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

[objectivist1]

Worth watching and sharing with those who are ignorant about the Fed:

www.youtube.com/watch?v=j282JKnmeVo

[objectivist1]

Who Is The New Secret Buyer Of U.S. Debt?


This article was written by Brandon Smith and originally published at Alt-Market.com - May 23, 2014

On the surface, the economic atmosphere of the U.S. has appeared rather calm and uneventful. Stocks are up, employment isn’t great but jobs aren’t collapsing into the void (at least not openly), and the U.S. dollar seems to be going strong. Peel away the thin veneer, however, and a different financial horror show is revealed.

U.S. stocks have enjoyed unprecedented crash protection due to a steady infusion of fiat money from the Federal Reserve known as quantitative easing. With the advent of the “taper”, QE is now swiftly coming to a close (as is evident in the overall reduction in treasury market purchases), and is slated to end by this fall, if not sooner.

Employment has been boosted only in statistical presentation, and not in reality. The Labor Department’s creative accounting of job numbers omits numerous factors, the most important being the issue of long term unemployed. Millions of people who have been jobless for so long they no longer qualify for benefits are being removed from the rolls. This quiet catastrophe has the side bonus of making it appear as though unemployment is going down.

U.S. Treasury bonds, and by extension the dollar, have also stayed afloat due to the river of stimulus being introduced by the Federal Reserve. That same river, through QE, is now drying up.

In my article The Final Swindle Of Private American Wealth Has Begun, I outline the data which leads me to believe that the Fed taper is a deliberate action in preparation for an impending market collapse. The effectiveness of QE stimulus has a shelf-life, and that shelf life has come to an end. With debt monetization no longer a useful tool in propping up the ailing U.S. economy, central bankers are publicly stepping back. Why? If a collapse occurs while stimulus is in full swing, the Fed immediately takes full blame for the calamity, while being forced to admit that central banking as a concept serves absolutely no meaningful purpose.

My research over many years has led me to conclude that a collapse of the American system is not only expected by international financiers, but is in fact being engineered by them. The Fed is an entity created by globalists for globalists. These people have no loyalties to any one country or culture. Their only loyalties are to themselves and their private organizations.

While many people assume that the stimulus measures of the Fed are driven by a desire to save our economy and currency, I see instead a concerted program of destabilization which is meant to bring about the eventual demise of our nation’s fiscal infrastructure. What some might call “kicking the can down the road,” I call deliberately stretching the country thin over time, so that any indirect crisis can be used as a trigger event to bring the ceiling crashing down.

In the past several months, the Fed taper of QE and subsequently U.S. bond buying has coincided with steep declines in purchases by China, a dump of one-fifth of holdings by Russia, and an overall decline in new purchases of U.S. dollars for FOREX reserves.

With the Ukraine crisis now escalating to fever pitch, BRIC nations are openly discussing the probability of “de-dollarization” in international summits, and the ultimate dumping of the dollar as the world reserve currency.

The U.S. is in desperate need of a benefactor to purchase its ever rising debt and keep the system running. Strangely, a buyer with apparently bottomless pockets has arrived to pick up the slack that the Fed and the BRICS are leaving behind. But, who is this buyer?

At first glance, it appears to be the tiny nation of Belgium.

While foreign investment in the U.S. has sharply declined since March, Belgium has quickly become the third largest buyer of Treasury bonds, just behind China and Japan, purchasing more than $200 billion in securities in the past five months, adding to a total stash of around $340 billion. This development is rather bewildering, primarily because Belgium’s GDP as of 2012 was a miniscule $483 billion, meaning, Belgium has spent nearly the entirety of its yearly GDP on our debt.

Clearly, this is impossible, and someone, somewhere, is using Belgium as a proxy in order to prop up the U.S. But who?

Recently, a company based in Belgium called Euroclear has come forward claiming to be the culprit behind the massive purchases of American debt. Euroclear, though, is not a direct buyer. Instead, the bank is a facilitator, using what it calls a “collateral highway” to allow central banks and international banks to move vast amounts of securities around the world faster than ever before.

Euroclear claims to be an administrator for more than $24 trillion in worldwide assets and transactions, but these transactions are not initiated by the company itself. Euroclear is a middleman used by our secret buyer to quickly move U.S. Treasuries into various accounts without ever being identified. So the question remains, who is the true buyer?

My investigation into Euroclear found some interesting facts. Euroclear has financial relationships with more than 90 percent of the world’s central banks and was once partly owned and run by 120 of the largest financial institutions back when it was called the “Euroclear System”. The organization was consolidated and operated by none other than JP Morgan Bank in 1972. In 2000, Euroclear was officially incorporated and became its own entity. However, one must remember, once a JP Morgan bank, always a JP Morgan bank.

Another interesting fact – Euroclear also has a strong relationship with the Russian government and is a primary broker for Russian debt to foreign investors. This once again proves my ongoing point that Russia is tied to the global banking cabal as much as the United States. The East vs. West paradigm is a sham of the highest order.
Euroclear’s ties to the banking elite are obvious; however, we are still no closer to discovering the specific groups or institution responsible for buying up U.S. debt. I think that the use of Euroclear and Belgium may be a key in understanding this mystery.

Belgium is the political center of the EU, with more politicians, diplomats and lobbyists than Washington D.C. It is also, despite its size and economic weakness, a member of an exclusive economic club called the “Group Of Ten” (G10).

The G10 nations have all agreed to participate in a “General Arrangement to Borrow” (GAB) launched in 1962 by the International Monetary Fund (IMF). The GAB is designed as an ever cycling fund which members pay into. In times of emergency, members can ask the IMF’s permission for a release of funds. If the IMF agrees, it then injects capital through Treasury purchases and SDR allocations. Essentially, the IMF takes our money, then gives it back to us in times of desperation (with strings attached).  A similar program called ‘New Arrangements To Borrow’ (NAB) involves 38 member countries.  This fund was boosted to approximately 370 billion SDR (or $575 billion dollars U.S.) as the derivatives crisis struck markets in 2008-2009.  Without a full and independent audit of the IMF, however, it is impossible to know the exact funds it has at its disposal, or how many SDR’s it has created.

It should be noted the Bank of International Settlements is also an overseer of the G10. If you want to learn more about the darker nature of globalist groups like the IMF and the BIS, read my articles, Russia Is Dominated By Global Banks, Too, and False East/West Paradigm Hides The Rise Of Global Currency.

The following article from Harpers titled “Ruling The World Of Money,” was published in 1983 and boasts about the secrecy and “ingenuity” of the Bank Of International Settlements, an unaccountable body of financiers that dominates the very course of economic life around the world.

It is my belief that Belgium, as a member of the G10 and the GAB/NAB agreements, is being used as a proxy by the BIS and the IMF to purchase U.S. debt, but at a high price. I believe that the banking elite are hiding behind their middleman, Euroclear, because they do not want their purchases of Treasuries revealed too soon. I believe that the IMF in particular is accumulating U.S. debt to be used later as leverage to absorb the dollar and finalize the rise of their SDR currency basket as the world reserve standard.

Imagine what would happen if all foreign creditors abandoned U.S. debt purchases because the dollar was no longer seen as viable as a world reserve currency.  Imagine that the Fed’s efforts to stimulate through fiat printing became useless in propping up Treasuries, serving only to devalue the domestic buying power of our currency.  Imagine that the IMF swoops in as the lender of last resort; the only entity willing to service our debt and keep the system running.  Imagine what kind of concessions America would have to make to a global loan shark like the IMF.

Keep in mind, the plan to replace the dollar is not mere “theory”.  In fact, IMF head Christine Lagarde has openly called for a “global financial system” to take over in the place of the current dollar based system.

The Bretton Woods System, established in 1944, was used by the United Nations and participating governments to form international rules of economic conduct, including fixed rates for currencies and establishing the dollar as the monetary backbone. The IMF was created during this shift towards globalization as the BIS slithered into the background after its business dealings with the Nazis were exposed. It was the G10, backed by the IMF, that then signed the Smithsonian Agreement in 1971 which ended the Bretton Woods system of fixed currencies, as well as any remnants of the gold standard. This led to the floated currency system we have today, as well as the slow poison of monetary inflation which has now destroyed more than 98 percent of the dollar’s purchasing power.

I believe the next and final step in the banker program is to reestablish a new Bretton Woods style system in the wake of an engineered catastrophe. That is to say, we are about to go full circle. Perhaps Ukraine will be the cover event, or tensions in the South China Sea. Just as Bretton Woods was unveiled during World War II, Bretton Woods redux may be unveiled during World War III. In either case, the false East/West paradigm is the most useful ploy the elites have to bring about a controlled decline of the dollar.

The new system will reintroduce the concept of fixed currencies, but this time, all currencies will be fixed or “pegged” to the value of the SDR global basket. The IMF holds a global SDR summit every five years, and the next meeting is set for the beginning of 2015.

If the Chinese yuan is brought into the SDR basket next year, if the BRICS enter into a conjured economic war with the West, and if the dollar is toppled as the world reserve, there will be nothing left in terms of fiscal structure in the way of a global currency system. If the public does not remove the globalist edifice by force, the IMF and the BIS will then achieve their dream – the complete dissolution of economic sovereignty, and the acceptance by the masses of global financial governance. The elites don’t want to hide behind the curtain anymore. They want recognition. They want to be worshiped. And, it all begins with the secret buyout of America, the implosion of our debt markets, and the annihilation of our way of life.

[DougMacG]

Worth watching and sharing with those who are ignorant about the Fed:
www.youtube.com/watch?v=j282JKnmeVo

Plenty is wrong over at the Fed but the video is misleading in many ways. 

They find the name 'Federal Reserve"  deceptive, but the motto "In God We Trust" implies an even larger backing... 

One feature of the Federal Reserve that always seems to get overlooked in these attacks is that the Federal Reserve returns the profit it makes to the Treasury.   
http://blogs.wsj.com/economics/2014/01/10/fed-sent-77-7-billion-in-profits-to-treasury-last-year/
http://www.nytimes.com/2013/01/11/business/economy/feds-2012-profit-was-88-9-billion.html?_r=0

Another overlooked feature is that the selection of the people running it is a process nearly the same as Judiciary / Supreme Court selections (though not lifetime appointments).  Indirect control is intentional!  What is the alternative they propose that is better?

Conspiracy is implied at the founding but it is bankers who know banking.  Should the Federal Reserve Act have been drawn up by plumbers, electricians or a random cross-section like a jury?  The Act was passed by the elected representatives, and not repealed in all those years.
 
The video does not address the largest problems IMHO, such as the Humphrey-Hawkins Act, where lawmakers assigned the Fed a "dual mandate" making them believe they are in charge of "full employment", something well beyond its control that greatly weakens their real mandate which is to manage a stable and reliable money supply.  This is what politicians did in their 1970s economic wisdom and still have not repealed.  Other changes in direction came earlier in the 70s, Friday the 13th in August 1971: http://www.federalreservehistory.org/Events/DetailView/33  Those were your elected officials acting.

The video implies that running the money supply at arms length from politicians is worse than giving Pelosi-Reid-Obama-Ford-Bush-Dole et al direct control.  Really?  Do we want it run more like the V.A.?

The Fed under Yellen (and Bernancke etc.) is being run the way the politicians who chose them want it run.  A change of direction could easily be done within the current Federal Reserve system if that mandate came from the people through their representatives.  As simple as passing Humphrey Hawkins, a new Act could repeal the dual mandate, or prohibit QE activities and things like covering deficit spending without borrowing, bailing out uninsured non-financials, and other irresponsible activities.  No eery, conspiratorial music, just a change of direction coming out of new, elected, national leadership.

[objectivist1]

Re: Video on the Federal Reserve System:

This is no conspiracy theory.  These are facts.  The Constitution states very clearly that money shall consist ONLY of gold and silver coinage.  Paper money was used under the Articles of Confederation with disastrous results, and the Founders well understood this.

Fiat money was NEVER intended to be allowed by the Founders - and for good reason.  There are many relevant quotes from Jefferson, et. al. on this subject, and how devaluing the currency would enslave the people.

Far too many people accept the fiction that the Federal Reserve is a necessary evil.  Its actions actually greatly exacerbated the Great Depression, and it is now on the verge of destroying the dollar altogether.  No conspiracy theory.  Just the facts.

[DougMacG]

Do you propose to eliminate the Federal Reserve and eliminate paper and electronic money? If so, good luck.

[objectivist1]

Absolutely I advocate eliminating the Federal Reserve.  It's nothing more than a legalized cartel that steals wantonly from American citizens at will. This country's economy ran just fine without it up until 1913, and there was actually much less volatility, and MUCH less debt - as the Fed by definition incentivizes the creation of massive amounts of debt.  This way - Congress doesn't have to raise taxes nearly as much to fund its wild spending sprees.

And yes - fiat money needs to be eliminated as well.  At the very least - a gold standard needs to be re-introduced, and it needs to have teeth.  Otherwise we are at the mercy of international bankers who will create money as they see fit to manipulate markets and economies.  This is where we are at now - and we're about to reap the whirlwind...

The Founders also understood that ancient Rome faced the same dilemma before its collapse, as their coinage had been debased to the point where it was virtually worthless by the Emperors.  They steadily reduced the amount of precious metals in the coins until rampant inflation occurred in the general marketplace.

[DougMacG]

Absolutely I advocate eliminating the Federal Reserve.  It's nothing more than a legalized cartel that steals wantonly from American citizens at will. This country's economy ran just fine without it up until 1913, and there was actually much less volatility, and MUCH less debt - as the Fed by definition incentivizes the creation of massive amounts of debt.  This way - Congress doesn't have to raise taxes nearly as much to fund its wild spending sprees.

And yes - fiat money needs to be eliminated as well.  At the very least - a gold standard needs to be re-introduced, and it needs to have teeth.  Otherwise we are at the mercy of international bankers who will create money as they see fit to manipulate markets and economies.  This is where we are at now - and we're about to reap the whirlwind...

The Founders also understood that ancient Rome faced the same dilemma before its collapse, as their coinage had been debased to the point where it was virtually worthless by the Emperors.  They steadily reduced the amount of precious metals in the coins until rampant inflation occurred in the general marketplace.

I am with you in spirit, but see a different way forward.  Unlike putting toothpaste back in a tube, reforming the mission of the Fed is do-able, right now, eliminating the Fed is not.

The US inflation rate is currently 2%: http://www.tradingeconomics.com/united-states/inflation-cpi
We target it to be no less than 1%.  It averaged 3.33 Percent from 1914 until 2014.  It could be targeted lower - today - and we could hit lower targets if we were not trying to solve non-monetary problems with monetary tools and QE nonsense.  We could require the Treasury to borrow funds (sell T-bills) in advance of all deficit spending checks issued eliminating the need for QE (currency flooding).  We could pass a balanced budget amendment with a percent of GDP spending limit in it easier than closing the Fed IMHO and that would remove the need for the Fed to behave the way it is.

Without changing the current structure, the Fed could and should be targeting the value of the dollar to keep the price level stable for a basket of goods with the price of gold having the heaviest weight of all goods and commodities tracked.

Making every dollar including electronic dollars and all our "fiat currency" convertible to gold or made of gold, after all this inflating, is easier said than done.  For one thing, we don't even know how many dollars (or measure anything else accurately) we have and if we did, it changes every second.

Quite a few complex functions go on down at the 12 districts of the Federal Reserve Bank.  My experience was at the 9th District; Hermann Cain's was Chairman of the 8th.   How do I say this delicately.  You are trying to accomplish something that has 1% support right while we fail to accomplish things that have 60% support.  Herman Cain did not propose elimination of the Fed.  Is he too liberal, or part of the Cartel?  I don't think so.  He thought cutting 2/3 of the federal income tax, even on the rich, in the middle of the Obama years, would be easier to achieve!

[Crafty_Dog]

Herman Cain also advocated repealing the Humphrey-Hawkins Law, which added full employment to the Fed's mission of price stability.  This seems to me a VERY good idea.

[objectivist1]

Doug,

I never said I advocate eliminating the Fed as a top priority, or that it should be done in one fell swoop.  I'm simply saying it's a desirable ultimate goal.  I'm quite familiar with Herman Cain and his ideas - having lived here in Atlanta for many years and listened to and even infrequently chatted with him.  He is ultimately in favor of eliminating the IRS and instituting the Fair Tax.  His 9-9-9 plan is an incremental step in that direction.  He has told me this in person.  Obviously the elimination of the Federal Reserve would have to be done in an incremental fashion as well.

[DougMacG]

Thanks.  We aren't very far apart on any of this. 

[Crafty_Dog]

Monday Morning Outlook
________________________________________
The ECB Wants a Free Toaster To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/9/2014

Banks used to give toasters away to customers who opened checking or savings accounts, but the world is changing. Soon, customers may need to give toasters to the bank. Last week, the European Central Bank (ECB) created a “negative” interest rate of 0.1% annually on bank reserves. In other words, banks must pay the ECB to hold excess reserves.  The reason for this maneuver is to give banks an incentive to lend. European bank loans fell by 0.6% in 2012, 2.3% in 2013 and 2.5% during the year-ended in April 2014. Inflation is also so low in Europe that the ECB is worried about deflation. Many analysts are comparing Europe to Japan.

But it all may backfire. If banks are forced to pay the ECB to hold reserves, banks may start charging customers to hold deposits (with negative rates, more fees, or maybe even a toaster).  Doing this would boost the incentive for bank customers to hold more cash and fewer deposits. In turn, more cash and fewer deposits mean a shrinking money supply, which, in turn, can cause deflation. In other words, by trying to fight deflation, the ECB could actually cause deflation.

The real problem with Europe has nothing to do with money. It has to do with heavy labor regulations, high tax rates, government spending, and excessive redistribution. All of this is caused by political sclerosis, which then causes economic sclerosis.  And, like Japan, European population growth has slowed precipitously and is actually falling in some countries. Like we said, none of this has anything to do with a lack of liquidity from the ECB. European banks hold €104 billion in required reserves and €92 billion in excess reserves. While M2 growth has slowed, it is still positive – up 2.5% in 2013 and 2.0% in the past 12 months.

In other words, Mario Draghi is being asked to do the impossible. The ECB doesn’t have the authority to cut government regulation, spending, or tax rates. Draghi has provided lots of liquidity, but the demand for loans (driven by economic growth) is just not there. Europe, America, Japan, the world – none of these economic entities have a problem with liquidity.

The “myth” that central banks saved the world from calamity in 2008 has become conventional wisdom. The result is that people think central banks can impose their will. If only they get loose enough, their economies (real GDP) will grow faster, the theory goes. But central banks can’t do this.

Trying to force banks to lend, building massive balance sheets, manipulating interest rates…all of it…is futile. If the problems in the economy were actually due to a lack of liquidity, then some, or maybe all of these policies might help. But, liquidity is not the problem. The money supply is growing faster than loans. Central banks are pushing on a string.

What Keynesians call a liquidity trap is in reality a “fiscal policy trap.” Governments are just too big, they tax too much, they regulate too much, and they distort investment incentives in massive ways. If the world wants faster growth it needs a massive fiscal overhaul. The best thing to do would be to sunset every law on the books and re-think fiscal policy from the ground up.

Anarchists are few and far between. We don’t know any and think the government should provide basic services which it can do more efficiently than other societal institutions. The problem is that governments around the world exceeded those limits long ago and never looked back.

Using central banks to fix problems caused by fiscal mistakes just creates bigger problems. Negative interest rates are just such a policy. “Let them give toasters” is not much different than “let them eat cake.”

[DougMacG]

"The real problem with Europe has nothing to do with money. It has to do with heavy labor regulations, high tax rates, government spending, and excessive redistribution." ...
"Using central banks to fix problems caused by fiscal mistakes just creates bigger problems. Negative interest rates are just such a policy."

Reminds me of points people here have been making about US monetary policy:
http://dogbrothers.com/phpBB2/index.php?topic=1948.msg79953#msg79953
"It isn't a Monetary Problem"

[G M]

"The real problem with Europe has nothing to do with money. It has to do with heavy labor regulations, high tax rates, government spending, and excessive redistribution." ...
"Using central banks to fix problems caused by fiscal mistakes just creates bigger problems. Negative interest rates are just such a policy."

Reminds me of points people here have been making about US monetary policy:
http://dogbrothers.com/phpBB2/index.php?topic=1948.msg79953#msg79953
"It isn't a Monetary Problem"

I'd bet he has. If you Google Wesbury, this forum pops up.

[prentice crawford]

http://michaeljdaugherty.com/2014/06/09/ftc-takes-gloves-just-getting-started/


Michael J. Daugherty

Folks, the Federal Trade Commission has only just begun to take off their gloves in their 21st Century updating of medieval torture. While their old machines are in the museums, their new tactics have gone high tech and LabMD is tightly strapped to their slab.

All professional tyrants and bullies have plenty of tricks up their sleeves. This nest is no exception. For starters, the FTC seduced Congress into allowing the FTC to make their own rules and have their own Administrative Court . This is very handy when the judge makes an adverse decision, as the commissioners sit above him and can flip his decision like a Sunday morning omelette. Yes, we spend months and millions in an Administrative Court and if the FTC jailers don’t like the ruling they can just overturn it. Prosecutors in the real world would kill for this type of power, and with that in their back pocket, off the FTC goes choosing from their smorgasbord of tricks and tactics, due process and fair notice be damned. Here is a sampler:

Trick One:  Use the court (inside the FTC building called the Administrative Court) to drain the victim dry by making him spend millions defending himself. Always good to starve the victim to get a nice loose skin. The courts have ruled repeatedly that they won’t interfere until this bloodletting is completed. Once this is over, off you go to Federal court to pay the game again.

Trick Two:  Allow the media to assume, using the very well worn FTC habit of lying through omission, that the judge decides on motions to dismiss.  This is a lie. The FTC decides what the judge sees. The FTC likes to keep a bag over the judge’s head because cowards don’t deign to play fair.

Trick Three:  Break every rule in the book if you have to, as the FTC banks on your very short attention span. For example, in our trial the FTC has rested their case. Does that stop them from trying to enter additional evidence as their case implodes? Why don’t be silly! Rules don’t apply to the Gods. They are just laying bread crumbs on the trail to flipping Judge Omelette.

Trick Four: Scare every future organization into early submission by making the execution of LabMD particularly dirty and gruesome. Show no shame. Sink as low as possible. Destroy a cancer detection center. Kill jobs. Trample into healthcare like a bull in a china shop. Lie, cheat, and be so outrageous that the mention of your name makes every CEO run for cover. After all, this is America. The FTC knows all too well the odds of their being held accountable are laughably low.

While this is just a sampler from the FTC’s menu, let me assure you that they aren’t done with me. Hell hath no fury like cowards caught in the act.

Is Congress beginning to wonder what the hell is going on over at the FTC?   Congress rarely acts, the media doesn’t report and the American people don’t pay attention. The FTC banks on it. But so far we have pleading of the 5th and more fun to come. The FTC’s utter lack of integrity will be put on display for all the world to see. Maybe this time things will be different.

I understand you may find my acid words over the top and dramatic. To this I implore,  “Watch and remember.” As I mentioned to an FTC lawyer just this past weekend: Shameless.


P.C.

[Crafty_Dog]

The Consumer Price Index Increased 0.4% in May To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/17/2014

The Consumer Price Index (CPI) increased 0.4% in May versus consensus expectations of a 0.2% rise. The CPI is up 2.1% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) rose 0.4% in May and is up 2.0% in the past year.
Food prices increased 0.5% in May, while energy rose 0.9%. The “core” CPI, which excludes food and energy, increased 0.3%, above consensus expectations of 0.2%. The gain in core prices was led by shelter and core prices are up 2.0% versus a year ago.

Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – declined 0.2% in May, and are down 0.1% in the past year. Real weekly earnings are also down 0.1% in the past year.


Implications: The long-awaited acceleration in inflation is finally here and is sure to be a hot topic of conversation at the Federal Reserve meeting both today and tomorrow. Consumer prices increased 0.4% in May, the most in fifteen months. Energy and food led the way higher, but were not the whole story. The “core” CPI, which excludes food and energy, was up 0.3% in May, the largest gain since 2009. The trend in inflation is starting to show the influence of prolonged loose monetary policy. Although consumer prices are up a moderate 2.1% from a year ago, they’re up at a 3.3% annual rate in the past three months. Core prices are up 2% from a year ago, but up at a 2.8% annual rate in the past three months. In addition, owners’ equivalent rent (the government’s estimate of what homeowners would charge themselves for rent), which makes up about ¼ of the overall CPI, is up 2.6% from a year ago but up at a 2.8% annual rate in the past three months. This measure will be a key source of the acceleration in inflation in the year ahead, in large part fueled by the shift toward renting rather than owning. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, probably increased 0.3% in May. If so, it would be up 1.8% from a year ago, barely below the Fed’s target of 2%. We expect to hit and cross the 2% target later this year, consistent with our view that the Fed starts raising short-term interest rates in the first half of 2015. Expect tomorrow’s Fed announcement to include a continued taper of quantitative easing, keeping the Fed on pace to finish expanding its balance sheet this Fall. Also pay close attention to how Fed Chair Janet Yellen talks about inflation in her press conference. A lack of concern would bolster the case that, despite a public target of 2% inflation, the Fed intends to let inflation move and stay higher. If so, that’s a bad sign for bonds and, at least in the near term, a good one for equities.

[DougMacG]

"The long-awaited acceleration in inflation is finally here"

Wesbury is the expert, my my thoughts...

Inflation is / was the increase of the money supply we all saw happen while growth in goods and services was approximately zero.  Price increases are what most certainly follow excess money growth as a consequence.

CPI is a notoriously inaccurate economic measure (like almost all other highly reported economic measures).  The real amount of inflation is unknown. 

The above quote is surprising; long awaited, like we all knew this was coming.  I don't recall him warning us much of the dangers of what we were doing with our money supply.  I thought it was us warning him!  Maybe it's just me, but what I was hearing from the optimists was denial of what was most certainly happening. 

[Crafty_Dog]

Doug:

I am going to challenge you here.  Go back and you will see him consistently warning that this would come.

[G M]

http://www.humanevents.com/2008/02/25/brian-wesbury-sees-no-recession-ahead/

[ccp]

I met a few people who sold within the year before 2009.   They seemed to see something coming. 

I read the housing situation is now being duplicated with bad loans on the housing thread.

[DougMacG]

Doug:  I am going to challenge you here.  Go back and you will see him consistently warning that this would come.

You are right he has warned that QE has gone on too long, should have tapered sooner, and we are risking price increases ahead.  At the same time he seemed to be in denial that the money supply was going up at an alarming rate all this time.  He denies that the stock market's remarkable (nominal) rise was largely more money chasing the same old companies in a stagnant economy.  He keeps giving us other reasons for the equity increases, but growth in actual goods in services has been at a fraction of the rate of monetary expansion over the last 5 years. 

[objectivist1]

Energy Markets Are On The Brink Of Crisis


Thursday, 19 June 2014 04:17    Brandon Smith  www.alt-market.com


The multitudes of people, especially Americans, who view U.S. government activity in a negative light often make the mistake of attributing all corruption to some covert battle for global oil fields. In fact, the average leftist seems to believe that everything the establishment does somehow revolves around oil. This is a very simplistic and naïve view.

Modern wars are rarely, if ever, fought over resources, despite what the mainstream gatekeepers might tell you. If a powerful nation wants oil, for instance, it lines the right pocketbooks, intimidates the right individuals, blackmails the right officials or swindles the right politicians. It has no need to go to war when politicians and nations are so easily bought. Modern wars, rather, are fought in order to affect psychological change within a particular country or population. Wars today are fought to cover up corrupt deals and create desperation. Oil is used as an all-encompassing excuse for war, but it is never the true cause of war.

In reality, oil demand has become static and is even falling in many parts of the world, while new oil and gas-producing fields are discovered on a yearly basis. Petroleum is not a rare resource — at least, not at the present. And the propaganda surrounding the “peak oil” Armageddon scenario is pure nonsense. Oil prices, unfortunately, do not rise and fall according to supply - instead they rise and fall according to market tensions and, most importantly, the value and perceived safety of the U.S. dollar. Supply and demand have little to do with commodity values in our age of fiat manipulation and false investor perception.

That said, certain political and regional events are currently in motion that could, in fact, change investor perception to the negative, and convince the world of a false fear of reduced supply. While supply is more than ample, the expectation of continued supply can be jilted, shocking commodities markets into running for the hills or rushing into mass speculation, generally resulting in a sharp spike in prices.

A very real danger within energy markets is the undeniable threat that the U.S. dollar may soon lose its petrodollar status and, thus, Americans may lose the advantage of relatively low gas prices they have come to expect.  That is to say, the coming market crisis will have far more to do with the health of the dollar than the readiness of supply.

In the span of only a few years, as the derivatives crisis took hold and the fed began its relentless bailout regime, petroleum costs have doubled. It wasn’t that long ago that someone could fill his vehicle's tank with a $20 bill. Those days are long gone, and they are not coming back. The expectation has always been that prices would recede as the overall economy began to heal. Of course, our economy will not be healed until it is allowed to crash, as it naturally should crash. And as it crashes, because of our currency's unique place in history, the price of oil will continue to climb.

The petrodollar has always been seen as invincible — a common denominator, a mathematical constant. This is a delusion propagated by a lack of knowledge and common sense amongst establishment economists.

As I have covered in great detail in numerous articles, the U.S. dollar’s world reserve status is nearing extinction. Multiple major economies now trade bilaterally without the use of the dollar; and with foreign conflicts on the rise, this trend is going to become the norm.

In the past week alone, Putin adviser Sergey Glazyev recommended to the Kremlin that a coalition of nations be formed to end the dollar's reserve status and initiate a form of economic warfare to stop "U.S. aggression".  Of course, anyone familiar with the escapades of international banking cartels knows that it is the money elite that dictate U.S. aggression, just as they dictate the policy initiatives of Russia.  I would note that there is only ONE currency exchange structure that could be used at this time to shift global forex reserves away from the dollar system, and that is the IMF's Special Drawing Rights.

The argument has always been that the IMF is a U.S. controlled institution, however, this is a faulty assumption.  The IMF is a GLOBAL BANKER controlled institution, a front organization for the Bank of International Settlements, which is why the recent refusal by the U.S. Congress to vote on new capital allocations for the IMF has resulted in the world's central bank threatening to remove U.S. veto power. Globalists have no loyalty to any single nation, and the reality is, the fall of the dollar actually benefits these financiers in the long term.

Russia’s historic oil and gas deal with China, just signed weeks ago, removes the dollar as the petroleum reserve currency.

Russia’s largest gas company, Gazprom, has all but excluded the dollar in all transactions with foreign nations. In fact, nine out of 10 of Gazprom’s foreign clients were more than happy to buy their products without using dollars.  This fact cripples the arguments of dollar cheerleaders who have always claimed that even if Russia broke from the dollar, no one else would go along.

Gazprom and the Russian government have followed through with their threats to cut off gas pipelines to Ukraine, and now, some analysts fear this strategy may extend to the EU, in which many countries are still 30% dependent on Russian energy.

China is currently striking oil deals not only with Russia but also with Iran. New oil deals are being signed even after a $2 billion agreement fell through this spring.  And, despite common misinformation, it was actually China that was reaping the greatest rewards through the reopening of Iraqi oil fields, not the U.S., all while U.S. military assets were essentially wasted in the region.

Now, any U.S. benefits are coming into question as Iraq disintegrates into chaos yet again. With the speed of the new Islamic State of Iraq and Syria (ISIS) insurgency growing, it is unclear whether America will have ANY access to Iraqi oil in the near future.  If ISIS is successful in overrunning Iraq, it is unlikely that Iraqi oil will ever be traded for dollars again. Unrest in Iraq has already caused substantial market spikes in oil prices, and I can say with considerable confidence that this trend is going to continue through the rest of the year.

Interestingly, mainstream news sources suggest that Saudi Arabia has been a primary funding source for the ISIS movement.  It is true that the Saudis have warned for years that they would fund and arm Sunni insurgents if America ever pulled out of the country.  But, I would point out that the U.S. has also been covertly supporting such extremist groups in the Mideast for quite some time, and this is not discussed at all in the MSM storyline. The mainstream narrative is painting a picture of betrayal by the Saudis against the U.S. through subversive groups designed to break the foundations of nations opposed to its policy views.  When, in fact, the destabilization of Iraq has been nurtured by money and weapons from both America and Saudi Arabia.

It was the CIA which trained ISIS insurgents secretly in Jordan in preparation for their subversive war in Syria.  It was an agreement signed by George W. Bush and delegated under Obama's watch that allowed ISIS leader, Abu Bakr al-Baghdadi, to be set free in 2009.  Saudi Arabia has been openly arming the Sunni's for years with the full knowledge of the U.S. government.  So then, why is the narrative being created that America and Saudi Arabia are at odds over ISIS?

Such a development would place the U.S. squarely in conflict with the Saudi government, our only remaining toehold in the global oil market. Without Saudi Arabia’s patronage of the dollar, most OPEC nations will follow (including Kuwait), and the dollar WILL lose its petrodollar status. Period.

In the past few days, Saudi Arabia has demanded that the foreign interests refrain from any military intervention in Iraq.  While Barack Obama has repositioned an aircraft carrier, armed troops, and special forces in the area.

Now, my regular readers understand that this was going to happen eventually anyway. The Federal Reserve’s quantitative easing bonanza has destroyed true dollar value and spread unknown trillions of dollars in fiat across the planet. The dollar’s death has been assured. It has been slated for execution. This is why half the world is positioning to dump the currency altogether. My regular readers also know that the destruction of the dollar is not an accident; it is part of a carefully engineered strategy leading to the centralization of all economic power under the umbrella of a new global currency basket system controlled by the International Monetary Fund.

I believe Saudi Arabia may be a near term trigger in the next great shift in petroleum markets away from the dollar. Renewed U.S. involvement in Iraq, diplomatic tensions over ISIS, and more lucrative offers from Eastern partners have been edging Saudi Arabia away from strict petrodollar ties. This shift is also not limited to Saudi Arabia.

“Abu Dhabi, the most influential member of the United Arab Emirates,” has suddenly ended its long-standing exclusive relationship with Western oil companies and has signed a historic deal with China’s state-owned China National Petroleum Corporation (CNPC).

Russia has formed the new Eurasian Economic Union with Belarus and Kazakhstan, two countries with freshly discovered oil fields.

On the surface, it appears as though the world is huddling itself around oil resources in an environment of East versus West conflict. However, these changes are not as much about petroleum as they are about the petrodollar. The reality is the dollar’s reserve-status days are numbered and this is all part of the plan.

What does this mean for us? It means much higher gas prices in the coming months and years. Is $4 to $5 per gallon gasoline a burden on your pocketbook? Try $10 to $11 per gallon, perhaps more. Do you think the economy is straining as it is under the weight of current gas prices? Imagine the earthquake within our freight-based system when the cost of trucking shipments triples. And guess who will end up paying for the increased costs? That’s right: you, the consumer. High energy prices affect everything, including shelf prices of retail goods. This is just the beginning of what I believe will be ever expanding inflation in oil prices, leading to the end of the dollar’s petroleum reserve status, then it's world reserve status by default, and the introduction of a basket currency system that will ultimately benefit a select few global financiers while diminishing the quality of living for millions, if not billions, of people.

[Crafty_Dog]

Monday Morning Outlook
________________________________________
Dollar Ain't Losing Its Reserve Status To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/23/2014

A staple of the doomsday crowd is the idea that the US is on the verge of losing its “reserve currency” status. It’s held that prominent financial position since the end of World War II. But, now, the doomsday crowd argues the US economy is in a bubble, the Fed is printing money like crazy, government spending and regulation on the rise, so it’s just a matter of time.
Get ready they say, the dollar will plummet in value and interest rates will skyrocket, even above where US economic fundamentals suggest they should go, hurtling the economy back into deep recession.
Over the centuries, the world has typically had one key currency - the Greek drachma or Roman denari in ancient times or the British Pound or US Dollar in modern times. Other currencies get their value in comparison and have used these currencies as reserves. Perhaps the best thing for a country issuing the world’s reserve currency is that it attracts capital from abroad, which lets it run prolonged trade deficits with the rest of the world.
The one thing they all have in common – at least, all the ones that preceded the dollar – is that they eventually lost their status. So, it’s easy to believe this could happen to the US, especially with all the bad things going on.
Other countries in competition with the US like to egg these stories on and, sometimes, wish they could dislodge the US from its pedestal. So, Russia, or China, or some OPEC countries talk about re-denominating transactions.
But this is just talk. The US reserve currency status doesn’t hinge on how countries denominate their transactions. They could do the accounting in dominoes or tiddlywinks. In the end, what matters is what foreigners want to own when the deal is done. And that’s still dollars.
The dollar share of foreign central bank reserves – what foreign central banks hold to back up their own currencies – has gradually declined since 1999, to about 61% from 71%. But that decline follows a large spike in the 1990s. The dollar share of reserves today is actually higher than it was in 1995, before the Euro was created. Seriously, what currency could compete?
The Chinese Yuan? It’s not traded outside China. The country is not free, and the currency is really just 30-years old.
The Euro? In a crisis, Germany could leave the currency union, as was rumored a couple of years ago. It’s hard to imagine a Germany-less Euro holding its value over time.
The British Pound? One key reason the pound lost its reserve currency status is that the empire dissolved. That’s not coming back and the GDP of the UK isn’t large enough.
The Yen? That train left the station when population and the economy peaked years ago.
The US doesn’t have to issue the best currency in human history to keep its reserve currency status; it just has to issue what’s most likely to be the best among its current competitors.
We do have to admit that the Swiss Franc is one darn good currency. Over the past several decades it has generally gained value versus the dollar and we wouldn’t at all be surprised if that trend continued. But Switzerland has a population of 8 million people with a GDP of about $650 billion and a national debt of roughly $125 billion. The world needs much more debt and GDP for foreign central banks to use the Swiss Franc to back up their currencies in a responsible fashion.
In other words, you can look all across the globe and not find a worthy successor to the US Dollar. This won’t stop the doomsday stories, but, hopefully, it will help you ignore them. The dollar is here to stay, for a long time to come.

[G M]

Refer back to Wesbury's 2008 prediction.

[objectivist1]

Here is the "money quote" (pun intended) from Brandon Smith's article I posted earlier:

As I have covered in great detail in numerous articles, the U.S. dollar’s world reserve status is nearing extinction. Multiple major economies now trade bilaterally without the use of the dollar; and with foreign conflicts on the rise, this trend is going to become the norm.

In the past week alone, Putin adviser Sergey Glazyev recommended to the Kremlin that a coalition of nations be formed to end the dollar's reserve status and initiate a form of economic warfare to stop "U.S. aggression".  Of course, anyone familiar with the escapades of international banking cartels knows that it is the money elite that dictate U.S. aggression, just as they dictate the policy initiatives of Russia.  I would note that there is only ONE currency exchange structure that could be used at this time to shift global forex reserves away from the dollar system, and that is the IMF's Special Drawing Rights.

The argument has always been that the IMF is a U.S. controlled institution, however, this is a faulty assumption.  The IMF is a GLOBAL BANKER controlled institution, a front organization for the Bank of International Settlements, which is why the recent refusal by the U.S. Congress to vote on new capital allocations for the IMF has resulted in the world's central bank threatening to remove U.S. veto power. Globalists have no loyalty to any single nation, and the reality is, the fall of the dollar actually benefits these financiers in the long term.

Russia’s historic oil and gas deal with China, just signed weeks ago, removes the dollar as the petroleum reserve currency.

Russia’s largest gas company, Gazprom, has all but excluded the dollar in all transactions with foreign nations. In fact, nine out of 10 of Gazprom’s foreign clients were more than happy to buy their products without using dollars.  This fact cripples the arguments of dollar cheerleaders who have always claimed that even if Russia broke from the dollar, no one else would go along.

One of these guys is wrong.  Note well that Wesbury has a paid advisory relationship with the Federal Reserve Bank of Chicago, and thus a vested interest in promoting the idea that the dollar is stable, along with the U.S. economy...

[Crafty_Dog]

He also has a FAR better track record than we do over the last six years.

[DougMacG]

He also has a FAR better track record than we do over the last six years.

I agree with Wesbury on the reserve currency debate.  If we keep going down the tubes while other nations get their act together, then that status shifts to the next USA of the world.  In the 1960s-1970s, the communists didn't buy oil from the Arabs in US Dollars because somebody liked us.  It was a reluctant business decision, based on stability and predictability of value.  At the point where we lose reserve currency status, it will be a symptom, not a cause, of everything that is wrong.

Obama, Pelosi-Reid years aside, the IMF and the yuan are no contest for a healthy US economy.  (http://www.imf.org/external/country/Index.htm) And if they ever do get their collective act together, that only helps us all the more.

[objectivist1]

"Healthy" is the operative word there.  I don't see any reason to believe the U.S. economy will become "healthy" before it crashes.  Thus the very real risk that the dollar will lose its reserve status.

[DougMacG]

"Healthy" is the operative word there.  I don't see any reason to believe the U.S. economy will become "healthy" before it crashes.  Thus the very real risk that the dollar will lose its reserve status.

You may be right.  But we will lose that status when we deserve to lose it, not because of other entities or events around the globe.  I looked at the IMF list of countries with Albania, Algeria, Angola, etc. and I don't see a perfect data set coming from there either.  IMF without the USD and a few other strong and free countries isn't anything formidable.  Japan had what we are trying to avoid, China isn't without risk, and Europe has some dead wood: Portugal, Italy, Ireland, Greece and Spain.

The US economy will be healthy the instant we repeal the current nonsense and destructiveness.  Whether that is before or after the crash is up to the voters.

[G M]

He also has a FAR better track record than we do over the last six years.

Aside from missing the 2008 crash, he predicted 8 of last zero recoveries since then.

[Crafty_Dog]

Well, he got that the market was going up big time whereas we clever folks here missed a move of over 150%.  I sure wish I had done nothing and let me investments sit in simple conservative things.  I would be in distinctly different shape now if I had.  Profit over prophet!

[objectivist1]

Amazing what prescience knowledge of the Fed's massive inflation of the money supply will give one in the SHORT-TERM, isn't it?  I'll say it again - if you timed things right, and you got out NOW, and put your earnings into gold and silver, yeah - you'd be in a better position. But you wouldn't do that.  You'd continue to ride it until it crashed and then you'd be looking at a 50% loss from your ORIGINAL position.  Be careful what you wish for, Crafty.

[G M]

http://www.bizzyblog.com/2014/06/25/1q14-gross-domestic-product-3rd-reading-062514/

[DougMacG]

http://www.bizzyblog.com/2014/06/25/1q14-gross-domestic-product-3rd-reading-062514/

1st Qtr US contraction is now at 3%.

GDP growth in North Dakota was 13%. It is as if we are not all pursuing th same policies.

[objectivist1]

EXACTLY, Doug - this contraction, this devastation of the economy is a DIRECT RESULT OF POLICY.  Sadly,  most Americans evidently don't blame the Obama administration.
With the assistance of the traitorous establishment media, Obama has been able to portray himself as detached and above all this.  Why, he's doing everything in his power to turn things around and make them better!  If it weren't for those nasty, evil Republicans - all would be well.

This is the sad state of our present voter base - a large percentage of them believe this crap.  Why?  40 years of government education.

[DougMacG]

A less optimistic view than we have been seeing:

No Bubble?
June 27, 2014  by Doug Nolan, Prudent Bear
http://www.prudentbear.com/2014/06/no-bubble.html#.U7HYc1OJVld
Fed hawks are beginning to make some noise.

...the Bubble is so comprehensive – so systemic – that the greatest financial Bubble in human history somehow goes largely unappreciated – hence unchecked.

...The past 25 years have been unique in financial history. Indeed, the world is trapped in a perilous experiment with unfettered finance - with no limits on either the quantity or quality of Credit created. Closely associated with this trial in unchecked electronic finance (“money” and Credit) has been runaway experimentations in “activist” monetary management. Just as crucial is the experiment in unconventional economic structure – including the deindustrialization of the U.S. economy, with the corresponding unprecedented expansion of industrial capacity throughout China and Asia. This has engendered a period of unmatched global economic and financial imbalances – best illustrated by the massive and unrelenting U.S. Current Account Deficits and the accumulation of U.S. IOU’s around the globe.

...there has been no effort to reform either a patently flawed global financial “system” or a reckless policymaking doctrine. Instead, global central bankers have turned only more “activist,” drifting further into the bizarre (that passes for “enlightened”). The world’s leading central banks have resorted to rank inflationism, massive “money” printing operations specifically to inflate global securities markets. And the resulting raging “bull” markets ensure bullishness and a positive spin on just about everything. The sophisticated market operators play the speculative Bubble for all its worth, while the unsuspecting plow their savings into stock and bond Bubbles.

Credit is inherently unstable. Marketable debt instruments exacerbate instability. A financial system where Credit expansion is dominated by marketable debt (in contrast to “staid” bank loans) is highly unstable - I would argue unwieldy, whimsical and prone to manipulation. And a monetary policy regime that specifically nurtures and backstops a system dominated by marketable securities and associated speculation is playing with fire. Importantly, the more deeply central bankers intervene and manipulate such a system and the longer it is allowed to inflate – the more impossible for these central planners to extricate themselves from the financial scheme.

I’m fond of a relatively straightforward analysis that does a decent job of illuminating the state of ongoing U.S. (marketable securities) Bubbles. From the Fed’s Z.1 “flow of funds” data, I tally Total Marketable Debt Securities (TMDS) that includes outstanding Treasury securities (not the larger Federal liabilities number), outstanding Agency Securities (MBS & debt), corporate bonds and municipal debt securities.

My calculation of TMDS began the 1990’s at $6.28 TN, or an already elevated 114% of GDP. Led by explosive growth in GSE and corporate borrowings, TMDS ended the nineties at $13.59 TN, for almost 120% growth. Over this period, GSE securities increased $2.65 TN, or 209%, to 3.916 TN. Corporate bonds jumped 185% to $4.564 TN. It is worth noting that total Business borrowings expanded 9.2% in 1997, 11.5% in 1998 and 10.4% in 1999, excess that set the stage for the inevitable bursting of the “tech” Bubble.

The Fed’s aggressive post-tech Bubble reflation ensured already dangerous excess was inflated to incredible new extremes. On the back of a doubling of mortgage borrowings, TMDS expanded 102% in the period 2000 through 2007 to $27.50 TN. Over the mortgage finance Bubble period, Agency Securities jumped 89% to $7.40 TN. Corporate bonds surged 154% to $11.577 TN. Municipal bonds rose 135% to $3.425 TN.

This unprecedented Credit expansion fueled various inflationary manifestations, including surging asset prices, spending, corporate profits, investment, GDP and trade/Current Account Deficits. After beginning the nineties at $6.227 TN, the value of the U.S. equities market surged 409% to end the decade at $19.401 TN. As a percentage of GDP, the nineties saw TMDS jump from 114% to 147%. Spurred by crazy technology stock speculation, Total Securities – TMDS plus Equities – jumped from 183% of GDP to end 1999 at 356%. Although Total Securities to GDP retreated to 284% by 2002, mortgage finance Bubble excesses quickly reflated the Bubble. Total Securities ended 2007 at a then record 378% of GDP.

A “funny” thing happened during the post-mortgage Bubble’s so-called “deleveraging” period. Since the end of 2008, total TMDS has jumped $8.348 TN, or 29%, to a record $37.542 TN. As a percentage of GDP, TMDS ended Q1 2014 at a record 220%. Even more importantly from a Bubble analysis perspective, in 21 quarters Total Securities (debt & equities) inflated $27.2 TN, or 61%, to end March 2014 at a record $72.039 TN. To put this in context, Total Securities began 1990 at $10.0 TN, ended 1999 at $33.0 TN and closed 2007 at a then record $53.01 TN. Amazingly, Total Securities as a percent of GDP ended Q1 at 421%. For comparison, Total Securities to GDP began the nineties at 183%, ended Bubbly 1999 at 356% before peaking at 378% in a more Bubbly 2007. No Bubble today? “Valuations in historical range”?

Let’s return to “A Bubble is predicated on leverage.” Yes, Total Household Liabilities declined $715bn from the 2008 high-water mark (much of this from defaults). Yet over this period federal liabilities increased almost $10.0 TN. Corporate borrowings were up more than $2.3 TN. On a system-wide basis, our system is inarguably more leveraged today than ever.

Many contend there is significantly less speculative leverage these days compared to the heyday (“still dancing”) 2007 period. I’m not convinced. Perhaps there’s less leverage concentrated in high-yielding asset- and mortgage-backed securities. However, from today’s vantage point, there appears to be unprecedented “carry trade” leverage on a globalized basis. I’ve conjectured that the “yen carry trade” – using the proceeds from selling (or borrowing in) a devaluing yen to speculate in higher-yielding securities elsewhere – could be one of history’s biggest leveraged bets. Various comments also suggest that there is enormous leverage employed in myriad Treasury/Agency yield curve trades. I suspect as well that the amount of embedded leverage in various securities and derivative trades in higher-yielding corporate debt is likely unprecedented.

When it comes to leverage, the Federal Reserve’s balance sheet is conspicuous. Fed Assets will end the year near $4.5TN, with Federal Reserve Credit having expanded about $3.6 TN, or 400%, in six years. Few, however, appreciate the ramifications from this historic monetary inflation from the guardian of the world’s reserve currency. I find it astonishing that conventional thinking dismisses the market impact from this unprecedented inflation of central bank Credit.

Over the years, I have argued that “money” is integral to major Bubbles. A Bubble financed by junk debt won’t inflate too far before the holders of this debt begin to question the rationale for holding rapidly expanding debt of suspect quality. In contrast, a Bubble fueled by “money” – a perceived safe and liquid store of nominal value – can inflate for years. The insatiable demand enjoyed by issuers of “money” allows protracted excesses and maladjustment to impart deep structural impairment (financial and economic).

I’m convinced history will look back and view 2012 as a seminal year in global finance. Draghi’s “do whatever it takes,” the Fed’s open-ended QE, and the Bank of Japan’s Hail Mary quantitative easing will be seen as a fiasco in concerted global monetary management. The Fed’s QE3 will be viewed as an absolute debacle. After all, QE3 incited an unwieldy “Terminal Phase” of speculative Bubble excesses throughout U.S. equities and corporate debt securities, along with global securities markets more generally.  It unleashed major distortions throughout all markets, including sovereign debt.

A quick one-word refresher on “Terminal Phases:” Precarious. Their inherent danger arises from egregious late-cycle speculative excess and attendant maladjustment coupled with timid policymakers. Over recent years I have repeatedly invoked “Terminal Phase” in my analyses of a progressively riskier Chinese Bubble backdrop impervious to hesitant policy “tinkering.”

Here at home, we’re beginning to hear the apt phrase “The Fed is behind the curve.” Traditionally, falling “behind the curve” indicated that the central bank had been too slow to tighten policy in the face of mounting inflationary pressures. “Behind the curve” dictated that more aggressive tightening measures were required to rein in excesses. These days, “behind the curve” is applicable to an inflationary Bubble that has taken deep root in stock and bond markets. With the Yellen Fed seen essentially promising to avoid even a little baby-step 25 bps rate bump for another year, highly speculative Bubble markets can blithely disregard poor economic performance, a rapidly deteriorating geopolitical backdrop and the approaching end to QE. Worse yet, market participants are emboldened that “behind the curve” and the resulting dangerous market Bubbles preclude the Fed from anything but the most timid policy responses. A dangerous market view holds that, after instigating inflating securities markets as a direct monetary policy tool to stimulate the economy, the Fed would not in any way tolerate a problematic market downturn.

June 26 – Bloomberg (Steve Matthews and Jeff Kearns): “Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens. Asked about his forecast for the timing of the first interest-rate increase since 2006, he said: ‘I’ve left mine at the end of the first quarter of next year.’ ‘The Fed is closer to its goal than many people appreciate,’ Bullard said… ‘We’re really pretty close to normal…’ If his forecasts bear out, ‘you’re basically going to be right at target on both dimensions possibly later this year… That’s shocking, and I don’t think markets, and I’m not sure policy makers, have really digested that that’s where we are.’”

The same day Bullard was talking hawk-like, Federal Reserve Bank of Richmond President Jeffrey Lacker was also making comments that should have the markets on edge. Countering uber-dove Yellen, Lacker stated that the recent jump in inflation was not entirely “noise.” Interestingly, he suggested that the Fed follow closely the FOMC’s 2011 exit strategy. “It’s not obvious to me a larger balance sheet should change any of our exit principles. I still think we should, as our exit principles say, be exiting from mortgage backed securities as soon as we can...” And following the lead of Kansas City Fed head Esther George, Lacker believes the Fed should allow its balance sheet to begin shrinking by ending the reinvestment of interest and maturity proceeds. Bullard also said the Fed should consider ending reinvestment.

Market ambivalence notwithstanding, I’m sticking with my analysis that the Fed can’t inflate its balance sheet from $900bn to $4.5 TN – and then end this massive monetary inflation without consequences. Things get even more interesting when talk returns to the Fed’s 2011 “exit strategy” road map. Regrettably, instead of exiting the Fed doubled-down – literally. And Dr. Bernanke may now say (while earning $250k) that the Fed’s balance sheet doesn’t have to shrink even “a dime.” Yellen and Dudley likely agree. But there’s now a more hawkish contingent that has other things in mind, and I don’t believe they will be willing to simply fall in line behind Yellen as officials did behind Greenspan and Bernanke.

Actually, I believe the so-called “hawks” (i.e. responsible central bankers) are gearing up to try to accomplish something that might these days appear radical: normalize monetary policy. Read “Systematic Monetary Policy and Communication” presented this week by Charles Plosser. Read Esther George’s “The Path to Normalization.” Re-read Richard Fisher. While you’re at it, read John Taylor’s op-ed from Friday’s WSJ: “The Fed Needs to Return to Monetary Rules.” http://online.wsj.com/articles/john-taylor-the-fed-needs-to-return-to-monetary-rules-1403823464  I’m with Taylor (and Plosser!) on having and following rules. I’m also with Bullard: “I don’t think markets… have really digested… where we’re at.”

[G M]

http://etfdailynews.com/2014/07/07/why-the-almighty-dollar-is-so-vulnerable-right-now/

[Crafty_Dog]

http://www.ftportfolios.com/Commentary/EconomicResearch/2014/7/10/the-fed-ends-qe-but-stays-easy

[DougMacG]

http://www.ftportfolios.com/Commentary/EconomicResearch/2014/7/10/the-fed-ends-qe-but-stays-easy

June, 2014, Wesbury:  The Fed is Flying by the Seat of its Pants
July, 2014, Wesbury:  Fed Still Easy

Both Grannis and Wesbury have opposed QE as it was carried out.  Both believe Fed Policy has been too easy for far too long.  (As do we, I think.)  If the monetary or liquidity policy has been far too expansive for far too long, then what (do they say) is the consequence for that?  Nothing?  A large mistake has a large consequence, it seems to me, unless there is some other factor offsetting that imbalance.

Curious, what was Wesbury's forecast for Q1?   What is his Q2 forecast?  Q2 is over and if the problem turns out to be weather, again, we should know that by now!  Other pros estimate Q2 growth at 2.3% (about the same as they forecasted in Q1, off by more than 5 points.)  http://businessroundtable.org/resources/ceo-survey/2014-Q2  But if after months of revisions it turns out growth was negative, again, then we have been in a recession since December of last year - and no one knew!  If the economy hits the estimate, then combining the two quarter still means this is a no-growth, slightly contracting economy.  If we had hit all the positive estimates all along (and we didn't!) then we would still only be growing at half the rate we should be under better policies (that both Wesbury and Grannis would favor).  That is a little like hitting on 4 cylinders with a V8 engine.  We know we have all these new taxes and all these new mandates and yet we are so surprised to see the economy under-performing.  It is quite sad in many ways.

The countries we are emulating have half their younger workers not working.  Printing more euros and more dollars doesn't address any of what is wrong.

[Crafty_Dog]

The Producer Price Index Rose 0.4% in June To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/16/2014

The Producer Price Index (PPI) rose 0.4% in June, coming in above the consensus expected increase of 0.2%. Producer prices are up 1.9% versus a year ago.
The increase in producer prices was due to both services, up 0.3%, and goods, up 0.5%

In the past year, prices for service are up 1.9% while goods prices are up 2.1%. Private capital equipment prices were flat in June but are up 1.5% in the past year.
Prices for intermediate processed goods rose 0.4% June, and are up 1.5% versus a year ago. Prices for intermediate unprocessed goods declined 0.9% in June, but are up 4.2% versus a year ago.

Implications: The volatility in producer prices continues as we reach the half way mark for 2014, but the underlying trend points to some acceleration in inflation. Following a large jump in April and dip in May, producer prices rose 0.4% in June, more than making up for last month’s decline. The gains in producer prices were broad based, with both goods and service prices moving higher. The rise in the final demand goods index was nearly all due to energy, which rose 2.1% in June. Excluding food and energy, goods prices rose 0.1%. Through the first six months of the year, producer prices are up at a 2.8% annual rate, well above the 1.1% rate over the same period last year. The acceleration is most prevalent in prices for goods, which account for nearly 35% of the total index. Goods prices are up 2.1% in the past year but have climbed at a 3.4% annual rate so far in 2014. By contrast, services are up 1.9% from a year ago and have climbed at a 2.4% rate in the past six months. Prices further back in the production pipeline (intermediate demand) do not yet confirm a continued acceleration in inflation. Prices for processed goods are up at a 1.4% annual rate in the past three months, nearly identical to the 1.5% gain over the past year. Prices for unprocessed goods are down at a 2.1% annual rate in the past three months versus a 4.2% gain from a year ago. Taken as a whole, the trend in producer price inflation is hovering around 2%. Given loose monetary policy, this trend will likely move higher in the year ahead. If anything, the Federal Reserve should be tapering quantitative easing faster than it already is. We expect the Federal Reserve to start raising short-term rates in the first half of 2015, not the second half as many now expect.

[Crafty_Dog]

Scott Grannis:  Buying up trillions of forex and gold reserves is not necessarily a smart thing to do, especially when your currency has been appreciating against almost every other currencies for over 20 years. China's forex losses alone could be staggeringly large. And I'll bet they bought a lot of gold at higher prices than today's. Not to mention what they might lose on their trillions of Treasury holdings if Treasury yields jump.

Japan did something similar back in the day, and it proved to be extraordinarily painful.


On Jul 18, 2014, at 4:43 AM, "XYZ" wrote:

I can only say, that Chinese gold holdings are rising, their aim is to exceed US reserves, or at least have the second highest gold reserve. Their sole goal is to compete and beat the US in every sphere. ..ie be superpower number 1. Whether they succeed,  is open to discussion.

"ABC" wrote:

Thanks to all for your comments and articles.  Not too long ago I was told by a devoted conspiracy theorist sleuth that China was buying up tons of gold in order to make the Yuan 'gold based' and a (the) potential reserve currency.  I told him that wasn't likely and sent the following article which I post below.
http://www.forbes.com/sites/kitconews/2013/08/12/rumors-of-a-chinese-gold-standard-are-overblown-cpms-christian-and-author-jim-rickards/

[G M]

The PRC gov't actually has infomercials exhorting the citizenry to buy gold. I think because the anticipate the collapse of the dollar and the rest of the global economic system.

The communists won the Chinese civil war in part because the Nationalists created hyperinflation. This is still remembered in China.

[Crafty_Dog]

The Consumer Price Index (CPI) Increased 0.3% in June
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 7/22/2014

The Consumer Price Index (CPI) increased 0.3% in June, matching consensus expectations. The CPI is up 2.1% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) rose 0.3% in June and is up 1.9% in the past year.
Most of the increase in the CPI in June was due to a 1.6% rise in energy prices. Food prices increased 0.1%. The “core” CPI, which excludes food and energy, increased 0.1%, below consensus expectations of a 0.2% rise. The gain in core prices was led by shelter and core prices are up 1.9% versus a year ago.
Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were flat in June, and are down 0.1% in the past year. Real weekly earnings are also down 0.1% in the past year.

Implications: In her last press conference, Janet Yellen said recent higher inflation readings weren't a problem because the data are "noisy." But, lately, that noise all seems to be coming from the direction of higher inflation. Consumer prices increased 0.3% in June, following a large 0.4% rise in May. Although consumer prices are up a moderate 2.1% from a year ago, this year-over-year number masks a real acceleration. Over the past three months, the CPI is up 3.5% at an annual rate. And if you think three months is just noise, how about the first half of the year? In the first six months of 2014, consumer prices are up 2.7% at an annual rate, a clear acceleration from the 1.5% rate seen through the first six months of 2013. Energy led the way in June, with gasoline prices, up 3.3%, accounting for two-thirds of the increase in the overall index. And while a 0.1% increase in "core" prices in June means core prices are up only 1.9% from a year ago, they are still up an annualized 2.5% in the past three months. In addition, owners’ equivalent rent (the government’s estimate of what homeowners would charge themselves for rent), which makes up about ¼ of the overall CPI, is up 2.6% over the past 12 months. This measure will be a key source of the acceleration in inflation in the year ahead, in large part fueled by the shift toward renting rather than owning. The worst news in today’s report was that “real” (inflation-adjusted) average hourly earnings remained flat in June and are down 0.1% in the past year. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, probably increased 0.2% in June. If so, it would be up 1.7% from a year ago, barely below the Fed’s target of 2%. We expect to hit and cross the 2% target later this year, consistent with our view that the Fed starts raising short-term interest rates in the first half of 2015.

[DougMacG]

The President of the Dallas Fed says there are dangers from having monetary policy be too loose for too long.  Both Wesbury and Scott Grannis think the Fed has already been "too loose for too long'.  Why do we think there will be no consequence from that?

http://online.wsj.com/articles/richard-fisher-the-danger-of-too-loose-too-long-1406499266

The Danger of Too Loose, Too Long
With an improving labor market and an uptick in inflation, the danger now is to wait too long to tighten.

By RICHARD W. FISHER
July 27, 2014 6:14 p.m. ET
I have grown increasingly concerned about the risks posed by current monetary policy.

First, we are experiencing financial excess that is of our own making. There is a lot of talk about "macroprudential supervision" as a way to prevent financial excess from creating financial instability. But macroprudential supervision is something of a Maginot Line: It can be circumvented. Relying upon it to prevent financial instability provides an artificial sense of confidence.

Second, I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose, too long. We did a good job in staving off the deflationary and depression risks that were present in the aftermath of the 2007–09 financial crisis. But we now risk fighting the last war.

Given the rapidly improving employment picture, developments on the inflationary front and my own background as a banker and investment and hedge fund manager, I am increasingly at odds with some of my respected colleagues at the policy table of the Federal Reserve as well as with the thinking of many notable economists. The economy is reaching the desired destination faster than we imagined.

Third, should we overstay our welcome, we risk not only doing damage to the economy but also being viewed as politically pliant.

The Fed has been running a hyper-accommodative monetary policy to lift the economy out of the doldrums and counteract a possible deflationary spiral. Much of what we have paid out to purchase Treasurys and mortgage-backed securities has been put back to the Fed in the form of excess reserves deposited at the Federal Reserve banks. As of July 9, $2.517 trillion of excess reserves were parked on the 12 Fed banks' balance sheets, while depository institutions wait to find eager and worthy borrowers to lend to.

But with low interest rates and abundant availability of credit in the nondepository market, the bond markets and other trading markets have spawned an abundance of speculative activity.

There are some who believe that "macroprudential supervision" will safeguard us from financial instability. I am more skeptical. Such supervision entails the vigilant monitoring of capital and liquidity ratios, tighter restrictions on bank practices and subjecting banks to stress tests. All to the good. But whereas the Federal Reserve and banking supervisory authorities used to oversee the majority of the credit system by regulating depository institutions, depository institutions now account for no more than 20% of the credit markets.

I am not alone in worrying about this. In her recent lecture at the International Monetary Fund, Fed Chair Janet Yellen said, "I am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns." She added that "[a]ccordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability."

I believe that time is fast approaching.

Some are willing to tolerate the risk of financial instability because the Fed has yet to fulfill the central bank's mandate of "promot[ing] effectively the goals of maximum employment and stable prices." Where do we stand on those two fronts? Answer: closer than many think.

While it is difficult to define "maximum employment," labor-market conditions are improving smartly, quicker than the principals of the Federal Open Market Committee expected. The commonly cited household survey unemployment rate has arrived at 6.1% a full six months ahead of the schedule predicted only weeks ago by the central tendency of the forecasts of FOMC participants. The U.S. Bureau of Labor Statistics' so-called Jolts (Job Openings and Labor Turnover Survey) data indicate that job openings are trending sharply higher, while "quits" as a percentage of total separations continue to trend upward—a sign that workers are confident of finding new and better opportunities if they leave their current positions.

Wages are beginning to lift. Median usual weekly earnings collected as part of the Current Population Survey are now growing at a rate of 3%, roughly their pre-crisis average. In short, the key variable of the price of labor, which the FOMC feared was stagnant, is beginning to turn upward. It is not doing so dramatically, but wage growth is an important driver of inflation.

The FOMC has a medium-term inflation target of 2% as measured by the personal consumption expenditures (PCE) price index. The 12-month consumer-price index (CPI), the Cleveland Fed's median CPI, and the so-called sticky CPI calculated by the Atlanta Fed have all crossed 2%, and the Dallas Fed's Trimmed Mean PCE inflation rate has headline inflation averaging 1.7% on a 12-month basis, up from 1.3% a few months ago. PCE inflation is clearly rising toward our 2% goal more quickly than the FOMC imagined.

I do not believe there is reason to panic on the price front. But given that the inflation rate has been accelerating, this is no time for complacency either. Some economists have argued that we should accept overshooting our 2% inflation target if it results in a lower unemployment rate. But the notion that we can always tighten policy to bring down inflation after overshooting full employment is dangerous. Tightening monetary policy once we have pushed past sustainable capacity limits has almost always resulted in recession, the last thing we need.

So what to do? My sense is that ending our large-scale asset purchases this fall will not be enough. The FOMC should consider tapering the reinvestment of maturing securities and begin incrementally shrinking the Fed's balance sheet. Some might worry that paring the Fed's reinvestment in mortgage-backed securities might hurt the housing market. But I believe the demand for housing is sufficiently robust to continue improving despite a small rise in mortgage rates. Then early next year, or potentially sooner depending on the pace of economic improvement, the FOMC may well begin to raise interest rates in gradual increments. (more at link)

Mr. Fisher is president of the Federal Reserve Bank of Dallas. This article is excerpted from his speech on July 16 at the University of Southern California's Annenberg School for Communication & Journalism.

[G M]

http://www.caseyresearch.com/cdd/western-delusions-vs.-chinese-realities

[Crafty_Dog]

Interesting, but I remain a skeptic.  Rising interest rates will kill gold, just as they did in the late 70s.

[G M]

This isn't the 70's, it's the reset.

[Crafty_Dog]

The Fed’s Massive Power Grab

Take your pick of these two jobs. You get to manage a $4+ trillion bond portfolio and have omnipotent control over banks and other financial institutions. Or, you can manage an $800 billion portfolio, control the level of the federal funds rate and manage some regulatory issues. Is this really a hard choice? Well, it certainly doesn’t seem to be for the Federal Reserve.

The Fed has seamlessly morphed from an institution that occasionally intervened in financial markets to a monster that apparently wants to control a great deal of the US financial system. Federal Reserve Board Chair, Janet Yellen, and her fellow central bankers, with virtually no pushback from Congress, are in the process of adopting an entirely new economic management technique called “macroprudential regulation.”

The definition of macroprudential regulation is hard to pin down. In short, it means managing systemic risks. This is done by regulating specific financial system behavior in an attempt to avoid cascading economic problems. The idea is that the Fed can reduce the risks of financial instability for the economy as a whole by regulating certain behaviors.

In practice, what this really means is that the Fed wants to run a monetary policy that it believes is appropriate for the economy as a whole – to keep unemployment low. But, if this overall monetary policy causes too much financial risk, the Fed wants to micro-manage that risk by deeming it a macro-risk. At its root, this is hypocritical.

Everyone knows that when the Fed holds rates too low, this encourages some investors to leverage up more than they would otherwise. For example, in 2004-05, the Fed held the federal funds rate at 1% which helped cause a bubble in housing. But, rather than raising rates at that point, the Fed wants to have the right to regulate home lending activity. It could do this in any number of ways, by raising the capital required by banks to make home loans or possibly putting a limit directly on certain types of loans. That’s macroprudential regulation.

In effect – and the Fed has argued this – the Fed blames banks for bubbles, not its strategy of holding interest rates artificially low. This is central planning to the second degree. The Fed wants to set rates first and then police the impact of those rates as if these decisions are not related.

This is a very dangerous precedent and it moves the US away from the free market while continuing to concentrate the power in the hands of the Fed. In a true free market, monetary policy should not be used to manage the economy. Rather, monetary policy should have one goal – to keep the value of the currency stable.

Unfortunately, as is true with all government institutions, the Fed is always looking to expand its influence and power. Remember when Rahm Emmanuel said, “never let a crisis go to waste.”? The Fed has taken this to heart. In the thirty years, between 1977 and 2007, its balance sheet (the monetary base) averaged 5.4% of US GDP. Today, it’s 22.4%.  (!!!!!!!!!!!!!!!!!!!!!!!!)  Never, in the history of the United States, outside of the military in World War II, has one government institution been so dominant.

And, under Janet Yellen, the Fed is making a steady, insistent and disciplined argument that growing the Fed’s power is necessary for economic stability. The Fed wants to keep its balance sheet large, hold interest rates low, and regulate banking activities. From a distance this behavior looks awfully like that of the Bank of China.

The alternative would be for the Fed to shrink its balance sheet, hold interest rates where economic fundamentals and the Taylor Rule suggest they should be, and have faith that the free market will police excessively risky behavior. But, the US has entered a new era of doubt about free markets.
This was pre-ordained when Congress passed the Troubled Asset Relief Plan (TARP) in October 2008 – a $700 billion slush fund for the government that was sold as a way to save the world from Wall Street. As President Bush later said, “[We] abandoned free market principles to save the free market system.”

But, by violating free market principles, politicians created conditions which allowed the Fed to justify regulation of the economy in new and broadly expansive ways. Republicans were always the defenders of free markets, but TARP signaled a new era. Now, because the GOP won’t say TARP was a mistake, it has no effective argument against the Fed grabbing more power.

What this means for the economy is that flawed economic models, combined with the very visible hand of regulation, are distorting economic activity and leading the US toward more politicized control of financial markets. What could keep the Fed from lowering capital requirements on clean energy and raising them on fossil fuels? After all, many argue that fossil fuels are destabilizing.

But even more dangerous is that the Fed will hold rates down at artificially low levels for long periods of time in order to bring unemployment back down, all the while believing it can control the risks of easy money by using macroprudential regulation tools.

There are many reasons to disagree with this policy, but the most important is that artificially low rates distort decision making. High-return businesses will lever up unnecessarily and probably show up as bubbles. But some low-return enterprises will wrongly assume that borrowing to expand is still profitable. If resources flow too heavily to low return businesses, the economy will be less efficient and have more danger of inflation.

When rates eventually rise, both these behaviors will be tested and perhaps crack. Rather than trying to figure out where dangerous leverage is being employed, the Fed should put rates at the correct level and keep the whole boom-bust process from happening in the first place.

Congress needs to push back hard against macroprudential regulation, but it’s highly doubtful they will because they don’t understand it. The Fed is expanding its mandate in massive and unprecedented ways. Who is going to stand up and say stop?

Brian S. Wesbury, Chief Economist
Click here for PDF version

[G M]

https://s3-eu-west-1.amazonaws.com/nomadcapitalist/7-new-safe-havens.pdf

[DougMacG]

The Fed’s Massive Power Grab
...The Fed has seamlessly morphed from an institution that occasionally intervened in financial markets to a monster that apparently wants to control a great deal of the US financial system.
...

I like the Brian Wesbury who speaks out boldly against failing policies much better than the one who tells us things will be just fine no matter how badly we screw things up.

[G M]

The Fed’s Massive Power Grab
...The Fed has seamlessly morphed from an institution that occasionally intervened in financial markets to a monster that apparently wants to control a great deal of the US financial system.
...

I like the Brian Wesbury who speaks out boldly against failing policies much better than the one who tells us things will be just fine no matter how badly we screw things up.

Me too.