Here Is Why the Fed Cannot Simply Continue to Inflate Its Way Out of Every Financial Crisis That It Creates

The return on each new dollar of US debt is plummeting to new lows according to figures from the Federal Reserve.

The chart below is from the essay, Not Just Another Greek Tragedy by Cornerstone.

I have been watching this chart for the past ten years, as part of the dynamic of the sustainability of the bond and the dollar as the limiting factor on the Fed's ability to expand the money supply.

The ability to expand debt is contingent on the ability to service debt. If the cost of the debt rises over the net income of the country's capital investment, or even gets close to it, the currency issuing entity is trapped in a debt spiral to default without a radical reform.

In other words, if each new dollar of debt costs ten percent in interest, largely paid to external entities, and it generates less than ten cents in domestic product, it is a difficult task to grow your way out of that debt without a default or dramatic restructuring.

So we are not quite there yet. But we are getting rather close on an historic basis. Without the implicit subsidy of the dollar as the world's reserve currency it would be much closer.

As it is now, this chart indicates that stagflation at least, rather than a hyperinflation, is in the cards for the US. But the trend is not promising, and the lack of meaningful reform is devastating.

A 'soft default' through inflation is the choice of those countries that have the latitude to inflate their currencies. Greece, being part of the European Monetary Union, did not. The US is not so constrained, especially since it owns the world's reserve currency.

The economy is out of balance, heavily weighted to a service sector, especially the financial sector which creates no new wealth, but merely transforms and transfers it. With stagnation in the median wage, and an historic imbalance in income distribution skewed to the top few percent, with the banks levying de facto taxation and inefficiency on the economy as a function of that income transfer, there should be little wonder that the growth of real GDP is sluggish in relation to new debt.

Or as Joe Klein so colorfully phrased it, the elite have been strip-mining the middle class in America for the past thirty years.

Along with the 'efficient market hypothesis,' trickle-down economics is also a fallacy. This is why the stimulus program being conducted by the Federal Reserve, in an egregious expansion of its authority to conduct monetary policy, in subsidies and transfer payments to Wall Street is not working to stimulate the real economy. It merely inflates the bonuses of the few, and extends the unsustainable.

So obviously one might say, "The Banks must be restrained, and the financial system reform, and the economy brought back into balance, before there can be any sustained recovery.

The Net Asset Value of Certain Precious Metal Funds and Trusts

The Central Fund of Canada is selling 23,600,000 units from their shelf offering at 14.85.

The proceeds will be used to buy additional gold and silver bullion. This action tends to dampen the premium. The calculations will be updated when the transactions are completed and announced on their website. Closing is expected to occur on or about May 18, 2010.



Note: As a reminder, The Cafe is long gold and silver, and has been since 2001. All that varies is the form and the degree with occasional hedging.

Silver S Q U _ _ Z _ : Would You Like to Buy a Vowel?

"Whoever commits a fraud is guilty not only of the particular injury to him who he deceives, but of the diminution
of that confidence which constitutes not only the ease but the existence of society."

Dr. Samuel Johnson

Another vertical move in silver from the New York open, as the bullion bears who are heavily short silver attempt to cover their paper shorts, which is a trick considering how tight the physical market is, and how vulnerable they are to discovery now that their attempt to suppress the price is falling apart.

It is like watching the Hunt Brothers silver gambit in reverse. As you might suspect, this is not the kind of action one sees in healthy markets. These volatile price swings are unnerving to most investors, and to the industries who rely on the markets to set prices for their planning in the real economy.

If you like your markets opaque, imbalanced, and dangerous, the NYMEX is your Bartertown.

If this turns into a serious short panic the price of silver could reach its all time high. Markets that are allowed to become this out of sync with legitimate price discovery are inefficient and disruptive to the real economy.

But now we will see if the bullion banks who have sowed the wind, reap the whirlwind.

But for now, the Administration is failing to reform the markets, as seen by the SEC's latest attempt to deal with a sudden 1,000 point drop in the Dow. It is almost funny to hear the Wall Street squeaktoys explaining that one away on bubblevision.

The Banks must be restrained, the financial system reformed, the economy brought back into balance, before there can be any sustained recovery.

Trading in Hubris: Pride, Overreach, and the Inevitable Blowback and Consequences

"We have always known that heedless self-interest was bad morals; we know now that it is bad economics. Out of the collapse of a prosperity whose builders boasted their practicality has come the conviction that in the long run economic morality pays...

We are beginning to abandon our tolerance of the abuse of power by those who betray for profit the elementary decencies of life. In this process evil things formerly accepted will not be so easily condoned..."

Franklin D Roosevelt, Second Inaugural Address, January 1937

The hubris associated with the trading crowd is peaking, and heading for a fall that could be a terrific surprise. It seems to be reaching a top, trading now in a kind of triumphant euphoria after the European capitulation and the recent equity market volatility.

I had a conversation this morning with a trader that I have known from the 1990's, which is a lifetime in this business. I have to admit that he is successful, more so than any of the popular retail advisory services you might follow such as Elliott Wave, for example, which he views with contempt, a useful distraction for the little guy, the same way that casino operators view most gambling systems except counting cards. He is a bit of an insider, and knows the markets internals and what makes them tick. I remember a time when some of the more obvious market shenanigans used to bother his conscience a little. But he is well beyond that point now.

He likes to pick my brain on some topics that he understands much less, such as the economic relationships and monetary developments, and sometimes weaves them into his commentary, always without attribution. He has been a dollar bull forever, and his worst trading is in the metals. He likes to short gold and silver on principle, and always seems to lose because he rarely honors his first stop loss, which is a shocking lapse in trading discipline. That stubbornness is probably what kept him from making top management.

His tone was ebullient. The Street has won, it owns the markets. They can take it up, and take it down, and make money on both sides, any side, of any market move. I have to admit that in the last quarter his trading results are impeccable.

We diverged into the dollar, which he typically views as unbeatable, with the US dominating the international financial system forever. He likes to ask questions about formal economic terms and relationships, or monetary systems and policy. He relies on others for that knowledge, although he almost never admits it and will argue from pure emotion if necessary, until he gets what he wants to know.

I am not a social worker. Its a quid pro quo. He gives me insights into the trading world, and the pits where he dwells. What they are thinking, and what is going around in his crowd, with which I rarely associate these days.

He thinks the euro is done, and the dollar will remain the sole currency. His attitude is, "What will replace it?" He cannot even imagine anything different than what we have today. But interestingly enough he does not believe that the US government is running things. "Things are being run by a new world order, and have been for some time." He said that so matter of factly that it made me catch my breath.

And he's good with that. Does not bother him in the least little bit, as long as he is making money. And that is where our conversation started to go downhill, quickly. I was in no mood to hear his usual perspective on the future and the triumph of the willful.

If there is a new Mussolini in the US to maintain order, he's good with that. If they start putting people on trains to resettlement camps in the southwest, he's ok. If there are starving people in the streets, it doesn't bother him because he lives in a gated community. If the middle class gets crushed by a new market crash that is ok. He made a killing shorting the Crash of 1987, and was able to enjoy the resort where he spent the winter even more than ever because they were so few people there.

I would like to say he is an outlier, a one of a kind. But he is not. He is typical. He is driven purely and almost solely by personal greed, and he makes no bones about it. Life is a war, and he wants to conquer you.

But he is not a monster. If you met him you might like him. He's affable, conservative, a decent conversationalist, and personally well kept and engaging. But he is missing something, like the derivative of a human being. If you talk about the 'bad guys' he doesn't identify with them. He thinks he is 'us.' It's never occurred to him that he is the problem. Because his value system is utterly one dimensional and egocentric. In some ways he is the most intelligent twelve year old I have ever met. But I am sure he considers me a fool and an idealist. And I might agree. But it is not so much who you are, but why. Who or what do you serve?

He is a microcosm of Wall Street, and the prevailing attitudes in the Big Banks in particular. If you wish to form public policy, if you want to create a stable system, one based on human values, never ask a trader or a trading company for advice. They are incapable of framing the question in a way that will provide you a workable answer. What is good is whatever works for them in the most narrow definition of the terms. They think they are being altruistic when they take a little bit of a haircut on terms that are already well into the realm of usury.

The problem is the ability of Wall Street to buy power and influence among the regulators and politicians, and bring their unbalanced world view to bear so heavily on the formation of public policy and governance.

That is not to say that they are necessarily bad people. They are what they are. It's just that they need to be restrained by regulation, and certainly should not be in the driver's seat of anything outside of their own accounts, and those with external supervision and transparency. But certainly not in control of things in general, of running the system by proxy, which is where they are today. Or at least where they think they are.

Goldman trades big, but more probes loom
By Steve Eder
May 10, 2010, 11:55 am EDT

NEW YORK (Reuters) - Goldman Sachs Group Inc on Monday showed how its trading operations are stronger than ever, but warned that more litigation and investigations loom.

Goldman, in a quarterly regulatory filing, said it made it through the first quarter without a single day of trading losses, the first time it had accomplished such a feat. The firm reported trading revenue of more than $100 million on 35 days in the quarter.

In the same filing, Goldman said it still faces a number of probes and reviews, which could be damaging.

It said it anticipates additional shareholder actions and other investigations related to its offerings of collateralized debt obligations, which are at the heart of charges against the firm filed by the Securities and Exchange Commission.

Goldman shares have tumbled more than 20 percent since the SEC accused the bank on April 16 of failing to tell investors who bought risky debt tied to subprime mortgages that hedge fund manager John Paulson helped select the underlying portfolio for the security and was shorting the deal.

Goldman shares were up 2.1 percent to $145.99 in morning trading but lagged behind others in the Amex Securities Broker/Dealer Index. Equities were rallying after tumbling last week.

Goldman, in its filing, said the SEC case "could result in collateral consequences to us that may materially adversely affect the manner in which we conduct our businesses." It said certain outcomes could impact the firm's ability to act as broker-dealer or provide certain advisory and other services to U.S.-registered mutual funds.

The Wall Street Journal reported last week that Goldman had begun settlement talks with the SEC.

Some analysts and investors have speculated that scrutiny surrounding Goldman would lead to the resignation of Chief Executive Lloyd Blankfein. But at the bank's annual shareholder meeting on Friday, Blankfein said he had no plans to resign.

More Investigations

For the past year, Goldman has faced a backlash over its quick rebound from the financial crisis, while benefiting from various government bailout programs, and its bonus pool, which topped $16 billion last year.

Goldman, which reported record profit in 2009, has been trying to live down a Rolling Stone article last year that labeled the firm a "giant vampire squid wrapped around the face of humanity"

Its blockbuster trading performance in the first quarter, coupled with the SEC charges, could heighten the public furor surrounding the firm, which has been cast as profiting from the subprime mortgage meltdown.

Goldman, criticized for not disclosing it had received notice last year of the likelihood of SEC charges, discussed several investigations on Monday, including probes by the Financial Industry Regulatory Authority and the UK's Financial Services Authority related to CDO offerings and related matters.

The bank said it is cooperating with a number of investigations and reviews into its sales and trading operations related to corporate and government securities and other financial products.

The firm also said it is facing investigations and reviews relating to the 2008 financial crisis, including the establishment and unwinding of credit default swaps with American International Group Inc. Goldman has been criticized for benefiting from the government rescue of AIG.

Inquiries into the financial crisis are also looking at Goldman's transactions with Bear Stearns and Lehman Brothers.

Goldman also disclosed that it is subject to inquiries related to its transactions with the government of Greece, including financing and swap transactions.