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Special Wells Fargo Report on Gold
Let me get this straight: a big bank, completely captured / insolvent without taxpayer largesse via Fed and Treasury, writes an anaylsis piece that tells people that it's not time to buy gold (please leave your money in the bank, in dollars!), and uses as the basis for its analysis metrics that have been rendered completely useless by Fed market intervention?
Well, now I've seen everything.
After all, we gave them that new money to make those purchases . All we asked in return, was to let the ink dry completely before they break open the bundles.
I started buying gold and silver a few months back.
One day I had to go into the bank to make a withdrawl so I could use the cash to buy some silver coins form the bullion dealer.
After giving me my cash the bank teller asked me "is there anything else we can do for you" to which I said "I'm not sure. Do you sell gold or silver?"
I knew they didn't, I just wanted to see what her reaction was. Of course she said "no", but I saw the bank manager shooting me a dirty look, like he wanted to punch me in the face.
Wish I could have gotten a picture of his face at that exact moment, his expression was priceless.
Gold is saying, "Beware, those who own WFC..."
"have they lost confidence? probably not at least yet"
I feel better already
Anyone like this guy? He seems interesting
and is gold telling yelling louder through a muzzle if GATA's got it right?
FOFOA is probably the most interesting thinker/writer looking at the issue of "gold as money" of anyone in the world right now. He's built an INCREDIBLE community of really smart readers who conduct very thoughtful discussions on the most interesting gold-related topics of the day.
And no, I was not paid to write this review. But I did tip him $500 recently to thank him for all his hard work.
Yeah, not really convinced with the Freegold concept but I like his writings.
Interest by foreign central banks to increase their gold holdings begs a more fundamental question. Have they lost confidence in the dollar?
As John Huston said in the movie Chinatown,,,"You don't have to think about that do you"?..
This garbage has got to stop. On behalf of the 4,927 readers of this site who do not comment, I demand a halt to the following.
Post about the falling dollar
Post about Gold
There has to be something to replace this content. And do me a favor; please stop trashing CNBC and then showing their YouTube content.
My therapist says that I have shown significant improvement in my anger management since I have started visiting Zero Hedge. Little does he know.
Maybe not apparent to most,, That was one of the funniest posts I've seen in a day or so... as there are many..
Omigod - mine too! Are you a Libra? Or maybe the therapists are Libras?
It's hard to remain balanced when you are incessantly immersed in a sea of information suggesting / demonstrating that:
The USD is in an unfavorable position
Gold is likely to shine brightly for a long time
Carefully selected CNBC videos are instructional; sometimes presenting meaningful content, other times demonstrating the weakness, bias, and Other Assets of CNBC and their talking heads.
Give it up, your therapist cannot understand your conundrum. An aspirin does wonders.
heh...nothing sexier than anger when directed at the right target.
Although I'm with you on the YouTube CNBCs. That propaganda stream needs to be put out of our misery.
PS: Something to replace the content you say? Some celebrity skin or crime drama with soapie subplots? I vote for more MALE celebrity skin on this site. In the name of equal opportunity you know.
You like em rugged, or pretty? I like rugged. I find pretty men (like Brad Pitt, no offense TD) pretty fucking useless. Rugged, mmmmhhhh! Now that, I can do something with and not break it.
I have a feeling our conversation is not going to be popular.
Not popular in the Fight Club? Well shit we gotta have it then.
Agreed on pretty but I appreciate Brad's mouf tho. What can I say I'm a sucker for lips.
Jackman is sexy in every way. BUILT. Gorgeous, humble, charming, witty. Married, faithful, family. Aussie. (OK so I'm biased.) And a frikkin nice mouth, not that you could see it that well in that sizzling cage pic you posted. :-D
Here's a hot one for ya babe:
Nick Younquest da bomb hahaha damn I wish I could post shots. I love a man who works out. Aus footballers - who cares what they say, just LOOK at them.
If we're going with celebrity skin, and totally ignoring Good Character, I still like Christian Bale in American Psycho. Yes he was Bad, but he looked Delicious.
Alas my opinions would be even less popular if I ignore Good Character completely. You know, like some guys do!
Christian Bale, oh lord, Batman does, truly begin. Now we are on that fine line between rugged and pretty. I pick this one as a sort of counter to push it rugged.
Did you know that Jackman has made love to his wife in the wolverine get up. AHHHHHH!!!
Your first one, I don't know. I'm a lying sack of you know what if I say I'd throw him out of bed, but he is sooo youngish, I may need to put one of our Anon bags on him to really make it work.
Brad is pretty and would make pretty babies, I need to own this. I like his jawline. Hell, I don't roll that way but Jolie is hot. They should make babies that would not be photographable in their stunningness.
I like older men, so we may diverge here.
Some blondes for your pallet:
Now I am getting weak...
WOAH. That one of Liam just put him on my radar. Must confess I didn't pay any attention to him before...but that is a MIGHTY neck.
hahahaha...making love in getup is all part of the fun! Just makes me love him even more hearing that!!! Maybe I'll see if I can get my down-to-earth hubster to wear at least the Wolverine pants if not the claws...all for the sake of research of course.
I was afraid you'd write Christian off on the Good Character technicality...that guy is FINE, got the muscles AND the manners when well coached. Altho not many have a dance mix recorded of their tantrum on-the-job gotta admit!
Sorry about Harrison, that's a great pic but it's true I do prefer the younger lot. How about away from the whiteboyz for a change of pace...
Usually Will Smith too lean for me but when he played Ali, OW! BABY.
Or LLCoolJ, check it:
hahahaha...on-topic...err, yeah...I think Will might WEAR some gold now and then, and J wears 'ice' still prolly. And Bale did play a bankster in Psycho...
...reaching but HMPH. It's not like we have any CNBC 'money honeys' to talk about, hired for their 1) mind and 2) experience, both of which bob gently when they walk.
Who we gonna talk about 'on-topic', Cramer? Bove? Tiny Timmy Geithner? Damn, now I have to look back at those pix again, got all cooled off again for a sec. That pic you found of CHRISTIAN is next up for my laptop wallpaper!
PS: Oh, agreed on Joli too. So, some women other than me are hot too. Hey! Got no problem admitting that...my bloke doesn't mind me & my friends 'flirting' a little anyway, he says that's hot too so whatevah. ;-) Hell, if I was gay and single and we lived in the same country, I'd prolly ask out a girl who writes as cleverly as you so there!!!
Very flattering!! So much so I wanted to find the real goodies for you. Your pic of Will Smith is actually from I Robot. I remember because I first "noticed" him in that movie where the aliens invade the planet (Independence Day??) but I was in denial (after all, he is the kid who sings "parents just don't understand"). But there is a shower scene in I Robot, where we get a hint that he has some cybernetics himself, OMFG!! First, the silhouette in the shower. Then the bod in full rich color. Then the question becomes how do we "deny" that supreme ass shot, the high round glute line melding into hamstring. All hail and worship the ass, oh yes! I wanted to find that shot for you so baaaad (okay, for me to, to see if memory can match reality). All wet too. See the movie. You deserve it.
LLCoolJ is cute, nice physique, but allllmost trying too hard on the thug thing. I remember driving by a young man such as him at the gas station, working the attitude, I wasn't having it. I smiled at him huge. He busted out laughing and had the most beautiful smile, that smile transformed him. Thug is, I guess, a necessary self defense posture or they make a chump out of you. It is cute, but every bit as cosmetic as Brad's sometimes overdone hair. Don't know if I said that well. The beauty I saw in that man who started laughing (I swear he saw me seeing through him), mainstream media has not begun to capture the real beauty in men.
As I looked into Neeson some more, many of the pics don't look too good. But some are great. He was exquisite in Schindler's list. I don't like smokers but damn he made it sexy. I did not know what the movie was about when I walked in, and I was devastated to learn his character was a Nazi. But obviously, it all worked out.
Had a great deal of fun talking to you. I think our tastes (slurp) are not far off at all. I lean a little older, you younger, I think between us we can cover quite a range.
We should get together and talk Gold in the future!!
A friend of mine has done a lot of mix tapes with big name artists, and the word on tha street 'bout LL Cool J is that he likes to "put from the rough."
I mean, name one other rapper (besides Hammer) who has been with the same woman since they were 18. He's like the hip-hop version of Ashton Kutcher.
Just sayin', you know... Keepin' it real...
So this what ladies locker room sounds like.
Somebody needs to check the digit restriction on captcha.
...or am I suppose to answer in Hex? Don't think I won't.
For the record, this conversation is on topic. We are discussing GOLD baby!
Oh, thanks. For a moment there, I thought I'd wandered over to Dealbreaker.
Alex, I'll take "Empires in Collapse" for $400
Answer: Foreigners are buying gold and hoarding it fast.
Question: Why the Collapse of the American Empire will be a messy affair.
I keep asking myself an important question when I read these reports: What fiat currency nation would want a monetary gold regime?
If gold is really a threat to the dollar, then it is an even greater threat to the euro, et al. And. if the dollar regime is a problem for these nations, how much of a problem would it be if they had to come up with several tons of golds to stabilize their currencies during last years debacle?
I am not saying gold isn't a good buy right now - I really don't know anything about it - but there is a logical fallacy hidden in every discussion of gold I have witnessed.
It isn't a threat to nations that actually *possess* gold. Of their own, that is.
It is a threat to nations whose currencies are backed by nothing at all but debt and air. (Err, 'faith'...err, 'confidence'...)
And keep in mind the TBTF gold-shorting investment banks of the OECD don't own the central banks of *all* the world's nations. Only *some* of them.
I expect that some nations are having a conversation starting with, "What can't continue forever, won't..." and carrying on from there.
I am not sophisticated in these areas and don't know how a 'partially asset-backed currency' would work. I also expect that once established, such a currency would revert again to pure fiat eventually, since central bankers are in charge. And so the cycle asset-fiat-asset-fiat would continue.
But I can certainly see some nations 'fleeing to the safe haven' of tangible assets, and tying their currencies to what they actually have, to avoid being pulled into a hyperinflationary pit.
I like how you think.
But consider this: They need to sell to the US. The US isn't paying for its imports with gold. They can write off their trade with the US but how much is that going to cost them?
I think that when some nations have a conversation starting with, "What can't continue forever, won't..." they will immediately see that their currencies must collapse before, or about the same times as, the dollar does.
At this point, the dollar is on the correct side of the historical process of globalization: namely, soon, you will only need once currency, and that one currency will be legal tender in every country. The only way this won't be the dollar is that all the other nations overcome their distrust and competition with each other to force the US to adopt a common currency.
The only chance THAT will happen is about the same as successfully running a marathon through the pits of Hell in a gasoline jockstrap.
This doesn't so much make me a dollar bull as it does make me a mega-bear on every other currency. They are pretty much toast.
Hey, Charley, just an ordinary J6P trying to preserve what little wealth I have by staying one step ahead of 'them' by wits alone. :-)
Producer nations need to sell, yes...but not the the US if the US isn't buying. I think this is the reality that the world is starting to come to terms with. The US as Mega-Consumer is tapped out. And let's face it, that arrangement (US/UK/OECD as perpetual Consumer, everyone else as perpetual Provider of both goods and credit) always did have an expiry date.
Who can be the new Mega-Consumer? No-one. (...yet? China is trying but I don't see it happening.) On this, one perpetual 'Consumer', is what a pure fiat currency relies.
I disagree that we will ever have one global currency. Central bankers would love that but it would require a harmony between major debtors and major creditors, let alone political wannabe 'superpowers' and religions/cultures, that would be superhuman to achieve and could not last. Look at the uneasy truce now among the euro nations (on the brink of breaking up after only, what, ten years?), and the even more uneasy truce between China and Russia as together they target the USD. I do not see any of this temporary truce lasting for more than a few years, let alone long enough to sustain a global fiat.
Too many powerful competing interests.
So, without our 'Consumer', what is the alternative? A number of competing currencies among producers and consumers of varying strengths, just as there have always been throughout history, but each measured against one globally agreed and fairly objective asset *standard*.
That standard has historically been gold. And, historically, the standard has been abandoned, then returned to, abandoned and returned to. Simply because such global agreement cannot last among powerful competing interests.
In other words, I expect nothing to change in this cycle either. The stage we are at now, is the 'return to standard' phase.
Well, we'll see who's right. Hopefully we who are watching will be nimble enough, and close enough on the edge of our wit, to still stay one step ahead of 'them'!
This may seem really silly..., but if gold were to go up in price a little, say to 6 or even 7 thousand an ounce, maybe there actually would be enough gold out there to stabilize with.
And, by extension of that possibility, maybe gold IS a good buy right now. I don't know..., what you think?
Bingo. Someone gets it.
I am Chumbawamba.
When you invest in gold, you are fighting every central bank on the planet, as GOLD constricts banks lending fiasco,,,,, But in the long run, gold will eat their lunch... GET OUT OF ALL DOLLAR DENOMINATED ASSETS....GET OUT NOW
Ready? Here it is plain and simple:
IF YOU OWN BANK STOCK YOUR ARE PART OF THE PROBLEM.
I hope no one here owns bank stock because I think this crowd gets it. If you do sell all of it.
Authors of this report say,
"Moreover, we are not convinced that the current run-up in the price of gold is indeed associated with concerns about rising inflation, because other early-warning signals of inflation are quiescent at present. Consider Treasury bond yields. The high inflation rates of the early 1980s and expectations that inflation would remain elevated led to double-digit yields on 10-year U.S. Treasury securities (Figure 3). Today, however, the yield on the 10-year U.S. Treasury security is comfortably below 4 percent. Would investors really be concerned about runaway inflation if they are willing to lend money to the U.S. Treasury for 10 years at less than 4 percent per annum?"
That view ignores the very real propensity for the Federal Reserve to monetize its own Treasuries in an effort to a) Reassure investors that demand for TBonds is strong and that that propaganda-stuffed metrics like CPI and GDP are telling the truth and b) Artificially push interest rates lower to help promote economic recovery.
Goes to show you how myopic these supposed pros can be with regards to economic reality.
Question: What would the interest rate be on 10+ year Treasury bonds if we weren't monetizing?
Answer: No one knows as all real money investors have been driven out and there is NO free market equilibrium. Therefore as an inflation indicator it is worth bupkiss.
It isn't that they can't handle the truth, they know the truth. That they act like this is all we need to know.
What I don't understand is why they do it. I only kicks the can down the way and makes things worse later. What are they doing that is going to heal this while they are kicking the can buying time?
I missed a gold buy today, but I got more silver. I am getting close to 50% now, PM and cash.
My dealer has platinum. I am wondering if I should just do it...
Silver and Gold seem good at todays prices, but who knows? I know nothing about Platinum. I will wait for a move lower before increasing my physical. Could miss the train, but I'm already about halfway there.
I'll give it a shot,,
It appears that the time they need is coincident with how long it will take to appropriately move their money out of the falling empire. Let's face it ,what we are all talking about is financial Armageddon. Americans will be picking through dumpsters, and hijacking delivery trucks until no commerce can be transported, shelves will be picked clean. END OF EMPIRE. Summation:
They want out!! Paraguay, Baltic's, We all now the preferred list of destinations.
Is WFC volunteering to sell me some gold at $250/oz? I'd like to amass a large pile at a fat discount...
It is telling us that it has been the best performing asset class of the last 10 years and will continue to be as long as the money printing and government stock market support continues (if it stops, shorting will be the most profitable strategy).
You are right,, playing gold up/down.. But I'm getting tired.....Life no longer normal
The horror, the horror
Thanks WFC is short gold?
Nahhhhh. What do banks have to fear from gold?
If I found out I had terminal cancer, with only months to live, and decided I could take 1 of the culprits of this mess with me. who would it be? who would you put at the top of the pyramid of bastards? just for fun lets make a list.(disclaimer: I do not advocate any illegal act.)
It takes illegal acts to straighten this cluster fuck out..
You failed to use your spell check again, isn't clusterfuck one word? ;-)
Only if you don't want to delay the effect...............
I do tutoring on the side for friends.
Easy. Bernanke, clear and away. he is pure evil.
OK, he's like, already dead and besides, I guess I should go for the string-puller rather than the puppet.
So OK, Martin Feldstein then.
Oh, and in Australia, John 'Bobblehead' Howard.
Two candidates for two countries, right? Only one per country though?
David Rockefeller Jr. _Council on _Foreign _Relations-- Bilderberg Group
Shh...they're watching. :)
paulson bernanke geitner dimon blankfein graham come on throw a few names in the hat, It'll be good therapy
The gold chart I use now shows gold priced in a basket of currencies versus its price in USD. That's b/c there is no point in a USD-only price of gold. Doesn't show anything when the USD is falling as it is.
Chart also has a cute little sum at the top showing effect on price of gold in 'real' movement, when you cut out the USD effect:
It's still a paperbug world though, so far. We'll see next year.
Next up: chart showing falling 'basket of currency' fiats relative to their price in gold...
Bullshit analysis, and written by nincompoops. Where they saying buy gold in 1999-2000, fuck NO! They were telling you to be LONG TECH!
Absolute BULLSHIT and an insult to the readership of this site.
Enough of the horseshit DEFLATION talk already, students of history know where this leads.
Paper money eventually returns to its intrinsic value ---- zero. Voltaire
Or Better YET
"Mark it zero dude" The big Lebowski.
Notice, THEY AIN'T TALKING ABOUT GOLD.
Any of you dumb shits want to sell some gold? JPM is paying spot +25% if you are that fucking deluded.
Can We PLEASE HAVE THOUGHTFUL ANALYSIS, like Ummm, maybe comparing the US to Argentina or the RUSSIAN Collapse?
That would AT LEAST be in the realm of REALITY!!!
This guy seems to get it:
Does USA 2009 = Argentina 2001? Part I: Falling economy reaches terminal velocity
• Slowed by green parachutes
• Bond market suspends disbelief
• Why China is nervous
We have all heard that the U.S. economy cannot go the way of Argentina in 2001 when foreign investors expressed lost confidence in the government and refused to roll over maturing short-term government bonds. Money fled the country as foreign currency reserves dwindled. A balance of payments crisis facilitated by investor panic led to the very outcome investor’s feared: the world’s largest ever sovereign bond default, a collapsing currency, and hyperinflation.
That can never happen here in the U.S., we are told. The U.S. owes its foreign debts in its own currency. U.S. lenders will never shoot themselves in the foot by allowing a dollar debt and currency crisis to develop because they depend on the U.S. for trade to support their own domestic economies. Foreign central banks, such as the People's Bank of China, will continue to step in to rescue the U.S. They will not fail the U.S. as the IMF failed Argentina. They will keep buying U.S. debt forever no matter how large U.S. fiscal deficits become, or how much bad debt the Federal Reserve takes onto its balance sheet, or how long it takes for the U.S. economy to recover.
But this is no more than an argument that the U.S. is not likely to experience a replica of an Argentina 2001 debt and currency crisis, and of course that is true. But that does not mean that a related, equally unseemly but fundamentally different catastrophic result may follow from similar causes and crisis triggers. Evidence abounds that the U.S. is trapped in a cycle of economic contraction and declining creditworthiness from which an Argentine style default with U.S. characteristics is all but inevitable.
Here we take a deep dive into the macro economics of the Argentine crisis—GDP growth, consumption, investment, inflation, industrial production, unemployment and a dozen other details of the Argentine economy in the period before it collapsed at the end of 2001. We compare the same macro economic measures during the U.S. economic crisis that started in 2008.
A few items, such as currency reserves, stand out in ways that show how different the U.S. situation is now from Argentina’s then, but most of the macro economic comparisons reveal astonishing similarities, especially measures of output and inflation.
Argentina and Ka-Poom Theory
We had not re-visited the case of Argentina since 1998 when we developed our now ten-year-old Ka-Poom Theory. We did so because simplistic Keynesian and monetarist models of inflation and deflation neglect the critical factor of capital flows on net debtor economies like the U.S. and Argentina in crisis. In the kind of crisis that is most likely to grip the U.S. with anything but fleeting economic troubles, capital flows become the only economic factor that matters and others that monetarists dwell on, such as bank credit, become irrelevant. "Inflation is always and ever a monetary phenomenon" is great marketing for hawkish monetary policy but lousy economics.
We needed our own theory because we wanted to know what to do with the proceeds of investments in technology companies that we planned to liquidate before the stock market bubble we were in at the time collapsed, which bubble was also a theory to most in 1998 but was to us a fact, its collapse an inevitability to be timed not debated.
Ka-Poom Theory lays out an economic process. It begins with a post credit bubble economic collapse, such as occurred in 2000 and again in 2008, that immediately results in debt deflation and a contraction in bank credit. The credit contraction then spills over into the real economy to produce monetary deflation as demand and output fall. But the period of deflation is brief because the economics orthodoxy of our time calls for radical and immediate fiscal and monetary policy action to slow the contraction of money and credit and boost demand.
We call this part of the Ka-Poom process “disinflation” to distinguish it from the self-reinforcing process of monetary and credit deflation that gripped the U.S. in the 1930s, aka a deflation spiral. No deflation spiral has never occurred anywhere else ever since, yet many economists still opine on deflation spirals and liquidity traps, as if gold backing still held back credit and money expansion as it did in the early 1930s. These economists apparently have not noticed that even during the gold standard era any government wishing to produce money to pay for war first went off the gold standard—temporarily of course—after which money and inflation appeared in abundance no matter the circumstances of the economy, high unemployment or low, high debt levels or low. Since the 1930s governments skip the step of dropping off the gold standard and go right to the printing, and for any number of political purposes other than war. Many have to excess, with Zimbabwe as the most recent and illustrious example. Deflation is the penultimate red herring of modern central banking.
The second inflationary part of the Ka-Poom process occurs if re-inflation of a crashed economy by fiscal and monetary stimulus goes haywire for reasons of trade and finance, as in the case of Argentina in 2001 and dozens of other indebted nations throughout the world before and several since.
Worth noting: in 1998 we used the early 1990s Argentina inflation crisis as one of our models for Ka-Poom Theory as the 2001 version was not yet available. In 1998 the early 1990s Argentina hyperinflation was already a distant memory, and economics papers of the time lauded Argentina’s economic stabilization program that brought inflation down to low single digits. We did not know at the time that Argentina was set up for a recurrence of its 1990s debt crisis and inflation. Paradoxically, the collapse of U.S. stock market bubble in 2000 caused a U.S. recession that spread to Argentina, among other places in the world, and that recession was itself a catalyst for the 2001 Argentine crisis that resulted in hyperinflation there.
Our readers understand economics as an ongoing process rather than a series of disconnected events as deflation and inflation are usually presented. It is not either deflation or inflation, here it is one then the other. The axiom of Ka-Poom Theory, that defines a specific economic, trade, and finance process that occurs under circumstances unique to our time, is that the appearance of a sharp period of deflation after a bubble collapses is in and of itself a warning sign of potential impending out-of-control inflation. That is why we give it a special name disinflation to distinguish it from deflation.
To understand why disinflation in a post-bubble context points to a period of future high inflation we compare the 2000 and 2001 Argentine economy to the economy we are sit inside today here in the U.S. The U.S. escaped the high inflation “Poom” phase in 2002 by dint of the Greenspan credit bubble that produced the housing bubble and others. Will we escape again?
Ben Bernanke 2009 cannot play Paul Volcker 1980
Even as oil and other prices rise to price in future inflation from the Fed’s and Congress’ re-inflation policies, current chairman Ben Bernanke cannot in 2009 raise interest rates as Paul Volcker did in 1980. Conditions then—low unemployment, positive GDP growth, and high inflation—are the precise opposite of those that prevail here in the middle of our FIRE Economy Depression.
Argentina's economy started to blow up when its fiscal deficit exceeded 3% of GDP in 2001 and its gross external debt, the majority of it short term, exceeded 55% of GDP while the nation fell into recession. The recession reduced the nation's economic output and thus its ability to earn income to repay its foreign debts.
The CBO projects the U.S. fiscal deficit at 12.3% in 2009, and increasingly short-term external debt now exceeds 100% of GDP. Meanwhile GDP is shrinking. U.S. Q1 2009 GDP growth came in at minus 6.3% and 5.5% in Q1 2009, setting the stage for an Argentina type crash, but with American characteristics. In fact, if the U.S. were any other country that owed so much to so many but in foreign currencies we’d have seen a “Poom” inflationary event long ago.
The fact that the U.S. owes its foreign debt in dollars only limits the extent and speed of an Argentina type economic crisis for the U.S. Counter intuitively, if monetary and fiscal policy today allowed the money supply to fall, and demand and economic output to decline further, and CPI inflation to fall below 2% or so, a debt and currency crisis for the U.S. is virtually assured.
If Bernanke pulled a Volcker today, raising interest rates and cutting the money supply, he’d launch a process to send the U.S. economy into a hyperinflation.
The circumstances facing the U.S. today and in 1980 are apples and oranges.
The Paul Volcker Fed raised interest rates when unemployment was low and falling, and inflation was high and rising. Today unemployment is high and rising, and inflation low and falling, although rising long term interest rates and commodities are pricing in future inflation.
With high unemployment and negative GDP, how can the Fed raise interest rates? In this environment high interest rates are the greatest risk to economic growth and output, and thus U.S. ability to repay debts. If the idea of raising them is to reduce inflation and interest rates, we will see the opposite of that intended result. That is why we do not expect to see short term interest rates raised until early 2011, but expect to see long term rates as high as 7% by the end of 2010.
Eerie Timely Parallels between Argentina and the U.S. economies
Argentina’s economy collapsed at the end of 2001 after a decade of mismanagement of the political economy led to a year of financial and economic turmoil that culminated in sovereign debt default, collapse of the currency, and hyperinflation.
As much as the Argentina economy may appear on the surface to not apply to the U.S.--Argentina is not a superpower that issues the world’s leading reserve currency--basic laws of economics, trade, and finance can be stretched but not broken.
Argentina broke several laws in the year 2001 and paid dearly for it. The U.S. between mid 2008 and 2009 broke more than one economic law, aggressively flaunted others, and is on the verge of breaking several more. We cannot accept uncritically the conceit that U.S. geopolitical advantages give our economy a permanent get out of jail free card. Thresholds of tolerance may be exceeded, we just don’t know exactly where they are. We are getting close if Chinese officials are openly discussing alternatives, and this airing of grievances is in fact part of the leading edge of the "Poom" process as in Argentina in the period before the actual crisis.
The latest: A top Communist Party research chief said Thursday that China should buy gold and U.S. real estate rather than Treasuries, according to a Reuters report.
Why China is nervous
Three charts out of dozens we show you in Part II lay out our case.
Argentine Inflation 1995 - 2009
In the year before the bond default in December 2001 and ending in late 2003, CPI inflation increased from -4% deflation to 120% inflation on an annual basis. Here at iTulip we call this process a “Ka-Poom” of deflation and inflation.
The Argentine peso, un-pegged from the U.S. dollar, collapsed by 73% in a few months, and over the next two years inflation wiped out savings and erased all debts.
Argentine Exchange Rates 1995 - 2009
The bond market disintegrated.
Argentine Bond Market 1995 - 2009
A U.S. bond crisis will never get this bad, but then it doesn’t need to for bond holders to lose most of their money.
In Part II we show you how many developments in the U.S. economy since 2008 bear striking similarities to the antecedents of the Argentine crisis in 2001, and a few key differences. The grandfather of such crises: out of (political) control fiscal deficits.
All government debt and currency crises are rooted in runaway fiscal deficits. Each nation has its own threshold, depending on trade balance, size and composition of external debt, currency reserves, and other factors. Argentina’s threshold in 2001 was 3% of GDP.
Argentine Fiscal Surplus/Deficit 1995 - 2009
Argentina’s quarterly fiscal deficit threshold before triggering a crisis: 3% of GDP
Compared to the U.S. projected fiscal deficit of 12.3% in 2009, Argentina’s government spending in 2001 was austere. In March 2009 we projected a worse case U.S. fiscal deficit of 8% in 2009 and 12% in 2010. As usual, we were optimistic.
Inflation before and after a Ka-Poom event
You might think that before Argentina’s economy blew up in a hyperinflationary conflagration that the central bank over-expanded the money supply leading to high inflation, and that the inflation spooked foreign investors. But as you may have already guessed from the first chart that shows negative and falling CPI going into the crisis, the opposite is true: the money supply fell in the year leading up to the crisis even as bond prices fell and yields increased.
Here at iTulip we refer to this as the “Ka” or “disinflation” phase of the Ka-Poom deflation-inflation process.
The economy was caught in a vicious cycle of declining economic output and negative credit expansion. The bond markets demanded higher interest rates to compensate for higher default risk. Credit contracted even more, and further reduced economic output. This is the liquidity trap that the Fed hopes to avoid by purchasing long-term debt directly to hold down long-term interest rates. Unfortunately, as in Argentina in 2001, it appears to not be working; 10-year Treasury bond interest rates are up 200 basis points so far this year. The mistake is to think that for a net debtor that failed to escape from a liquidity trap is headed toward a deflation spiral as in the U.S. in the 1930s. Ka-Poom Theory forecasts the opposite outcome.
Where is the U.S. in the Ka-Poom deflation-inflation process? Is the U.S. economy in the kind of deflationary crisis that led to a hyperinflationary outcome for Argentina in 2001?
U.S. Economy reaches terminal velocity
Here on earth falling objects accelerate at a rate of 32 feet per second per second until the downward force of gravity equals the upward drag force of the surrounding air. A man, for instance, who leaps from an airplane, arms outstretched, stops falling faster after reaching a terminal velocity of approximately 120 miles per hour after hurdling for15 seconds. He hasn’t landed—he’s still falling—but no at least his rate of descent is not still increasing.
Different falling objects have varying maximum speeds depending on shape and density. So it is with the many measures of our economy that are hurdling toward the ground after our financial system blew up in 2008.
Keep this in mind when you read the economic news items such as yesterday’s that sent the stock market up.
Durable goods orders rise for second straight month in May
June 24, 2009 (Martin Crutsinger, AP Economics Writer)
WASHINGTON (AP) -- Orders to U.S. factories for manufactured goods from computers to aircraft surged in May for a second straight month. And a gauge of business investment rose last month by the most in nearly five years.
Together, the data Wednesday signal that the recession could be at or near a bottom.
Here are the durable goods data that caused all the excitement.
Recession bottom? Maybe so or maybe not. The collapse in Durable Goods Orders appears to have finally achieved an economic “terminal velocity” of -25% year over year.
Here we look for a rise in production resulting from an increase in orders. How about Durable Materials Production?
Terminal Velocity of Durable Materials Production: -33%?
So far, Durable Materials Production continues in freefall with no sign of slowing. But orders are picking up, so maybe if in the next few months orders are not held up or canceled manufacturers may turn these into actual production. If so we can expect to revisit Durable Materials Production over the next few months and see it rising or at least no longer in free fall.
Durable Materials Production covers both household and business sector spending. An economy like the U.S. economy that is more than 70% based on consumer spending can’t recover without a rise in consumer demand. Producers are watching closely, ready to pounce on increased demand. This should show up right away as a rise in Durable Consumer Goods production. Has it?
Terminal Velocity Durable Consumer Production: -28%
While still negative, consumer goods production bounced last month as it usually does at the end of a recession. But then it may be heading back down again. To get further evidence that this change may indicate a more lasting trend change, we check into Total Business Inventories. Have they slowed their rate of descent?
Terminal Velocity of Business Inventories: -$80 billion?
The rate of increase in the decline in business inventories has not let up yet. For further clarification we check into Final Sales of Domestic Purchasers.
Terminal Velocity of Final Sales: -$340 billion?
Final Sales is GDP minus the change in business inventories. It is the same as PCE, private fixed investment, government consumption expenditures, and gross investment, all added together with net exports of goods and services.
This very comprehensive measure is giving us an ugly still-in-free-fall reading. The number is not only huge but is the very first negative reading on record since the end of WWII.
FIRE Economy Depression Version 2.0
In every respect this depression is worse than the one that preceded WWI, with world stock markets and trade falling far more quickly in the year since April 2008 than occurred during the first year of The Great Depression.
Central bankers believe that the only policy error that central banks and governments made in the early 1930s that resulted in The Great Depression was to fail to counter debt deflation with sufficient monetary and fiscal stimulus quickly enough, to supply parachutes of money to slow the descent of the economy. That’s the theory, and so the major difference between the first year of this economic collapse and the 1930 version is the scale of cash injections into the economy via monetary and fiscal policy.
Global Money supply growth 1930s vs 2008
Global fiscal deficits 1930 vs 2008
Credit: A Tale of Two Depressions
Will it work for the U.S.?
If there is one place to watch the Bernanke Fed’s great experiment play out this year, it is here in the measure of Personal Consumption Expenditures (PCE).
Terminal Velocity of PCE: -$200 billion?
During the FIRE Economy Depression, PCE registered its first ever year over year negative growth rate. After a bounce off -$100 billion last month, this month PCE resumed falling and is now at -$150 billion. We’ll return in a month to see where we are. If it is lower still, watch out. That means the U.S. economy may still be trapped in a vicious Argentina 2001 type of production-consumption down cycle.
Naturally, PCE cannot rise at a sustained pace until unemployment has stopped rising.
Terminal Velocity of Unemployment: 6 million?
See that tiny blip at the top of the long rise in the number of unemployed? That might develop into a full-blown reversal and decline in unemployment as we saw at the end of previous recessions. But be careful: we have seen a half dozen similar blips during this depression since we warned about Unemployment by industry: Recession or depression?, so we’ll have to look for other signs to confirm whether or not we are seeing a recovery this time, unlike the other six false starts. In Argentina in 2001, a similar rate of rising unemployment to 20% leading up to the crisis continued through the crisis before peaking in the middle of 2002 at 24%.
The money’s got to come from someplace to finance increased consumer spending, either from personal incomes, savings, or new borrowing. A look at personal income and debt will help us confirm whether the Fed, Congress, and governments around the world pulled the ripcord early enough and supplied big enough green parachutes to slow the economy’s descent.
Terminal Velocity of Personal Income and Consumer Debt: Negative?
Change in consumer debt just turned negative for the first time on record. CMDEBT is a measure of credit demand not supply, by the way. Until we see personal incomes rise along with consumer debt, we will not chime in with the latest calls for a “bottom” in the FIRE Economy Depression.
Set-up for a Balance of Payments Crisis?
Before we get to specific parallels between recent macro-economic developments in the U.S. since mid 2008 and Argentina in 2001, two additional exhibits show the trajectory of tools that support the economic recovery we need to avoid a “Poom” type inflation crisis.
Terminal Velocity of Reserve Bank Credit: $1.2 trillion?
No sign of relief to the banking system here. Maybe the Fed is cutting Net Free or Borrowed Reserves as the banks recover?
Terminal Velocity of Net Free or Borrowed Reserves: $800 billion?
With borrowing levels by banks from the Fed reaching new highs last month it’s hard to conclude that the U.S. banking system is on the mend.
All in all, we remain, like our foreign creditors, in a period of suspension of disbelief. We all want to believe that the U.S. can come out of this economic crisis without a debt and balance of payments crisis such as Argentina suffered in 2001. No one wants that--not our creditors, not U.S. politicians, no one. But in the real world we don’t always get what we want. If certain thresholds are surpassed, feedback loops take over that are difficult if not impossible to break.
Next we look at how the current U.S. crisis might evolve into an inflationary crisis--an Argentine debt crisis with U.S. characteristics--or not, and signs to look for to indicate whether conditions are improving or worsening, and provide key indicators that help us determine where we are in the process.
America in 24 month's time?
Does USA 2009 = Argentina 2001? Part II: Four Crisis Indicators ($ubscription)
All the pieces necessary for a Ka-Poom inflationary crisis are in place, and several have already occurred. How can we tell if the process is following through?
We start to answer the question by restating the key event of the Argentina crisis in 2001, the loss in confidence in the repayment of debt with full-valued currency, leading to capital flight and a self-fulfilling process of devaluation and debt default. more... ($ubscription)
iTulip Select: The Investment Thesis for the Next Cycle™
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Everyone is wrong, again – 1981 in Reverse Part I: The Great Divide – Eric Janszen
It’s October 1981, the year IBM launched personal computer, air traffic controllers went on strike and were fired by President Reagan, and Israeli jets destroyed a nuclear plant in Iraq. The annual inflation rate in September was over 12%, a 30 year Treasury bond carried a constant maturity rate of 14.68%, and the Effective Fed Funds Rate hit 15.5% as the Paul Volcker Fed stood on the brake pedal, determined to crash the economy to cut off multiple simultaneous inflation channels -- energy cost-push, supply shock, and the reckless monetary policy of the previous administration.
Thing is, no one believed it.
A risk-free government bond promised 14.68% interest for 30 years but no one wanted them. Gold traded between $432 and $453, or $1011 and $1063 in 2009 dollars, well below a peak of $850 – nearly $2000 2009 dollars -- on January 21, 1980.
With perfect 20/20 hindsight we ask, what was going on the heads of investors then? That 30 year bond produced stellar after-inflation returns for decades, and on a risk-adjusted basis was the best investment of a generation.
No one wanted it.
Why did investors collectively not see that the inflation rate was destined to fall? Few believed that the U.S. government was serious about putting the economy through two massive recessions, earning the certain wrath of voters, in order to wring inflation expectations out of the economy. Fixed income investment professionals didn’t believe it, stock market investors didn’t believe it, and certainly the gold bugs didn’t believe it. Some held on for 20 years as gold went down, down, down.
Just about everyone expected the politicians to chicken out and let inflation go on forever.
The majority were wrong.
Today, the situation is a near perfect reverse of the situation investors faced in 1981. The annual inflation rate in March was a deflationary -1.7%, a 30 year Treasury bond carries a rate of 3.64%, the Effective Fed Funds Rate is close to 0%. Today just as few investors believe that central banks and governments are serious about, and capable of, halting deflation as expected the exact opposite of the same institutions 28 years ago – not this year, nor next year, nor in ten years, or even twenty.
The Great Divide
Humans extrapolate the recent past into the infinite future. But the history of transitions from inflation to deflation and back to inflation again is a story of discontinuous asset price responses to fiscal and monetary inputs.
The current deflation period D shares more in common with the early 1920s depression period A than The Great Depression period B and bears no similarity to the disinflation created by the Fed in the early 1980s period C. Neither The Great Depression nor the depression that followed the end of WWI were intended as the 1981 and 1983 recessions were. Note the very quick reversal of deflation in 1921, and also the sharp reversal in 1933 when the U.S. devalued the dollar 69% against gold.
Deflation expectations have over the past two quarters become so deeply embedded in investor’s minds that they now see a deflationary pricing environment persisting for decades, this despite the fact that only a year ago they could not shake the prospect of ever rising inflation, fed as it was by cost-push energy import prices, in turn driven by a weak dollar. Markets also expect central banks, as the economy climbs out of recession, to move quickly to respond to any sign of inflation with rate hikes before inflation price cycles set in.
In other words, the vast majority of investors believe that central banks and governments have so fine tuned fiscal stimulus and monetary policy that the economy can grow out of recession without significant inflation and also that our government is willing to risk sending the economy back into recession in order to halt inflation, if it re-emerges.
We think investors have it wrong again. Big time. We see a collective miscalculation as great as 1981, but in reverse.
We believe the current Fed and administration will embrace a nominal economic recovery, even if real growth is negative, that is, even at the cost of high inflation. As usual, the inflation will be hidden by the government’s inflation data indexing and computation methodology, and manipulation of Treasury bond yields across the curve, but evidence will be apparent all around us. The benchmark 10 year Treasury bond price is now overtly manipulated by Fed. But commodity markets generaly are not. So while the bond markets are now pricing in a real economic recovery with very slow growth and near zero inflation for the foreseeable future, commodity investors are pricing in negative real growth just ahead. Call it The Great Divide.
Inflation inflection indicators
The anomaly in, then, in our model of current period as the negative image of the 1981 period are commodity prices, especially oil, and metals, including gold.
During the last period of deflation, these traded well below prices we see today.
The $2.2 trillion in global fiscal stimulus committed by governments over the past six months, with the U.S. and China leading the pack with 5.5% and 7.5% of GDP spent respectively, dedicated to demand creation plus trillions more in cash from central banks into the banking system to boost credit creation has at last halted the deflationary process in its tracks. Many falling trends, from retail sales to personal consumption expenditures, have either slowed their decline or even reversed. The euphoria that markets are expressing may be short lived, either because the growth will turn out to be unreal in the sense that it is self-sustaining or that it cannot be self-sustaining without also being inflationary and not real.
Our thesis since the middle of last year is that inflation will arise by late 2009 to early 2010 from three channels. One, a reduction in supply of raw, intermediate, and finished goods relative to demand due to the impact of the credit crunch on producers and retailers (see Fed cuts dollar, Fire sales and F.I.R.E. sales, Duh-flation, and the Bezzle is shrinking... again). Two, the inevitable impact of excessive money growth with lag effects (see Ka-Poom Theory deflation-inflation two-step: Too complex for deflationsts to grasp?). Three, a weakening dollar once global deleveraging ends (see Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation). We review these forecasts below.
Yesterday the market rallied on decline in inventories. Again, the communal thought process is that this is a recession like any other since WWII and the decks are now cleared for inventory rebuilding. But as I have explained since at least 2005, this depression is nothing like any of the Fed induced recessions that have occurred since the end of WWII.
As previously noted, starting in Q3 2009 we should start to see the inflationary impact of the credit crunch induced supply crash. In this context, low inventories reflect a lack of availability of credit to float inventory. Persistent low inventories will cause prices to rise as Keynesian demand side stimulus succeeds while output and supply remain constrained.
A period of global deleveraging began last year that drove up demand for dollar denominated assets and with them the dollar itself. In July 2008, we estimated that the period of deleveraging to last for approximately six months. In line with that forecast, the dollar rally produced by safe haven flight appears to be ebbing.
Money at Zero Maturity shows the Fed still standing on the gas. The long-term correlation between the money supply and inflation is irrefutable.
If the Fed keeps ramping the money supply in this fashion, inflation is inevitable.
Note we do not talk about velocity of money in this analysis. As Dr. Peter Warburton reminded me in a call yesterday, velocity is volatile – changes diection quickly -- and has zero predictive value, unlike the money supply itself. Using the velocity of money to try to detect the future direction of inflation is like running through the woods at full speed with your eyes closed and your arms extended in hopes of avoiding injury.
As the period of rising inflation arrives, the U.S. economy will appear to recover -- and will in nominal terms, but not in real terms. The commodity markets are wise to this; unlike the 1981 period, the bond market investors are not. As the 1981 era, the equity markets are confused, not knowing whether to price in inflation or deflation, as the credit crunch reduces supply (inflationary), creates industry consolidation (inflationary), while weak demand weighs on earnings (deflationary). The cross-currents in our view weigh in favor of a general price inflation in coming quarters.
In Everyone is wrong, again – 1981 in Reverse Part II: Nine Signs of Inflation we review a recent paper by Dr. Warburton following our interview with him yesterday.
Everyone is wrong, again – 1981 in Reverse Part II: Nine Signs of Inflation – Eric Janszen
There we were, slaving away on a new macro analysis, trying to navigate our post FIRE Economy, post-market world, with its fiscal spending boom and bust cycles, and the Fed buying benchmark 10 year Treasury bonds, messing with the world's sea level measure of inflation, U.S. sovereign bond yields.
Despite taking an approach to disprove our own theory of impending inflation, all the data kept leading us back to our conviction that we will see significant inflation arising in the U.S. as soon as Q4 2009 but no later than early 2010 due to a combination of three factors: one, credit crunch induced supply shock meets Keynesian fiscal spending based aggregate demand stimulus; two, persistent money supply growth after lag effects; and three, cost-push price inflation as we experienced in the 2004 to 2008 period, the last time the dollar weakened, once the bid for dollars slows after the end of global debt deleveraging in Q1 2009.
I love short stories,,,
But I think I agree.................
Enough with the cut-n-paste already.
With all due repect, start your own blog.
It started out good but then I fell asleep. Sorry.
Charlie, instead of worrying about governments, worry about women. Right now the ratio of gold to women is still low, because a lot of women are still carrying around a lot of green paper and plastic cards. When they start realizing that those things won't buy what they need, they will remember what always has and always does: gold.
lol, i just kept scrolling, and scrolling
This Wells B.S. reminds me of the little boy whistling in the dark, Or maybe the advisor/broker praising the client for his awe inspiring appetite for risk and then congratulating him on cashing Tbills for amazon at 200.
That was very difficult to read, mostly because it really didn't have much substance. Shallow and worthless if you ask me.
The whole issue of gold and what's happening with the dollar / treasuries / stock markets / economy was dealt with superficially...I'm a novice and I see more than they do...geez.
I am disappointed to say the least....how much do these clowns make at WFC?
Glad to read this report of Wells Fargo, it was pretty short so I wasted only little time. What an utter nonsense.
Btw Charlie, as far as Iam concerned the answer to your question (what fiat currency nation would want a monetary gold regime) is a easy one, its entire population especially if you also throw in silver!
Looking for references for reputable dealers to buy gold bullion from. Any suggestions??
Patriot Trading Group 1-800-951-0592
They also have a great radio show everyday @ 12:00 noon EDT High integrity and very fair pricing.
A "dollar" is a Fed Note. If central banks are trading Fed Notes for Treasury Notes, then they do not have faith in the Fed Note.
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