Central Banks

Geithner frets that the crisis in Europe could undermine confidence. But if confidence isn't based on facts and transparency, it's a con game.

The freedom to choose the form of money we can use in our daily lives is inseparable from the ability to live one’s life as a free man and a free woman. Monetary freedom is inseparable from all other inalienable freedoms we possess in this life. What we have today is monetary enslavement. In 1792, Alexander Hamilton equated essential freedoms with the preservation of the purchasing power of all money and passed into law a Coinage Act that punished anyone that deliberately debased the value of coins with death. In 2011, the citizens of Utah give us The Utah Monetary Declaration. If we wish to stand in solidarity with our brothers and sisters around the world in restoring our essential freedoms, the first pro-active step every citizen in this world must take is to research and learn why the debasement of monetary value is a direct attack on the freedoms of every citizen of every district, every province and every state in every country in the world.

I am amazed at how these Captain Obvious “analysts” do nothing more than state the obvious, and rather late at that.

Those continuing to be bearish on gold and misdiagnosing a gold bubble (for a variety of simplistic and ill thought out reasons – see Commentary) are ignoring the deeply held belief in gold as a store of value of some 3 billion people in Asia. They also ignore the small but growing number of buyers in the western world who are diversifying into gold leading to an increase in allocations to gold from a miniscule base. These buyers include hedge funds, banks, pension funds and most importantly central banks. These buyers continue to rightly focus on gold’s value rather than its price. Physical demand for silver remains high and is being reflected in a slight uptick in premiums. GoldCore have seen continuing coin and bar demand and physical buyers are not being deterred by the latest sell off on the COMEX market. Those buying silver continue to expect silver to rise to $50/oz and many expect silver to rise to over $140/oz which is the real record (CPI inflation adjusted) high from 1980. Demand from western buyers remains minimal as buyers remain a contrarian few with the majority of investors and savers having no allocation to silver whatsoever. However, this is not the case in Asia where both gold and silver are held in far higher esteem and appreciated for their wealth preservation qualities. Indian demand has been very significant in months and has accelerated in recent days after the sell off and tentative signs of a bottoming.

On Friday, as pertains to Dexia, a name that suddenly everyone is talking about yet which nobody except for this blog covered back in May, we predicted that "We expect a partial or complete nationalization to be announced imminently, which in addition to all other side effects, would lead in a Bear Stearnsing of all accrued profit." Sure enough overnight we got the following announcement from the French and Belgian Finance ministers: "As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia." Translation: Partial nationalization. And with 5 year CDS ripping in a good 6-8 point upfront, bid at about 26 points at last check, down from 35 on Monday, getting out while the getting was good sure seems like a good idea. Alas, none of this will be any consolation to equity longs, whose value has just dropped over 20%, as this is nothing but a repeat of Bear Stearns. We repeat that at the end of the day, Dexia CDS will trade just wide of Belgian default risk, which we in turn expect to soar in the coming hours.

Go no further than the Der Spiegel piece, Why Europe Is Right and Obama Is Wrong, to understand the fundamental differences between American and German thinking on fiscal and monetary stimulus. Michael Sauga, the author, writes: "American economists, central bankers and fiscal policy makers have reinterpreted British economist John Maynard Keynes’s clever idea that government spending is the best way to counteract a serious economic downturn — and have turned it into a permanent prescription. In their version of the Keynesian theory, declining growth or tumbling stock prices should prompt central banks to lower interest rates and governments to come to the rescue with economic stimulus programs. US economists call this “kick-starting” the economy...The only problem is that this method of encouraging growth has not stimulated the US economy in recent years, but in fact has put it on a crash course. From the Asian economic crisis to the Internet and subprime mortgage bubbles, economic stimulus programs by monetary and fiscal policy makers have regularly laid the groundwork for the next crash instead of encouraging sustainable growth. In the last decade, the volume of lending in the United States grew five times as fast as the real economy....The real problem, though, is a different one. The US economy doesn’t lack money. Rather, it lacks products that can compete in the global marketplace. The country has a deep trade deficit, yet the Obama administration is borrowing money at the same rate as near-bankrupt Greece."

All you need to read.

I have been very bearish.  I fought some strong moves up.  I argued why certain things wouldn't work - and by certain things, I mean everything the politicians out of Europe said.  I'm not planning on being long for long. Europe is fracturing, but France, without a doubt is still pushing for a solution. The data has been marginal, but not horrible. BAC was a disaster again today in terms of stock and then there is Morgan Stanley. I'm playing around for a quick bounce.  I might be being too cute, but too many of the moves seem ripe for a rebound.  I do think, as some smart commenter on ZH pointed out, that 1120 is now resistance rather than support. And with regard to Buffett, are we as a country, ignoring some people, who may not always be bullish, but at least have been right more often than not in the last 10 years?  As a business and a country we should be looking for other oracles, and some of the best out there aren't always positive, but maybe that is what we, collectively need, a harsh dose of reality.

There's so many ways this could go wrong.

“you put your short bonds in, you pull your long bonds out, you put your short bonds in and you shake them all about.”

We are going to hear several carefully fashioned talking points concerning the economic collapse over the course of the final quarter of 2011, especially in light of the dismal end of the stimulus driven bull market that sustained public optimism since the derivatives implosion in 2008. Let’s not forget, three years ago mainstream economists and the Obama administration were calling for a near full recovery by 2011. Obviously this never materialized, and so, the game has to shift to a new dynamic to keep us all guessing. The deflationary boogieman will be resurrected to frighten taxpayers into taking on even more debt in order to feed the fiat machine, but this is going to meet extraordinary resistance. If you think the protests on Wall Street today are gaining momentum, just wait until Helicopter Ben announces QE3! The next logical step in the progression of banker planning is the call for “Globally Coordinated Action”; global initiatives tying numerous countries together in a unified effort to whitewash the crisis and solidify their real purpose of economic centralization.

David Stockman, former US Representative and Director of the Office of Management and Budget under Reagan, does not mince words. He sees the monetary systems of the world coming apart. How did we get here? He identifies the root cause as the intentional over-leveraging of world economies by central planners in a misguided effort to enjoy growth without consequence.

I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved -- or morphed -- a central banking policy in the world that absorbs unlimited amounts of government debt. And so we went on what I call the "T-bill standard" or the "federal debt standard." And the other central banks of the emerging mercantilist Asian economies -- Japan, Korea, and now, especially, the People’s Printing Press of China -- have absorbed this massive emission of debt that otherwise would’ve created powerful negative consequences that would’ve forced politicians to act long ago. In other words, higher interest rates, pressure for inflationary monetary policy, and the actual appearance of price inflation. But because all the bonds on the margin were being absorbed by the central banks, we got away for twenty or twenty five years with “deficits without tears.”

And he's just getting started. The only thing more impressive than Stockman's CV of insider roles in public economics and private finance is his talent for colorful metaphor.

We’ve updated our chart of the sources of financing of the U.S. budget deficit from the Fed’s Flow of Funds data released on September 16th.   The chart illustrates how the Fed and foreign central banks have been indirectly fully funding the  massive U.S. budget deficit for the last three quarters.   It will be interesting to see the data for the quarter ending today as no doubt there will be less yellow with the end of Q2 on June 30 and more “flight to quality” blue (domestic) and red (rest of world).

Denial. Denial is safe. Comforting. Religiously and relentlessly abused by politicians who don't want nor can face reality. A word synonymous with "muddle through." Ah yes, that "muddle through" which so many C-grade economists and pundits believe is the long-term status quo for the US and the world just because it worked for Japan for the past three decades, or, said otherwise, "just because." Well, too bad. As the following absolutely must read report, which comes not from some trader of dubious credibility interviewed by BBC, nor even from an impassioned executive from a doomed Italian bank, but from consultancy powerhouse Boston Consulting Group confirms, the "muddle through" is dead. And now it is time to face the facts. What facts? The facts which state that between household, corporate and government debt, the developed world has $20 trillion in debt over and above the  sustainable threshold by the definition of "stable" debt to GDP of 180%. The facts according to which all attempts to eliminate the excess debt have failed, and for now even the Fed's relentless pursuit of inflating our way out this insurmountable debt load have been for nothing. The facts which state that the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world's financial asset holders: the middle- and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path. But not before the biggest episode of "transitory" pain, misery and suffering in the history of mankind. Good luck, politicians and holders of financial assets, you will need it because after Denial comes Anger, and only long after does Acceptance finally arrive.

There are few things more cringe-inducing than a government-subsidized bank CEO spouting self-serving, entitlement-laden idiocy to the world just because he and his bank might be subject to some extra constraints. That hasn’t stopped JPM Chase CEO Jamie Dimon from acting like a spoiled, sociopathic brat while characterizing proposed Basel III capital requirements and regulations as ‘anti-American’ at every opportunity. They are not ‘anti-American’ but globally risk-mitigating in a time of widespread economic Depression, a point lost in the haze of Dimon’s megalomania....Here’s what’s really anti-American – big banks receiving extreme federal assistance while the rest of the country is crushed, loan refinancing and other foreclosure reducing negotiations are anemic, and both private and public sectors can’t finance enough job growth to alter our horrific unemployment or poverty situation.