Seriously... A Precious Metals Bubble?
Bernanke Sees Risks to Economy From Europe to U.S. Budget
Submitted by Tyler Durden on
06/06/2012 18:42 -0400
Submitted by Jeff Clark of Casey Research
Bernanke Sees Risks to Economy From Europe to U.S. Budget
Bernanke can't see two feet in front of his manicured beard...
The real risk to the economy is right here at home:
Paul Craig Roberts
Prisonplanet.com
June 5, 2012
Ever since the beginning of the financial crisis and quantitative easing, the question has been before us: How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits? Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury’s credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.
In other words, financial deregulation leading to Wall Street’s gambles, the US government’s decision to bail out the banks and to keep them afloat, and the Federal Reserve’s zero interest rate policy have put the economic future of the US and its currency in an untenable and dangerous position. It will not be possible to continue to flood the bond markets with $1.5 trillion in new issues each year when the interest rate on the bonds is less than the rate of inflation. Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign.
The question is: when is sooner or later? The purpose of this article is to examine that question.
Let us begin by answering the question: how has such an untenable policy managed to last this long?
A number of factors are contributing to the stability of the dollar and the bond market. A very important factor is the situation in Europe. There are real problems there as well, and the financial press keeps our focus on Greece, Europe, and the euro. Will Greece exit the European Union or be kicked out? Will the sovereign debt problem spread to Spain, Italy, and essentially everywhere except for Germany and the Netherlands?
Will it be the end of the EU and the euro? These are all very dramatic questions that keep focus off the American situation, which is probably even worse.
The Treasury bond market is also helped by the fear individual investors have of the equity market, which has been turned into a gambling casino by high-frequency trading.
High-frequency trading is electronic trading based on mathematical models that make the decisions. Investment firms compete on the basis of speed, capturing gains on a fraction of a penny, and perhaps holding positions for only a few seconds. These are not long-term investors. Content with their daily earnings, they close out all positions at the end of each day.
High-frequency trades now account for 70-80% of all equity trades. The result is major heartburn for traditional investors, who are leaving the equity market. They end up in Treasuries, because they are unsure of the solvency of banks who pay next to nothing for deposits, whereas 10-year Treasuries will pay about 2% nominal, which means, using the official Consumer Price Index, that they are losing 1% of their capital each year. Using John Williams’ (shadowstats.com) correct measure of inflation, they are losing far more. Still, the loss is about 2 percentage points less than being in a bank, and unlike banks, the Treasury can have the Federal Reserve print the money to pay off its bonds. Therefore, bond investment at least returns the nominal amount of the investment, even if its real value is much lower. (For a description of High-frequency trading, see:http://en.wikipedia.org/wiki/High_frequency_trading )
The presstitute financial media tells us that flight from European sovereign debt, from the doomed euro, and from the continuing real estate disaster into US Treasuries provides funding for Washington’s $1.5 trillion annual deficits. Investors influenced by the financial press might be responding in this way. Another explanation for the stability of the Fed’s untenable policy is collusion between Washington, the Fed, and Wall Street. We will be looking at this as we progress.
Unlike Japan, whose national debt is the largest of all, Americans do not own their own public debt. Much of US debt is owned abroad, especially by China, Japan, and OPEC, the oil exporting countries. This places the US economy in foreign hands. If China, for example, were to find itself unduly provoked by Washington, China could dump up to $2 trillion in US dollar-dominated assets on world markets. All sorts of prices would collapse, and the Fed would have to rapidly create the money to buy up the Chinese dumping of dollar-denominated financial instruments.
The dollars printed to purchase the dumped Chinese holdings of US dollar assets would expand the supply of dollars in currency markets and drive down the dollar exchange rate. The Fed, lacking foreign currencies with which to buy up the dollars would have to appeal for currency swaps to sovereign debt troubled Europe for euros, to Russia, surrounded by the US missile system, for rubles, to Japan, a country over its head in American commitment, for yen, in order to buy up the dollars with euros, rubles, and yen.
These currency swaps would be on the books, unredeemable and making additional use of such swaps problematical. In other words, even if the US government can pressure its allies and puppets to swap their harder currencies for a depreciating US currency, it would not be a repeatable process. The components of the American Empire don’t want to be in dollars any more than do the BRICS.
However, for China, for example, to dump its dollar holdings all at once would be costly as the value of the dollar-denominated assets would decline as they dumped them. Unless China is faced with US military attack and needs to defang the aggressor, China as a rational economic actor would prefer to slowly exit the US dollar. Neither do Japan, Europe, nor OPEC wish to destroy their own accumulated wealth from America’s trade deficits by dumping dollars, but the indications are that they all wish to exit their dollar holdings.
Unlike the US financial press, the foreigners who hold dollar assets look at the annual US budget and trade deficits, look at the sinking US economy, look at Wall Street’s uncovered gambling bets, look at the war plans of the delusional hegemon and conclude: “I’ve got to carefully get out of this.”
US banks also have a strong interest in preserving the status quo. They are holders of US Treasuries and potentially even larger holders. They can borrow from the Federal Reserve at zero interest rates and purchase 10-year Treasuries at 2%, thus earning a nominal profit of 2% to offset derivative losses. The banks can borrow dollars from the Fed for free and leverage them in derivative transactions. As Nomi Prins puts it, the US banks don’t want to trade against themselves and their free source of funding by selling their bond holdings. Moreover, in the event of foreign flight from dollars, the Fed could boost the foreign demand for dollars by requiring foreign banks that want to operate in the US to increase their reserve amounts, which are dollar based.
I could go on, but I believe this is enough to show that even actors in the process who could terminate it have themselves a big stake in not rocking the boat and prefer to quietly and slowly sneak out of dollars before the crisis hits. This is not possible indefinitely as the process of gradual withdrawal from the dollar would result in continuous small declines in dollar values that would end in a rush to exit, but Americans are not the only delusional people.
The very process of slowly getting out can bring the American house down. The BRICS–Brazil, the largest economy in South America, Russia, the nuclear armed and energy independent economy on which Western Europe (Washington’s NATO puppets) are dependent for energy, India, nuclear armed and one of Asia’s two rising giants, China, nuclear armed, Washington’s largest creditor (except for the Fed), supplier of America’s manufactured and advanced technology products, and the new bogyman for the military-security complex’s next profitable cold war, and South Africa, the largest economy in Africa–are in the process of forming a new bank. The new bank will permit the five large economies to conduct their trade without use of the US dollar.
In addition, Japan, an American puppet state since WWII, is on the verge of entering into an agreement with China in which the Japanese yen and the Chinese yuan will be directly exchanged. The trade between the two Asian countries would be conducted in their own currencies without the use of the US dollar. This reduces the cost of foreign trade between the two countries, because it eliminates payments for foreign exchange commissions to convert from yen and yuan into dollars and back into yen and yuan.
Moreover, this official explanation for the new direct relationship avoiding the US dollar is simply diplomacy speaking. The Japanese are hoping, like the Chinese, to get out of the practice of accumulating ever more dollars by having to park their trade surpluses in US Treasuries. The Japanese US puppet government hopes that the Washington hegemon does not require the Japanese government to nix the deal with China.
Now we have arrived at the nitty and gritty. The small percentage of Americans who are aware and informed are puzzled why the banksters have escaped with their financial crimes without prosecution. The answer might be that the banks “too big to fail” are adjuncts of Washington and the Federal Reserve in maintaining the stability of the dollar and Treasury bond markets in the face of an untenable Fed policy.
Let us first look at how the big banks can keep the interest rates on Treasuries low, below the rate of inflation, despite the constant increase in US debt as a percent of GDP–thus preserving the Treasury’s ability to service the debt.
The imperiled banks too big to fail have a huge stake in low interest rates and the success of the Fed’s policy. The big banks are positioned to make the Fed’s policy a success. JPMorgan Chase and other giant-sized banks can drive down Treasury interest rates and, thereby, drive up the prices of bonds, producing a rally, by selling Interest Rate Swaps (IRSwaps).
A financial company that sells IRSwaps is selling an agreement to pay floating interest rates for fixed interest rates. The buyer is purchasing an agreement that requires him to pay a fixed rate of interest in exchange for receiving a floating rate.
The reason for a seller to take the short side of the IRSwap, that is, to pay a floating rate for a fixed rate, is his belief that rates are going to fall. Short-selling can make the rates fall, and thus drive up the prices of Treasuries. When this happens, as these charts illustrate, there is a rally in the Treasury bond market that the presstitute financial media attributes to “flight to the safe haven of the US dollar and Treasury bonds.” In fact, the circumstantial evidence (see the charts in the link above) is that the swaps are sold by Wall Street whenever the Federal Reserve needs to prevent a rise in interest rates in order to protect its otherwise untenable policy. The swap sales create the impression of a flight to the dollar, but no actual flight occurs. As the IRSwaps require no exchange of any principal or real asset, and are only a bet on interest rate movements, there is no limit to the volume of IRSwaps.
This apparent collusion suggests to some observers that the reason the Wall Street banksters have not been prosecuted for their crimes is that they are an essential part of the Federal Reserve’s policy to preserve the US dollar as world currency. Possibly the collusion between the Federal Reserve and the banks is organized, but it doesn’t have to be. The banks are beneficiaries of the Fed’s zero interest rate policy. It is in the banks’ interest to support it. Organized collusion is not required.
Let us now turn to gold and silver bullion. Based on sound analysis, Gerald Celente and other gifted seers predicted that the price of gold would be $2000 per ounce by the end of last year. Gold and silver bullion continued during 2011 their ten-year rise, but in 2012 the price of gold and silver have been knocked down, with gold being $350 per ounce off its $1900 high.
In view of the analysis that I have presented, what is the explanation for the reversal in bullion prices? The answer again is shorting. Some knowledgeable people within the financial sector believe that the Federal Reserve (and perhaps also the European Central Bank) places short sales of bullion through the investment banks, guaranteeing any losses by pushing a key on the computer keyboard, as central banks can create money out of thin air.
Insiders inform me that as a tiny percent of those on the buy side of short sells actually want to take delivery on the gold or silver bullion, and are content with the financial money settlement, there is no limit to short selling of gold and silver. Short selling can actually exceed the known quantity of gold and silver.
Some who have been watching the process for years believe that government-directed short-selling has been going on for a long time. Even without government participation, banks can control the volume of paper trading in gold and profit on the swings that they create. Recently short selling is so aggressive that it not merely slows the rise in bullion prices but drives the price down. Is this aggressiveness a sign that the rigged system is on the verge of becoming unglued?
In other words, “our government,” which allegedly represents us, rather than the powerful private interests who elect “our government” with their multi-million dollar campaign contributions, now legitimized by the Republican Supreme Court, is doing its best to deprive us mere citizens, slaves, indentured servants, and “domestic extremists” from protecting ourselves and our remaining wealth from the currency debauchery policy of the Federal Reserve. Naked short selling prevents the rising demand for physical bullion from raising bullion’s price.
Jeff Nielson explains another way that banks can sell bullion shorts when they own no bullion. (See,http://www.gold-eagle.com/editorials_08/nielson102411.html) Nielson says that JP Morgan is the custodian for the largest long silver fund while being the largest short-seller of silver. Whenever the silver fund adds to its bullion holdings, JP Morgan shorts an equal amount. The short selling offsets the rise in price that would result from the increase in demand for physical silver. Nielson also reports that bullion prices can be suppressed by raising margin requirements on those who purchase bullion with leverage. The conclusion is that bullion markets can be manipulated just as can the Treasury bond market and interest rates.
How long can the manipulations continue? When will the proverbial hit the fan?
If we knew precisely the date, we would be the next mega-billionaires.
Here are some of the catalysts waiting to ignite the conflagration that burns up the Treasury bond market and the US dollar:
A war, demanded by the Israeli government, with Iran, beginning with Syria, that disrupts the oil flow and thereby the stability of the Western economies or brings the US and its weak NATO puppets into armed conflict with Russia and China. The oil spikes would degrade further the US and EU economies, but Wall Street would make money on the trades.
An unfavorable economic statistic that wakes up investors as to the true state of the US economy, a statistic that the presstitute media cannot deflect.
An affront to China, whose government decides that knocking the US down a few pegs into third world status is worth a trillion dollars.
More derivate mistakes, such as JPMorgan Chase’s recent one, that send the US financial system again reeling and reminds us that nothing has changed.
The list is long. There is a limit to how many stupid mistakes and corrupt financial policies the rest of the world is willing to accept from the US. When that limit is reached, it is all over for “the world’s sole superpower” and for holders of dollar-denominated instruments.
Financial deregulation converted the financial system, which formerly served businesses and consumers, into a gambling casino where bets are not covered. These uncovered bets, together with the Fed’s zero interest rate policy, have exposed Americans’ living standard and wealth to large declines. Retired people living on their savings and investments, IRAs and 401(k)s can earn nothing on their money and are forced to consume their capital, thereby depriving heirs of inheritance. Accumulated wealth is consumed.
As a result of jobs offshoring, the US has become an import-dependent country, dependent on foreign made manufactured goods, clothing, and shoes. When the dollar exchange rate falls, domestic US prices will rise, and US real consumption will take a big hit. Americans will consume less, and their standard of living will fall dramatically.
The serious consequences of the enormous mistakes made in Washington, on Wall Street, and in corporate offices are being held at bay by an untenable policy of low interest rates and a corrupt financial press, while debt rapidly builds. The Fed has been through this experience once before. During WW II the Federal Reserve kept interest rates low in order to aid the Treasury’s war finance by minimizing the interest burden of the war debt. The Fed kept the interest rates low by buying the debt issues. The postwar inflation that resulted led to the Federal Reserve-Treasury Accord in 1951, in which agreement was reached that the Federal Reserve would cease monetizing the debt and permit interest rates to rise.
Fed chairman Bernanke has spoken of an “exit strategy” and said that when inflation threatens, he can prevent the inflation by taking the money back out of the banking system. However, he can do that only by selling Treasury bonds, which means interest rates would rise. A rise in interest rates would threaten the derivative structure, cause bond losses, and raise the cost of both private and public debt service. In other words, to prevent inflation from debt monetization would bring on more immediate problems than inflation. Rather than collapse the system, wouldn’t the Fed be more likely to inflate away the massive debts?
Eventually, inflation would erode the dollar’s purchasing power and use as the reserve currency, and the US government’s credit worthiness would waste away. However, the Fed, the politicians, and the financial gangsters would prefer a crisis later rather than sooner. Passing the sinking ship on to the next watch is preferable to going down with the ship oneself. As long as interest rate swaps can be used to boost Treasury bond prices, and as long as naked shorts of bullion can be used to keep silver and gold from rising in price, the false image of the US as a safe haven for investors can be perpetrated.
However, the $230,000,000,000,000 in derivative bets by US banks might bring its own surprises. JPMorgan Chase has had to admit that its recently announced derivative loss of $2 billion is more than that. How much more remains to be seen. According to the Comptroller of the Currency http://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdf the five largest banks hold 95.7% of all derivatives. The five banks holding $226 trillion in derivative bets are highly leveraged gamblers. For example, JPMorgan Chase has total assets of $1.8 trillion but holds $70 trillion in derivative bets, a ratio of $39 in derivative bets for every dollar of assets. Such a bank doesn’t have to lose very many bets before it is busted.
Assets, of course, are not risk-based capital. According to the Comptroller of the Currency report, as of December 31, 2011, JPMorgan Chase held $70.2 trillion in derivatives and only $136 billion in risk-based capital. In other words, the bank’s derivative bets are 516 times larger than the capital that covers the bets.
It is difficult to imagine a more reckless and unstable position for a bank to place itself in, but Goldman Sachs takes the cake. That bank’s $44 trillion in derivative bets is covered by only $19 billion in risk-based capital, resulting in bets 2,295 times larger than the capital that covers them.
Bets on interest rates comprise 81% of all derivatives. These are the derivatives that support high US Treasury bond prices despite massive increases in US debt and its monetization.
US banks’ derivative bets of $230 trillion, concentrated in five banks, are 15.3 times larger than the US GDP. A failed political system that allows unregulated banks to place uncovered bets 15 times larger than the US economy is a system that is headed for catastrophic failure. As the word spreads of the fantastic lack of judgment in the American political and financial systems, the catastrophe in waiting will become a reality.
Everyone wants a solution, so I will provide one. The US government should simply cancel the $230 trillion in derivative bets, declaring them null and void. As no real assets are involved, merely gambling on notional values, the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system. The financial gangsters who want to continue enjoying betting gains while the public underwrites their losses would scream and yell about the sanctity of contracts. However, a government that can murder its own citizens or throw them into dungeons without due process can abolish all the contracts it wants in the name of national security. And most certainly, unlike the war on terror, purging the financial system of the gambling derivatives would vastly improve national security.
This article first appeared at Paul Craig Roberts’ new website Institute For Political Economy. Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His Internet columns have attracted a worldwide following.
Prisonplanet.com
June 5, 2012
Ever since the beginning of the financial crisis and quantitative easing, the question has been before us: How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits? Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury’s credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.
In other words, financial deregulation leading to Wall Street’s gambles, the US government’s decision to bail out the banks and to keep them afloat, and the Federal Reserve’s zero interest rate policy have put the economic future of the US and its currency in an untenable and dangerous position. It will not be possible to continue to flood the bond markets with $1.5 trillion in new issues each year when the interest rate on the bonds is less than the rate of inflation. Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign.
The question is: when is sooner or later? The purpose of this article is to examine that question.
Let us begin by answering the question: how has such an untenable policy managed to last this long?
A number of factors are contributing to the stability of the dollar and the bond market. A very important factor is the situation in Europe. There are real problems there as well, and the financial press keeps our focus on Greece, Europe, and the euro. Will Greece exit the European Union or be kicked out? Will the sovereign debt problem spread to Spain, Italy, and essentially everywhere except for Germany and the Netherlands?
Will it be the end of the EU and the euro? These are all very dramatic questions that keep focus off the American situation, which is probably even worse.
The Treasury bond market is also helped by the fear individual investors have of the equity market, which has been turned into a gambling casino by high-frequency trading.
High-frequency trading is electronic trading based on mathematical models that make the decisions. Investment firms compete on the basis of speed, capturing gains on a fraction of a penny, and perhaps holding positions for only a few seconds. These are not long-term investors. Content with their daily earnings, they close out all positions at the end of each day.
High-frequency trades now account for 70-80% of all equity trades. The result is major heartburn for traditional investors, who are leaving the equity market. They end up in Treasuries, because they are unsure of the solvency of banks who pay next to nothing for deposits, whereas 10-year Treasuries will pay about 2% nominal, which means, using the official Consumer Price Index, that they are losing 1% of their capital each year. Using John Williams’ (shadowstats.com) correct measure of inflation, they are losing far more. Still, the loss is about 2 percentage points less than being in a bank, and unlike banks, the Treasury can have the Federal Reserve print the money to pay off its bonds. Therefore, bond investment at least returns the nominal amount of the investment, even if its real value is much lower. (For a description of High-frequency trading, see:http://en.wikipedia.org/wiki/High_frequency_trading )
The presstitute financial media tells us that flight from European sovereign debt, from the doomed euro, and from the continuing real estate disaster into US Treasuries provides funding for Washington’s $1.5 trillion annual deficits. Investors influenced by the financial press might be responding in this way. Another explanation for the stability of the Fed’s untenable policy is collusion between Washington, the Fed, and Wall Street. We will be looking at this as we progress.
Unlike Japan, whose national debt is the largest of all, Americans do not own their own public debt. Much of US debt is owned abroad, especially by China, Japan, and OPEC, the oil exporting countries. This places the US economy in foreign hands. If China, for example, were to find itself unduly provoked by Washington, China could dump up to $2 trillion in US dollar-dominated assets on world markets. All sorts of prices would collapse, and the Fed would have to rapidly create the money to buy up the Chinese dumping of dollar-denominated financial instruments.
The dollars printed to purchase the dumped Chinese holdings of US dollar assets would expand the supply of dollars in currency markets and drive down the dollar exchange rate. The Fed, lacking foreign currencies with which to buy up the dollars would have to appeal for currency swaps to sovereign debt troubled Europe for euros, to Russia, surrounded by the US missile system, for rubles, to Japan, a country over its head in American commitment, for yen, in order to buy up the dollars with euros, rubles, and yen.
These currency swaps would be on the books, unredeemable and making additional use of such swaps problematical. In other words, even if the US government can pressure its allies and puppets to swap their harder currencies for a depreciating US currency, it would not be a repeatable process. The components of the American Empire don’t want to be in dollars any more than do the BRICS.
However, for China, for example, to dump its dollar holdings all at once would be costly as the value of the dollar-denominated assets would decline as they dumped them. Unless China is faced with US military attack and needs to defang the aggressor, China as a rational economic actor would prefer to slowly exit the US dollar. Neither do Japan, Europe, nor OPEC wish to destroy their own accumulated wealth from America’s trade deficits by dumping dollars, but the indications are that they all wish to exit their dollar holdings.
Unlike the US financial press, the foreigners who hold dollar assets look at the annual US budget and trade deficits, look at the sinking US economy, look at Wall Street’s uncovered gambling bets, look at the war plans of the delusional hegemon and conclude: “I’ve got to carefully get out of this.”
US banks also have a strong interest in preserving the status quo. They are holders of US Treasuries and potentially even larger holders. They can borrow from the Federal Reserve at zero interest rates and purchase 10-year Treasuries at 2%, thus earning a nominal profit of 2% to offset derivative losses. The banks can borrow dollars from the Fed for free and leverage them in derivative transactions. As Nomi Prins puts it, the US banks don’t want to trade against themselves and their free source of funding by selling their bond holdings. Moreover, in the event of foreign flight from dollars, the Fed could boost the foreign demand for dollars by requiring foreign banks that want to operate in the US to increase their reserve amounts, which are dollar based.
I could go on, but I believe this is enough to show that even actors in the process who could terminate it have themselves a big stake in not rocking the boat and prefer to quietly and slowly sneak out of dollars before the crisis hits. This is not possible indefinitely as the process of gradual withdrawal from the dollar would result in continuous small declines in dollar values that would end in a rush to exit, but Americans are not the only delusional people.
The very process of slowly getting out can bring the American house down. The BRICS–Brazil, the largest economy in South America, Russia, the nuclear armed and energy independent economy on which Western Europe (Washington’s NATO puppets) are dependent for energy, India, nuclear armed and one of Asia’s two rising giants, China, nuclear armed, Washington’s largest creditor (except for the Fed), supplier of America’s manufactured and advanced technology products, and the new bogyman for the military-security complex’s next profitable cold war, and South Africa, the largest economy in Africa–are in the process of forming a new bank. The new bank will permit the five large economies to conduct their trade without use of the US dollar.
In addition, Japan, an American puppet state since WWII, is on the verge of entering into an agreement with China in which the Japanese yen and the Chinese yuan will be directly exchanged. The trade between the two Asian countries would be conducted in their own currencies without the use of the US dollar. This reduces the cost of foreign trade between the two countries, because it eliminates payments for foreign exchange commissions to convert from yen and yuan into dollars and back into yen and yuan.
Moreover, this official explanation for the new direct relationship avoiding the US dollar is simply diplomacy speaking. The Japanese are hoping, like the Chinese, to get out of the practice of accumulating ever more dollars by having to park their trade surpluses in US Treasuries. The Japanese US puppet government hopes that the Washington hegemon does not require the Japanese government to nix the deal with China.
Now we have arrived at the nitty and gritty. The small percentage of Americans who are aware and informed are puzzled why the banksters have escaped with their financial crimes without prosecution. The answer might be that the banks “too big to fail” are adjuncts of Washington and the Federal Reserve in maintaining the stability of the dollar and Treasury bond markets in the face of an untenable Fed policy.
Let us first look at how the big banks can keep the interest rates on Treasuries low, below the rate of inflation, despite the constant increase in US debt as a percent of GDP–thus preserving the Treasury’s ability to service the debt.
The imperiled banks too big to fail have a huge stake in low interest rates and the success of the Fed’s policy. The big banks are positioned to make the Fed’s policy a success. JPMorgan Chase and other giant-sized banks can drive down Treasury interest rates and, thereby, drive up the prices of bonds, producing a rally, by selling Interest Rate Swaps (IRSwaps).
A financial company that sells IRSwaps is selling an agreement to pay floating interest rates for fixed interest rates. The buyer is purchasing an agreement that requires him to pay a fixed rate of interest in exchange for receiving a floating rate.
The reason for a seller to take the short side of the IRSwap, that is, to pay a floating rate for a fixed rate, is his belief that rates are going to fall. Short-selling can make the rates fall, and thus drive up the prices of Treasuries. When this happens, as these charts illustrate, there is a rally in the Treasury bond market that the presstitute financial media attributes to “flight to the safe haven of the US dollar and Treasury bonds.” In fact, the circumstantial evidence (see the charts in the link above) is that the swaps are sold by Wall Street whenever the Federal Reserve needs to prevent a rise in interest rates in order to protect its otherwise untenable policy. The swap sales create the impression of a flight to the dollar, but no actual flight occurs. As the IRSwaps require no exchange of any principal or real asset, and are only a bet on interest rate movements, there is no limit to the volume of IRSwaps.
This apparent collusion suggests to some observers that the reason the Wall Street banksters have not been prosecuted for their crimes is that they are an essential part of the Federal Reserve’s policy to preserve the US dollar as world currency. Possibly the collusion between the Federal Reserve and the banks is organized, but it doesn’t have to be. The banks are beneficiaries of the Fed’s zero interest rate policy. It is in the banks’ interest to support it. Organized collusion is not required.
Let us now turn to gold and silver bullion. Based on sound analysis, Gerald Celente and other gifted seers predicted that the price of gold would be $2000 per ounce by the end of last year. Gold and silver bullion continued during 2011 their ten-year rise, but in 2012 the price of gold and silver have been knocked down, with gold being $350 per ounce off its $1900 high.
In view of the analysis that I have presented, what is the explanation for the reversal in bullion prices? The answer again is shorting. Some knowledgeable people within the financial sector believe that the Federal Reserve (and perhaps also the European Central Bank) places short sales of bullion through the investment banks, guaranteeing any losses by pushing a key on the computer keyboard, as central banks can create money out of thin air.
Insiders inform me that as a tiny percent of those on the buy side of short sells actually want to take delivery on the gold or silver bullion, and are content with the financial money settlement, there is no limit to short selling of gold and silver. Short selling can actually exceed the known quantity of gold and silver.
Some who have been watching the process for years believe that government-directed short-selling has been going on for a long time. Even without government participation, banks can control the volume of paper trading in gold and profit on the swings that they create. Recently short selling is so aggressive that it not merely slows the rise in bullion prices but drives the price down. Is this aggressiveness a sign that the rigged system is on the verge of becoming unglued?
In other words, “our government,” which allegedly represents us, rather than the powerful private interests who elect “our government” with their multi-million dollar campaign contributions, now legitimized by the Republican Supreme Court, is doing its best to deprive us mere citizens, slaves, indentured servants, and “domestic extremists” from protecting ourselves and our remaining wealth from the currency debauchery policy of the Federal Reserve. Naked short selling prevents the rising demand for physical bullion from raising bullion’s price.
Jeff Nielson explains another way that banks can sell bullion shorts when they own no bullion. (See,http://www.gold-eagle.com/editorials_08/nielson102411.html) Nielson says that JP Morgan is the custodian for the largest long silver fund while being the largest short-seller of silver. Whenever the silver fund adds to its bullion holdings, JP Morgan shorts an equal amount. The short selling offsets the rise in price that would result from the increase in demand for physical silver. Nielson also reports that bullion prices can be suppressed by raising margin requirements on those who purchase bullion with leverage. The conclusion is that bullion markets can be manipulated just as can the Treasury bond market and interest rates.
How long can the manipulations continue? When will the proverbial hit the fan?
If we knew precisely the date, we would be the next mega-billionaires.
Here are some of the catalysts waiting to ignite the conflagration that burns up the Treasury bond market and the US dollar:
A war, demanded by the Israeli government, with Iran, beginning with Syria, that disrupts the oil flow and thereby the stability of the Western economies or brings the US and its weak NATO puppets into armed conflict with Russia and China. The oil spikes would degrade further the US and EU economies, but Wall Street would make money on the trades.
An unfavorable economic statistic that wakes up investors as to the true state of the US economy, a statistic that the presstitute media cannot deflect.
An affront to China, whose government decides that knocking the US down a few pegs into third world status is worth a trillion dollars.
More derivate mistakes, such as JPMorgan Chase’s recent one, that send the US financial system again reeling and reminds us that nothing has changed.
The list is long. There is a limit to how many stupid mistakes and corrupt financial policies the rest of the world is willing to accept from the US. When that limit is reached, it is all over for “the world’s sole superpower” and for holders of dollar-denominated instruments.
Financial deregulation converted the financial system, which formerly served businesses and consumers, into a gambling casino where bets are not covered. These uncovered bets, together with the Fed’s zero interest rate policy, have exposed Americans’ living standard and wealth to large declines. Retired people living on their savings and investments, IRAs and 401(k)s can earn nothing on their money and are forced to consume their capital, thereby depriving heirs of inheritance. Accumulated wealth is consumed.
As a result of jobs offshoring, the US has become an import-dependent country, dependent on foreign made manufactured goods, clothing, and shoes. When the dollar exchange rate falls, domestic US prices will rise, and US real consumption will take a big hit. Americans will consume less, and their standard of living will fall dramatically.
The serious consequences of the enormous mistakes made in Washington, on Wall Street, and in corporate offices are being held at bay by an untenable policy of low interest rates and a corrupt financial press, while debt rapidly builds. The Fed has been through this experience once before. During WW II the Federal Reserve kept interest rates low in order to aid the Treasury’s war finance by minimizing the interest burden of the war debt. The Fed kept the interest rates low by buying the debt issues. The postwar inflation that resulted led to the Federal Reserve-Treasury Accord in 1951, in which agreement was reached that the Federal Reserve would cease monetizing the debt and permit interest rates to rise.
Fed chairman Bernanke has spoken of an “exit strategy” and said that when inflation threatens, he can prevent the inflation by taking the money back out of the banking system. However, he can do that only by selling Treasury bonds, which means interest rates would rise. A rise in interest rates would threaten the derivative structure, cause bond losses, and raise the cost of both private and public debt service. In other words, to prevent inflation from debt monetization would bring on more immediate problems than inflation. Rather than collapse the system, wouldn’t the Fed be more likely to inflate away the massive debts?
Eventually, inflation would erode the dollar’s purchasing power and use as the reserve currency, and the US government’s credit worthiness would waste away. However, the Fed, the politicians, and the financial gangsters would prefer a crisis later rather than sooner. Passing the sinking ship on to the next watch is preferable to going down with the ship oneself. As long as interest rate swaps can be used to boost Treasury bond prices, and as long as naked shorts of bullion can be used to keep silver and gold from rising in price, the false image of the US as a safe haven for investors can be perpetrated.
However, the $230,000,000,000,000 in derivative bets by US banks might bring its own surprises. JPMorgan Chase has had to admit that its recently announced derivative loss of $2 billion is more than that. How much more remains to be seen. According to the Comptroller of the Currency http://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq411.pdf the five largest banks hold 95.7% of all derivatives. The five banks holding $226 trillion in derivative bets are highly leveraged gamblers. For example, JPMorgan Chase has total assets of $1.8 trillion but holds $70 trillion in derivative bets, a ratio of $39 in derivative bets for every dollar of assets. Such a bank doesn’t have to lose very many bets before it is busted.
Assets, of course, are not risk-based capital. According to the Comptroller of the Currency report, as of December 31, 2011, JPMorgan Chase held $70.2 trillion in derivatives and only $136 billion in risk-based capital. In other words, the bank’s derivative bets are 516 times larger than the capital that covers the bets.
It is difficult to imagine a more reckless and unstable position for a bank to place itself in, but Goldman Sachs takes the cake. That bank’s $44 trillion in derivative bets is covered by only $19 billion in risk-based capital, resulting in bets 2,295 times larger than the capital that covers them.
Bets on interest rates comprise 81% of all derivatives. These are the derivatives that support high US Treasury bond prices despite massive increases in US debt and its monetization.
US banks’ derivative bets of $230 trillion, concentrated in five banks, are 15.3 times larger than the US GDP. A failed political system that allows unregulated banks to place uncovered bets 15 times larger than the US economy is a system that is headed for catastrophic failure. As the word spreads of the fantastic lack of judgment in the American political and financial systems, the catastrophe in waiting will become a reality.
Everyone wants a solution, so I will provide one. The US government should simply cancel the $230 trillion in derivative bets, declaring them null and void. As no real assets are involved, merely gambling on notional values, the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system. The financial gangsters who want to continue enjoying betting gains while the public underwrites their losses would scream and yell about the sanctity of contracts. However, a government that can murder its own citizens or throw them into dungeons without due process can abolish all the contracts it wants in the name of national security. And most certainly, unlike the war on terror, purging the financial system of the gambling derivatives would vastly improve national security.
This article first appeared at Paul Craig Roberts’ new website Institute For Political Economy. Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His Internet columns have attracted a worldwide following.
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The apparent end to momentum in the 12-year bull market in the gold price is a carefully coordinated exercise in perception management. J.P. Morgan and a handful of the world’s largest banks have been permitted the right to originate contracts for forward sales and purchases of various commodity products far in excess of what is produced of each commodity annually.
There is seldom any delivery of physical metals, and the contracts are originated on completely false premises equivalent to a casino where every game is rigged in favour of the house. Thus, the effect of real
supply has been replaced by the effect of artificial supply.
This represents a regulatory deficiency on the part of the Commodities Futures Trading Commission at minimum,
and at worst, outright criminal fraud and collusion among the U.S. government, the banks, and the market operators themselves.
CFTC Commissioner Bart Chilton has admitted on behalf of his agency that they are of the opinion that certain entities are engaged in manipulative and unlawful practices in the futures markets, and announced and investigation was under way. Four years ago. No results from the investigation have materialized, and that’s because the apparent end to the momentum in the 12-year bull market in the gold price is a carefully coordinated exercise in perception management.
The banks will forever be able to lay legitimate claim to the pursuit of profit as the primary motivation for exploiting the regulatory aberration that permits and even abets fraud on such a large scale. The government will never admit to active collusion.
CNBC, Bloomberg, the Wall Street Journal et al refuse to extend their line of inquiry into the factors controlling the price of gold beyond superficial fundamentals such as jewelry demand and store-of-value investor demand.
This perception management apparatus has now become so finely-tuned that the gold price is rather deftly handled upward and downward in movements that serve the requirements of the two parties operating the scam. For the banks, reliable risk-free profit, and for the government of the United States, the perception that the U.S. dollar is a safer haven than gold.
I think the current continuous downward pressure on gold is undertaken to create the reality of a gold price that declines below its 52-week low. That would, in the invisible deliberations of the fraud participants, end the perception of gold as a safer store of value than U.S. Treasury bills, widely understood to be a key component of keeping the U.S. dollar lie alive.
The Bloomberg headline of May 29th is precisely the objective of anti-gold dollar defenders: “Gold Set for Worst Run Since 1999 as Dollar Strengthens”. The U.S. Dollar lie is complete.
When you’re living a lie, perception outweighs the importance of reality, and that is optimally here achieved.
The second part of the elaborate perception management ploy is that the third round of U.S. stimulus will coincide perfectly with the re-emergence of the U.S. deficit and debt position at the top of the news heap once Europe has fallen the rest of the way apart. Stimulus will be required then, because the banks who are the recipients of the stimulus are subject to conditions that result in substantial proportions of that money being invested into U.S. Treasuries, which is essentially the mechanism by which the United States government counterfeits its own currency to the detriment of U.S. dollar-denominated sovereign reserve currency
positions and its own population.
Thus the objective of the perception management exercise – the condition where selling U.S. debt is just slightly more egregious in a net-net evaluation of sovereign reserve value than buying more of it – is achieved. And the U.S. can continue bullying the rest of the world around because
theoretically we are all unfortunate passengers in the same boat.
The problem with this strategy, as the perps likely comprehend perfectly, is that there is a point where the math can simply no longer support the illusion. That point is visible in a not-too-distant future. That is when all the major currencies collapse into the black hole of debt, whose traction is so strong that nothing in proximity can escape it.
Increasingly, that is the inescapable inevitability in this manufactured debt crisis charade.
For gold to fall below its current 52-week high implies a price of $1543 an ounce. That’s only ~$60 from where we are today. The fact that the ongoing futures market fraud is yet unable to drive it down below that mark is evidence of the growing demand for gold in view of the inevitable outcome for currencies outlined above. As Sprott U.S.A. CEO Rick Rule so aptly points out, “gold isn’t somebody’s promise to pay (like currencies) – its
payment.” So China continues to accumulate gold surreptitiously to offset its U.S. dollar reserve risk, while other nations such as the Philippines, Kazakhstan, and Mexico do so more overtly.
The inflection point at which gold explodes to the long-awaited stratosphere (taking silver and PGM’s along with it) is exactly the moment at which it becomes apparent that what’s happening in Greece and Spain will engulf Italy, France, Germany, Britain, and ultimately, the United States.
When the largest capital positions suddenly hit that “Oh shit” moment, when they realize that they’ve been had, the relief valve for all that financial terror will be precious. Metals that is.
Knowing the date of that event in the future is not really that important. All a capital-preservation minded investor needs is to understand that no matter what price gold is had at below $2,000 and ounce, there’s a 5-bagger at least waiting just round the bend.
All of the institutional analyst calls for gold heading back below $1200 are not necessarily to be ignored either.
Remember, the supply of precious metals is now infinite, according to current futures law, and so the way to achieve $1,200 or even $1,000 or even $600 an ounce is to sell vast quantities of gold into the future at lower prices. For those with deep pockets sitting on lots of cash, PRAY that gold is driven below $1,200 because it will be the trade of the decade to scoop it up at that price.
The attention riveted on Greece and Spain is exactly the smokescreen that the banks and governments colluding to perpetuate and amplify the debt need to continue operations. The fabrication of capital in the form of loans and credit extensions, the primary source of revenue for many banks directly and for
many government officials indirectly, will thus intensify as Spain, Italy, France and finally the U.K. and Germany are dragged into the widening whirlpool.
Gold is the buy for the long term. Gut-wrenching plunges in the price should be expected and ignored, except perhaps to buy more on such dips. The entire global financial apparatus is slowly crumbling, and the collapse of investment banks and funds from Geneva to Toronto to New York is underway.
And as far as arguments go for and against gold as a standard, there has never been a time in human recorded history where whatever fiat currency was in use was not measured in ounces of gold for comparison. All those currencies have ceased to exist, just as the Euro and the U.S. dollar and renmibi must one day, because mankind is incapable of responsible fiscal management. Gold is not a theoretical, or even a possible, monetary standard. It is the only true monetary standard, and always has been.
There is seldom any delivery of physical metals, and the contracts are originated on completely false premises equivalent to a casino where every game is rigged in favour of the house. Thus, the effect of real
supply has been replaced by the effect of artificial supply.
This represents a regulatory deficiency on the part of the Commodities Futures Trading Commission at minimum,
and at worst, outright criminal fraud and collusion among the U.S. government, the banks, and the market operators themselves.
CFTC Commissioner Bart Chilton has admitted on behalf of his agency that they are of the opinion that certain entities are engaged in manipulative and unlawful practices in the futures markets, and announced and investigation was under way. Four years ago. No results from the investigation have materialized, and that’s because the apparent end to the momentum in the 12-year bull market in the gold price is a carefully coordinated exercise in perception management.
The banks will forever be able to lay legitimate claim to the pursuit of profit as the primary motivation for exploiting the regulatory aberration that permits and even abets fraud on such a large scale. The government will never admit to active collusion.
CNBC, Bloomberg, the Wall Street Journal et al refuse to extend their line of inquiry into the factors controlling the price of gold beyond superficial fundamentals such as jewelry demand and store-of-value investor demand.
This perception management apparatus has now become so finely-tuned that the gold price is rather deftly handled upward and downward in movements that serve the requirements of the two parties operating the scam. For the banks, reliable risk-free profit, and for the government of the United States, the perception that the U.S. dollar is a safer haven than gold.
I think the current continuous downward pressure on gold is undertaken to create the reality of a gold price that declines below its 52-week low. That would, in the invisible deliberations of the fraud participants, end the perception of gold as a safer store of value than U.S. Treasury bills, widely understood to be a key component of keeping the U.S. dollar lie alive.
The Bloomberg headline of May 29th is precisely the objective of anti-gold dollar defenders: “Gold Set for Worst Run Since 1999 as Dollar Strengthens”. The U.S. Dollar lie is complete.
When you’re living a lie, perception outweighs the importance of reality, and that is optimally here achieved.
The second part of the elaborate perception management ploy is that the third round of U.S. stimulus will coincide perfectly with the re-emergence of the U.S. deficit and debt position at the top of the news heap once Europe has fallen the rest of the way apart. Stimulus will be required then, because the banks who are the recipients of the stimulus are subject to conditions that result in substantial proportions of that money being invested into U.S. Treasuries, which is essentially the mechanism by which the United States government counterfeits its own currency to the detriment of U.S. dollar-denominated sovereign reserve currency
positions and its own population.
Thus the objective of the perception management exercise – the condition where selling U.S. debt is just slightly more egregious in a net-net evaluation of sovereign reserve value than buying more of it – is achieved. And the U.S. can continue bullying the rest of the world around because
theoretically we are all unfortunate passengers in the same boat.
The problem with this strategy, as the perps likely comprehend perfectly, is that there is a point where the math can simply no longer support the illusion. That point is visible in a not-too-distant future. That is when all the major currencies collapse into the black hole of debt, whose traction is so strong that nothing in proximity can escape it.
Increasingly, that is the inescapable inevitability in this manufactured debt crisis charade.
For gold to fall below its current 52-week high implies a price of $1543 an ounce. That’s only ~$60 from where we are today. The fact that the ongoing futures market fraud is yet unable to drive it down below that mark is evidence of the growing demand for gold in view of the inevitable outcome for currencies outlined above. As Sprott U.S.A. CEO Rick Rule so aptly points out, “gold isn’t somebody’s promise to pay (like currencies) – its
payment.” So China continues to accumulate gold surreptitiously to offset its U.S. dollar reserve risk, while other nations such as the Philippines, Kazakhstan, and Mexico do so more overtly.
The inflection point at which gold explodes to the long-awaited stratosphere (taking silver and PGM’s along with it) is exactly the moment at which it becomes apparent that what’s happening in Greece and Spain will engulf Italy, France, Germany, Britain, and ultimately, the United States.
When the largest capital positions suddenly hit that “Oh shit” moment, when they realize that they’ve been had, the relief valve for all that financial terror will be precious. Metals that is.
Knowing the date of that event in the future is not really that important. All a capital-preservation minded investor needs is to understand that no matter what price gold is had at below $2,000 and ounce, there’s a 5-bagger at least waiting just round the bend.
All of the institutional analyst calls for gold heading back below $1200 are not necessarily to be ignored either.
Remember, the supply of precious metals is now infinite, according to current futures law, and so the way to achieve $1,200 or even $1,000 or even $600 an ounce is to sell vast quantities of gold into the future at lower prices. For those with deep pockets sitting on lots of cash, PRAY that gold is driven below $1,200 because it will be the trade of the decade to scoop it up at that price.
The attention riveted on Greece and Spain is exactly the smokescreen that the banks and governments colluding to perpetuate and amplify the debt need to continue operations. The fabrication of capital in the form of loans and credit extensions, the primary source of revenue for many banks directly and for
many government officials indirectly, will thus intensify as Spain, Italy, France and finally the U.K. and Germany are dragged into the widening whirlpool.
Gold is the buy for the long term. Gut-wrenching plunges in the price should be expected and ignored, except perhaps to buy more on such dips. The entire global financial apparatus is slowly crumbling, and the collapse of investment banks and funds from Geneva to Toronto to New York is underway.
And as far as arguments go for and against gold as a standard, there has never been a time in human recorded history where whatever fiat currency was in use was not measured in ounces of gold for comparison. All those currencies have ceased to exist, just as the Euro and the U.S. dollar and renmibi must one day, because mankind is incapable of responsible fiscal management. Gold is not a theoretical, or even a possible, monetary standard. It is the only true monetary standard, and always has been.
____________________________
Submitted by Jeff Clark of Casey Research
Is The Table Set For A Mania In Precious Metals?
It may feel like I'm out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver.
There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it.
Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world's money supply isn't getting any smaller, and all that cash has to go somewhere.
I wanted to look at cash levels among various investor groups to get a feel for what's out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you'd expect, the contrast is still rather striking.
It's striking, when you really stop to think about just how big the impact could be if some significant fraction of the larger financial world started chasing the small niche market that is gold. Such cash inflows will send our industry to the moon.
In the meantime, keeping our eye on the big-picture forces that have yet to play out is the plan to follow. Sooner or later, though, I'm convinced the catalysts will kick in that will pull/push/drag/compel/force the mainstream into our sector. I suggest beating them to it.
And when the mania arrives, we'll all wonder why anyone doubted it in the first place.
____________________________
Silver – Another Bernanke Smackdown – 125 million ounces sold in minutes
Try as the banking cartel might, it should be clear now that these smackdowns in the Precious Metals are futile!
When you see prices drop...BUY BUY BUY!!! And don't forget to say thank you to the dumbass banker for the gift!
Gold Plunges As Bernanke Speaks: China Is Most Grateful
It may feel like I'm out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver.
There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it.
Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world's money supply isn't getting any smaller, and all that cash has to go somewhere.
I wanted to look at cash levels among various investor groups to get a feel for what's out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you'd expect, the contrast is still rather striking.
(Click on image to enlarge)
Naturally, not all this money or even a big chunk of it will be used to buy
GLD, Barrick, or American Eagles, but it's clear that if any significant
fraction of the cash sloshing around the economy were to be used to buy gold, it
would have a major impact on the price of gold – which would trigger the mania I
fully expect. Let's take a quick look at what kind of impact our sector could
experience if just a small amount of available funds were devoted to various
forms of gold and silver.- The entire worldwide value of all gold exchange-traded products (ETPs) currently represents just 2.1% of the cash and short-term investments held by S&P 500 corporations. If 20% of these companies decided to put a mere 5% of their available holdings into these precious metals vehicles, their value would more than double.
- If just 1% of the physical currency (M1) floating around the system were used to buy gold Eagles, it would be 13 times more than the entire value of all coins purchased last year.
- If corporations chose to invest 1% of their cash in silver ETFs, it would surpass the total current value of all such ETFs.
- If corporations moved 5% of their "short-term investments" evenly into gold stocks, the market cap of every gold company would increase by 20%.
- If they chose silver stocks, they'd each grow by a factor of six.
- Five percent of M1 would increase the market cap of gold producers by 14%. The same fraction would be 3.4 times bigger than the entire current value of all primary silver producers.
It's striking, when you really stop to think about just how big the impact could be if some significant fraction of the larger financial world started chasing the small niche market that is gold. Such cash inflows will send our industry to the moon.
In the meantime, keeping our eye on the big-picture forces that have yet to play out is the plan to follow. Sooner or later, though, I'm convinced the catalysts will kick in that will pull/push/drag/compel/force the mainstream into our sector. I suggest beating them to it.
And when the mania arrives, we'll all wonder why anyone doubted it in the first place.
____________________________
Silver – Another Bernanke Smackdown – 125 million ounces sold in minutes
Try as the banking cartel might, it should be clear now that these smackdowns in the Precious Metals are futile!
When you see prices drop...BUY BUY BUY!!! And don't forget to say thank you to the dumbass banker for the gift!
Gold Plunges As Bernanke Speaks: China Is Most Grateful
Submitted by Tyler Durden on 06/07/2012 - 11:47
It would appear that the asset-class most sensitive to the next round of renewed money-printing by the Fed - that implicitly seems to provide stock investors with some belief that their USD-numeraire priced holdings should go up in price - is dropping fast and pricing out hope of a 'New QE' anytime soon. As The Bernank speaks and offers nothing more than a Draghi-reinforcing check-to-the-government around the poker table of global macro, Gold is plunging. The biggest beneficiary of the Bernanke soliloquy so far is China, which has managed to get a new cheaper entry point on Bernanke's latest attempt to talk down Gold while keeping stocks up (because rising input costs courtesy of oil apparently only impact the gold bottom line). After importing 100 tons in physical gold (not GLD) in April, the country will be even happier to buy far more at lower, not higher prices.
It would appear that the asset-class most sensitive to the next round of renewed money-printing by the Fed - that implicitly seems to provide stock investors with some belief that their USD-numeraire priced holdings should go up in price - is dropping fast and pricing out hope of a 'New QE' anytime soon. As The Bernank speaks and offers nothing more than a Draghi-reinforcing check-to-the-government around the poker table of global macro, Gold is plunging. The biggest beneficiary of the Bernanke soliloquy so far is China, which has managed to get a new cheaper entry point on Bernanke's latest attempt to talk down Gold while keeping stocks up (because rising input costs courtesy of oil apparently only impact the gold bottom line). After importing 100 tons in physical gold (not GLD) in April, the country will be even happier to buy far more at lower, not higher prices.
____________________________
Bernanke can talk all he wants...what escapes me is that people still listen to this oaf...what irritates me is that members of our government actually believe ANYTHING this overrated "economist" lets fall from his quivering lips...and what truly disgusts me is the mainstream financial news media's complete ignorance of the TRUTH:
The US Federal Reserve is at the root of this GLOBAL Economic Crisis...not Europe as we are dutifully being lead to believe by these muppets of disinformation.
Bernanke, much like the Cry Baby President, can try to blame Congress for all that ails America...but it is the Fed that enables both Congress and The White House with its printing press.
Dallas Federal Reserve President Richard Fisher gets it:
The Limits of the Powers of Central Banks (With Metaphoric References to Edvard Munch's Scream and Sir Henry Raeburn's The Reverend Robert Walker Skating on Duddingston Loch)
Dallas Federal Reserve President Richard Fisher gets it:
The Limits of the Powers of Central Banks (With Metaphoric References to Edvard Munch's Scream and Sir Henry Raeburn's The Reverend Robert Walker Skating on Duddingston Loch)
Remarks at St. Andrews University
St. Andrews, Scotland · June 5, 2012
Thank you, Professor Sutherland. I am delighted to be here at St. Andrews and very much appreciate your organization of this meeting today. To be at the site where John Knox preached an epic sermon about Christ’s cleansing of the temple and overthrowing the money changers’ tables, which was so powerful that it led to riots against the establishment of the time, the papacy, is daunting—nearly as much so as playing the Old Course on yesterday’s bank holiday with Professor Andy Mackenzie, the university’s great scratch golfer and noted physics professor.
In a setting as august as this one—on the eve of the 600th anniversary of this great academy—and speaking on the day marking the 129th anniversary of the birth of John Maynard Keynes and the 289th anniversary of the baptism of Adam Smith in nearby Kirkcaldy—I should disclose up front that I am the least formally trained among the mostly academic economists who sit at the table where we make monetary policy at the Federal Reserve, the 19-person forum known as the Federal Open Market Committee, or FOMC. I have an MBA, not a PhD. I am an autodidact when it comes to monetary theory. On the other hand, I am the only participant in our policy deliberations who has been both a banker and a professional money manager—the only one who has been a market operator. What the credentialing gods denied me, the practitioner angels kindly granted me: another skill set that provides a complementary perspective to those of my more learned colleagues. I shall speak today, as I always do, only from my perspective; nothing I say represents the thinking or proclivities of other members of the FOMC. And most of what I will say will confront theory with my interpretation of the rude reality of the marketplace.
A Quick Primer on the Federal Reserve’s Structure
For those of you who do not know well our central bank’s structure, a quick primer. The Federal Reserve is the third central bank in American history. We were created during Woodrow Wilson’s presidency, in the aftermath of the Financial Panic of 1907. Congress passed the Federal Reserve Act in 1913; like St. Andrews, we will mark a centennial next year, but it will be our first, while you celebrate your sixth.
The Federal Reserve Act established 12 Federal Reserve Banks, together with a Board of Governors. The members of the Board, of which Ben Bernanke is Chairman, are appointed by the president of the United States and confirmed by the Senate. The 12 Bank presidents are not: They serve at the pleasure of nine-member boards of directors composed of private bankers and citizens from their respective districts. They are distinctly nonpolitical, immune from partisan influence; they represent Main Street, not the Washington power elite or the New York money changers, just as President Wilson and the Federal Reserve founders envisioned. These are profit-making banks that perform services for the private banks in their districts: warehousing and distributing currency; operating discount windows from which banks borrow to assist in their operating funding needs; functioning as the depository for the $1.5 trillion or so in excess reserves presently piled up and going unused in our private banking system. The Banks also house and manage staff that supervise and regulate banks in the districts (under policy guidance from the Board of Governors), and perform other services, the most widely observed and commented upon of which is the operating of the open-market operations conducted by the Federal Reserve Bank of New York on behalf of all 12 Banks at the instruction of the FOMC. All 12 Bank presidents serve on the FOMC together with the seven members of the Board of Governors. This is where monetary policy for the United States is determined by collective decision. The operating procedure of the FOMC is for each of the governors to have a vote on policy; the bankers rotate their votes, with the New York Fed having a constant vote. However, all 19 members—the seven governors and the 12 bankers—participate fully in every FOMC meeting and actively contribute to policy discussions.
The FOMC has traditionally decided the federal funds rate, the overnight rate for interbank lending that anchors the yield curve. In recent years, in reaction to the Financial Panic of 2008 and 2009 and its aftermath, the FOMC has instructed the New York desk to buy mortgage-backed securities and Treasury notes and bonds—eschewing Treasury bills. Presently, the Fed holds more than $850 billion in mortgage-backed securities (MBS) and over $1.6 trillion in Treasuries. This expansion of our portfolio and extension of maturities held therein is known as “quantitative easing,” or QE. After cutting the base rate for overnight lending—the fed funds rate—to zero, the majority of the committee decided to expand the money supply by purchasing MBS, notes and bonds. When we buy something in the marketplace, we pay for it, and this has resulted in significant liquidity floating about the U.S. economy, much of it going unused. As mentioned earlier, $1.5 trillion of excess reserves from private banks is on deposit in the 12 Federal Reserve Banks, where it earns a paltry 0.25 percent, rather than being lent to job-creating businesses at rates bankers would prefer. Additionally, some $2 trillion of excess cash is parked on corporate balance sheets—above and beyond the operating cash flow needs of the business sector—and copious amounts of cash are lying fallow in the pockets of nondepository financial institutions, such as private equity and other investment funds.
A running discussion in the marketplace centers around whether the FOMC will decide to engage in further quantitative easing, especially given the most recent economic weakness in the U.S., against the backdrop of the well-known problems in Europe and slower growth in China and other “emerging” economies. I shall turn to that in a few moments. First, I want to go back to the 12 Federal Reserve Banks.
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Different Growth Patterns in the 12 Federal Reserve Districts
Here is a map of the 12 Federal Reserve Bank districts. The Federal Reserve Bank of Dallas is responsible for the Fed’s activity in the light green area—the Eleventh District—home to 27 million people in Texas, northern Louisiana and southern New Mexico. Roughly 96 percent of the district’s output comes from Texas.
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Here is a chart showing the disparate behavior of the economies in the 12 Federal Reserve Districts, as measured by employment growth. You will see that going back to 1990—some 22 years—the Eleventh Federal Reserve District has outperformed the other Federal Reserve Districts in job creation.
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In terms of employment, the Dallas Fed’s district went into the recession last and was one of the first to come out. We have since punched through previous peak employment levels.
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Here is the job creation record of the so-called mega-states within the United States since 1990. And last, and just for fun, here is the record of Texas’ job creation over the past two decades versus resource-rich countries, such as Australia and Canada, as well as versus the major countries of Europe, the U.S. and Japan.
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Indulge me for a minute here. I share these with you not to engage in stereotypical “Texas brag” or because St. Andrews has become a popular destination for recent generations of undergraduate scholars from Texas. I do so to illustrate a point, specifically the influence of fiscal policy on the effectiveness of monetary policy.
The Limits of Monetary Policy and the Importance of Fiscal Policy
Here is the rub. As mentioned, the FOMC sets monetary policy for the nation, for all 50 states—its influence is uniform across America. The same rate of interest is charged on bank loans to businesses and individuals in Texas as is charged New Yorkers or the good people of Illinois or Californians; Texans pay the same rates on mortgages and so on. Why is it that the Texas economy has radically outperformed the rest of the states? A cheap answer is to revert to the hackneyed argument that Texas has oil and gas. It is true that we produce as much oil as Norway and almost as much natural gas as Canada. And we have some 60 percent of the refineries of the United States. But remember that the numbers I showed you are employment numbers. Only 2 percent of employment in Texas is directly generated by oil and gas and mining and related services. We are grateful that we are energy rich. But we are a diversified economy not unlike the United States, where business and financial services, health care, travel and leisure activities and education account for similar portions of our workforce. Why, then, do we outperform the rest of the United States?
To me, the answer is obvious: We have state and local governments whose tax, spending and regulatory policies are oriented toward job creation. We have the same monetary policy as all the rest; our income is taxed at the same federal tax rate; and we are equally impacted by Washington’s tax, spending and regulatory policies. But we have better fiscal policy at the state level. We have no state income tax; we are a right-to-work state; we have state and local governments that, under both Democratic and Republican leadership, have for decades assiduously courted job creators—so much so that we have even outperformed the job creation of most every other major industrialized economy worldwide, as shown by the previous slide.
Whither Monetary Policy?
Now, back to the hue and cry of financial markets, and the question of further monetary accommodation. Interest rates are at record lows. Trillions of dollars are sitting on the sidelines, not being used for job creation. We know that in areas of the country where fiscal and regulatory policy incents businesses to expand—Texas is the most prominent of those places—easy money is more likely to be put to work than in places where government policy retards job creation. During the next few weeks as I contemplate the future course of monetary policy, I will be asking myself what good would it do to buy more mortgage-backed securities or more Treasuries when we have so much money sitting on the sidelines and yet have no sense of direction for the future of the federal government’s tax and spending policy. And with the president’s health care legislation awaiting resolution in the Supreme Court, we also know that no business can budget its personnel costs until that case is decided. If job-creating businesses have no idea what their taxes will be, are clueless about how federal spending will impact their customers or their own businesses and cannot budget personnel costs—all on top of concerns about the risk to final demand posed by the imbroglio in Europe and slowing growth in emerging-market countries—how could additional monetary policy be stimulative?
A good theoretical macroeconomist can acknowledge that a great deal of liquidity is, indeed, going unused at present. They might likely argue that further monetary accommodation would raise inflationary expectations by magnifying the fear that the Fed and other monetary authorities are hell-bent on expanding their balance sheets and, consequently, the money supply so dramatically that inflation will inevitably follow. The result, the good macroeconomist would deduce, would be salutary: It would scare money out of businesses’ pockets and into job expansion and would lead individuals to conclude they better spend their money today rather than have it depreciated by inflation tomorrow, thus pumping up consumption and final demand.
I beg to differ. I would argue that this would represent a form of piling on the already enormous uncertainty and angst that businesses face with our reckless fiscal policy. To me, that would be the road to perdition for the Federal Reserve. There is in the marketplace a lingering fear that the Fed has already expanded its balance sheet to its stretching point and that an exit strategy, though articulated, remains theoretical and untested in practice. And there is a growing sense that we are unwittingly, or worse, deliberately, monetizing the wayward ways of Congress. I believe that were we to go down the path to further accommodation at this juncture, we would not simply be pushing on a string but would be viewed as an accomplice to the mischief that has become synonymous with Washington.
Raeburn versus Munch
There is no question that these are worrisome times: The world economy is slowing, joblessness is rampant in many countries, and in the United States, growth is anemic and unemployment remains unacceptably high. To me, this means that the Fed, and all central banks, must keep their heads about them and not give in to the convenient recommendations of those who are given to solving all problems with monetary policy.
If only for your visual pleasure, I have chosen two paintings anybody in the vicinity of St. Andrews and Edinburgh would know, in order to illustrate alternative approaches to central banking at this juncture.
The first is an icon of Scottish culture: Sir Henry Raeburn’s depiction of The Reverend Robert Walker Skating on Duddingston Loch, a seminal work in the permanent collection of the Scottish National Gallery and a favorite of mine since I first saw it some 30 years ago.
To me, Raeburn’s work provides a fitting visual metaphor for the ideal countenance of a central banker: The Reverend Walker skating forward confidently and with grace upon a notably uneven, rocky surface on an icy, dark, blustery day.
An alternative depiction is Edvard Munch’s The Scream from Norway’s Gunderson Collection, now on temporary exhibit at the National Gallery. (There are four versions of this pastel, one of which recently sold for $119.9 million at auction at Sotheby’s. If you haven’t been into Edinburgh to see the Gunderson version, I am sure you read about Sotheby’s record-setting auction.)
In sharp contrast to Raeburn’s painting of composure, The Scream depicts a panicked form. In an autobiographical epigraph, Munch wrote that he conceived of the painting after a period of exhaustion and despair: “I stopped and leaned against the balustrade, almost dead with fatigue. Above the blue-black fjord hung the clouds, red as blood and tongues of fire. My friends had left me, and alone, trembling with anguish, I became aware of the vast, infinite cry of nature.”[1]
I am going to conclude by suggesting that the image that best behooves central bankers as guardians of financial stability and agents of economic potential is that of Henry Raeburn’s Reverend Walker. To be sure, central bankers everywhere are fatigued and exhausted and increasingly friendless. But when the landscape is dark and threatening, those charged with making monetary policy must comport themselves with a grace that reassures markets and the public that they are calmly in control of the sacred charge with which they have been entrusted. They must keep their “cool” even when the vast, infinite cry of the money changers reaches a fevered pitch, the economic seas are blue-black and the clouds in the financial markets are red as blood and tongues of fire. Presenting an image comparable to that of the visage depicted by Edvard Munch—of policymakers trembling with anguish at the daunting demands of their profession—would provide scant comfort to those who depend upon them to maintain their composure and skate ably across a cold and foreboding economic landscape, seeking to guide the economy to a better place.
Central banks are just one vehicle for influencing overall macroeconomic behavior, in addition to influencing through regulation the microeconomic agents that transmit that influence to the markets—banks of deposit and other financial institutions. We work alongside another potent macroeconomic lever: fiscal authorities—governments that have the power to tax the people’s money, spend it in ways they deem appropriate, and create laws and regulations that influence microeconomic behavior.
Unless fiscal authorities can structure their affairs to incent the private sector into putting the cheap and ample money the Fed has provided to the economy to work in job creation, monetary policy will prove impotent. And we will likely barely survive our first centennial, let alone have confidence that we will reach our sixth.
Thank you.
Notes
The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System.
“Painting and Sculpture in Europe 1880 to 1940,” by George Heard Hamilton, Baltimore, Md.: Penguin Books, 1967, p. 75. This quote was written by Edvard Munch in his epigraph for the “The Scream”—known then as “The Cry”—when it was reproduced in the Revue blanche in 1895.
About the Author Richard W. Fisher is president and CEO of the Federal Reserve Bank of Dallas. ___________________________
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