BBC: Bankers: Risking It All - Part II

If you live in the UK you may watch this online here.

Otherwise you may watch it below.

Here is a link to Part 1 - Fixing the System

As a Reminder, the Fed Is NOT Printing Money

“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."

Alan Greenspan, 20 July 2005

Yes that's right. The Fed is NOT printing money.

It is 'retiring Treasuries' and 'issuing Reserves.'

And everyone knows that Reserves are benign, if not almost meaningless accounting entities. 

Banks just like to collect them.  Like Pokémon cards.

So implies the AngryBear amongst others.

And Mark Dow shows that there is zero correlation between the Fed printing money and the money supply.  And so 'deal with it.'  Hey rube, you obviously don't understand the difference between 'liquidity' and 'credit.'

I thought it was cute that the study went back to 1986, long before the Fed had to resort to  Quantitative Easing, and expanding its Balance Sheet as they are doing today. 

And they are doing it on a continuing basis, and not as an unusual action with regard to secular and isolated liquidity problems.  Unless you want to count chronic insolvency as a liquidity problem.

And the Fed purchases of Treasury debt at non-market prices is just dandy as long as it passes through the hot little hands of the likes of a friendly bank like JPM, who take their vig and then some.

And this chart shown below, printed courtesy of the St. Louis Fed, is just an illusion, so don't look at it.  Seriously.  Don't look at it. Knowledge is bad.  As a reminder, there are two scales on that chart, and the Adjusted Monetary Base uses the lesser scale.

As a reminder:

"In economics, the monetary base (also base money, money base, high-powered money, reserve money), is defined as the sum of currency circulating in the public and commercial banks' reserves with the central bank."

Hey, the Monetary Base includes reserves that the Banks are keeping safe at the central bank.  And the monetary base is the foundation for that leveraged expansion of debt money that is characteristic of a fractional reserve banking system.   What's up with that.  Does the Fed need to get out the liquid paper and correct that?

Here is a link to 'Money Supply: A Primer."

I recall that not long ago, Alan Blinder suggested that the Fed might alter the interest it pays on Reserves in order to stimulate more lending.  But he is just being a party pooper and doesn't understand banking. Or the difference between liquidity and credit.

"The nation's biggest banks have been nursed by the Federal Reserve way too long, former Federal Reserve Vice Chairman Alan S. Blinder said Thursday as he kicked off the tour for his new book, After The Music Stopped: The Financial Crisis, The Response and the Work Ahead.

The Federal Reserve, says Blinder, should stop paying interest to banks for their overnight deposits and should move to charge them for parking money. He says if the Fed set negative interest rates for overnight deposits – in effect charging a fee – banks would have to figure out better ways to make money and one obvious alternative would be to lend more to customers."

Yes I understand these are not 'excess' reserves which is an 'accounting designation' created by the Fed.  It is the Fed that sets the aggregate level of reserve requirements, or the lack thereof, in its role of banking regulator.   And it has quite a bit to say about the quality of the collateral that be used as reserves.  Such as cash, aka liquidity to those ascending masters of finance.  And as I recall they set margin requirements on the equity markets.  But perhaps they no longer do that. 

But this statement by Blinder somewhat 'blows a big hole' in the arguments of those who occasionally come out and lecture us that when the Fed 'creates money' (or liquidity if you prefer) and buys Treasury and Agency Debt from the Banks at non-market rates, it is not really creating money.  It is a benignly useless action.  It simply gives the banks 'cheap liquidity' that they can choose to use as they wish.  I wish they would buy some useless paper from me at non-market rates.  I accept all major forms of payment.

The Banks hold this liquidity, and use it to prop up their zombie Balance Sheets.  I don't think the virtual dollars are sequentially numbered and marked.  So they may also use it, and more properly the vig obtained therein,  and pay themselves bonuses from their leveraged up gambling.  Oh I forgot, Dodd-Frank changed that.  Except for 'hedging.' 

"While banks cannot control the overall level of excess reserves, there are a several ways they can reduce the level of excess reserves on their own individual balance sheets. They can lend excess reserves to other banks in the federal funds market, they can lend them to consumers or businesses, or they can purchase securities. Each of these outlets has been constrained for various reasons since the recession."

Cleveland Fed, The Federal Reserve's Influence Over Excess Reserves

Keep in mind that my argument here is not the true nature of excess reserves, but rather, is the Fed 'printing money' by expanding its Balance Sheet.

Normally the Fed does not have to print money.  The members of the Federal Reserve Banks do that for themselves under their charters with the consent and oversight of the Fed, and subject to the prevailing capital requirements. 

But when the real economy falters, as typified in the recent collapse and the continuing plunge of the velocity of money indicators, the Fed picks up the ball and prints money for the benefit of the economy.  They use this to 'lower interest rates,' except in a liquidity trap which is like pushing a rope. 

I think what some of these helpful pundits are trying to say is that the Fed is not 'printing money' so that it is becoming an inflationary problem.  They are giving that 'money' to the Banks, and they hold it for safekeeping.  And for their gambling stash. And for credit cards and food stamp distributions and other fee generating activities.  And for loans to pay dividends, and fund share buybacks, and the occasional industrial activity.

And among other things it involves the payments on excess reserves that they are giving to the Banks to sit on that money.  And the gaming of the financial markets to which they turn a blind eye.  And the enormous abuses in the financial system which have still not been reformed.

And keep in mind that the purpose of my writing this is not to argue about 'excess reserves' but rather with regard to the question of whether the Fed is 'printing money.'  Yes they are.  The quibble is what is being done with that money, which the Fed is providing in its function as the lender of last resort by buying Treasuries, and sometimes dodgy paper at non-market prices, and providing a subsidy to the Banks in the process. 

That the Banks are NOT getting that money to the real economy in sufficient amounts is another matter perhaps.  There is a difference between liquidity and risk. 

And I think that there is a strong indication that the interest rate policy mechanism of the Fed has broken down because Banks, or at least those holding those Reserves, are not making the bulk of their profits from conventional lending any longer. 

They are making their profits through various forms of private investment and the many permutations of prop trading.  And their lending preferences tend towards further financialization of the economy.  This is the downside of the lack of serious reform.

Click on the subject link 'Excess Reserves' below for more on these Tales from the Vienna Woods (the play, not the waltz) from our financial sophisticates, and sophists, who like to argue what the meaning of is, is.    And there are some related articles and essays at the end that might be useful.

Or just start by clicking here.

Foreign Banks Hold Most Excess Reserves at the Fed - WSJ

Why Are Banks Holding So Many Excess Reserves - NY Fed

Gold Daily and Silver Weekly Charts

"Buying gold and silver is a vote of 'no confidence' on the financial system and the Fed."

If that is true, and considering that Bernanke is the Pelé of printing money, how could you NOT?

It's pretty clear how the BRICS are trying to cast their vote.

And how the Banks and their associates are trying to stuff the ballot box with paper.

SP 500 and NDX Futures Daily Charts - Back On Suffragette City

Hey man, I gotta straighten my face,
This mellow thighed chick just put my spine out of place.
Hey man, my schoolday's insane
Hey man, my work's down the drain
Hey man, well she's a total blam-blam...

Oh don't lean on me man, cause you can't afford the ticket
I'm back on Suffragette City...

Ohhh, Wham Bam Thank You Ma'am!

This mispricing of risk is going to leave a mark.

But you can't stop dancing while the music keeps playing.

Let's File This Email About Greenspan and Replicating the Gold Standard Under 'Irony'

I found this little gem, and added it to my collection of reminders that Greenspan said that fiat money 'worked' because central bankers had learned to 'replicate' the gold standard through their policy actions.  I had said 'emulate' but perhaps that was a quirk of memory.

This is from a publicly published note by Jude Wanniski titled Savings Glut.

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

"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."

Wanniski sent this to Bernanke, who was at that time either on the Fed Board of Governors, or on the Council of Economic Advisors to W Bush.  I can't recall the exact date of the transition.

The note is almost a howler, given the excesses in trickle down helicopter monetization and banking subsidies that Bernanke has engaged in since becoming the Chairman of the Fed, and the manner in which he has haplessly ravaged the quality of the Fed's Balance Sheet, while accomplishing little except extending the unsustainable status quo.  The Fed's performance as a major banking regulator has been almost pathological.

And I also like this note because it helps to dispel the myth that the Fed does not watch and worry about the price of gold, which we have known about for quite some time. It is tied to their aspirations on interest rates, through the management of market perception. Larry Summers wrote about this relationship in Gibson's Paradox.

Well, nothing has changed, the irresponsibles are still in charge, and they are being defended by their economic partisans while they degrade the national currency to support the looting of the system by their cronies from Wall Street and the Banks. 

The idea that stuffing the one percent's already swollen pockets with even more hot money will stimulate the economy would be funny if it was not having such tragic consequences, with even worse to come.

My only regret is that I wasted so much time trying to raise these concerns on economic chat sites with establishment economists who clearly did not wish to hear or see anything but the party line.  This is about when Brad DeLong, in explaining why he had to censor my concerns about Greenspan's monetary policy and the growing credit bubble said, "Greenspan never made a policy decision with which I disagreed."  Well Brad, how did that work out in retrospect? 

And as bad as the neo-Keynesians may be, the Chicago-Columbia austerity crowd are even worse.  Economics is a generally disgraced profession with only a few bright lights.

The stock, bond, and commodity markets are a joke. The Banking System resembles a control fraud.

The manipulation of the metals, equity, and credit markets is approaching a financial war crime, it is so contemptible. Although I am sure it will have its bureaucratic defenders.

At long last, they have no shame.

Another crisis is coming.  They know it is coming, and are attempting to cover it up while they make themselves and their patrons comfortable.  They are trying to stifle all alarms and indicators to the contrary.

The market is whatever we say it is, indeed.  And this time it will be worse.

I am sorry to speak so bluntly.  I keep trying to maintain some optimism, but these jokers are barking at the moon.  This disconnect between reality and the official story is becoming almost unbelievable.

The History of the Johnstown Flood: Audacious Oligarchy, Reckless Disregard

The history of the Johnstown Flood of 1889, at that time the worst natural disaster in the US as measured by loss of life, is little understood these days, but quite fascinating.

A group of about fifty wealthy 'robber barons' took over an old dam which had been used as a reservoir for a canal system,  and used it to create a lake resort for their private pleasure.  It served as a weekend retreat from the heat and noise of nearby Pittsburgh. 

Prior to selling the dam to them, the owner, a Congressman Reilly who had purchased the abandoned reservoir from the Commonwealth of Pennsylvania, removed the discharge pipes from the dam and sold them for scrap, thereby eliminating any emergency water relief measures, excepting the spillway.

They constructed buildings, and cottages, and formed the Southfork Fishing and Hunting Club.

They screened the spillway in order to preserve the fish with which they stocked the lake.  The screening tended to collect debris, and hamper the function of the spillway to relieve pressure on the dam caused by the occasional heavy rains.

Poorly maintained, the dam gave way, and wiped out the towns located down river. Having received no warning, many of the people who could have retreated to the nearby foothills were lost in the deluge.

The powerful members of the Club were never held to account because the law was interpreted to find no single member had been personally involved.

The Club itself was sold at auction to pay its mortgage to the banks.  The litigants received nothing.

It would have been even worse if the wealthy had bought insurance on the lives and property of the towns below, in order to further profit from the tragedy, and had cut telegraph wires and warning whistles to maximize the damage, loss of life, and their profit. 

And it would have been despicable if they had hired experts and newspapers to falsely lecture the public on the nature of dams, and how their concerns were misplaced and ridiculous. And if they had 'captured' the public officials and inspectors so that they would overlook and excuse the reckless disregard of the Club members for others.

I hope the lessons from this story from history are not lost on you.

When things don't make sense, that is often because there is deception involved.  How can there be widespread destruction and crime, but no one is held accountable? 

It is easy to underestimate the brazenness with which wealthy and powerful people will game the system for their personal profit, and then to cover up their wrongdoing.   That is because most people themselves would not lie and cheat to profit from the misery of others.  They find such behavior to be almost inhuman.

It is natural perhaps to blame the victims. They should have known, one might say. And how often can one be fooled before being blamed for their misfortune as a fool?

But most people, when faced with the uncertainty of conflicting stories, tend to accept the one that is put forward by the mainstream media, and backed by very important people. 

This is especially true if it seems like something they might do. Who could believe in such deceit? But they forget that they themselves are not heartless sociopaths.  And they are not well-practiced, almost pathologically proficient, con men who will say and do almost anything for money, without a twinge of conscience. Surely they may bend the truth a little, but never about anything so great.

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

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

Gold Daily and Silver Weekly Charts - South Africa Imports $1 Billion In Gold Bullion From NYC?

The stories on the sidebar are interesting today. The last piece by Golem XIV about What Bankers Don't Know is a 'must read' in my opinion.

I was greatly amused to read that South Africa imported about a billion dollars in gold bullion from New York earlier this year, an amount large enough to turn their trade surplus into a deficit.

The reason given was that South Africa had problems in its mining sector because of union actions etc.

What is not stated is that it was cheaper for South Africa to ship gold all the way from New York to meet their delivery obligations than it was to acquire the bullion from their own region, or the regions where their customers reside, which are presumably in Asia.

Couple this with the news we had that bullion shortages in Hong Kong were being met by gold bullion imports from London and Switzerland.

Gold is flowing from west to east, and this is precipitated by price distortions in the paper markets of New York and London.

The pundits on Bloomberg TV met the comments from Putin about Russia's desire for a change in the reserve currency with contemptuous laughter and snide derision after the close today.

It reminded me of what Robert Johnson said about the attitude on Wall Street. 'Ok, you're mad. So what are you going to do about it?'

There are a number of May gold contracts at the Comex standing for delivery. I suspect they are wiseguys sniffing around for a premium on a cash settlement. I don't think the Comex would allow anyone to take delivery of that much of the real deal.

This is going to get interesting.

SP 500 and NDX Futures Daily Charts - Rally Tuesday

"Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk."

Bill Gross, 14 May 2013

Today was rally Tuesday when the banks and funds decide to take stocks up.

Check out the results for the last few Tuesdays. This makes more sense for today's rally than anything else I have heard.

Be careful in challenging the technical when they are driven by hot money and abetted by lax regulation. We've been here before from 2004 to 2007.

The Bullish Case For Stocks (and a Commensurate 'Repricing of Risks' Caused By Fed Intervention)

Here is the 'bullish case for stocks' from Ralph Dillon at Global Financial Data, in quotes below.  The chart is also from their site.

Calculating the Equity Risk Premium Tutorial is here.

Those of us who stood by and watched the Fed blow asset bubbles in financial paper and the housing market from 2003 to 2007, after the bubble in tech stocks from 1998 to 2001, are understandably appalled that the Fed has seen fit to follow essentially the same game plan again, matched by a lack of reform in the financial system. 

Bernanke's policy failure is, in my humble opinion, going to cause another financial crisis if he continues on. There are much more effective ways of reflating and stimulating the economy than creating paper asset bubbles for Wall Street, and hoping that the Banks allow for a trickle down effect to the real economy.  Not a chance when gaming the markets can produce outsized profits and perfect trading records.  Where is the downside, where is the risk?   And where are the regulators?

I think I understand the rationale for leaving the TBTF Banks in place, and making them even bigger. It was two parts craven self-interest and one part backstop for the eventual unwinding of the Fed's Balance Sheet, when someone has to help them to absorb the trillions in mispriced paper.

In my opinion Bernanke is literally fighting a new kind financial crisis, of the Fed's own making, with the last war's tactics and weapons, in the manner of the French generals at the beginning of the Second World War. Therefore the next crisis could be quite impressive and pervasive, affecting sovereign debt and currencies to an even great degree than the last two or three bubble/crises, depending how one is keeping score.

The failure points, or limits if you will, are the valuation of the bonds and the US dollar. And Bernanke looks to be giving those limits, and the theories of risk and valuation therein, a rather rigorous stress test. 

"At 85 Billion a month, massive amounts of liquidity are driving the markets higher each day. While we are closely watching the FED for signs of an exit strategy, I heard a very interesting piece from David Tepper at Appaloosa Management this morning that put todays markets in a much better perspective. According to David, The FED will have a 368 Billion dollar surplus this year! That is 368 Billion in more liquidity that “has to go somewhere”.

With the Dow and the S&P 500 trading at or near all time highs and 10yr paper trading at historic lows, you would think that we have run our course and we may want to pull some money off the table. Think again? Do you fight the FED? Do you create the MOAS? (Mother of all shorts)….Or do you stay long?

In this chart, we look at the Equity Risk Premium Index versus the DJIA, S&P 500 and the US 10yr to 1885. The red line represents the Equity Risk Premium Index and by all accounts, looks like it is ready to breakout and make a move to new highs.

Provided that the FED follows through to 2014 with the QE program, one would have to assume that the respective equity indices will all move higher with the massive amounts of liquidity that are in the pipeline.

That has proven wise, as long as the FED stays your partner."

Currency Wars: Russia's Proposal for the Post-Bretton Woods II Global Financial System

"The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.

In our age there is no such thing as 'keeping out of politics'. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia.

When the general atmosphere is bad, language must suffer."

Eric Arthur Blair

The dollar reserve system has been struggling, if not failing, in stages for at least ten years now.

There have been a series of financial crises since the mid-1990's that are related to the strains of an unsustainable reserve currency system which is no longer able to 'emulate the gold standard,' as ex-Fed Chairman Greenspan described it. 

This situation is a macrocosm of the failings of the Eurocurrency zone as it is presently constituted.

I believe that the ultimate solution will be to migrate global trade to a super-currency, constituted of a basket of currencies and most likely a metal or two, gold and silver. I have been calling it the 'SDR' but that is only a representative description. It is unlikely that 'ownership' of such an important instrument will be given to the IMF unless its management is opened up to a broader representation of countries and their interests.

This relieves the 'owner' of the currency from the need to run trade deficits in order to support the expansion of global trade, and allows them great freedom in pursuing domestic monetary policy without risking the global markets. cf Triffin's Dilemma.

There is a strong push from the Anglo-American banking cartel to maintain the status quo, for what are surely selfish reasons. A strong dollar and the dollar as reserve currency is a powerful tool of financial and political policy, even though it may take a toll on some segments of their own domestic economy. The bankers benefit, and the politicians are somewhat captured by their well-funded lobby. And so we have a bifurcated economic structure in the financialized economies of the US and UK. And this suits the financial elite quite well, but hardly anyone else.

This has come to resemble a form of financial neo-colonialism.  And I hardly think that this is an overstatement of the situation, especially if one considers the meme of 'economic hitmen.'  But this involves more than just the currency.  It includes the interwoven apparatus of the World Bank, the IMF, the Federal Reserve and its clients, the dominance of multinational TBTF banks that enjoy strong government subsidies, the three major US credit ratings agencies, and the NY-London metals complex. And this Frankstein's monster is tottering badly, but seeking to sustain itself at all cost.

So let's see how this goes. Expect the fog of war to remain, and perhaps thicken.  I have rarely read more economic misinformation than I have read with regard to money and exchange rates and the current issues facing the world's economy today. Discourse has been polluted by self interest and corruption.

 But now that moe people are waking up to this, I would look forward to additional recognition and discussion of the ongoing currency war. But I doubt most of it will make much sense until there is another crisis and the day of reckoning arrives. To paraphrase a saying, those who are capable of an oligarchy are capable of the perjury to sustain it.

You might click on some of the category links at the bottom of this posting to obtain past articles on these subjects.

Russia's Plan For The BRICS To Dismantle The Dollar System
By Valentin Mândrăşescu, Editor of Reality Check @ The Voice of Russia
May 12, 2013 at 3:38PM

Former commodity trader, economist, journalist. Nomadic lifestyle. When not in Moscow, he can be found travelling across Eastern Europe. Areas of interest: world economy, East European politics, and the theory of propaganda.

The status of the US dollar as the world reserve currency gives the US a number of advantages over other countries. The world’s most important commodities are priced and traded in dollars, even if most of these commodities are not produced in the US. The fact that the world’s financial system is based on the dollar allows the Federal Reserve to export inflation to other countries, while the Federal Government runs a huge deficit with impunity.

So far, only China has been active in challenging the dollar supremacy. The internationalization of the yuan is an official priority of Chinese leaders. Currency swap agreements with major trade partners like Brazil, France, or Australia are small but important steps in the Chinese strategy. Changing the world financial system is not an easy task and certainly a very challenging undertaking for China. Now, it seems that Beijing has found an ally in the Kremlin. And there appears to be a consensus between the BRICS countries: the urgent necessity to dismantle the dollar system.

A week before the recent BRICS summit in Durban, the Kremlin administration has silently produced a document which describes the Russian strategy in the context of BRICS cooperation. The document makes for a fascinating read for anyone brave enough to plow through the dense Russian legalese. The strategy has been designed in the “inner circle” of Vladimir Putin’s team, so it is safe to assume that it represents the official view on the BRICS future...

Read the entire article here.

Gold Daily and Silver Weekly Charts - Brad DeLong: 'Bernanke Defines What the Market Is'

"For the greater good, I want to do what must be done."

Dolores Umbridge

Brad DeLong, the Berkeley history of economics professor, said on Bloomberg TV today that Bernanke is 'the whale that can't be harpooned.'   

And hedge funds missed an easy trade by not going along to get along by riding the rising markets.  Those that are fading Bernanke are going to be overwhelmed by his power.  So just follow the Fed's guidance, obey, and get rich.

As Brad says, and I quote,  'Bernanke defines what the market is.'  

That is a fairly profound statement, containing certain judgements and assumptions, if one thinks about it.  So much for old fashioned concepts like price discovery. Wasn't there some lesson in this most recent financial crisis about the mispricing of risk?

I cannot say I was entirely surprised, because Brad also derided the moral hazard objections to the TARP, when it was proposed by Hank Paulson on a single sheet of paper, as puritanical.

What would we call such an intellectual position, that the Fed has and should have the power to define the market and what it is?   

It is a big ironic that the omnipotent Fed doesn't hesitate to claim cluelessness and non-involvement after something in the economy blows up, generally a bubble of their own making whether they admit it or not.

I don't think Bernanke is a whale. I think he is the captain of the Titanic.  And I think that Brad aspires to a position on the bridge.

We all understand the theory of a modern money which can be created and distributed at will, whether it be by a central bank or the Treasury. And control of the world's reserve currency is certainly what some might call an 'exorbitant privilege' of power. 

Bernanke and the Fed may be powerful.  But they do not control the whole world, at least not yet.  And so their power may have some boundaries.  And if those boundaries are transgressed, the result might be rather memorable.

I suppose we could turn to someone with a knowledge  of the history of economics for examples of that.  But perhaps not the history of economics professor from Berkeley.

Hedge Funds Receive Bernanke's Market Decrees, Janet Yellen Escorts Them Out

SP 500 and NDX Futures Daily Charts - Complacency Buys the Dip

Or as Brad DeLong, the blogging Berkley economist said on Bloomberg today, the Fed is the market and don't fight the Fed.

Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

The premiums are pressed rather heavily, reflecting both short selling and a type of capitulative pessimism.

As you know I tend to view 1420 as key downside support for gold.

Gold Daily and Silver Weekly Charts - Acts of Desperation

"It is not at all uncommon for someone to arrive at a scene of brutality or injustice and, with a sympathetic murmur or heroic flourish, attack the victim."

Renata Adler

Intraday gold tagged the 50 percent retrace of its rally off the bottom, and then bounced back.

From everything I hear all these paper price declines are met by heavy physical buying. The jokers may have overplayed their hand.

The potential 'bull flag' is gold is very much intact.  The rally from the bottom has now been retraced. 

See you Sunday evening.

SP 500 and NDX Futures Daily Charts - Complacency

This is the longest beginning streak for a year without at least a 4% correction since 1995.

Have a pleasant weekend.

BBC2: Bankers Fixing the System

"In our time political speech and writing are largely the defense of the indefensible."

George Orwell

Libor scandal: Can we ever trust bankers again?

"In the five years since the crash that brought the world's economy to its knees, bankers have lurched from one crisis to another.

Scandal after scandal has raised questions about their pay, their values and their judgement and after the industry received billions in taxpayer bailouts, the public is in no mood to forgive and forget.

Like it or loathe it, banking is a vitally important industry to London and the whole of the UK.

But can we ever trust bankers again?"

If you live in the UK you may watch the series here. BBC iPlayer

Otherwise you may watch episode one below.

Gold Daily and Silver Weekly Charts - The BRICs Are Restless and Demanding Change

Apparently the depressed prices in mining stocks have resulted in record insider buying in junior mining shares.

The Yen broke 100 to the US dollar today.  That is a 'big deal' in forex circles.

David Rosenberg thinks that:

"We currently are witnessing the Potemkin rally. For a quick background the phrase Potemkin villages was originally used to describe a fake village, built only to impress. According to the story, Russian minister Grigory Potemkin who led the Crimean military campaign erected fake settlements along the banks of the Dnieper River in order to fool Empress Catherine II during her visit to Crimea in 1787..

The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is.."

Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.”

There has been little or no mention of or word out of the G20 conference in Turkey about 'Reinventing Bretton Woods.'  I have been talking about this for some time and linked to the original agenda when it first came out.  I reminded you of it a couple of weeks ago.  But there is little heard about it so far.

The G7 did call a special meeting for this weekend to discuss serious bank reform.  The Bankers were not pleased with this, but apparently had no choice.   And some were not happy with having to make all the last minute arrangements for this august gathering of central bankers and finance ministers.

The G7 tried to spin this as a late reaction to Cyprus, but that is what the Brits like to call 'bollocks.'

It is said to be a response to a request from China and Russia and a few associates for the G7 to get their dirty financial house in order.  Cyprus was the last straw in a series of outrages.  Europe is none too pleased with having been sold all that dirty paper in the last bubble.  We already knew that from Jeffrey Sachs talk to the Philly Fed last month.

And as always, gold is talked about in whispers.

"It's very rare for a G7 to focus on financial regulation," one of the officials said, speaking on condition of anonymity.

There is also a general displeasure about the currency games being played by London, New York/Washington and Tokyo, and their playing fast and loose with global commodity prices that are disrupting other nations' economies.

There is apparently some behind the scenes 'horse trading' going on at the G20 currency conference.  And there is a push back by the Anglo Americans to defer any action or announcement until later this year,  other than the usual bilateral and multilateral currency agreements.

I hear that this may culminate in September.  But words are cheap, and rumours are plentiful, so let's see what happens.

SP 500 and NDX Futures Daily Charts - Excelsior

Congratulations to JP Morgan and Bank of America for their 'perfect' trading records in 1Q 13.

Perfect records in what is at least nominally an efficient market is a bit unusual. And it speaks volumes.

I read a justification at Economist's View yesterday for why stocks are not in a bubble. The primary thrust of the argument was to deflate the nominal SP 500 and compare it to its previous highs. That those highs were the peaks of grossly mispriced credit and risk bubbles apparently goes without mention.

This will end badly and the same jokers who missed the credit bubbles in tech and housing will say, 'How could we have known.'

Chris Hedges: On a Windy Afternoon In Front of Goldman Sachs - Hunger Games

“All the animals, the plants, the minerals, even other kinds of men, are being broken and reassembled every day, to preserve an elite few who are the loudest to theorize on freedom, but the least free of all.

I can’t even give you hope that it will be different someday— that they’ll come out, and forget death, and lose their technology’s elaborate terror, and stop using every form of life without mercy to keep what haunts men down to a tolerable level— and be like you instead, simply here, simply alive.”

Thomas Pynchon, Gravity's Rainbow

Although people like to imagine dystopian futures like The Road, or even The Walking Dead, if you wish to see a more possible vision of the future, especially in Europe, go see The Hunger Games.  

Part 1 has been out for some time, and Part 2 is coming to theatres late this year.  I read the books when all the kiddos were reading them a few years ago. 

They not literary classics, but diverting and well worth reading. And I recommend them to you, so that you can at least know what many bright young people are thinking about the world which we are creating for them.

And when you see or read about the frivolous excess and self-important obsessions of the incredibly out of touch ruling elite in The Capitol, and their perfect records of achievement in games in which they make the rules as they go, recall that telling phrase of Hannah Arendt's, the banality of evil.

They would be as gods, and so revel in violence and death which, unable to create life, is their greatest power and the means of their control.

And the winners will owe their allegiance to a faceless System. And if they use power and money to pervert justice, instead of bombs and bullets, so much the better for its efficient use of resources.