Central Banks

As the herpe of sovereign default continues to flare across Europe, Jürgen Stark of the ECB paints a refreshingly honest portrait of the horizon: "we may already have entered into the next phase of the crisis: a sovereign debt crisis." The sum of 'Taking stock: where do we stand in the crisis?' in four lines: while continental Europe is a deformed cripple; the US, UK and Japan are each morbidly obese, wart-ridden trolls; it's last call and everyone's drunk; so who do you want to lay with?

The ECB's executive board member Juergen Stark had a rare admission (and even rarer for a central banker demonstration of rationality) that not only are most advanced economies about to enter a "third wave, a sovereign debt crisis in most advanced economies", not only is a "timely exit of extraordinary fiscal measures crucial in order to ensure a continued recovery",  but that the mentioned recovery and economic improvements are largely as a result of "massive support measures taken by governments and central banks." In other words, the whole episode of the past year has been a one-time item which most analysts would exclude from "recurring operations" yet due to the magic of the Keynesian magic wand, the new normal is expected to persists as the magical "consumer" at some point takes over the recovery from the government effort. Alas, while the economy has indeed stabilized (effect), the cause continues to be purely based on governmental actions, as the consumer, and the private sector in general, continues retrenching. Too bad the US Federal Reserve has no aerobic critters than can formulate the same critical thoughts as Mr. Stark, or else they would realize that the path they are leading the US on is pure disaster, and furthermore, with the lessons from the last bubble fresh in everyone's mind, doing all they can to be branded mad, at least according to the Einsteinian definition of insanity: let's just keep flooding the system with money and keep hoping that something will change. In retrospect, pleading insanity in a decade when the entire western world is in ruins, before a tribunal of the people may not have quite the desired effect.

Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott

We apologize in advance for the NY Magazine-style headline, but this is a report that has to be read by all Senators who are preparing to reconfirm Bernanke for a second term. When voting for the Chairman, be aware that all of America will now look at you as the perpetrators who are encouraging the greatest inter and intra-generational theft to continue, and as prescribed by Newton 3rd law, sooner or later, an appropriate reaction will come from the very same middle class that you are seeking to doom into a state of perpetual penury and a declining standard of living.

America spoke in Massachusetts and will speak again very soon if you do not send the appropriate signal that you have heard its anger - Do Not Reconfirm Bernanke.

One month ago, Zero Hedge did an exhaustive examination into the topic of over half a trillion of foreign FX liquidity swaps to central banks issued by the Fed, and how by administering this unprecedented incursion into international monetary policy, Ben Bernanke became the lender of last resort not only to US institutions on the brink, but to all those foreign central banks, and thousands of foreign financial institutions, who were massively short the dollar the last time the bubble popped (ring a bell?). Since we have ended up in the same boat promptly once again, and since the ponzi scheme can only continue so long before all those short the dollar scramble to cover shorts at some point in the future, as Roubini has predicted, it is merely a matter of time before the Fed will need to disburse another trillion or so of FX swaps to bail out all those who are shorting the US middle class into oblivion. We ignore the ethics of bailing out those who have done nothing but piggyback on the dollar carry trade, and in doing so, have decimated the purchasing power of America's working class, which is precisely what Ben Bernanke did. Buying stocks may be patriotic but bailing out those who want your dollar to purchase less tomorrow than it can today, sure does not pass the sniff test (Bernanke, of course, being at the top of that particular food chain).

India buys 200 metric tons of IMF gold.

Who's next?

Asian central banks have left unattended a bunch of pretty upset carry-traders... We had a well-established support line on EURUSD and on Friday when we tested it (for the 5th or 6th time) central banks came to the rescue. However, when we tried to break again this morning, the market awaited... in vain, and with no massive buyers it's a wave of stops that met the swing traders selling the break.

"The IMF’s Q2 COFER data show that central banks are increasingly reluctant to accumulate USDs. EM central banks appear much more aggressive than in the past in shifting out of the USD into other G10 currencies. This makes it likely that USD pressures will mount as, increasingly, the currency’s buyers of last resort are reticent buyers." - Barclays Capital

All global economic problems today are rooted in the existence of Central Banks and their commitment to an application of destructive Keynesian economic theories to our global monetary system that simply has not worked for the better part of this century. Within the realm of academics, monetary policy, politics and media, there is a persistent refusal to acknowledge the primary role Central Banks undertake in artificially creating boom-bust cycles that would not occur in such severe fashion were Central Banks simply willing to step out of the way and allow free market forces to operate.

"The Federal Reserve System has disclosed to GATA that it has gold swap arrangements with foreign banks that it does not want the public to know about. The disclosure contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally." - GATA

The most recent quarterly data confirms the MBS->Treasury flight. In all reality, the Fed will likely have to expand the agency/MBS portion of QE even more than the Treasury monetization portion when it is time for QE 2.0, as foreigners want to have increasingly nothing to do with Fannie and Freddie. Yet their poison, is the eager involuntary meat of US taxpayers, or so Bernanke will like everyone to believe.

Another quite intriguing piece by Chris Martenson "The Shell Game - How The Federal Reserve Is Monetizing Debt" reveals some of the intricacies of the Fed's monetization game and, by digging deeper into the Fed's Custody Account, demonstrates not just how the Federal Reserve is enabling foreigners to swap out of Agencies into Treasuries, but how it is implicitly monetizing a markedly larger portion of debt than is assumed.