Thursday, May 26, 2011

Today, it's 1984, and what is shouldn't be, and what shouldn't be is.

Stocks Turn Higher as Crude Tops $100 a barrel- AP
Francesca Levy and Matthew Craft, AP Business Writers, On Wednesday May 25, 2011, 4:58 pm EDT
Stocks are closing higher for the first day this week, as rising oil prices offset worries about the global economic recovery.

Rising Oil prices are good for the global economic recovery?  Did I read that "headline" correctly?  Have things gotten so out of whack that rising Oil prices are a good thing?  Were we not told just recently, by no less an authority than the The President Of The United States, that rising Oil prices were a "threat" to the economic recovery?  And now they are a "good thing", eclipsing any worries about the global economic recovery?

And I always thought rising Oil prices were a drag on the economy because they made the cost of doing business more foolish of me.

But what's this?

High energy takes a bite out of economic growth- AP
Martin Crutsinger, AP Economics Writer, On Thursday May 26, 2011, 12:14 pm EDT

WASHINGTON (AP) -- High gasoline prices, government budget cuts and weaker-than-expected consumer spending caused the economy to grow only weakly in the first three months of the year.

The Commerce Department estimated Thursday that the economy grew at an annual rate of 1.8 percent in the January-March quarter. That was the same as its first estimate a month ago.

Consumer spending grew at just half the rate of the previous quarter. And a surge in imports widened the U.S. trade deficit.

That's right, less than 24 hours after telling us that rising Oil prices "offset worries about the global economic recovery", the Associated Press is reporting to us that "high gasoline prices...caused the economy to grow only weakly in the first three months of the year".

George Orwell couldn't have written a better script.

It is noteworthy that the correlation between rising commodity prices and rising equity indexes is no accident.  "Asset Inflation" is at the root of Bumbling Ben and the Fed's conceptual "wealth effect" to jump start the economy.  The Fed believes that a strong stock market encourages individuals to borrow more against their "wealth", spend more, and drive the economy.  Nothing could be further from the truth.

Recall that the recent commodities "sell-off" [government sanctioned take down] was blamed for the coincident fall in equity indexes.  The public's growing "fear" of inflation forced the Fed to "engineer" a commodity market sell-off at the expense of the equity markets.   The Fed can not have their cake and eat it too.  No matter how successful the Fed is at providing an "illusion of wealth", if the prices of goods and services are rising faster than consumers "real" wealth, consumers are certain to cut back their spending, and harpoon the economy.  This is why we so often hear the Fed Heads speak of "containing Inflation expectations", and this is why the Fed had to "take down" the commodity markets. 

Strangely, rising commodity prices are interpreted by the financial press as "signs of economic growth", and this in turn drives stock prices higher.  Falling commodity prices are interpreted by the financial press as "signs of economic weakness", and this in turn drives stock prices lower.  The perfect example of this is the rise and fall in energy prices.  Isn't is a bit disturbing that rising Oil prices are now considered a boon for stocks?  And falling Oil prices doom for stocks?  It wasn't that long ago when a sudden jump in Oil prices could stop a Bull Market in stocks dead in it's tracks.  But that only occurred in "free markets".  Today, it's 1984, and what is shouldn't be, and what shouldn't be is.

Case in point: Today's Precious Metals trade.  The Dollar was weak all day today against not only the Euro, but the Yen as well.  Silver and Gold were under pressure from the moment the London markets opened after rising strongly overnight in Asia.  Does this make any sense?  Just last week every headline claimed that the Precious Metals were weak because of a strong Dollar.  And today the Precious Metals are weak along side a weak Dollar? 

Well of course...  We just had June options in Gold expire ahead of the second largest Gold delivery month annually.  AND at the close of business Wednesday, 94,016 Gold contracts, representing 9.4 MILLION ounces of Gold, remained open for June delivery with First Notice Day just 48 trading hours away.  Not to mention that, with just 48 trading hours remaining to make Good on all the demands for Silver delivery in May, there are 146 contracts STILL waiting for 730,000 ounces of Silver to be delivered.  How can the prices of these Precious Metals be "allowed" to rise with our CRIMEX bankers once again caught with their pants down around their ankles?

Amazing isn't it?  And the "free markets" have been blamed for the global financial crisis?  If the markets really were "free", there never would have been a global financial crisis. 

Debunking the Myth of a Free Market Run Wild
By Joel Bowman
05/25/11 Buenos Aires, Argentina – A question for you, Fellow Reckoner: Why do people so frequently demand more of the same poison to cure what ails them? Is it because they are stupid? Are they too busy with their workaday lives to notice the difference? Or are they being persistently lied to and indoctrinated?

Most likely, it’s a mixture of all three. Today, we address the third point.

One of the more pervasive myths, perpetuated – either ignorantly or maliciously – by the mainstream media, is that the market tumult witnessed over the past few years is somehow a result of the free market having “run wild.”

The argument, as you are surely familiar with it, goes something like this…

Until recent and heroic intervention by the Feds, the world had been aimlessly bobbing about on a sea of unregulated, laissez-faire capitalism. Adrift in the cold, harsh, dog-eat-dog seascape, where rules were callously discarded and government vigilance eschewed, we clueless individuals simply made our way as best we could. Of course, it wasn’t long before we lost sight of the horizon. Then, the clouds of capitalist deceit obscured our view of the stars, by which we had previously been navigating our way across the perilous oceans. Sensing our vulnerability, the greedy capitalists stealthily moved in under the cover of “free market anarchism” to rock the markets and capsize our tiny, unguarded vessel.

What followed – around 2007-08 – was the painful aftermath of a great era of free market irresponsibility. Lessons were to be learned. Regulators, it was said, had failed to protect us (mostly from ourselves). The markets had been allowed to “run wild,” fleecing all and sundry of their earthly wares. The whole system was in danger of collapsing under the weight of its own free reigns and pundits from every corner of the boat were soon crying out for some form of central guidance, some direction, some calm. This, we were told, and not without a wag of the finger, is what happens to modern, mixed-market economies when they become adulterated by the blinding whims of free market capitalism.

And it would be a nice story, with a presumably easy remedy…if only it were true. Alas…

“All these claims [about us living in a free market] are wrong,” asserts Jeffrey A. Tucker, editorial vice president of the Ludwig von Mises Institute and author of the refreshingly insightful Bourbon for Breakfast: Living outside the Statist Quo. “We live in the 100th year of a heavily regulated economy; and even 50 years before that, the government was strongly involved in regulating trade.”

Continues Mr. Tucker: “The planning apparatus established for World War I set wages and prices, monopolized monetary policy in the Federal Reserve, presumed first ownership over all earnings through the income tax, presumed to know how vertically and horizontally integrated businesses ought to be, and prohibited the creation of intergenerational dynasties through the death tax.”

Contrary to what interventionalists would have you believe, the government has not been repealing its influence in and control over our lives at all. Quite the opposite. We can see this by tracking the mammoth growth of the beast during the past century.

In the decade leading up to WWI, government spending as a percentage of GDP averaged a relatively minuscule 2.5%, give or take. By the time FDR had finished prolonging the Great Depression through the 1930s, that percentage had jumped to double digits. And today, government spending accounts for one-quarter of all economic activity in the world’s largest economy, or one in every four dollars spent (25.32%). Never during time of peace has government spending occupied so much of the GDP pie chart.

(We’ll leave aside the spurious nature of the GDP computation itself for another day but, suffice to say, GDP, as measured by the preferred “expense” method, actually rises when government spending increases. Ergo, GDP went through the roof during both the First and Second World Wars as the nation allocated capital to the manufacturing of military machinery. This led “top down” Keynesian economists to believe they had real economic growth on their hands, the origin of the “WWII cured the depression” myth. Of course, anyone familiar with Bastiat’s “Broken Window” knows this to be an entirely fallacious argument and that the destruction of capital is certainly no way to achieve prosperity.)

The very existence of the Federal Reserve itself flies in the face of any notion of free market capitalism. “For the government to authorize a counterfeiter-in-chief is a direct attack on the sound money system of a market economy,” Mr. Tucker observes.

The “alchemic temple,” as Mr. Tucker aptly describes it, used its monopoly on currency creation to pump trillions of dollars worth of credit into the supposedly laissez-faire system during the 1990s and early 2000s. This led, inevitably and with the direct collusion of Government Sponsored Enterprises (GSEs), Fannie Man and Freddie Mac, to the unsustainable expansion of the mortgage loan sector. Effectively, the government intervened to encourage – and for a while even reward – rampant malinvestment through the creation and distribution of money the free market never would have tolerated. And they have the hide to blame a free market that never existed for the subsequent implosion!

“With ‘free markets’ like this,” quips Tucker, “who needs socialism?”

Is it any wonder then that those who support the fictitious narrative above are now wondering why the financial storm the state gave birth to has not yet passed? If government intervention is the cure to crises and not their cause, surely then with Bernanke pulling levers at the Fed, Obama barking orders from the ship’s helm and Krugman spouting his Keynesian gibberish from the NYT’s editorial pulpit, we ought to have already witnessed the remarkable recovery they promised last summer. And yet home prices continue to fall – one percent per month, at last count. Unemployment, too, is in the dumps with job creation unable even to keep pace with population growth. Meanwhile, that oft-referenced statistical go-to for Keynesians – GDP growth – is lower than when Bernanke unleashed his now infamous $600 billion QE2 program.

O Recovery, Recovery! Wherefore art thou Recovery?

They say the free market had “run wild,” the implication being that if we could only elect a group of all-knowing, all-powerful bureaucrats to somehow train this savage beast, we would surely all be better off. But the free market is not like a domesticable animal; neither are the hundreds of millions of individuals, engaging in billions of individual interactions and transactions daily, who comprise it. To say that the free market ought to be tamed is really to say that those individuals who drive it ought to be tamed; that they ought to be taxed, regulated and herded along like beasts incapable of thinking for themselves.

This is, quite obviously we would think, the exact opposite of freedom and the liberty and prosperity for which free men and women strive. As such, it is surely something to freely oppose.

Joel Bowman
for The Daily Reckoning

I'd say Mr. Bowman hit the nail squarely on the head.

The debasement of world currency: It is inflation, but not as we know it
By Peter Warburton
April 9, 2001
What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.

It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first. Last November, I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil and commodity markets? Probably, no more than $200 billion, using derivatives. Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world's large investment banks have over-traded their capital so flagrantly that if the central banks were to lose the fight on the first front, then their stock would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil, and commodity prices.

Central banks, and particularly the US Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the equity index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade.

Mr. Warburton wrote this essay 10 years ago, yet it describes succinctly what the Fed is up to right here, and right now, today.  The only difference between 2001 and 2011 is that what the Fed has been doing to the US Dollar is no longer a secret.  A 550% increase in the price of Gold, and a 1250% increase in the price of Silver since 2001 are proof of that.

GATA urges Paul to probe Fed's gold swaps; he tells CNBC he will
Submitted by cpowell on Wed, 2011-05-25 22:09. Section: Daily Dispatches
6:14p ET Wednesday, May 25, 2011

Dear Friend of GATA and Gold:

Yesterday GATA Chairman Bill Murphy and your secretary/treasurer met in Washington with U.S. Rep. Ron Paul, R-Texas, chairman of the House Subcomittee on Domestic Monetary Policy and Technology, and two of his staff members. We reviewed GATA's work and the information produced by our recent successful freedom-of-information lawsuit against the Federal Reserve and urged him to press the Fed for accountability, particularly in regard to its manipulation of the gold market, its involvement with the U.S. gold reserve, and its secret gold swap arrangements, the latter admitted to GATA by Fed Governor Kevin M. Warsh as we began our litigation in 2009:

Paul told us that he planned to address these issues at hearings of his subcommittee in June on legislation to audit the U.S. gold reserve, and he elaborated this afternoon in an 11-minute interview with CNBC. Paul told CNBC:

"I'd sort of like to see how much gold is actually there and whether we've made any agreements to loan out our gold or sell the gold, because there's a lot of questions about that. As a matter of fact, I'm going to have hearings on having a true audit of the gold, and they're very, very resistant to that. But if the gold is all there and there are no attachments to the gold, what's the big deal? Why shouldn't the people know that it's there?"

Paul added in the CNBC interview that his broader objectives include getting the Fed out of central economic planning, getting the United States out of its fantastically expensive foreign military adventures, and allowing people to keep more of the fruit of their labor.

GATA will be providing information to Paul's office for possible use in interrogation of the Fed.

You can watch CNBC's interview with Paul at its video archive here:

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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