US Dollar Index Very Long Term Chart - A Rake's Progress

Here is an end of year update on the very long term US dollar chart, la douleur du monde.

As a reminder, this is a chart based on the DX dollar index.

That index is woefully out of date with the progress of the world economy and the currency wars with their competitive devaluations and rising currencies of the developing nations.

The DX Index is far too heavily weighted to Europe and Japan, and does not include any of the BRICs.

What it has to its merit is a history of pricing points, that were more meaningful in the past.

A Rake's Progress is a series of eight paintings by William Hogarth that show the decline and fall of Tom Rakewell, the spendthrift son and heir of a rich merchant, who comes to London, wastes all his money on luxurious living, prostitution and gambling, and as a consequence is imprisoned in the Fleet Prison and ultimately Bethlem Hospital, or Bedlam.

Below is painting number six, in which young Tom begs for help from the almighty after a losing night of gambling.

One of my favorite pied-à-terres in London for short layovers many years ago was the Hogarth Hotel off Earl's Court Station on the Piccadilly Line, a serviceable route to and from Heathrow. The area was at one time called Aussie Alley because of the tendency of Australians to cluster there for some reason.

For longer term stays there was a favorite hotel in Mayfair, which was closer to the book stores and my bank, and a small residence in Hampstead Heath which was convenient to almost nothing, but pleasant in the summer. This was my favorite time of the year in London for long walks, the theatre of course, and Christmas shopping in Knightsbridge.

As Samuel Johnson observed, "You find no man, at all intellectual, who is willing to leave London. No, Sir, when a man is tired of London, he is tired of life; for there is in London all that life can afford." And I think the emphasis is well-placed on 'afford.' New York is extravagant, Paris is comfortable, Rome is expansive, but London is civilized.

This is not to be confused with The City, of course, which is a bastion of vipers and thieves. lol.

Chris Hedges At The Sanctuary for Independent Media in Troy, NY

Overall this is one of Hedges' better presentations. I had not seen it in its entirety before and was pleasantly surprised.

We are going to learn quite a bit about America over the next eighteen months. This talk gives us a framework in which to place certain events.

Gold Daily And Silver Weekly Charts - FOMC and 12-12-12

The Fed did the completely expected today, pledging to continue to expand its balance sheet in buying sovereign and mortgage debt at the pace of $85 billion per month until unemployment drops below 6.5% and/or inflation rises above 2.5%.

Considering that both measures are tacitly rigged and phony, that pretty much means that Benny will print until the exhaustion and collapse of the dollar, or until it suits their interests not to do it. 

The only surprise in Benjy's press conference was that he grew up in rural South Carolina and goes back for visits. I didn't see that one coming.

The money shot today was when the male spokesmodel on Bloomberg said 'and gold is up only five dollars after that Fed announcement.' All that capping just to try and make the impression that QE until hell freezes over isn't inflationary? I hope it was worth it.

Stocks pulled back from the necklines on their inverse head and shoulders, and gold and silver rallied back, but the pop higher was pale in context because of the pounding the metals had taken for the past week. There were no big drops, but lots of cheap shots and quick hits.   

So what next. It's all fiscal cliff now, all the time, until the end of the year. Or the real Mayan calendar end date, which is not 12-12-12 like so many think. It is 21 December 2012, which is also the last date by which legislation can be submitted to the US Congress for consideration this year.  So if you are planning on the end the world, its time to RSVP.

I really cannot say what these fiscal cliff jokers are going to do, but I do know that Obama has the whip hand, even if it was ten years in the making, and after the previous twenty times that the Republicans used and abused his good will gestures in negotiating against himself, he is likely to let it ride.

The cliff is phony anyway, although I am sure it will be used as a looting opportunity on Wall Street.

Once the cliff passes, 70% of the deficit evaporates.   Horrors!  And they have plenty of time to tweak it in the new Congress so the effects are very unlikely to be lasting.

I am almost positive the US is heading into a recession next year anyway, the policy decisions are so cockeyed against the median wage earner and consumer.  They might try and hide it by throwing money at it, and there lies stagflation, even if they hide the inflationary part.

El Cliffo Fiscal gives the Republicans political cover, because now the tax cuts expire and they cannot be blamed for raising taxes. So Grover and his bully boys cannot be madder than usual that they are not warlords in Somalia rather than citizens in a Republic. And then the Republicans can cut a deal and lower taxes somewhat and look like heroes.

I don't have a lot of confidence (lot = greater than zero) in Obama and the Dems making a decent deal for the American people.   The Republicans are whores for the monied interests and are as bad or worse.  I think it was Gore Vidal who said that the Dems and GOP are just two different wings of the Big Money Party, and that sounds about right.

So let's see what happens.

In the short term, the short side of a hedged stock/bullion pair seems like the thing to do.

SP 500 and NDX Futures Daily Charts

The FOMC did the expected today, and the market yawned.

Its all fiscal cliff on the informercial channels now until year end.

Federal Reserve Adjusted Monetary Base Watch - What The Financial System Needs Is More Power

Let's see what the new QE does to the Fed's Balance Sheet growth over time.

Although the 'spike' in the post financial collapse recession skews the percentage scale, the growth in the monetary base was fairly strong during the housing bubble expansion post-911.

That third chart might be labeled 'a Decade of Policy Errors.'

There are some who will observe that the third chart shows that Modern Monetary Theory would be a wonderful idea because it takes the monetary policy levers away from the evil Federal Reserve Bank (and the often dodgy sovereign debt markets).

Let us consider what a blessing it would be to put that much discretionary, and apparently almost unrestrained, power to create money, manipulate market prices, and transfer wealth in the hands of those wise and selfless paragons of civic virtue, the professional politicians in the Congress, the Treasury, and the Administration, so they can exploit the monetary power until exhaustion or collapse.

This is not to say that the Fed will not also achieve that end. It does seem to be the historical trend for fiat money. But it very probably is a matter of degree and duration.

The financial system is not broken, distorted, and corrupt. It just needs more power. So let's rewire it...

Fed Statement: QE and Exactly As Expected

The Fed will be expanding its Balance Sheet at $45 Billion per month in what seem to be non-sterilized purchases of government obligations, in addition to their existing program of purchasing $40 Billion in mortgage securities each month.

This is a 'save the banks' program that will have no serious effect on the real economy.  And if austerity is enacted in order to support this subsidy to finance, the effect on the real economy will be devastating.

So one could say that this is QE without a forseeable end, except perhaps in meaningful reform or a de facto default, whichever comes first. 

Significantly there is no purchasing of non-traditional instruments such as equities or more private, non-bank held debt.

As for the policy, there is no real change, just an affirmation of what they are currently doing.

It appears that the slamming of gold and silver into the announcement was a bit unnecessary, excepting of course for the usual private profiteering motives of insiders who are infesting the financial system and draining it of its vitality and ability to enable the effects of monetary policy.

It is like warlords seizing the Red Cross supplies before they can reach the people.  Does that seem too harsh?  I think it is a rather apt comparison.

Press Release
Federal Reserve Statement
Release Date: December 12, 2012

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. 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 remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant 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. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially 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, in January, will resume 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. The Committee views these thresholds as consistent with its earlier date-based guidance. 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; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

Modern Monetary Theory And Its Toolbox

I think the essay excerpted at the bottom is a 'must read.'  If you do not have time for this intro, please read it. 

The shallow cynic will glibly say that what Modern Monetsry Theory describes is what we already have, so what is the difference. Let us just have more of it, and cut out the middlemen.  But that is not really the case. You have to see such a system of pervasive official value setting and willfulness close up to see the implications of its mindset and its full capabilities.

On the surface Modern Monetary Theory can seem to be an attractive proposition.    And it troubles me that some people whom I like and even admire seem to be favorable to it.   After a great deal of thought it appears to be the situation in which the cure is as bad as the disease, with reformers driven to pick up the tools of desperation and what looks like a quick fix.

The key objection one would naturally raise in considering Modern Monetary Theory is the protection of the value of the currency.  Domestically the use of official force is an obvious if unfortunate reach.  The real issue of acceptance of the currency at value comes down particularly in foreign trade where one cannot so easily enforce draconian rules designed to promote the value of the currency to some official prescription.

A short term solution is to maintain and expand your sphere of command and control until it overextends, fails, and collapses.   We have seen how this worked out in the former Soviet Union.

Foreign holders have the 'right of first refusal' on debt and currency. It is almost a tautology to say that most serious instance of inflation, including hyperinflation, start outside that country.

Often people are attracted to the principles of Modern Monetary Theory because it sounds 'ethical' and fair. Why pay interest on debt to evil bankers when you can merely print your own money? Never mind that most debt is held by private people as savings vehicles, in theory at least. The current balance of trade problems and surpluses held by some foreign countries are policy aberrations. Free trade is a canard that suits multinational interests, but that is another story.

As I have said before, I do not intend to justify the current financial system which is distorted and corrupt. No system is perfect and self-regulating, but some are more prone to corruption than others.

I do wish to point out that any currency system must have some balance, some limiting factor, that is difficult for people to circumvent with respect to the expansion of the currency. A commodity standard like gold is one, since gold cannot be created. A debt based central banking approach is another, because the marketplace has some immediate ability to react to expansionary policies.

A concentration of power in few hands leads invariably to corruption and abuses.

But rather than belabor this, here is an excerpt from a recent essay from 'New Economic Perspectives' on Modern Monetary Theory.  There is no need to debate this when one can merely peel back the fog of supposition and let it speak in its own words beyond the surface gloss.

The management mechanisms in the MMT toolbox are central economic planning to a far greater degree than we currently see in most developed nations, government allocation of resources, distribution of income at will, official propaganda (and presumably censorship) since the lie will tolerate none other, and foreign currency controls.

There is a juicy worm on the end of hook, but there is a hook in there nonetheless.  I have read and listened to most of their spiels, to the extent that one can work their way past the browbeating and obfuscation that true believers like to deliver to doubters.  I do not wish to be 'mean' but to me it seems to be an old fairy tale fraud in a new wrapper. 

An Alternative Meme for Money, Part 6: Alternative Framing on Inflation
By L. Randall Wray

As we have discussed, sovereign government cannot run out of the keystrokes it uses to mark-up balance sheets as it spends...Obviously, government cannot run out of these. Government can “afford” to buy what’s for sale in its own currency.

The question is not about affordability but rather concerns effects on the value of the currency and impacts on the pursuit of private interest.

a. If something is in scarce supply, more purchases of it by either government or private buyers might push up the price. A government purchase of something that is scarce can “crowd out” a private purchase. Government purchases need to be, and can be, planned to avoid undesired crowding out and price pressures.

b. ...government has at its disposal a number of options to reduce price pressure, including patriotic propaganda and rationing. It also has the big gun: taxes. An excise tax raises the cost to private buyers; an income tax reduces disposable income to free up production for the public purpose.

We never need rich folks’ money in order to provide for the poor. We can keystroke the bank accounts of the poor so that they won’t be poor. We increase taxes on the rich only when their spending threatens our currency with inflation. If there’s no inflation danger, there is no point in taxing the rich before keystroking the poor.

The rich also are much more likely to endanger the currency’s value by pulling out of the domestic currency and running to safe havens at the first sign of inflation... We need progressive taxes and inheritance taxes to protect our currency from antisocial behavior by the rich.

Most important: the goal of taxing the rich has nothing to do with raising government revenue. Taxes are used to keep the currency strong and to punish sin. An ideal sin tax raises no revenue because it eliminates sin. While we cannot achieve that ideal, we can make sin less enjoyable. It is fitting that those who already enjoy all the benefits of life at the top ought to suffer more when they are sinful...

To conclude:

1. When inflation threatens, in some circumstances it makes sense to raise taxes. Since the rich pose a greater inflation threat, put the taxes on them. Cash registers don’t discriminate, so tax those with greater purchasing power.

2. There are additional measures that can be taken when inflation pressures arise; depending on circumstances, they are probably more effective: rationing, targeted wage and price controls, patriotic saving.

3. At full employment it makes sense to tax the rich while providing income to the poor. At less than full employment, this is not necessary.

4. Government spending and taxing need not be closely linked; however, as the economy nears full employment taxes need to be raised if there are strong public purpose interests in continuing to increase government spending. The goal is not to increase government revenue, but to reduce competition for relatively scarce resources in order to direct them to the public interest.

5. Not only does the high income and thus potential spending by the rich threaten domestic value of the currency, there is a danger that the rich will speculate against the currency. This provides an additional justification for removing excessive income from them through taxes, and perhaps also for taxing their speculation. Again, the goal here is not to raise government revenue, but rather to punish the sin of anti-social excess.

6. Explaining that government cannot run out of its own keystrokes (or other records of its IOUs) does not mean that one is promoting run-away government spending. Rather, it means that one must confront the inflation danger directly, ensuring that government spending and tax policy take account of inflation pressures.

Read the entire essay here.

Gold Daily and Silver Weekly Charts

The capping actions in gold and silver are heavy handed and obvious.

Benny must have something in mind for the FOMC on Wednesday.