Neil Barofsky On the Economy

I think there is a general recognition that the economic and financial systems are broken, no matter what words one wishes to use to describe them.

A credibility trap impedes honest discussion of what happened and what is wrong. The corrupt bargain between the politicians and the monied interests casts a fog over any investigations and the rule of law.

Reform efforts like The Tea Party have been quickly turned by the corporate money powers into platforms for further economic repression of the weak. People are easily led during times of high emotion, no matter how superior they may think themselves to be. Even a cultured, educated people are capable of monstrous acts of madness.

So it is a tough situation, when no one loves the truth, and when appeals to hate and greed find such a ready footing amongst a vocal minority. Sounds familiar to those who read history.

Power structures that have outlived their time remain in control through force and fraud. And as the fraud deteriorates, the force increases.

I found it interesting that Barofsky thinks that the impulse to reform might require another financial crisis to make it happen. I happen to think that there will be another crisis and that it will be pivotal. Which way it goes depends on who grabs the reins of power and who can hold them the longest.

"Barofsky served the watchdog role for the Troubled Asset Relief Fund for years and knows a thing or two about how money and politics are paired in Washington. Now with the current state of the country still causing concern even after his tenure with TARP, Barofsky made little effort to paint a pretty picture to the readers of Gawker.com when offering his input.

In a question-and-answer session hosted on the website this week, one commenter didn’t hold back by asking Barofsky for confirmation on America’s current condition.

So we're just totally f*cked, right?” a user with the online handle grebeck asked. “As citizens, like no-way-out f*cked?”

Barofsky eventually responded to the inquiry with a bit of optimism, but not before confirming that fear with a simple, two-word statement.

“Pretty f*cked,” Barofsky wrote.

“But there is a way-out,” he added. “We need to convince those seeking or trying to retain power that they will not get our votes unless and until they commit to meaningful change of a financial system.

Might not work until we are in the grips of another crisis, but worth trying until then.”

RT, Top Obama Watchdog: We're Pretty F*cked

The problem is that it does not matter if you vote for them or not, if they control who makes it on the ballot.  This is why some people have concluded that working within the system is death by a thousand cuts, and the only recourse at this point is alternative movements and peaceful demonstrations such as the country saw in the civil rights movement.

And these movements should take care in who offers to fund and lead them, keeping the Tea Party in mind as to how quickly reform movements can be co-opted by those with money, slick public relations skills, and ulterior motives.

"That humanity and sincerity which dispose men to resist injustice and tyranny render them unfit to cope with the cunning and power of those who are opposed to them. The friends of liberty trust to the professions of others because they are themselves sincere, and endeavour to secure the public good with the least possible hurt to its enemies, who have no regard to anything but their own unprincipled ends, and stick at nothing to accomplish them."

William Hazlitt

Marshall Auerback: Central Banks Will Need to Recover Their Gold

Although I have heard this line of reasoning before, it was interesting to see it coming from the economist Marshall Auerback.

There is not much doubt in my mind that the markets are being 'managed' here. By whom, for what reasons, and for how long is another question. But the trades and the tape are telling their tale.

I am wondering if this is a new phase of the Fed's interference in the markets in lieu of genuine economic reform. They have used indirect means to pump equities as a means of wealth transmission before. This was a favorite ploy of Robert Rubin when he was Treasury Secretary.

It would not surprise me if the gold price was being held around 1600 in order to give the banks an opportunity to redeem their leased gold IOU's to avoid embarrassment before things get 'messy' in Europe. The people in Germany, Italy, Spain, England, and Portugal will be angry enough, and to find out that their irresponsible banks had sold off their gold to their cronies in the bullion banks on the cheap might be a bit much. As for the US, that is a murky situation indeed.

I tend to view this as a long term trend. So whether it comes to light next week, next month, or next year is of less consequence than the continual leaking of information that confirms the great changes that are occurring.

If one is looking for quick hot money there are plenty of places and ways to chase that rainbow. And plenty of carnival barkers and tricksters to tell you how easy it is to do it.

Get Ready for the Gold Rebound Before It Is Too Late: Marshall Auerback
by Brian Sylvester of The Gold Report
August 8, 2012

The Gold Report: Marshall, in a July 12, 2012, post on the Pinetree website, you suggest that some central banks may have forward-sold their gold against their initial positions, thereby eliminating them altogether. Can you tell us more?

Marshall Auerback: I have seen these central banks in action and have met with people from several of them. They would contend it was their obligation to maximize the yield on any of the assets they had in their reserves, including gold.

Back when gold was in the low $300s/ounce (oz), the Bundesbank considered gold nuclear waste from the old gold-standard era. There are some suggestions, based on Roger Lowenstein's work, that the Bank of Italy lent out some of its gold to Long Term Capital Management as a funding source. The point is that these banks have been a major source of flows into the market. These flows have had the same impact as de facto sales, in that they make available gold to the forward market and help fill the gap between supply and demand.

This is significant that the Bank for International Settlements has talked about reclassifying gold for commercial banks from a Tier 3 to a Tier 1 asset, which effectively means that gold will have 100% weighting, as opposed to 50%. This reflects a change in how the official sector views gold.

The second phenomenon is what has been happening in the Eurozone. A fiat currency is vaporizing before our eyes. A number of central banks hold a substantial amount of euros in their foreign exchange reserves that may be worth nothing. Some central banks may have gold holdings, but not as much as they claim, because of forward sales. There is most likely a structural short in the market from the central banks.

A decade ago, the mining companies would have been selling forward production, and the private sector would have had the structural short position. Today, nobody is selling forward gold because companies are much more optimistic about the price, and nobody wants to borrow it right now. As usual, the central banks are on the wrong side of the trade.

TGR: Are you willing to speculate about which central banks are shorting gold?

MA: From what I have heard, it would not surprise me if the International Monetary Fund and the Bank of Italy have done it. The Bank of Spain and the Bank of Portugal have sold a lot of their gold and may be lending the rest; also the Bundesbank.

A lot of these sales took place many years ago when the price of gold was $500–1,000/oz. My point is that the actual holdings these banks retain are much smaller than what appears on their balance sheets. Of course, they would want to get that gold back to spare the embarrassment if the euro blows up. This is why I have suggested that even if there is one more selloff in gold, the declines will be cushioned because the central banks will be bidding to buy back what they sold forward.

TGR: Could this information create a spike in the gold price?

MA: Many thoughtful people would see the demise of the euro as very bullish for gold, along with the possibility of higher inflation in China and all of the qualitative easing introduced by the Federal Reserve lately. Yet, gold has gone nowhere.

If one measures the position of traders reports on the Comex and then factor in that the Over the Counter market (OTC) is about 5–10 times the size, the net long position of speculative interest in gold is huge. That said, net positions have been reduced substantially in the past several months—several hundred tonnes would be my guess—and yet the price hasn't declined that much, which suggests that there is a bid in the market. The official sector, perhaps?

I would say there could be another 400–500 tons liquidated, which would easily be absorbed by the central banks. Ultimately, this slow, ticking time bomb will resolve itself with a much higher gold price.

Source: Auerback at The Gold Report

Gold Daily and Silver Weekly Charts - Cap and Coil, Cap and Coil

The Chris Powell interview which I posted the other day is quite good, and I suggest you watch it if you have not done so already.

Someone is leaning all over the precious metals market. It is hard to tell who and why and when it might stop, but history suggests that if these fellows lose control of it, the result could be impressive.

That might make for a fairly straightforward trading strategy, except that Europe is tilting on a knife's edge of insolvency, and that induces quite a bit of event risk in the cash markets.

The real economy is faltering, the international money exchange system is broken, the financial system is crooked, and the politicians are in the grip of the monied interests and a nasty credibility trap.

Other than that, everything is fine.

This is 'the phony war' phase of the ongoing currency war. I suspect we might see some serious fireworks in September-October for a number of reasons that I do not care to go into at this time.

SP 500 and NDX Futures Daily Charts - More Low Volume Flim Flam

I do not wish to sound like a broken record, but the markets are clearly marking time until Europe falters, and then they hope the central banks step in with loads of newly printed money which can be used to bail out the bondholders, and which the financiers can channel into a fresh round of speculative excess.

So for now its summertime, and the living is easy.