VICIOUS CYCLE FEEDS UPON ITSELF

Simply stated, each QE round guarantees the next round, since damage is done, nothing is remedied, and the funding needs intensify. The list of damage factors is actually growing. The main factor is capital destruction from monetary inflation, as the price of capital is declared zero, and it flees from the USEconomy. Witness the industry long gone, hardly a critical mass remaining to support the system with legitimate income. Government regulation and taxes assure the flight continues in exodus. Almost half of the US Gross Domestic Product is derived from financial paper shuffling, whose negative value has been clearly displayed in the form of mortgage bond wreckage, profound bond fraud, home foreclosure processing, absent home equity withdrawals, bankruptcy processing, and piles of debt that burden households. US economists fail to comprehend the entire concept of capital, this from the supposed leading capitalist nation. The banking and political leaders struggle to produce jobs without a clue of what capital is, instead seeking to put cash in consumer hands. They should pursue business formation, with capital investment, encourage risk taking, provide broad tax incentives, and lead the consumer spending process with job creation and income production. But no. They prefer QE, the accelerator that pushes the nation over the cliff.

The bond market has been disrupted and corrupted, as the debt monetization has driven off foreign creditors, leaving the USFed isolated as buyer. The 0% rate slows the USEconomy tremendously by removing a proper return on honest savings. Return on capital is greatly disrupted all through the USEconomy. The heavily increased monetary supply maintains the emphasis on asset bubbles, as desperation sets in to find the next asset to produce a new bubble. The answer is USTreasury Bonds. A mildly violent reaction has come to the long-term USTBonds, while the short-term USTBills stay near 0% but with the aid of intense leverage power of Interest Rate Swaps. The long end reacts negatively to QE, while the short end is under QE control from the big bulging bid. The entire financial structure is crumbling under the surface. The USEconomy will continue to falter at minus 3% to minus 5% growth in a powerful ongoing recession, covered up by the fraudulent quarter to quarter calculations that permit deep deceptions from adjustments. Businesses cannot justify any expansion, given the household dependence upon home equity has vanished. Businesses have been put on notice, a certain shock, that the national health care plan will place greater burden on the business models. So the USGovt deficits will perpetuate in high volume, making the supply overwhelming in USTreasury securities and making the creditors retreat in a cringe of fear, shock, and disgust. The more the USFed buys its own paper feces with USTBond labels, the more the securities lose their security, the more the foreign creditors refuse to participate in the next auction, the more the integrity of the US$ and USTBond is shredded and lost. The United States has become a Weimar nation with gradual global recognition. Instead of a recovery, it slides into the Third World. Thus the need for the USFed to cover the next USTreasury auction in full, or almost in full. It is deeply committed to monetizing the entire USGovt debt. Call it Weimar, Third World, Banana Republic, whatever!!

An encouragement has come from the QE movement to the entire world to revolt against the USDollar, to seek an alternative, to establish bilateral trade mechanisms, and to bypass the current system that enables privilege, fraud, market meddling, which permits an unwarranted standard of living to the US and its people. The bilateral accords between Russia and China, between China and Brazil, between Germany and Russia, and between India and Iran are all telltale signs of revolt. They wish not to participate in the US$-based system. The consequence is a new trend to diversify out of the USTreasurys with existing reserves, and to avoid accumulation in the future within banking systems for satisfaction of trade settlement in global commerce. The foundation on a global level is crumbling for the USDollar. As the bilateral links build, eventually enough fabric will be woven to support a new global currency, or a new global system. Often mentioned in certain circles is a sophisticated barter system, built upon high level credits in exchange, with a vast trickle down flow of funds, within a balanced system. Nations addicted to deficits will be left out in the cold. The most deficit ridden is the United States, dragged down by endless war costs. Their location has another name, the Third World.

Furthermore, the inflation effect has crossed from the monetary side to the price systems, hitting the entire cost structure in a profound way. The moron bankers strive to cut off the process from handing higher wages to the workers, so that they can afford a higher cost of living. The leaders thus strive to bankrupt the Middle Class, hardly a pursuit in commitment of economic recovery. The cost squeeze is deeply felt by both businesses and households, businesses that cannot hold their workers as profits erode badly, and households that cannot maintain their spending patterns as incomes are devoted increasingly to food, fuel, clothing, insurance, and everything else. Tax revenues from wages and corporate profits and capital gains are descending into the gutter, not available to cover the USGovt deficits. Witness the death of the USEconomy in hyper-drive, pushed by the USFed Quantitative Easing. The impact on the worsening recession at the macro level, and the shrinking of both businesses and households, translates to larger deficits. Notice that in early 2009 when QE1 was first announced, and later when QE-Lite was announced, the USGovt minions forecasted reduced budget deficits for 2010 and 2011. The USGovt posted its largest monthly deficit in history in February, a $223 billion shortfall. Most decisions center on budget cuts, for education, welfare, projects, and more, while war spending is largely intact, priorities revealed. They have no clue how to build tax revenues. The Jackass forecast was for greater deficits due to the ravages of capital destruction and cost inflation, which both arrived with billboard attachments. The dependence therefore upon the USFed for its Printing Pre$$ buyer of USTreasury Bonds will increase with each QE round, assuring the next round.

The harsh savage negative reaction to QE2 kicked into high gear the movement of funds out of the USTreasury complex and into commodities generally. The shift to financial commodities in Gold & Silver has been even greater than for crude oil, the traditional hedge. Despite not being the leading non-financial commodity in price increase, the crude oil impact is enormous, in food production, in transportation costs, and especially in industrial feedstock costs. The result is an energy tax, compounded by a systemic cost that acts like a gigantic tax. The USFed QE program thus imposed a significant tax increase on the entire USEconomy. The entire population is aware, except for the USFed, the Wall Street master, and banking elite. Actually, they are aware, but they cannot speak about the scourge they unleashed since they would invite criticism and turn the blame onto themselves for destroying the United States financially, economically, and systemically. The moral fiber is long gone among leaders, as the US nation is being recognized as a fraud king playpen. The end result is that in the cycle, movement from USTreasurys to the USEconomy is not happening during this death spiral, as it normally does. Instead, the next bubble is in the entire commodity arena. Beware that such a trend is highly destructive, since it erodes the profit margins and disposable income, thus causing deep recession if not systemic collapse. The energy and material tax renders huge harm, pushing the system into a deeper recession. It never ended.

Money is fleeing bonded paper, as all bond markets are in a severe situation. Even the stock market is supported heavily by the Working Group for Financial Markets and Flash Trading, a form of self-dealing, whereby both prop up stock share prices. Hence, the USFed is left more isolated to purchase its own inbred cousin toxic paper securities. The USFed must continue with QE3, the only remaining details are the securities that join the USTreasurys. My bet is state and municipal bonds, along with a bigger swath of mortgage bonds that would otherwise be put back to the Big US Banks, the dead pillars taking up space casting long shadows. Numerous are the bond candidates for official rescue, since all of them are in deep trouble. Buyers are simply vanishing. The bond markets is in ruins, propped by QE.

LAST ASSET BUBBLE

The tragedy is that the USTreasury Bond is the location of the biggest and most important asset bubble in the last 100 years. It is propped by the QE debt purchase, enforced by the USFed, made urgently necessary by the USGovt deficits, and blessed by the USDept Treasury. The USTBond bubble is the last bubble with any semblance of positive benefit. The next bubble in commodities will be negative, harsh, and highly destruction, as they will lift costs without a corresponding rise in wages. That event has already been triggered. The key characteristic of asset bubbles is that in the late stages, they require an accelerated source of funds just to maintain their inflated condition. The QE programs will be endless because the USTBond bubble demands it, even infinite funds. Thus the mantra in criticism of QE TO INFINITY. With the heightened source and blossoming channels to fund it, the integrity of the USTreasury Bond complex will be ruined even as the reputation and prestige of the USDollar will be shattered. This is an end chapter, marked by central bank frachise model failure.

USDOLLAR FACES THE ABYSS

The US$ DX index is a bad joke, but its performance is highly revealing. As preface, the DX major component is the Euro, even though the biggest trade partner of the United States is Canada, with Mexico and China close behind. The argument is old and tired. Rare is the 30-year chart offered by the Jackass, since its reliance as a tool is often evidence of shallow analysis and little insight to offer for the current year and its main events. But the historical USDollar chart shows the great danger, since the world banking system rests on its unit of exchange. The DX index lows from 1991, 1992, 1995, and 2005 have all been breached, a major warning signal. Jesse at Cafe Americain points out the pennant flag pattern formed in the last three years. It must resolve up or down. My contention is that the pennant has already been broken on the lower barrier, a bear signal. The next QE3 announcement should send the DX index heading fast toward the 2008 critical low with a 71-72 handle. It is written; it will be done.

Many technical analysts are pre-occupied with monitoring the critical support levels. Those levels are 72, 75, and 76.5, seen in the weekly chart. Instead, focus on the lower barrier of the crucial pennant. The pennant trendline has been broken on the downside, an important development. Traders in the currencies, a multi-$trillion market, will take the minor technical breakdown and push the already weak USDollar lower. Many argue the Euro is in deep trouble, with a union in the midst of dismantlement. That might be true, but in the Reverse Beauty Pageant, the USDollar is by far the ugliest of the coined damsels. Its deficits are on par with the PIGS of Southern Europe in percentage terms. Besides, the US is the site of QE, the greatest monetary inflation scourge in modern history. Notice that the bounce in recovery off the October and November low of 76.5 could not manage a rise about the 20-week or the 50-week moving average. Those MA series serve as current overhead resistance. The DX chart is caught in powerful downward momentum. My forecast is for a breach of 76 in the next few weeks, and a battle of paramount importance at 74, the next critical support.

The intraday US$ DX chart shows more trouble in the very short term. The recovery off the 76 floor could not be maintained. In fact, the sudden swoon displayed its weakness if not artificial props. Be sure that the USDept Treasury with its fascist business model trusty tagteam of JPMorgan and Goldman Sachs are trying to do the herculean feat of preventing the USDollar from a powerful decline. The ugly truth is that JPM & GS are probably trying to manage the decline in the USDollar down to the 50-60 range in the US$ DX index, all as part of the USGovt agenda. The plan is to weaken the USDollar sufficiently enough to make the USEconomy competitive again with respect to export trade. The backfire in their faces is the price inflation curse and anathema. The price structures will rise first from the QE exercise in Weimar desperation, and will rise second from the US$ decline most assuredly worse than its major currency competitors. The report card will be seen in a much worse recession in the USEconomy, grander USGovt fiscal deficits, even larger USTBond issuance, and more grotesque QE debt monetization more characterisitic of a Third World Banana Republic.

SWIRL DOWN TOILET IN DETERIORATION

Within the Jackass archives, an item was found from work done in 2005. What began as a graphic display of the grand liquidity trap emanating from the failed housing & mortgage bubble has turned out to be highly relevant in the aggressive metastasizing process from monetary inflation cancer combined with basic economic deterioration from capital destruction. Many are the ills of the USEconomy and its fractured financial foundation. Take the time to note all the different powerful factors at work that slow the entire system down. Forces are shown from external shocks and internal shocks. The money supply velocity is falling, ordered slower by the short-term interest rate stuck at 0%, the Zero Interest Rate Policy described as an important chamber label of failure. Recall the empty calls for an Exit Strategy throughout 2009 and into early 2010, as vacant as the Green Shoots and Jobless Recovery basis of propaganda that unmasks the fraudulent bank leadership. The Fed Funds Rate stuck at 0% cannot rise by USFed dictate, because the housing market would implode more quickly, because the USEconomy would sink more quickly, because the US stock market would dive like a dead mallard, because the USGovt borrowing costs would bring more deficit from debt service than other major items. The USFed has been backed in a corner for two years, no longer relying upon a temporary 0% rate to stimulate. It is stuck with 0% as a badge of dishonor, as a two ton cement block around its neck, as a Weimar membership card. The complex chart should remind the reader of a toilet, sewer drain, or even a rectum.

Some advice. As the movement swirls, as the next QE program details are revealed, as the central bank model is shattered in discredit, as the global monetary system crumbles before your eyes, as sovereign debt worldwide loses its exalted safe haven security, as your personal budget finances erode beyond your worst nightmare, invest what is left of your life savings in Gold and especially Silver. In time, they will be the primary portions of your portfolio with surviving value. Each will rise, but Silver will do a moon shot!!

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Chart 1: Cumulative US Individual Income tax revenues and debt issuance. Since the failure of Lehman, through November 30, 2010, the US government has issued $3.8 trillion in debt, and collected $3.6 trillion in tax receipts. Uncle Sam continues to fund over 100% of every dollar received from taxes with his own credit card, which is somehow still stuck at an APR of about 2%.

Chart 2: The same as above, but also showing the cumulative differential between the two metrics. We fail to observe any green shoots, or any improvement in the cumulative delta.

Chart 3: While the debt to tax collection metric is deplorable, what is far more scarier, and has very profound implications for future US debt, is that the cumulative debt over deficit differential not only continues to rise, but has hit an all time high. Forgive us if we laugh in the faces of all those who claim that rising tax revenues are a certain indication of economic improvement. Nothing could be further from the truth: the only “improvement” is short-term economic stimulus (with an ever declining half life), purchased on Uncle Sam’s credit card. Should the recent acceleration in interest rates higher persist, we expect that very soon the Uncle Sugar APR will no longer be quite as attractive as it has been during this period of drunken sailor borrowing.

And if you are not scared enough by the above figures, here is Bill Buckler of the Privateer fame’s condemnation of what anyone with half a brain realizes is pure, unadulterated fiscal lunacy (dictated in no small part by the same people at Goldman who are now in charge of monetary policy as well):

Before fiscal 2008, the US Treasury had only run an official deficit above the $US 400 Billion level once – in 2004. In the three years between 1998 and 2000, the Treasury had even claimed to have run budget SURPLUSES, even thought its debt climbed throughout the period.

• In fiscal 2008 – the official Treasury deficit was $US 438 Billion
• Ten weeks into fiscal 2009 – the Fed cut its controlling rate to 0.00 – 0.25 percent
• In fiscal 2009 – the official Treasury deficit was $US 1.42 TRILLION
• In fiscal 2010 – the official Treasury deficit was $US 1.29 TRILLION
• White House projections for fiscal 2011 are for an official Treasury deficit of $US 1.5 TRILLION

In fiscal 2009 and early fiscal 2010, the Fed directly monetised an official $US 300 Billion of US Treasury debt. Between November 2010 and June 2011, the Fed plans to buy another $US 900 Billion worth. Nobody, including the Fed knows what will happen after that.

When looking at these figures, it is wise to remember that what is being “produced” here is the reserve currency of the world. This is why the US government has gotten away with this borrowing as long as they have. And it is also why the Fed has been able to accommodate them with non-existent official interest rates for as long as they have. But for how much longer?

That is the 64 quadrillion dollar question.

The Governors summary and text of the Inflation report in hindsight implies that high inflation during 2010 was obvious, however that is NOT what the Bank of England has been stating for virtually the whole year when the exact OPPOSITE was implied, which confirms my long-standing view that the Bank of England Inflation reports are nothing more than propaganda so as to enable the Bank of England to better manage the populations inflation and growth expectations by using the non existant Deflation Threat and therefore make the Banks job easier.

Mervyn King, BoE Inflation Propaganda Report Statement Excerpts:

Despite weak demand, inflation remains more than a percentage point above our 2% target. There is no shortage of explanations for the current high level of inflation. The exchange rate, on average, remains around 25% below its level in mid-2007; there have been sharp gyrations in global commodity prices and sizeable changes to VAT. It is not surprising that the combined effect of all of these factors has led to movements in inflation that are larger than those experienced in the period 1992-2007. Indeed, were it not for these factors, our inflation experience might well have been closer to that in the United States, with inflation about as far below as it is currently above our target.

Given the quantitative importance of the different influences buffeting the economy at present, it is hard to judge how inflation will evolve in the medium term, and there are sizeable risks in both directions. On the one hand, slack in the economy is likely to reduce inflationary pressure. Unemployment, at almost 8%, is high, and growth in money wages has been subdued at around 2%. If the weakness in wage growth were to continue, then once the temporary effects of higher import prices and VAT wane, inflation could move substantially below the 2% target. On the other hand, inflation has been above the target for much of the 2 past three years. It is possible that additional import price pass-through or commodity price rises will push up further on inflation. And if the period of above-target outturns causes medium-term expectations to drift up, then the inflation outlook could be significantly higher.

Bringing together this assessment of the uncertainties, Chart 3, on page 7 of the Report, shows the Committee’s best collective judgement of the range of outcomes for CPI inflation. It is based on the assumption that Bank Rate follows a path implied by market interest rates and that the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion throughout the forecast period. Inflation is likely to remain above the 2% target throughout 2011. Over this period, the projection is higher than in August, largely reflecting higher import prices, stemming from the recent depreciation of sterling and increases in a range of commodity prices. Further ahead, CPI inflation is projected to fall back, as the effects of higher import prices and VAT diminish, and persistent economic slack continues to restrain the growth of wages and prices.

At present, there are large upside and downside risks to inflation. Monetary policy has to balance these risks. Only with hindsight will it be clear which has predominated. But there is, as you would expect and should want, a vigorous debate between members, and a range of views that is wider than usual, about the weight to attach to those different risks. The MPC will continue to judge the balance of risks each month. And, like the English batsmen preparing to defend the Ashes, watching carefully and perfectly balanced in the crease ready to play forward or back according to the length of the incoming delivery, so the MPC will watch the incoming data carefully, ready to adjust policy in either direction in order to keep inflation on track to meet the 2% target in the medium term.

The Bank of England’s current (November 2010) Inflation Report now forecasts UK CPI Inflation to target an early 2011 peak of 3.5% before inflation falls to below 2% CPI by the end of 2011 to target a rate of about 1.6%, and for inflation to remain well below 2% into the end of 2012, therefore supporting the Bank of England’s persistent view that everyone should focus on the Deflation threat and ignore high inflation during early 2011.

Bank of England’s Inflation Propaganda

Whilst the mainstream press laps up the latest inflation report, according to the Bank of England’s forecast for UK inflation as of Feb 2010, CPI inflation by September should have fallen to about 1.4%, instead it is at 3.1% (see graph), with the forecast for inflation to fall to below 1% by the end of 2010 and magically always converge towards a sub 2% target in two years time which fails to occur 96% of the time.

Clearly the Bank of England relies on the gold fish memory of the mainstream press as the BoE seeks to revise inflation forecasts every quarter to always push forward sub 2% to two years forward, which is nearly always preceded by a trend to below 2% one year forward. But as mentioned above the quarterly inflation reports are just propaganda aimed at psychologically managing the populations expectations on the economy and inflation in the direction where the BoE wants it to be as the alternative would be to make the BoE’s job harder.

For instance if the Bank of England stated that Inflation would be 6% during 2011 then that would ignite a wage price spiral that would make the Bank of England’s job at controlling inflation significantly harder, therefore it is much more convenient for the Bank of England to be deliberately wrong in its inflation forecast than to accurately publicise probable inflation expectations. For instance if the Bank of England was not expecting high inflation during 2010 and beyond then why did the Bank of England staff pension fund switched from being 30% invested in inflation index linked government bonds to 70% during late 2009 ?

More here – The Real Reason for Bank of England’s Worthless CPI Inflation Forecasts

UK Inflation Forecast 2010

UK CPI Inflation at 3.1% for September 2010 is in line with my trend forecast for 2010 as of December 2009 that projected CPI above 3% inflation for most of 2010 (27th December 2009 UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) and the Inflation Mega-trend Ebook of January 2010 (FREE DOWNLOAD) as illustrated by the below graph.

UK CPI Inflation Prospects for 2011

As elaborated in the Inflation Mega-trend Ebook, I am expecting high inflation for many years, whilst the forecast for 2011 is pending, however there is every sign that the average inflation rate for 2011 will be higher than that which was for 2010, which again is contrary to the Bank of England’s forecast for CPI 1.7%.

Translating the Bank of England’s Inflation Propaganda Report – If the Bank expected UK inflation to end 2010 at 1% instead it looks set to be around 3%, then the Bank of England’s current expectation for UK Inflation to be at 1.6% by end of 2011 suggests that UK CPI will again be well above above 3% and quite possibly spike above 4% during 2011, with RPI significantly higher, perhaps breaking above 6%. In-depth analysis and forecast for UK inflation will follow in December, ensure you are subscribed to my always FREE NEWSLETTER to get this and all other in depth analysis and forecasts in your email in box.

The British Pound is Dieing

Print, print, print either overt (QE) or covert (off balance sheet liabilities), British governments are stealthily killing the currency as purchasing power continues to erode year in year out:

The mainstream press repeatedly makes the mistake of stating that future generations will pay the price for today’s debts and deficits – THAT IS WRONG – The CURRENT generation pays the price TODAY for debt and liabilities because as I have oft mentioned, the markets will not WAIT for future generations to be born and grown up and service the debt, but rather the market will force the current generation to bear the consequences of current deficits and FUTURE liabilities by means of erosion of purchasing power of current earnings and accumulated savings. The system will long since have been cleansed of current debt either by means of inflation (29 Jun 2010 – UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt ) highly probable or an outright debt default (less probable as the UK can print money and inflate)

UK Economic Growth

The Bank of England’s expectations now are for the UK economy is grow by 3% for 2010 which is up from 2.2% at the start of the year. The BoE also expects growth of 3% for 2011 and 2012, which are fairly optimistic given the prospects for several years of economic austerity about to be implemented.

GDP Growth for Q3 of 0.8% was inline with my forecast of December 2009 (31 Dec 2009 – UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom ) that forecast Q3 growth of 0.9% which is set against Reuters poll of academic economists the day before that forecast GDP growth of 0.4%. The below graph illustrates the forecast trend for UK GDP (ABMI chain linked at market prices, change on year earlier). The UK GDP Growth trend forecast was updated following the June Emergency Budget that resulted in a revision for 2011 growth from +2.3% to +1.3% (09 Aug 2010 – UK Economy GDP Growth Forecast 2010 to 2015).

• UK GDP 2010 2.8%
• UK GDP 2011 = 1.3%
• UK GDP 2012 = 1.1%
• UK GDP 2013 = 1.4%
• UK GDP 2014 = 3.1%
• UK GDP Mid 2015 = 3.3%

Stagflation – The Invisible Depression

Low forecast growth of between 1% and 1.5% for the next 3 years plus high inflation of between 3% and 6% (CPI / RPI), implies there is enough margin for error in the GDP price deflator utilised by the government statisticians in estimating real GDP for there to be NO REAL growth for 2011-2013, which therefore means that the UK is entering a number of years of stagflation, the experience of which will be just as painful as the Great Recession of 2008-2009 as it will be mostly hidden from public view as the government hides behind phony statistics that imply growth and prosperity when REAL INFLATION ensures they will be losing just as much wealth if not more than they did during 2008-2009!.

Time for a Tea Party for Britain ?

As mentioned in the June analysis (29 Jun 2010 – UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt ) the announced spending cuts will not prevent total UK debt from rising over the next 4 years by 50%. This is as a consequence of the budget deficit that will persist into the 3rd year of the cuts programme as illustrated below, which anticipates the abandonment of the cuts programme during 2013 as the Coalition government gears itself up towards generating an election boom into May 2015.

Therefore the spending review did not alter Britains’ path towards a debt mountain total of £1,262 billion for 2013-14, an increase of 50% on the 2009-10 total of £784 billion.

The impact of a 50% increase in total debt also implies at LEAST a 50% increase in ANNUAL debt interest payments to £70 billion a year up from £34 billion for 2009-10, which also illustrates how clueless are those that argue the Coalition government is cutting too much too fast when the facts are that it is not cutting enough to have any impact on growing UK debt.

Coalition Government Flaws

There are two major flaws in the Coalition Government policies:

1. Socialist Frankenstein Coalition Government Targets Middle Class

Taxes – The Frankenstein coalition government is adopting far worse socialist measures that squarely targets the middle class to pay for the price for Labour’s incompetence, far worse than that which the labour government had planned to do by effectively taxing the middle class to at least 70% of their earnings (40% Income Tax + 12% NI Tax + 17.5% VAT + 4.6% RPI Inflation (inflation is a stealth tax that the population has been conditioned to view as beneficial when it is actually an earnings and savings purchasing power destroyer) ).

Government Spending - The policies announced to date pay lip service to spending cuts on an out of control welfare state with the largest budgets that deliver no output for additional resources such as the NHS being ring fenced for growth. The consequences of this is that government spending will NOT be cut and instead continue to increase every year from £680 billion for 2009-10 to at least £739 billion for 2014-15.

Therefore the coalition government has FAILED to implement ANY meaningful cuts in what remains as out of control Government spending.

Tuition Fees – The coalitions policy on tuition fees illustrates a government that is anti-education and destroying the ability for the country to generate future wealth.

1. Tuition Fees will rise from £3,300 to £9,000, saddling graduates with an estimated average debt of £40,000 with all of the consequences both psychological and financial in terms of credit ratings where the debt will impact on graduates for the next 30 years of their working lives.

2. That the debt interest will be at Inflation (RPI) Plus 3% (7.6%), against the current student loan interest rate of 1.5%.

3. Those that pay off their loans off early will be punished, and unpaid debt will be wiped out after 30 years.

4. Repayments will kick in for those earning at £21,000 rather than £15,000, which effectively punishes those that are more productive and acts as a disincentive to work harder, and every year workers delay working harder for higher pay means loss of potential tax revenue, which suggests that the Government is grossly over optimistic in what it expects these workers will earn in the future which is based on growth in graduate pay of the past 30 years when there were far fewer graduates who were NOT saddled and disincentivised to work with £40k of debt repayments. Which also means that perhaps as much as 50% of the monies loaned will never be repaid.

The overall effect is to make university education less palatable to all sections of the population as all will feel the financial and psychological pressure of being saddled with £40k of debt as soon as they leave University and get their first job, especially as the high interest rate ensures that the debt total will continue to soar.

Instead of turning students into debt slaves for life, the government should view graduates as the countries life blood who will go on to become higher rate tax payers and therefore they should incentivise to work harder for more pay and therefore pay more taxes, which is the exact opposite to the coalition governments policy

Key to the countries future is always in the quality of those that enter the Labour force, therefore education should be free so as to maximise the educated worker population pool that will maximise the higher tax payer base, after all middle class tax payers are taxed at an extortionately high rate of approx 70%.

2. Protecting The Socialist Banking System

The Coalition (as did Labour) have let off hook those who are responsible for the financial crisis i.e. the banking sector with the Bank of England at its head.

Many mistakenly jump to the conclusion that capitalism was to blame for the financial crisis. However it was not capitalism to blame but socialism, because if there was any doubt in anyone’s mind that the banking system that operates in all of the western countries is socialist, then the bailout and protection of the bankster’s and their bonuses should have put that to rest.

The power to print electronic money is delegated from the central bank by means of fractional reserve banking which creates the booms and boosts between alternating trends of out of control credit creation followed by credit destruction.

BoE governor Mervyn King has apparently also come to this conclusion recently :

“Of all the many ways of organising banking, the worst is the one we have today.”

“What we cannot countenance is a continuation of the system in which bank executives trade and take risks on their own account, and yet those who finance them are protected from loss by the implicit taxpayer guarantees.”

However what Mervyn King will never acknowledge is the fact that the Bank of England is THE PRIMARY REASON why the banking crisis occurred, because it lies at the heart of Britains fractional reserve banking system that allows bankster’s to bank bonuses on the basis of fictitious profits and then dump the losses onto tax payers i.e. profits are privatised whilst the losses are nationalised.

The Bank of England will never allow real radical reforms to end the socialist banking system because that would result in an end to fractional reserve banking, and if there is no more fractional reserve banking then there is no need for the Bank of England to exist. Therefore Mervyn King is talking a load of nonsense that he does not even agree with as the Bank of England aims are to grab more power from Parliament so that more money can be fraudulently funneled into the hands of a few thousand bankster’s that Mervyn King is literally the King of!

If the UK government were not in the back pockets of the Bankster elite then they would be taking powers away from the Bank of England instead of handing over more powers to the Bank to print money and inflate the wealth and purchasing power away of hard working citizens that have increasingly been turned into debt slaves, families now work twice as hard as they did 20 years ago with less purchasing power as a consequence of the theft of purchasing power by means of continuous money printing / credit creation (electronically) via the factional reserve banking system that continues to destroy the value of the currency in real terms as the above British Pound graph illustrates.

The only way to stabilise the value of money and prevent a future banking crisis (which is guaranteed) is to end fractional reserve banking so that Banks can only loan out what they have received in deposits.

Instead our current fraudulent banking system exists where the Bank of England prints money that is loaned out on leverage to the bankrupt banks so that they can go and buy government bonds on even more leverage, resulting in huge profit margins for near zero risk.

The Banks then treat these government bond holdings as assets against which they can create many multiple of times of electronic money in the accounts of borrowers, loaned out at exuberant interest rates in many cases X20 the rate of the base interest rate that Banks can borrow at from the Bank of England.

The system is designed to generate literally unlimited profits for the bankster elite, and if the banks lend too much then the socialist banking system ensures that the ordinary tax payers will be forced to step in and bail out the banks at any cost and ensure that all bond holders are protected at 100%. This is NOT capitalism, this is socialism. Capitalism is a mechanism for the allocation of capital towards whichever business is profitable, and as long as the business is profitable the business is financed, if the business stops being profitable then capital is reallocated to other ventures that could prove profitable. Capitalism is not conjuring money out of thin air that is loaned out to ANY business whether it is viable or not amidst a credit boom (as there is unlimited money), and then when the bubble bursts have tax payers step in and cover ALL of the banking sectors losses after bank officers have banked bonuses on fictitious profits, leaving hollow husks behind for the tax payers to cover the liabilities of. That is not capitalism, this is fraud on the tax payers of Britain, far greater than any mafia don could ever hope to achieve.

Interest rates are near ZERO so as to allow the bankrupt banks to maximise the amount of profits they can make as they borrow at 0.5% and then leverage it up by the fractional reserve banking system to between X10 and X20 then go on and buy government bonds at 3% which implies an instant profit 25% to 50% all courtesy of the Bank of England and Tax payers.

In America the tea party movement is rising up against the blatant frauds that are taking place such as Hank Paulson the ex CEO of Goldman Sachs effectively engineering a £700 billion theft from taxpayers to the bankster’s. Isn’t it time for the middle class of Britain to also wake up to the fraud of the socialist fractional reserve banking system that seeks to destroy the value of a life time of savings ?

David Cameron’s coalition government is not showing any vision, instead it is magnifying the policies that the Labour government had planned to implement and even more eager to protect the Bankster Elite that many Conservative MP’s hope to join on leaving office. So Britain does appear ripe for a Middle Class led Tea partyesk movement across Britain to cut taxes from 70% and out of control government spending and destroy the power of the bankster elite that the country remains firmly in the grips of.

Ireland Announces Policy of Quantitative Cheesing

Ireland’s economic depression is intensifying as the economy remains in recession and Irish bonds plunged sending yields soaring on concerns of more banking sector losses that continue to send Irelands public debt and liabilities soaring as the bankrupt banks continue offload their huge losses onto Irish tax payers, that negates all of the austerity pain suffered to date, which requires even more sacrifice to ensure that the bankster’s and bond holders are bailed out 100%, resulting in an country bankrupting annual budget deficit of 32%, which Ireland cannot monetize through money printing.

The irish government is desperate to follow the lead of the UK and USA by printing its way out of its debt crisis, but it cannot do so because it remains firmly anchored along with the other bankrupting PIIGS within the Euro currency zone so money cannot be printed and their currencies cannot be competitively devalued against the might of the German Industrial Empire that holds the rest of the Euro-zone as a captured market for its goods and services.

The people of Ireland having endured over a year of austerity on the promise that it was all necessary to suffer pain today by cutting public spending so as to reduce the annual budget deficit to sustainable level for economic gains tomorrow. Instead the exact opposite is taking place as the Irish economy contracts due to economic austerity whilst its bankrupt banks are sending the countries debt and liabilities soaring, thus resulting in a far worse budgetary position than where Ireland was before the austerity measures were implemented as the bond markets are waking up to evitable debt default which is sending interest rates demanded to hold Irish debt soaring to new credit crisis highs.

An exhausted Irish Government devoid of any new workable solutions to the spiraling debt crisis, unable to print money and inflate their way out of debt are instead announcing policies the likes of Quantitative Cheesing, which literally boils down to handing out parcels of cheese from the European Unions Cheese Mountain to Irish families to consume or trade as opposed to handing out money which they are unable to do. This is no joke, as a 55 ton handout of E.U. cheese is heading for Irish towns and cities, which does not exactly send a message of confidence to the financial markets as to the state of the Irish economy.

Whilst the crisis in Ireland and the other PIIGS may be new to the mainstream press, however when the eyes of the world were focused on Greece 6 months ago, I pointed out that a far bigger crisis was brewing in Ireland (13 Apr 2010 – Britain’s Accelerating Trend Towards High Inflation and UK Debt Default Bankruptcy )-

Whilst the mainstream press these past two months has been obsessed with the Greek debt crisis, the above graph clearly illustrates that a far larger debt crisis looms in Ireland that could soon transplant Greece in the debt crisis headlines over the coming months, similarly a number of other Euro Zone countries head the risk towards bankruptcy league table with Belgium and Portugal not far behind Greece. The price that these countries pay for being stuck in the Euro single currency is that they cannot devalue to try and gain some competitive advantage for their economies and therefore try and grow and inflate their way out of a high debt burden that stifles economic activity.

However they also benefit from the fact that had they not been in the Euro then many of these countries would also be where Iceland is today as they would no longer be able to service the debt denominated in foreign currencies as their own currencies would have crashed as investors rush to the exit to preserve as much of the purchasing power of their investments into alternative currencies. The consequence of this in ability to devalue is deflationary as the economies contract in an attempt to reduce the debt burden and budget deficit as they attempt to move to a new sustainable equilibrium within the Euro block that demand greater competitiveness by means of reduction in costs i.e. by deflating wages, failure to do this results in higher interest rates and therefore a greater debt interest burden which again risks default.

As the above illustrates, Greece was and remains just the tip of the Eurozone debt ice-berg as countries such Ireland, Belgium, Portugal and Spain were destined to line up for a Euro-zone (German) bailout. All of the Eurozone PIIGS have since accelerated along the debt deflation path, feeding the economic crisis in Ireland as they cannot print money and devalue as the PIIGS are locked into the Euro which benefits the industrial countries such as Germany that profit from the Eurozone both in terms of a captured internal market that cannot compete against German industry, and exports to outside the Eurozone where the Euro is kept weaker as a consequence of the PIIGS thus enabling Germany to profit from a huge trade surplus.

Ireland Debt Crisis Solutions ?

The same trend continues as I wrote of in April 2010, which requires the same solution of the Eurozone splitting into two or more currency blocks so as to enable competitive currency devaluations to take place, the alternative is for all of the Eurozone trade surplus countries to hand over a large chunk of their annual surpluses to the PIIGS in order to reduce their annual budget deficits to a manageable % level inline with the E.U. average. Neither of these solutions is perfect as ejecting the PIIGS from the Euro would send their currencies sharply lower and inflation soaring as they try to inflate their way out of their debt crisis (as the UK is doing). However the problem here is, as I have identified several times before that most of the debt of the Eurozone PIIGS is denominated in Euro’s, which means that a devaluation would increase the value of the debt in the new currencies.

The only solution is for a costly European Union / ECB / IMF bailout of Ireland as they cannot allow the current crisis in ireland to trigger a complete bailout of ALL of the PIIGS which could cost as much as Euros 2 trillion. Therefore the Irish debt crisis has the potential to turn into the mother of all bailouts where today’s talk of billions turns into trillions if decisive action is not taken to finance the Irish budget deficit before they triggered a PIIGS debt collapse Euro-zone wide bailout

The price paid would manifest itself in significantly higher Eurozone inflation as the ECB follows the UK and USA with a series of Quantitative Easing, money printing runs to monetize the debt of bankrupting PIIGS, the impact of which will be to increase the relative rate of free fall of the Euro against other major currencies thus give the illusion of a rising Dollar (temporary) and British Pound (less temporary) as the below forecast graphs from recent in depth analysis suggest:

U.S. Dollar Index

The Euro comprises 60% of the USD Index which therefore represents the prime determinant for the USD index trend. The USD is currently at 78, and is forecast to rise to 80 by early December as part of a volatile trend towards USD 69 by mid 2011 (12 Oct 2010 – USD Index Trend Forecast Into Mid 2011, U.S. Dollar Collapse (Again)?)

British Pound

Euro woes also benefit sterling which unlike the PIIGS can print money and inflate its way out of debt and has been doing so with vigour where even the manipulated under reporting official inflation statistics such CPI has spent virtually the whole of 2010 above the Bank of England’s 3% upper limit. The forecast trend for sterling is to rally against currencies such as the Euro and U.S. Dollar to target a rate of at least £/$1.85 by mid 2011 which is set against the current rate of £/$1.61 (04 Oct 2010 – British Pound Sterling GBP Currency Trend Forecast into Mid 2011 )

Again, when you view these forecast graphs note that you are viewing the relative rate of free fall between currencies at a particular point in time, as ALL currencies are continuously in free fall which results in the loss of real purchasing power of all currencies of which the official inflation statistics are one measurement. For example the British Pound in exchange rate terms is roughly where it was against the U.S. Dollar 20 years ago, however sterling has lost over 40% of its purchasing power on the RPI inflation measure over the past 20 years.

Debt Default is the Final Destination

Ultimately all governments are heading towards the same final destination of debt default bankruptcy, the only question mark is will it be outright debt default or stealth default by inflation. Where countries such as Ireland and Greece are concerned then they are currently more probably heading for outright default. Countries such as the UK and USA are DEFINETLTLLY heading along the path of stealth default by means of inflation as engineered by governments which is usually the more probable route as outright debt defaults tend to culminate in extreme crisis events associated with economic collapse (29 Jun 2010 – UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt).

Bottom Line: Where Ireland is concerned, the E.U. will do its best to delay the inevitable debt default, which means a Eurozone bailout (one of a series) is imminent, because if one of the PIIGS defaults then so will they all which would require the mentioned Euro 2 trillion QE bailout virtually immediately (a Euro 750 billion bailout fund was announced in May), rather than perhaps Euros 80 billion for Ireland on its own at this stage of the crisis, and after Ireland will soon follow Portugal, then Spain, then Italy before the bailout cycle returns once more for another Greece bailout (probably sooner rather than later). All of which feed the Inflation mega-trend across the Euro-zone.

The Bears Are Now Bulls – Quick Stock Market Trend Update

The stock market trended inline with expectations for a break below 11,380 to target a down trend to at least 11,200.(08 Nov 2010 – Fed Inflationary Money Printing Propels Stocks ‘Stealth’ Bull Market to New High ) The Dow entered the downtrend form early week into Friday’s 11,192 close, for a relatively mild correction of some 250 points to date.

During the past few weeks stock market sentiment appears to have become overly bullish as evidenced by the internet littered by those that were bears when the stock market was over a thousand points lower who are now bullish AFTER the stock market has put in a sizeable rally. Even more worry some are tend patterns and expectations that are resolving towards a minor correction now for a rally into the end of the year to target 12,000+, which is the trend pattern I have had in place for the Stock Market since January 2010′s Inflation Mega-Trend Ebook (FREE DOWNLOAD) and (02 Feb 2010 – Stocks Stealth Bull Market Trend Forecast For 2010).

More recently updated forecast graph (18 Oct 2010 – Stocks Stealth Bull Market Dow Trend Forecast into Jan 2011).

The question I am asking myself is should I ignore the prevailing bullish consensus ? After all the consensus is NOT always wrong, especially if this stealth bull market is entering a stage where ‘stealth’ should now be dropped in favour of a bull market proper. Off course the next big correction will once more convince the perma bears that the great bear market or worse a crash is once more imminent.

The recent correction is relatively mild, the actual peak came in a little later and higher than anticipated which on face value suggests a higher target low for the correction i.e. in the region of 10,900 to 11,000 rather than 10,500 to 10,700. So the Dow could be about half way along what looks like turning out to be a relatively mild correction of 4%-5%. Therefore the Dow targets a continuing downtrend to 10,950 this coming week.

Gold and Silver Quick Update

Gold managed to push to a new all time high of $1425 before peaking out and plunging on Friday to close at $1365. Silver’s strong rally continued early week by breaching $29 to peak at $29.33 before tumbling all the way to close at $26.06. Last weeks analysis specifically warned Silver investors to keep a very close eye on the market and be prepared to bank profits, as it was highly probable that all of the run up form $22 could evaporate quite quickly.

SILVER IS VERY VOLATILE and could easily retrace ALL the way back to about $22, so I am eyeing to bank profits and not get blinded by the uber bullish silver sentiment that is now emerging as for instance a drop from about $29 to $22 would be a huge 33%! Remember there is no such thing as a missed move as the market is always there, and the number one aim of trading and investing is to bank profits.

Friday’s Gold and Silver plunge implies there’s more to come, which suggests that Gold targets support at $1300 and Silver at $22.50 (-33%!).

In summary, courtesy of Ireland and the other PIIGS, stocks, gold and silver are firmly back to being inversely correlated to the U.S. Dollar, and as the dollar is expected to rally, then these markets (and other commodities) are following the script for a decline, the degree to which depends on how high will the dollar spike (my trend target is USD 80).

Your analyst.

Comments and Source: http://www.marketoracle.co.uk/Article24284.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem’s forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

The Weimar Republic is perhaps the quintessential example of hyperinflation. But the buildup took longer than one might think.

Walter Levy is a German-born oil consultant. His father, a German lawyer, took out a life insurance policy in 1903.

“Every month he had made the payments faithfully,” recounts Levy. “It was a twenty-year policy, and when it came due, he cashed it in and bought a single loaf of bread.“

Such was life in the German Weimar Republic.

Things got so bad there for a while, dentists and doctors stopped asking for currency, seeking payment in butter or eggs instead. But the farmers weren’t keen on trading their produce for paper money either.

Prices rose not just by the day, but by the hour — or even the minute. If you had your morning coffee in a café, and you preferred drinking two cups rather than one, it was cheaper to order both cups at the same time.

Here is how a Weimar factory worker described payday (which was every day):

At eleven o’clock in the morning a siren sounded and everybody gathered in the factory forecourt where a five-ton lorry [truck] was drawn up loaded brimful with paper money. The chief cashier and his assistants climbed up on top. They read out names and just threw out bundles of notes. As soon as you had caught one you made a dash for the nearest shop and bought just anything that was going.

Crime was rampant then too:

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items — bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren’t safe. Gasoline was siphoned from cars. People bought things they didn’t need and used them to barter — a pair of shoes for a shirt, some crockery for coffee. Berlin had a “witches’ Sabbath” atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug…

The above anecdotes come from Paper Money by Adam Smith, aka George Goodman. It is the same book we touched on recently in reference to the 1970s housing bubble. (If you’re interested in more of my investment commentary, sign up for Taipan Daily.)

Weimar Germany is of intense interest today as fears of hyperinflation abound. Some folks, as we have seen, are expecting a literal repeat of Weimar (or Zimbabwe) practically any day now.

But apart from the stories — which are frightening but fun — there is another interesting parallel to draw from the Weimar experience.

Let’s investigate…

Plenty of Runway

The Weimar Republic — a name bestowed by historians — was established in 1919. (“Weimar” was the name of the city where the constitutional assembly that formed the republic was held.)

But here is the thing. Inflation had been running rampant in Germany well before Weimar came about.

Largely due to the war, prices had already doubled between 1914 and 1919. Not only did the ramp-up to hyperinflation take a while, but the German government remained complacent long after inflation strains went from moderate to severe.

As George Goodman explains,

Why did the German government not act to halt the inflation? It was a shaky, fragile government…

More than inflation, the Germans feared unemployment. In 1919 the Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines — Krupp, Thysen, Farben, Stinnes — condoned the inflation and survived it well. A cheaper mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

So the printing presses ran, and once they began to run, they were hard to stop…

Hmm. Who else fears unemployment above all (as tied to concerns of regime change), has a heavy emphasis on export dependency, and is furthermore experiencing serious inflation pressures as you read this? (Hint: Their mascot is a dragon…)

So, if the United States is to echo Weimar Germany, one might argue we need to see years’ worth of rampant inflation first… with a government intent on doing nothing about it.

“Well,” some of you will argue, “We already have seen an inflationary ramp in prices. The government inflation data is bogus. And look at how paper assets got pumped up. Look at the housing bubble and the equity bubble and the price of oil.”

And that would constitute a very valid point — except our biggest bubbles have already gone bust. We had a massive housing bubble and it popped. We had a massive bubble in the price of oil and that popped too. Furthermore, the consumer psychology of ever-rising price expectations was shattered by these busts. When U.S. consumers look to real estate trends and personal income trends, they do not see prices going up. They see them going down.

Again, the goal here is not to rule out the prospect of hyperinflation completely. Instead, the point is looking to history in search of some perspective.

In order to recreate the Weimar experience, we would need to see the following:

• A multiyear period of sustained inflation in goods and services
• A relaxed attitude toward inflation on the part of government
• A deliberate strategy of tolerating inflation for the sake of employment

We have already addressed the first part. The 2000s did indeed see a multiyear period of sustained asset inflation and commodity inflation, but a huge bust came on the heels of that.

When it comes to inflation as a Washington hot-button issue, the political mood right now is anything but relaxed. One might call it vigilant, or even hyper-vigilant (no pun intended). That is why an aggressive political shift is forecast for the upcoming U.S. elections. Austerity has caught on with the public, at least in theory.

We are also seeing a certain comfort level with unemployment in the United States. The private sector is perfectly happy to fire workers left and right in its effort to cut costs and improve profit margins. Washington may not be happy about this, but there is no political will to radically change the situation (and no simple means of recreating jobs).

The good news is, factors like these mean we have time to think, to respond, and to plan. If things were about to go to hell in a handbasket right away, that would represent less opportunity to profit… and less time to flexibly prepare for the great unknowns ahead.

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And herein lies the rub: if and when the economy ever picks up, and at this point that looks like an event that may well never happen, “Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation.” The backstops offered by the Fed looks increasingly more brittle: reverse repos and IOER. The longer ZIRP continues, the more aggressive the Fed will have to become if and when the money multiplier finally shoots higher. If prior examples of hyperinflation are any indication, this will not be a seamless or smooth process, which is why aside from the traditional calls for hyperinflation as a result of a collapse in the faith of the monetary system as a whole, many are also calling for this outcome should the Fed, paradoxically, stabilize the economy. And it is about to get worse: the Fed’s balance sheet is likely about to grow by another $2 trillion as soon as QE 2 is announced. Which means that by the time the economy needs to remove excess liquidity, the Fed will need to find a way to remove not $2Bn, but probably double that number. The simple conclusion is that the longer the Fed fights deflation, the greater the likelihood for (hyper) inflation as the final outcome once it ultimately rights the economy. We tend to think that Odysseus was faced with an easier choice.

From the St. Louis Fed:

The Monetary Base and Bank Lending: You Can Lead a Horse to Water…

In its response to the worsening financial crisis during the fall of 2008, the Federal Reserve took actions that dramatically increased the size of the monetary base (the sum of currency in circulation and depository institution deposits with the Fed) (see chart). Subsequently, the Fed purchased some $1.7 trillion of securities issued by the U.S. Treasury and federally sponsored housing agencies, which expanded the monetary base further. The base more than doubled in size between September 2008 and May 2010. Yet measures of the money stock, such as MZM, M1, and M2, increased far less. For example, M1 increased about 17 percent over these months; consequently, the ratio of M1 to the monetary base (measured by the St. Louis Adjusted Monetary Base), commonly referred to as the “M1 money multiplier,” fell from about 1.6 to 0.84.

Why was the increase in the money stock so small when the increase in the monetary base was so large? The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordi -
narily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. How ever, despite an increase in reserves of
over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008. Banks added to their holdings of securities, which resulted in a modest increase in deposits and the money stock, but many banks were reluctant to make new loans. Partly this reflected weak loan demand, but it also indicated a diminished appetite for risk on the part of bankers. Further, a lack of equity capital (and a high cost of obtaining additional capital) constrained the lending of many banks (banks are subject to minimum capital requirements based on their outstanding loans and other assets).

Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation. Minutes of Federal Open Market Committee meetings indicate that Fed officials have discussed possible measures to discourage excessive growth in lending and the money  stock. One option is to sell securities outright or under repurchase agreements, which would shrink the monetary base. Recent experience illustrates, however, that large changes in the base may be necessary to effect the desired changes in bank lending. Another option is to raise the interest rate paid to banks on their reserve deposits, which would raise the opportunity cost of lending and thereby tend to exert upward pressure on market rates generally and slow the growth of loans and the money stock. However, because the Fed has little experience with paying interest on reserves,
it is difficult to predict how much bank loans would change in response to an increase in the interest rate paid on reserve deposits. Hence, the Fed may resort to both options if monetary growth threatens to become excessive.

—David C. Wheelock

The reality is that hyperinflation is first and foremost set in motion and driven by a deteriorating fiscal situation. In fact, significant economic weakness and deflation is a precursor to hyperinflation. Too many analysts believe that there has to be some economic demand or some consumption to stimulate inflation or hyperinflation. Printing money to try and stimulate your economy or excessive credit growth is what leads to inflation. Printing money because you are broke and can’t service your debts is what leads to hyperinflation.

Recently Jim Rickards wrote about how a change in velocity can trigger hyperinflation or severe inflation.

At Mises.org, Henry Hazlitt educates us on velocity:

For example, it is frequently said that the value of the dollar depends not merely on the quantity of dollars but on their “velocity of circulation.” Increased “velocity of circulation,” however, is not a cause of a further fall in the value of the dollar; it is itself one of the consequences of the fear that the value of the dollar is going to fall (or, to put it the other way round, of the belief that the price of goods is going to rise). It is this belief that makes people more eager to exchange dollars for goods. The emphasis by some writers on “velocity of circulation” is just another example of the error of substituting dubious mechanical for real psychological reasons.

Indeed! The focus on velocity may have led you astray over the past 10 or 15 years. Take a look at this chart of velocity from Dr. Lacy Hunt of Hoisington Investment Management.

As you can see, velocity actually increased during a time of disinflation and has been muted throughout most of the bull market in commodities. Moreover, despite in recent years, the sharp drop in credit growth and bank lending in the West, Gold and Commodities have powered higher. We know that Gold has made all time highs against every currency. Yet, take a look at this chart.

Priced in Euros and Pounds, Commodities have rallied back to their 2008 high! Priced against a basket of currencies (ex US$), Commodities are 9% below their 2008 peak. Not bad considering the crash in 2008 and ensuing deflationary environment.

Why are Gold and Commodities performing so well if we are in a deflationary environment? The greater the deflation and the worse the economy gets, the greater the worry about sovereign bankruptcy, which will come via default or hyperinflation.

Certain government bonds are rallying because they are safe-havens relative to other government bonds.

The point is, precious metals are outperforming and commodities to a lesser extent even without a rise in bank lending, a rise in credit growth and a rise in velocity. As we already explained, deflationary forces and a weak economy ultimately exacerbate the ability of various governments to service their ongoing and growing debt burdens.

Hyperinflation is a fiscal phenomenon borne out of a bankrupt state that can’t service its debts. Monetization is a trigger while a rise in consumption and velocity is a psychological effect as Hazlitt notes. After all, if massive inflation is coming, what is the first thing you want to do? You’ll position yourself in hard assets well ahead of thinking that “I need to spend now because this money will be worthless later.”

In our premium service, we have paid little attention to inflation-deflation or money supply or velocity. Instead, we correctly focus on the fiscal health of various governments. As that deteriorates, it brings us closer and closer to the eventual end game, which is a new currency regime. For what it is worth, I do believe we will see severe inflation but note that hyperinflation of the Zimbabwe or German kind is out of the question due to the deep and liquid bond markets that we, Europe and the UK have. If you’d be interested in more clear analysis and how you can reap big profits while protecting yourself, consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

Jordan@thedailygold.com

http:/www.thedailygold.com/newsletter

Want premium information and analysis on Gold, Gold Stocks and more? Consider a free 14-day trial to our premium service.

Once again we see another bearish piece on Gold in the WSJ. Rather than attack the author personally, we want to illustrate how the article is another example of the lack of any quality gold commentary both in general and in mainstream publications.

First, its important to note why you won’t see much quality gold-related commentary (or any positive commentary) in publications such as the WSJ and the Economist. It’s because these publications can’t make any money (yet) selling gold-related advertisements. If I’m advertising something related to stocks or bonds, I don’t want to see any gold advertisements in that publication nor do I want to see any gold-friendly content. This is similar with the television networks. When CNBC can make lots of money advertising gold, you’ll see them become friendlier to gold. Why does Fox News talk up Gold? It’s because they are selling Gold advertisements.

Secondly, most professionals in today’s world are biased towards stocks because they grew up during a historic bull market. The only people who really saw and experienced the last bull market in gold are 60+ years old now. Go back to the 1970s and most professionals were skeptical of stocks and saw the value of gold. Today’s 40-year old professional, just three years ago had barely seen anything other than low inflation and a stock and bond bull.

This illustrates why it is pointless to compare stocks against gold. Both are different asset classes and there is a time and season for each. To try to say one is better than the other just shows bias. Gold bulls will start their comparison in 1971 while stock bulls will start their comparison in 1980. There is a time and season for everything.

Moreover, it’s important to understand why the stock market rises over time. It is because market indexes have a survivor-ship bias. The Dow of today is not the Dow of 1980 or 1920. It is always changing as stronger companies replace weaker companies. Hence, it is designed to go higher over time.

Now if Altucher wants to make a good argument against gold he should do some more research by attending our upcoming Webinar.

He starts off picking 1980 (as a comparison date), which any stock bull does. That immediately shows bias.

Secondly, he can’t figure out a “use” for gold. This is where stock bulls really fail.

Centuries ago Aristotle said gold and silver were money because they fit the five properties of money. Kings and governments used gold for international transactions. JP Morgan, 100 years ago, said gold was money and nothing else. If Gold has no use or utility, then why do central banks own it? Why does the US own gold and no paper reserves? It is because gold is money and the ultimate backstop to our monetary system. Throughout history no currency other than gold and silver has kept its value. You can’t get a stock bull or gold bear to admit to this, because it defeats their central argument against gold.

Altucher makes more mistakes. He talks about “recent spikes” in Gold due to hedge fund money. Where has this guy been? Gold has been rising for 10 years. It is actually up every year since 2000. Recent spikes aside, seems to me there were some buyers five and ten years ago.

Gold has been rising for a variety of reasons but the main reason is that there is serious question about the creditworthiness of governments. That is the “fear trade” that no one cares to clarify or explain. Unless you think the US, Europe and Japan can grow out of their debt problem, then there is little reason to be bearish on gold. Every major debt crisis, credit contraction and depression has seen a rise in the real price of gold. Gold will continue to outperform until there is a new monetary system or until the world can grow its way out of the debt problem. This isn’t doom and gloom. It is probable based on the facts.

The facts also tell us that stocks are not a good inflation hedge (as Altucher tries to assert). Look at the data. Commodities always outperform in periods of rising inflation. Altucher thinks that the stock market has grown greater than inflation, consistently for 200 years. How is this relevant to our lives? What is relevant is the next five or ten years. Stocks are in a bear market and will continue to suck wind for another five or seven years.

In the meantime, precious metals are the only asset (aside from bonds) in a full-fledged bull market. Bears often say “everyone is bullish on gold” but this is simply not the case. The bears provide zero research to back this claim, because there isn’t any! Barely anyone owns precious metals. Take a look at the charts in my last editorial. Less than 1% of global funds are invested in the precious metals sector. By the way, that figure was 26% in 1981. Given that statistic, it is obvious that too much money is in stocks and bonds and not precious metals. Furthermore, it is obvious that we aren’t even at the outset of a big move into precious metals.

Moreover, as we recently showed our subscribers in a premium research report, bull markets typically accelerate in the ninth or tenth year and then begin a final acceleration three to four years later. It is not difficult to see why we are on the cusp of acceleration in the precious metals. European banks still need to rollover $1.65 Trillion in debt by the end of 2011. Our big states are likely to need bailouts by the end of the year. The Fed will begin a new round of quantitative easing in a desperate attempt to help the banks recover so they can lend again.

Furthermore, it is just a fact that the US, UK, Europe and Japan can’t grow their way out of the debt mess. A new currency regime is coming. It is only a question of when. It could be five years or ten years if we are lucky.

Precious metals will continue to crush stocks for another five to seven years. However, a portfolio of quality emerging gold and silver stocks will outperform gold. Eventually silver will outperform gold. While we are bullish on the metals, we do agree with Altucher that silver is preferred and stocks are the way to go- as long as they are gold and silver stocks.

Hence, while we analyze the short and long term developments in the metals (in our premium service) we also focus on about 50 gold and silver stocks. We would urge you to consider a free 14-day trial to our premium service.

If you want to learn more about gold and silver and investing in the respective companies, then consider attending our free Webinar, sponsored by the CME Group. It is absolutely free and we promise it will be well worth your time.

Jordan Roy-Byrne, CMT

Jordan@thedailygold.com

http://www.thedailygold.com/newsletter

As we should know by now, when it comes to the capital markets, conventional advice is eventually deadly. It identifies trends too late and fails to warn when risk increases and reward diminishes. However, most people would rather feel more comfortable than be a contrarian. Most people are too weak minded to find the answers, which usually oppose the herd.

Look at the capital markets today and the trends are clear. With global growth likely to remain low to stagnant for quite some time, stocks and commodities will not help your portfolio. Treasury bonds are performing well but the threat of severe inflation and sovereign bankruptcy looms. Precious metals are the only winner, yet the herd doesn’t see it that way. To them, the bull market in precious metals isn’t even a bull market. It is an aberration. It is a mistake.

The vast majority looks at the 1980s and 1990s as the norm. This is especially true of the financial industry. They don’t make any money from Gold and Silver so they don’t pay attention to it. It is only a nuisance. When will the financial media care about Gold? The answer is when it can make money selling Gold-related ads and products.

It is interesting how much has changed. Fifty or sixty years ago you were supposed to have 10% invested in Gold and that was regardless of market conditions. Today, the mainstream advisors and analysts that like and recommend Gold, own less than 10%. They like it but they are afraid of it. It reminds me of a quote: The philosophies of one age have become the absurdities of the next.

Most people look at the last 30 years as the norm, when the norm was the 170 years before that. Monetary systems are restructured several times per century. It’s nothing new. A monetary system without an anchor will ultimately fail. The greatest generation and their forefathers knew this and owned Gold. It paid off in their time. Those with a long view of history know that the real risk is the current monetary system and not Gold/Silver. Every fiat currency in history has failed. Is it doom and gloom to expect the current monetary system to fail? No, its just prudence and foresight.

Now that we’ve established this let’s refute the bubble calls. Because of the recent collapse in so many markets and industries (technology, internet, homebuilding, mortgage finance, banking, oil) investing professionals and the public are now quite wary of any market that rises materially. Most will miss the coming explosion in precious metals because they are too scared of an eventual collapse. Yet, they don’t even realize that precious metals are not even close to bubble territory.  If precious metals were really in a bubble then please explain this chart to me:

As of last year Gold and gold shares were 0.8% of global assets. If we are in a bubble then what was 1981? A volcano?

And how are we in a bubble when the gold stocks have yet to breakout to new all time highs. (See the chart below). In fact, one of the best times to buy is when a market is on the cusp of a breakout to new all time highs. There are numerous examples of this in history.

Moreover, gold stocks are still much closer to historic lows when compared to common stocks. See the chart below of the Barron’s Gold Mining Index against the S&P 500.  It is highly probable that gold stocks will outperform common stocks over the next five years.

Meanwhile, even though Gold has outperformed stocks for 10 years, this chart suggests that outperformance has much more room to run. This is why one has to look at 100 years of history and not 10.

The reality is that too many investors will continue to make terrible decisions either on their own or through a mainstream advisor. They are convinced that precious metals are risky. You can’t even get them to put 5-10% of their assets in precious metals. We are talking about the only bull market! This isn’t 2003-2007.

Going forward, it is a near certainty that precious metals will outperform. Why? This is what happens in a major credit contraction. There is a run for real money. It doesn’t matter if there is hyperinflation or deflation. Since the crisis began we’ve had strengthening deflationary forces. Gold has advanced to a new all-time high and even higher against most currencies. Quality gold stocks have surged to all-time highs. Silver has outperformed nearly everything except Gold.

Amazingly, there is still time to get involved before the precious metals accelerate, leaving other markets in the dust. Looking to learn more? My publishers and I are hosting a CME-sponsored educational Webinar that will explain and educate on all things Gold, Silver and the mining stocks. It is completely free and you can sign up here.

We also maintain a professional service, which helps guide traders and investors through this bull market. We offer a free, no risk 14-day trial, which gives you access to a month’s worth of updates!

Good Investing and Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com
http://www.thedailygold.com