Friday, October 29, 2010

2% GDP Guarantees QE2

US third quarter GDP prints this morning at +2%, a full 3/10 of one percent higher than second quarter GDP! Weeeeeeeeeee! [It should be noted that second quarter GDP was revised lower after it's original estimate.] 2% growth is less than anemic.

The US financial media will make every effort to paint this number as a "sign of recovery". It isn't. It isn't even close. This is a sign that the US economy is on life support, and going nowhere fast. This number is irrelevant to the QE2 question. The Fed believes that further QE2 will aid in their meeting their dual mandate of ensuring full employment and price stability. 2% growth in the economy will not cut it in the eyes of the QE2 supporters at the Fed.

Economists say a growth pace of at least 3.5 percent, driven by solid domestic demand and exports, over several quarters is needed to bring down high unemployment. The Fed is determined to create "growth". They will succeed, but only by delivering the illusion of growth resulting from the rising prices that QE2 will produce.

The path forward is clear: Rising Gold and Silver prices on the back of a collapsing US Dollar.

Gold vs. the Fed -- the record is clear
By Charles W. Kadlec
When it meets next week, the Federal Open Market Committee (FOMC) is widely expected to signal its desire to increase the rate of inflation by providing additional monetary stimulus. This policy is based on a false -- and dangerous -- premise: that manipulating the dollar's buying power will lead to higher employment and economic growth. But the experience of the past 40 years points to the opposite conclusion: that guaranteeing a stable value for the dollar by restoring dollar-gold convertibility would be the surest way for the Federal Reserve to achieve its dual mandate of maximum employment and price stability.

From 1947 through 1967, the year before the U.S. began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable -- the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.

What has happened since 1971, when President Nixon formally broke the link between the dollar and gold?

Higher average unemployment, slower growth, greater instability, and a decline in the economy's resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.

And today, with the Fed at a crossroads, QE2 looms on the horizon. Statistics prove that printing money does little to improve growth or lower unemployment. Yet the Fed appears to be determined to follow this path in the face of almost certain failure. Why?

Wouldn't it make infinitely more sense to simply devalue the Dollar versus Gold and Silver than print money into infinity? Yes it would, but what if the Fed had no Gold to devalue the Dollar against? They'd have to print money as fast as they can, and use the Gold and Silver futures markets to suppress the price of these Precious Metals in an effort to "hide" the money printing.

Could the Fed's decision to follow a path of Quantitative Easing in a effort to grow the economy via inflation be proof that the Fed has sold and, or swapped away the US Treasury's Gold? Are they faced with no other choice but to inflate away the country's debt because they have no more Gold? It is certainly beginning to look that way.

The government claims to have 261.5 million ounces of gold but this doesn't belong to the government; it belongs to the citizens. This is believed to be the largest hoard of Gold in the world. IF the US Federal Reserve has "spent" the better part of the past 40 years "suppressing" the price of Gold to foster an illusion of a "strong Dollar" have they literally stolen the wealth of the nation? Are US Dollars literally absolutely worthless? Is this why the US Gold Reserve has not been independently audited since 1958?

It is becoming increasingly obvious that the Fed has America on a road to nowhere. If in fact the Fed has lost their only compass, Gold, then the road to nowhere is likely now to lead over a cliff.
And the price of Gold is going to the Moon.

Piercing the mystery of the gold market[DEFINITE MUST READ]
By: Chris Powell, Secretary/Treasurer, GATA
The precious metals markets have tremendous potential for investors. But they are also wrapped up in great mystery -- deliberately so

Gold is the worst understood financial market. Most official data about gold is actually disinformation.

Years ago GATA disclosed that the International Monetary Fund, the leading compiler of
official gold reserve data, allowed its member nations to count gold they had leased, gold that had left their vaults, as if it was still in their vaults. The effect of this accounting fraud was to deceive the gold market into thinking that central banks had much more gold left to bomb the market with than they really did.

But that's only the start of the false data.

In September 2009, in the course of seeking access to gold records from the Federal Reserve and then suing the Fed in U.S. District Court for the District of Columbia, GATA obtained a sensational written admission from the Fed, signed by Fed Board of Governors member Kevin M. Warsh, a former member of the President's Working Group on Financial Markets -- the so-called "Plunge Protection Team." Warsh wrote that the Fed has secret gold swap arrangements with foreign banks and that these arrangements must be kept secret.

So has gold from the U.S. reserve been swapped? Does the United States really have 8,200 tonnes of gold in its reserve, as it long has claimed to have?

Fed Governor Warsh didn't quite say that U.S. gold had been swapped, only that the Fed has gold swap arrangements. But the U.S. gold reserve hasn't been audited in more than half a century, and the last audit wasn't really complete. So in the next session of Congress U.S. Rep. Ron Paul hopes to introduce legislation requiring an audit of the gold reserve, including specifically any encumbrances like swaps and leases.

Then there are the major gold and silver exchange-traded funds, which were established in the last few years supposedly to help ordinary investors invest conveniently in gold and silver. How much metal do the ETFs have?

While the major gold and silver ETFs frequently report their metal holdings, studies by GoldMoney founder James Turk and GATA board member Catherine Austin Fitts and her lawyer, Carolyn Betts, suggest that this data is unreliable too. For the major ETFs won't disclose exactly where their metal is, and indeed their prospectuses say it's OK for the ETFs not even to know where their metal is kept among custodians and sub-custodians. And the custodians for the major gold and silver ETFs are, perhaps not so coincidentally, also the two major international banks that report having the biggest short positions in gold and silver, short positions that give these banks and metal custodians a powerful interest in suppressing the price of the assets they supposedly are holding for investors who want those assets to rise in value.

How much gold do the major gold and silver ETFs really have in their vaults? How much of it is encumbered in some way? ETF investors themselves will never be permitted to know.

The biggest so-called "physical" gold market in the world is the one run by the London Bullion Market Association. The LBMA publishes statistics on how much gold and silver are traded by its members. But these statistics show spectacular volumes, more metal than could possibly exist. Of course much of this metal could be sold and resold back and forth many times every day. But an expert in that market, Jeffrey Christian of the CPM Group, acknowledged at the March 25 hearing of the U.S. Commodity Futures Trading Commission, as he had acknowledged in an explanatory report published in 2000, that the London bullion market is actually a fractional-reserve gold banking system built on the presumption that most gold buyers will never take delivery of their metal but rather leave it on deposit with the LBMA members from whom they bought it.

GATA board member Adrian Douglas has studied the LBMA statistics and Christian's work and estimates that the great majority of gold sold by LBMA members doesn't exist -- that most gold sales by LBMA members are highly leveraged. How leveraged? How much gold is due from LBMA members that doesn't really exist? The LBMA doesn't report that. Like the Fed's gold swap arrangements, the world mustn't be permitted to know. The consequences might be catastrophic for the banking interests that run the world.

For then the world might understand why even at its recent price above $1,300 per ounce gold has not come close to keeping up with the inflation, the currency debasement, of the last few decades, why gold has not fulfilled its function of hedging against inflation. That is, gold's enemies figured out how to increase its supply by vast amounts without going through the trouble of digging it out of the ground. They invented "paper gold" -- gold that doesn't exist but that many buyers accepted, never suspecting that major financial institutions might deceive or defraud them

He continues...

Since the United States now issues the reserve currency for the world, the dollar, the United States now more or less occupies most countries economically, even those countries that have their own currencies, since even those countries hold most of their foreign exchange reserves in dollars.

Free-trading and widely accessible gold always has been and always will be a threat to the rigging of the currency markets, always will be the escape from overbearing government generally and from any overbearing government in particular. That is why so many U.S. government records compiled by GATA over the years candidly discuss or advocate or describe controlling and suppressing the gold market. A declassified cable from the U.S. Embassy in Paris to the State Department in Washington, written in March 1968, even talks about the necessity for U.S. monetary officials to remain what the cable calls "the masters of gold." This is also why U.S. government agencies like the Federal Reserve are trying desperately to prevent other such documents from being disclosed.

That is, gold is the secret knowledge of the financial universe and its true value relative to currencies is vastly greater than its nominal price today, since much of the gold that investors think they own doesn't exist.

Gold Will Outlive Dollar Once Slaughter Comes[INSIGHTFUL READING]
John Hathaway
The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.

The only questions are how long the denouement of the dollar reserve system will last, and how much more damage will be inflicted by new rounds of quantitative easing or more radical monetary measures to prop up the system.

Whether prolonged or sudden, the transition to a stable monetary system will become possible only when the shortcomings of the status quo become unbearable. Such a transition is, by definition, nonlinear. So central-bank soothsaying based on the extrapolation of historical data and the repetition of conventional wisdom offers no guidance on what lies ahead.

It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.

Telltale signs of future trouble aren’t hard to spot. Only a few months ago, Federal Reserve Chairman Ben Bernanke and a chorus of other high-ranking Fed officials were talking about exit strategies from the U.S. central bank’s bloated balance sheet and the financial system’s unprecedented excess liquidity. Now, those same officials are talking about pumping more money into the system to stimulate growth.

And they’re not alone: Six months ago, the chief economist of the International Monetary Fund, Olivier Blanchard, suggested that raising inflation targets to 4 percent from 2 percent wouldn’t be too risky.

This sort of talk must grate on the nerves of our trading partners, China, India, Russia and others, who have accumulated pyramids of non-yielding Treasury debt. No haven there. Return- free risk may be a better way to put it. And bickering among central bankers over currency manipulation and rising trade tensions doesn’t exactly reinforce one’s confidence in a scenario of sustained economic growth and a return to prosperity.

The prospects for an orderly unwinding of the extreme posture of global monetary policy are zero. Bernanke, Jean- Claude Trichet and Mervyn King, his counterparts in Europe and the U.K. respectively, are huddling en masse upon the most precarious perch in the history of monetary affairs. These alleged guardians of monetary stability, in their attempts to shore up the system, have simply created the incinerator for paper money. We are past the point of no return. Quantitative easing may well become a way of life.

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