median household income dropped 1.5 percent last year while the proportion of Americans living in poverty was 15 percent, little changed from 2010. The 46.2 million people living in poverty remained at the highest level in the 53 years since the Census Bureau has been collecting that statistic.
The census data show the wealthiest Americans secured most of the benefits from the economic recovery that began in June 2009.
The top 1 percent of households experienced about a 6 percent increase in income, said David Johnson, chief of the social, economic and housing division at the Census Bureau.
What kind of an economy does phoney money produce? You just saw it. One where most people get poorer, not richer. Why is that?
We'll go back to basics.
A society is made wealthy by accumulating capital. Not by spending money. Not by having a good time. Not by being nice... respecting women... following the Koran... borrowing... singing well... or bathing regularly. Capital is not wealth itself. But it's what allows a society to create wealth.
You can understand that just by comparing farmers in very poor countries to farmers in very rich countries. The poor farmer has to till the land by hand. The rich farmer uses a tractor. The poor farmer can produce, maybe, 1,000 bushels of corn.
The rich farmer can produce 100,000. The rich farmer is 100 times richer. Is he smarter? Is he nicer? Is he more honest or a better story teller? Who knows... and who cares? He has a tractor!
'But don't worry,' says the poor man. 'I don't have any savings, but my central banker is going to print up some money.'
Will that work? Only insofar as the central bank can get away with its flim flam. The tractor seller may believe the money is real... for a while. He may sell the tractor to the poor farmer... take the new money that the central bank printed up... and send an order to the factory for another one, thus setting off a boom in the tractor business.
But who believes QE money is real today? It's too late. The world is hip to the central bank scam.
That doesn't mean QE will have no consequences. Speculators might make money. The rich might see their assets (and their wealth) increase. But most people will get poorer.
First, super-low interest rates will encourage people to keep their money in mattresses, rather than lend it out. Why lend it when you will earn a negative interest rate?
Second, oil and commodities - food and energy prices - rise as soon as there is any hint of more QE. This leaves the poor and middle classes with less discretionary income. Not only are they poorer, they are also less able to push the consumer economy forward.
Third, negative real interest rates take money from savers... and reduce the amount of savings (capital) in an economy.
Fourth, eventually, the build-up of phoney money leads to higher rates of consumer price inflation... further reducing the real standard of living of the typical household... and reducing the real value of the nation's capital savings.
What is the real consequence of reducing the real savings in an economy? We've already seen it. Mother Jones tells us:
25.3 million Americans: The true size of the unemployment crisis. This figure includes people who are out of work, forced to work part-time, or unable to find a full-time job, as well as those who want to work but have given up searching for a job in the past month, most likely out of frustration.
6.9 million jobs: How many fewer jobs there are today than in December 2007.
0.22 jobs: The number of job openings per one unemployed worker.
Twenty-eight out of 32 months: The number of months since January 2009 that job growth failed to keep up with basic population growth (roughly 150,000 jobs a month). All those headlines saying job growth has stalled are wrong; it's not even doing that.
43%: The percentage of jobless workers who haven't pulled a steady paycheck in more than six months. That's 6 million workers.
16.7%: The jobless rate for African-Americans. Black unemployment is now at its highest in 27 years.
11.3%: The Hispanic unemployment rate. This figure has held steady since February 2009.
17.7%: The unemployment rate for 16- to 24-year-olds of all races, ethnicities, and educational backgrounds. Often overlooked, youth unemployment has a long-term toll; young people who enter a weak job market are almost guaranteed to earn less over their lifetimes than those who find jobs during boom times.
280,000: The number of jobs the American economy needs to add each month to fill its 11.3 million-job deficit by the middle of 2016.
Regards,
Bill Bonner
for The Daily Reckoning Australia
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The US Dollar: A Titanic Disaster
By Eric Fry
One hundred years ago, the Titanic slipped below the frigid waters of the North Atlantic Ocean. That's roughly the same moment when the US dollar also hit an iceberg. In 1913, one year after the Titanic disaster, the US government passed the Federal Reserve Act...and the dollar's value has been sinking ever since.
Eight years ago, in an essay for Whiskey & Gunpowder, Byron King, editor of Outstanding Investments, examined these twin disasters. The insights he shared were poignant then; they are especially timely now...as the Federal Reserve's Federal Open Market Committee just announced a brand new round of quantitative easing - i.e. money printing.
The popular press cheers the QE campaigns as "good for the economy." Maybe yes, maybe no. But one thing is certain; the QE campaigns, like all other forms of currency debasement, are not so great for the US dollar's purchasing power.
The QE campaigns, like all other forms of currency debasement, create illusions of wealth-generation, while quietly dragging an entire nation to the bottom of the sea.
The nearby chart illustrates this phenomenon very clearly...and painfully. Since the end of 1989, America's inflation-adjusted GDP has grown by 70%. Yet, over this identical timeframe, the inflation- adjusted median household income has declined!
In other words, according to the government's heavily massaged GDP calculations, there's lots of "growthy" type stuff going on the economy. America is doing just great. But in the real world of real people, incomes are stagnant.
(Intriguingly, from 1967 - when the median household income data series begins - until mid-1971, when Nixon removed the dollar's last link to gold, the median income and GDP advanced in lock step - both growing 7% over that 3-year timeframe.)
Net-net, the Federal Reserve may be great theater, but it is not great economics. Sound money creates a starting point for true wealth creation. Debasement never does.
Regards,
Eric Fry
for The Daily Reckoning Australia
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