Free Money

What took Ben Bernanke sixty minutes of mumbling about tools, word-twisting, and data-manipulating to kinda-sorta admit - that in fact he is lost; Ron Paul eloquently expresses in 25 seconds in this Bloomberg TV clip. Noting that "we are creating money out of thin air," Paul sums up Bernanke's position perfectly "We've Lost Control!" From mal-investment to Bernanke's frustration and the unintended consequences, the full 5-minute interview is a must-watch.

There is one last irony in Bernanke's constant promotion of his powers to unleash QE. Having talked up the market for years with his promises/threats of QE, the market has priced in ever higher doses of QE, in effect bidding expectations of QE's effectiveness to the sky. Bernanke has lost the power to surprise the market. Having raised expectations to the sky, he must deliver something beyond the stratosphere to surprise the market. But he doesn't have anything capable of matching the absurd expectations he's inflated, never mind exceed them. The only surprise left is a negative one. Chairman Bernanke and his fellow doves will soon realize the consequences of over-promising and under-delivering. It works better the other way around, but now it's too late.

Two weeks ago when we posted "The Kangaroo In The Metals Mine: Fortescue Trying To Raise $1.5 Billion From 20 Banks As Iron Prices Implode" we observed several developments in the bond prices of Australian mega iron miner, and fourth largest in the world, Fortescue, which suddenly found itself in dire need of cash which is always a first step to insolvency, which made us comment that just "like that we are back to those days of 2008 when the Chinese demand collapse meant any day could be FMG's last. Happy days are back again." Not really. We added that "as usual, the bond market is the first to get the memo that the landing is going to be a hard one. We give the farce that is known as equities about 4-6 weeks before they too get the memo." We were actually wrong: it took just two weeks for equities to finally figure out what we were warning about. From Reuters: "The world's no.4 iron ore miner Fortescue Metals Group Ltd has asked lenders to waive debt covenants if iron ore prices remain under pressure, the firm said on Thursday, after its shares suffered their worst loss in almost four years. Like other Australian miners, Fortescue's earnings have come under pressure from a plunge in commodity prices caused by weak demand in top consumer China. This has squeezed its ability to service its long-term debt, which stands at $11.3 billion." Of course, those who read our August 31 report, and were positioned accordingly and ahead of the market, made 20% in two weeks.

Cui bono--to whose benefit?--is a skeptic's scalpel that cuts through the fat of propaganda and political expediency to the hard truth. Since the world has been trained (in Pavlovian fashion) to hang on every word issued by America's privately owned central bank, the Federal Reserve, it's appropriate to ask a simple but profound question: Who benefits from the Fed's existence and its policies of loaning "free money" to banks at 0% and ZIRP (zero interest rate policy)? The Status Quo's answer is "the American people," of course, a deliciously juicy layer of "Big Lie" propaganda and obfuscation. Any healthy political and financial system would have broken the fraud-based system and dismantled the failed banks en masse in an orderly fashion. One institution stopped this from happening: the Federal Reserve. The Fed exists to serve the banks. Everything else is propaganda. Ever-expanding debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs. Cui bono, baby.

I have often identified Keynesian economists and the Federal Reserve as cargo cults. After the U.S. won World War II in the Pacific Theater, its forces left huge stockpiles of goods behind on remote South Pacific islands because it wasn’t worth taking it all back to America. After the Americans left, some islanders, nostalgic for the seemingly endless fleet of ships loaded with technological goodies, started Cargo Cults that believed magical rituals and incantations would bring the ships of “free” wealth back. Some mimicked technology by painting radio dials on rocks and using the phantom radio to “call back” the “free wealth” ships. The Keynesians are like deluded members of a Cargo Cult. They ignore the reality of debt, rising interest payments and the resulting debt-serfdom in their belief that money spent indiscriminately on friction, fraud, speculation and malinvestment will magically call back the fleet of rapid growth. To the Keynesian, a Bridge to Nowhere is equally worthy of borrowed money as a high-tech factory. They are unable to distinguish between sterile sand and fertilizer, and unable to grasp the fact that ever-rising debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs.

The disregard for the future and the fundamentals of fiscal well-being is about to reap consequences. The Powers That Be counted on "time healing all," as if the mere passage of time would magically heal a broken economy and political machine. Time heals all--unless you have an aggressive cancer. The system has been pushed to extremes: the expectations are impossibly high, the promises are impossibly generous and the sums of money demanded by the vested interests "just to stay afloat" are stratospheric. The "run to fail" levers have all been pushed to the maximum, and it is simply too politically painful to make any real-world adjustments that might save the system from imploding. Nobody wants a crisis, yet a crisis is the only thing that can save the system from implosion.

Saving the World somehow seems like an extreme sport. It is talked about by many but practiced by few. The newest attempt has been claimed by Mario Draghi but it may be one of those Lance Armstrong kind of things where the steroids of the moment pushed the claimer past his boundaries. The markets, the equity markets in particular, have been betting for weeks that the world was going to be saved and have been waiting for the evidence of the transformation as I have stood on the sidelines and shook my head. I have seen the prophets before; the world is going straight to Heaven, the world is going straight to Hell and yet somehow we always find ourselves stuck in Perdition where mankind vacillates between the two. In Mario Draghi’s case, you see, he needs the parishioners to go along with the scheme and while everyone may share the same Bible the interpretation is not the same.

The odds of some instability erupting globally in 2013-14 seem high, but what the trigger might be remains unknown. The fragility and vulnerability of systems pushed to extremes are like sandpiles: it doesn't really matter which grains finally trigger the cascade; the system's rising instability is the causal factor. Where does this put us? If the ultimate crisis is another decade away, we might as well enjoy what we can in the meantime and assemble the pieces of a semi-sustainable life: income streams that we own/control, a very low cost of living, and property in areas that are universally desirable, i.e. they have decent weather, surface supplies of water, concentrations of intellectual and financial capital, and ideally, a functioning local government that isn’t hopelessly corrupted by vested interests. Any disadvantages in these resources can be offset by a solid network of friends, family, associates, business contacts, etc., i.e. social capital. I think it is safe to assume the promises of Social Security, Medicare and pensions will be chipped away by one force or another (inflation, taxation, “austerity,” etc.) and so those who have written these out of their own personal expectations will be psychologically primed for self-reliance embedded in local support networks.

Listen up, debt-serfs, you have it good here on the manor estate. You get three squares of greasy fast-food or heavily processed faux-food a day, and if Reverse Robin Hood and his Merry Band of Thieves is ripping you off it's for a good reason: the predatory Neofeudalist Financial Lords need the money more than you do, as they have a lot of political bribes to pay: it's an election year, and the bribes are getting increasingly costly. Poor things, we're sure you understand. Now go back to work or watching entertainment (or "news," heh) and leave the Lords alone - but answer these 11 questions first, before hailing the new hero.

Complicity reigns supreme as everyone benefiting from a scam keeps quiet about everyone else's skim lest their own share of the spoils fall under the harsh light of inquiry. Can an economy that has become dependent on lies, misrepresentation, "fudging" of numbers, fraud, embezzlement and a multitude of skimming and scamming operations escape the moral and financial black hole it has created? The self-evident answer is "no."

What do we call a power center that enables and enforces neofeudal exploitation and predation? We call it evil. The Federal Reserve is a force of evil that should be abolished at once. Its purpose - enabling and enforcing a neofeudal transfer of wealth from the productive many to the unproductive, parasitic few - is evil. Those within it are serving evil. Those who defend it are serving evil. Those who worship its power are serving evil. Those who mask its true nature are also serving evil. In a society and culture that has lost its moral compass, a culture of greed, self-serving lies and corrupt vested interests, the word "evil" has lost its power. It has been reduced to a cartoonish label, a cynic's smarmy joke.

When your local friendly Too-Big-To-Fail bank needs a 'helping hand' loan to get through pay-day or buy some extra S&P futures, it picks up the shiny red phone and asks Ben for unlimited access to free money. When the 'rest-of-us' need a little extra - to get through the next week before our pay-check hits, we call this guy - who charges a 400% APR. The Central Bank Discount Window - Priceless.

Organic growth is slow and painful (Boo!), central bank money fast, cheap and with few strings attached (Yes!)…And anyway, QE and other supports have already been priced in… Can’t change the programme.

We think as a matter of political reality, given the German polls, that Berlin will refuse to adequately fund Greece and that they will be forced back to the Drachma as a matter of Ms. Merkel’s desire for re-election. The honest truth is that the Greek debts have become so large and so impossible to pay that unless there is absolute debt forgiveness, which we think is politically impossible in Germany and a number of other European countries; the country must roll over as a matter of fiscal reality. In March, the last figures that are available, the Spanish banks lost $66 billion of capital as the citizens of Spain moved their money to safer havens. What the LTRO gave, the populace took away and the situation is unsustainable. Spain will soon be forced into a full-fledged bailout in my opinion which will require money for the regions and for the banks. What amazes us the most is that so many people have the honest opinion that Sir Draghi is going to come charging out from the round table, from the gilded gates of the ECB and save Europe. That White Knight is subject to the whims of Germany and the rest and all of the talk of independence and the separation of Church and State is just that; talk.

You may recall that one of the “tricks of the trade” was the use of people in the audience. They stood up and claimed that they had taken the magic potion and were cured of rheumatism, arthritis, cancer and that ninety year old Uncle Elijah and been able to throw away his cane after imbibing the stuff. This may remind you of what is going on in Europe presently as politicians from each and every nation claim that the newest European snake oil will cure the ailments of Europe for all time, for forever and for always. Yes, well, the printing of money has a cost besides the paper and brandishing yourself as the next new Savior of Europe is the trick of Kings and countless empires on the Continent and yet here we are after being saved so many times in the past. So I will tell you this; you produce the Vampire and then I will buy the garlic and we’ll leave it at that!