What Is the Effective Limitation on the Fed's Ability to 'Print Money?'

"There is felt today very widely the inconsistency in this condition of political democracy and industrial absolutism. The people are beginning to doubt whether in the long run democracy and absolutism can coexist in the same community; beginning to doubt whether there is a justification for the great inequalities in the distribution of wealth, for the rapid creation of fortunes, more mysterious than the deeds of Aladdin’s lamp."

Louis D. Brandeis, Speech to Harvard Ethical Society, May 4, 1905

In a purely fiat monetary system the effective limitation on the Fed is the acceptance of the dollar and the bond at value in objective, non-coercive market transactions.

Since the value of a currency can be viewed as 'relative' to other currencies, if one ignores the values of other goods, there is some thought that a group devaluation of money can be accomplished if all the issuing entities devalue at the same time, so that the average person will not notice it.  As if.

When such frauds fail, then there is the result to force.  There are numerous examples of non-objective market transactions being used by failing monetary regimes, where they are guided by a central bank or directly by politicians.

Most recently in the case of satellites of the former Soviet Union,  there was an increasing divergence between an 'official exchange rate' versus a 'black market' exchange rate, even in Russia itself as the old rouble failed.  The bad money crowded out the good,  the good which became the new benchmark of value. 

The notion that a sovereign government issuing their own currency and debt cannot fail flies in the face of history, if not common sense.   The ability of the government to enforce an increasingly arbitrary valuation ultimately comes down to a measure of the oppressive power and reach of the regime.   Therefore the failures tend to begin at the edges, where arbitrary force does not reach as effectively.

This is not to say that the US is at that point. But to say we are not yet at that point is like the drunk who says he has not crashed his car into a brick wall yet.  It is to say that the idea that money can be created endlessly without engaging powerful forces of political and financial hazard is nonsense. It requires increasing amounts of official fraud, fear, and force to maintain, until the system ultimately collapses. I have seen this first hand, and have listed numerous examples of it on this site in prior posts.

One of the reasons that this current scheme of the Fed seems to be succeeding is that instead of increasing the overall money supply by distributing it freely 'out of helicopters' and stimulating aggregate demand to the objective of stimulating a recovery,  they are printing loads of money and then carefully handing it to their cronies in the Banks and other private multinational corporations.

And since they are dealing with the world's reserve currency, the base of their Ponzi scheme is very broad in its number of potential contributors.

The notion is that they will be forced to do productive and constructive things with it, and prosperity will 'trickle down.'  Rather, they prefer to use that money to further enrich themselves, to acquire productive assets, rentals, establish new frauds and rig more markets, and buy other companies to establish monopolies, and to put themselves increasingly above the law.

The resulting distortion does not yet result in a general inflation, but certainly facilitates and promotes a bubble in certain financial paper, and a massive wealth transfer from the public to the privileged in a corrupt and systematized plunder.

This system will not cohere.  But it has become very profitable for the status quo, if one ignores the consequences.  It results in a society turned upside down, a bizarro world where nothing makes sense.

Wars have been fought to sustain such looting, and to distract the people from their misery.  It always ends badly, in social disruption and worse.

C. S. Lewis On Kindness and Civility at the Table (And Online)

"We hear a great deal about the rudeness of the rising generation. I am an oldster myself and might be expected to take the oldsters' side, but in fact I have been far more impressed by the bad manners of parents to children than by those of children to parents.

Who has not been the embarrassed guest at family meals where the father or mother treated their grown-up offspring with an incivility which, offered to any other young people, would simply have terminated the acquaintance? Dogmatic assertions on matters which the children understand and their elders don't, ruthless interruptions, flat contradictions, ridicule of things the young take seriously - sometimes of their religion - insulting references to their friends, all provide an easy answer to the question "Why are they always out? Why do they like every house better than their home?"

Who does not prefer civility to barbarism?

If you asked any of these insufferable people - they are not all parents of course - why they behaved that way at home, they would reply, "Oh, hang it all, one comes home to relax. A chap can't be always on his best behaviour. If a man can't be himself in his own house, where can he? Of course we don't want Company Manners at home. We're a happy family. We can say anything to one another here. No one minds. We all understand."

Once again it is so nearly true yet so fatally wrong.

Affection is an affair of old clothes, and ease, of the unguarded moment, of liberties which would be ill-bred if we took them with strangers. But old clothes are one thing; to wear the same shirt till it stank would be another. There are proper clothes for a garden party; but the clothes for home must be proper too, in their own different way. Similarly there is a distinction between public and domestic courtesy. The root principle of both is the same: "that no one give any kind of preference to himself."

C. S. Lewis, The Four Loves

I suspect Mr. Lewis would be inclined to make similar observations about online manners as compared to public manners, where electronic anonymity tempts the worst part of a person to be belittling, dismissive, condescending, and in short, a bully.

Sometimes people come to confuse rudeness with strength and position, and choose to exercise it when they feel that they have some power, even if it is just the power to say what you will with relative impunity given the distance of electronics. The culture of the internet is nascent; and intelligence without education and cultural broadening can quickly degenerate into barbarism, even amongst people, not only commenters but bloggers, who might be otherwise appalled by how they act online.

Understanding, compassion, and kindness are the signs of real power and strength. Rudeness, incivility, and bad manners are the signs of ill-breeding and ignorance, of the disordered mind of the narcissist, who proceeds through life unaware and uncaring of those around them.

I am certainly no stuffed shirt. Manners does not mean that famous English reserve which is mannerism. Rather, manners are no ritual. Ritual manners, like accents, are too often an artificial construct with the purpose of promoting a type of class system.

Civility is a certain ease of behavior, a tolerant awareness and acceptance of the commonalities of the human condition, supported by kindness.

Barbarism can become fashionable, almost contagious. One may even have learned such dismissive and condescending behaviour from a parent, who learned it from one of theirs, or in some deep disappointment in their lives.

Don't tell yourself that this is just the way it is. Rather, tell yourself that this is just wrong, and let such incivility stop with me.

Gold Daily and Silver Weekly Charts - Silver Price Rigging, Huge Week for News Coming

Gold and silver bounced back quite a bit from the bear raid earlier this week.

Things are so boring on the Comex I think they didn't bother to update the clearing reports or the warehouse data.

 

Deutsche Bank, Bank of Nova Scotia, and HSBC have been accused of manipulating the silver fix.    Whitewash and/or wristslaps to follow. There is little justice, and no real reform.  Like flies to wanton boys are we to the Banks.

Next week is going to be a huge week for news.

First off we have a Comex option expiration on Monday the 28th.

Next, we will be seeing a trifecta of metals sensitive news events including 2nd Quarter Advance GDP release on Wednesday morning.   I have heard that John Williams is looking for a disappointing number.  I am thinking we will see a decent number, that will deteriorate noticeably in later revisions when no one cares as much.  They are also tinkering with the benchmark numbers and history in this release, so who the heck knows what will get tossed up from the Capitol maw.

And on Wednesday afternoon we will hear the results of a two day FOMC meeting.  I expect it will be steady on the taper, and we'll do something if something big happens.

And last but not least, we will be getting the Non-Farm Payrolls Report for July on Friday August 1.  The jobs number will likely be in line with seasonal adjustments, but keep an eye on hours worked and wages.  Without wage growth the velocity of money will continue to languish, and the Fed will feel free to keep pursuing a top down monetary stimulus and feed the asset bubbles.

There will also be the Chicago PMI, Michigan Sentiment, and the ISM Index.

I have included a calendar of next week's news events and projections below.

And in background the Ukraine and Gaza continue to simmer.

So let's get ready for some action in Madame Tussaud's precious metals museum on the Comex.  Maybe.

Have a wonderful weekend.

SP 500 and NDX Futures Daily Charts - Ho Hum

Earnings and geopolitical events continued to drive the US markets this week.

As for geopolitical events, since nothing blew up within the last 24 hours, the markets pretty much forgot about them, including plague, wars, and rumours of war.

As for earnings, they are mediocre, and stocks gave back some of their gains today on that disappointment.

Next week ought to be action packed. I will discuss that further in tonight's metals commentary.

Have a great weekend.

Beloved CEO Fired By Board For Being Insufficiently Ruthless: Employees Leave Jobs In Protest

"Just remember this, Mr. Potter, that this rabble you're talking about,  they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?

Anyway, my father didn't think so. People were human beings to him. But to you, a warped, frustrated old man, they're cattle. Well in my book, my father died a much richer man than you'll ever be!"

George Bailey in It's a Wonderful Life

This is by far the most remarkable story I have seen in a while.  Ordinary employees lay their jobs on the line to support a wealthy CEO who was fired by the board.  Talk about a 'man bites dog' story.

In the latest development the CEO of a northeastern grocery store chain, Mr. Demoulas, has made an offer to buy back his company, Market Basket.

If only more of us would put people before power and greed.  If only more of us would insist that our leaders live up to their duties to the people first, and not wallow in money and privileges for themselves and their cronies. 

If only those spreading fear and hatred to keep the people compliant would not find so many willing and gullible fools to support them.

 

Then that really might be 'a wonderful life.' 

Meet America’s Most Beloved CEO—Too Bad He Just Got Fired

Brad Tuttle

July 23, 2014

After the wealthy CEO of a supermarket chain was fired, thousands of workers walked off the job in protest—some getting fired themselves. What's up with that?

Workers understandably tend to go on strike or protest for selfish reasons—more pay, better benefits, improved working conditions. Over the last week in New England, however, thousands of employees at Market Basket, a supermarket chain with 71 stores in New Hampshire and Massachusetts, have been sticking their necks out (and in some cases putting their jobs on the line) in support of Arthur T. Demoulas, who was the company CEO until he was fired in June.

Rallies pushing for “Arthur T.” to be given his job back were held at the Market Basket headquarters in Tewksbury, Mass., on Friday and Monday, drawing upwards of 5,000 protestors. Meanwhile, the shelves of many Market Basket locations have gone barren, as there are too few employees still on the job to stock them. At least eight employees were fired over the weekend related to the protests...

“He’s George Bailey,” Trainor explained to the Washington Post, comparing Arthur T. Demoulas to the beloved savings-and-loan manager played by Jimmy Stewart in It’s a Wonderful Life. “He cares more about people than he does about money...."

Read the entire story here.

Joy

If I have learned anything in the past few years, it is that work and money and the markets are only things.   Important things perhaps, but only as means to the ends.  The ends are where the real stores of value in our lives reside.

And so I will enjoy the rest of the day, and be back tomorrow.  And the markets will still be there, as I hope that you and I will also be, thanking God for His small but tender mercies.

Have a pleasant evening.

The Sirens Sweetly Singing

'Free' as in free storage is perhaps a red flag for potential risk, according to Ted Butler as he muses in his latest article, Still Waters Run Deep.

I think there is an obvious and substantial difference between the unallocated metals accounts at Kitco and Perth in terms of 'backing' given that Perth has ties to the government, and Kitco is working through an insolvency.  And Ted rightfully allows for that.  

But considering the matter from another related angle,  I would think that one's investment choices should flow from one's reasoning and objectives in the first place.

If you want to own gold and silver for protection and 'insurance' in unusual and even catastrophic six sigma financial events, unallocated storage is a less expensive but weaker way to do it, unless you are content with the risk of a forced cash settlement and/or a possible loss of capital depending on who is holding your counterparty risk.   If you are content, then no worries.

On the other hand, if you are buying gold and silver for a short term trade or some other reason, then the lower cost alternative might be very logical and just the thing, if not perhaps to everyone's taste.

What brought this to mind was a discussion I had the other day with a very nice fellow who is playing the short to intermediate swings in silver, trading in and out.   He does this by buying and selling at a coin shop. 

He was complaining that now that he wishes to buy back in to silver, that they are demanding a twenty-five percent premium and he would like to get back in.  I suggested that if he was just trading the metals, there could be much lower cost alternatives with much narrower premiums, such as the various precious metals funds. 

He said, and I quote, "I prefer to hold my bullion closely." 

And of course I can understand that sentiment under some conditions, but then I would wonder, what is the real objective here?  Is it for insurance, or for short term profits or what?  

If one is trading gold and silver on even an intermediate term, the spreads (difference between buy and sell) that one obtains by buying metal at coin shops would represent a fairly significant transactional friction for those trades. Not to mention the other associated costs of this method, versus just buying a position in some reasonably sound fund that may even offer the option of physical delivery, of which there are some that appear to be reasonable.

In other words, if you are just trading, why care if you are actually holding the metal, and especially in one of its more expensive forms?

I would not presume to judge what a person chooses to do with their trading money. But I would like to point out that being consistent in your goals and your methods is quite important if you wish to have any chance of being successful at it. 

And you do not need to commit to one or the other approach either.  It used to confuse my conventional brokers, back when I still had them, that I could take some high beta short term trades in one account, and then take longer and much more conservative trades in another, and be very adamant about not diverting from either one.

They were failing to accept that there was a rather obvious reason for having two different accounts, and that one could have different money amounts and very different objectives in each!  But it did not make sense to those who think that there should be just one optimal solution and you should put everything on that, and all your effort should be concentrated in being 'right.'  If I had listened to this nice young man, I would have gone down in flames with his other clients in the tech market crash of 2001.  And probably 2008 for that matter.  

The concession to portfolio theory was to buy some lower beta stocks and 'diversification by stock sector.'  The snare is that it pays off, and sometimes very well, in long bull equity markets such as we have recently enjoyed. 

It is in times of change and trend that otherwise well-intentioned but forgetful people fail to be fully aware to the changing market context, and get lulled into overly directional trades by false stability of returns.  And they can take some rather big hits on those excessively directional bets. 

This not only holds true for stocks but for bonds and commodities as well.  But I have never seen the 'buy and hold' no matter what mentality more generally expressed as sound advice in stocks, backed up by adjusted numbers from stock indices that change their own composition quite regularly.

When people start believing that stocks can only go up, it might be time to start considering your portfolios structure in light of rougher seas ahead, the Fed's promises of oceans of liquidity notwithstanding, and the barbarism of doubting their omnipotence. 

I will and can never claim true knowledge of the future, and I have never found anyone or any 'system' that can.  Besides betting on a sure thing, which requires quite a bit of money and control of the exchange rules in order to gain an unfair advantage, the markets maintain their elements of risk and uncertainty, sometimes more so than others, particularly at the extremes.

How many times has the Federal Reserve and their Banks failed to avert crisis in the past twenty years?  Not hardly enough, and too often they seem to be near the center of them, especially since the repeal of Glass-Steagall.  

As you know,  I think that the Banks need to be restrained and brought back into balance as utilitarian functions in support of the real economy, and that the Fed needs to find another solution other than top down monetary stimulus.  And the Government needs to be reminded of its responsibilities and purposes.

But given the allure of hot money, and the sirens of wealth sweetly singing, we are more likely heading for the rocks, again.

Note: A reader informs me that Perth Mint no longer offers unallocated accounts since 2011, and instead offers 'pooled accounts.'  As in all such situations you should familiarize yourself with the particulars and make a judgement whether this conforms to your objectives, which was one of the primary messages of this writeup. 

 

"I reported last week of recently discovering that Kitco Metals, which is currently in the process of an insolvency reorganization, holds $260 million in precious metals pool accounts (mostly gold and silver) for clients. I found this disturbing since the ultimate backing to a precious metals pool account is the financial strength of the issuer because the metal backing the pool accounts is not specifically identified...

It’s no wonder the offer of free storage has been responsible for the immense popularity of the Perth Mint’s unallocated silver certificate program. After all, what’s better than free? But it is also true that a prudent person should beware of anything if it seemed to be too good to be true. That, in a nutshell, is at the core of my longstanding distrust of silver pool and unallocated accounts, including Kitco’s and that of the Perth Mint. In other words, the most likely explanation for why and how no storage fees are charged is because no metal (or not enough metal) is being stored and set aside for customers holding pool or unallocated accounts."

Ted Butler, Still Waters Run Deep

She rides the frothing ocean waves,

Upon a crimson shell,

Her skin is of the milk white reef,

Her breasts, the ocean's swell.

In her eyes behold the fathoms of the deep.

Aphrodite of the shifting seas,

and of the languid bays,

Riding with her dolphin band,

Across the sea-skipped waves.

Aphrodite from the depths where dark things sleep.