Guest Post: Too Much Of A Good Thing Is Not A Good Thing

Tyler Durden's picture

Submitted by David Galland of Casey Research

Too Much Of A Good Thing Is Not A Good Thing

I am beginning to feel a bit like one of the French unfortunates stumbling through the fog in the Ardennes, circa 1914. Except that, instead of Germans full of deadly intent coming at me in the gloomy forest, it is a flock of black swans.

As it was for the French in the Ardennes, the number of problems – then Germans, now black swans – is becoming overwhelming.

Consider just a little of what we as investors, and as individuals looking forward to retirement in accommodations more commodious than a shipping box, must contend with:

  • The Euro-Stone. Despite all the bailouts and bluster flying about Europe, the yields in the wounded “piiglets” of Greece, Portugal, etc. have failed to soften to more tolerable levels. Worse, yields in the fatter PIIGS of Spain and Italy are hardening. This is of no small import to the German and French banks, which together are owed something like US$2 trillion by the porkers. At this point, it is becoming clear that the eurozone’s systematic flaws doom the euro to continue trending down until it ultimately takes its place in the pantheon of failed monies.
  • The Yen Has Lost Its Zen. This week the Japanese government again began intervening in currency markets because, remarkably, the yen has been pushed to highs against the dollar. This in a nation with a government debt-to-GDP ratio that is better than twice the also horrible ratio sported by these United States.

That ratio ensures that Japan’s long struggles will continue, burdened as it also is with the aftermath of the deadly tsunamis and the ongoing drama at Fukushima. Adding to its woes are the commercial challenges it faces from aggressive neighbors, and maybe worst of all, the demographic glue trap it is stuck in, with fewer and fewer young to pick up the social costs of the old. Toss in the waterfall plunge in Japan’s much-vaunted savings rate – formerly a big prop keeping Japanese interest rates down – and the picture for Japan is anything but tranquil.

  • China’s Crucible. There are many reasons for being optimistic about the outlook for China, including a large and hard-working populace. But there is one overriding reason to expect a big bump in the path to China’s emergence as the world’s reigning economic powerhouse.

Simply, it’s a capitalistic country with a communist problem.

Now, in the same way that some people believe in leprechauns or any of dozens of other magical beings, some people believe that an economy can be successfully commanded just as a captain commands the crew of a Chinese junk cruising along the coast. It’s a fantasy.

While the comrades in charge have done quite well – largely by getting out of the way of natural human actions – they are fast reaching the limits of their ability to navigate the shoals. As I don’t need to tell you, China is a massive country, with hundreds of millions of people capable of every manner of human strengths and frailties. But if they share one interest, it is in a job that allows them to keep their rice bowls full and a roof over their heads. Said jobs don’t come from government dictate – at least not on a sustainable basis – but rather by the messy process of free-wheeling commerce… and the more free-wheeling, the better.

In the July edition of The Casey Report, guest contributor James Quinn discusses the very real challenges facing China, not the least of which is that in the latest reporting period, official Chinese inflation popped up to 6.4%. Even more concerning was a 14% rise in the price of food.

Scrambling to keep employment high while also keeping inflation low, the Chinese government is throwing all sorts of ingredients into the mix – building ghost cities, raising interest rates, stockpiling commodities, clamping down on dissent, hacking everyone – but in the end, the irrefutable laws of economics must prevail. And so the Chinese government will have to atone for the massive inflation it unleashed in 2008, and for the equally disruptive misallocations of capital that are the hallmark of command economies.

While the blowup in China will wreak havoc in world markets, including many commodities, a bright side for gold investors is that the country’s rising inflation should help keep the wind in the sails of monetary metal. It’s no coincidence that the World Gold Council’s latest data show investment demand for gold in China more than doubling in the first quarter of this year.

  • Uncle Scam. Then there is the United States. Casey Research readers of any duration know the fundamental setup… The political avarice that dominates both parties… The fear and greed of John Q. Public and his steady demands that the government do more… The scam being run by the Treasury and the Fed to provide the funny money to keep the government running… The cynical attempts by certain politicians to stoke a class war… The cellars full of toxic paper at the nation’s financial institutions… The outright corruption and deceit of the various government agencies as they twist and torture the data to fool the people into supporting them in their scams.

But there’s a growing problem: An increasing number of people and institutions are coming to understand just how intractable the problems are. This has resulted in a steady move into tangible assets – gold, especially – that are not the obligation of any government. And it’s not just individuals and money managers moving into gold, but central banks as well. That is an absolute sea change from the situation even a few years ago.

Meanwhile, with the Treasury unable to borrow since May, a backlog in government financing needs has built up. Which begs the question: With the Fed standing aside (for the moment), where is the government going to find all the buyers for the many billions of dollars worth of Treasuries it needs to flog in order to keep the scam going?

If I were a conspiracy theorist, I might look at the sell-off in equities this week, triggered as it was by nothing specific, and see a gloved hand operating behind the curtain. After all, nothing like a good old-fashioned stampede out of equities to send billions chasing after “safe” Treasuries… which has been exactly the case this week.

Regardless, with the crossroads for hard choices now behind us, the global economy finds itself at the top of a long hill… with no brakes.

From here on, it will increasingly be every nation for itself – meaning a return to competitive currency devaluations and, in time, exchange and even trade controls.

And we will see a return of the Fed to the markets. On that topic, I will once again trot out a chart from an article by Bud Conrad that ran in The Casey Report a couple of years back.

I do so because it shows what I think is a very strong corollary between what occurred in Japan after its financial bubble burst and what is now going on here in the U.S. (and elsewhere). As you can see, as a direct result of the Japanese central bank engaging in quantitative easing, the Japanese stock market bounced back strongly. But then, when the quantitative easing stopped, the market quickly gave back all its gains.

(Click on image to enlarge)

If I had the time and the resources to whip up a chart overlaying the quantitative easing here in the U.S. of late versus the equity markets, I would. But I don’t, and so will delve into that fount of all information – the Internet – and grab a chart constructed by someone else (in this case, Doug Oest, managing partner of Marquette Associates – thanks, Doug!)

As one can readily see, the Japanese experience is indeed a corollary to what’s happened here, with QE pushing the stock market higher. Conversely, until the Fed comes back in, equities could be in for a rough ride. Likewise, when the Fed returns with the next round of QE, stocks could put in a very nice rally.

(Click on image to enlarge)

Some conclusions:

  1. The Fed will have to roll out another round of quantitative easing. And it will likely have to once again provide swap lines to the European central banks as it did in 2008 – though this time around, a belligerent Congress is watching the Fed’s every move, so it may not be able to move as quickly as it would have otherwise. In the end, however, given there is less than nothing being done on the front of fiscal policy, it will fall to the Fed to once again ride to the rescue. But it will do so on a lame horse.
  1. A delay by the Fed to act could help the Treasury, at least temporarily. Per above, the U.S. government has to move a boatload of paper by the end of this year. If it wants to avoid the dire consequences of having to pay out higher yields in order to attract sufficient buying, it will have to find a lot of demand in a hurry. Should the Fed sit on its hands a bit longer, especially in the face of the escalating euro crisis, the resulting turmoil in global equity markets could provide the necessary demand to clean up the backlog and keep the U.S. government operating.?(In July’s Casey Report, Bud Conrad dissects the situation and comes to some startling conclusions… and an emerging profit opportunity.)
  1. The return of the Fed may signal the beginning of the end. In the face of broad weakness in the global economy and in most commodities, the fact that gold has held up so well is a clear indication that there has been an intrinsic change in the gold market. Barbarous relic no more, it has clearly been returned to its longstanding role as sound money – unique and increasingly valued when compared to the fiat competition.

This role will only become more crucial as the world’s desperate nation-states fire their currency cannons in the war to remain viable. The Fed’s return to Treasury markets will be, in the rear-view mirror of future history, seen to be a seminal event – the beginning of the end of the current fiat monetary system.

Simply put, too much of a good thing is too much of a good thing. And make no mistake, the decades of operating under a fiat monetary system have been a very good thing for the political classes and their pandering cronies.

Those good times are coming to an end.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
km4's picture

terrific post and agree with conclusion

caerus's picture

and with the winter come clouds...and patience...and scorn...

Michael's picture

You would think the Republicans at the debate, were running for President of Israel.
Except for Dr Ron Paul.

Dr. Paul mentioned at the debates last night Israel had nuclear weapons.

And today, in an interview, Ron Paul said; "well, Israel has 300 of them".

Starting at about 3:00 in this video of the interview, you can see and hear those words said by Dr Paul himself.

This is an amazing video.

Ron Paul Trying To Break 100 Years Of Brainwashing 

http://www.youtube.com/watch?v=RnRqm6dvNr0&feature=player_embedded#at=126 

Pay Day Today's picture

I've always been so-so about RP, having assumed that he was just a plant by the establishment to provide a distraction and vain hope to the people who "get it". But now he has my undivided attention.

Prometheus418's picture

I've been a fan of Dr. Paul for years- but now I'd rather he retired than gain the presidency.  I'd fear for his safety if he was actually elected, and odds are he'd be saddled with all the blame for the mess we're in.    

Better to just have another useless clod to accept the punishment for this trainwreck.

FEDbuster's picture

I will vote for Ron Paul in the primary.  If he doesn't win, Obama will get my vote in the fall.

Restore the Republic, RON PAUL 2012

or

Hasten the Collapse, OBAMA 2012

Heroic Couplet's picture

I thought Ron Paul was going to grill Ben Bernanke in front of Congress. Did Ron Paul decide to punt to Dylan Ratigan? Do we have to wait until Alan Grayson runs again and gets elected?

Nathan Muir's picture

Ron Paul has grilled Bernanke, and every other FED chairman in the last 30 years.  His consistency and voting record is unparalleled in the US Congress, perhaps in US history.  Ron Paul has done more for the cause of individual liberty and freedom than any other person I can think of.  I volunteered in his 2008 campaign and plan on helping out next year.  Instead of bitching why don't you pitch in for the cause?  Ultimately, it is only the people, the individuals, which can restore our country to what it was intended to be.

Wild tree's picture

NM,

But, but, but how about American Idol, and the great job the MSM does on letting us know how peachy-keen things are right now? I'm content to let the "politicians" take care of us, as long as the checks don't stop coming. Now where is that dang remote..... Sarc off

"Ultimately, it is only the people, the individuals, which can restore our country to what it was intended to be." Yes Nathan, that is true. Sadly, most of those that could be counted on to do the right thing are dying off faster than they are being replaced. Individual self-sufficiency and personal responsibility seem to have "Gone with the Wind". I too have volunteered in trying to make things right, but the need is so great and the volunteers carrying the water seem to be old, and few. Keep up the good fight Nathan, in the hope that it does not become literal. I don't see it any other way unfortunately; the fight can't help but get real when the dollar defaults. We are seeing a tame preview in Great Britain right now, and that is only over entitlements. Imagine the color when it is over lack of food.

Long-John-Silver's picture

2011 Seasons of Change: Arab Spring, Euro Summer, American Fall, Winter Reset.

Escapeclaws's picture

You make me want to barf!

Cult_of_Reason's picture

A Six-Point Plan for Ending the Debt Crisis

http://www.spiegel.de/international/europe/0,1518,779984,00.html

 

Also FoxNews has been reporting tonight about a coordinating action in works between the Fed and ECB that will put an end to the EU crisis and guarantee a soft landing in the US that Clinton incidentally leaked to them -- US will help to bailout EU banks. What's up with that?

Ahmeexnal's picture

World's Taxpayers to bailout EU banks.

"KING EURO"

Cult_of_Reason's picture

FoxNews (Nightly Scoreboard) says, US taxpayers (Bernanke using taxpayer money) will help to bailout/backstop EU banks.

They said, it was the reason for the stock market being up today.

snowball777's picture

And you believed them? Buahhahaahahaha!

Smiddywesson's picture

But don't we already know that the Fed has already done exactly that with $16 trillion, much of it going to foreign banks?  Why should we expect any different behavior in the future?

If any lesson should be clear by now, they will spend anything to kick the can.  No costs are too high.

The only thing the centrral banks are doing that doesn't involve kicking the can is amassing gold.  Hmmm?

snowball777's picture

Not to mention the liquidity swaps, but it was the "market going up" causal ponderance that really made the coffee fly out my nose.

I'm not sure on the "return to the gold standard" thesis (I've read your other posts to that effect)...most of them already have plenty of gold (in theory, at least) and while it may be leased far and wide, don't they only need to continue their debasement in order to achieve the goals you've stated for them? Why the need to accumulate more? If its proper gearing to the multi-trillion dollar economy isn't that just a matter of picking a ridiculously high number per toz?

Pegasus Muse's picture

"FoxNews (Nightly Scoreboard) says, US taxpayers (Bernanke using taxpayer money) will help to bailout/backstop EU banks."

So how is this any different than the under-the-table money printing & bailouts the Fed's been doing all along? 

Senator Bernie Sanders:

================= 

The Fed Audit

 

Share This

July 21, 2011

The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse.  In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed.  Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.

In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds.  One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.

To Sanders, the conclusion is simple. "No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed," he said.

The investigation also revealed that the Fed outsourced most of its emergency lending programs to private contractors, many of which also were recipients of extremely low-interest and then-secret loans.

The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo.  The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.

A more detailed GAO investigation into potential conflicts of interest at the Fed is due on Oct. 18, but Sanders said one thing already is abundantly clear. "The Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street."

To read the GAO report, click here.

 http://sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3

 

Cult_of_Reason's picture

Official US Bailout of European Banks in the Works

Gasparino on Fox Business reports Obama, Treasury and the US government is discussing how to backstop the European banks. That means the US taxpayer guarantees Euro debt. Gasparino says they will be working hard all weekend to get it done.

http://www.investorvillage.com/smbd.asp?mb=144&mn=80033&pt=msg&mid=10836603

Caviar Emptor's picture

Told ya 2 yrs ago: Ben will bail the world. It's inevitable. And (best of all) it won't stop. Because a pail with a hundred holes in it needs constant refilling. He'll have to start all over again soon enough. 

Cult_of_Reason's picture

If ECB and the Fed simultaneously monetize (print money) a trillion of debt each (coordinated QE), EUR/USD cross will not change (though gold will go parabolic from two trillion of fiat injected into the system).

CosmicBuddha's picture

Gold is going to $56,000-$60,000 an ounce by the end of this fiat bond bubble nonsense.

Long-John-Silver's picture

This will not be the first time Gold has reached the high plateaus.

Gold Mark in Paper Marks.

macholatte's picture

Didn't we read right here on ZH that nearly all of QE2 went to bail out the EU, or did I miss something?

So, if that is correct, what's the big surprise? Isn't the American tax payer the sucker of first resort, the chump who gets his pocket picked, insulted, spit on and still comes back for more?

Moe Howard's picture

The European Banksters own us. Benjamin Shalom Bernake is their agent. We are a cow to be milked. AIG was used as a funnel for billions of dollars of taxpayer cash to Europe. We the voters control nothing, as seen in the 2010 election, which has had zero effect on economic policy.

They will drain us dry and blame us for the problem. That's how these parasites have worked for hundreds of years. Name one Rothschild who was in a death camp in WWII.

CompassionateFascist's picture

Rumor has it that one of the younger RedShields had to hide out in a haystack in France for awhile. Not surprising that Nazis went EZ on Rothschilds and other rich, Zionist collaborators; 3rd Reich got plenty of finance via Rothschild cognate Mantagu Norman at BOE during 1930s. South African/Brit Zionists also bought Churchill during same timeframe, and there's your World War.

Herbert Philbrick's picture

Well, if it's on Fox News and reported by Gasparino, it must be true.  

kito's picture

tyler woudve covered something that big, dont know if we should make anything of it.

Smiddywesson's picture

Why not?  We can't even guarantee to pay our own debt, why not their's too?  

In fact, I can guarantee we can't pay our debt.  So it doesn't matter who we backstop.  Hell, let's backstop Japan's debts, they could use some assistance.

ViewfromUndertheBridge's picture

Did you read those six points?

From (aptly titled) No. 2: " euro-zone officials could even replace those of individual nations to perform duties such as collecting taxes and implementing plans to cut costs and privatize state assets"

They tried a similar arrangement in 1939 (though they called it a different name), it ultimately met with some resistance and had considerable human and social costs.

Despite my more optimistic contribution below, if this is truly the state of their thinking this thing is fucking over.

Cult_of_Reason's picture

It is surreal. Basically, this German economist proposes, we will lend you more money so you can pay interest on your debt to our bankers, but in return you will allow us to occupy your country.

It just shows how f*cked up this European experiment is.

Spitzer's picture

If you  think the ECB is fcuked up more then the Treserve then you know nothing about central banking.

wisefool's picture

+1 Dammned straight. And those who dont realize that ... as much as the EuroTrash are playing out the doughboys with PhDs from universities that were founded by the crown .. better understand that Sun Tzu and Ghengis Khan invented the fork, sold it to the Europeans, and now laugh at them while they eat.

Moe Howard's picture

Yes, having your mouth in a bowl and using two sticks as shovels is superior. What fools the Europeans are. Now get back in the rice paddy, fool.

Pay Day Today's picture

East Asia will have the last laugh.

They've always understood Westerners as mercantile barbarians after all is said and done.

ping's picture

That's great, honey. Now why don't you fish a dollar from your purse and go get me a sandwich?

Smiddywesson's picture

German payback for French occupation of the Rhineland.  We are stuck in replay mode.

Mactheknife's picture

>What's up with that?  It's like this...most Euro banks are owned or controlled in some part by the Rothchild cartel...that's right, decendents and partners of the original father and sons.  They also own a big part of the JP Morgue (they helped JP get his start) which in turn owns the Federal Reserve and they bought out the rest of our government a long time ago. Get it? That's not tin foil stuff, that's history. They would just rather you didn't remember that.

Escapeclaws's picture

Horrible plan. He wants to make those EU politicians have even more power. We need to take power away from politicians. I'm convinced that politicians are the worst sort of people. How did we get rooked into trusting them with our welfare?

Down with politicians--the scum of the earth!

slicktroutman's picture

Consider most politicians are lawyers........scum becomes scum....

Lord Welligton's picture

It would be foolish to expect that even a perfect implementation of these six measures could solve all aspects of the debt crisis for ever. There will always be governments that don't keep to what they've agreed to do, as well as others that continue piling up debt. These proposed solutions are practical, but not perfect.

Neither will they be able to prevent the next crisis. But they would help to make it less likely -- and, if worse comes to worst, they'll make it easier to deal with the consequences.

It's all nonsense.

Can only be achieved by Totalitarian Government.

Good luck with that.

In the words of GW Bush. "This sucker's goin down".

Only a matter of time.

Smiddywesson's picture

A six point plan to end the debt crisis and a Fed ECB coordinated action to put an end to the EU crisis?

I have a three point plan

  1. kick the can
  2. Buy as much gold as possible
  3. Announce a "gold standard" and ramp gold prices so everyone who doesn't hold gold sees their net worth track inversely to high manipulated gold prices.

Gold, tomorrow's stealth tax for those that don't hold it.

ISEEIT's picture

You of course do not believe that Fed intervention globally is either new or anything more than a prop right? The effort to support the EUR above 1.40 has been a global (globalist) hot potato for quite some time now. If the E.U experiment were (when it does) implode, with that goes agenda 21 and the whole elitist framework for single, centralized global governance. All the 'generals' have been participating. The IMF bid to hold EUR/USD over 1.42 all of Friday. They are scared as hell (which is likely the origin point of their souls) of the grand design collapsing. This shit has been in the works for a very long time. How long is debatable. The fact that globalist have this agenda and that the agenda has achieved a significant percentage of their goals is not debatable. It is history.

Of course the Fed is propping the EUR. Even the Chinese elite have been brought into this game, although it does appear that they may be ready to pause for a bit and reconsider an alliance with the western bankers.

My skin in the game is that ultimately this EUR/USD battle is lost. EUR takes a hit to near parity. Just a battle though. The war will go on.

Ahmeexnal's picture

And now, the Chi-Chi riots.

China

http://thecomingcrisis.blogspot.com/2011/08/china-riots-thousands-take-t...

Chile

http://www.guardian.co.uk/world/2011/aug/10/chile-riot-student-protest-v...

 

Chile's government is about to collapse. Fascist Pinera is already less popular than Pinochet.

kito's picture

whaaaaaat!!! chiles govt is about to collapse?!?!? simon black told me its the greatest place in the world to live!!! a house for $100 with mermaids in the swimming pool!!! the police give children lollipops!!!!chilean inflation protection bonds!!!!!! i poured every dollar into the country through all those nice people that simon introduced me to!!!!! it cant be!!! NOT chile!!!!!

Vic Vinegar's picture

Way to bring it as you usually do dude.  Good stuff here.

Moe Howard's picture

Hey, I didn't hear about the mermaids in the swimming pool! Is it too late to get in on Chile?

Rodent Freikorps's picture

The bottom half is a fish, you know.