Even if you don’t buy that QE and ZIRP will lead to a dollar collapse, you do have to admit that these Fed policies have severely brainwashed investors. The Federal Reserve is the boiler room operation that has pumped up the equities market by way of QE and ZIRP. You are investing in a pump-and-dump scam. And like in all such scams, you will lose. Clear enough for ya?
Neoliberal economics has been a wonderful driving force for progress and material prosperity - but it cannot be the single ruling principle of our lives, of our government, or of our society. If we allow the profit motive to be the only motive, then we and our society are doomed. We are already seeing the shape of that doom, in our health care, our government, and our industry.
If policymakers were gunfighters, they’d be out of bullets: They have run out of effective policy tools to improve the economy.
So the question is simple: If there is a recession in 2014, and policymakers are out of bullets, how will it play out across the American economy?
MERS: The Center of the Mortgage Scam
My colleague and erstwhile nemesis Gonzalo Lira posed the question above in a recent essay, and it is indeed a most puzzling one. Given that the world’s central banks — joined most recently by a shockingly reckless Switzerland — are waging all-out economic war by inflating their currencies, shouldn’t gold be soaring?
The newly elected Japanese Prime Minister, Shinz? Abe, has caused quite a stir. The leader of the Liberal Democratic Party, which scored a landslide victory in 2012’s election, he’s promised to restart the Japanese economy, whatever it takes. How will he do this? By “bold monetary policy”, what he means—and what he has said—is to end the independence of the Bank of Japan, and have the government dictate monetary policy directly. The perception is, the Bank of Japan will not only print yens and buy government bonds à la Quantitative Easing of old - it is also generally thought that Mr. Abe and the incoming Japanese government fully intend to target the yen against foreign currencies, like Switzerland has been doing with the euro. This perception is what has been driving the Nikkei 225 index higher, and driven the yen lower. But why was this decision triggered?
The Fed is caught between a rock and a hard place. If they inflate, they risk the danger of initiating a damaging and deleterious trade war with creditors who do not want to take an inflationary haircut. If they don’t inflate, they remain stuck in a deleveraging trap resulting in weak fundamentals, and large increases in government debt, also rattling creditors. The likeliest route from here remains that the Fed will continue to baffle the Krugmanites by pursuing relatively restrained inflationism (i.e. Operation Twist, restrained QE, no NGDP targeting, no debt jubilee, etc) to keep the economy ticking along while minimising creditor irritation. The problem with this is that the economy remains caught in the deleveraging trap. And while the economy is depressed tax revenues remain depressed, meaning that deficits will grow, further irritating creditors (who unlike bond-flipping hedge funds must eat the very low yields instead of passing off treasuries to a greater fool for a profit), who may pursue trade war and currency war strategies and gradually (or suddenly) desert US treasuries and dollars. Geopolitical tension would spike commodity prices. And as more dollars end up back in the United States (there are currently $5+ trillion floating around Asia), there will be more inflation still. The reduced global demand for dollar-denominated assets would put pressure on the Fed to print to buy more treasuries.
There continues to be no coverage of silver in the non specialist financial media and little coverage of silver in the specialist financial media. However, both the Financial Times and Bloomberg cover silver today which might be a harbinger of short term weakness. The majority of articles on silver are bearish and most bank analysts remain bearish on silver again in 2012 – as they have been in recent years. Prices will average $37.50/ounce in Q4, according to a survey of 13 analysts by Bloomberg. The lack of coverage of silver and consequent “animal spirits” in the silver market is of course bullish from a contrarian perspective. Analysts look set to get the silver market wrong again as recent rocketing industrial demand for silver, from solar panels to batteries to medical applications and growing investor demand for coins, and small & large bars is “diminishing a supply surplus” according to Nicholas Larkin of Bloomberg. This has led to silver’s best January gains in 30 years with silver up over 20% from below $28/oz to nearly $34/oz. Barclay's estimates that manufacturers will need a 2.5% increase of the metric tons used last year and investment demand continues to grow due to risks posed by both inflation and systemic risks. Silver supply shortages are something we and other analysts who are bullish on silver have been warning of for some time. This is because the silver market is small versus the gold market and tiny versus equity, bond, currency and derivative markets. This is why we believe silver should rise to well over its nominal recent and 1980 high of $50/oz in the coming months.
"So Rick Ackerman posted a piece that I spotted on Zero Hedge—which surprised the hell out of me. Either Tyler and his gang of merry pranksters are losing their nerve about the downward trajectory they think the U.S. economy and monetary policy is headed in—or they ran the piece for shits and giggles. Ackerman’s piece said, in effect, that dollar hyperinflation was impossible. His post was titled “Big Gap in Logic Weakens Hyperinflation Argument”. The cause of hyperinflation is always the same: Spiralling prices that cannot be reigned in with traditional monetary policies of interest rate hikes. But Ackerman doesn’t see this: In his piece, it’s clear he doesn’t realize hyperinflation is an effect of rising prices. Eventually people realize the money itself is to blame—but only eventually, at the end. That’s why Ackerman’s first sentence sort-of makes sense, but not really. But although Ackerman is partly right in the first sentence, his second sentence? That it’s “highly unlikely that this will happen in the United States”? Brother, a panic in the dollar that leads people to exit it for commodities has happened already—and not that long ago: In 1979-’80, when inflation crossed the double digits but before Volcker slammed the brakes via interest rate hikes, people were beginning to get out of the dollar and into anything else, especially commodities, especially gold and silver." Gonzalo Lira
The recently announced Quantitative Easing 2 policy of the Federal Reserve has had and will have a profound effect on the dollar—and a profound effect on the American people: Especially the bottom 80%. In a word, QE2 will make four fifths of the American people poorer. Bernanke’s stated purpose in QE2 is to spark consumer spending, and thereby reignite the economy. But QE2 will have the paradoxical effect of making basic necessities—food, housing, clothing, transportation—more expensive for everyone. This will mean that basic necessities will take a bigger bite out of household incomes, reducing consumption, rather than stimulating it. So like a frog dropped in a pot of cold water that's had the heat turned up, the American people—especially the bottom 60% to 80% of the population—will slowly be boiled to death in the stew of QE2. —Gonzalo Lira
The life of a fluffer like Brad DeLong is long and hard — and contradictory: Defending his master, Paul Krugman, from all bloggers and infidels, while at the same time attacking people like David Broder, for saying the exact same things that Krugman is saying. Here's my little examination of Brad DeLong — the poor, hapless fluffer in the porn movie known as Keynesian economics. —Gonzalo Lira.
The rise in oil and grain prices over the last several months will be reaching Main Street by this winter. Gonzalo Lira argues that those price rises, coupled with the Federal Reserve's Quantitative Easing 2—scheduled for announcement in the coming two weeks—as well as the escalating Currency War with China will inevitably lead to runaway inflation: And he is prediciting it will start this March of 2011. —Gonzalo Lira
Gonzalo Lira picks up on a topic much discussed on Zero Hedge, if not so much elsewhere: the religulousity (thank you Bill Maher) of the "science" of economics: "It’s no great insight to say that economics—the so-called “dismal science”—has had a dismal track-record in terms of predicting macro-economic events over the last forty-odd years. And as for the last couple of years? Sheesh—a monkey throwing darts would have done a better job of predicting how the macro-economic picture would play out. But I argue that economics is not and has never been a science—what's more, it's become a religion. And just like any religion, it has adepts, denominations, and orthodoxies. Which is why it will fail in its efforts to get out of this Global Depression." —Gonzalo Lira.
We’ve seen this movie so many times already, we can practically recite the ending: The Too Big To Fail banks are once again in the middle of another crisis—another mortgage crisis—that’s breaking like a bad rash. And this new scandal has so many moving parts!
Robo-signings!—Foreclosure mills!—Forged documents!—Attorneys General huffing and puffing!—Too Big To Fail banks tottering!—Foreclosures suspended!—Bond holders freaking out!—Credit default swaps shooting the moon!—Aaaaaahhhh!!!!! Again. As I explained in a long piece discussing the current Mortgage Mess, all of these different issues are all symptoms of the same disease: The Mortgage Backed Securities—America’s Herpes: The gift that just keeps on oozing. - Gonzalo Lira
I wrote a couple of weeks ago about Brian & Ilsa, a retired couple in their sixties who were trying to refinance their house through HAMP, but were being jerked around by their bank—probably so the banks and servicers could get government bonuses that created perverse incentives to put homeowners into the HAMP program, then toss them out after a three-month "trial mod". In this update of their story, we find out the happy ending they got—and the cattle-prod to the crotch that their bank got. All Brian and Ilsa needed to do was say four little words: "Show Me The Note." — Gonzalo Lira