Dow 10,000: A Celebration

Team coverage today on Bloomberg by the Money Honeys as the Dow Jones Industrial Average crossed 10,000 intra-day, led by J.P. Morgan, in a move that surely epitomizes the illusions of wealth granted by modern accounting practices.

Can you believe the NYSE had the nerve to prepare new Dow 10,000 hats and distribute them for today? The first time the Dow Industrials crossed 10,000 was in 1999. The last time it closed over 10,000 was in October of 2008, just before the most recent plunge of the collapsing credit bubble.

That does not speak well of equities for the "buy and hold" crowd, which has surely had a wild ride if they have indeed managed to hold on for the last ten years, and ex-dividends and fees and commissions and inflation and a plunging US dollar and soaring commodities are... even.

And all that was required to create this economic miracle was to repeal the Glass-Steagall safeguards created by Congress after the Great Depression, decimating the productive economy, amassing a mountain of debt that can never be repaid, restructuring the Dow Industrials every so often, most recently replacing such inconsequential names as General Motors and Citigroup, and of course the devastation of the US dollar and a general loss of reputation and credibility around the world for justice and liberty.

But look where we have been? But who do you think took us there? Al, Ben, Larry Summers, Robert Rubin, Sandy Weil, craven economists and the crony capitalists in corporate America and their enablers and dependents in Washington.

"At what point shall we expect the approach of danger? By what means shall we fortify against it? Shall we expect some transatlantic military giant, to step the Ocean, and crush us at a blow? Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth (our own excepted) in their military chest; with a Buonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years. At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide." Abraham Lincoln.

And to what benefit? So that a bunch of pathetic sociopaths can try and fill the hole in their hollow beings with trophy wives and trophy houses, empty titles and hair pieces, extravagant lifestyles with ridiculously overpriced cars and jewelry and ugly art, spoiled idiot children who hate and fear them as they hated and feared their own parents, and the illusion of love and power while making asses out of themselves as a few paid sycophants sing their praises, trodding over corpses on the road to hell.

Oh, bravo. Well done. Surely a light for the ages.

Wall Street Set to Pay a Record $140 Billion In Bonuses Topping 2007

While the world suffers, Wall Street pays itself record bonuses, larger even than the peak year of 2007, by taxing the productive economy to maintain an extravagant lifestyle. These bonuses are being paid with your money, and your children's money, if you hold US dollars.

And while this happens, the US credit card banks are raising interest rates to 20+% even on customers with excellent payment records and jobs which is certainly usury, and with an arrogant impunity. The insider trading scandals and tales of government graft yet to be told are so blatant and shocking that only a captive mainstream press keeps them from being investigated.

The rest of the world looks on in shock and amazement. What has gone wrong with America? What are they thinking? America has not only lost the high ground, it is sliding into a ditch.

While Americans are pacified by bread and circuses, the rest of the world looks at a painful reality show in the States, a country in a death spiral of corrupt leadership and public apathy. If it was Zimbabwe or Iceland there would still be sympathy for the people, but far less concern.

A deflationist friend was railing about the US slide into bankruptcy, and I could not help but ask, "What happens to the paper of a bankrupt company, or country?"

Where indeed will the dollar gain its long anticipated strength, its renaissance of value?

Or yes, from "less dollars" through debt destruction. Mutant monetarism gone mad, an argument worthy of Herr Goebbels. The dollar will rise in value by immersing itself in a pool of corruption, and by destroying its shareholders, those who hold their savings in it, while oligarchs loot the financial system. Unless the US can turn its trade balance positive overnight, while raising interest rates, and maintaining a growing domestic economy based on consumption, it is not going to happen. The US is running out of degrees of freedom.

Wall Street holds the US public and government hostage by threatening financial armageddon if they do not get what they wish. We would anticipate a similar threat to the global economy based on dollar debt at some point, asking for a global monetary regime controlled out of New York and London, with perhaps a few associates.

Nothing goes straight up or down. There will be more sucker rallies and bubbles, but the train is starting to come off the rails a little more with each wrenching turn of this cycle.

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

Finfacts Eire
Wall Street firms set to break new records in 2009 with pay rising to $140bn; Bailed-out insurance giant AIG paid “retention bonuses” to kitchen staff
By Finfacts Reporting Team
Oct 14, 2009 - 6:10:22 AM

Wall Street firms are set to break new records with employee pay set to rise to $140bn this year. Meanwhile, it has been reported that the bailed-out insurance giant AIG paid “retention bonuses” to kitchen staff earlier this year from a $168m pot, that was ostensibly designed to keep staff from leaving the government controlled firm.

Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did in the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal.

The Journal reports that total compensation and benefits at the publicly traded firms it analyzed, are on track to increase 20% from last year's $117bn -- and to top 2007's $130bn payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.

Average compensation per employee at investment bank Goldman Sachs, is set to reach about $743,000 this year, double last year's $364,000 and up 12% from about $622,000 in 2007, according to the Journal analysis...

How Much Gold Does the US Have In Its Reserves?

Looking around the web, and considering some recent questions regarding gold and SDRs on the Fed's and Treasury's balance sheets and reserve statements, I came across quite a bit more confusion and misinformation than one might have expected to find on what should be a fairly straightfoward question, ranging from completely incorrect but precise numbers to 'shitloads' at Yahoo!Answers.

So, I spent some time reading the relevant source documents, and have decided to publish this little fact sheet here, so that one might at least be able to find some of the basic facts about the US gold holdings on the books of the Treasury and the Fed in one place, with references.

There is also a little detail about the SDRs. It should be noted that because SDRs may be added to the Treasury's books, as in the recent allocation from the IMF, it does not mean necessarily that they are monetized by the Fed and placed on their own balance sheet.

Not getting into issues of where the gold is, what claims there may be on it, and what fineness it may actually be, according to the US Treasury:

The US currently holds 261,499,000 fine troy ounces in its reserves. US International Reserve Position, US Treasury

The gold is valued on the books at $42.2222 per fine troy ounce.

This represents a total value of $11,041,063,078.

This value appears on the Treasury's International Reserve Position US Treasury on Line 4.

Since there are 32150.7466 troy ounces in a tonne, the US Treasury is holding 8,133.528072 tonnes of fine gold.

Federal Reserve Gold Certificates

The Federal Reserve holds $11,037,000,000 in gold certificates as assets on its Balance Sheet as shown in their weekly H.41 report. The Fed has no physical gold of its own. According to my reading of the relevant law, the Fed is not able to place claims upon or issue those gold certificates to any other entity other than the 12 federal reserve banks.

With regard to the Fed's Gold Certificates here is some history by way of explanation:

Acting under this authority [the Emergency Banking Act of March 9, 1933], the secretary of the Treasury issued orders dated December 28, 1933, and January 15, 1934, the latter requiring all gold coin, gold bullion, and gold certificates to be delivered to the Treasurer of the United States on or before January 17, 1934.

A new type of gold certificate, series of 1934, in denominations of $100, $1,000, $10,000, and $100,000, was issued only to Federal Reserve banks against certain credits established with the Treasurer of the United States. These certificates are not paid out by Federal Reserve banks and do not appear in circulation. They bear on their face the wording: "This is to certify that there is on deposit in the Treasury of the United States of America dollars in gold, payable to bearer on demand as authorized by law."

Gold certificates, however, have not been printed since January, 1935. Under the Gold Reserve Act of January 30, 1934, all gold held by the Federal Reserve banks was transferred to the U.S. Treasury, in accordance with Presidential Proclamation of January 31, 1934, the former receiving the gold certificate credits on the books of the Treasury at the former statutory price for gold $20.67 per ounce.

Gold assets were valued at $35 per fine troy ounce, giving effect to the devaluation January 31, 1934, until May 8, 1972, when they were revalued at $38 pursuant to the Par Value Modification Act, P.L. 92-268, approved March 31, 1972. The increment amounted to $822 million.

Gold assets were subsequently revalued at $42.22 pursuant to the amendment of Section 2 of the Par Value Modification Act, P.L. 93-110, approved September 21, 1973. This increment amounted to $1,157 million. All of the U.S. Treasury's monetary gold stock valuation, including the preceding revaluation increments, has been monetized by the U.S. Treasury by the issuance to the Federal Reserve banks of $11,160,104,000 for their gold certificate account (total as of close of 1980). In addition, the U.S. Treasury monetized $2,518 million (as of close of 1980) of the U.S. special drawing rights by issuance to the Federal Reserve banks for their special drawing rights certificate account.

On the books of the Federal Reserve banks, neither the gold certificate account nor the special drawing rights certificate account plays any restrictive role in Federal Reserve banks' operations. With the U.S. losing monetary gold in recent years of balance-of-payments deficits, causing decline in gold certificates (credits), two restraints were eliminated: P.L. 89-3, March 3, 1965, eliminated the requirement contained in Section 16 of the Federal Reserve Act for the maintenance of reserves in gold certificates by Federal Reserve banks of not less than 25% against Federal Reserve bank deposit liabilities; and P.L. 90-269, March 18, 1968, eliminated the remaining provision in Section 16 of the Federal Reserve Act under which the Federal Reserve banks were required to maintain reserves in gold certificates of not less than 25% against Federal Reserve notes.

Gold certificates (credits) held by the individual 12 Federal Reserve banks, therefore, merely reflect the total of monetary gold held by the U.S. and also the individual Federal Reserve bank holdings of gold certificates (credits) to their credit on the books of the INTER-DISTRICT SETTLEMENT ACCOUNT. Nevertheless, both the gold certificate account and special drawing rights account at Federal Reserve banks were utilized as eligible assets to serve as part of the 100% collateral pledged with the Federal Reserve agent at each Federal Reserve bank for issues of Federal Reserve notes. (The Depository Institutions Deregulation And Monetary Control Act Of 1980 removed the collateral requirements for Federal Reserve notes held in the vaults of Federal Reserve banks.)

Encyclopedia of Banking & Finance (9th Edition) by Charles J Woelfel

Does any of this amount to a hill of beans? Perhaps, but probably not. At least the next time I need to look up some of these facts and history to explain or correct a question or misunderstanding, I will not have to look all around the web for it again, and wade through many links of incorrect misinformation and rubbish to find it.

This is in no way meant to imply that the Treasury actually possesses the gold it says it has, the fineness of the gold, and the nature of any claims that might be on that gold. This is not a trivial issue as the estimates of the fineness of the gold have shown that a meaningful portin of it may be 'coin melt' and not of deliverable quality unless it has been further refined. It is said that the Bank of England recently discovered that some of their own gold stocks were not suitable for a delivery to the London Bullion Market Association (LBMA) for example.

By the way, and just as a point of curiosity, I calculated that if the Fed wished to back its balance sheet with all the gold in the US Treasury, the amount today would be approximately $8,000 per troy ounce. Don't hold your breath. LOL

Some of this may become an issue IF the SDR does become the international reserve currency, and IF gold is added to the mix of its basket of currencies as some countries like China and Russia have requested.

And in a new Google search, How Much Gold Does the US Have In Its Reserves, this little blog pops right up on page one, so its 'mission accomplished.'

And in case you were wondering, here is a recent lineup of official gold reserves from the major countries around the world.

Consumer Credit Contracting at Record Levels

Total Consumer Credit Outstanding in the US is contracting at a year-over-rate of almost 5 percent, which is a record for the post 1960 economy.



The challenge facing Bernanke and the Obama economic team is how to get the US consumer spending again, if they cannot be paid a living wage, and if they can no longer be encouraged to borrow beyoned their means, by using their homes as a cash machine with variable interest rates, as they were encouraged to do by Fed Chairman Greenspan.

This is as much a public policy question as it is an economic question. Large segment of the population which are homeless and and jobless tend to be destabilizing to the community. The liquidationist school is not without its attraction to the let-them-eat-cake frame of mind, but from a societal perspective it is fraught with peril and unintended consequences.

For now the remedy being utilized by Bernanke and associates is to prop the financial system and allow the dollar to decline while artificially supporting the long bond. They may also be attempting to control certain indicators of monetary inflation such as gold and oil by using position limits exclusively on long positions and 'speculation.' while exempting the naked short selling. Similarly, pumping up equities provides a flowback into financial assets that helps to support the banks.

This is obviously no solution. The Fed is in maintenance mode, trying to coddle the banks through their ongoing crisis despite the recent appearances of vitality, which are an illusion.

The Obama Administration is not engaging in the systemic and financial reform that really is their responsibility. So what we have here is a bit of a mess with no clear way out at least to us, except to weaken the dollar, and perform their particular version of 'pray.'

I believe the colloquial American characterization of Team Obama's current policy might best be described as 'throwing shit at the wall and hoping something sticks.'



Yes, there is often a lag between credit contraction and the appearance of decline in the broader money stock. This may be a direct correlation with a lagged, or a colinearity resulting from the effects of the recession in the real economy on both, again with uneven impacts over time.

There can be no denying that the Fed is promoting money supply growth in ways never seen before in the US. Whether they can be successful is open to question. We think they will keep at it until they break something.

Wall Street has a gun to the head of the public, in the form of derivatives positions that are 'weapons of mass destruction.' For now it is a standoff. But there should be little doubt that this is artificial and unsustainable, and that something has got to give.

Stiglitz: The Banks Must Be Restrained, The Financial System Must Be Reformed

"We will have another armed robbery unless we prevent the banks, the banks that are too big to fail. We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.” Joe Stiglitz

If a Nobel Prize winnter in economics says the obvious, besides a few diligent bloggers, perhaps other economists will obtain 'air cover' in speaking about the economic and regulatory absurdity taking place today in the US and the UK. Winning the Nobel is even better than tenure.

Here is a video of his speech in Brussels, because this Bloomberg article leaves out some of the more 'pithy' remarks on the Wall Street bank bonuses, the errors efficient market theory, political and ideological capture, lies (his wording) told by central bankers including Alan Greenspan, unproductive "taxes" by banks on the real economy, 'criminal' management of beta, and the social costs of this financial crisis from Joe Stiglitz from the Brussels banking conference.

Stiglitz characterizes the reforms being put forward by the US Congress as completely wrong, and harmful. Watch the video, and compare what Joe Stiglitz is saying with the ponderous mendacity of Larry Summers, and you may better understand why Obama's policies are doomed to failure.

It does not take much imagine to see how things might be quite different if Joltin' Joe was the Chief Economic Advisor or Fed Chairman, rather than 'Last War' Larry or Zimbabwe Ben.

Again, here is a link to this 'must see' video which can be a bit slow to start because of Bloomberg's video platform.

Bloomberg
Stiglitz Says Banks Should Be Banned From CDS Trading
By Ben Moshinsky
October 12, 2009 06:28 EDT

Oct. 12 (Bloomberg) -- Large banks should be banned from trading derivatives including credit default swaps, said Joseph Stiglitz, the Nobel prize-winning economist.

The CDS positions held by the five largest banks posed “significant risk” to the financial system, Stiglitz said at a press conference in Brussels. Big banks should have extra restrictions placed on them, including a ban on derivative trading, because of the risk that they would need government money if they fail, he said in a speech today.

“We will have another armed robbery unless we prevent the banks, the banks that are too big to fail,” Stiglitz said. “We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.”

Derivative trading and excessive risk-taking are blamed for helping to spark the worst financial crisis since World War II. American International Group Inc., once the world’s largest insurer, needed about $180 billion of government money after its derivative trades faltered and pushed the company toward bankruptcy.

Financial markets should be subject to taxes that will discourage “dysfunctional” trading and help pay for the effects that the global crisis had on poorer nations, Stiglitz said last week.

U.S. and European regulators have pushed for tighter regulation of the $592 trillion over-the-counter derivatives market, amid concerns that it could create systemic failures in the financial system. Lawmakers have called for global rules covering derivatives to prevent financial institutions from exploiting jurisdictional differences in regulation.

Stricter Standards

Former German finance minister Hans Eichel said in an interview today that global regulation would ultimately be needed. The European Union should enforce tougher legislation, even if the U.K. is reluctant to adopt stricter standards, he said.

“The Eurozone is strong enough economically to go it alone,” Eichel said. European legislation could then become the blueprint for global rules, said Eichel.

Central Banks More Aggressively Reducing US Dollar Exposure In Their Reserve Portfolios

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

If The Independent and Robert Fisk can be dismissed as the tabloid fringe by the mainstream media and those desperately clinging to status quo, here is a piece on the diminishing dollar from the radical paparazzi known as Bloomberg news.

Currencies can have significant volatility even within long term trends, due to short squeezes and official intervention. Forex trading is for professionals only, as most amateurs become fooled by the leverage and the opacity of the market's positional dynamics, ie. they don't know who the patsy is at the table.

That being said, there is an interesting aspect to the currant position of the dollar as the long time, but fading,world's reserve currency known as The Prisoner's Dilemma.

In a situation such as this, the country which quietly sheds dollars first takes a lesser loss on their reserves than those who hold, but also risks punishment by the US and the G7 for deviating from the consensus of central banks and their financial engineers.

This is further complicated by the entanglement of some exporting countries in their own mercantilist support for large dollar surpluses. This requires a replacement for the dollar to be phased in slowly, and to gain support amongst non-US trading partners of the major exporting countries. The matter of the petrodollar is also an important aspect, but can probably wait until the move out of the dollar is well underway.

Is there anyone buying US dollar Agency Debt these days besides the Fed? It used to be a favorite among the Central Banks, but was dumped them in an amazingly short period of time once the perception of risk changed around the world. Almost overnight in Central Bank time.

As we pointed out several times previously, the SDR, which is a basket of currencies, is a logical replacement for the US dollar reserve. It is rebalanced in its composition every five years, and the next remix is going to occur in 2010.

If the equity market breaks and the US dollar carry trade reverses, the dollar may catch a sharp rally, which will bring the strong dollar crowd, especially deflationists, out of their funk and kicking their heels in "mission accomplished" mode. The celebration is most likely to be, once again, a kind of a 'false Spring' that merely serves to draw them deeper into losses, and ultimately over a cliff.

This sort of historic change always starts slowly, first a trickle, then a trend, but thereafter can quickly become a torrent.

Bloomberg
Dollar Reaches Breaking Point as Banks Shift Reserves
By Ye Xie and Anchalee Worrachate
October 12, 2009 00:40 EDT

Oct. 12 (Bloomberg) -- Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

Sliding Share

The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification.

America’s currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009 ended Sept. 30.

Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell to 75.77 last week, the lowest level since August 2008 and down from the high this year of 89.624 on March 4. The index, trading at 76.489 today, is within six points of its record low reached in March 2008.

Foreign companies and officials are starting to say their economies are getting hurt because of the dollar’s weakness...

Dollar’s Weighting

Developing countries have likely sold about $30 billion for euros, yen and other currencies each month since March, according to strategists at Bank of America-Merrill Lynch.

That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002.

“The diversification out of the dollar will accelerate,” said Fabrizio Fiorini, a money manager who helps oversee $12 billion at Aletti Gestielle SGR SpA in Milan. “People are buying the euro not because they want that currency, but because they want to get rid of the dollar. In the long run, the U.S. will not be the same powerful country that it once was.”

Central banks’ moves away from the dollar are a temporary trend that will reverse once the Fed starts raising interest rates from near zero, according to Christoph Kind, who helps manage $20 billion as head of asset allocation at Frankfurt Trust in Germany.

‘Flush’ With Dollars

“The world is currently flush with the U.S. dollar, which is available at no cost,” Kind said. “If there’s a turnaround in U.S. monetary policy, there will be a change of perception about the dollar as a reserve currency. The diversification has more to do with reduction of concentration risks rather than a dim view of the U.S. or its currency...”


Dollar Forecasts

The median estimate of more than 40 economists and strategists is for the dollar to end the year little changed at $1.47 per euro, and appreciate to 92 yen from 90.13 today.

Englander at London-based Barclays, the world’s third- largest foreign-exchange trader, predicts the U.S. currency will weaken 3.3 percent against the euro to $1.52 in three months. He advised in March, when the dollar peaked this year, to sell the currency. Standard Chartered, the most accurate dollar-euro forecaster in Bloomberg surveys for the six quarters that ended June 30, sees the greenback declining to $1.55 by year-end.

The dollar’s reduced share of new reserves is also a reflection of U.S. assets’ lagging performance as the country struggles to recover from the worst recession since World War II...

“The world is changing, and the dollar is losing its status,” said Aletti Gestielle’s Fiorini. “If you have a 5- year or 10-year view about the dollar, it should be for a weaker currency.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

Crash 0f 2007 and Retracement From the Top

The US Equity Market Decline from the October 2007 Top on a Percentage Basis with Fibonacci Retracements.



The SP 500 Decline from the October 2007 Top Deflated by Gold in $US, with Fibonacci Retracements from the Point of Secondary Breakdown.

The Speculative Bubble in Equities and the Case for Deflation, Stagflation and Implosion

As part of their program of 'quantitative easing' which is another name for currency devaluation through extraordinary expansion of the monetary base, the Fed has very obviously created an inflationary bubble in the US equity market.



Why has this happened? Because with a monetary expansion intended to help cure an credit bubble crisis that is not accompanied by significant financial market reform, systemic rebalancing, and government programs to cure and correct past abuses of the productive economy through financial engineering, the hot money given by the Fed and Treasury to the banking system will NOT flow into the real economy, but instead will seek high beta returns in financial assets.



Why lend to the real economy when one can achieve guaranteed returns from the Fed, and much greater returns in the speculative markets if one has the right 'connections?'



The monetary stimulus of the Fed and the Treasury to help the economy is similar to relief aid sent to a suffering Third World country. It is intercepted and seized by a despotic regime and allocated to its local warlords, with very little going to help the people.



Deflation

By far this presents the most compelling case for a deflationary episode. As the money that is created flows into financial assets, it is 'taxed' by Wall Street which takes a disproportionately large share in the form of fees and bonuses, and what are likely to be extra-legal trading profits.

If the monetary stimulus is subsequently dissipated as the asset bubble collapses, except that which remains in the hands of the few, it leaves the real economy in a relatively poorer condition to produce real savings and wealth than it had been before. This is because the outsized financial sector continues to sap the vitality from the productive economy, to drag it down, to drain it of needed attention and policy focus.

At the heart of it, quantitative easing that is not part of an overall program to reform, regulate, and renew the system to change and correct the elements that caused the crisis in the first place, is nothing more than a Ponzi scheme. The optimal time to reform the system was with the collapse of LTCM, and prior to the final repeal of Glass-Steagall, and the raging FIRE sector creating serial bubbles.

Stagflation

These injections of monetary stimulus to maintain a false equilibrium is in reality creating an increasingly unsustainable and unstable monetary disequilibrium within the productive economy. As the real economy contracts, the amount of money supply that the economy can sustain without triggering a monetary inflation decreases, and in a nonlinear manner. This is because the money multiplier does not 'work' the same in reverse, owing to the ability of private individuals and corporations to default on debt.

Ironically, with each iteration of this stimulus and seizure of wealth, the dollar becomes progressively weaker because there is a smaller productive economy to support it, even if there are less dollars, despite the nominal gains in GDP which are an accounting illusion. This has been further enabled by the dollar's status as reserve currency backed by nothing since 1971, which has created an enormous overhang of dollars in the hands of other nations.

One cannot have a sustained economy recovery in which the real median wage and domestic employment are stagnant or declining, and Personal Income is declining, as wealth is being increasingly concentrated in corporations and the upper 2% of the population.



This is why stagflation, rather than hyperinflation or a sustained monetary deflation with a stronger dollar, is most likely. There will be a mix of falling and rising prices, depending on the elasticity and source (imported content) of the products, with a wildly staggering dollar that could destabilize other parts of the world, and pernicious underemployment and growing civil unrest domestically.

Those who have taken a huge share of the last three bubbles would like to stop the bubble now, keep their gains, and return to a system of fiscal restraint with light taxation on their windfall of assets.



So why does this not just simply happen? Because the political risks become enormous. It is difficult to reduce a population of free men into debt slaves, without risking a significant reaction. Therefore, it seems most likely that the government and the Fed will try to 'muddle through' for the time being, and look for an exogenous event to break the stalemate.



The traditional solution has been a military conflict, which stifles dissent against the government while generating artificial demand sufficient to energize the productive economy. It is a means of exporting your social misery, official corruption, and fiscal irresponsibility to another, weaker people.

Implosion

One only has to look at the "German miracle" of the 1930's to see this progression from artificial stimulus, to domestic seizure of assets, to scapegoating and aggressive wars of acquisition, as described above. But this progress out of economic depression had made Hitler and Mussolini the darlings of Wall Street and the international financiers. Indeed, Time Magazine had even named Hitler their "Man of the Year" for this economic miracle, even though it was a fraudulent house of cards.



If the Fed continues to apply monetary stimulus and subsidy into this system, without a significant reform, the dollar will eventually "break" and the real economy will temporarily collapse. This will result in the mother of all stagflation, with a hyperinflationary edge to it, and a breakdown in the electoral process, the rise of demagogues, and soaring interest rates.

At this point the cure will not be a monetary stimulus, but more like a surgery to remove a life-threatening cancer, fraught with risk and a significant challenge to the continuing governance of the US not seen since the 1860's.

Conclusion

As you know, our own judgement on this is that we will go through a cycle of demand deflation, which we are in now, and then most likely a pernicious stagflation which may see some episodes that will be remniscent of the inflation of the 1970's. A persistent deflation with a stronger dollar, as well as hyperinflation, seem to be outliers that are dependent on exogenous factors.

If the world dumped its dollars tomorrow, we would see a US hyperinflation. If the Fed raised short term rates to 20 percent tomorrow under duress we would see a ture monetary deflation. As a reminder, in a purely fiat currency regime with an absence of external standards, the question of iflation and deflation is a policy decision. The limiting factor is the latitude with which that policy decision can be made.

The most probable path is a lingering death for the dollar over the next ten years, with a produtive economy that continues to stagger forward under the rule of the financial oligarchs.

See Money Supply: A Primer and Price Demand and Money Supply As They Relate to Inflation and Deflation. You might also take a look at Some Common Fallacies About Inflation and Deflation and Gold: Until the Banks Are Restrained and Balance Is Restored. And finally, if you intend to trade and invest in these markets, you really ought to take a look at A Priori Vs. Empirical Reasoning and Practical Decision-Making.

Reading for the Weekend

Surely, there is at this day a confederacy of evil, marshalling its hosts from all parts of the world, organizing itself, taking its measures, enclosing the Church of Christ as in a net, and preparing the way for a general apostasy from it...

Far be it from any of us to be of those simple ones, who are taken in that snare which is circling around us! Far be it from us to be seduced with the fair promises in which Satan is sure to hide his poison!

Do you think he is so unskillful in his craft, as to ask you openly and plainly to join him in his warfare against the Truth?

No; he offers you baits to tempt you. He promises you civil liberty; he promises you equality; he promises you trade and wealth; he promises you a remission of taxes; he promises you reform. He promises you illumination, he offers you knowledge, science, philosophy, enlargement of mind.

He scoffs at times gone by; he scoffs at every institution which reveres them. He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods.

Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."

John Henry Newman