Another laughable start to the week in the Precious Metals markets.
Gold and Silver gapped up, and raced higher at the open in Asia last night. Gains were once again quickly halted as Gold tried to move above $1750 and slapped back to a tight trading range for remainder of the overnight session as the Dollar leaked lower...until the AM Fix in London. As soon as "the Fix was in", the Gold price was bombed for $12, and the Dollar miraculously caught a bid.
No, the suggestion that these markets are rigged is absurd!
Iran Military Shoots Down US Drone, Threatens Response
From ZeroHedge
A senior Iranian military official says Iran's Army has shot down a remote-controlled reconnaissance drone operated by the US military in the eastern part of the country.
The informed source said on Sunday that Iran Army's electronic warfare unit successfully targeted the American-built RQ-170 Sentinel stealth aircraft after it crossed into Iranian airspace over the border with neighboring Afghanistan.
He added that the US reconnaissance drone has been seized with minimum damage.
The RQ-170 is a stealth unmanned aircraft designed and developed by Lockheed Martin Company.
The US military and the CIA use the drone to launch missile strikes in Afghanistan and in Pakistan's northwestern tribal region.
The unnamed Iranian military official further added that “due to the clear border violation, the operational and electronic measures taken by the Islamic Republic of Iran's Armed Forces against invading aircraft will not remain limited to the Iran's borders.
In the good 'ol days, what is the reaction of the Gold market on news like this? 'Nuff said
Gold most likely gapped up at the Asian open on more rumours of the US Federal Reserve bailing out Europe:
The Latest Rumor: Fed To Fund IMF, Bypassing Congressional Refusal Of European Bailout
From ZeroHedge
While we have long been mocking any rumors indicative formal attempts to get the IMF's funding to higher level, due to the need for a congressional approval over and beyond what is currently permitted which means any such plan is DOA, one loophole always has been the private bank known as the Federal Reserve, which may, as permitted by its charter since its charter allows it to do pretty much anything even buy Greek and EFSF, not to mention Italian, bonds, lend to the IMF at will. And just as last week demonstrated, when push comes to shove the Fed will always bail out Europe, so tonight German paper Die Welt (which has about the same success rate as Thomas Stolper at predicting the future) had put two and two together and come up with the latest rumor, namely that Ben Bernanke is about to directly bail out Europe using the IMF as an intermediary. Specifically, via Reuters, "The Federal Reserve, along with the 17 euro zone national central banks, may help provide the International Monetary Fund with funds that could be used to aid debt-ridden states, a German newspaper said. Die Welt cited sources close to the negotiations as saying the euro zone central banks could pay at least 100 billion euros ($134.2 billion) into a special fund that could be used for programs for nations struggling to control their debts. "Also other central banks, for example the U.S. Federal Reserve, are apparently prepared to finance a part of the costs," the paper said in an advance copy of an article to appear on Monday." That there is not an iota of truth in this article is a given, yet the market will latch on to this latest rumor like a rabid pitbull... until it realizes that by having to resort to such grotesquely made up stories it means that the ECB, which is the only real short-term rescue mechanism for Europe, is nowhere near close agreeing to do what the bulk of Europe's bankers (but not Goldman) demand it do - print.
On Friday, conservatives in Congress moved to block the IMF from bailing out Italy and Spain.
Major IMF decisions require an 85 percent supermajority. The United States has always been the only country able to block a supermajority on its own. If agreed to, the largest monetary contributor to an IMF bailout of Italy and Spain would be the United States taxpayer.
The Hill Just Killed The Market - Stocks, Euro Stumble As Conservatives Push To End IMF Bailout
From ZeroHedge
...conservatives say they will try to block the IMF from bailing out Italy and Spain. Pointing to the huge bill this could leave at US taxpayer's feet, Republicans are concerned at the secrecy with which Geithner has acted. Sen. Tom Coburn appears to be at the helm of this legislation, noting:
"We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending."Of course, this is beyond obvious, because as we have been saying all along with every reincarnation of the idiotic "IMF to bailout [XXX]" rumor, there always is just one snag. A rather substantial one at that: US congressional approval for expanded IMF bailout capabilities.Specifically, when discussing the latest iteration of the IMF rescue we said: "La Stampa forgot to mention one thing: any changes to the IMF, which currently is massively underfunded and is why the organization was forced to create two new liquidity facilities: a Precautionary and Liquidity Credit line, since it is unable to fund its New Arrangements to Borrow, have to go through US Congress when it comes to expanding funding capacity. Yup, the most dysfunctional, corrupt and criminal thing in the world - the US House of Representatives, where unless everyone is short Italian CDS, this will never pass. In other words: this rumor is dead in the water." And so it is.
From The Hill:
eurozone
Conservatives say they will try to block the International Monetary Fund from bailing out Italy and Spain, which they say could leave U.S. taxpayers with a huge bill.
Republicans on both sides of the Capitol complain that the Obama administration has refused to share details of what Treasury Secretary Timothy Geithner is discussing with European leaders amid reports the IMF could intervene.
Sen. Tom Coburn (R-Okla.) says he is planning legislation directing the U.S. government to veto an expanded role for the fund.
Senate Republican Steering Committee Chairman Jim DeMint (R-S.C.) and Rep. Cathy McMorris Rodgers (Wash.), a member of the House Republican leadership, also have legislation to curb the proposed intervention.
“I’m adamantly against the IMF being involved in this,” Coburn said.
“We’re throwing good money after bad down a hole that I think is not a solvable problem,” he said.
“Europe is going to default eventually, so why would you socialize their profligate spending,” he added.
Coburn estimates the U.S. could be liable for as much as $176 billion if the IMF shores up Italy and Spain and the European Union collapses.
President Obama this week said the U.S. “stands ready to do our part” to help resolve the crisis, and Geithner in October said using U.S. tax dollars through the IMF to shore up Europe’s efforts was appropriate.DeMint offered an amendment to the defense authorization bill instructing the U.S. executive director of the IMF to use the voice and vote of the United States to oppose funding of the European Financial Stability Facility, the bailout fund that would be used to stabilize countries at risk of default.
“We need some transparency about what’s really going on,” said McMorris Rodgers. “It’s hard to get information. We’re talking about U.S. taxpayer dollars being involved in the European bailout. The administration needs to be honest with the Congress. I believe Congress needs to be involved in making this decision.”
The question begs to be asked:
Does the US Federal Reserve, an institution created by the US Congress in 1913 in conflict with the US Constitution, now see itself as above the US Congress and "the law of the land"?
The US Federal Reserve has, since day one of this GLOBAL financial crisis, thrown money around to any bank in the WORLD that has asked for it. Money, that in theory, is backed by the sweat and equity of the American taxpayer, is literally given away without the consent of the US Congress. The US Congress, by appropriation, is the ONLY entity in the structure of the US Government that is allowed to spend "the people's money".
The US Federal Reserve is a "private for profit bank". Is the "money" they "create" really the people's money and responsibility? Or is the money they create the US Federal Reserve's sole responsibility? They are, after all, a "private for profit bank". If they believe that they are "above the law" and can fund bailout operations of the IMF, why should American taxpayers be on the hook for the Federal Reserves monetary decisions?
Isn't it about time the US Congress get their dog under control? The US Congress created the Global Financial Crisis we endure today, the day they passed the Federal Reserve Act in 1912. Allowing the Federal Reserve to fund an IMF bailout of Italy and Spain, by over stepping the US Congress, would be the height of US Government fiscal malfeasance.
Is anybody looking out for the American taxpayer?
The bid in the US Dollar at the AM London Gold Fix has all but reversed itself since I began to put this blog post together at 7AM est. Yet the "price" of Gold has fallen further to a new morning low of $1728...now $26 off the opening high in Asia last night as the Dollar tests overnight lows.
No, the suggestion that these markets are rigged is absurd!
Sadly, this revelation that the US Federal Reserve might circumvent the US Congress and help the IMF bailout Italy and Spain is not the story of "money creation" that should be told. The Fed has been creating money and handing it out to banks in the US and around the World since day one of the Global Financial Crisis. If anybody believes this irresponsible act of "counterfeiting the currency" ended with QE2 in June this past summer, they are sadly mistaken. As per Jim Willie's latest dissertation on the subject, the only thing that ended in June 2011 was the Fed "admitting" they were creating money, and giving it away to the World's banks:
Perpetual QE Without the Billboard
By: Jim Willie CB, GoldenJackass.com
The US Federal Reserve has fooled a lot of people into believing that the grand monetary pump and debt monetization project has been put on hold. The only thing that changed was their talking publicly about it. The money press has been working to the limit, never stopped. The discussion has been kept quiet, but the machinery still makes a lot of shrill noise. The proof is not movement of lips by central bankers, but the data from the monetary aggregate. The data is compelling in calling them out. The conclusion to reach is that Quantitative Easing has become the norm, the foundation policy, the emergency action to prevent implosion of the US banking system. Hyper monetary inflation is the New Normal. The sinkholes are so broad and dispersed that even run of the mill analysts are beginning to see the light. They are concluding more and more than the credit-based system is collapsing. Never does the Jackass rely upon central bankers to inform of events, policies, and actions. They have been dedicated lately to deceptions much like turning off smoke alarms, killing the electricity on fire station monitors, laying off the working firemen, and hoping the public does not notice the raging fires which have been accompanied by grand larceny looting to hide the flames.
Always trust Ludwig, our reliable patron saint of money whose epistles combat the evil forces of fiat money. VonMises said that inflation always has been a matter of money growth. It always will be. Notice in the yearly monetary aggregate chart, where ticks are full years, that the 2010 and 2011 years show a steady linear growth. The money supply never stopped growing in summer 2011. The June deadline came and went, and nothing changed, only the words from the increasingly desperate central bankers, led by the hack economist professor Ben Bernanke. If the public were ever to glimpse at what passes for Economics Dept research at universities, they would vomit at its abstruce uselessness. Phony money not only produces phony wealth, but phony faculty research and phony integrity of financial systems. Over one third of all university professors with chaired posts are funded by the USFed, if truth be known. They perpetuate their mental muck. Heck, the Jackass had the pleasure to observe some Statistics Dept research back in the day. Half was as we enlightened students called FLUFF, like new statistical measures that had value only in a strange world where the researcher defined the criterion for good. The fluff merchants stunk as professors too. Two come to mind from my Carnegie Mellon University years. But at CMU the majority of professors were utterly outstanding, brilliant, great teachers, grounded in reality, and having produced reams of highly useful work. Two fine professors remain my friends, being on first name basis since adults. They go along with the notion of the Jackass being adult, wondering the definition of a Jackass in bemused reaction.
The money supply is still growing. The data contradicts the premise that the QE program was terminated. Easily explained. The initiative turned global to produce Global QE. The USFed has been accommodating the Europeans and Wall Street banks, so that the broken insolvent big Euro banks can be propped with more phony money. The Euro Central Bank is printing money heavily or else borrowing in heavy volume from the USFed Dollar Swap Facility. Without bond market buyers, the EuroCB has reluctantly filled the void and has been buying the Italian Govt Bonds. Recall that big Euro banks are huge sellers of sovereign bonds. The USFed never stopped printing money to buy USTreasury Bonds, which ramps up each month as USGovt debt piles up each month. Recall that foreign creditors are net sellers of USTBonds. The USTBond auctions have not failed, and for a reason. The USFed is buyer of last resort. Where the bids came from has been kept quite secretive. It is the USFed, which never stopped QE. In fact, Global QE is the mainline policy nowadays, and it has turned into hyper-inflation under the sleepy eyes of both investors and the financial press. Why the investment community relies upon the central bank liars and the financial press dimwits is proof of national stupidity in my view. Intelligent people are wondering if QE3 will emerge when QE never ended!!
THE ONLY THING THAT CHANGED SINCE JUNE 2011 WAS THE USFED DOES NOT TALK ABOUT THEIR VAST MONEY PRINTING AND DEBT MONETIZATION. THE DULL MENTAL CAPACITY OF THE MASSES IS ASTONISHING.
Pretty clever, huh?? The end result is the investment community is dominated by truly moronic questions about when the USFed will print money again. They never stopped. Jim Rogers in a recent interview had to chastise the financial press nitwit in control of the conversation, to urge a quick view of the money supply. He showed patience though. The interviewer seemed not to understand the concept of money supply even after three instances of veiled insults. It is like asking a liar if the weather outside is rainy. TAKE A LOOK. THEY NEVER STOPPED PRINTING MONEY. The Operation Twist was a USTBond redemption plan built around QE3 designed to buy all what foreign central banks sold. They sold it as a pause in the pattern. Dull witless people bought the notion. The Jackass called it for what it was from the start, a smokescreen to cover for foreign bond sales. Foreign creditors were big net sellers of USTBonds. It is right there in the data published by the same liars at the USFed and USDept Treasury. TAKE A LOOK. THEY NEVER STOPPED PRINTING. My respect for the American financial sector has never been lower, and that includes the investment community. For three years, the Jackass has been advising to remove funds from the system, which would be at risk of pilferage. The MFGlobal event has sealed both the reputation of the US financial sector and the outcome of the implosion.
The big Euro banks are selling boatloads of bonds. But on the other side of the table, the Euro Central Bank is buying only truckloads. The net is still an exodus, thus rising bond yields. A few emails from clients came in the last week wondering why sovereign bond yields in Spain, Italy, and even France are still rising if the EuroCB has entered the arena with both hands buying the bonds, however reluctantly. Remember the initial pronouncements by the new Head Draghi (aka Euro Dragon), that he did not want to buy government bonds. The European Govt Bond market is in freefall. The only way to stop it is vast recapitalization of the entire US and London and European banks at a cost of $4 to $5 trillion. When the Powerz and Technocrat generals flip the switch and make the decisions, Gold will then go to $3000 then rest, then go to $5000 later on. Similar for silver, going to $80 then rest, then go to $150. In the interim, the objective is to beat down Gold and Silver by whatever deception.
Do you really believe that ANYBODY is selling their physical Gold and Silver into the picture that I have painted above? The fact is that the same crooks that have been involved in the "suppression" of the Gold and Silver "price" are the same crooks that are trying to steal your physical Gold and Silver from you now via either deception, or outright theft as in the case of the MF Global bankruptcy.
Consider the following essay by Gary North before being "scared out of your physical Gold and Silver holdings" because of the deception that they might "fall in value".
French Fried Banks
By Gary North
Ben Bernanke is in panic mode. The November 30 coordinated announcements of six central banks regarding their intervention into the currency markets was exactly that – coordinated. If you think it was coordinated by anyone other than Bernanke, you are out of touch with reality. (Test: name the heads of at least two of the other five central banks.)
As I shall argue, this was an action preliminary to (1) Angela Merkel's December 2 speech to the German parliament, which is preliminary to (2) the next Eurozone summit, scheduled for the weekend of December 9, which is preliminary to (3) a coordinated violation of the two treaties that created the European Union, which is hoped will (4) pressure the European Central Bank to buy newly created Eurobonds issued illegally by the EU, in order to (5) raise enough euros fast enough to buy Italian government bonds before (6) the Italian government misses interest payments, which may (7) bankrupt the largest French banks, which could (8) trigger a worldwide financial panic.
In short, Bernanke and his peers are in a pre-panic panic.
DECIPHERING THE ANNOUNCEMENT
This was an announcement of a very specific kind. Ninety minutes before the American stock markets opened, the six central banks said that they would increase the availability of money.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
In short, The FED assured us, they were acting on behalf of the best interests of common people around the world. They were doing this in the name of the People. "What's good for the People is good for central bankers."
The problem is, they were silent on why, exactly, the strains of the supply of credit was threatening the People. On November 29, the interest rate for 90-day U.S. Treasury bills was 0.01%, or one one-hundredth of a percent, which is the lowest it has been in history, basically. To be honest, I do not regard this as evidence of a strain in the financial markets.
This raises these questions: "Which financial markets? Paying what rates? Why?"
In the good old days, meaning earlier than November 30, "strain in the credit markets" meant a frantic rush by investors and speculators to purchase a financial asset. The asset's price rises rapidly, which is what happens when there is greater demand than supply for any asset.
The U.S. dollar has been bumping around in relation to the euro all year. There has been no indication of a frantic rush to sell euros. On January 1, 2011, a euro bought $1.34. On November 29, a euro had fallen in price to $1.33. That was not what I would call a strain on the euro market. We are not talking even nickels and dimes here. We are talking pennies . . . in single digits.
So, the question arises: Why was it necessary for a coordinated intervention? The FED explained:
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
This is central bank gibberish. It refers to the practice of lending U.S. dollars for a period of time. These are central bank loans to other central banks. They are called central bank liquidity swaps. For a description, see Wikipedia. Say that one central bank needs dollars. It can swap its assets for dollar-denominated assets for a fixed period of time. In this case, the deadline is February 1, 2013.
The five other central banks promised to supply liquidity, meaning their own currencies.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013. It can therefore supply dollars to those who demand them.
So, the problem is the dollar. Better put, it may soon be the dollar. But, just in case, the central banks are willing to inflate.
At this point, I can imagine an exchange between a confused caller and some call-in satellite radio investment show.
But won't the free market do this? "Yes, but at a higher price."
So, the coordinated action was a move to keep down the price of the dollar. "You've got it, Sherlock."
So, the other five banks are working with the Federal Reserve to keep the dollar low, which will reduce their nations' exports to America. "That's one effect."
But that means the central banks are acting to hurt their own export markets. "That is one effect."
But central bankers never do this. "This time, they are."
Why? "Because they are scared out of their wits."
To get some indication of what the coordinated action is intended to accomplish, pay attention to this.
In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.
So, the FED thinks there is a chance that there will be an increase in demand for dollars in other currencies: "to provide liquidity in any of their currencies if necessary." So, more than one of them are afraid of a panic-driven sell-off of their currencies.
Are they all equally at risk? No. There has to be one targeted bank: the central bank of the currency that is being dumped by investors in order to buy any of the others. Which might that be?
It is obvious: the European Central Bank.
But the euro has been stable in relation to the dollar all year. It is obvious that Bernanke and five other central bankers think that this rosy scenario is about to end.
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.
The FED said that U.S. financial institutions are not having problems getting access to dollars. Furthermore, the FED "has a range of tools available to provide an effective liquidity backstop for such institutions." Then why the swaps? Why would five other central banks join in? Why should they need to worry about "such institutions"?
Simple: the central bankers are not worried about U.S. financial institutions. They are worried about their own financial institutions. They have good cause to be worried.
FRANCE'S BIG BANKS
With a useful interactive graph in the New York Times, we can see which nations owe how much money to which other nations' commercial banks.
The chart reveals something ominous. French banks are sitting on top of a mountain of Italian bonds. What if Italy decides to create what I have elsewhere called an "Iceland event"? It could be a disaster!
Europe will then have French fried banks. Then the question arises: What will Sarkozy do? How will the French government get the money it needs to bail out its now-insolvent big banks? Who will lend it this money?
The money needed will be euros. But, under the present laws governing the European Union, the ECB is not allowed to buy bonds of nations that are considered poor credit risks. France will be a bad credit risk if Italy skips interest payments, let alone defaults.
Then what is the FED's problem? This: if Merkel does not get her government to accept instant inflation by the ECB, but without a revision of the Maastricht and Lisbon treaties, then she will go into the December 9 summit as a barrier to a quick decision by the ECB. The summit will be stuck.
The threat of Italy's default is imminent. If the ECB does not act, and act fast, then the Eurozone will be seen as approaching a break-up. This means the euro may not survive. That fear may trigger a run on the euro: a mad dash to sell it and buy U.S. dollars. If dollars are not available at a price people are willing to pay, then there will be a rush to buy other currencies.
This is the much-feared, long-denied domino effect. The orders to sell euros are placed by people with big money: hedge funds. They want instant conversion. They will also start looking for safe-haven banks located outside the Eurozone. They will fear a Lehman event. This is what an Iceland event can become if Italy defaults. It owes too much money.
At that point, the ECB will be pressured to intervene to prop up the euro. Question: Intervene with what? With U.S. dollars. Where will it get these dollars? From the FED.
This is what the coordinated announcement was designed to forestall. This is the "bazooka."
TWO BAZOOKAS
What is the bazooka? It was the word used by then-Secretary of the Treasury Hank Paulson to describe his promise that the Treasury would provide funding for the two visibly tottering, over-leveraged mortgage companies, Fannie Mae and Freddy Mac. He told Congress: "If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka and people know you've got it, you may not have to take it out." This has been identified as one of the 21 dumbest business moments in 2008. Two months later, both outfits went bust, and Paulson, on his own authority, nationalized them. The taxpayers picked up the tab. Michael Pento commented on this on November 14.
But years after Secretary Paulson fired his bazooka, those formerly thought of as "safe" investments are now trading at just pennies a share. And just last week the government – or more appropriately the taxpayer – was forced to throw an additional $7.8 billion at the GSEs for the last quarter's losses. That was on top of the $169 billion they have already spent to rescue the black holes known as Fannie and Freddie since 2008.
Pento then commented on the newly installed head of the ECB: "Similarly, Draghi now believes that the problem with European debt is fear, not one of insolvency."
And just like Hank, Mario will soon learn that offering to purchase an unlimited amount of Italian debt does nothing in the way of bringing down the debt to GDP ratio. In fact, it has the exact opposite effect. It encourages more profligate spending, just as it also lowers the growth of the economy by creating inflation. What's even worse is that yields on Italian debt will reach much higher levels in the longer term. That's because the purchasers of sovereign debt have now become aware that their principal will be repaid with a rapidly depreciating currency. Therefore, the yield they will require in the future must reflect the decision to use inflation as a means of paying off debt.
This is the first bazooka. The joint announcement of the six central banks is the second. This one tells the world that any rush out of euros into dollars will take place in an orderly way.
A PANIC-DRIVEN SELL-OFF
I assume that Prof. Bernanke understands the #1 principle of chapter 1 of any college-level economics 1 textbook: "When the price of any scarce resource falls, more is demanded (other things remaining equal)." This is described graphically in the famous intersecting S/Q supply and demand curves.
The economist assumes that the reason why demand increases faster than supply does is because speculators believe that the price of an asset will rise. So, they buy it now. In the case of currencies, they sell one and buy the other.
Why would speculators buy dollars and sell euros? Because they fear a major event that will threaten the euro as a currency. So far, the price of dollars in euros has not revealed any such imminent fear.
It is clear that the central bankers think this lull in the storm is unlikely to last much longer. So, they hauled out the bazooka.
What are they aiming at? They did not say. We can figure it out.
TIMING IS EVERYTHING
If French banks lose the value of Italy's bonds on their balance sheets, some of them will face bank runs. This could easily cause a system-wide banking panic in France. That panic could spread to other nations' commercial banks.
This will not be allowed by the Powers That Be. They will find some loophole to bail out the banks. But they would prefer to implement it soon, before the dominoes start falling.
Strategically, the public support of Italy is wiser. The Powers That Be don't want to face an Iceland event. At that point, they would have to save France's big banks. But the Powers That Be are the big banks. There will be panic, bank to bank, national banking system to national banking system. They want to forestall this.
The first bazooka – the ECB saving Italy – needs a legal cover. There has to be an annulment of the treaties. The ECB will be hesitant to fire the bazooka if it is not given authorization.
What if it isn't? What if the crisis hits Italy before the annulment can be codified by some cooperative announcement by the summit – an announcement that the members can get their governments back home to agree on?
That's where the second bazooka comes in. The FED will supply dollars to the ECB, which can then sell them to investors fleeing the euro.
Back to economics 1. If you can see that the supply of any asset will run out, and there is a rush to buy, it will do no good for the sellers to promise more of the sought-after asset. They will not be believed. The low price subsidizes skeptics to buy even more. At a lower price, more is demanded.
So, the central bankers have to hope that there will not be a panic run out of the euro into the dollar. They are buying time. They have a deadline: February, 2013. So, they think that the panic will be short-lived. A show of force – a bazooka – may cut it off before it begins.
Note: it didn't work for Paulson.
They must assume that a panic will force the hand of the ECB to inflate and buy either Italian bonds (early) or the debt of the French government (late), which will lend money to the largest French banks. The second bazooka is supposed to lend credibility to the first one: the one the ECB could use to save Italy from default. The ECB's managers at present are afraid to invoke it. "We are not going to use it."
If the ECB fails to act fast enough, Italy could cease making payments. A run on large French banks could begin. That will force the hand of the ECB. The central banks have handed the ECB lots of bazooka ammunition.
CONCLUSION
Bernanke and his peers are in panic mode. They are taking steps to deal with a run out of French banks and maybe out of the euro. They are in effect subsidizing this run, assuming that the ECB sells dollars to all buyers who bid. I think the goal is to sell to big banks only – those being hit by runs. They will do this because they don't think the panic will last beyond January 2013.
We shall see how much longer Italy continues to make its interest payments. Long-term, Italy will default. There will be an Iceland event. I think there will be more than one.
Bottom line: The November 30 coordinated announcements of six central banks regarding their intervention into the currency markets was a coordinated effort by these central banks, led by the US Federal Reserve, to prevent a rise in the cost AND the "value" of the US Dollar.
It did absolutely nothing to solve the European sovereign solvency problem. All it did was provide some short-term liquidity for Europe's financial institutions, many of which are bordering on collapse.
BTFD!
Got Gold you can hold?
Got Silver you can squeeze?
Until it's all gone, it's not too late to accumulate!
BUY NOW!!!
Gold and Silver gapped up, and raced higher at the open in Asia last night. Gains were once again quickly halted as Gold tried to move above $1750 and slapped back to a tight trading range for remainder of the overnight session as the Dollar leaked lower...until the AM Fix in London. As soon as "the Fix was in", the Gold price was bombed for $12, and the Dollar miraculously caught a bid.
No, the suggestion that these markets are rigged is absurd!
Iran Military Shoots Down US Drone, Threatens Response
From ZeroHedge
A senior Iranian military official says Iran's Army has shot down a remote-controlled reconnaissance drone operated by the US military in the eastern part of the country.
The informed source said on Sunday that Iran Army's electronic warfare unit successfully targeted the American-built RQ-170 Sentinel stealth aircraft after it crossed into Iranian airspace over the border with neighboring Afghanistan.
He added that the US reconnaissance drone has been seized with minimum damage.
The RQ-170 is a stealth unmanned aircraft designed and developed by Lockheed Martin Company.
The US military and the CIA use the drone to launch missile strikes in Afghanistan and in Pakistan's northwestern tribal region.
The unnamed Iranian military official further added that “due to the clear border violation, the operational and electronic measures taken by the Islamic Republic of Iran's Armed Forces against invading aircraft will not remain limited to the Iran's borders.
In the good 'ol days, what is the reaction of the Gold market on news like this? 'Nuff said
Gold most likely gapped up at the Asian open on more rumours of the US Federal Reserve bailing out Europe:
The Latest Rumor: Fed To Fund IMF, Bypassing Congressional Refusal Of European Bailout
From ZeroHedge
While we have long been mocking any rumors indicative formal attempts to get the IMF's funding to higher level, due to the need for a congressional approval over and beyond what is currently permitted which means any such plan is DOA, one loophole always has been the private bank known as the Federal Reserve, which may, as permitted by its charter since its charter allows it to do pretty much anything even buy Greek and EFSF, not to mention Italian, bonds, lend to the IMF at will. And just as last week demonstrated, when push comes to shove the Fed will always bail out Europe, so tonight German paper Die Welt (which has about the same success rate as Thomas Stolper at predicting the future) had put two and two together and come up with the latest rumor, namely that Ben Bernanke is about to directly bail out Europe using the IMF as an intermediary. Specifically, via Reuters, "The Federal Reserve, along with the 17 euro zone national central banks, may help provide the International Monetary Fund with funds that could be used to aid debt-ridden states, a German newspaper said. Die Welt cited sources close to the negotiations as saying the euro zone central banks could pay at least 100 billion euros ($134.2 billion) into a special fund that could be used for programs for nations struggling to control their debts. "Also other central banks, for example the U.S. Federal Reserve, are apparently prepared to finance a part of the costs," the paper said in an advance copy of an article to appear on Monday." That there is not an iota of truth in this article is a given, yet the market will latch on to this latest rumor like a rabid pitbull... until it realizes that by having to resort to such grotesquely made up stories it means that the ECB, which is the only real short-term rescue mechanism for Europe, is nowhere near close agreeing to do what the bulk of Europe's bankers (but not Goldman) demand it do - print.
On Friday, conservatives in Congress moved to block the IMF from bailing out Italy and Spain.
Major IMF decisions require an 85 percent supermajority. The United States has always been the only country able to block a supermajority on its own. If agreed to, the largest monetary contributor to an IMF bailout of Italy and Spain would be the United States taxpayer.
The Hill Just Killed The Market - Stocks, Euro Stumble As Conservatives Push To End IMF Bailout
From ZeroHedge
...conservatives say they will try to block the IMF from bailing out Italy and Spain. Pointing to the huge bill this could leave at US taxpayer's feet, Republicans are concerned at the secrecy with which Geithner has acted. Sen. Tom Coburn appears to be at the helm of this legislation, noting:
"We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending."Of course, this is beyond obvious, because as we have been saying all along with every reincarnation of the idiotic "IMF to bailout [XXX]" rumor, there always is just one snag. A rather substantial one at that: US congressional approval for expanded IMF bailout capabilities.Specifically, when discussing the latest iteration of the IMF rescue we said: "La Stampa forgot to mention one thing: any changes to the IMF, which currently is massively underfunded and is why the organization was forced to create two new liquidity facilities: a Precautionary and Liquidity Credit line, since it is unable to fund its New Arrangements to Borrow, have to go through US Congress when it comes to expanding funding capacity. Yup, the most dysfunctional, corrupt and criminal thing in the world - the US House of Representatives, where unless everyone is short Italian CDS, this will never pass. In other words: this rumor is dead in the water." And so it is.
From The Hill:
eurozone
Conservatives say they will try to block the International Monetary Fund from bailing out Italy and Spain, which they say could leave U.S. taxpayers with a huge bill.
Republicans on both sides of the Capitol complain that the Obama administration has refused to share details of what Treasury Secretary Timothy Geithner is discussing with European leaders amid reports the IMF could intervene.
Sen. Tom Coburn (R-Okla.) says he is planning legislation directing the U.S. government to veto an expanded role for the fund.
Senate Republican Steering Committee Chairman Jim DeMint (R-S.C.) and Rep. Cathy McMorris Rodgers (Wash.), a member of the House Republican leadership, also have legislation to curb the proposed intervention.
“I’m adamantly against the IMF being involved in this,” Coburn said.
“We’re throwing good money after bad down a hole that I think is not a solvable problem,” he said.
“Europe is going to default eventually, so why would you socialize their profligate spending,” he added.
Coburn estimates the U.S. could be liable for as much as $176 billion if the IMF shores up Italy and Spain and the European Union collapses.
President Obama this week said the U.S. “stands ready to do our part” to help resolve the crisis, and Geithner in October said using U.S. tax dollars through the IMF to shore up Europe’s efforts was appropriate.DeMint offered an amendment to the defense authorization bill instructing the U.S. executive director of the IMF to use the voice and vote of the United States to oppose funding of the European Financial Stability Facility, the bailout fund that would be used to stabilize countries at risk of default.
“We need some transparency about what’s really going on,” said McMorris Rodgers. “It’s hard to get information. We’re talking about U.S. taxpayer dollars being involved in the European bailout. The administration needs to be honest with the Congress. I believe Congress needs to be involved in making this decision.”
The question begs to be asked:
Does the US Federal Reserve, an institution created by the US Congress in 1913 in conflict with the US Constitution, now see itself as above the US Congress and "the law of the land"?
The US Federal Reserve has, since day one of this GLOBAL financial crisis, thrown money around to any bank in the WORLD that has asked for it. Money, that in theory, is backed by the sweat and equity of the American taxpayer, is literally given away without the consent of the US Congress. The US Congress, by appropriation, is the ONLY entity in the structure of the US Government that is allowed to spend "the people's money".
The US Federal Reserve is a "private for profit bank". Is the "money" they "create" really the people's money and responsibility? Or is the money they create the US Federal Reserve's sole responsibility? They are, after all, a "private for profit bank". If they believe that they are "above the law" and can fund bailout operations of the IMF, why should American taxpayers be on the hook for the Federal Reserves monetary decisions?
Isn't it about time the US Congress get their dog under control? The US Congress created the Global Financial Crisis we endure today, the day they passed the Federal Reserve Act in 1912. Allowing the Federal Reserve to fund an IMF bailout of Italy and Spain, by over stepping the US Congress, would be the height of US Government fiscal malfeasance.
Is anybody looking out for the American taxpayer?
The bid in the US Dollar at the AM London Gold Fix has all but reversed itself since I began to put this blog post together at 7AM est. Yet the "price" of Gold has fallen further to a new morning low of $1728...now $26 off the opening high in Asia last night as the Dollar tests overnight lows.
No, the suggestion that these markets are rigged is absurd!
Sadly, this revelation that the US Federal Reserve might circumvent the US Congress and help the IMF bailout Italy and Spain is not the story of "money creation" that should be told. The Fed has been creating money and handing it out to banks in the US and around the World since day one of the Global Financial Crisis. If anybody believes this irresponsible act of "counterfeiting the currency" ended with QE2 in June this past summer, they are sadly mistaken. As per Jim Willie's latest dissertation on the subject, the only thing that ended in June 2011 was the Fed "admitting" they were creating money, and giving it away to the World's banks:
Perpetual QE Without the Billboard
By: Jim Willie CB, GoldenJackass.com
The US Federal Reserve has fooled a lot of people into believing that the grand monetary pump and debt monetization project has been put on hold. The only thing that changed was their talking publicly about it. The money press has been working to the limit, never stopped. The discussion has been kept quiet, but the machinery still makes a lot of shrill noise. The proof is not movement of lips by central bankers, but the data from the monetary aggregate. The data is compelling in calling them out. The conclusion to reach is that Quantitative Easing has become the norm, the foundation policy, the emergency action to prevent implosion of the US banking system. Hyper monetary inflation is the New Normal. The sinkholes are so broad and dispersed that even run of the mill analysts are beginning to see the light. They are concluding more and more than the credit-based system is collapsing. Never does the Jackass rely upon central bankers to inform of events, policies, and actions. They have been dedicated lately to deceptions much like turning off smoke alarms, killing the electricity on fire station monitors, laying off the working firemen, and hoping the public does not notice the raging fires which have been accompanied by grand larceny looting to hide the flames.
Always trust Ludwig, our reliable patron saint of money whose epistles combat the evil forces of fiat money. VonMises said that inflation always has been a matter of money growth. It always will be. Notice in the yearly monetary aggregate chart, where ticks are full years, that the 2010 and 2011 years show a steady linear growth. The money supply never stopped growing in summer 2011. The June deadline came and went, and nothing changed, only the words from the increasingly desperate central bankers, led by the hack economist professor Ben Bernanke. If the public were ever to glimpse at what passes for Economics Dept research at universities, they would vomit at its abstruce uselessness. Phony money not only produces phony wealth, but phony faculty research and phony integrity of financial systems. Over one third of all university professors with chaired posts are funded by the USFed, if truth be known. They perpetuate their mental muck. Heck, the Jackass had the pleasure to observe some Statistics Dept research back in the day. Half was as we enlightened students called FLUFF, like new statistical measures that had value only in a strange world where the researcher defined the criterion for good. The fluff merchants stunk as professors too. Two come to mind from my Carnegie Mellon University years. But at CMU the majority of professors were utterly outstanding, brilliant, great teachers, grounded in reality, and having produced reams of highly useful work. Two fine professors remain my friends, being on first name basis since adults. They go along with the notion of the Jackass being adult, wondering the definition of a Jackass in bemused reaction.
The money supply is still growing. The data contradicts the premise that the QE program was terminated. Easily explained. The initiative turned global to produce Global QE. The USFed has been accommodating the Europeans and Wall Street banks, so that the broken insolvent big Euro banks can be propped with more phony money. The Euro Central Bank is printing money heavily or else borrowing in heavy volume from the USFed Dollar Swap Facility. Without bond market buyers, the EuroCB has reluctantly filled the void and has been buying the Italian Govt Bonds. Recall that big Euro banks are huge sellers of sovereign bonds. The USFed never stopped printing money to buy USTreasury Bonds, which ramps up each month as USGovt debt piles up each month. Recall that foreign creditors are net sellers of USTBonds. The USTBond auctions have not failed, and for a reason. The USFed is buyer of last resort. Where the bids came from has been kept quite secretive. It is the USFed, which never stopped QE. In fact, Global QE is the mainline policy nowadays, and it has turned into hyper-inflation under the sleepy eyes of both investors and the financial press. Why the investment community relies upon the central bank liars and the financial press dimwits is proof of national stupidity in my view. Intelligent people are wondering if QE3 will emerge when QE never ended!!
THE ONLY THING THAT CHANGED SINCE JUNE 2011 WAS THE USFED DOES NOT TALK ABOUT THEIR VAST MONEY PRINTING AND DEBT MONETIZATION. THE DULL MENTAL CAPACITY OF THE MASSES IS ASTONISHING.
Pretty clever, huh?? The end result is the investment community is dominated by truly moronic questions about when the USFed will print money again. They never stopped. Jim Rogers in a recent interview had to chastise the financial press nitwit in control of the conversation, to urge a quick view of the money supply. He showed patience though. The interviewer seemed not to understand the concept of money supply even after three instances of veiled insults. It is like asking a liar if the weather outside is rainy. TAKE A LOOK. THEY NEVER STOPPED PRINTING MONEY. The Operation Twist was a USTBond redemption plan built around QE3 designed to buy all what foreign central banks sold. They sold it as a pause in the pattern. Dull witless people bought the notion. The Jackass called it for what it was from the start, a smokescreen to cover for foreign bond sales. Foreign creditors were big net sellers of USTBonds. It is right there in the data published by the same liars at the USFed and USDept Treasury. TAKE A LOOK. THEY NEVER STOPPED PRINTING. My respect for the American financial sector has never been lower, and that includes the investment community. For three years, the Jackass has been advising to remove funds from the system, which would be at risk of pilferage. The MFGlobal event has sealed both the reputation of the US financial sector and the outcome of the implosion.
The big Euro banks are selling boatloads of bonds. But on the other side of the table, the Euro Central Bank is buying only truckloads. The net is still an exodus, thus rising bond yields. A few emails from clients came in the last week wondering why sovereign bond yields in Spain, Italy, and even France are still rising if the EuroCB has entered the arena with both hands buying the bonds, however reluctantly. Remember the initial pronouncements by the new Head Draghi (aka Euro Dragon), that he did not want to buy government bonds. The European Govt Bond market is in freefall. The only way to stop it is vast recapitalization of the entire US and London and European banks at a cost of $4 to $5 trillion. When the Powerz and Technocrat generals flip the switch and make the decisions, Gold will then go to $3000 then rest, then go to $5000 later on. Similar for silver, going to $80 then rest, then go to $150. In the interim, the objective is to beat down Gold and Silver by whatever deception.
Do you really believe that ANYBODY is selling their physical Gold and Silver into the picture that I have painted above? The fact is that the same crooks that have been involved in the "suppression" of the Gold and Silver "price" are the same crooks that are trying to steal your physical Gold and Silver from you now via either deception, or outright theft as in the case of the MF Global bankruptcy.
Consider the following essay by Gary North before being "scared out of your physical Gold and Silver holdings" because of the deception that they might "fall in value".
French Fried Banks
By Gary North
Ben Bernanke is in panic mode. The November 30 coordinated announcements of six central banks regarding their intervention into the currency markets was exactly that – coordinated. If you think it was coordinated by anyone other than Bernanke, you are out of touch with reality. (Test: name the heads of at least two of the other five central banks.)
As I shall argue, this was an action preliminary to (1) Angela Merkel's December 2 speech to the German parliament, which is preliminary to (2) the next Eurozone summit, scheduled for the weekend of December 9, which is preliminary to (3) a coordinated violation of the two treaties that created the European Union, which is hoped will (4) pressure the European Central Bank to buy newly created Eurobonds issued illegally by the EU, in order to (5) raise enough euros fast enough to buy Italian government bonds before (6) the Italian government misses interest payments, which may (7) bankrupt the largest French banks, which could (8) trigger a worldwide financial panic.
In short, Bernanke and his peers are in a pre-panic panic.
DECIPHERING THE ANNOUNCEMENT
This was an announcement of a very specific kind. Ninety minutes before the American stock markets opened, the six central banks said that they would increase the availability of money.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
In short, The FED assured us, they were acting on behalf of the best interests of common people around the world. They were doing this in the name of the People. "What's good for the People is good for central bankers."
The problem is, they were silent on why, exactly, the strains of the supply of credit was threatening the People. On November 29, the interest rate for 90-day U.S. Treasury bills was 0.01%, or one one-hundredth of a percent, which is the lowest it has been in history, basically. To be honest, I do not regard this as evidence of a strain in the financial markets.
This raises these questions: "Which financial markets? Paying what rates? Why?"
In the good old days, meaning earlier than November 30, "strain in the credit markets" meant a frantic rush by investors and speculators to purchase a financial asset. The asset's price rises rapidly, which is what happens when there is greater demand than supply for any asset.
The U.S. dollar has been bumping around in relation to the euro all year. There has been no indication of a frantic rush to sell euros. On January 1, 2011, a euro bought $1.34. On November 29, a euro had fallen in price to $1.33. That was not what I would call a strain on the euro market. We are not talking even nickels and dimes here. We are talking pennies . . . in single digits.
So, the question arises: Why was it necessary for a coordinated intervention? The FED explained:
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
This is central bank gibberish. It refers to the practice of lending U.S. dollars for a period of time. These are central bank loans to other central banks. They are called central bank liquidity swaps. For a description, see Wikipedia. Say that one central bank needs dollars. It can swap its assets for dollar-denominated assets for a fixed period of time. In this case, the deadline is February 1, 2013.
The five other central banks promised to supply liquidity, meaning their own currencies.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013. It can therefore supply dollars to those who demand them.
So, the problem is the dollar. Better put, it may soon be the dollar. But, just in case, the central banks are willing to inflate.
At this point, I can imagine an exchange between a confused caller and some call-in satellite radio investment show.
But won't the free market do this? "Yes, but at a higher price."
So, the coordinated action was a move to keep down the price of the dollar. "You've got it, Sherlock."
So, the other five banks are working with the Federal Reserve to keep the dollar low, which will reduce their nations' exports to America. "That's one effect."
But that means the central banks are acting to hurt their own export markets. "That is one effect."
But central bankers never do this. "This time, they are."
Why? "Because they are scared out of their wits."
To get some indication of what the coordinated action is intended to accomplish, pay attention to this.
In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.
So, the FED thinks there is a chance that there will be an increase in demand for dollars in other currencies: "to provide liquidity in any of their currencies if necessary." So, more than one of them are afraid of a panic-driven sell-off of their currencies.
Are they all equally at risk? No. There has to be one targeted bank: the central bank of the currency that is being dumped by investors in order to buy any of the others. Which might that be?
It is obvious: the European Central Bank.
But the euro has been stable in relation to the dollar all year. It is obvious that Bernanke and five other central bankers think that this rosy scenario is about to end.
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.
The FED said that U.S. financial institutions are not having problems getting access to dollars. Furthermore, the FED "has a range of tools available to provide an effective liquidity backstop for such institutions." Then why the swaps? Why would five other central banks join in? Why should they need to worry about "such institutions"?
Simple: the central bankers are not worried about U.S. financial institutions. They are worried about their own financial institutions. They have good cause to be worried.
FRANCE'S BIG BANKS
With a useful interactive graph in the New York Times, we can see which nations owe how much money to which other nations' commercial banks.
The chart reveals something ominous. French banks are sitting on top of a mountain of Italian bonds. What if Italy decides to create what I have elsewhere called an "Iceland event"? It could be a disaster!
Europe will then have French fried banks. Then the question arises: What will Sarkozy do? How will the French government get the money it needs to bail out its now-insolvent big banks? Who will lend it this money?
The money needed will be euros. But, under the present laws governing the European Union, the ECB is not allowed to buy bonds of nations that are considered poor credit risks. France will be a bad credit risk if Italy skips interest payments, let alone defaults.
Then what is the FED's problem? This: if Merkel does not get her government to accept instant inflation by the ECB, but without a revision of the Maastricht and Lisbon treaties, then she will go into the December 9 summit as a barrier to a quick decision by the ECB. The summit will be stuck.
The threat of Italy's default is imminent. If the ECB does not act, and act fast, then the Eurozone will be seen as approaching a break-up. This means the euro may not survive. That fear may trigger a run on the euro: a mad dash to sell it and buy U.S. dollars. If dollars are not available at a price people are willing to pay, then there will be a rush to buy other currencies.
This is the much-feared, long-denied domino effect. The orders to sell euros are placed by people with big money: hedge funds. They want instant conversion. They will also start looking for safe-haven banks located outside the Eurozone. They will fear a Lehman event. This is what an Iceland event can become if Italy defaults. It owes too much money.
At that point, the ECB will be pressured to intervene to prop up the euro. Question: Intervene with what? With U.S. dollars. Where will it get these dollars? From the FED.
This is what the coordinated announcement was designed to forestall. This is the "bazooka."
TWO BAZOOKAS
What is the bazooka? It was the word used by then-Secretary of the Treasury Hank Paulson to describe his promise that the Treasury would provide funding for the two visibly tottering, over-leveraged mortgage companies, Fannie Mae and Freddy Mac. He told Congress: "If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka and people know you've got it, you may not have to take it out." This has been identified as one of the 21 dumbest business moments in 2008. Two months later, both outfits went bust, and Paulson, on his own authority, nationalized them. The taxpayers picked up the tab. Michael Pento commented on this on November 14.
But years after Secretary Paulson fired his bazooka, those formerly thought of as "safe" investments are now trading at just pennies a share. And just last week the government – or more appropriately the taxpayer – was forced to throw an additional $7.8 billion at the GSEs for the last quarter's losses. That was on top of the $169 billion they have already spent to rescue the black holes known as Fannie and Freddie since 2008.
Pento then commented on the newly installed head of the ECB: "Similarly, Draghi now believes that the problem with European debt is fear, not one of insolvency."
And just like Hank, Mario will soon learn that offering to purchase an unlimited amount of Italian debt does nothing in the way of bringing down the debt to GDP ratio. In fact, it has the exact opposite effect. It encourages more profligate spending, just as it also lowers the growth of the economy by creating inflation. What's even worse is that yields on Italian debt will reach much higher levels in the longer term. That's because the purchasers of sovereign debt have now become aware that their principal will be repaid with a rapidly depreciating currency. Therefore, the yield they will require in the future must reflect the decision to use inflation as a means of paying off debt.
This is the first bazooka. The joint announcement of the six central banks is the second. This one tells the world that any rush out of euros into dollars will take place in an orderly way.
A PANIC-DRIVEN SELL-OFF
I assume that Prof. Bernanke understands the #1 principle of chapter 1 of any college-level economics 1 textbook: "When the price of any scarce resource falls, more is demanded (other things remaining equal)." This is described graphically in the famous intersecting S/Q supply and demand curves.
The economist assumes that the reason why demand increases faster than supply does is because speculators believe that the price of an asset will rise. So, they buy it now. In the case of currencies, they sell one and buy the other.
Why would speculators buy dollars and sell euros? Because they fear a major event that will threaten the euro as a currency. So far, the price of dollars in euros has not revealed any such imminent fear.
It is clear that the central bankers think this lull in the storm is unlikely to last much longer. So, they hauled out the bazooka.
What are they aiming at? They did not say. We can figure it out.
TIMING IS EVERYTHING
If French banks lose the value of Italy's bonds on their balance sheets, some of them will face bank runs. This could easily cause a system-wide banking panic in France. That panic could spread to other nations' commercial banks.
This will not be allowed by the Powers That Be. They will find some loophole to bail out the banks. But they would prefer to implement it soon, before the dominoes start falling.
Strategically, the public support of Italy is wiser. The Powers That Be don't want to face an Iceland event. At that point, they would have to save France's big banks. But the Powers That Be are the big banks. There will be panic, bank to bank, national banking system to national banking system. They want to forestall this.
The first bazooka – the ECB saving Italy – needs a legal cover. There has to be an annulment of the treaties. The ECB will be hesitant to fire the bazooka if it is not given authorization.
What if it isn't? What if the crisis hits Italy before the annulment can be codified by some cooperative announcement by the summit – an announcement that the members can get their governments back home to agree on?
That's where the second bazooka comes in. The FED will supply dollars to the ECB, which can then sell them to investors fleeing the euro.
Back to economics 1. If you can see that the supply of any asset will run out, and there is a rush to buy, it will do no good for the sellers to promise more of the sought-after asset. They will not be believed. The low price subsidizes skeptics to buy even more. At a lower price, more is demanded.
So, the central bankers have to hope that there will not be a panic run out of the euro into the dollar. They are buying time. They have a deadline: February, 2013. So, they think that the panic will be short-lived. A show of force – a bazooka – may cut it off before it begins.
Note: it didn't work for Paulson.
They must assume that a panic will force the hand of the ECB to inflate and buy either Italian bonds (early) or the debt of the French government (late), which will lend money to the largest French banks. The second bazooka is supposed to lend credibility to the first one: the one the ECB could use to save Italy from default. The ECB's managers at present are afraid to invoke it. "We are not going to use it."
If the ECB fails to act fast enough, Italy could cease making payments. A run on large French banks could begin. That will force the hand of the ECB. The central banks have handed the ECB lots of bazooka ammunition.
CONCLUSION
Bernanke and his peers are in panic mode. They are taking steps to deal with a run out of French banks and maybe out of the euro. They are in effect subsidizing this run, assuming that the ECB sells dollars to all buyers who bid. I think the goal is to sell to big banks only – those being hit by runs. They will do this because they don't think the panic will last beyond January 2013.
We shall see how much longer Italy continues to make its interest payments. Long-term, Italy will default. There will be an Iceland event. I think there will be more than one.
Bottom line: The November 30 coordinated announcements of six central banks regarding their intervention into the currency markets was a coordinated effort by these central banks, led by the US Federal Reserve, to prevent a rise in the cost AND the "value" of the US Dollar.
It did absolutely nothing to solve the European sovereign solvency problem. All it did was provide some short-term liquidity for Europe's financial institutions, many of which are bordering on collapse.
BTFD!
Got Gold you can hold?
Got Silver you can squeeze?
Until it's all gone, it's not too late to accumulate!
BUY NOW!!!
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