Money/inflation, the Fed, Banking, Monetary Policy, Dollar, BTC, crypto, Gold

[G M]

http://www.europac.net/commentaries/late_party%E2%80%A6once_again


Late to The Party…Once Again

 By: Peter Schiff


Monday, April 18, 2011
 
The only thing more ridiculous than S&P’s too little too late semi-downgrade of U.S. sovereign debt was the market’s severe reaction to the announcement. Has S&P really added anything to the debate that wasn’t already widely known? In any event, S&P’s statement amounts to a wakeup call to anyone who has somehow managed to sleepwalk through the unprecedented debt explosion of the last few years.
 
Given S&P’s concerns that Congress will fail to address its long-term fiscal problems, on what basis can it conclude that the U.S. deserves its AAA credit rating? The highest possible rating should be reserved for fiscally responsible nations where the fiscal outlook is crystal clear. If S&P has genuine concerns that the U.S. will not deal with its out of control deficits, the AAA rating should be reduced right now.
 
By its own admission, S&P is unsure whether Congress will take the necessary steps to get America’s fiscal house in order. Given that uncertainty, it should immediately reduce its rating on U.S. sovereign debt several notches below AAA. Then if the U.S. does get its fiscal house in order, the AAA rating could be restored. If on the other hand, the situation deteriorates, additional downgrades would be in order.
 
AAA is the highest rating S&P can give. It is the Wall Street equivalent to a “strong buy.” If a stock analyst has serious concerns that a company may go bankrupt, would he maintain a “strong buy” on the assumption that there was still a possibility that bankruptcy could be averted? If the company declared bankruptcy, would the analyst reduce his rating from “strong buy” to “accumulate”?
 
In truth, if bankruptcy is even possible, the rating should be reduced to “hold,” at best. Only if the outlook improves to the point where bankruptcy is out of the picture should a stock be upgraded to “buy.” A “hold” rating would at least send the message to potential buyers that problems loom. Then if the company does declare bankruptcy, at least it does not do so sporting a “buy” rating.
 
Of course, by shifting to a negative outlook, S&P will try to have its cake and eat it too. In the unlikely event that Congress does act responsibly to restore fiscal prudence, its AAA would be validated. If on the other hand, out of control deficits lead to outright default or hyperinflation, it will hang its hat on the timely warning of its negative outlook. This is like a stock analyst putting a strong buy on a stock, but qualifying the rating as being speculative.
 
The bottom line is that the AAA rating on U.S. sovereign debt is pure politics. S&P simply does not have the integrity to honestly rate U.S. debt.  It has too cozy a relationship with the U.S. government and Wall Street to threaten the status quo. In fact, given the culpability of the rating agencies in the financial crisis, it may well be a quid pro quo that as long as the U.S.’ AAA rating is maintained, the rating agencies will continue to enjoy their government sanctioned monopolies, and that no criminal or civil charges will be filed related to inappropriately rated mortgage-backed securities.
 
Remember S&P had investment grade, AAA, ratings on countless mortgage-backed securities right up until the moment the paper became worthless. Amazingly, the rating agencies somehow maintained their status, and their ability to move markets, after the dust settled.
 
Currently, they are making the same mistake with U.S. Treasuries. Once it becomes obvious to everyone that the U.S. will either default on its debt or inflate its obligations away, S&P might downgrade treasuries to AA+. Such a move will be of little comfort to those investors left holding the bag.
 
In its analysis of U.S. solvency, S&P typically factors in the government’s ability to print its way out of any fiscal jam. As a result, it applies a very different set of criteria in its analysis of investment risk than it would for a private company, or even a government whose currency has no reserve status. But the agency completely fails to consider how reckless printing will impact the value of the dollar itself. It can assure investors that they will be repaid, but the agency doesn’t spare a thought about what if anything our creditors may be able to buy with their dollars.

[G M]

http://articles.economictimes.indiatimes.com/2011-04-14/news/29417583_1_economies-food-security-local-currencies

BRICS credit: Local currencies to replace dollar
IANS, Apr 14, 2011, 01.46pm ISTTags:
US dollar|financial cooperation

SANYA: Brazil, Russia, India, China and South Africa - the BRICS group of fastest growing economies - Thursday signed an agreement to use their own currencies instead of the predominant US dollar in issuing credit or grants to each other.

The agreement, the first-of-its-kind, was signed at the 3rd BRICS summit here attended by Indian Prime Minister Manmohan Singh, China's Hu Jintao, Brazil's Dilma Rousseff, Russia's Dmitry Medvedev and South Africa's Jacob Zuma.

[G M]

http://finance.yahoo.com/news/Dollar-weakens-against-most-apf-4263890409.html?x=0&.v=8

NEW YORK (AP) -- The dollar fell against most major currencies Wednesday, hitting a 15-month low against the euro, after solid earnings from major U.S. companies and a healthier reading on the housing market fueled investors' appetite for currencies linked to higher benchmark interest rates.

Higher interest rates tend to support investor demand for a currency, since it can generate a bigger return on investments denominated in that currency. The Federal Reserve has kept its key rate near zero since December 2008, while most of the world's other central banks are raising interest rates.

The euro jumped to $1.4514 in afternoon trading Wednesday from $1.4340 late Tuesday. Earlier, the euro hit $1.4547, its highest point since January 2010.

The dollar had advanced against the euro earlier in the week as speculation mounted that Greece would need to restructure its debt, but that fear wasn't weighing on the euro Wednesday as investors turned to assets of countries where interest rates are higher.Greece's finance minister also said that the country's debt was "absolutely sustainable."

[G M]

http://www.cnbc.com/id/42683030

A dollar plumbing three-year lows is hitting Americans squarely in the gas tank, and one economist thinks it could drive prices as high as $6 a gallon or more by summertime under the right conditions.

With the greenback coming under increased pressure from Federal Reserve policies and investor appetite for more risk, there seems little direction but up for commodity prices, in particular energy and metals.

Weakness in the US currency feeds upward pressure on commodities, which are priced in dollars and thus come at a discount on the foreign markets.

One result has been a surge higher in gasoline prices to nearly $4 a gallon before the summer driving season even starts, a trend that economists say will be aggravated as demand increases and the summer storm season threatens to disrupt oil supplies.

"All we have to have is a couple badly placed hurricanes which could constrain some of the refinery output capacity in some key locations," says Richard Hastings, strategist at Global Hunter Securities in Charlotte, N.C. "If you get weakness in the dollar concurrent with the strong driving season concurrent with the impact of one or two hurricanes in the wrong place, prices could go up in a quasi-exponential manner."




Jeff Cox
Staff Writer
CNBC.com
Using a model that combines "subtle rates of change" with movements in the dollar index [.DXY  73.86    -0.50  (-0.68%)   ] and commodity prices, Hastings figures the low dollar is responsible for about one-third, or $1.31, of the total gas-at-the-pump cost. Regular unleaded Wednesday was $3.84 a gallon nationwide, according to AAA.

While there's far from unanimity about the dollar's future course, the proportionate contribution that currency weakness makes to oil prices is clear.

The dollar as measured against a basket of foreign currencies has dropped 6 percent this year, while regular unleaded gasoline is up about 28 percent.

Gas prices also have been boosted from turmoil in the Middle East which in turn has triggered a wave of speculation that traders estimate has added about $15 or so to the cost of a barrel of crude [CLCV1  112.14    0.69  (+0.62%)   ], which is now teetering above the $110 mark.

Hastings sees gasoline having "no problem" getting to $6.50 a gallon over the summer after increased demand and storm disruptions come into play.

Others, though, say gasoline prices haven't needed any help so far from other events—the moves by the Fed to keep interest rates in negative real terms are enough to boost energy by themselves.

Michael Pento, senior economist at Euro Pacific Capital in New York, says there is an almost perfect negative correlation between the falling dollar and oil prices—minus-0.9 to be exact.

"When you have negative correlations that strong, it's not hard to understand that the reason why we're having this price spike in commodities is primarily because of the weaker currency and not because of shortages of oil or international tensions or global growth," Pento says.



The assertion from Hastings that the weak dollar is responsible for one-third of the total cost for a gallon of gas "sounds very low," Pento says, adding that a barrel of oil should be closer to the $65 to $70 range if priced properly.

"That's exactly where it would be if we weren't crumbling our currency," he says.

Should events follow their current course, sharply higher gas prices will burden consumers further as they also cope with the rise in food costs this year.

[G M]

http://www.nationalreview.com/exchequer/265199/four-national-debts

The Four National Debts

April 20, 2011 4:00 A.M.

By Kevin D. Williamson

 

Tags: Four different Treasury instruments


As I have argued (repeatedly, endlessly, ad nauseam, I know!), our real national debt is not that $14.3 trillion we always hear about, but more like $140 trillion. Another thing to keep in mind: That $14.3 trillion is not just one national debt, but four of them.
 
There are two flavors of national debt: debt held by the public and intragovernmental debt. The first category — securities held by investors, basically — is the one we mostly worry about. (I worry about the other one, too, but that’s another story.) If I may be permitted to express it in its full glory, the debt held by the public as of April 15 amounts to $9,679,202,714,701.01. (Love, love, love that penny on the end — can’t say Treasury isn’t minding the details! Wasn’t it Ben Franklin who said, “Mind the pennies and the trillions will take care of themselves”? Or something like that?)
 
That debt held by the public is really four debts, because we have four main ways of financing our borrowing: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). Bills are the shortest-term security, the attention-deficit-disorder case of the U.S. sovereign-debt world, maturing in one year or less. Notes, like liberal-arts graduates, mature in one to ten years, and bonds, like a mortgage (remember mortgages?), go from 20 to 30 years. TIPS are a mixed bag, in five-year, ten-year, and 30-year versions. TIPS are a relatively new thing, having been introduced in 1997. They’ve grown popular, from accounting for $33 billion of the national debt in their first year to $640 billion as of March 2011.
 
Now, when you’ve got $9,679,202,714,701.01 in debt floating around out there in the marketplace, and you’ve got S&P sort of frowning in a meaningful way at your ledger, and bond funds are wishing you the very best of British luck as they dump your debt and refuse to buy any more, but you just can’t help yourself and have to buy a shiny new windmill whenever you see one — in that sort of a situation, you might be keenly interested in how much of your debt is financed through short-term bills vs. how much is locked into 20- or 30-year rates with the long bond. We are starting to have that discussion just now. And it ain’t pretty: The average maturity is 59 months, and about $1.7 trillion of the publicly held debt is in short-term notes, which presents real, sobering risks of the standing-on-a-ledge variety should interest rates spike up.
 
Here’s the thing: It costs more to finance your debt with 30-year bonds than with 30-day bills. (Yeah, I know, they’re 28-day bills, but cut a poet some slack.) That’s because investors, like men with options, are commitment-shy. If you’re going to lock your investment down for 20 or 30 years, you want a pretty high rate of return. But for 28 days? Less so. But there’s a tradeoff: Interest rates change, sometimes dramatically and often unexpectedly. When the 28-day bill comes up and you still haven’t balanced the budget, you have to refinance that debt. Ben Bernanke and Ramesh Ponnuru are working hard to keep Washington’s short-term borrowing rate at basically zero right now, so there’s a lot of incentive to use short-term rather than long-term financing. Sometimes that works out well: The Clinton administration pushed a lot of our debt into shorter-term instruments back in the 1990s and helped save a bundle on borrowing costs. (The other way to save a bundle on borrowing costs: Stop borrowing.) But sometimes taking the short-term deal and leaving yourself open to unexpected changes in debt-service costs is really, really stupid: Ask somebody who signed up for one of those brilliant adjustable-rate mortgages that take you from free money to pawn-shop rates overnight. A lot of people, myself included, worry that we’ve got too much short-term debt and should use more long-term financing to protect ourselves from interest-rate risk, even if it costs more to do so. Why? Because debt service is one of those checks the government absolutely has to write, and you don’t want surprises. That’s how you get the sort of fiscal crisis that leaves you with banana-republic finances while the Canadians laugh at you.

[Crafty_Dog]

This point about the mix of short, middle, and long term rates is exactly right.

[G M]

http://www.washingtonpost.com/business/economy/the-dollar-less-almighty-big-investors-see-possible-long-term-currency-weakness/2011/04/19/AFxVaKLE_story.html

The dollar, less almighty: Big investors see possible long-term currency weakness


By Steven Mufson, Thursday, April 21, 8:41 PM



Last month, Warren Buffett went shopping — abroad.

He flew to South Korea for a factory opening and called the country a “hunting ground” for investments. He also pronounced post-earthquake Japan “a buying opportunity,” and then traveled on to India, where he said he was eyeing more acquisitions.

April 21 (Bloomberg) -- Greg Anderson, senior currency strategist at Citigroup Inc., talks about the outlook for the U.S. dollar and other major global currencies.

This is Buffett’s way of betting against the U.S. dollar. Armed with about $38 billion of cash at Berkshire Hathaway, he can use dollars now to buy companies that will generate profits in other currencies for years to come. (Buffett is a director on the Washington Post Co. board.)

“I would recommend against buying long-term fixed-dollar investments,” Buffett said at a public appearance in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011 five years, 10 years or 20 years from now, I would tell you it will not.”

Buffett isn’t alone. Some of the most successful investors in the United States and the biggest money management funds are worried that trade deficits, big budget deficits and the possibility of renewed inflation will make the U.S. dollar a weak currency compared with others around the world. On Thursday, the dollar fell to an 181 / 2-month low against the euro.

Bill Gross, chief executive of the giant bond investment firm Pimco, said its flagship Total Return Fund has 8 percent of its assets — a historic high — in issues denominated in currencies other than the dollar. Earlier this year, the fund dumped its entire holdings of U.S. Treasury bonds, according to disclosures.

“The United States is one of the serial abusers of deficits and inappropriate budgets and finance,” Gross said in an interview. “Do the headlines in terms of debt ceilings and 10 percent budget deficits and the back-and-forth between Republican and Democratic orthodoxies, does that matter? Sure it does. It’s not confidence-inducing.”

Gross said the decline of the dollar is part of a longer-term trend Pimco calls “the new normal.”

“We are in this new-normal type of economy in which the developing world is growing at a far faster pace than the developed world,” he said. “And growth tends to be reflected in terms of currency value.”

The dollar may still have more room to decline against other currencies. Gross noted that the currencies of many Asian economies are still 50 percent or more below their levels before the Asian currency crisis of 1997.

[G M]

http://www.nypost.com/p/news/opinion/opedcolumnists/geithner_goof_undermines_the_dollar_w1Ysjcn9xJWm8vz2oPPgEM?sms_ss=facebook&at_xt=4db172776178ca87%2C0

Chicago thug-style.

[G M]

http://pajamasmedia.com/tatler/2011/04/21/its-not-just-the-s-p-chinas-dagong-credit-agency-downgraded-us-in-november/

It’s not just the S & P – China’s Dagong credit agency downgraded US in November

From the Economist Magazine:


JOSH Noble in the FT has a great piece on the views of Dagong, China’s credit rating agency. Since China is the world’s key creditor, it makes sense to focus on its views. Never mind “negative watch”; Dagong downgraded the US back in November from AA to A+, on a par with Chile. Only Switzerland, Denmark and Australia are ranked AAA; China and Germany are AA+ or three notches higher than the US.
 
Nor does the agency pull its punches. In its outlook for the year, published in January, it said that
 
the United States, as the biggest country involved in sovereign debt crisis around the world, will continue its quantitative easing policy when the country is in danger, and the world credit war will be escalated due to the overflow of US dollars. In particular, the trend of continuous depreciation of US dollar will result in haircut of international creditors’ debts dominated in US dollar. The issuance of US dollar encourages numerous speculative capitals into the global commodity market, leading to an increasing pressure on global inflation. Different countries, in order to avoid unpredictable losses on their own interests, will have to seek for adjustment of international credit relations, and the global credit war, no doubt, will become the turning point of reforming international credit relations in 2011.
 

[DougMacG]

"The dollar, less almighty: Big investors see possible long-term currency weakness"

 - Another theory I was reading yesterday is that at the end of QE2 interest rates will rise and the dollar will rise.  We'll see.  I see it all as flawed measurement.  The weakness and strength of the dollar is measured against other flawed currencies from other flawed flawed places like Europe and China.  I wouldn't  bet in either direction, on the current direction of our country or on the others to do better. 
-----

Bernanke is AWOL to not be out-front, obnoxiously outspoken against the excessive spending in the economy.  And congress has done nothing to remove the 'dual purpose' of his job.

[G M]

http://online.wsj.com/article/SB10001424052748703789104576272983322884562.html?mod=googlenews_wsj

Fleeing the Dollar Flood
The world tries to protect itself from U.S. monetary policy.

Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That's a dangerous game, given the need for investment to drive economic development. But it's also increasingly typical of the world's reaction to America's mismanagement of the dollar and its eroding financial leadership.

The dollar is the world's reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.

The Fed's relentlessly easy monetary policy combined with Congress's reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on.

This incoming wall of money puts the central bankers in these countries in a bind. If they do nothing, the result can be asset bubbles and inflation. Brazil (6.3%) and China (5.4% officially but no doubt higher in fact) are both enduring bursts of inflation, as are many other countries. These nations can raise interest rates or let their own currencies appreciate, at the risk of slower economic growth. Rather than endure that adjustment, many countries are resorting to capital controls and other administrative measures to try to stop the inflow.

View Full Image


Bloomberg News
 
Treasury Secretary Timothy Geithner, right, and Fed Chairman Ben Bernanke during the IMF-World Bank spring meeting in Washington, D.C., on Friday.
.
Over the past year, Brazil has introduced taxes on stock and bond investment and raised bank reserve requirements; Indonesia has introduced holding periods for government bonds; South Korea has limited banks' ability to engage in foreign-currency financing, among other things; Peru and Turkey have taken action, too. Yet their currencies have in many cases continued to rise and the money keeps coming in.

So it was little surprise earlier this month when IMF chief Dominique Strauss-Kahn joined the parade and endorsed capital controls as a necessary "tool" to be used on a "temporary basis," ending the fund's long-time commitment to free flows of capital. The last time the fund did this was amid the Mexico monetary crisis of the mid-1990s.

The IMF wanted its members last weekend to endorse guidelines on when they would use such measures. Brazil's finance minister spoke for many when he refused, calling capital controls necessary "self defense" measures against "spillover effects" from other countries' policies. He meant the U.S.

As if to underscore the point, U.S. Treasury Secretary Timothy Geithner responded by pointing the finger right back at developing countries, essentially updating Treasury Secretary John Connally's famous line to a delegation of Europeans in the 1970s that the dollar is "our currency but your problem."

The larger story is that the world is starting to protect, and perhaps ultimately free, itself from America's weak dollar standard. The European Central Bank recently raised interest rates and may do so again to prevent an inflation breakout. China is allowing more trade to be conducted in yuan, a first step toward making it a global currency. At a meeting of developing countries—the so-called BRICs—in China recently, leaders called for "a broad-based international reserve currency system providing stability and certainty." They weren't referring to the dollar.

Even in the U.S., Americans are buying commodities (oil per barrel: $111) and gold ($1,500 an ounce) as a dollar hedge, and the state of Utah recently took steps to make it easier for citizens to buy and sell gold as a de facto alternative currency. Whether or not these prove to be wise investments, they are certainly signals of mistrust in Washington's economic stewardship.

At an economic town hall this week, President Obama blamed "speculators" for rising oil prices. He should have mentioned the Fed and his own Treasury, which have encouraged the world to invest in hedges against the falling dollar. Chairman Ben Bernanke and Mr. Geithner have deliberately pursued a policy of unprecedented monetary and spending stimulus to reflate the economy and boost asset prices. The bill is coming due in a weak dollar, food and energy inflation, and the decline of U.S. economic credibility.

[DougMacG]

One obvious explanation on high gas prices is the laws against domestic production, but another is the deterioration of our currency.  Gas prices, it turns out, have not increased  - if you are paying with silver.

Of course these two problems are related.  Our shipment of dollars overseas for energy (along with our horrendous deficits) is a contributing problem for our deteriorating currency (and to our security problems).

[Crafty_Dog]

By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — The dollar’s revenge?

That possibility has many gold bugs worried, since recent strength in gold’s dollar-denominated price appears to have come at the expense of the U.S. dollar. In fact, the correlation has been particularly striking this year: The U.S. Dollar Index /quotes/comstock/11j!i:dxy0 DXY -0.23%   has fallen 6.3% since the end of last year, for example, while gold bullion /quotes/comstock/21e!f:gc\j11 GCJ11 -0.50%   has risen 6.1%.

The gold bugs’ concern isn’t just theoretical, either. Many expect the dollar to stage a comeback as the U.S. Federal Reserve brings its monetary-stimulus program — its second round of quantitative easing, or QE2 — to an end June 30. Indeed, some are anticipating that the rally could begin as soon as later this week, depending on the outcome of the Fed’s meeting. Read more on Fed.


Gold at record highPaul Vigna discusses why gold prices are at a fresh record and silver is flirting with $50 an ounce for the first time since 1980.
But are the gold bugs right to worry about a stronger dollar? That’s what I set out to discover for this column.

I fed into my PC’s statistical package five years’ worth of data for gold bullion and the Dow Jones FXCM Dollar Index (which represents the dollar’s value against a basket of the currencies of the U.S.’ largest trading partners). I was specifically interested in the extent to which changes in the dollar’s value led to changes in gold’s price.

As expected, I found an inverse correlation: Increases in the dollar’s value tended to correspond to decreases in gold’s U.S. dollar price, and vice versa. Crucially, however, I found that the ups and downs of the dollar were only able to explain about a quarter of gold’s gyrations.

(For the statistically minded among you: The r-squared for the correlation was never higher than 0.26, regardless of whether I focused on daily, weekly or monthly changes in the dollar index and gold.)

What this means: Assuming the future is like the past, other factors besides the dollar’s value against other currencies will explain the bulk of what happens to gold in coming sessions.

This somewhat surprising finding is confirmed by another study recently conducted by Ned Davis Research, the quantitative research firm. In that study, the firm focused on commodities generally, not just gold. Joseph Kalish, senior macro strategist for the firm, and John LaForge, Ned Davis’s commodity strategist, found that only about one-third of the S&P GSCI Commodity index’s gain over the past couple of years is due to the weak dollar.

Note carefully that my results, as well as those of Ned Davis Research, don’t mean that currency devaluations generally account for only a quarter (or a third) of the increase in the dollar-denominated price of gold. That conclusion only applies to the U.S. dollar’s value relative to other currencies.

Indeed, it is possible to imagine a hypothetical scenario in which all currencies are debased at precisely the same rate over time. In that case, gold’s U.S. dollar price would still rise, even though the U.S. dollar’s value relative to other currencies would remain more or less constant. (Marc:  My understanding is that this is not a hypothetical, indeed it is precisely what is happening-- other countries debase their currencies so as to maintain some semblance of stability in the exchange rate with the dollar; bottom line is that the Fed exports inflation/currency debasement)

The bottom line? Only a minority of gold’s recent rally can be attributed to weakness in the dollar. That means that, while unexpected dollar strength will likely cause some weakness in gold, such strength is not likely, by itself, to cause gold’s bull market to come to an end.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980. (Marc: My impression is that this is a well regarded newsletter for tracking the comparative results of other newsletters)

[Crafty_Dog]

By LEWIS E. LEHRMAN
No man in America is a match for House Budget Committee Chairman Paul Ryan on the federal budget. No congressman in my lifetime has been more determined to cut government spending. No one is better informed for the task he has set himself. Nor has anyone developed a more comprehensive plan to reduce, and ultimately eliminate, the federal budget deficit than the House Budget Resolution submitted by Mr. Ryan on April 5.

But experience and the operations of the Federal Reserve system compel me to predict that Mr. Ryan's heroic efforts to balance the budget by 2015 without raising taxes will not end in success—even with a Republican majority in both Houses and a Republican president in 2012.

Why? Because the House Budget Resolution fails to reform the Federal Reserve system that supplies the new money and credit to finance both the budget deficit and the balance-of-payments deficit. So long as the Treasury deficit can be financed with discretionary money and credit—newly created by the Federal Reserve, by the banking system, and by foreign central banks—the federal budget deficit will persist.

It is true that federal deficits will rise more or less with the business cycle, leading previous deficit hawks such as Sens. Phil Gramm and Warren Rudman to believe that if we just reined in federal spending and increased economic growth we'd have a balanced budget. Indeed, for two generations, fiscal conservatives and Democratic and Republican presidents alike have pledged to balance the budget and bring an end to ever-rising government spending.

They, too, were informed, determined and sincere leaders. But they did not succeed because of institutional defects in the monetary system that have never been remedied.

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Chad Crowe
 .President Reagan was aware of the need to reform the monetary system in the 1980s, but circumstances and time permitted only tax-rate reform, deregulation efforts, and rebuilding a strong defense. And so the monetary problem remains.

The problem is simple. Because of the official reserve currency status of the dollar, combined with discretionary new Federal Reserve and foreign central bank credit, the federal government is always able to finance the Treasury deficit, even though net national savings are insufficient for the purpose.

What persistent debtor could resist permanent credit financing? For a government, an individual or an enterprise, "a deficit without tears" leads to the corrupt euphoria of limitless spending. For example, with new credit, the Fed will have bought $600 billion of U.S. Treasurys between November 2010 and June 2011, a rate of purchase that approximates the annualized budget deficit. Commodity, equity and emerging-market inflation are only a few of the volatile consequences of this Fed credit policy.

The solution to the problem is equally simple. First, in order to limit Fed discretion, the dollar must be made convertible to a weight unit of gold by congressional statute—at a price that preserves the level of nominal wages in order to avoid the threat of deflation. Second, the government must at the same time be prohibited from financing its deficit at the Fed or in the banks—both at home or abroad. Third, only in the free market for true savings—undisguised by inflationary new Federal Reserve money and banking system credit—will interest rates signal to voters the consequences of growing federal government deficits.

Unrestricted convertibility of the dollar to gold at the statutory price restricts Federal Reserve creation of excess dollars and the inflation caused by Fed financing of the deficit. This is so because excess dollars in the financial markets, at home or abroad, would lead to redemption of the undesired dollars into gold at the statutory parity price, thus requiring the Fed to reduce the expansion of credit in order to preserve the lawful convertibility parity of the dollar-gold relationship, thereby reducing the threat of inflation.

This monetary reform would provide an indispensable restraint, not only on the Federal Reserve, but also on the global banking system—based as the system now is on the dollar standard and foreign official dollar reserves. Establishing dollar convertibility to a weight unit of gold, and ending the dollar's reserve currency role, constitute the dual institutional mechanisms by which sustained, systemic inflation is ruled out of the integrated world trading system. It would also prevent access to unlimited Fed credit by which to finance ever-growing government.

By adding these monetary reforms to his House Budget Resolution, Mr. Ryan has a chance to succeed where previous deficit hawks have failed. As today's stalwart of a balanced budget, he must now become a monetary-reform statesman if he is to attain his admirable goal of balancing the federal budget by 2015 without raising taxes.

Mr. Lehrman is chairman of The Lehrman Institute.

[G M]

http://www.theglobeandmail.com/report-on-business/us-dollars-dizzying-drop-wreaking-economic-havoc/article2002887/

The U.S. dollar’s long decline has turned into a sudden plunge, throwing currency markets into a frenzy that is complicating life for policy makers and executives the world over.

An index that measures the value of the dollar against six major peers declined for the eighth consecutive day Thursday, the longest slump in two years.

[G M]

http://www.bloomberg.com/news/2011-04-29/china-s-yuan-strengthens-beyond-6-5-per-dollar-for-first-time-since-1993.html

Yuan Strengthens to Post-’93 High Against Dollar as China Fights Inflation

 By Bloomberg News - Apr 29, 2011 2:43 AM MT


China’s yuan strengthened beyond 6.5 per dollar for the first time since 1993, supported by speculation the central bank will allow appreciation to help tame the fastest inflation in more than two years.

The currency’s seventh weekly gain, its longest winning streak since July 2008, may damp U.S. criticism of China’s exchange-rate policy before Vice Premier Wang Qishan heads to Washington next month for talks with Treasury Secretary Tim Geithner. Consumer prices in Asia’s biggest economy rose 5.4 percent from a year earlier in March, exceeding the government’s 4 percent goal for this year.

“Inflation is still higher than what the government would like to see,” said David Cohen, a Singapore-based economist at Action Economics, who previously worked for the Federal Reserve. “The central bank is tolerating faster currency appreciation to contain import costs.”

The yuan strengthened 0.16 percent to close at 6.4910 per dollar in Shanghai, earlier touching a 17-year high of 6.4892, according to the China Foreign Exchange Trade System. It rose 0.9 percent this month, the best performance of 2011. In Hong Kong’s offshore market, the currency jumped 0.28 percent to 6.4645, the biggest gain in Bloomberg data going back to Aug. 24.

The People’s Bank of China set the yuan’s reference rate at 6.4990 per dollar, the strongest level since July 2005. The currency is allowed to trade up to 0.5 percent on either side of the official rate.

Dollar Slide

Twelve-month non-deliverable forwards rose 0.22 percent to 6.3095 per dollar as of 4:40 p.m. in Hong Kong, trading at a 2.9 percent premium to the onshore spot rate, according to data compiled by Bloomberg. Local billionaire Li Ka-shing’s Hui Xian Real Estate Investment Trust, the city’s first listed shares denominated in yuan, began trading today.

The “unusually fast pace” of yuan gains confirms that the yuan is being used to fight inflation, Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong, wrote in a note to clients today. He said there may be a “sharp gain” once 6.50 is breached and recommends buying the yuan against the greenback using non-deliverable forwards.

The dollar weakened this month against all 16 major currencies monitored by Bloomberg as the Fed maintained a near- zero benchmark interest rate and boosted the supply of the U.S. currency by buying Treasuries, a policy known as quantitative easing that is set to end in June.

[DougMacG]

Isn't that what everyone wanted, the stronger yuan?  Adjusting the currency without fixing our problems leaves us with ... the same problems along with new ones.  Imports, cost of living and inflation worsens while nothing significant is gained on the export side because our currency exchange rate wasn't the problem.

Just more sign of failed policies, mis-managing what was recently the greatest economy on the planet.

[G M]

http://pajamasmedia.com/blog/americas-fiscal-high-noon/?singlepage=true


America’s Fiscal High Noon

Beyond today's myriad fiscal woes, we’re just months away from a potential economic Pearl Harbor, and yet all we hear from Obama is happy talk.

April 29, 2011 - by Mary Claire Kendall

Right now, it’s 1941 all over again.
 
We’re just months away from another Pearl Harbor — potentially — and all we hear from President Barack Obama and company, as Governor Haley Barbour (R-MS) puts it, is “happy talk.”
 
According to the unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman, what’s referred to as “Bear Raid II” — phase III of an economic terrorist attack against the United States — is poised to fatally hit the U.S. Treasury and the U.S. dollar, causing the collapse of America’s economy.
 
It was a threat former Secretary of State James A. Baker III underscored on CNN’s Fareed Zakaria GPS on April 10, noting if the dollar was replaced as the global reserve currency, it would be catastrophic for America.
 
Yet red flags galore signal that the train has already left the station.
 
Three weeks ago, George Soros hosted his Bretton Woods II summit, “CRISIS and RENEWAL: International Political Economy at the Crossroads,” focused on reordering the world’s financial architecture. At the same time, our political leaders were haggling over fiscal peanuts — Obama proudly announcing at the 11th hour, crisis averted: the Washington Monument would remain open after all.
 
Three weeks earlier, Obama began bombing Libya. It was the straw that broke the camel’s back energy-wise, sending gas prices soaring, OPEC countries reaping rich rewards. It’s right out of the economic terrorism playbook Freeman writes about.  But wiser heads are beginning to get it. As the Financial Times reports, “The western allies are in a fine Libyan pickle. The real mission of the British and French military ‘advisers’ being dispatched to the rebel camp is to explore what the west might do to get out of it.”
 
Then, just as Americans were wrapping up their taxes, BRICS (Brazil, Russia, India, China, South America) met in China, and announced that, it would, in fact, like to displace the U.S. dollar as the world’s reserve currency.
 
At the same time, the International Monetary Fund declared, as reported in Financial Times, “The US lacks a ‘credible strategy’ to stabilize its mounting public debt posing a small but significant risk of a new global economic crisis….”
 
Then, Standard & Poor’s issued its “stark warning” regarding America’s debt on Tax Day, sending stocks plunging. While maintaining our triple-A rating, for the first time since it began rating U.S. debt — the same year as the Pearl Harbor attack — S&P lowered its outlook from “stable” to “negative,” threatening a downgrade within two years. 

And now the dollar has slid to its lowest level in three years given disappointing growth, higher inflation, and the Fed’s cheap money.
 
It’s almost a perfectly executed set-up for this potential economic Pearl Harbor.
 
Wake up, America! It’s no longer OK to say, let’s just issue ourselves another credit card and take some happy pills — or happy spirits — and everything will be fine.
 
Rather, as Republican and Democratic legislators alike ponder the debt ceiling vote, hurtling down the road at a dizzying pace, it’s critical that they admit and confront the reality that, unless we sober up vis-à-vis deficit spending, the party is over.

[Crafty_Dog]

I heard that the margin requirement on silver has been raised.  Anyone have any word on this?  (Also note implications for margin requirements on oil futures)

[G M]

http://www.cnbc.com/id/42985646

'I Will Be Shorting US Bonds': Jim Rogers
Published: Wednesday, 11 May 2011 | 8:13 AM ET Text Size By: Antonia van de Velde
CNBC Associate Web Producer



Veteran investor Jim Rogers said on Wednesday he plans to short US bonds and sees more currency turmoil in the markets this fall.



"I will be shorting US bonds," Rogers told a conference in Edinburgh. "I would probably be doing it today if I weren't here," he said.

Bonds in the US have been in a bull market for 30 years, Rogers said.

"In my view that's coming to an end...the bond bulll market is coming to an end. If any of you have bonds I would urge you to go home and sell them. If any of you are bond portfolio managers I would get another job," he said.

Addressing one bond portfolio manager among conference delegates, Rogers said: "If I were you I would think about becoming a farmer. You buy land and learn how to farm."

"In my view it’s going to be a spectacular way to make money," he said, adding: "This is where the great fortunes are going to be made in the future."

Rogers also said he expected to see more currency turmoil in the markets this fall.

"One of the safest investments I see is the renminbi," he said. “Longer term the US dollar is going to be a total disaster,” Rogers said, urging investors to “think about getting out of US dollars before it’s too late.”

Many investors say the Chinese yuan is a good place to invest, but China's capital controls make it hard for foreigners to buy the currency.

Dollar in Danger

"I would expect to see some serious problems in the foreseeable future….By 2011, 2012, 2013, 2013, I don’t know when, we’re going to have an economic slowdown again," he said. "This time it’s going to be a real disaster because the US cannot quadruple its debt again. Dr Bernanke cannot print staggering amounts of money again."

"How much more can they print without a serious collapse of the US dollar?" he said.

Rogers said he owns the dollar for the moment but he may have to sell it.

"There’s been a huge amount of good news for the dollar and you think it would be strengthening by now…it hasn’t been," he said.

Rogers said the world was facing an ongoing bull market in commodities and said it hadn’t run its course yet. "Commodities are totally underowned," he said.

“This bull market in commodities has a long way to go,” he said, pointing to supply constraints. "If the world economy does not get better I’d rather own commodities than stocks.”

[ccp]

Jim Rogers
From Wikipedia, the free encyclopedia
Jump to: navigation, search
For other uses, see James Rogers (disambiguation).
James Beeland Rogers, Jr.
 
Born October 19, 1942 (1942-10-19) (age 68)
Baltimore, Maryland, USA[1]
Alma mater Balliol College, Oxford
Yale University
Occupation Financial investor, author
Website
www.jimrogers.com
James Beeland Rogers, Jr. (born October 19, 1942) is an American investor and author based in Singapore. He is chairman of Rogers Holdings and Beeland Interests, Inc. He was the co-founder of the Quantum Fund with George Soros and creator of the Rogers International Commodities Index (RICI).

Rogers is an outspoken proponent of the free market, but he does not consider himself a member of any school of thought. Rogers acknowledges, however, that his views best fit the label of Austrian School of economics.[2]

Rogers was born in Baltimore, Maryland and raised in Demopolis, Alabama.[1][3] He started in business at the age of five by selling peanuts and by picking up empty bottles that fans left behind at baseball games. He got his first job on Wall Street, at Dominick & Dominick, after graduating with a bachelor's degree from Yale University in 1964. Rogers then acquired a second BA degree in Philosophy, Politics and Economics from Balliol College, Oxford University in 1966.

In 1970, Rogers joined Arnhold and S. Bleichroder. In 1973, Rogers co-founded the Quantum Fund with George Soros. During the following 10 years, the portfolio gained 4200% while the S&P advanced about 47%.[4] The Quantum Fund was one of the first truly international funds.

In 1980, Rogers decided to "retire", and spent some of his time traveling on a motorcycle around the world. Since then, he has been a guest professor of finance at the Columbia University Graduate School of Business.[citation needed]

In 1989 and 1990, Rogers was the moderator of WCBS' The Dreyfus Roundtable and FNN's The Profit Motive with Jim Rogers. From 1990 to 1992, he traveled through China again, as well as around the world, on motorcycle, over 100,000 miles (160,000 km) across six continents, which was picked up in the Guinness Book of World Records. He tells of his adventures and worldwide investments in Investment Biker, a bestselling investment book.

In 1998, Rogers founded the Rogers International Commodity Index. In 2007, the index and its three sub-indices were linked to exchange-traded notes under the banner ELEMENTS. The notes track the total return of the indices as an accessible way to invest in the index. Rogers is an outspoken advocate of agriculture investments and, in addition to the Rogers Commodity Index, is involved with two direct, farmland investment funds - Agrifirma,[5] based in Brazil, and Agcapita Farmland Investment Partnership,[6] based in Canada.

Between January 1, 1999 and January 5, 2002, Rogers did another Guinness World Record journey through 116 countries, covering 245,000 kilometers with his wife, Paige Parker, in a custom-made Mercedes. The trip began in Iceland, which was about to celebrate the 1000th anniversary of Leif Eriksson's first trip to America. On January 5, 2002, they were back in New York City and their home on Riverside Drive. His route around the world can be viewed on his website, jimrogers.com. He wrote Adventure Capitalist following this around-the-world adventure. It is currently his bestselling book.

On his return in 2002, Rogers became a regular guest on Fox News' Cavuto on Business which airs every Saturday.[7] In 2005, Rogers wrote Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market. In this book, Rogers quotes a Financial Analysts Journal academic paper co-authored by Yale School of Management professor, Geert Rouwenhorst, entitled Facts and Fantasies about Commodity Futures. Rogers contends this paper shows that commodities investment is one of the best investments over time, which is a concept somewhat at odds with conventional investment thinking.

In December 2007, Rogers sold his mansion in New York City for about 16 million USD and moved to Singapore. Rogers claimed that he moved because now is a ground-breaking time for investment potential in Asian markets. Rogers's first daughter is now being tutored in Mandarin to prepare her for the future. He is quoted as saying: "If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia." In a CNBC interview with Maria Bartiromo broadcast on May 5, 2008, Rogers said that people in China are extremely motivated and driven, and he wants to be in that type of environment, so his daughters are motivated and driven. He also stated that this is how America and Europe used to be. He chose not to move to Chinese cities like Hong Kong or Shanghai due to the high levels of pollution causing potential health problems for his family; hence, he chose Singapore. He has also advocated investing in certain smaller Asian frontier markets such as Sri Lanka and Cambodia, and currently serves as an Advisor to Leopard Capital’s Leopard Sri Lanka Fund.[8] However, he is not fully bullish on all Asian nations, as he remains skeptical of India's future - "India as we know it will not survive another 30 or 40 years".[9] In 2008 Rogers endorsed Ron Paul.[10]

Rogers has two daughters with Paige Parker. Hilton Augusta(nicknamed Happy) was born in 2003, and their second daughter Beeland Anderson in 2008. His latest book, A Gift To My Children, contains lessons in life for his daughters as well as investment advice and was published in 2009.

On November 4, 2010, at Oxford University’s Balliol College, he urged students to scrap career plans for Wall Street or the City, London’s financial district, and to study agriculture and mining instead. “The power is shifting again from the financial centers to the producers of real goods. The place to be is in commodities, raw materials, natural resources."[11]

In February 2011 Rogers announced that he has started a new index fund which focuses on "the top companies in agriculture, mining, metals and energy sectors as well as those in the alternative energy space including solar, wind and hydro."[12] The index is called The Rogers Global Resources Equity Index and the best and most liquid companies, according to Rogers, go into the index.

[edit] Books
1995: Investment Biker: Around the World with Jim Rogers. - ISBN 1-55850-529-6
2003: Adventure Capitalist: The Ultimate Road Trip. - ISBN 0375509127
2004: Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market. - ISBN 140006337X
2007: A Bull in China: Investing Profitably in the World's Greatest Market. - ISBN 1400066166
2009: A Gift to My Children: A Father's Lessons For Life And Investing. - ISBN 1400067545
[

[Crafty_Dog]

I see that fears of global recession are causing commodities to pull back (my silver holdings have been hard hit, in part due to increased margin requirements) and the problems with Greece and the Euro to strengthen the dollar and Treasuries , , ,

[G M]

Just wait..... Gold and silver are the future. Just because the EU and the Euro are circling the drain doesn't mean the dollar doesn't face the same fate.

[Crafty_Dog]

I remind you of what happened to the price of the dollar when Volcker had to dramatically raise interest rates in the late 70s and of what happened when the Hunt Brothers tried cornering silver in the same period.  How much hot momentum money has been playing silver with its de minimis margin requirements.

What happens to US interest rates in a month when/if QE 2 comes to a close? 

[G M]

I think there are different factors in play now. The dollar WAS the reserve currency in the 70's. Not so much anymore. Was the AAA rating of the US in question back then?

[Crafty_Dog]

If anything I think that makes my point stronger-- US interest rates will have to go up MORE due to dollar's diminished world role.

Coincidentally enough , , , see this:
http://finance.townhall.com/columnists/larrykudlow/2011/05/12/bernankes_quantitative_neutrality/page/full/

http://finance.townhall.com/columnists/mikeshedlock/2011/05/12/oil_crashes

[DougMacG]

The 'what will happen at the end of quantitative easing' story is interesting.  Of course in economics they always mean 'if all other things remained constant'.

A 'weak' dollar (now) and a 'strong' dollar later (again) are just 2 misnomers for 2 different sets of problems.  I agree we probably have high interest rates coming and a 'stronger' dollar, if monetary dilution ever stops.  That will hurt manufacturing, exporting and jobs, houses and tax revenues from people in those sectors even further.

My way of thinking of this is that all these problems are inextricably linked. The fiscal budget debt mess is linked to the monetary irresponsibility.  Both are linked to the anti-production regulatory environment, linked to the anti-incentive productive investment environment and that is all linked to the political uncertainty of heading into another fork in the road having no idea which way this country or the global economy will turn.

In other words, this is all easier to fix than most people think.  

[Crafty_Dog]

I agree with 95% of that.  The point I don't agree with is the idea that a stronger dollar would hurt the US.  I disagree on a number of levels.

[Crafty_Dog]

--------------------------------------------------------------------------------
The Producer Price Index (PPI) increased 0.8% in April To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 5/12/2011


The Producer Price Index (PPI) increased 0.8% in April, beating the consensus expected rise of 0.6%.  Producer prices are up 6.8% versus a year ago.

The April gain in the PPI was led by energy, which increased 2.5%. Food prices rose 0.3%. The “core” PPI, which excludes food and energy, increased 0.3%, higher than the consensus expected rise of 0.2%.
 
Consumer goods prices rose 0.9% in April and are up 8.7% versus last year.  Capital equipment prices were up 0.3% in April and are up 1.3% in the past year.
 
Core intermediate goods prices increased 1.1% in April and are up 5.6% versus a year ago.  Core crude prices rose 2.6% in April and are up 18.2% in the past twelve months.
 
Implications: Declining oil prices may temporarily tame producer price inflation in May, but, through April, inflation was roaring. Prices are up 6.8% in the past year and accelerating. In the past six months producer prices are up at an 11.5% annual rate; in the past three months they’re up at a 13.1% rate. Most of the gain in April was due to energy. But, while the Federal Reserve can still claim core inflation is low for consumers, core producer prices are accelerating, up 0.3% in April and up at a 3.2% annual rate in the past three months. Further up the production pipeline, core intermediate prices increased 1.1% in April and are up at a 13.1% annual pace in the past three months; core crude prices bounced back in April increasing 2.6%, and are up at a 10.5% rate in the past three months. Based on these inflation signals and the current state of the economy, the Fed’s monetary policy is way too loose, even if headline inflation takes a breather in May due to the drop in oil prices. In other news this morning, new claims for unemployment insurance fell 44,000 last week to 434,000.  This is very close to the four-week moving average of 437,000.  Continuing claims for regular state benefits increased 5,000 to 3.76 million.  Claims have been roiled of late by early auto shutdowns related to the disasters in Japan as well as a brutal tornado season in much of the Midwest and South.  We expect claims to generally decline over the next several weeks.

[DougMacG]

"The point I don't agree with is the idea that a stronger dollar would hurt the US"

My point came out wrong.  I only meant that along with the good effects, there will also be negatives.  Neither a strong or weak dollar solves the other problems - a bloated public sector anchor and the regulations that prevent hiring or production from coming back.  If we fix those other things that are wrong, the dollar find its own level of strength.

QE needs to end.  Money can only increase at the same pace as production, and maybe we need to send that to them in a constitutional amendment. 

The inflation we already put in motion will be extremely harmful.

[G M]

http://www.europac.net/commentaries/silver_takes_it_chin

Silver Takes it on the Chin


 By:
 John Browne


Friday, May 6, 2011
 
This week saw the type of downside volatility in the precious metals market that will be remembered for years to come. For those of us who have been long gold, and silver in particular, the memories will not be pleasant.  While many had been expecting a pullback in silver, when the violence did come it was nevertheless shocking. Silver shed one third of its value in less than one week. And while gold was pulled down by the general sell off in all commodities (oil, copper, coffee, etc.) the yellow metal shed only 6.5% during the carnage. Those mild losses should remind us that  gold is not just another commodity, but has monetary qualities that tend to smooth out volatility. But will silver survive the vicious downturn?
 
First, despite all the valid reasons that, in an era of perpetual quantitative easing, silver had become an attractive asset class, it had become clear in recent days that it was overbought. Leading up to April 28, the price of silver rose by more than 150 per cent in U.S. dollar terms over the prior year. On Wall Street momentum always attracts momentum, and as a result, the ascent accelerated in April, with silver rising 31 per cent from April 1 to April 28.
 
A ‘hot” commodity tends to attract leveraged speculators. As a result, the rise became more technical than fundamental. Its recent sell off should be viewed on the same terms.
 
After an exponential rise, supercharged by leveraged speculators, silver was bound to attract the attention of short sellers. In addition, silver speculation became more expensive as the Chicago Mercantile Exchange raised the margin requirement for buying silver futures five times in just one week! Factoring in all of these increases, the last of which becomes effective this coming Monday, the cost of owning  silver futures contracts will have increased a staggering 84 per cent from the beginning of May. The rationale behind these moves requires serious inquiry…which I will leave to more informed columnists.  But the results were predictably dramatic, as many leveraged players were forced to liquidate.
 
In addition to these technical catalysts, other factors contributed to the decline this week. Facing pressure from domestic exporters who complain about an overly strong euro, there are signs that the ECB is losing its commitment to vigilance against inflation. This has led to speculation that the U.S. dollar could strengthen for the remainder of the year. This could adversely affect the price of precious metals. In addition, with private sector unemployment rising in the United States, there is a risk that the U.S. economy could be entering a second, or double dip recession. This would lower the risks of overt inflation and dampen the industrial demand for silver.
 
But as far as long term fundamentals are concerned, the case for precious metals remains intact. First, as long as the Federal Reserve and other central banks around the world continue to treat fiat currencies as monopoly money, investors will be seeking alternative currencies as a hedge against inflation. But until bank lending to consumers and businesses increases dramatically, the dangers of hyperinflation will remain largely hidden from the broad swath of investors. As a result, silver’s upward price movements will be vulnerable to panic selling.
 
But from my perspective the biggest driver in purchases of silver and gold is likely a fear of a meltdown of the dollar and a collapse in the financial system. There are few signs that these fears have abated with the selloff in silver. The U.S. dollar is still standing close to a 3-year low against the dollar index. If more rumors spread that the dollar may lose its reserve status, the greenback could plummet. It is perhaps this perceived risk that has provided the majority of the force behind increases in precious metals over the past year. It is important to remember that the fundamental strength of metals attracted the speculators, but speculators did not create the bull market. It is my feeling that it will endure without them.
 
While a threatened recession and a stronger dollar should deflect inflation expectations in the short-term, the longer-term risk of a debt crisis spreading into a currency crisis remains. Indeed, the risks of a currency crisis are increasing. For investors who share this view, and who can tolerate the volatility, the reduced prices of silver may be attractive.

[G M]

http://business.financialpost.com/2011/05/10/gold-could-hit-2000-deutsche-bank/

Gold, which reached a record $1,577.57 an ounce on May 2, may surge a further 30 percent by January as investors seek to protect themselves from “economic uncertainty,” according to Deutsche Bank AG.
 
“I’m bullish on gold despite its current levels,” Hal Lehr, Deutsche Bank’s managing director for cross-commodity trading, said in an interview in Buenos Aires. “It could reach $2,000 dollar an ounce in the next eight months.”
 
Investors including George Soros and John Paulson invested in gold as the metal surged over the past year amid a sovereign debt crisis in Europe, economic turmoil in the U.S. and civil unrest in the Middle East. This month‘s record was a sixfold gain since the precious metal’s low in August 1999.
 


Gold fell 1.6 percent on May 4 after the Wall Street Journal reported that Soros Fund Management LLC sold precious-metal assets. Soros’ fund held shares in the SPDR Gold Trust, the biggest exchange-traded product backed by gold, and the iShares Gold Trust at the end of 2010, U.S. Securities and Exchange Commission filings show.
 
Gold rose for a third day in New York today as concern about Europe’s debt woes spurred demand for precious metals as a protection of wealth. Standard & Poor’s yesterday downgraded Greece’s credit rating for the fourth time since April 2010. Gold for June delivery rose $6.10, or 0.41 percent, to $1,509.3 an ounce at 9:03 a.m. on the Comex in New York.
 
Bullion rose for six consecutive weeks through April 29 as the metal is seen as a hedge against inflation around the globe. Central banks in China, India and the European Union, among others, have increased interest rates in recent weeks as policymakers seek to control consumer prices with tighter monetary policy.
 
The U.S. Federal Reserve has kept the benchmark rate between zero percent and 0.25 percent since December 2008 and pledged to purchase $600 billion in Treasuries through June to stimulate the economy. Standard & Poor’s earlier last month revised its debt outlook for the U.S. to negative from stable.
 
The U.S. Treasury Department projects the government could reach its debt ceiling limit of $14.3 trillion as soon as mid- May and run out of options for avoiding default by early July.

[G M]

http://online.wsj.com/article/SB10001424052748703730804576314953091790360.html

A 100-trillion-dollar bill, it turns out, is worth about $5.

 
Associated Press
 
A man in Harare, Zimbabwe, carried cash for groceries in 2008.
.That's the going rate for Zimbabwe's highest denomination note, the biggest ever produced for legal tender—and a national symbol of monetary policy run amok. At one point in 2009, a hundred-trillion-dollar bill couldn't buy a bus ticket in the capital of Harare.

But since then the value of the Zimbabwe dollar has soared. Not in Zimbabwe, where the currency has been abandoned, but on eBay.

The notes are a hot commodity among currency collectors and novelty buyers, fetching 15 times what they were officially worth in circulation. In the past decade, President Robert Mugabe and his allies attempted to prop up the economy—and their government—by printing money. Instead, the country's central bankers sparked hyperinflation by issuing bills with more zeros.

The 100-trillion-dollar note, circulated for just a few months before the Zimbabwe dollar was officially abandoned as the country's legal currency in 2009, marked the daily limit people were allowed to withdraw from their bank accounts. Prices rose, wreaking havoc.

The runaway inflation forced Zimbabweans to wait in line to buy bread, toothpaste and other essentials. They often carried bigger bags for their money than the few items they could afford with a devalued currency.

Today, all transactions are in foreign currencies, mainly the U.S. dollar and the South African rand. But Zimbabwe's worthless bills are valuable—at least outside the country. That Zimbabwe's currency happened to be denoted in dollars has amplified appeal, say currency dealers and collectors, particularly after the global financial crisis and mounting public debts sparked inflationary fears in the U.S.

"People pick them up and make jokes about when that's going to happen here," says David Laties, owner of the Educational Coin Company, a currency wholesaler based in Highland, N.Y.

 .Dealers prescient enough to buy Zimbabwe's biggest notes while they were in circulation are now taking their investment to the bank. Mr. Laties spent $150,000 buying bills from people in South Africa and Tanzania with experience moving currency and other clandestine cargo, including migrants, across Zimbabwe's borders. Sensing that Zimbabwe's last dollars would be "the best notes ever" on the collector's market, he even fronted $5,000 to someone who approached him over the Internet.

"It worked out," he says. "I got my notes."

Frank Templeton, a retired Wall Street equities trader, bought "quintillions of Zimbabwe dollars" through a broker from Zimbabwe's central bank. On eBay, he now does a brisk trade in the bills from his home in the Hamptons, on New York's Long Island. "I like to say Warren Buffett made a lot of people millionaires, but I've made more people trillionaires," Mr. Templeton says. The dealer paid between $1 and $2 for each of the bills in several purchases over about a year, and now sells them for around $5-$6 apiece.

House Budget Committee Chairman Paul Ryan (R., Wis.) and Stanford economist John B. Taylor are among the new owners of Zimbabwean bills. Each keeps one in his wallet, brandishing it at opportune moments as evidence of inflation's most extreme possible ramifications. "No self-respecting monetary economist goes around without a 100-trillion-dollar note," Mr. Taylor says with a chuckle.

[Crafty_Dog]

The Consumer Price Index (CPI) increased 0.4% in April To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 5/13/2011


The Consumer Price Index (CPI) increased 0.4% in April, matching consensus expectations. The CPI is up 3.2% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was up 0.5% in April and is up 3.8% in the past year.
 
About half of the increase in the CPI in April was due to energy, which rose 2.2%.  Food prices were up 0.4%.  Excluding food and energy, the “core” CPI increased 0.2%, matching consensus expectations. Core prices are up 1.3% versus last year.
 
Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – fell 0.3% in April and are down 1.2% in the past year. Real weekly earnings are down 0.6% in the past year.
 
Implications:  The price inflation that has been evident at the producer level for some time has clearly made its way to the consumer. The CPI is up 3.2% in the past year and is accelerating. In the past six months, the CPI is up at a 5.1% annual rate and an even stronger 6.2% rate in the past three months. We like to follow “cash inflation,” which is everything in the CPI (including food and energy) but without owners’ equivalent rent (the government’s estimate of what homeowners would pay if they rented their own homes). Cash inflation increased 0.5% in April and is up at a 7.8% annual rate in the past three months. While these increases have been led by energy, which is up at a 42.8% annual rate in the past three months, the “core” CPI (which excludes food and energy) is also accelerating. Core prices are up only 1.3% versus a year ago, but up at a 2.1% annual rate in the past three months. Rising inflation is a concern now, but we fully expect the Federal Reserve to continue to justify keeping short-term interest rates near zero – through around the middle of next year – by saying that it’s “transitory.”

[ccp]

Silver manipulated.  Well just around the time of the crash was the word coming out that Soros had sold.  Naturally he than probably took a short position so he made money on the way up, sold, then let the word out *he* is selling then makes money on the way down.  He than adds to his billions pays for his liberal/business concerns and tells us how easy it is to make money.

So what else is new?  Puppet master?  No not him.  Just a general all around philantropist/humanitarian.  I just wish he wsn't Jewish.

***Silver Was 'manipulated' Down, Sprott Says
By Alistair Barr

Published May 12, 2011
|LAS VEGAS -- Silver has been manipulated down in recent weeks, Eric Sprott, head of Sprott Asset Management, said Thursday. Silver slumped by $6 in 13 minutes late on a recent Sunday, when the market was thinnest, Sprott noted during the SkyBridge Alternatives Conference in Las Vegas. That was followed by four margin increases, Sprott added. Sprott recently launched a silver fund and has been a gold bull for at least a decade. Despite the recent drop in precious metals, Sprott reckons they are a good way to protect against trouble in the banking system and a potential devaluation of the U.S. dollar and other paper currencies. "The market has judged the world's reserve currency as gold," he said on Thursday.

Copyright © 2011 MarketWatch, Inc.***

[G M]

http://www.cnbc.com/id/43074525

Demand from China and India has been healthy according to Marcus Grubb, who said central banks continue to add to their reserves.

"Central bank purchases jumped to 129 tons in the quarter, exceeding the combined total of net purchases during the first three quarters of 2010," he said.

"The resilience of gold during recent volatility in the commodities market exemplifies the strength of the global gold market and its unique demand drivers," he added.

[G M]

http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/

Not if, when.

[DougMacG]

This could go in the thread of very bad humor or WTF...

Via Powerline: "Our friend Seth Lipsky wasn't able to make it to the press conference, but he took to the pages of the Wall Street Journal to pose four questions for Bernanke. Here is the third of the four questions Seth served up:" (all 4 are linked below)

    Mr. Chairman, last month a federal jury in North Carolina convicted a man named Bernard von NotHaus of counterfeiting U.S. coins. His medallions, which he called "Liberty Dollars," were made of silver. When he sold them he was getting about $20 for a medallion containing an ounce of silver, and now the coin is worth nearly twice that amount in U.S. dollars.

    Yet the dollars you issued back when Mr. von NotHaus was in business have plunged in value to but a fraction of the silver or gold they were worth when you issued them. Mr. von NotHaus may be going to jail for years, and yet here you are. I don't mean to suggest in any way that you broke any law, but how do you feel about this situation?

http://online.wsj.com/article/SB10001424052748703778104576286813887619884.html

[G M]

A well structured question.

[Crafty_Dog]

Marc:  I'm not sure I really follow his logic here 100%, but Mundell is deep and IMHO his thoughts deserve considerable contemplation. 

By SEAN RUSHTON
Conservative economists have been raising alarms for months about the Federal Reserve's second quantitative-easing program, QE2. They argue it has lowered the dollar's value, leading to higher oil and commodity prices—a precursor to broader, more damaging inflation.

Yet the man many of them regard as their monetary guru—supply-side economics pioneer and Nobel Laureate Robert Mundell—says dollar weakness is not his main concern. Instead, he fears a return to recession later this year when QE2 ends and the dollar begins its inevitable rise. Deflation, not inflation, should be the greater concern. Avoiding the recession is simplicity itself: Just have the U.S. Treasury fix the exchange rate between the dollar and the euro.

Mr. Mundell's surprising statement came at a March 22 conference in New York sponsored by the Manhattan Institute, The Wall Street Journal and the Ronald Reagan Presidential Foundation. His economic predictions carry great weight because, unlike most economists of his generation, he is often right. His analysis of international economics has revolutionized the field, making him the euro's intellectual father and a primary adviser to China's economic policy makers.

Nevertheless, with gold around $1,500 and oil above $100 a barrel, supply-siders are scratching their heads: How can he possibly see deflation ahead? How can dollar weakness not be the problem?

The key to Mr. Mundell's view is that exchange rates transmit inflation or deflation into economies by raising or lowering prices for imported items and commodities. For example, when the dollar declines significantly against the world's second-leading currency, the euro, commodity prices rise. This creates U.S. inflationary pressure. Conversely, when the dollar appreciates significantly against the euro, commodity prices fall, which leads to deflationary pressure.

.From 2001-07, he argues, the dollar underwent a long, steady decline against the euro, tacitly encouraged by U.S. monetary authorities. In response to the dollar's decline, investors diverted capital into inflation hedges, notably real estate, leading to the subprime bubble. By mid-2007, the real-estate bubble had burst. In response, the Fed reduced short-term interest rates rapidly, which lowered the dollar further. The subprime crisis was severe, but with looser money, the economy appeared to stabilize in the second quarter of 2008.

Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch—exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses—the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy's back, causing a serious economic contraction and crippling financial crisis.

In March 2009, the Fed woke up and enacted QE1, lowering the dollar against the euro, and signs of recovery soon appeared. But in November 2009, QE1 ended and the dollar soared against the euro once again, pushing the U.S. economy back toward recession. Last summer, the Fed initiated QE2, which lowered the value of the dollar, allowing a second leg of the recovery to take hold.

Nevertheless, Mr. Mundell views QE2 as the wrong solution for the problem. Instead, the U.S. and Europe simply should coordinate exchange-rate policies to maintain an upper and lower limit on the euro price, say between $1.30 and $1.40. Over time, the band would be narrowed to a given rate. Further quantitative easing would be off the table.

With a fixed exchange rate, prices could move free from the scourge of sudden deflation and inflation, allowing investment horizons and planning timelines to expand along with production levels on both sides of the Atlantic. To supercharge the U.S. recovery, he also recommends permanently extending the Bush tax rates and lowering the corporate income tax rate to 15% from 35%.

Above all, he made it clear that the volatile exchange rate is the responsibility of the U.S. Treasury, not the central bank. Without a breakthrough on exchange rates, he predicted another dollar appreciation following QE2, resulting in a return to recession and a worsening of the U.S. debt crisis. This would likely lead to a third round of quantitative easing, continuing the dysfunctional cycle.

Criticize the Fed all you like, Mr. Mundell says, but the key to recovery is to stabilize the dollar at a healthy level relative to the euro. Given his stellar track record, it's worth asking: Is anyone in Washington listening?

Mr. Rushton edits The Supply Side blog.

[G M]

How does the euro debt crisis work into this? I don't see the euro surviving.

[Crafty_Dog]

Good question. 

Coincidentally, Scott Grannis just responded to a similar question from me as follows:

Marc, of course it's impossible to rule out a catastrophic sequence of events. If everything goes the wrong way we will be in deep sh*t. But I would note that the market does not sit still when defaults loom. As I noted in a post about commercial real estate backed securities not too long ago, a year ago the market expected gigantic defaults. Actual defaults have been much lower than expected and feared, and the prices of those securities have soared in the past year. The market has already priced in a significant restructuring (a nice word for default) of Greek debt, with 2-yr Greek govt bonds now trading at a yield of 25%. The unknowns are not whether Greece will default, they are a) when will the default occur and b) how big will it be? If the actual default is equal to or less than the market expects already, then that will be good news.


I would further note that Euro swap spreads are only mildly elevated. If the european bond market suspected that a Greek default would precipitate and end-of-the-world scenario, I can assure you that swap spreads would be trading at multiples of their current level. Swap spreads are a measure of the likelihood that big banks will be unable to honor their obligations. 2-yr euro swaps are only 50 bps or so, with 25-30 being normal. The market is telling you that a Greek default is not going to be a big deal, believe it or not.


All of the things you worry about have been front and center for the markets for over one year now. I think it's reasonable to assume that the market, in its wisdom, has by now fully analyzed the risks and has priced them in.
=======

I've responded to this with some probing questions about the validity of the efficient market hypothesis, which seems to inform his answer, and now await his response.

[G M]

Good. Those were my questions. The market isn't the embodiment of wisdom/perfection.

[Crafty_Dog]

FARR WEST, Utah — Most people who amass the pure gold and silver coins produced by the United States Mint do so for collections or investments, not to buy Slurpees at 7-Eleven.

“You’d be a fool,” Tom Jurkowsky, a spokesman for the Mint, said of the Slurpee idea, “but you could do it.”

After all, while the one-ounce American Eagle coin produced by the Mint says “One Dollar,” it is actually worth more like $38 based on the current price of silver. (An ounce of gold is worth more than $1,500.)

Now, however, Utah has passed a law intended to encourage residents to use gold or silver coins made by the Mint as cash, but with their value based on the weight of the precious metals in them, not the face value — if, that is, they can find a merchant willing to accept the coins on that basis.

The legislation, called the Legal Tender Act of 2011, was inspired in part by Tea Party supporters, some of whom believe that the dollar should be backed by gold or silver and that Obama administration policies could cause a currency collapse. The law is the first of its kind in the United States. Several other states, including Minnesota, Idaho and Georgia, have considered similar laws.

Mr. Jurkowsky said the new law “is of no real consequence,” and is purely symbolic, but supporters say it is more than political pocket change. They say that it is just a beginning, that one day soon Utah might mint its own coins, that retailers could have scales for weighing precious metals and that a state defense force could be formed to guard warehouses where the new money would be made and stored.

“This is an incremental step in the right direction,” said Lowell Nelson, the interim coordinator for the Campaign for Liberty in Utah, a libertarian group rooted in Ron Paul’s presidential campaign. “If the federal government isn’t going to do it, then we here in Utah ought to be able to establish a monetary system that would survive a crash if and when that happens.”

Utah has a strong conservative streak, but there are other reasons why it was first to pass such a law.

For many of its supporters, the new law represents an extension of the notion of preparedness that is nurtured by Utah’s powerful founding institution, the Church of Jesus Christ of Latter-day Saints. Many of the law’s supporters believe policies like stimulus spending, the bank bailout and national health care will soon bankrupt the government, sending inflation soaring. Owning gold and silver, they say, will help protect people.

“It’s kind of written into our theology that we’re supposed to be prepared for any eventuality,” said Mr. Nelson, who was involved in early meetings with state lawmakers about the law.

Wayne Scholle, the marketing director for Old Glory Mint, in Spanish Fork, Utah, showed off a commemorative silver coin the company made honoring the new law, one he said he hoped could be a model for a future state-minted coin. The front — or obverse — includes an image representing “the miracle of the gulls,” an important story in Mormon folklore in which seagulls are said to have suddenly appeared and eaten insects that were destroying the first crops Mormon settlers raised, a year after arriving in Utah in 1847.

“Their messaging is spot on with this,” Mr. Scholle said. “It’s preparedness. It’s protecting yourself.”

Old Glory is not the only company that hopes to benefit. Craig Franco, a coin dealer south of Salt Lake City, said he was finishing an arrangement with a bank to create a depository through which people will be able to spend their gold and silver indirectly, by using a Visa credit card that makes charges against the value of their holdings. Mr. Franco noted that state law, for now, left it to the private sector to figure out how conducting business with gold and silver should work.

“The regulation of the system?” Mr. Franco said. “There is no regulation of the system. We are working out the nuances of it.”

Mr. Franco is among several supporters who say the law’s most important feature may be that it eliminates state capital gains taxes on the sale of gold and silver, a move he thinks will prompt individuals and large scale investors outside the state to move their gold and silver to Utah. But federal capital gains taxes would still apply.

==============

2 of 2)



“I would hope the federal government would simply concede: ‘O.K., you’re right, it’s money, so we can’t tax it,’ ” said Larry Hilton, a lawyer and insurance broker who first took the idea to lawmakers. “But that may not happen.”

Article 1, Section 10 of the Constitution says no state shall coin money, though Mr. Hilton and some others argue that a phrase used later, saying no state shall “make anything but gold and silver coin a tender in payment of debts” can be read as a license for Utah’s new law and, perhaps, for a state’s right to mint its own coins.

A spokesman for the Mormon church would not comment on the Utah law, but said in a statement that the church’s teachings related to preparedness were “simply a matter of encouraging people to practice sound principles of provident living and to save for a rainy day.”

State Representative Brad Galvez, the freshman Republican who sponsored the bill at the request of party leadership, said he was “not trying to push back against the federal government” but simply to “create an alternative” to the dollar that lawmakers hoped might send a message to Washington about fiscal policy. He noted that the law does not require businesses to accept gold or silver, but only gives them a choice.

Much of the logic of the law is rooted in the belief that the dollar is at risk and that gold and silver, coined around the world for thousands of years, are enduring, stable investments. That, too, is in dispute.

“From an investment standpoint, I’ve always found that if something is heavily advertised on television, it’s not a good thing to do,” said Gary P. Brinson, a philanthropist who spent 40 years as an investment strategist. “Right now, it’s hard to find anywhere on television where you don’t see gold and silver being advertised.”

For all the excitement, so far, it is hard to find anyone who is using gold or silver to buy anything. But here in Farr West, about 40 miles north of Salt Lake City, there is at least some precedent for such transactions.

Decades ago, the rambling Smith and Edwards store, a kind of giant 7-Eleven from the Old West that sells everything from survival kits to sporting goods and copies of the Constitution, had a special sale, offering a very favorable rate if people made purchases with “junk silver” dollars and half dollars. In the 1980s, the store sold a man a $1,200 air compressor for a little less than 4 ounces of gold, recalled Bert Smith, one of the owners, who is now 91.

Mr. Smith said that he liked the new law, and that he was ready to accept silver and gold. But he does not expect to see much brought to his registers.

“I don’t suppose there’s going to be a big run on it,” Mr. Smith said, “because people are going to hang on to their gold and silver more than ever.”

[DougMacG]

Interesting stuff here.  Sorry I missed until now the followup on Robert Mundell's view in Crafty's post a week ago. That was a good catch.  He makes very important, contrarian points.  In all economic issues we have a multitude of different forces pushing and pulling in different directions.  Mundell is far smarter than me and points out an aspect that was not previously addressed here.  Nothing against him personally but to note his perspective, he is a Canadian, working in the US (Columbia) and consults with Europe and China.  It was his work making the Euro possible that won his Nobel, not his previous work designing the Reagan plan.

About the Euro going away (mentioned in the thread), I don't know about that, but if it did go away we would just face the more complicated world we had before, with a separate Deutch Mark, Pound Sterling, Belgian Franc etc. etc.  It seems more logical for Europe to boot out the countries not complying fiscally and economically, than to end the currency.

Former WSJ editor Bartley wrote that he and Milton Friedman used to argue publicly over fixed vs. floating currency acknowledging he took no pleasure being spanked by Milton Friedman, a mentor of his I'm sure. There are good arguments on both sides of this.  Basically a fixed rate eliminates distractions and excuses and force good money supply policies, a floating rate can adjust constantly to balance the real supply and demand forces on the currencies.   Mundell is taking the side of fixed exchange rate between U.S. and Euro, which is consistent with his work making the single currency in Europe possible.  In other words, locking the currencies would eliminate the next quantitative expansion.  In the sense that we don't trust the economic future of Europe and vice versa, I'm not sure I see that wisdom.

We had a friendly argument here recently regarding weak or strong dollar.  Mundell (I think) is saying we need a neutral dollar, which is correct, the only question is how best to get there.

I intuitively disagree with linking a currency to an inferior economy, whichever way that arrow may point, Germany with Greece, etc. or even a post-2012 America with Europe.  If we were Germany, we should boot out Greece, and for Greece I would strive to fixthings and link back to the Deutch Mark or new, improved Euro, like Hong Kong and others have done with the US$.

For the dollar or the U.S. in general, I think I would care less about the Euro and work directly on getting our own house in order. I can't see how there is a sound monetary policy possible in the context of our other problems: unfunded and supersized government alongside our strangulated, private former production capability. 

It is good to be warned by Mundell about how forces now in play could cause deflation and also good to be warned by everything else including our lying eyes about inflation setting in.  These diseases both pose risks for different reasons.

Instead of the shining city on a hill, we seem more like a teetering teeter-totter unbalanced on a two or more sided cliff, with a host of different problems that could easily cause the next fall off the precipice in any one of these directions.  A dearth of energy, the highest corporate taxes on earth, Carter-like individual tax rates coming, complete uncertainty about all taxes, a budget deficit unbalanced by 60% to the tune of a trillion and a half a year, 6 trillion over 4 years?, 50% of us and growing not participating, burning off our food supply as energy but not even start to make up for the real energy production we prohibit - eliminating our biggest export and starving the third world, putting a cap on everything down to exhaling.  Take all that in and devise a plan that keeps our purchasing power constant and our debts honored.  To me it is just a bad joke. 

Mundell alludes to these other problems requiring solutions:  "To supercharge the U.S. recovery, he also recommends permanently extending the Bush tax rates and lowering the corporate income tax rate to 15% from 35%. "

That is far more aggressive than those who call for lowering rates to the OECD average.  I take that to be symbolic of his larger view of economics that none of this gets fixed without restoring growth to the economy. 
------
Inflation means too many dollars relative to the supply of goods and services.  Deflation means that demand to too weak to maintain price levels.  If we leave so many things this screwed up for very much longer, how can anyone accurately predict which direction we will fall.

[G M]

http://www.cnbc.com/id/43300748


Gold [GCCV1  1549.70    3.20  (+0.21%)   ] and silver [SICV1  37.215    0.433  (+1.18%)   ] have outperformed the S&P 500 by 8 percentage points over the past month as traders choose precious metals over stocks to stash cash.

 
Boris Engelberg | Stock4B | Getty Images
--------------------------------------------------------------------------------
 

The move is fueled by a number of worries: The European Union is planning its second Greek bailout, the Federal Reserve is angling to keep interest rates low while the second round of quantitative easing runs out—and global economic growth is slowing.

“Gold is more valuable at this juncture as the flight to quality accelerates,” said Stephen Weiss of Short Hills Capital. “Global equity indices will all be in decline as multiple growth engines sputter: US, China, Eurozone and Japan. Only place is commodities, and specifically gold, because that is where perceived safety and momentum will be.”

The SPDR Gold Trust [GLD  150.48    0.26  (+0.17%)   ] and the iShares Silver Trust [SLV  35.71    0.37  (+1.05%)   ], the most popular ways for the retail investor to trade these commodities, are both up 4 percent in the last month. The S&P 500 is down 4 percent.


Spdr Gold Trust(GLD)
150.48     0.26  (+0.17%%)
NYSE Arca
 
 
 

Over the last 80 years, gold has traded, on average, about 1.5 times the S&P 500, but traded as high as six-times the S&P 500 back in 1980 when inflation damaged the value of the dollar, according to John Roque, a technical strategist for WJB Capital. Roque, who like a lot of chart analysts, studies this ratio quite closely, is seeing a bullish breakout in gold.

For the metal to get back to its average price relative to stocks, it would need to increase 23 percent to $1900 from its current level around $1540.

 

“Gold is a currency and its re-monetization is accelerating,” said Brian Kelly of Brian Kelly Capital. “Stocks will not perform well in a stagflationary environment. China's next export is inflation, with a slow growth global economy profit margins will get squeezed.”

[Crafty_Dog]

By SETH LIPSKY
'Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market," Peter Diamond, an economics professor at MIT, wrote in the New York Times on Sunday. "But I am unqualified to serve on the board of the Federal Reserve—at least according to the Republican senators who have blocked my nomination. How can this be?"

Not a bad question for the Republicans to be thinking about in the wake of Mr. Diamond's decision to withdraw his name from consideration for the Fed. Announcing his decision in the Times, Mr. Diamond warned of what he called "a failure to recognize that analysis of unemployment is crucial to conducting monetary policy."

Is another Ph.D. in economics really what is needed at the Federal Reserve? Prof. Diamond's leading opponent, Sen. Richard Shelby of Alabama, wants someone who has more experience in crafting monetary policy. Yet the Fed has plenty of experts in monetary policy.

I'd suggest what the board of the Fed really needs is a sage of the Constitution. The Constitution is the only place where our government gets its monetary powers and disabilities. And the more the Fed flounders during the course of this monetary crisis—in which the value of a dollar has plunged to less than a 1,500th of an ounce of gold—the more glaring is the blitheness of its attitude toward America's foundational law. And, for that matter, toward how the Founders of America thought about money.

This became clear within moments of Ben Bernanke being sworn in as the Fed's chairman in 2006. President Bush had gone over to the Federal Reserve for the occasion, and after the constitutionally required oath was sworn, Mr. Bernanke went over to a microphone to offer thanks to the president and his colleagues. Then he made an odd statement.

"The Federal Reserve," he said, "was created by Congress in 1913, and it was entrusted with the power, granted originally to the Congress by the U.S. Constitution, to coin money and regulate the value thereof."

Yet the Federal Reserve Act that Congress passed in 1913 didn't contain a single reference to the coinage power. On the contrary, as scholar Edwin Vieira Jr., has written, "one can search the Act until his eyes fall out without finding a delegation of the '"power to coin money.'"

The Supreme Court case that vouchsafed the power of the Congress to set up a national bank—McCulloch v. Maryland (1819), one of the most famous decisions ever handed down by the court—didn't mention the coinage power either, though it did allude to the taxing and spending power and the war powers.

By claiming power under the coinage clause, Mr. Bernanke was behaving a bit like Secretary of State Alexander Haig when, after President Ronald Reagan was shot, he suggested, albeit fleetingly, that he had the constitutional authority of the president. The fact is that not long after the Constitution was ratified, Congress exercised its coinage power not by creating the Fed but, in the Coinage Act of 1792, the United States Mint.

Even if, somewhere in the mists, the Fed can trace its authority to the coinage power, who on the Fed board is going to look out for these kinds of issues? Or more basic ones—like what a dollar really is, and what is its purpose?

Back in March, when Chairman Bernanke testified before the House Financial Services Committee, Congressman Ron Paul asked him for his definition of the dollar. Mr. Bernanke made no mention of the Constitution or any law passed by Congress. Instead he replied that his definition of a dollar was what it will buy.

That isn't how the Founders thought about the dollar. They thought about it as a measure of value. They gave Congress the coinage power in the same sentence in which they also gave it the power to fix the standard of weights and measures. When they twice used the word "dollars" in the Constitution, they had something specific in mind—371¼ grains of silver. They made reference not only to silver but to gold.

My guess is that the Founders would agree with Mr. Diamond when he writes that "[w]e need to preserve the independence of the Fed from efforts to politicize monetary policy." This is why they defined money in terms of silver and gold, the latter in particular being the measure of value that is hardest to politicize. Wouldn't it be nice to have among the governors of the Fed someone who thinks about money not in terms of theories but in the constitutional terms in which the Founders thought?

Mr. Lipsky is editor of the New York Sun. An anthology of its editorials on the gold standard, "It Shines for All," has just been published by New York Sun Books.

[Crafty_Dog]

From an internet friend who is deep into Austrian economics:
==================

A good article, as most of "Pater Tenbrarum's" articles are -- and solidly
grounded in a good understanding of Austrian School economics, too.

In my mind we truly have an unprecedented situation in the world. Almost
every government, everywhere, is facilitating a rapid debt buildup -- mostly
unproductive debt created by issuing new money unbacked by any commodity or
even any productive activity. Whenever markets swoon and threaten to stop
some of the nonsense, these governments act to prevent any correction from
being completed. They give yet more newly created money to the entities that
have already wasted hundreds of billions of dollars of real resources -- and
then count the ensuing spending as "economic activity." It's not; it's
un-economic activity. This is not a process that can continue forever.

Given where we are now, it's pretty clear that governments around the world
will continue this craziness until some circumstance forcibly prevents them
from doing so. By definition, I would think, such a crisis will be bigger
and more difficult to endure than any previous crisis.

I will post yesterday's Doug Noland commentary immediately below. I wish he
wrote the English language better than he does, but Noland still does
understand some things about credit expansions that elude most other
analysts. He writes the weekly Credit Bubble
Bulletin<http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10541>
.

Here is one of my key take-away paragraphs from Noland's column:

"At some inevitable - if not predictable - point the markets will care
tremendously whether a Credit system is sound or not.  Regrettably, the
current era’s ... unique capacity for sustaining non-productive debt booms
poses major problems.  In short, the booms last too long and activist
policymaking ensures they end up afflicting the heart of Credit systems.
These protracted Bubbles are resolved through problematic crises of
confidence, debt revulsion and economic restructuring."


Tom

The King Of Non-Productive Debt:

There is important confirmation of the “bear” thesis to discuss.  But, as
usual, let’s first set the backdrop:

The world is in the midst of history’s greatest Credit Bubble.  A
dysfunctional global financial system essentially operates without
mechanisms to regulate the quantity and quality of debt issuance.  In
response to severe banking system impairment and fiscal problems in the
early-nineties, the Greenspan Fed helped nurture a Credit system shift to
nontraditional marketable debt.  The bank loan was largely replaced by
mortgage-backed securities (MBS), asset-backed securities (ABS), GSE debt
instruments, derivatives and a multitude of sophisticated “Wall Street”
Credit instruments.  The Credit expansion grew exponentially, while becoming
increasingly detached from production and economic wealth-creation (the
boom, in fact, exacerbated deindustrialization).

The Fed implemented momentous changes in monetary management to bolster the
new “marketable debt” Credit system structure, including “pegging”
short-term interest rates; serial interventions to assure “liquid and
continuous markets;” and adopting an “asymmetrical” policy framework that
disregarded asset inflation/Bubbles, while guaranteeing the marketplace an
aggressive policy response to any risk of market illiquidity or
financial/economic instability.  Massive expansion of marketable debt
coupled with a highly-accommodative policy backdrop incited incredible
growth in speculation and leveraging.  Over time, trends in U.S. Credit,
policy and speculative excess took root around the world.

Global markets suffered a devastating crisis of confidence in 2008.  The
failure of Lehman Brothers, in particular, set off a panic throughout global
markets for private-sector debt, especially Credit intermediated through
sophisticated Wall Street structures.  Unprecedented government intervention
reversed the downward spiral in Credit and economic output.  Especially in
the U.S., Trillions of private debt instruments were put under the umbrella
of government backing.  Meanwhile, Trillions more were acquired by the Fed,
ECB and global central bankers in the greatest market intervention and debt
monetization in history.  Policy making – fiscal and monetary, at home and
abroad – unleashed the “Global Government Finance Bubble”.

Currency market distortions have been instrumental in sowing financial
fragility and economic instability.  Chiefly because of the dollar’s special
“reserve currency” status, U.S. Credit system excesses have been
accommodated for way too long.  Global central banks have been willing to
accumulate Trillions of our I.O.U.s, providing a critical liquidity backstop
for the marketplace.  Highly liquid and orderly currency markets have been
instrumental in ensuring a liquid Credit market, which has provided our
fiscal and monetary policymakers extraordinary flexibility to inflate our
Credit, our asset markets and our economy.  Meanwhile, massive U.S. Current
Account Deficits and other financial flows have inundated the world,
creating liquidity excess and unfettered domestic Credit expansion
throughout the world.  Global imbalances, having mounted for decades, went
“parabolic” over the past few years.

I would argue strongly that the euro currency regime owes much of its great
success to the structurally weak U.S. dollar.  For all the flaws and
potential pitfalls of a common European currency, the euro has from day one
looked awfully appealing standing side-by-side with the dollar.  And the
buoyant euro created powerful market distortions that promoted Credit excess
throughout the region, especially in Europe’s periphery (Greece and the
so-called “PIIGS” would never have enjoyed the capacity to push borrowing to
such extremes had they been issuing debt denominated in their own
currencies).  The weak dollar and strong euro – along with the perception
that the Eurozone and ECB would never tolerate a default by one of its
sovereigns – were instrumental in promoting profligate borrowing, lending,
spending and speculating.

I have recently turned more focused on differentiating between “productive”
and “non-productive” debt.  This is an important analytical distinction –
although, by nature, a challenging gray area for Macro Credit Analysis.  At
the time of its creation, there might actually be little difference from a
systemic perspective whether a new financial claim is created in the process
of financing real investment or an asset purchase or, instead, to fund a
government stimulus program.  In each case, new purchasing power is released
into the system.  The key is that the new Credit stimulates economic
“output” through increased spending, incomes and/or asset inflation.
Especially during the halcyon Credit boom days, the markets will pay scant
attention to the assets underpinning the new debt instruments (particularly
when policymakers are actively intervening and distorting markets!).

However, don’t be fooled and don’t become too complacent.  At some
inevitable - if not predictable - point the markets will care tremendously
whether a Credit system is sound or not.  Regrettably, the current era’s
(unrestrained global finance, structurally-unsound dollar, “activist”
policymaking, rampant global speculation, etc.) unique capacity for
sustaining non-productive debt booms poses major problems.  In short, the
booms last too long and activist policymaking ensures they end up afflicting
the heart of Credit systems.  These protracted Bubbles are resolved through
problematic crises of confidence, debt revulsion and economic
restructuring.

First of all, booms create a fragile mountain of debt not supported by
underlying wealth-creating capacity.  Second, Credit Bubbles inflate various
price levels throughout the economy, creating systemic dependencies
requiring ongoing debt and speculative excess.  And, third, the boom in
non-productive debt will tend to foster consumption and malinvestment at the
expense of sound investment in productive capacity.   When the boom
eventually falters, market revulsion to unsound debt, the  economy’s
addiction to uninterrupted Credit expansion, and the lack of capacity for
real wealth creation within the (“Bubble”) real economy ensure a very severe
crisis and prolonged adjustment period.  These dynamics become critically
important as soon as a government (finally) loses its capacity to perpetuate
the Bubble (i.e. Greece, Portugal, Ireland, etc.)

As a crisis unfolds, the markets eventually must come to grips with a very
harsh reality:  There will be denial and it will take some time to really
sink in - but the markets will come to recognize that too little of the
existing debt is backed by real wealth.  Non-productive Credit booms are,
after all, essentially “Ponzi Finance” schemes.  Worse yet, only huge
additional injections of debt/purchasing power will hold economic collapse
at bay.  Fundamentally, non-productive Credit booms foment deleterious
effects upon the economic structure – that only compound over time.  As we
have witnessed with Greece and Ireland, “bailout” costs can quickly
skyrocket to meaningful percentages of GDP - and will keep growing.

And once stunned by the downside of “Ponzi Finance,” markets will be keen to
mitigate risk exposure to the next episode.   This is the essence of
“contagion effects.”  Especially in interlocking global markets dominated by
leveraged speculation and trend-following trading strategies, de-risking and
de-leveraging in one market tend to quickly translate to risk aversion and
faltering liquidity throughout the marketplace.  Markets perceived as
liquidity abundant can almost overnight be transformed to
liquidity-challenged.  This dynamic went to devastating extremes during the
2008 crisis – only to begin mount a resurgence with last year’s Greek debt
crisis and contagion.

It has been my thesis that last year’s aggressive market interventions –
QE2, the European fiscal and monetary “bailouts,” and massive global central
bank monetization – incited a highly speculative Bubble environment
vulnerable to negative liquidity surprises.  And now we’re down to the final
few weeks of QE2.  The European bailout strategy is unwinding, with little
possibility of near-term stabilization.  Meanwhile, the US economy has
downshifted in spite of massive fiscal and monetary stimulus.  Risk and
uncertainty abound; de-risking and de-leveraging are making a comeback.

Bloomberg went with the headline, “Fed’s Maiden Lane Sales Trigger Bank
Stampede to Dump Risk.”  At The Wall Street Journal, it was “As ‘Junk’ Bonds
Fall, Some Blame the Fed.”  Both articles noted the deterioration in pricing
for a broadening list of Credit market instruments, including junk bonds,
subprime mortgage securities, and various Credit derivatives.  And while the
Fed’s liquidation of an old AIG portfolio is surely a drag on some prices, I
believe the rapidly changing liquidity backdrop is more indicative of global
de-risking dynamics.  This is providing important confirmation of the bear
thesis.

There are fascinating dynamics at work throughout our Credit market.
Arguably, the U.S. is the King of Non-Productive Debt.  In the wake of a
historic expansion of non-productive household debt comes a Bubble in
government (Treasury and related) Credit.  The assets underpinning too much
of the U.S. debt mountain are of suspect quality, although this hasn’t
mattered recently.  And in true Bubble fashion, the marketplace has
increasingly gravitated to Treasury debt as the “Greek” crisis escalates and
contagion effects gather momentum.  The corporate debt market has enjoyed
extreme bullish sentiment – along with waves of investment and speculative
inflows.  While the corporate balance sheet appears sound, I would counter
that corporate earnings and cash flows have been artificially inflated by
unsustainable federal deficits.  In particular, the bubbling junk bond
market would appear vulnerable to the deteriorating liquidity backdrop.

Elsewhere, there is the murky world of subprime derivatives and such.  This
bastion of speculative excess certainly enjoyed the fruits of policy-induced
reflation.  But not only has housing performed dismally, there are now the
market issues of de-risking and liquidity uncertainties.  Today from the
WSJ:  “Since April, prices of many subprime mortgage securities have
declined between 15% and 20%... The decline in subprime mortgage bonds
accelerated in the last two weeks…”  From Bloomberg this morning:  “Declines
in credit-default swaps indexes used to protect against losses on subprime
housing debt and commercial mortgages accelerated this month, reaching
almost 20% in the past five weeks..”  Also from Bloomberg:  “Default swaps
on the six largest U.S. banks have gained an average of 19.4 bps to 137.2
bps since May 31…”

In conclusion, support seemed abundant this week for the thesis which holds
that the U.S. Credit system and economy are much more vulnerable to
contagion effects than is commonly appreciated.  Treasury and dollar rallies
appear constructive for system liquidity.  In reality, it is likely that
both markets are heavily impacted by speculative trading (speculators, in
various forms, have used Treasury and dollar short positions to finance
higher-returning holdings).  Strength in the Treasury market and the dollar
are indicative of – and place additional pressure on – the unwind of
leveraged trades.  And it is when the speculator community finds itself back
on its heels and backing away from risk that liquidity becomes a critical
market issue.

[Crafty_Dog]

Data Watch

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The Producer Price Index (PPI) increased 0.2% in May To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 6/14/2011


The Producer Price Index (PPI) increased 0.2% in May, higher than the consensus expected rise of 0.1%. Producer prices are up 7.3% versus a year ago.

The May gain in the PPI was led by energy, which increased 1.5%. Food prices fell 1.4%. The “core” PPI, which excludes food and energy, increased 0.2%, matching consensus expectations.

Consumer goods prices rose 0.2% in May and are up 9.4% versus last year. Capital equipment prices were up 0.2% in May and are up 1.3% in the past year.

Core intermediate goods prices increased 0.9% in May and are up 6.3% versus a year ago. Core crude prices fell 0.9% in May but are up 19.0% in the past twelve months.

Implications:  Producer prices continued to move higher in May, outpacing consensus expectations, and are up 7.3% in the past year. Most of the gain in May was due to energy, but core prices (which exclude food and energy) are up at a 3.5% annual rate in the past six months. Further up the production pipeline, core intermediate prices increased 0.9% in May and are up 6.3% versus a year ago. Core crude prices, despite slipping in May, are up 19% in the past year. So while the Federal Reserve can still claim core inflation is low for consumers, core producer prices are accelerating.  Based on these inflation signals and the current state of the economy, the Fed’s monetary policy is way too loose. With oil prices so volatile, producer prices are going to be volatile as well. However, we anticipate that the underlying trend in producer price inflation will remain too high. In other recent inflation news, trade prices continue to escalate.  Import prices increased 0.2% in May and are up 12.5% versus a year ago.  Excluding oil, import prices increased 0.4% in May and are up 4.5% in the past year.  Export prices rose 0.2% in May and are up 9% versus a year ago.  Excluding farm products, export prices are up 7% in the past year. Like back in the early 2000s the Fed has been too loose for too long.

 

[Crafty_Dog]

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The Consumer Price Index (CPI) increased 0.2% in May To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 6/15/2011


The Consumer Price Index (CPI) increased 0.2% in May versus a consensus expected gain of 0.1%. The CPI is up 3.6% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was up 0.2% in May and is up 4.2% in the past year.

The rise in the CPI came despite a 1.0% drop in energy prices. Food prices were up 0.4%. Excluding food and energy, the “core” CPI increased 0.3% versus a consensus expected gain of 0.2%. Core prices are up 1.5% versus last year.

Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – rose 0.1% in May but are down 1.6% in the past year. Real weekly earnings are down 1.0% in the past year.

Implications:  The Federal Reserve is running out of room to hide. Policymakers have used low “core” consumer inflation (which excludes food and energy) to justify keeping short-term interest rates near zero. But core inflation is accelerating. Although core prices are still up only 1.5% in the past year, they increased 0.3% in May – the most for any month since 2006 – and are up at a 2.5% annual rate in the past three months. The increase in core prices in May was broad-based, led by vehicle costs, shelter (homes and hotels), and clothing. The unusually sharp increase in auto prices in May is related to supply-chain disruptions from Japan. But accelerating core inflation is evident even without autos. The surprising news in today’s report was that, despite a 1% drop in energy prices, overall consumer prices still climbed 0.2%, which was more than the consensus expected. The CPI is up 3.6% in the past year.  The measure we closely follow, “cash inflation,” is everything in the CPI (including food and energy) but without owners’ equivalent rent (the government’s estimate of what homeowners would pay if they rented their own homes). Cash inflation also increased 0.2% in May and is up 4.2% versus a year ago. Inflation has been evident at the producer level for some time. Now, producers are passing some of those costs on to consumers. Rising inflation is a concern now, but we fully expect the Fed to maintain short-term interest rates near zero until mid-2012.