“As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate…”
“Bernanke: Fed Could Act If Economy Weakens,” 6/7/2012
Martin Crutsinger, AP Economics Writer, Associated Press
Fed Vice-Chairman Janet Yellen’s “hint” of possible further QE on Wednesday, June 6, 2012 was followed by Ben Bernanke’s much weaker mere openness to the possibility, expressed on Thursday.
It is thus no surprise that the Equities Markets Massively Rallied Wednesday. And also no surprise that the “Rally” petered out late Thursday.
This raises the question: how Durable are Rallies juiced by QE? Just consider the Quite Temporary Effect of QE1, then QE2, then Operation Twist, then (or in conjunction with) LTRO1 and LTRO2.
The answer is: increasingly Less Durable.
Like another dose to a Drug User, the effects of QE (however it is disguised) are increasingly fleeting, and less effective, and more damaging in the long run. And China’s similar Stimulus has created a Property Bubble (now deflating) and a loan bubble, and considerable Civil Unrest.
More significantly, what does it say about the underlying strength of the Equities Markets that it takes QE or the prospect thereof, to Rally them. It says that the Fundamentals are very weak.
So it is very important to stay focused on the Fundamentals in order to Profit and Protect, and to screen out the Noise, and Disinformation.
Indeed, one Fundamental Reality is that QE in whatever form has considerable downsides. For example, U.S. QE has created considerable net Real Inflation in the U.S. (and notwithstanding real Deflation in certain Sectors and MSM Reports which indicate an overall Deflation, a False Indication) and elsewhere, especially in Food and Energy (9.93% Annualized per Shadowstats – Note 1). That is why our High Yield Portfolio is aimed at generating Total Return in Excess of this Real Inflation (Note 2).
Another Fundamental Reality is that Liquidity Injections do not solve Solvency Problems. Taking on more Debt does not solve the problems caused by Debt Saturation, but only worsens them. The Eurozone is an object lesson in how Bank and Sovereign Bailouts harm, not help, Economies.
Even so, yet another Fundamental Reality is that the Central Bankers will continue to implement repeated QE to Prop up the Financial System which is designed to Operate for their benefit.
“More than six months have passed since Frances Weaver and I published our pamphlet, Guilty Men, identifying those financiers, politicians and propagandists who advocated the creation of the European single currency 15 years ago, and exposing the dishonest or even brutal methods they used. …
“It must be acknowledged this week that the main reason for the depth and longevity of the economic and financial catastrophe striking Europe is that all the policy-makers who are dealing with the crisis were advocates of the euro right from the beginning. In other words, the very people who caused the conflagration in the first place are in charge of putting it out.
“This is a disaster. For them, the logical step of abandoning the failed policies of the past decade is unthinkable. …Far from being driven out of public life, which is what they deserve, the creators of the eurozone crisis remain very much in charge of events. …
“Such is the sensibility of the European political class as they confront one of the largest financial crises in our history. … as this week’s call for eurobonds shows. … They would have to be underwritten in common by all European countries, … The introduction of eurobonds would therefore lead immediately to the full economic and political integration of Europe, which has been the objective of the European political class from the very start. …
“The only lasting solution to the crisis is a total reversal of the policies being pursued by the European elite. …
“Hence the importance of a paper published this week by Jonathan Compton of Bedlam Asset Management, a heretical investment company which (almost alone among City firms) predicted the banking crash of four years ago.
“Mr Compton expertly makes the case for the weaker eurozone countries to default on their debt and to pull out of the single currency. He argues that such a move, far from leading to the chaos and devastation predicted by an out-of-touch Euro elite, would very quickly cause the return of economic buoyancy.
“Inside the eurozone, a number of countries – among them Greece, Spain, Portugal, Ireland and Italy – are facing intolerable levels of distress. Bank depositors are withdrawing their money, the banks are in collapse, capital investment has stalled, while foreign investors are pulling out as fast as they can.
“Mr. Compton argues that the moment that these countries quit the eurozone and default on their debt this process will go speedily into reverse. The bank depositors, no longer having anything to fear, will return. New owners will buy the failed banks and foreign investors will flood back in, while a surge in inflation will stimulate a revival of economic activity. …
“Already in Greece, Spain and the Netherlands, the voters are rejecting austerity – and once they start to link that austerity to eurozone membership, monetary union will collapse quite quickly. This partly explains the warnings of economic Armageddon that would follow from euro collapse emanating from Brussels and Frankfurt. In fact, the opposite is the truth.”
“The euro’s ‘guilty men’ are now steering Europe to catastrophe”
Peter Osborne, www.telegraph.co.ul, 6/6/2012
Another Fundamental Reality is that The Fed-led Banker Cartel (Note 3) will continue to work very hard to Suppress Gold and Silver Prices, because increasing recognition of Gold and Silver as Real Money tends to delegitimize their Fiat Currencies and Treasury securities. (Thus the $50, as we write on June 7, Takedown of the Gold Price is no surprise either.) Of course, ongoing Price Suppression attempts do not change the fact that these Precious Metals have been the best performing Asset class in the past decade and will continue to be.
Another Fundamental Reality is that the Major over-indebted Sovereign Nations’ Debts can not under any Reasonable Economic Scenario ever be paid.
But rather than facing the Default Issue Head-On, the Central Banks elect to buy back, as an “Extend and Pretend” stop-gap, as it were, the Toxic Debt, and put it on their Balance Sheets. But that chicanery too has its limits.
Indeed, the Combined Balance Sheet “Assets” of these seven Major Central Banks – U.S., U.K., China, ECB, Germany, Japan, Switzerland – rose from just over $5 Trillion in mid-2006 to about $15 Trillion at the end of 2011.
This is Debt Monetization (i.e., via Monetary Inflation) with a Vengeance and can lead only, and is leading already, to Price Hyperinflation (see Note 1).
This Price Hyperinflation is not widely recognized, yet, because the Official Statistics of Major Economies (the U.S. & China, to name two) are Bogus.
Fortunately, a Profit Opportunity arises from the foregoing provided one buys Inflation Assets at the Right Time. We have recommended Gold and Agricultural Plays recently and thus were subsequently able to recommend Subscribers Take ‘Considerable Profits’.
The Bottom-line Reality, as it were, is that QE to Infinity can not continue, because, Major Sovereign Nations and Banks are Debt Saturated.
And there are other challenges, as former Assistant Secretary of the U.S. Treasury Dr. Paul Craig Roberts describes, and one action which could help achieving a solution:
“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? … 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. … 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 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. …Another explanation for the stability of the Fed’s untenable policy is collusion between Washington, the Fed, and Wall Street.
“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. …The banks can borrow dollars from the Fed for free and leverage them in derivative transactions.
“…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.
“The very process of slowly getting out can bring the American house down. The BRICS … 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.
“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.
“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…
“An unfavorable economic statistic that wakes up investors as to the true state of the US economy…
“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…
“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.
“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.
“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.
“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.
“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 … 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. … And most certainly … purging the financial system of the gambling derivatives would vastly improve national security.”
“Collapse At Hand,” prisonplanet.com, 6/5/2012
Dr. Paul Craig Roberts, Former Asst Secretary of Treasury
However, while derivatives cancellation would help stabilize the financial situation, it would not by itself suffice to solve all the aforementioned problems. Considering all those problems, are there not eventually and ultimately only two choices?
The two “choices” are the Intensifying current monetary, and thus price, Inflation (itself eventually unsustainable) or Partial Debt Repudiation.
The Late Johan Joubert provides an example of a Successful Implantation of the latter by Iceland, whose Economy is now recovering nicely.
“In Iceland, the people have made the government resign, the primary banks have been nationalized and it was decided not to pay the debt that these created with Great Britain and Holland due to their bad financial politics, and a public assembly has been created to rewrite the constitution….
“In March (2010) the referendum and the denial of payment is voted in by 93%. Meanwhile the government has initiated an investigation to bring to justice those responsible for the crisis, and many high level executives and bankers are arrested….
“And all of this has been done in a peaceful way. A whole revolution against the powers that have created the current crisis.
“This is why there hasn’t been any publicity during the last two years: What would happen if the rest of the EU citizens took this as an example? What would happen if the US citizens took this as an example?”
“We Must Learn from Iceland”, Johan Joubert, 6/7/2012
The Johan Joubert Community, Truth & Justice Global Informer
Focusing on Fundamental Realities and tuning out the Noise and Disinformation, is the key to Profit and Protection in Turbulent Times.
June 8, 2012