Stocks and Precious Metals Charts - Without Shame or Honor - Hitmen

 

“The most tragic thing in the world is a man of genius who is not a man of honor." 

George Bernard Shaw

 

"We may make ourselves popular by telling our fellow citizens that they have made Discoveries, conceived Inventions, and made Improvements; We may boast that we are the chosen people; we may even thank God that we are not like other men.  But after all it will be but flattery, and the delusion, the self deceit of the Pharisee."

John Adams, Letter to John Taylor,  29 July 1814

 

“Melancholia is the beginning and a part of mania.  The development of a mania is really a worsening of the disease.  A period of lewdness and shamelessness exists with the worst type of manic delirium.”

Aretaeus of Cappadocia

 

"Time and again we hope for better leaders, but all too often those hopes are dashed.  The reason is that power causes people to lose the kindness and modesty that got them elected, or they never possessed those sterling qualities in the first place.  In a hierarchically organised society, the Machiavellis are one step ahead.  They have the ultimate secret weapon to defeat their competition.  They’re shameless.” 

Rutger Bregman, Humankind: A Hopeful History

 

“The real conflict is the inner conflict.  Beyond armies of occupation and the  the sacrifice of many victims of extermination camps, there are two irreconcilable enemies in the depth of every soul: good and evil, sin and love.  And what use are the victories on the battlefield if we ourselves are defeated in our innermost personal selves?”

Maximilian Kolbe

Stocks had a number of ways to demonstrate that they have put in a decent bottom from this recent flirtation with lower lows.

The action today was not one of them.  

A gap open and sprint higher that flopped into the close reeked of artificiality.

Gold and silver did manage a bounce from the expiration lows, and went out nearer to the highs of the day.

But to extend that in the face of titanic monetary events is key.

The Dollar continued its march higher, taking on the 103 handle and then some.

Or should we more correctly say that this is not Dollar strength so much as Yen and Euro weakness?

And is this Dollar strength more like the receding of the ocean, prior to some greater seismic event?

The strong Dollar has had its impact already, shaving several whole points off GDP in a yawning trade imbalance, fostered by a stronger dollar.

A strong Dollar favors imports, discourages exports, and encourages hot money of finance to seek acquisitions abroad.  

Save yourself from the madness, if you will.

And you may be grateful yet, if you do so moderate your passions, while remaining standing safely and faithfully, on higher ground.

Have a pleasant evening.

Why the Fed's Policy Actions Are Not Working

“Trickle-down theory - the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”

John Kenneth Galbraith

As I said earlier today in a reaction to the FOMC announcement:

"This is all a bit moot really, because except for the betting parlors it doesn't matter whether the Fed raises 25 basis points or not. You can print money and give it to the banking system and the very wealthy for their personal gambling and asset acquisitions activities all day long.

The system is broken, the real product of the nation has been hijacked by financialization, the international monetary exchange is in chaos, and almost all of the gains are going to the top.

And the Fed and the government are doing virtually nothing to change this."

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be an sustainable recovery.

And keep the financial system on life support while the rest of the economy languishes, the poor suffer, and the middle class deteriorates is not coherent, except for a narrow band of beneficiaries.

Let us be reminded that the Fed is also a primary regulator of the financial system as well as an interest rate joystick operator.

And the mainstream media and the politicians wonder why the public is not doing what they expect.

This chart below is from Bloomberg News, The Richest Americans Are Winning the Economic Recovery.

"U.S. Census Bureau data out Wednesday underscore just how lousy the recovery has been if you aren't rich.
Looking at eight groups of household income selected by Census, only those whose incomes are already high to begin with have seen improvement since 2006, the last full year of expansion before the recession. Households at the 95th and 90th percentiles had larger earnings through 2014, the latest year for which data are available.

Income for all others was below 2006 levels, indicating they're still clawing their way out of the hole caused by the deepest recession in the post-World War II era."

And this result, after eight years of some of the biggest expansion of a central bank balance sheet in US history!

The Investment of the Millennium: 'Pet Rocks'

"Gold has worked down from Alexander's time.

When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory."

Bernard M. Baruch

Who would have thought it?

So why haven't the precious metals been 'working' since they spiked higher in 2011?

"We hypothesize that, having learned from the misadventures of the 1960s, the policy elites, well-versed in the practice of financial engineering and market manipulation, would have seen no need to dump stocks of government gold reserves onto the market, 1960s style, to keep the price in check. 

Instead, synthetic gold, sourced in pyramids of credit extended to bullion bankers by central banks with little or no claim on physical substance, have provided a more efficient, better-camouflaged form of intervention. COMEX synthetic gold and related over-the-counter derivatives are traded in macro strategies implemented by hedge funds, high-frequency trades, and commodity funds in pair trades with interest-rate, currencies, equity futures, or even more exotic offsets. The volumes traded are huge, and bear little resemblance to actual flows of physical metal. 

We suspect that shorting gold has come to seem like a riskless proposition as long as there is confidence in the Fed. Synthetic gold is the perfect substance for a carry trade: an easy borrow with very low carrying cost and little upside basis risk. Such a hypothesis, in our opinion, does much to explain the incongruity of a declining gold price while fundamentals for paper currency, and the U.S. dollar in particular, obviously deteriorate; while demand for physical gold has exceeded new mine supply for several years running; and while above-ground 400-ounce .995-gold bars located in London, New York, and other financial capitals (in cohabitation with speculative trading activity in paper markets) have steadily dwindled and disappeared into Asian financial centers reformulated as .9999 kilo bars."

Tocqueville Gold Newsletter 2Q 2015

The physical market at some point is going to come bearing consequence for the schemes of the financiers.

I suspect that when the 'riskless proposition' of shorting gold starts to more visibly unwind, most likely under some significant duress, we are going to see what kind of rot has been concealed, and the bottom feeders that have thrived on it, as when the tide goes out.

This unwinding started in the spike in the metals after the financial crisis of 2008, but was held off by massive 'currency interventions' to 'save' the Western financial system in 2011.

Gold rose in 2009 from about +150% to +775% at the end of 2010, as measured from the beginning of the millenium in 2000.

The real longer term consequences of reckless monetary policy and irresponsible financial deregulation and a tolerance for massive frauds are still ahead of us.

Perhaps I am incorrect in this.  But nothing I have seen in the data makes me believe so.

Gold is still flowing in large numbers from West to East, and the central banks are still net buyers.

And once the bull market in metals resumes, which I believe that it will, the upside will be similar to the increase which was seen in the years from 2009 to 2011.

Change is coming.  That is the only certainty.  At some point I may be sharing some more thoughts about how this change might manifest it, and what forms the new 'closing of the gold window' may take.

The Recovery™ - Bubble Back To the Bar For the Hair of the Dog That Bit You

"Double, double toil and trouble,
Fire burn and cauldron bubble.

Cool it with a baboon’s blood,
Then the charm is firm and good...

By the pricking of my thumbs,
Something wicked this way comes."

William Shakespeare, Macbeth, Act 4 Sc. 1

And why would we expect anything different, given the lack of serious reform and the careful targeting of the monetary expansion into the hands of the same old TBTF financial firms that have been distorting markets and misallocating capital for their own advantage since the repeal of Glass-Steagall?

The best way to cure the damage from a widespread, real economic collapse in the aftermath of a financial asset bubble is surely a continuation of the failed policies of the past, and yet another asset bubble targeting the most wealthy in the hope that something will trickle down to the rest.

Greenspan: Role Of Central Bankers Is to Try to Replicate the Stability of the Gold Standard

Greenspan said on any number of occasions that his model was that a 'fiat currency' works when it emulates the rigor of the gold standard.

I am using this post as a placemarker to gather a few citations along these lines. Sometimes people doubt these things, and it is not always easy to go back and find the actual idea in print.

I will place other example here as I find them but it is not a high priority because Alan Greenspan has never deviated from this point of view. One of the most poignant examples I have was when Ron Paul asked him if he still believed in what he wrote in his famous essay on Gold and Economic Freedom.

And Greenspan answered that he would not change a word.

I think the squaring up of what Greenspan believed, and what he did as Fed Chairman, is one of the more interesting conundrums that I hope that time will explicate. 

The other of course is why the flaming liberal and 'socialist' Obama is really closer to Richard Nixon in his performance and outlook than most would care to admit, on either the right or the left. 

This is from a 2007 Interview by National Public Radio with Alan Greenspan on Turbulence and Exuberance

Greenspan: Well actually, we were not fundamentally regulators [at the Fed]. The vast portion of our efforts were not involved in bank regulation.

NPR: No, but you were regulating interest rates, which have a profound effect on world economies.

Greenspan: You're raising really a very interesting question. I have always argued that the gold standard of the 19th century was a very effective stabilizer. It kept inflation essentially at zero, and I felt it was critical for the tremendous growth that occurred for the American economy in the latter part of the 19th century. When we went off the gold standard essentially in 1933, we then had to have what we call "fiat money" which is essentially money that is - it's printed paper money. Which unless we restrict the volume of, can be highly inflationary.

The type of interest rate regulation that I and indeed most central banks in the last 20 years have been involved in...has been to try to replicate the laws and rules that were governing the gold standard.

And so it is an odd situation where all the central bankers -- while none of them are advocating a return to the gold standard -- nonetheless try to replicate the various types of interest rate policies that the gold standard would have created. And it is an interesting question whether you call that regulation, or basically functioning of a central bank in stabilizing the economy."

I remember all such statements of Greenspan's vividly because they were one of the few times in which I felt that he was telling the truth, at least as he sees it.

I think that a fiat currency can 'work' if it emulates the rigor of an external standard. And exceptions that can be made to this rigor during times of exogenous shocks could be a quite useful tool for monetary policy.

The problem is that it NEVER seems to work out that way in the real world. It does not take long for financiers and politicians to discover the heady power and easy money to be had in manipulating the markets and the fiat currencies to their own advantage, the public and the real economy be damned. And then a pigfest ensues, and a nation's savings and civic virtue are consumed.

"And, indeed, since the late '70s, central bankers generally have behaved as though we were on the gold standard. And, indeed, the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation, which, in turn, undermines economic growth.

So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I don't think so, because we're acting as though we were there. So I think central banking, I believe, has learned the dangers of fiat money, and I think, as a consequence of that, we've behaved as though there are, indeed, real reserves underneath the system."

Greenspan, A., Hearing on Monetary Policy Report, US House Committee on Financial Services, 20 July 2005, Washington D.C.

From: Jude Wanniski < jwanniski@polyconomics.com
To: Ben.S.Bernanke@ * * * * *.GOV
Subject: Fwd: Re: Savings glut
5:44 pm, 7/21/2005

I thought you should see this. Greenspan was plain awful in his testimony this week. But members of Congress don't know any better, so they slobber all over him. He again said we don't need a gold standard, because he has demonstrated since he came to the Fed in 1987 that the central bank could "replicate" the gold standard.

Take a look at the dollar/gold price from 1987 until today and you will see how terrific he has been in replicating the gold standard. I can't wait for him to leave, Ben, because he now has so much invested in his Fed legacy as a Maestro that he could never admit he screwed up almost all along the way.

Famous 2005 Exchange Between Ron Paul and Alan Greenspan about the Gold Standard


Related: Why There Is Fear and Resentment of Gold's Ability to Reveal the True Value of Financial Assets

FOMC January 2013 Statement

"The foundations of the Maginot Line were the war cemeteries of France."

Vivian Rowe, The Great Wall Of France, 1959

Nothing really new in the FOMC statement, but we have to view this in the light of the shocking revelation from the recently released Fed Notes that they failed to see the crisis coming even in the days before the financial system teetered on collapse.

These are old and tired generals, fighting new wars with the old tools and tactics.

Until the banking system is reformed, the Fed will continue to attempt to prop it up, and stand by doing little else while the real economy stagnates. Except perhaps to foment yet another imbalanced, unstable bubble in financial instruments.

Press Release

Release Date: January 30, 2013

For immediate release

Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.

Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement.

Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.

Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Warren Pollock: Overall Derivative Market Contracts - Warning Signs

I have spoken before about the fallacy of netting and the danger of instability in the derivatives market.

Critical Mass: The Mispricing of Derivatives Risk and How the Financial World Ends

Here is Warren Pollock's take on this and on the recent contraction in nominal value of the global derivatives market.

"Ponzi schemes can go on for a long time under the mask of expansion; these frauds blow up during a contraction of new money being input into them.

Such may be the story of credit derivatives as we see a working contraction in the notional value of these instruments as reported by the comptroller of the currency. In simple terms the number of these instruments has gone down to a mere 240 Trillion!

The premise for this ponzi is the concept of netting whereby risks off offset on paper under the false justification that positions can become risk neutral. In this ponzi scheme the efficacy of the netting process has magically risen from 50% or so to an astounding 92.2%.. This means that the reported risk of 240 Trillion is only 8% of the notional amount.

In less insane times the notional risk was reduced to a mere 50% through the netting process. Even with 8% risk not covered by netting the liabilities of JPM and others are far greater than their assets under management. The problem being that JPM's assets are secured by its liabilities and the liabilities of banks tend to be YOUR Savings.

With changes to Safe Harbor rules the government is not only facilitating fraud with these netting assumptions but they are also putting your savings at risk by giving the coverage of derivatives priority should there be a dispute. This very issue is being worked out presently with MF Global."

Performance of Stocks, Bonds, and Gold In an Inflationary Environment

Jeremy Grantham's GMO group has produced an interesting study showing the performance of three asset classes against inflation.

I think the true correlation is with negative real interest rates rather than inflation itself. In an inflationary period, interest rates tend to lag the increase in inflation, producing negative real rates.

But in a period of economic decline in which the Fed lowers rates artificially, negative real rates can also be created and rather more easily than some amateur economic theorists believe.

To slightly complicate matters, the markets tend to anticipate, tend to act on expectations before the reality of something. So we might see something like gold or interest rates signaling a period of inflation well ahead of its appearance, if they are allowed to seek their own levels in the market.

If you think about it, the correlation with negative interest rates makes sense. In a period of negative rates, all currency heavy financial instruments are probably facilitating the confiscation of wealth by the official banking system. Since gold has relatively little counterparty risk if properly held, it is likely to be considered a safe haven, in addition to other hard assets and stronger alternative currencies if such things are available.

Unfortunately for analysis, things are never so simple in real life.

In addition to negative interest rates, there are other forms of wealth confiscation, including the fraudulent mispricing of risk, outright fraud itself, and currency devaluation.

And finally, there is the sort of price manipulation which the Western central banks engaged in for a long period of time in strategically selling off portions of their gold in order to hold the price lower in a disastrous attempt to manage the financial markets and silence the warning signal from gold as asset bubbles began to build in the credit markets and the Bretton Woods global monetary agreement began to fall apart.

And so what might have been a gradual price increase in gold and silver instead became a powerful rally as the markets sought to correct to the primary trend once the banks stopped being net sellers of gold.   Now the financial system can only use other means in order to try and control their ascent to a genuine market clearing price based on years of monetary inflation.  There are various estimates of what that eventual price might be, but it most certainly is much higher than where the price is today.

Years of underinvestment in mining has created a dangerous shortage of gold and silver relative to potential demand.  Various financial instruments have been introduced to provide 'paper gold and silver' to meet that demand.  In addition, even physical exchanges like the LBMA have been pushed to dangerously high rates of leverage as demand for bullion outstrips available supply.  And so the markets drift inexorably into great opaqueness and repeated frauds because the world of paper has unhinged itself from reality across multiple fronts.   The problem is that the state of the currency feeds into all finanical markets and so a mischief done there spawns its children everywhere.

As one might suspect, the credibility trap in which the financial engineers find themselves causes occasional outbursts of hysterical animosity and antagonism against the reactions of the markets, and the reality of their own economic chickens coming home to roost. 

This is a recipe for disaster, and we can thank the Anglo-American banking cartel, and their gullible accomplices in the other western banks, for it when it happens.  When Dick Cheney said, "Reagan proved that deficits don't matter" what he did not realize was that he was reading the epitaph for the dollar reserve currency system that had been in place since the end of WW II.   They do matter, but sometimes the lags in time between cause and effect can be deceptively reassuring.

Debt may not matter in the short run, and Keynes had some very good and valid points to make about government stimulus during short periods of economic slumps to avoid feedback loops and the spiral of decline.   As an aside I wonder, if Keynes came back and saw what his acolytes were saying in his name, if he could stop throwing up.  When he found new facts he changed his mind, and I suspect he might have changed his and strongly cautioned against turning a remedy into an addiction to support  habitual corruption and unsustainable privilege.  But I do not know if he was that honest of a intellect, or would have merely gone along with the rest for the benefits of his class.

Huge deficits over long periods of time to finance non-structural consumption and underwrite malinvestment and currency manipulation are almost invariably toxic.  The 'vendor financing' that gave rise to the age of 'Asian miracles' is the rope which will be used to hang the capitalist system unless strong measures are taken to clean up the corrupt system that grew up to support and profit from this economic Frankenstein.

The only reasonable course of action is for the West to nationalize its TBTF banks, dismantle them gracefully while keeping their depositors whole, and give up their dreams of global and domestic financial domination by adopting a system of real capitalism based on market pricing, price discovery, competition kept intact from monopoly through effective regulation and law enforcement, transparency and a climate of honesty.  But that would visit restraint, inconvenience, and even some pain on the powerful and privileged, those who have benefited greatly from this long charade, so it will be resisted to their bitter end.

While the stock and housing market bubbles have burst, the bond bubble, which includes the US dollar as a bond of zero duration, remains to be resolved and marked to market.

Source: Jeremy Grantham's 4Q 2011 Investment Letter

Critical Mass: The Mispricing of Derivatives Risk And How the Financial World Ends

Jim Sinclair does a good job of explaining the difference between the notional and real value of derivatives, and how that real value comes to bear on the financial system in the event of a default. You can read this here for a review of the basic concept if you do not understand it.

Within my own view of money, uncollateralized financial instruments like derivatives are credits, or potential money. When an event triggers them so that they become real, with a significant presence on the balance sheet and the income statement, then they become money.

In the financial world we see the extraordinary growth of derivatives in notional value, to almost unbelievable proportions. This mass of derivatives facilitates the withdrawal of money from the real economy in the form of wealth transferal, such as bonuses and commissions for example. But they do not become actual money themselves until some trigger event. To perhaps stretch our analogy to the physical world, it could be described as the withdrawal of the ocean, as money is siphoned from the real economy by the financial world, in advance of the arrival of a tsunami as derivatives start hitting the balance sheets and are transformed into 'real money.'

This could be the cause of a hyperinflationary policy error which I have been alluding to for the past several years.  The policy error is not in the simple setting interest rates, but the Fed's failure to regulate the banking system and manage its risks.   In this the Fed, particularly under Greenspan, was an abysmal failure, and improvement has not been forthcoming.

The explosion of the realization of derivatives would create enormous fortunes and unpayable debts. Depending on how the monetary authorities deal with it, the potential for a Weimer experience is there. Nationalizing the banks and canceling the transactions is one way out. Attempting to sustain these mythical financial structures will take the existing currency system down. That is the limit of the Fed's power.

Most theories and models are tested at the extremes of their limits, and I suggest that the coming financial crisis will wash many of the current economic and monetary models away, scouring the detritus of years of conflicting interests and fanciful adornments down to their foundations.   But the responsible parties will all sit back and say, "We did not know."    But of course they did.  They just did not care, as long as it paid them handsomely.

Taking this discussion of derivatives an important step further, the most significant elements of concern in derivatives are the same as they are in all financial schemes: unsustainable leverage and the mispricing of risk.

In derivatives the unsustainable leverage arises from the fact that the impact or risk magnitude of the derivatives, which are often uncollateralized, are artificially reduced by the assumed effects of 'netting.' And the risk is mispriced, not only in the terms of the agreement itself, but in the failure to properly account for counterparty risk as the instrument plays out in a larger risk portfolio. There is individual contract risk, and then there is the cascading risk of a highly compacted financial system.

We see situations today in which a single bank may have a hundred or more trillion dollars of notional value in derivatives on their books, against much less than a trillion in assets.

But the risk in such a large position is allowed because the banks can show that they have supposedly 'netted out' the risk by making other derivative arrangements that offset their own risk, in the manner of a hedge. As the amounts of derivative netting grows larger and more intertwining, the secondary effects of counterparty risk become tightly compressed.

What if a counterparty fails? Then all its own agreements fail, many of which may be hedges that also fail, and a cascading failure of these financial instruments in a tightly compressed and overleveraged system becomes catastrophic.

In 2002 Warren Buffett famously referred to derivatives as 'financial weapons of mass destruction.' But beyond that headline, few in the media took the time to actually communicate what Buffett was really saying, and the risks that the unregulated derivatives markets posed to the banking system.

The collapse of Lehman Brothers threatened to trigger a financial meltdown. A panicked leadership of the country was able to stop it, but at the cost of many trillions of dollars, and a distortion in the real economy that still goes largely unmeasured. And this was by intent, because the leaders feared a loss of confidence in the system. And so while the meltdown was averted, a credibility trap was created that is the epitome of moral hazard.

The influence and knowledge, call it soft blackmail of mutually assured destruction if you will, that the 'Too Big To Fail' banks obtained in this coverup of the depths of the fraud and mispricing of risk in the financial system has given them enormous power over the political process. It would have been more effective to have nationalized the banks and cut the risk out at the source, but the new president Obama was badly advised to say the least, by advisors he himself appointed, who were in fact long time insiders in the creation of the risk situation itself.

The global financial system is like a nuclear bomb. At its center are at most ten banks whose financial posture is overleveraged and interdependent not only amongst themselves but also with their national economies. It is not a question of 'if' they fail, but 'when,' and what is done about it.

The bailouts become geometrically larger given the size and interwoven complexity of the bets. The only feasible solution is to nationalize the banks, keep the real parts of the economy whole, and restart the system in a more sustainable manner. This is essentially what Franklin Roosevelt did in 1933, and to a more limited extent what J.P. Morgan did with the NY banks in 1907. In both instances they dictated terms and made the banks sign to preserve the system.

In the case of the 2008-9 crisis, Bush-Obama failed to dictate terms, and essentially allowed the banks to do whatever they wished to keep going without reforming the system, taking huge sums of money and paying off their bets while maintaining their bonuses and most of their positions. And this was a monumental political failure indeed, and history will probably not be kind.

When the next crisis occurs, there are still a variety of responses. The monied interests will wish to promote another bailout, with harsh terms being dictated to the public, rather than to the banks. This is what is happening in Greece. The terms will be so draconian and unsustainable that state fascism is the most likely longer term outcome. Germany is struggling with that decision today, in light of  bad results in their last two experiences along those lines. 

I am not hopeful that the leaders of the political world will have the resolve to do what it takes to bring the banks back under control, given the power that big money has obtained over our worldly leaders.


Following are edited excerpts from the Berkshire Hathaway annual report for 2002.

I view derivatives as time bombs, both for the parties that deal in them and the economic system.

Basically these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. For example, if you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction, with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration, running sometimes to 20 or more years, and their value is often tied to several variables.

Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counter-parties to them.

But before a contract is settled, the counter-parties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands. Reported earnings on derivatives are often wildly overstated. That’s because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.

The errors usually reflect the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid, in whole or part, on “earnings” calculated by mark-to-market accounting. But often there is no real market, and “mark-to-model” is utilized. This substitution can bring on large-scale mischief.

As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counter-parties to use fanciful assumptions. The two parties to the contract might well use differing models allowing both to show substantial profits for many years.

In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.

Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counter-parties. Imagine then that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company.

The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.

Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counter-parties tend to build up over time. A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. However under certain circumstances, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z.

In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. (Such as in the case of AIG for example - Jesse) In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain.

Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants.  (This is the Greenspan argument for example, but he and others went further in fighting any sort of regulation in this area. - Jesse)

On a micro level, what they say is often true. I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.

On top of that, these dealers are owed huge amounts by non-dealer counter-parties. Some of these counter-parties, are linked in ways that could cause them to run into a problem because of a single event, such as the implosion of the telecom industry. Linkage, when it suddenly surfaces, can trigger serious systemic problems.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so  far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

As an endnote, it appears that the money in derivatives was too good for even Mr. Warren Buffett to pass up. Berkshire Profit Falls 30% On Insurance, Derivatives.

Netting

Here is a fairly simple financial industry explanation of 'netting.'

"Rather than execute a disastrously complicated web of transactions, swap dealers, and ordinary banks, use clearing houses to do exactly what we just did above, but on a gigantic scale. Obviously, this is done by an algorithm, and not by hand. Banks, and swap dealers, prefer to strip down the number of transactions so that they only part with their cash when absolutely necessary. There are all kinds of things that can go wrong while your money spins around the globe, and banks and swap dealers would prefer, quite reasonably, to minimize those risks.  (Presumably by assuming them away, as in the case of Black-Scholes. Except the assumptions made in netting as compared to the risk handwave in Black-Scholes seem like planet killer class ordnance compared to conventional bunker busters. - Jesse)

An Engine Of Misunderstanding

As you can see from the transactions above, the total amount of outstanding debts is completely meaningless. That complex web of relationships between A, B, and C, reduced to 1 transaction worth $1. Yet, the media would have certainly reported a cataclysmic 2 + 3 + 4 + 5 + 2 + 6 = $22 in total debts.  (But borrowing from Sinclair's description, if a major counterparty in this daisy chain fails, the notional netting can become 'cataclysmic,' and enormous losses can be realized, especially if there are linkages to the commercial credit and banking systems. And this is where 'mark-to-myth' and bailouts come in. - Jesse)

Charles Davi, Netting Demystified

Here is a visual representation of what a Lehman size failure would look like in today's financial markets.

Shock B: I'll Bust a Cap in Your Curve, And Then Some...

Ben Bernanke and his gangsta bankas have been following the approach outlined in this paper from 2004, Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment, which is excerpted below, and also in his famous 'printing press' speech on avoiding deflation from 2002.

I have written about this before several times over the years, but perhaps it is a good time to review the Fed's game plan.

The first item, communications to model and influence the perception of the markets, is obvious. Jawboning is a major element of any financial intervention. Acknowledging or denying the intervention is all about the message as well.

The most recent statement from the Fed, for example, about keeping rates at the zero bound for the next two years, depending on how the economy fares, is a good example of this. Other actions they may take through their own speeches, and the statements of informal intermediaries in the industry and the press, are good examples as well.

The expansion of the Fed's Balance Sheet is also known as quantitative easing, and that has been done at least twice now, and in epic proportions.

The third option, the targeted purchasing of certain assets, has been done to a large extent to support the banking and mortgage system, but not necessarily the real economy.  This is the program by which the Fed has been taking non-traditional assets into its portfolio in the various vehicles it has constructed in order to shore up the shaky creditworthiness of the TBTF asset profiles.

What the Fed is not doing in a major program yet, although it certainly has done it in the past, is to conspiculously shift the duration of its Treasury bonds portfolio in order to achieve certain interest rate objectives, effectively setting caps on target rates up the curve.

In 1961 in a program called Operation Twist, the Fed moved the duration of its portfolio to help lower longer term rates.  It should be noted that OT1, if you will,  was conducted during the fixed exchange rate period known as Bretton Woods I, which included the redeemability of dollars for gold.  Also, although the short end of the Treasury curve was not at the zero bound,  it was not viewed as adjustable for policy constraints than the zero bound.

So there are some subtle differences perhaps in any OT2 which the Fed might announce this week, or soon thereafter.

John F. Kennedy was elected president in November 1960 and inaugurated on January 20, 1961. The U.S. economy had been in recession for several months, so the incoming Administration and the Federal Reserve wanted to lower interest rates to stimulate the weak economy. Under the Bretton Woods fixed exchange rate system then in effect, this interest rate differential led cross-currency arbitrageurs to convert U.S. dollars to gold and invest the proceeds in higher-yielding European assets. The result was an outflow of gold from the United States to Europe amounting to several billion dollars per year, a very large quantity that was a source of extreme concern to the Administration and the Federal Reserve.

The buying of the longer end of the curve, moving out from the bills to the shorter notes, has been telegraphed repeatedly to the markets this year. So it does appear likely.

The effects would be to lower real rates more broadly across the curve, perhaps taking them all negative, or at least closer to zero on the longer end depending on how one wishes to calculate inflation. I think the Fed uses their chain deflator.  I doubt its accuracy for practical purposes, but let's not quibble.

This is 'bad' for the dollar and good for gold and longer dated Treasuries which will enjoy a brief rally. However it will drive yield hungry investors to seek other alternatives, perhaps in the stock market and overseas.   It may shake up the Treasury markets on the longer end moreso than we might expect if there is an erosion in confidence in the US' ability to put its house in order without devaluation of the dollar debt.  That erosion may be well-founded.

Such a policy move is intended to stimulate consumption and investment in situations where the middle of the curve and out is used as a benchmark for setting non-governmental interest rates.  There is thinking that by moving out from the short maturies, the pull lower on the even longer rates will be more pronounced.

I do not think this alone will work. Banks are reluctant to lend at any price, and lowering the rates would not improve the credit risk profile of potential borrowers.

The Fed could also reduce the interest it pays on reserves to zero, or even place a negative rate on it. This would stimulate banks to put the money to work in the markets for projects with positive yields. This is not so different from the Fed's actions in driving consumers out of short term bonds and zero interest savings accounts, which they have done from time to time.

There is some further indications that the Fed will be using a reverse repo mechanism in order to grow bank credit in a more targeted fashion.  I will not get into that further here, because if it does develop I am sure there will be much more lucid explanations given in some detail based on Fed announcements.

But it does follow the theme of actively stimulating lending in ways other than lowering rates, even on the longer ends of the curve.

The Fed might couple this with government guarantees on loans for example, for certain situations where the government wishes to stimulate activity, such as housing for example. It is hard to imagine anything like this passes through the dysfunctional Congress.

There is another option that the Fed has, which is not cited in the summary of this paper shown below.

For this we have to turn to Chairman Bernanke's famous speech on Deflation in 2002 in which he stated that 'the Fed's owns a printing press' and highlighted various steps which they might take to insure that deflation does not happen in the US, the ability and the resolve of the Fed to prevent it, and some of the options the Fed might have if they reach the infamous zero bound:

However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy...

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates.

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association). Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities...

If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. (Obviously the Fed has already been doing this as well).

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money. (I think the Obama Administration used this as the rationale for extending the Bush tax cuts).

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets. (I believe the Fed has already been doing this with the help of a few Primary Dealers.)

In summation, I think Bernanke's next move will be to start capping the two and three year rates, with the five year to follow. The purpose will be to keep rates low for the purpose of enabling spending and devaluing the dollar. I do not think he will have to expand the Fed's Balance Sheet to accomplish this.

But it is important to note that while the Congress can enforce a debt ceiling on the US Treasury, there is no such hard ceiling on the Fed's Balance Sheet. And this is probably the genesis of Presidential candidate Perry's scarcely veiled threat to Mr. Bernanke and the use of the word 'treason.'

I am not saying that the Fed is right in what they are doing. I am using Bernanke's thinking, and his own words, to determine what the Fed is likely to do next. I have been using this model for the past five years, and it has served me well. 

I have some sympathy for Bernanke, because he has few allies, especially among the libertine left and the luddites of the right, and the serpentine Obama.  The major obstacle to the US recovery is a failure in governance.

I have very little sympathy for the manipulation of certain markets traditionally viewed as safe havens, based on the rationale outlined in Larry Summer's paper about Gibson's Paradox, and the linkage between interest rates and gold.  That appears to be roughly analagous to machine-gunning the lifeboats.
Deflation or inflation are truly policy decisions in an unconstrained fiat currency regime such as that enjoyed by the US. On this Mr. Bernanke is correct, and anyone who thinks otherwise does not understand a fiat money system.  It really is that simple.  To their credit, the Modern Monetary Theorists understand it very well, except for the downside of excessive money creation in a co-dependent world, even if one does enjoy the exorbitant privilege of the world's reserve currency.

Various interests have been seeking to restrain the Fed, ranging from large creditors such as China, and the domestic monied interests who have already received their bonuses and bailouts, and who do not wish to see their dollar wealth erode. One is richer if all around them are made relatively poorer, or so some lines of thinking go.  And of course there are the prudent savers, who have been fleeing the dollar to the relative safety of some foreign currencies and hard assets like gold and silver.

I would hope that by now that any reader here would know that, at least in my judgement, deflation through hard money and austerity, or inflation through stimulus and money printing, are both unable to achieve a sustainable economic recovery because the system is caught in a credibility trap in which the governance of the country is unable to act justly and reform the system without implicating themselves in the compliant corruption that caused the unbridled credit expansion, massive frauds, and financial collapse in the first place. 

This was a major contributor to Japan's lost years.  The lack of will was in the failure of their largely single party system to correct the inefficiencies and crony capitalism of the banks and their keiretsus that provided a drag on all stimulus and the real economy, siphoning off the additional money into unproductive projects and support for zombie corporations.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery.

Federal Reserve
Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment

Ben S. Bernanke, Vincent R. Reinhart, Brian P. Sack

8 April 2004


Abstract

 The success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound.

When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely on “non-standard” policy alternatives. To assess the potential effectiveness of such policies, we analyze the behavior of selected asset prices over short periods surrounding central bank statements or other types of financial or economic news and estimate “no-arbitrage” models of the term structure for the United States and Japan.

There is some evidence that central bank communications can help to shape public expectations of future policy actions and that asset purchases in large volume by a central bank would be able to affect the price or yield of the targeted asset.


Non-Technical Summary

 Central banks usually implement monetary policy by setting the short-term nominal interest rate, such as the federal funds rate in the United States. However, the success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound on interest rates. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely instead on “non-standard” policy alternatives.

An extensive literature has discussed monetary policy alternatives at the zero bound, but for the most part from a theoretical or historical perspective. Few studies have presented empirical evidence on the potential effectiveness of non-standard monetary policies in modern economies. Such evidence obviously would help central banks plan for the contingency of the policy rate at zero and also bear directly on the choice of the appropriate inflation objective in normal times: The greater the confidence of central bankers that tools exist to help the economy escape the zero bound, the less need there is to maintain an inflation “buffer,” bolstering the argument for a lower inflation objective.

In this paper, we apply the tools of modern empirical finance to the recent experiences of the United States and Japan to provide evidence on the potential effectiveness of various nonstandard policies. Following Bernanke and Reinhart (2004), we group these policy alternatives into three classes:

1. using communications policies to shape public expectations about the future course of interest rates;
2. increasing the size of the central bank’s balance sheet, or “quantitative easing”; and
3. changing the composition of the central bank’s balance sheet through, for example, the targeted purchases of long-term bonds as a means of reducing the long-term interest rate.

We describe how these policies might work and discuss relevant existing evidence...

Additional Reading:
The Upcoming Expansion of US Bank Credit - Alasdair MacLeod

Gold and Interest Rates: More than Joined at the Hip - Rob Kirby

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.”

John Kenneth Galbraith

How Far Can the Fed Go in Manipulating Markets Before It Becomes a Private Banking Fraud?

When does public policy go too far and become an instrument primarily serving private fraud?

I have had this video on the manipulation of the debt markets by the Fed in the Matières à Réflexion links since last week, but moved it here on request because apparently many missed it, and did not understand its importance, the implications.

It is a fairly good example of the rationale for the Fed and its member banks dealing in paper derivatives to manage perception and attempt to 'manage' longer term interest rates. And by extention it also provides the reason and even some of the means in manipulating the price of gold and silver.

Papers such Gibson's Paradox by Larry Summers demonstrate a belief that the price of gold and silver have a definite correlation to long term interest rates, which the Fed is admittedly trying to 'shape.'

One may make the argument that this correlation between gold and the bond no longer exists since the US is no longer on a gold standard, and futher, just because the FED may use derivatives to distort long term rates, that does not mean the Fed and their multinational banking associates are doing the same thing in related markets such as gold, silver, stock prices, LIBOR, etc. It is circumstantial.

But in point of fact the evidence from the Fed's own transcripts, and quotes from various members and bankers, demonstrates that the perception of at least gold and silver in the market is still an active concern and of serious interest to the Fed. So now we have motive and means, and indications in half hidden documents that it is indeed occuring.

Why else would JPM short multiples of the entire supply of silver that probably exists in the world, while also holding massive positions in the derivatives markets, except for the purpose of manipulating the prices?

The recent stonewalling on the release of the relevant documents by the Fed is not frivolous, as well as the antics at the CFTC concerning position limits and investigation into the silver market. What starts out innocently enough obtains a life of its own, and the cover ups ensue, along with the abuses and private profiteering as we saw in the TALF disclosures, and the situation becomes much greater and more far-reaching than its original intent. A well intentioned program can indeed become a money machine for looting the public trust.

The problem of course is that while the Fed and its associated private banks can never run out of their own paper, or the ability to write derivatives on that paper, they can and may very well run out of physical gold and silver to support their financial engineering, if the demand is made to 'stand and deliver.' This has long been identified here as one of their weak spots which may be reached before the more extreme limit of the value at exchange of the bonds and the notes of zero duration, the dollar.

It is never so much the original scheme that brings them down, but it is almost always the ever-expanding cover up of personal larceny.

In other words, gold and silver bullion may expose the weakness of the Treasury, and the Fed and their member banks, and thereby restrict their ability to operate freely in managing perception by manipulating prices and rates. This is why they hold such an animosity to it, and attempt to conceal so many of their dealings in it, even promoting hysterical attacks from friendly sources in the establishment media.



Related: More on the Literal Bernanke Put- FT

US Employment and Wages, Modern Monetary Theory, Trade, and Financial Reform

There will be a sustainable recovery in the US when the median wage recovers in relation to inflation and consumer necessities, and the employment-population ratio rises to some reasonable equilibrium.

A rising employment-population ratio itself is no sign of recovery, if consumers must continue to rely on debt to finance their basic necessities. Conservsely, a falling employment-population ratio can be constructive if it is driven by a vibrant median wage, increasing industrial productivity, and excess income as savings, allowing for retirements and more people devoted to non formal employment such as charitable activities, parenting, artistic expression, and elder care, for example.   The point is that these measure are not one-dimensional.

As shown by the median wage below, the 'recovery' engineered by the Fed in the aftermath of the tech bubble they created was artificial and totally supported by credit creation and a bubble in housing, with enormous amounts siphoned off the top in the form of financial fraud and corruption.

The basic economic problem in the US economy is related to international trade, currency manipulation, public policy and wage arbitrage by multinational corporations. 'Free trade' interacts with public standards of health, worker compensation, environmental, child labor, and the entire structure of public standards.

Therefore the solution is not amenable to straightforward Keynesian stimulus. This is no cyclical contraction.

It has its roots in the conflict between 'free trade' amongst nations with different standards towards their workers, and various forms of governance.   A democratic republic and a autocratic dictatorship do not have the same  public policies and attitudes towards the individual and their rights vis a vis the state.  How then can free trade reconcile fair wages with what is by comparison virtual slavery?  These are the economics of 'the camps' and the plantations, a familiar attraction for the monied interests who have an abiding love of monopolies and oligarchies. 

And of course the unspoken problem in the US is the pervasive corruption in and overweighting of the financial sector in relation to the productive economy even today after so-called reforms.

On another note, there is renewed discussion of 'Modern Monetary Theory,' and some have asked me again to address this, as I have done previously.  I have only this to add.

I see no inherent problem with the direct issuance of non-debt backed currency as there is sufficient evidence that it can 'work.' Indeed, my own Jacksonian bias toward central banking would suggest that.
I think the notion that the Fed is some objective judge of what is best for the public welfare without effective oversight or restraint is anti-democratic and probably un-Constitutional, at least in spirit, as it has been implemented. And this notion that the FED and the discipline of the interest markets could reliably emulate an external restraint on excessive money creation is deeply flawed.

The problem becomes then how to implement a fiat currency without the discipline of issuing debt through private markets.

This is the important point that most MMT adherents seem to ignore, but it is their greatest area of strength.

One cannot print money at will. The limitation is always and everywhere the willingness of the markets to accept it in exchange for labor and real goods without coercion. To make counter claims is to undermine your own position.

It is a tautology to say that a state that controls its own fiat currency cannot become insolvent in that currency, since they can never lack that which they can create from nothing. The state does not run out of its currency, rather, it runs out of people who will accept it at the official face value.

I would stipulate that central currency issuers can attempt to set arbitrary values, and to enforce them through things like official valuation and wage and price controls. Indeed, practical experience seems to indeed they inevitably must and will become increasingly draconian in their central planning. Dictatorships generally embrace fiat monetary systems without external discipline as policy, but rarely is this a sign of a vibrant economy or a government that respects the individual's rights to just recompense for goods and labor.

The problem with limitless issuance would first appear with necessities that the state must acquire externally, that is, outside their direct sphere of political control. In the case of the United States, for example, oil comes to mind.

I am not suggesting a retur to a gold or silver monetary standard, for that too has its weaknesses and is no panacea. But rather, I am addressing the particular overstatements being made by those who promote the Fed, and those who promote the Treasury, as infallible arbiters of monetary value.

Transparency, oversight, checks and balances are the inherent genius of of the Constitution, and anything that weakens those pillers undermines the democratic Republic.

Most fiat currencies inevitably fail, without regard to their particular mechanisms, because of the weakness and corruption of the people who manage them. This the hard truth that no amount of accounting gimmicks and Utopian central planning can overcome. Such schemes spawn tyranny from their nature, since like a Ponzi scheme they require an ever expanding sphere of absolute control over the daily transactions of the public.

If the inherent evil contained in the concentration of power in a few hands in your concern, then Modern Monetary Theory does not seem to be a viable solution, replacing the Fed with the Treasury, and potentially one form of monetary tyranny with another.

Dwindling Comex Silver Bullion, But Where Is the Gold Coming From?

Special thanks to 24hourgold. This interactive chart can be viewed here.

I wonder how much of this silver being sold is leased out from unallocated accounts and holdings in ETFs.

How unfortunate for the silver shorts that the bankers lack a ready supply of bullion from the central banks.  Most national stores of silver in the west have already been depleted.

Gold bullion, however, is still available from those central banks who lease their gold to the bullion banks, where it is then sold into the private market, and is afterward carried on the national accounts as bookkeeping entries. 

This scheme has been promoted by some of the TBTF banks for many years as a means of providing a steady income for the central bankers and their Treasuries on their 'idle resources.'  Lease us your gold, and we will pay you a percent or two for it in paper.

What Mubarak and other dictators in history past have done using cargo planes, trucks and trains, the western bankers may have done over a period of time using computer entries and their cronies in the central banks: plundering the national treasuries of Europe, quietly and over time. And it was not stored in salt mines and lake bottoms, but sold in plain sight.

Won't the people be surprised if they find how much of their gold is gone, and how it was used to deceive them while their other assets were stolen using phony paper. Do you think there will be reparations made, and justice done?

They will most likely try to ignore it and dismiss it, claim that it is not needed and we are better off without it. And then they will buy it back, but at what prices? And what so called patriots will be their willing stooges and accomplices in theft, again.

Watch how they weave their arguments over the misappropriated social trust funds and pensions, bank bailouts, and subsidies to the corporations and monied interests to see what their methods will be. This debt is sovereign, a matter of national interest if not sacred honor, and so must be paid whatever the cost. But that debt to those people, well, the money is gone, so too bad for them. Sacrifices must be made, and we will choose who makes them based not on the law or justice, but on the principles of crony capitalism, which are always for private benefit of the few.

What a scandal! And irony indeed if this banking fraud is exposed not by the virtuous West, but by China and the BRICs, and their unwillingness to go along with the scheme.

But this could not be true.  Banks do not do this.  It would be like their presenting forged documents, concealing evidence, and committing blatant perjury to take people's homes in their very own courts!

But this is merely rhetorical speculation and conspiracy theory of course, because the theft could never pass undisclosed with all the independent audits, transparency, oversight, and accountability in the central banking system.  Surely the people have a good account of the amount, number, and quality of every bar that they own from an impeccable source which they control.  Uh, there have been no such audits or accountability, the system is necessarily opaque? Oh.  We are shocked, shocked, that the gold is gone and the private banks cannot replace it.  The smartest minds told us it was a good plan, an excellent idea.  The US pressured us to do it to support the dollar.  How could we have known that people would demand these barbarous relics again.  Do they not understand monetary theory? They are to be ridiculed1

And now all that is left is running the bluff, and playing for time, looking for an opportunity to deflect the issue to something, someone else.