One needs to look no further than Europe and its ongoing (no it isn’t over) debt crisis. The factoids have been around for a while now. Italy’s need to borrow roughly 300 billion Euros just to service its debt in 2012. The absolute failure of Greece’s austerity programs. And to top it off, the installation of shady leaders in both of these countries whose intentions should be questioned from the outset of their tenure simply because they are clearly establishment technocrats. Many of you have soundly criticized me for being ‘extremist’ because I suggested several times last year that what we’re actually seeing are economic coup d’ etats. What else can it be called when an organization enables a country to get into trouble with debt, then offers its own solution (more debt), then installs one of its operators as the country’s leader to make sure the solution is carried out? How would you feel if you had credit card debt that exceeded your yearly income and your friendly bank rep called you and said they’d bail you out by giving you even more credit, then sent a rep to live with you and control your budget when you balked or didn’t make enough spending cuts? Sometimes complicated things make sense when put in simple terms and that is exactly what is going on here.

Austerity is a cruel joke, and the national riots, strikes, and other discord that have resulted from attempts at austerity must be given our attention because it is all coming here. There is no point defined in time when a debt crisis will blossom. Many will argue that America is immune from a Euro-style debt crisis because we have a federal reserve that is willing to buy every single bond if it needs to. They will tell you we are immune because our currency is the ‘gold’ standard (sarcasm mine) of all the world currencies, and it is backed by the full faith and credit of the USGovt. If you’re still able to read this with a straight face, then you know what all this means. It is a paper promise based on an even shakier perception of ‘trust’ in an institution that deserves none. While it is true that we may not get the social anxiety and discord because of austerity, we will certainly get it because of the total loss of confidence in a currency that really died more than 40 years ago.  In the worst case, we’ll get both.

As we move into 2012, the European mess has been tabled for the past month so as not to interfere with the traditions of overconsumption and debt accumulation that normally accompany Thanksgiving through the New Year. I find it sadly ironic that the same Bible that speaks of the birth of Christ also speaks of the consequences of debt and the accumulation thereof. Yet each Christmas we spend well beyond our means not to shower gifts upon Christ as was done in the Bible, but on ourselves and then spend the better part of several months trying to pay it all off. Some never do. This might seem irrelevant, but when you think about it, this is precisely what we’ve been doing on a national scale for decades now. Borrow and spend to fund the current ‘party’, and then push payments well into the future. As Europe is just beginning to find out, the ‘buy now, pay later’ paradigm has become a dog that won’t hunt anymore.

A German Solution

The biggest story so far of 2012 is the negative yields on German debt. Monday’s 3.9 billion Euro auction sported an average yield of -0.0122% .We had a similar situation here in the US in the fall of 2010 when negative yields were achieved on 3-month treasury bills for a short period of time. Obviously, these are not novice investors that are making the decision to pay a government for the privilege of lending it money. These are financial institutions: banks, brokerages, and hedge funds that are conducting these types of transactions. They’re willing to take zero interest, and in fact, pay a small premium for the ability to park their money somewhere they feel is ‘safe’. What is interesting is the fact that anyone considers Germany to be safe. Germany is essentially the Daddy Warbucks of Europe, spreading around the hard work and savings of the German people to the rest of Europe, which can easily be described as the biggest welfare state in the history of mankind. Any sane person would at this point be questioning the continued willingness (forget for a second the ability) of Germany to continue in its role as the piggy bank that never runs dry

So scared are professional investors that they’re willing to pay someone else for the privilege of lending money to them. I’ve heard several analysts comment that these negative yield auctions are merely a social engineering tool that is being used to condition the rest of us to accept near-zero interest rates ad infinitum. This may well be accurate, but just in case it isn’t, we need to consider the naiveté of even pro investors in terms of selecting ‘riskless’ assets. While it is true that in absolute terms there is no such thing – as we’re now learning the hard way, there are certainly better means of lowering your beta than just piling money into a country that is filling its role on borrowed time. Yet the same people who dove into subzero rate auctions in Europe are the same ones who dove into our subzero auctions just over a year ago. Such folly underscores the need for the re-emergence of hard currencies; meaning those backed by gold and/or silver. Resource-backed currencies such as that of Canada aren’t bad, but their value is still at the whim of policymakers, not nailed down to underlying wealth and the ability to consistently balance payments in the long run.

The willingness and even zeal of investors to accept negative rates is a ringing endorsement of the need for a new gold standard.  I am quite sure that it would end up being perverted over time as all prior ‘standards’ have, but in a time of extreme crisis such as where are currently situated, having a bit of financial bedrock certainly wouldn’t be a bad thing. It certainly beats the quicksand we find ourselves trying to navigate today.

The Second Biggest Story of 2012

Buried under the headlines of Presidential politics and ‘who said what about whom today’ is the fact that the current administration has formally requested that Congress increase the debt ceiling by another $1.2 Trillion. I say the following only to point out the acceleration of the debt cycle in the past several years, not to pin the blame on any politician; they’re all responsible. In early 2009, the national debt was roughly $10.6 trillion. The most recent request to take the limit to over $16 Trillion will last the government less than another year if Congressional Budget Office projections prove to be accurate. Our actual debt just passed 100% of GDP. Exhausting this new increase will push it well past the breaking point of the Eurozone. Does anyone really think there will be no consequences for this flagrantly irresponsible fiscal behavior?

While there is no way to pin a date on when the current Keynesian debt paradigm will end, what we can be 100% sure of is that it will end. Will it be at 100.3% debt/GDP or will it be 200.3%? We don’t know for sure, but at some point, the weight of the mistakes of the past will be too much for the future to bear and it will all come crashing down. The system is too big to fail, yet at the same time it is already too big to save. The actions of policymakers to date give little reason for optimism as much of the emphasis is on kicking the can down the road and pushing the inevitable far enough into the future so that it will be someone else’s problem.  What is particularly disturbing is that most of the election year rhetoric focuses on attacks rather than on solutions; so much that you can almost hear the fiddles playing as Rome burns.

One of the traps all analysts fall into from time to time is their inability to see the forest through the trees. We are all guilty of this from time to time, and those who would deny this simple reality only set themselves up to miss important changes in the paradigms in which they operate.  Perhaps the most famous example of this happened in the life and times of Christopher Columbus. We’re sure you recall the mental model of that time; that the Earth was flat. Many very wise people in Columbus’ day felt he was going to sail the Nina, the Pinta, and the Santa Maria right off the edge of the Earth. And there are many other classic examples as well.

Today, we might call such a condition extreme dogmatism, which is essentially the clinging to a belief or set of beliefs despite overwhelming evidence to the contrary. These days we find the same type of dogmatism in our world. The belief that we can spend our way to prosperity is one. The belief that we can do so with borrowed money is another. However, even within the knowledge that both of these positions are completely reliant on fantasy, there is the danger to just pin our trust on the opposite side of the argument without really taking the time to consider what exactly we are espousing.

So one of the questions we obviously need to ask ourselves constantly is ‘what are we missing here?’ In looking at the current debt situation, we tend to focus on the ‘national debt’ and its continuing rise, but in truth, the national debt or public debt as it is also called is only a very small part of the total picture. The truth is it goes way beyond that. We have focused several times on consumer debt, and even that is only another small portion of the overall picture. Back in 2008, leverage was the word of the day and everyone was wrapped up in talking about which bank was leveraged the most. Guesstimates of 100:1 were flying around with regard to certain of the biggies that eventually would require an adrenaline shot to the heart in the form of the commitment of years of future GDP just to keep them alive.

The truth is that the debt problem is systemic. For the purposes of this paper, we are not going to even look at the future in terms of unfunded liabilities. Most understand that bleak picture fairly well. Instead we’re going to look at current information as reported by the (non)USFed and USTreasury. And when we’re done, we’re going to float the all-important question. Sorry, but you’ll need to read the rest of the paper to find out what that is. The balance of this essay is going to be from email conversations between Greg and Andy on this issue. The reaches were far and wide, but hopefully this will help readers to expand their thinking even further. Those that recognize the problems are becoming greater in number on a daily basis. Our goal is to enhance that understanding and hopefully to motivate people to action in their own lives where real reforms can take place. Starting at the top and working our way down has proven to be almost totally ineffective, and frustrating on top of it. Many people who have gone to ‘End the Fed’ rallies have come home euphoric, but that energy has dissipated quickly as they’ve seen the bankers just wave it all off and continue to sell our children and grandchildren into…. yes, debt slavery. So a bottom up fix it must be. And if you’re in a good spot, chances are you know a lot of people who aren’t. Encourage them to throw down the proverbial chains and dare to be free.

Here are some of the quotes from our email discussions. We only ask that you use/distribute this to enhance understanding of the reality of the current situation.

[Gregory Olson] “I’m not an economist, and in a way I’m glad I’m not.  I can look at the numbers with fresh open views without being forced into pre-defined boxes learned in college.  For example, after looking at the GDP, mortgages, and interest rates over 40 years, I don’t believe the interest rates have anything to do with the economy, but the Federal Reserve sets them for their own agendas.  The Fed slipped that fact out by their declaring the rates will not be raised for two more years.  The statement proves they are in complete control of the rates, not the markets.  Otherwise, they would not have said it so confidently.   In fact, if you look at the prime rate for the last 40 years, it changes direction like clockwork on average about every 5.5 years.  This leads one to believe on the surface that there are “cycles” in the economy, when the GDP is not affected significantly by the changes. 

Over the summer when I saw this pattern (or should I say no causal relationship), I pegged that the next year of change of the interest rates is about 2013.  One month later, sure enough, that is the exact time they are going to change the rates.  Basically, it means the Fed is full of BS, and they have deliberately lowered the rates, added debt, and then they will claim the market is raising the rates, when indeed, they are planning on doing it themselves to bankrupt the United States and set up an one world government.  The data does not support the Keynesian views at all in terms of the impact of inflation and interest rates.  Indeed, though it can’t be proven, I believe the spike in rates in 1970 was the Fed’s way to get us conditioned to ridiculously high interest rates on credit cards, which were being introduced into the economy at that time.  The prime rate decreases in the 1980s, but the credit card rates did not. 

The strategy was extremely successful.  I believe this is the correct answer based on the law of supply and demand.  There is no “economic law” when it comes to a fiat system, because the money supply is unlimited, removing the natural laws of the universe.  The Fed actually knows how the “real laws” work, but they lie about it and use the system to steal and cheat, profiting from the deception.  They deliberately lie, so they can control the rate.  So they (the Fed) feed the university economists and Ph.Ds junk ideas, based on their man-made system, claiming it follows the universal law of supply and demand, when it does not. 

So I’m glad I’m not an economist, and I can look at the data and think out of the box like this.  The “stagnation” idiot ideas of the 70s to explain the “inflation” that didn’t fit into the Keynesian models is simply a way to force fit an explanation that hides the more accurately and simple explanation, which is, the Fed raises and lowers the interest rate at its own bidding, to secretly promote their own hidden agendas. 

If I’m wrong about the interest rates, then prove it from the data over 50 years to me; I’m all ears. The data does not support a free market economy at all!  It supports a manipulated one.   The bottom line is the fiat system does not follow demand and supply laws because the money supply is unlimited, circumventing natural law. 

We’ve been duped.  That’s what I’ve concluded so far, among other things.

At first I thought everyone should know about this, or that the government should take control of the rate itself to prevent it from rising in two years according to the Federal Reserves’ hidden strategy.  (They will raise it 2 or 3 points to bankrupt the US and say it’s market forces driving it, doing the famous double-talk).  Then I realized the Fed has us over a barrel.  If we now let that idea gain traction, the credibility of the United States will be shot, and the whole globe will blame us and our greedy Fed for the world’s financial problems, and nobody will want our dollars.  So down goes the United States by telling the truth.

On the other hand, maybe telling the truth is better, and we should take the world’s rejection and transition slowly to a better system after being thrown into bankruptcy and poverty.”

[Andy Sutton] “I agree 100% there; the Fed has clearly used interest rates and the money supply to manipulate the economy. The irony is that the Fed was allegedly created to eliminate the prior boom-bust cycles, bank panics, and other financial and economic dislocations. It has done nothing but take those cycles and amplify them by an order of magnitude. Then when it all goes bad, the consumer is blamed – aka the ‘roaring 20s’ and the housing ‘crisis’. Sure, consumers signed the dotted line in both instances and so they’re ultimately responsible, but there was a good deal of misinformation propagated by the banking syndicate and the media to entice people to make bad decisions. Terms weren’t properly disclosed, nor were conflicts of interest. There was little due diligence on either part, but the bankers knew something the consumers didn’t. They knew (because of history) that when push came to shove that they would be made whole – at the consumer’s expense. Want proof? Just take a look at the government’s actions with regard to the scads of bank failures back in the early 1800s. Every time the banks over issued scrip and precipitated a run, the government bailed them out by allowing them to default rather than forcing them to come up with the silver that was owed to the depositors. Save Andrew Jackson, every instance of bad behavior resulted in a ‘bailout’. This is common knowledge in banking circles, but not consumer circles. A classic case of imperfect information. Would consumers have cared? I’ll give you two guesses, but you’ll only need one. So there is plenty of blame to go around on this one.

As to your comments about being an ‘economist’, I have been called one many times, but it is a title/label I really bristle at to be honest, mostly because of guilt by association. I reject all of Keynesianism out of hand, but that is a subtlety that many people don’t pick up on because all they know is Keynesianism. It is the prevailing thought process taught at all levels of education, with very few exceptions.

I think a final point here is that this is not ‘our’ Fed. That institution is owned by and large by 12 large banks that have no loyalty to any flag or other sovereign power including God Almighty. I have said this before, that they are men without a country, but seek to conquer all countries. I was having a conversation with a client yesterday and he mentioned a quote and I can’t attribute it to the author, but it is a very good one – Give a man a gun and he can rob a bank, but give a man a bank and he can rob the world.”

[Gregory Olson] “ I appreciate your attention to this important topic.  Bernanke let the cat out of the bag by his declaration of holding interest rates stable for two years.  I have vacillated over the solution of turning the setting of the rate to the government, rather than to a private banking cartel, wondering if it’s too late or not.  Your thoughts will be helpful to hear.

Indeed, these people are not stupid, and Bernanke’s comment appears to be a threat of sorts, in an extremely subtle manner, to those who are paying attention.  Those who want the United States to go down must be celebrating right now. He is communicating congratulations to those who are on his side. Their victory is only two or three years away. That is the message to them. After working on the destruction of the freedom of the United States for more than one hundred years, they no doubt are delighted to see the end in sight.”

[Andy Sutton] “That said, the interest rate conundrum is an interesting one because for a long time, there were two rate markets really – the manipulated short end (Fed Funds / Discount Rate) and the ‘free market’ long end from about one year out. So in theory, the USFed could drive the short end, but not the long end. I have opined and others have demonstrated that the USFed has been messing with the long end for a while now according to its own agenda. Those in charge certainly couldn’t give a rip about the US economy beyond its ability to further enrich them.

This said, I am not sure there is much to be gained by debating out the minutia of economic manipulations. We know the basic principles. Nobody borrows their way to prosperity, etc. There is no free lunch. These are facts. We can base what we do around them and leave the rest to the quants. I enjoy playing with the numbers just to try to understand a little deeper what is really going on and I suspect you’re the same way. In either case, if you know the trend, it is your friend. I think the biggest problem with returning monetary policy to the Congress at this point is that those people are also bought and paid for by the same people that own Bernanke, et al. So it really doesn’t matter. Congress certainly isn’t equipped to deal with this complex a monetary environment and that was done intentionally in my opinion to make it harder to dissolve the banking cartel.

As evidence of the inability of Congress to manage a complex environment, I’ll present several policy gaffes, namely the stimulus, which just prolonged the inevitable, the TARP mess, which further unequally yoked us to this corrupt system, and a complete failure to bring ANYONE to justice over the 2008 mess, and more recently the MF Global blowup. Although to be fair, the subpoenas just started flying and the denials by Corzine and others have only begun. I have zero confidence in Congress, given the fact that they allow Bernanke to testify on a regular basis and blatantly lie, refuse to provide information, and obfuscate without nary a word of protest. Congress would have a hard time managing a lemonade stand in my view, let alone interest rates. The only real answer there is to return rates to an unencumbered free market and take what comes with it. It certainly can’t be worse than what we’re dealing with now.”

The US Debt Mix

[Gregory Olson] The following numbers and graphs show the root cause of the financial problems of the US economy today and how we got there.  The Federal Reserve, or whoever had responsibility for the debt mix of the United States from 1946 to 2008, decided to reduce the % of government debt in favor of rapidly increasing debts in the financial sector, mortgages, the foreign sector, and the household sector, while simultaneously decreasing the business operational debt.  Only the business sector produces real wealth in the economy.   It is clear the economy has been manipulated by man to create cash from nothing, producing multiple bubbles in the economy as the fabricated cash changed into different forms over time.  The business sector cannot sustain the debt trends, and thereof, the economy has hit its financial limits.  Trading financial paper and flipping a home mortgage 4 times in 30 years does not create real wealth.  Rather, it inflates home prices. 

Please note, rather than the banks losing interest income due to decreasing debt after 2008 in mortgages, the household sector, and the financial sector, they have opted to increase government borrowing, swapping one debt for another one.  Otherwise, the total debt would actually have decreased after 2007.  Credit cards and mortgages decreased, for example.  The banks are not motivated to allow the total debt to decrease.  Thus, in spite of the economic troubles of the United States of America, the banks still have managed to keep the debt growing to sustain their income.   Tilt.  Game over.

[Andy Sutton] Whether people want to admit it or not, the above chart shows a definite separation between debt and GDP in the 1970s, starting around 1974. Most conventional logic would tie this divergence into the abandonment of the gold standard, and for the most part, that is correct. It is very applicable, especially when considering the discipline that even the pseudo-gold standard imposed on the system at that point in time. Our external debts were still settled in gold prior to August 15, 1971. But there is likely a lot more at work here, and that is the agenda of the international bankers and their policy tool, the USFed.  When considering the big picture, it becomes fairly obvious that the gold really didn’t go to other countries per se, but rather into the pockets and vaults of the banking syndicate. They knew all along that eventually the US would run out of gold to settle foreign trade deficits. It wasn’t an accident, like most conventional sources of news and history books will try to assert. This was all part of the agenda, from the very beginning. It reeks of incrementalism, which is the signature of most subversive movements in history.

[Andy Sutton] The above chart is really a paradigm buster, when you think of all the emphasis that has been placed on the last several years and the massive ramp-up of America’s public debt. That ramping up can be seen clearly in the chart, but the debt profile has become much more even, with all areas of the system coming under equal pressure and more and more parties ‘making payments’ on various expenditures. This is a fiat money system’s dream come true: everyone making payments. These payments require real labor and other inputs to pay back something that was created from nothing.

The $56 Trillion Question

With all of this information out there, the obvious question becomes this: who exactly is all of this ‘money’ owed to anyway? The quick answer would be the banks, but if you look at them, they’re in hoc too. Sure, Ma and Pa Kettle owe the commercial banking side of BofA $150,000 for the mortgage, and another $25,000 in credit cards, while the investment banking side of BofA owes untold billions to who? Who exactly is the counterparty to all this debt? Who exactly are we committing at present count roughly 4 years of aggregate economic output to pay off? This debt is claiming our country, our families, our kids, and our way of life and we don’t feel that we’re overstating this in the least. Since we can’t even effectively answer this question in a specific manner, wouldn’t it seem prudent to rid yourself of as much of the ‘making payments’ mentality as humanly possible?

Greg Olson is the CEO of GRO Enterprises; a company devoted to helping people spend money at optimal levels, removing all debts in 12 years or less, including the home mortgage.  His company develops software solutions to unleash the power of spending money.  He has an Accounting degree and a MBA and has worked in finance for companies such IBM, CBS, Fox, and Paramount before changing his career focus to personal finances.

Here in America, we are truly whistling past the graveyard. The financial press cannot stumble over itself enough to constantly remind us how extravagantly we spent money during this past week. The American shopper is back. Really? I still point at various consumer confidence polls, personal income numbers, and general indebtedness and wonder where the juice is coming from for all this consumer spending.

Manufactured Metrics?

One thing that has finally begun to see the light of day is the fact that many of our economic metrics have been and are being manipulated for the sake of public opinion. I’ve covered retail sales, labor market statistics, and GDP ad nauseum in these pages. Well, yesterday zerohedge made a posting showing three more important metrics – and the chicanery becomes even more obvious. In each case (ADP Employment Report, Chicago PMI, and Pending Home Sales), the reported number came in at a minimum of 4 standard deviations above the consensus. What does this mean?

Various media outlets, like Bloomberg, solicit predictions from economists and economic research firms on various economic data series. They take all the estimates and come up with a consensus forecast, which is essentially the average of the estimates they receive. They show the consensus and the range. Then when the actual number is reported, they show that as well. So in the series listed above economists were either off by 4SD or else something is seriously wrong. I think we all understand that the forecasts are never going to be precise on any regular basis, but to miss by 4SD? You could almost blindfold the forecasters and have them throw darts at a wall and get closer than this.

To drive home the significance of these events, occurrences that are 4 standard deviations from the mean are generally considered ‘outliers’. They are spurious type events that really have no basis in the underlying process. Many times such observations are thrown out depending on the type of study being done. So to have three of them occur within a relatively short time window is a rather big deal. Big enough of a deal that it should at least be a page 2 type news event since there is something obviously wrong with either the forecasting methodology, the reporting methodology – or both

The obvious conclusion here – and zerohedge pointed this out very eloquently – is that we’re being fed a line of baloney and that these ‘positive’ numbers are being reported to keep up the illusion that the economy is recovering when in fact it is not. So, all this said, what about the cyber Monday blitz? I can tell you this much.  I have contacts at both UPS and Fedex and they are seeing very high shipping volume right now. People are in fact spending an awful lot of money. At this point, it appears as though a much smaller proportion of the country is doing the majority of the spending. We’ll see how much of this was on credit in the months to come.  It certainly doesn’t appear as though most people are even bothered by what is going on in the Eurozone even though it affects us directly. They seem either less bothered or less willing to admit that the movie now playing in Europe is coming to their neighborhood theater – and sooner than they’d like.

The Great Liquidity Pump – Take 12

One of the most important issues of all with regard to the Eurozone and its systemic crisis is the prognosis for economic growth. One might wonder why that even matters at this point since the Euro is on the ropes, banks from Paris to Rome to Budapest are in trouble, and nobody seems to have answers. Make no mistake about this – the Eurozone cannot be bailed out; at least not without causing a dislocation of equal magnitude somewhere else. There have been several mainstream economists making the TV circuit asserting that the US could bailout Europe. Really? Many of these same people will use the IMF/World Bank model to make the case for the bailout of the EU. Not going to happen. Not without dislocations. What did take place is that the USFed (among others) stepped in and said it would provide what are essentially unlimited ‘loans’ to European banks to stave off the crisis.

Now we’re back to the coup situation I discussed last time. Is it becoming more clear how this all works? By virtually ignoring the prospects for economic growth in the Eurozone, the central bankers are going to foist a tab on the people of those countries that they will be hard pressed to get out from under for generations – if ever. Economic growth is the one way that a country can pay off its debts. Growth, coupled with sound fiscal behavior, creates surpluses and those surpluses can be used to pay down debt. No economic growth means no paying down debt. The IMF is forecasting that the Eurozone will re-enter recession in 2012. I will assert here that the EU never left the recession that started back in late 2007. I’ve showed the data for the US; and the EU has clearly followed suit.

Much of the way the crisis is being handled in Europe is along the same lines as what was done here in America back in 2008. Focus was placed largely on saving banks whose bets had gone terribly wrong. Only cursory attention was given to the macroeconomic picture and you can easily see what happened here. We now have fat banks, bursting with ‘profits’ thanks to bailouts and accounting rule changes (FASB Rule 157, etc) while we have an economy that is still churning out foreclosed homes faster than a broken widget machine. Trading revenue is up at the big wire houses while our kids are paying over 10% on student loans and Mr. and Mrs. America are shelling out an average of 14% on credit card debt. This is precisely what is going to happen in Europe. And to make matters worse, the people of those countries are going to be on the hook for the bill, much in the same way we are on the hook for 2008.

And oddly enough, the same pledges were made back on September 16 of this year. Quoting a Bloomberg News article:

“The Bank of England joined the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce that they would flood money markets with dollars over the coming months.

The move, on the third anniversary of the collapse of the US investment bank Lehman Brothers, sent shares soaring in banks heavily exposed to debt default by Greece and the other struggling members of the 17-nation Eurozone. The euro, which had been falling in recent days, rebounded, rising roughly 1% in European trading on Thursday.

Speaking in Washington, Christine Lagarde, the president of the International Monetary Fund, said: “They [the banks] are getting together and acting together. To me, that is the most important message.”

Perhaps the biggest untold byline of yesterday’s aberrant policy decision by central bankers was to point out that first it was illegal for our fed to do what it did. It has two mandates: price stability and maximum employment. Printing untold trillions to bail out banks in the Eurozone hardly seems like a recipe to ensure price stability to me. And they haven’t exactly done a banner job on the employment side either. So when government figures and policy analysts say that no taxpayer monies are being used, they are only partially correct. In fact it is much worse than if they had simply given over a year’s tax receipts to the ECB for the purposes of stemming the tide.

It is not so much your money that has been pledged to this completely unworthy endeavor, rather it is your future labor. You will work harder, longer, and enjoy less fruits of that labor all in the name of preserving the status quo of a financial system that will only be back for another round of feeding once the shock from these events has worn off.

Fast forward one year and the same mechanism is firmly in place again and working very well – this time in Europe. Again, the abuse of debt has been the main villain. Couple that to greed, avarice, and unlimited access to power and you’re going to have problems. EU2010 is no different than USA2008 on a fundamental level. The only difference is the consumer-driven side of the Eurozone didn’t cause problems first – the sovereign issues roared to the forefront.

And what is happening to those leaders in the countries that are balking what are essentially multiple coup d’ etats? They’re summarily dismissed. George Papandreou in Greece has been replaced by Lucas Papdemos, a rabid central banker (ECB). Silvio Berlusconi in Italy is out, replaced (likely) by Mario Monti, a guy who has all sorts of insidious connections to the Rockefeller/Rothschild global banking syndicate. Aka, the same syndicate that is gutting America through its creature from Jekyll Island, the federal reserve system itself.

So two countries’ leaders toppled, and what of Portugal? Interestingly enough, Portuguese President Anibal Cavaco Silva has evidently learned how he is supposed to behave from the demise of Berlusconi and Papandreou. He is now a card-carrying water carrier for the syndicate. Check out his quote made on 11/10/11:

“The European Central Bank has to go beyond a narrow interpretation of its mission and should be prepared for foreseeable intervention in the secondary market, not as the central bank has done up to now,” Cavaco Silva said yesterday in an interview at Bloomberg headquarters in New York. He said government leaders are unlikely to move fast enough to find solutions.

“It has to be able to be a lender of last resort,” said Cavaco Silva, 72, who as Portugal’s prime minister presided over the 1992 signing of the Maastricht Treaty, which cleared the way for the euro common currency. “It has to be a foreseeable, unlimited intervention.”

The coup in Portugal has been effectively completed. Some people may question why I use the term coup d’ etat. The term essentially means takeover of a formerly sovereign nation in the context we most often see it in. Oftentimes, coups are military in nature with a rebel force conducting a coup to remove an existing government. Well, a financial coup is along the same lines where the control of a country’s financial system and/or its economy is taken from the people of that nation by a banking cartel or syndicate. The very creation of the EU itself was a mini-coup since those countries that entered gave up a large portion of their sovereignty and put their destiny in the hands of a regional government and central bank. These countries could no longer issue their own debt and when things got bad, then couldn’t maneuver, and are now at the whimsy of international banksters.

Don’t forget what Silva is really saying above, either. By making the ECB the lender of last resort, what he is advocating is that the ECB becomes owner of the failing countries within the Eurozone. This is precisely what is happening in America now: that the federal reserve is openly monetizing USGovt debt. Few take the next step and make the admission that in doing this, the federal reserve is becoming an owner of this country – and it is getting a larger share with every bond it buys. And all this happens with the blessing of the US Congress and various Parliaments in Europe. The dominoes are falling one by one into the complete financial and economic control of international bankers. These are men without a country, but men who seek to dominate all countries.

One thing forgotten in all this is that the USA is indeed headed for the second stage of its continuing financial crisis, this time in the form of a sovereign debt nightmare that will make 2008 look like a game of Monopoly. No doubt there will be calls for the federal reserve to again be the lender of last resort and another chunk of America will fall to the syndicate. These nasty cycles will continue until it is all gone. Sounds pretty gloomy doesn’t it? Just look at what has happened so far and then ask yourself if we’ve turned in another direction or are just headed for more of the same.

At the end of the day, hopefully we will all come to realize that we can gripe all we want about what has taken place thus far and what is to come, but sooner or later we are going to have to own up to the fact that we allowed it. Bankers couldn’t have packaged hundreds of billions of dollars of junk mortgage bonds and leveraged it up 40:1 if people who had no business buying a house hadn’t done so. Sure the system enabled it all, but I have not heard a single case of an American citizen having a gun put to their head and being forced to buy a house or participate in some other sort of largesse.

We have allowed our elected officials to cede our national sovereignty to bankers while we argue about steroids in baseball, American Idol, and the fate of various Hollywood lawbreakers. We were so busy swiping our credit cards that nobody paid attention to the fact that our government was doing the exact same thing – on a grandiose scale, its ego writing checks that the people of this country can never pay.

We did it all voluntarily. So have the Europeans. Nobody was complaining when the welfare state was in full swing and sloth and laziness were incentivized on a regional scale. Nary a word was said when exceptions were made so that Greece could enter the EU in the first place. Nobody paid any attention when it became obvious several years ago that the numbers weren’t adding up. The whole EU was too busy partying.

I’d like to leave you with a quote from a wise man in American history – Thomas Jefferson:

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks
discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.”

Startling isn’t it? Look around you; his worst nightmare is becoming our reality – on a global scale.

Unfortunately for us here the United States, there are so few people alive who actually experienced the Depression at a time in their lives when they could remember and understand what was going on. We’ve lost our perspective, and our experience from the patriarchs of the day, and that is a dangerous combination. It means we’ll be pitched to and fro in the breeze and will buy almost anything that comes in a newscast, daily paper, or monthly magazine. It is really time for a thorough, while brief, reset on what the Great Depression was – and wasn’t.

The first really big misunderstanding about the Great Depression is that it happened because the stock market crashed. You can go into a bookstore and pick up countless history and economic texts and nearly all of them promulgate the absolute lie that the stock market crash of 1929 was responsible for the Depression. I don’t think, however, that it is enough to just call this out as a lie. WHY wasn’t the crash responsible for the Depression in and of itself?

Contributory Factors vs. Causes

Many people often confuse contributory factors for causes. It is certainly true that a crashing stock market erodes confidence. This is mostly true because so many people subscribe to another fairy tale – that the stock market is the economy when it has devolved into little more than a momentum casino for banks and hedge funds to shave pennies from each other. Another contributory factor is the idea that a crashing stock market makes people poorer, and thus gives them less discretionary funds with which to spend. Consider this – during the past several years, people have gotten hit with two hammers – a housing crash and a market crash. Yet the spending continues for the most part. People didn’t stop spending so much because of the stock market, but rather because they lost their jobs – an important distinction.

So the ‘official story’ of the Great Depression is that capitalism (in the form of the stock market) collapsed of its own weight and that Hoover, a laissez-faire believer, failed to use the full power of the government to manage the crisis. Later, FDR came in and, in similar fashion to today, wielded the power of government to ‘manage’ the crisis. And where power didn’t exist, it was created – in many cases outside the Constitution. The obvious takeaway here is that capitalism is a failure and only naked socialism can save us from the evils of economic torment. Don’t laugh folks – there are a lot of people who believe this nonsense. And many of them hold important roles in our government.

Multiple Depressions vs. a Single Event?

A reasonable assessment of the facts surrounding the Great Depression points to the fact that there were at least three, and possibly four, actual depression-like events rather than the single event depicted in the ‘official story’.  For the purposes of this paper, I am going to focus on three of these events: a low in the business cycle, global involvement in the US collapse, and the New Deal.

I – The Business Cycle – Monetary Implications

One of the biggest facts left out of the official story of the Depression was that it wasn’t the first. In fact, it takes quite a bit of digging in the history books to find any mention of previous tragic deflagrations of the business cycle. I am not going to outline each of them here in the interests of time, however, I am going to list them: 1819, 1836-37, 1857, 1873, 1893-95, and 1921. I have omitted banking panics such as 1907 since we’re discussing the business cycle. The very interesting fact about all of these sharp downturns of the business cycle is that ALL of them coincided with a complete and utter failure of the management of the money supply by the government. However, as can easily be inferred by the dates of these crises and by closer study of the crises themselves, these were all short-lived events. Most lasted two years with a couple of them lasting 4, but that was the most. The Great one was three times that long. Was this just because of monetary errors? Of course not. It was monetary errors compounded by policy missteps and ill-advised interventions on the part of government. In short, it wasn’t a failure of capitalism that caused the Depression, it was the failure to adhere to the free market that caused it – and then compounded it.

Let’s look at the causality of how monetary policy impacts, and as some would argue, even creates the business cycle. The cycle begins with a bolus of fresh money into the system. This oversupply of money drives down interest rates in the market place and causes businesses to undertake capital spending projects. Many businesses improperly interpret the bolus of fresh money and its effects as an increase in aggregate demand. Thus many of these capital spending projects are foolish in nature. I am sure it won’t take much intellectual gymnastics to figure out what some of today’s foolish endeavors happen to be.  As this move continues, business costs begin to rise due to the oversupply of money. This is further proof that inflation is a monetary event not an economic one. As cost increases persist, the monetary authorities begin to worry about inflation. Remember, their job is to manage inflationary expectations within a fiat system. So they turn off the pump, or even reverse it. As a result the ‘boom’, which was never real to begin with, comes crashing down once the supports are knocked out from under it. The business cycle bottoms and it starts all over again. This sequence of events was precisely played out during the latter part of the 1920’s. Austrian economist Murray Rothbard estimated that the money supply ballooned by around 60% between 1921 and 1929. There is a good deal of evidence that suggests the main reason the USFed kept the heel to the steel so long on monetary expansion in the 1920s was to enable the Bank of England to maintain low post WWI interest rates. Remember the fact that our USFed is beholden to the British by virtue of its owners.

The roaring 20s were just that – roaring. And nobody was paying any attention either. One of the biggest problems with advancements in technology – even then – is that they assist in masking the effects of monetary inflation. As such the 1920s saw a period of relatively stable prices for goods. The inflation made it into rampant asset speculation. Sound familiar??  As has been the case in so many subsequent boom cycles, the USFed has telegraphed its actions with regard to taking the punch bowl out the back door. By 1928, interest rates on the short end had begun to increase. Between January 1928 and August 1929, the discount rate was increased 4 times from 3.5% to 6%. It gets better. For the next three years into the depths of the first leg of the crisis in 1932, the USFed allowed the money supply to shrink by 30%.

Let’s keep score here. In the 1920s the Fed allowed the money supply to rise by over 60%, then allowed it to crash by 30% in the three years following August 1929.

Looking back in history, this has been the pattern of every boom-bust. Overissuance followed by contraction. The sad thing is that ending the USFed probably wouldn’t make too much of a difference – if only in this regard. Our government has shown complete ineptitude and an inclination to corruption as well when it comes to regulating the money supply. The one thing that would result in an ending of the USFed, at least in theory, is greater accountability. As an interesting aside, the St. Louis Fed in its most recent bimonthly ‘Review’ features an article that argues what a great creation the central bank is, and how it is directly accountable to the people. It is so biased as to be almost entertaining.

Friedman and Schwartz argued a ‘seismic incompetence’ by the USFed. It is my humble opinion, however, that these events constitute a self-inflicted wound. Why say such a thing? Look at the results; they are undeniable. A massive consolidation as the elite snapped up paper assets at fire sale prices and the unmistakable intrusion of government into the social and economic fabric of this nation, and a calling in of a fiat money’s only competition are three salient examples. Now take a look at the crisis of 2008 and ask yourself the same questions. Look at what has happened since. Government has gotten larger, and more intertwined with banks and in the regulation of everyone’s business. These are the events and facts. Draw your own conclusions.

II – Global Involvement and Resultant Disintegration

Unlike today, where collapses can happen across the globe in mere hours, the initial shocks of the Great Depression were limited to the United States. Ironically, had policy mistakes not been made at numerous times, the Great Depression would never have been great at all. It would have been just a footnote, like the aforementioned periods of economic duress. I mentioned previously that it is my opinion, based on the preponderance of the evidence, that the USFed precipitated the economic crash intentionally. However, what is certainly open to much speculation is the influence the central bank had on subsequent policy decisions. I am not going to go there since politics is not my field. What I will say in post-mortem fashion is that there were gross gaffes made that took a pinhole in the proverbial dyke and ran a train through it.

First lets look at unemployment. Granted, the methodologies were much different in the 1930s than they are today, but I am quite certain the numbers were much less maligned in those days. 1929 unemployment averaged a mere 3.2%, a figure that rose to a recessionary 8.9% in 1930. Oddly enough, calling 8.9% unemployment  ‘recessionary’ was not my label, but the labeling of the economists of the day. Contrast that with today’s metrics and the outright refusal to admit the continuing contraction in today’s economy.

Unemployment would peak at the now-famous 25% level in 1933. Much of this increase was blamed on the free market and its advocate, Herbert Hoover. However, a more in-depth and complete study of the policies Hoover endorsed and championed demonstrated that he wasn’t the free-market advocate he claimed to be. In fact, Roosevelt’s running mate John Nance Garner asserted that Hoover was ‘leading the country down the path towards socialism!’ Franklin Roosevelt of all people also rang the bell of Hoover’s socialist tendencies – and both were absolutely right. The true irony here is that FDR ended up being the one who would lead America perhaps the furthest down the path to socialism with the myriad programs enacted during his tenure, almost all of which put the destinies of the people in the hands of central planners.

In my opinion, Hoover’s biggest mistake was his enactment of the Smoot-Hawley Tariff Act. This one is actually in the history books, but it is always portrayed positively, when in fact it was almost singlehandedly responsible for passing the banner from the first phase of the crisis – that of America – to the rest of the world.

Smoot-Hawley was piggybacked right on top of Fordney-McCumber; another tariff act passed in 1922 that had devastated US agriculture. Smooth-Hawley was a protectionist bill at the time when it was least needed and it ended up triggering an international trade war. It essentially closed the border to foreign goods. Tariffs on agricultural goods were raised from an average of 20% to 34% and from 50% to 60% on wool and wool products. 887 tariffs were increased as a result of Smoot-Hawley and the list of dutiable goods increased to over 3,000. The biggest gaffe of Smooth-Hawley is that many of the tariffs were stated as an absolute amount as opposed to being a percentage of the price. As prices cratered as the USFed’s consolidative deflation kicked in, the flow of foreign products nearly stopped, as it no longer made sense for foreigners to export goods to America. Thousands went home jobless from the steel, paint, and clothing industries alone.

It was evident that the thinking behind Smoot-Hawley was to force Americans to buy products made at home, which would stimulate aggregate demand, thereby solving the unemployment problems. Unfortunately, the trade dynamics at the time dictated the other half of that equation. Foreigners with no place to export to won’t have the disposable income to purchase our exports. In a world where countries produce based on competitive and comparative advantages, a healthy trade environment is essential to the success of everyone. Societies that have not designed themselves to be self-sufficient can’t suddenly become so with the stroke of a politician’s pen. And that is what Smooth-Hawley tried to do – and it helped to take an American problem and make it a global one. Put another way, Smoot-Hawley was to the 1930s what the repeal of Glass-Steagall has been to the first part of this new century. Foreigners reacted in predictable fashion; they cut off the United States from the trade picture, refusing to purchase American goods. With trade sufficiently disrupted, the surpluses and shortages of goods around the globe worsened, and the economic calamity that had hit the US became a global problem.

The US agriculture industry in particular was devastated, losing around one-third of its market almost overnight. Food prices collapsed and the dominoes starting falling. 9,000 bank failures, mostly ones that held farm loans, rocked the financial sector between 1930 and 1933. Here is another point where facts diverge from populist historical opinion. The banks failures are today blamed on the stock market crash, and in effect, the failure of capitalism, when it was government intervention that was directly responsible for those failures. The stock market, which at that time was a better reflector of policy and the economy, peaked at DOW 381 in 1929, crashed to 198 in 1930, then rallied up to 294 by April 1930. The DOW would begin to fail again as Smoot-Hawley made its way through the legislative process. The bill would be signed, the bank failures would begin, the economy would tank due to a collapse in aggregate demand (which was exacerbated by a deflationary stance by the USFed), and the DOW would crater at 41 – a 90% loss two years later. As a side note, it would take 25 years for the DOW to reach 381 again. Feeling good about DOW 14,000 again anytime soon?

Many historians accurately point out that it was likely the trade war that started with the signing of Smoot-Hawley that eventually precipitated WWII. I’ll cite the old economic axiom: When goods don’t flow freely across borders, armies will. If you are feeling shivers up and down your spine right now – you should be. The environment in place today is eerily similar to that of the late 1920s and I am not even talking about the stock market. We’re hearing about potential trade wars over currency valuations, we are seeing foolish legislation fly through Congress on a regular basis, and we are seeing the USFed, in the middle of it all, as usual, rigging the system for its owners. Just like 1929, little has changed. Sure, the names, faces, and places have changed, but the song remains the same. Truly, there is nothing new under the sun.

III. The New Deal

Franklin Roosevelt rode into Washington on a political white horse in 1933, capitalizing in a huge way on the mistakes of his predecessor. He rode into town on the platform of reducing government spending by 25%, a balanced Federal budget, and a gold currency that would be defended at all costs. That was the platform. Also on the platform was the removal of the Federal government from all issues that would be better handled by private enterprises and the ending of the disastrous and terribly inefficient Hoover farm subsidies. You can do the research for yourself; this is what FDR promised when he ran for President. It all sounded very good. We got none of it and the mistakes and fiscal folly continued.

FDR’s first act, which would strike fear in the hearts of every American with a dollar to his name, came before his seat in the oval office was warm. On March 6, 1933, FDR declared a bank holiday that would last 9 days. Friedman and Schwartz also argued that the bank holiday was essentially a waste of time since it did nothing to correct the mischief of the USFed or reverse Smoot-Hawley. All the banking holiday did was deprive depositors of their funds and sow the seeds of further distrust – now directed at the new administration. 5,000 of the banks that closed their doors on March 6, 1933 did not re-open nine days later and of those 5,000, 40% of them never opened their doors again. Can you say consolidation?

Later that same year, Congress gave FDR the power to seize private gold and then fix the value thereof. The US was now well on its way to divorcing itself of the gold standard. This is where I must call into question the influence of the USFed and international bankers on US policy. Cui bono is clear in this case: the moneychangers. The Fed should have been abolished for its malfeasance in 1929, yet, essentially, it was handed more power when the private gold was called in. Sure, the USA would not totally leave the gold standard until 1971, but the die was cast – under a President who ran on the platform that such an event would never happen on his watch. This is not intended to be a hit piece of FDR; I am just stating the facts and events that took place. Senator Carter Glass summed it up in early 1933: “It’s dishonor, sir. This great government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold government bonds with a pledge to pay gold coin of the present standard of value. It is breaking its promise to redeem its paper money in gold coin of the present standard of value. It’s dishonor, sir.”

The hits continued to roll throughout the 1930s. In the first year of the New Deal, the proposed budget was $10 billion, on revenues of just $3 billion. So much for the cut in government spending. Between 1933 and 1936, government expenditures increased 83%, with government debt increasing by an amazing 73%. Seriously, does ANY of this sound familiar?

In 1935, we got Social Security, and it now hangs around the neck of America like a millstone. Three years later we would get the minimum wage law, which would ensure that more Americans would remain unemployed. Remember, absent Fed mischief and felonious behavior, your dollar would be a stable store of wealth and we would not need minimum wage laws, and increases of the same, to ‘keep up’.

Mainstream economists will be quick to extoll the virtues of both Social Security and minimum wage laws. In reality, the former told Americans that they could let up their guard – the government had their backs covered, while the latter ensured that many of them had no back to cover. The minimum wage law priced (and continues to) out the members of society at the bottom of the experience scales. Namely, teens, young entrants into the workforce, and the uneducated.  It does this by saying that a firm must pay a wage that is above equilibrium in order to have the privilege of that person’s time. Simply put, if a worker can’t produce the value of the cost of his employment, then that job will not be filled. By artificially raising the bar constantly (primarily due to the above-captioned inflationary shenanigans of the USFed), more of these people are never hired, and instead rely on government assistance to survive.

The AAA (Agricultural Adjustment Act) put a tax on food processors and the revenue from that program was used to destroy crops and cattle. See, there was a surplus as a result of Smoot-Hawley, so instead of solving the problem by abolishing the miscarriage of economics that was the law, the government taxed another area, then used the tax revenue to pay farmers to pour milk down the drain. It is kind of similar to the example of corn-based ethanol where the government taxes gasoline, then uses some of that revenue to burn up the food supply while corn prices hit record highs. I know it isn’t a perfect example, but it requires the same amount of insanity to justify.

Had enough yet? I’ve got just one more – the National Recovery Administration (NRA), brought into existence by the National Industrial Recovery Act, passed in July of 1933. Again, and I don’t care if I sound like a broken record – does ANY of this sound familiar? Under this law, many industrial businesses were forced into what might easily be considered cartels. The NRA was funded by taxes on the industries it regulated and it in many ways nearly dictated how they went about doing business. Here’s the kicker; in the months leading up to the passage of NIRA, there were signs that the economy might be finally on the verge of recovery. Factory employment had increased by 23% since its bottom, and payrolls were also on the rise. The NIRA was passed and work hours were cut, wages capriciously increased or decreased, and the full regulatory burdens of this new overlord of American industry were placed squarely on companies that were just starting to get a steady footing. The results were predicable and it would be absolutely obtuse of anyone to even suggest otherwise. Six months after the law was passed, industrial production had already dropped 25%. In fact, during the NRA’s entire existence, industrial production NEVER got as high as it had in the months before the passage of that bill in July of 1933.

I could spend another 5 pages and 5,000 words detailing the rest of the New Deal, the various agencies, Acts, and actions that put a boot on the throat of the American economy. But I think you get the point. In 1933, British ‘economist’ John Maynard Keynes would strut into the history books with what is really nothing more than a bunch of gobbledygook that would justify the preposterous and underhanded actions of Hoover, Roosevelt, and the USFed. His ‘work’ was called ‘The Means to Prosperity’, which when compared with the content, was an oxymoron of dictionary example quality.

As a footnote, many of the New Deal programs like the NRA and AAA, among others, were stomped by the Supreme Court in 1935 and 1936 as being unconstitutional. The economy would undergo some recovery from late 1935 through early 1937 before crashing again as the supports were blown out from under it by the Court. Oddly enough, revisionist historians blame the Supreme Court for the final leg of the Great Depression, when again it was government interference that set the stage for that portion of the collapse as well. Unfortunately, the government still wasn’t finished perpetuating the Depression and the Wagner Act (better known as the Labor Relations Act) was passed in 1935 after the voidance of the NIRA. This essentially resulted in organized labor kicking off an orgy of organizing activity from strikes to boycotts, to seizures of plants and violence. Just what the fledgling economic recovery needed. I am not against organized labor in principle, but again, the consequences of the mere timing of this action couldn’t have been that hard to fathom.

Conclusions

I am hopeful that I have established beyond reasonable doubt in this paper that monetary policy, and more importantly, the execution and timing of monetary policy, have a direct effect on the business cycle. The 21st century tendency towards booms and busts is a direct result of the mismanagement of both the currency and the supply thereof. As a corollary, mismanagement of the business environment by government can have consequences that are just as tragic as I discussed with regard to Smoot-Hawley, NIRA, AAA, and eventually the Wagner Act. We had two leaders and complicit Congresses in the 1930s that acted like proverbial bulls in the china shop. We had a central bank that was managing things for the benefit of those who own it, and what was even worse – we had a country that was very literally demanding all of the above. And I will say it one more time for posterity – does any of this sound familiar?

Wikipedia: hoover definition: Herbert Clark 1874–1964 31st president of the United States (1929–33). →

The Latest Ploy

The fed is expected to announce this week that it is going to reach back 50 years into its bag of tricks and pull out some manipulations that will save us. This latest cockamamie scheme is to shift its $1.7 Trillion in short term USBond holdings (monetized debt) to longer-term holdings in an effort to drive down the long end of the yield curve even further. Apparently, the current monetization efforts haven’t been good enough. They have been driving the long end down for three years now, either directly through direct rate intervention or by subsidies aimed at the end products resulting from those rates such as mortgages.

The obvious rationale is that driving down rates on debt will rescue the economy, since people will be able to take on even more debt to spend more money on more imported trinkets from China and elsewhere. Again, haven’t we heard this before? We still haven’t really felt the full impact from the last raft of malfeasance when the fed went on an overt $600 Billion bond-buying spree. For those who haven’t yet connected the dots, that is called monetization of debt. A very inflationary measure. The dollar has paid the price. Don’t be fooled by the ridiculous assertions that the dollar is ‘stronger’ because the dollar index has gone up. The only reason that has happened at all is because Europe is on the brink of total collapse and disintegration. There is no way anyone can conduct a sane examination of the dollar’s fundamentals and conclude there is anything that represents ‘strength’ at this point. At best it is status quo and the capitalization of another’s even more dire circumstances.

On the surface, all this might look very appealing. Lower interest rates across the board. Sure, there will be another wave of refinancing of mortgages. If you can qualify. If you’re not underwater. Maybe. The subsidies aimed at the housing market so far have been an absolute and total failure. That dog won’t hunt anymore. Game over for real estate for at least a decade. So as usual, we’re left to ask Cui bono? Who benefits. Well the bankers of course. The fed dropped short-term rates into the basement in 2008 and has held the hammer down. This punished savers around the country. All those baby boomers who are retired/retiring (maybe) are going to need income from their meager savings to make up for the rising prices that have resulted from the fed’s malfeasance and lack of stewardship of the dollar. They won’t get much in the way of income from traditional low-risk investment vehicles, that is for sure. The proverbial ‘riskless’ asset pays nothing after taxes. Nothing. And it isn’t riskless. Put it another way – would you be willing to give the USGovt a loan for 90 days? 180? 10 years? How about 30 years? At maybe 2.5% per annum? That is a foolish proposition on even the best of days. The savers get creamed again. Bernanke is so worried about the economy, but yet he’ll purposefully and deliberately undertake policies that will gut the one component of the economy that is capable of spurring growth – savers. And this is not the first time either. And he is not the first guy to do it. This has been a pattern for quite a long time now.

The All-Important Question – Cui Bono?

So who benefits again? The banks, obviously. The lower the yield curve, the higher the spread, the higher the profit margin. All actions done so far have been to protect and enrich the banks and their precious financial system – all at the expense of the economy and all done intentionally, in my opinion, with malice and aforethought. Just think back to TARP, TALF, TSLF, and the other multi-trillion dollar rescue packages. Think about the $500 billion (minimum) in swaps done between the fed and the ECB in 2008-09 that Bernanke was grilled on and claimed not to know the recipients thereof. Think about the latest harebrained stunt aimed at saving European banks. More unlimited dollar bailouts for foreign banks. More protection of the financial oligarchy. More inflation. Less purchasing power for the dollar. More pain for consumers. Less economic growth.

At the bottom of this issue is that the Keynesian way is still in full force, which guarantees that things will not get any better. Two of the biggest pillars of the Keynesian way are to punish savers because saving is a bad activity – all monies should be spent on consumption to maximize current ‘growth’. Never mind future growth; all actions are to be geared towards the short run. The second big pillar is deficit spending and debt accumulation at all levels of the economy. Again, forget about the long-term consequences. All focus is dedicated to the short run. That is the Keynesian way in a nutshell.

The Consequences

We’re already seeing firsthand the catastrophic failure of that policy pathway in Europe. It is an unmitigated disaster. We’ll reap the full whirlwind here in America before too long. Instead of focusing on debt reduction across the board, the central planners, our new economic politburo, are undertaking policies that will accelerate debt accumulation at all levels. Consumers are back on the credit card big time as unemployment remains high and people are forced to continue borrowing to make ends meet. They were in over their heads to begin with and now for many, there is no way out. The house is underwater. The job is gone. The unemployment check isn’t enough and it is going to run out soon anyway. These people end up running full speed to the bankers who are more than willing to accommodate with rates of usury that would make the mafia blush.

The ‘cuts’ that are forthcoming from our new unconstitutional ‘super congress’ will almost certainly be from social programs, not the sacred cows such as the Pentagon budget, bank bailout monies, or subsidies paid for keeping jobs out of America. The lobbyists have already guaranteed that. I’ll say it again – the American people are the only ones who don’t have someone lobbying for them to the members of that ill-conceived and very illegal group. It is terribly ironic that the one group who is going to bear the full burden of all of this does not even have one representative in the process. We know what Jefferson said about that. If we don’t, then shame on us for not knowing our history.

The bottom line is that our debt is already unpayable. Our bonds are junk. Our country is several orders of magnitude deeper into this mess than Greece. According to Laurence Kotlikoff, the net present value of our obligations relative to GDP is 14 times greater. Greece’s multiple is only 12. Yet we had people surprised when our debt rating was cut by one single notch. It was an affront to our perception of American superiority. That is gone, people. We’ve allowed it to be squandered – all for the satisfaction of short-run desires and an economic philosophy that was brought into the world in the worst possible manner: half improvised, half compromised. The policymakers of the day provided the compromise; Keynes was more than happy to provide the rest. In a way, he got off easy; his demise came long before that of a world that decided to throw away prudence in pursuit of his unattainable utopia.

Ben Bernanke, the official spokesman for Bankers, Inc. was quick to pontificate from Jackson Hole Wyoming that the second half of the year bodes very well for GDP and economic growth in general. This is where the shuck and jive starts. What nearly all commentators are missing here is that USGovt borrowing nearly ceased in the second quarter. On the surface, that might look positive, because it would indicate that a greater percentage of that 1% growth was real; that the economy was actually able to stand on its own, if even in a very small way. This is where the price deflator comes in. The GDP price index came in at a very tepid 2.4% in the second quarter of 2011 after coming in at 2.3% in the prior quarter. This number is a complete fabrication in that it certainly doesn’t properly discount the impact of price increases experienced on Main Street. Inflation metrics have been understating inflation for years in order to rip off transfer payment recipients. For example, the last SocSec cost of living adjustment came three years ago. Does anyone believe that the cost of living has remained unchanged in 3 years? The CPI, Core CPI and GDP price index have been manipulated to discount inflation and by definition, to overstate economic growth. Failing to properly discount for inflation is more than likely responsible for all of the 1% growth experienced in Q2 – and then some. I’ll provide more substantiation for that opinion a bit later.

Now the second part of the shuck and jive. Bernanke and everyone else knows what happened when the debt ceiling was raised. The government went on a borrowing binge, adding around $400 billion to the public debt within days of the bill’s signing. This bolus of new debt was pumped into the economy, and will go right into Q3 GDP calculations. When Q3 GDP shows a boost, Bernanke will get up in front of Congress, smile, and talk about how the Fed’s policies actually work, how government action is the best way to generate economic growth, and, by the way, please give us more power to create even better GDP results moving forward. Washington politicians who are hooked on the idea of a centrally planned economy will do the same. Think I’m cynical? Watch what happens. The overall lack of jobs will only be of minor concern, but enough to likely justify another ‘stimulus’ attempt at some point before the elections next year. They’re already cooking up something to bail out underwater homeowners, calling that a stimulus.

Let’s go out a bit further. There is now an economic kill-switch built into our economy in the form of massive (and allegedly mandatory) spending cuts. These cuts need to be agreed on and passed before Thanksgiving or else automatic cuts will be triggered. So either way, some of the cookies and candy ought to be coming out of the equation in Q4. Has anyone noticed that very little attention was given to this reality? The debt ceiling deal has long been forgotten and we haven’t felt even a single nudge from the negative consequences yet. So we see a boost of GDP in Q3, and likely Q4 as well from the increased borrowing. The massive budget deficits are still firmly in place and are being built on daily. Once the mandatory cuts take place, GDP drops, depending on the timing of the cuts. However, it is very likely that through manipulation of the GDP price index, that an official recession will be avoided – in governmentspeak at least.

The Consequences of a Fraudulent GDP

The entire notion of including government spending in economic output is tainted to begin with. Mainline economists will argue that it must be counted since the dollars are real and end up on Main Street where the vast majority of them are spent into the economy. My assertion would be that if the government butted out and left the dollars on Main Street, they would be spent anyway, and horror of all horrors, some might actually get saved. Keynes was quick to point out the evils of savings, though, and his followers are quick to maintain the tradition. If mainstream economists can make a case for including government spending in GDP, how about when half of that money is borrowed? Count it anyway, they say! Never mind that the debt must be paid back with interest, thereby reversing the infusion (plus a little extra for interest). There are plenty of folks who will quickly point out that ‘by accounting definition, borrowing makes us rich since the money goes into the economy’. You guys know who you are. You never tell anyone about what happens when the money must be repaid though. These folks are following Keynes to the letter – forget the long run – it doesn’t matter.

Unfortunately, GDP numbers are used in many financial activities, from capital spending decisions to financial asset purchases. Distorted numbers lead to distorted assumptions, which lead to bad financial decisions. Is it any wonder that corporate debt is at an all-time high? These folks are borrowing money in anticipation of a boom that never arrives. Granted, GDP isn’t the only metric they use, but I spent enough time in budget meetings to know that it is the biggie when next year’s budget allocations are on the table.

Those seeking to purchase financial assets often look at GDP for an insight as to how a particular company might fare in its quest for increased profits. A solid economy is likely to generate better profits, thereby increasing stock prices, etc. I don’t need to lay out the rationale; everyone understands it. Perceptions about the economy play into many other consumer decisions as well, although one thing I am noticing is that people are paying less attention to government numbers than they are to their own personal economic realities these days. This is one of the reasons why consumer confidence can be at recession levels despite the fact that the government doesn’t own up to it.

One thing a flagging economy also tends to do is drive people out of stocks and into bonds. This action lowers interest rates and allows the government to borrow money more cheaply. In that regard it is certainly in Washington’s interest to keep the idea of the never-ending recession going. Phony GDP numbers prevent accurate price discovery in the bond markets, although, admittedly, this isn’t nearly the issue it was a few years ago. Back then there was actually a bond market, as opposed to now where we have a group of primary dealers laundering bond market monies for the fed and little in the way of other activity taking place.

In a normal world, the fed wouldn’t have to conduct all these illicit bond-purchasing activities. The recession would do it for them, driving investors to grab USGovt debt in a flight to safety. However, the magnitude of USGovt borrowing has overwhelmed the savers of the world. Erosion of confidence in the dollar hasn’t helped matters. The realization that the US will never get its house in order has prompted savers around the world to seek out other safe haven assets, notably commodities, which people are learning don’t come off a printing press. The recently passed debt deal and the plan to switch to a chained-CPI are two landmark initiatives that lay bare the intentions of the powerbrokers to keep the Ponzi scheme going a little while longer.

An Alternative to Traditional GDP Metrics

With these matters in mind, one of the items of high priority should be discovering an authentic measurement of output. There will be no perfect measurement, since the definition of output varies depending on whom you happen to be conversing with. So I’ll frame this part of the essay by stating that my goal in seeking an alternative was to find a measurement that allowed capital, labor, and productivity to assume their proper roles in the determination of output. My earlier assumption that government shouldn’t be in the economics business means that I will not count any government spending in this definition of output. Government monies either arrive by taxation or borrowing. Taxed dollars would have stayed in the economy anyway if they hadn’t been taxed out of it, so there is no reason to count the taxed portion of government spending. There is definitely no sane reason to count the portion of government spending that arises out of debt accumulation. It must be paid back and constitutes a drag on future output. I also believe that corporate debt and bailout dollars don’t represent authentic capital and cannot be used to determine output. These are my biases; I’m being forthright and honest about them, rather than trying to use subterfuge to cover my motives.

That said we could simply revise the existing GDP formula to exclude all government spending and be done. That would be one way of doing things for sure, and people have done it. Another way would be to take labor and capital inputs, understanding the relationship between the two as they relate to output, then adjusting for changes in multifactor productivity. The Cobb-Douglas output function is a rather simplified way of doing that.

I am not going to get into the nitty-gritty of the methodology in this article, as this is not the forum. Frankly, we have subscribers and clients who pay good money for this information and there is way too much work involved to just hand out anything recent. What I will do is provide the graphic below and submit to you that (and I have said this many times) the great recession began in late 2006 – a year before my original call of the recession on 11/25/2007 – and has yet to end, despite what the Commerce Department has to say. This in itself should not be an earthshattering statement; it dovetails with what so many of you are experiencing. The real value is that we have empirical evidence to connect with our perceptions. Better yet, we have another tool in the toolbox for making financial and economic determinations.

There is an old adage that figures lie and liars figure, and I am sure there are those of you that will call me the latter because this empirical evidence doesn’t match up with your particular worldview. That is fine; the traditional measurement of GDP certainly doesn’t match up with mine – or the vast majority of Americans.

Bloomberg was also credited with filing various FOIA requests in an effort to force the US fed to disclose recipients of various emergency loans. These minor victories for the truth may have gone a long way towards giving this news outlet a clean bill of health in people’s minds and an A+ on the objectivity stress test. Nothing could be further from the truth.

On a day when gold has dropped over $100 or almost 5.5%, investors went looking for the reasons why the correction has been so severe. Certainly the market was due for a correction; it had come a long way in a very short time for some very good fundamental reasons. However, even the strongest bull market is not without pullbacks and this one was due. That is not, however, what caused the panic selling that has taken place. The overreaction was caused by another series of margin hikes, this time in the Chinese gold markets. Margins were raised to 12% starting this Friday. Rewind a few months and remember what CME did to silver with a series of margin hikes. The obvious fear is that margin hike fever will again spread back to US markets and CME will get back into the act – which they did – effective at close of business on 8/25/11.

However, what investors found on Bloomberg was an assortment of invectives against gold, how ‘stability’ in the global financial system – aka we haven’t had a crisis yet this week – and a strong US manufacturing report all contributed to the rout. Let’s take a look at some quotes from today’s ‘wall of shame’ article, which can be found by clicking the link. Bloomberg has a habit of updating and revising articles and as such I have saved the original version in PDF format for later reference if necessary.

“This is liquidation from a crowded trade,” (name redacted), a senior market strategist at MF Global Holdings Ltd. in Chicago, said in a telephone interview. “In the short run, there’s more optimism and that doesn’t bode well for gold. Investors have been using gold more as a fear barometer than a proxy for inflation.”

Obviously senior market strategists aren’t required to know even the most basic workings of the market that they claim to have expert knowledge of. Certainly the latter half of this statement has some truth to it, but why no mention of the margin hikes? If this guy did mention it and it wasn’t printed, he’s got a good reason to be hopping mad about it, because the omission makes him look incredibly incompetent.

“This is just pure panic selling” (name redacted), the head dealer at Integrated Brokerage Services in Chicago, said in a telephone interview. Before today, gold’s 14-day relative strength had been above 70 since Aug. 8, a signal to technical traders that prices are poised to fall.

Again, there is a nugget of truth here; there has been near panic selling, but again, no mention of the margin hikes. The comments allude to the fact that the decline is based on technical factors alone.

“Gold got pushed up on the idea that Bernanke will announce further quantitative easing,” (name redacted), a commodity market specialist at Scotia Capital, said in a telephone interview. “Now people are not so sure whether that will happen and that is creating disappointment in the gold market.”

Funny, Big Ben slammed the door several times on the idea of further overt QE, albeit leaving it open on other occasions, yet gold has rallied anyway despite the general inconsistency of his comments and an unclear picture of how much more the central bank is willing to bury the dollar in the short term. The Jackson Hole meeting this week might provide some clarity in that regard, but odds are probably even that we’ll know about as much then about monetization plans moving forward as we know now.

To Bloomberg’s minor credit, there was one ‘contrarian’ viewpoint printed at the very end of the article, but long after the central point of the piece had been well established:

The decline may be a buying opportunity to some investors, said
(name redacted), who manages $200 million at TEAM Financial Management in Harrisburg, Pennsylvania. “A lot of traders and investors who are long-term bullish on gold sold out hoping for a correction because of how much it went up,” said (name redacted). “The drivers remain intact. The toughest thing to do is stay invested during the various parabolas and sit through the corrections.”

Again, through the entire piece, there was not a single mention of the Shanghai Gold Market’s margin hikes, which will take effect this Friday. I guess it is possible that Bloomberg journalists might not know about this supposed subtlety in the gold market, but they talked to a minimum of 4 market ‘experts’ and I simply refuse to believe that none of these folks knew about this. It would appear that this is nothing more than another thinly veiled attempt to shuck and jive the public into thinking that gold is not a viable alternative to eroding paper currencies and a safe haven from foolish monetary and fiscal policies that span the globe.

Getting away from the media bias for a second, there are some obvious reasons why the paper establishment would like to knock down gold prices. First, the establishment has been playing a losing game for a decade now, putting up battles at critical junctures until market pressures forced prices higher. This has been going on for more than ten years now. The argument regarding speculators is really getting tired and worn out. It is very likely that another round of public easing is about to take place (the covert easing never stopped by the way) and the central banks of the world would certainly prefer that gold launch from $1,750 as opposed to $1,950, for example. And finally, central banks, hedge funds, and all those people who bash gold love the actual metal and bought more of it in the first half of this year than they bought during all of 2010. They’d like more and if they can use paper charades to knock down the price of physical so they can accumulate, then that is exactly what they will do. The Chinese would certainly like more ounces for their flagging dollar reserves that they desperately want no part of.

So we have folks with means, motive, and opportunity. You might think the news is all bad. It isn’t. I talk to many people who complain that gold has gotten too expensive, which has hampered their ability to accumulate. Guess what? It just went on sale. What we don’t know is what the final discount will be or how long the sale will last. You again have an opportunity to trade in the ultimate wasting asset – the US dollar – for real money and get more ounces for your paper. Not a single fundamental has changed. So there hasn’t been a crisis in Europe this week. So what? Nothing has been fixed there – or here. So, Bloomberg and its shenanigans notwithstanding, today’s action is positive for buyers of physical precious metals and adds another chapter what I dubbed back in 2008 as the opportunity of a lifetime.

]]> http://www.sutton-associates.net/blog/2011/08/25/pure-media-bias-on-gold-andy-sutton/feed/ 0 http://www.sutton-associates.net/blog/2011/08/04/debt-ceiling-or-qe3-by-andy-sutton/ http://www.sutton-associates.net/blog/2011/08/04/debt-ceiling-or-qe3-by-andy-sutton/#comments Thu, 04 Aug 2011 16:53:51 +0000 TwoCentsEditor http://www.sutton-associates.net/blog/?p=1020 With the debt deal now signed and the crisis proclaimed to be over by the government and the mainstream lapdog media, it is time to take a serious look at the debauchery that was just perpetrated on the American people – again. The names have barely changed from 2008. The tactics certainly haven’t.  The magic of government accounting has had another chapter added to it as something that actually adds to the deficit and requires money be borrowed on its behalf is now a ‘cut’. Isn’t that just special? There are several big myths about the past few weeks that we need to uncover before anyone is really going to understand what is really going on here.

QE3 in Disguise

QE2 was winding down and when you go back and look at it, the USFed had already been blamed (quite properly too) for record high food prices around the globe and some of the unrest in certain locales as well. The overt monetization stage is generally the last one in the fiat life cycle, and obviously it is in Bernanke et al’s best interests to prolong the fleecing, er, rather prosperity, as long as they possibly can. The debt ceiling non-issue was really a work of semi-genius when you think about it. Set an artificial date for the end of the world, get your buddies in the media to put countdown clocks all over their news broadcasts – really a nice touch guys, and then proceed to scare the daylights out of everyone that those checks might not go out if everyone doesn’t get together and take one for the banksters. Uh, the team. So what really happened on 8/2 anyway? Well, I will tell you. QE3 was born. Come again? Here’s the stick. The consumer is now in pullback mode – again. The government is up against the wall with the full light of day being shown on its foolishness. The only institution with any wiggle room is the fed.

I have gotten confirmation from several well-placed sources that the USFed is now buying nearly 80% of all new Treasury bond issues. Most of these are being purchased directly from the primary dealers, who are required to place bids at all auctions. This is one of the reasons why it seems everyone around the world is divesting; yet the Treasury always has plenty of buyers for new debt. Pension funds and other mutual/closed-end funds are good for most of the rest. So follow the logic. The USFed needs cover to launch another round of monetary stimulus even though the first two were an abysmal failure. The USGovt needs to be able to issue a trainload of bonds to make payments on a bunch of ill-advised promises. The best bet at this point would be to borrow enough to divest everyone from SocSec at a 4% per annum rate and opt everyone out and shut the system down. People could invest their own money accordingly and at least if they blow it, it would be on them. And here’s the carrot: we get a debt ceiling extension for $2.8 trillion-ish and this gives the government the ability to borrow and spend while giving the Fed cover for the next round of semi-overt monetary stimulus. The mechanisms may be slightly different, but this one will likely mimic QE1 and 2 in most ways. The fed will be monetizing debt and the government will be spending more of its borrowed money to try to stimulate an economy, and, more and more lately, appears to be beyond stimulation. It would appear that we’ve now reached the phase in Keynes ‘theory’ where the long run is upon us and we’re not dead so now what? Unfortunately, Keynes left us no answers because there weren’t any and he knew it. This may come as a shock to many Keynes proselytizers, but we’re in uncharted territory, with not even the basis of a clue as to how to right this ship. So what we can expect moving forward is more of the same. The ‘cuts’ in this debt deal, from what I’ve been able to see so far, are going to gut the middle two quartiles of the economy. Not at once or immediately, but slowly. Many of the prescribed cuts won’t happen for a while, but others are yet unknown. The ‘super congress’ will have frighteningly dictatorial powers in deciding the winners and the losers and obviously there will be fierce battles by industries, corporations, banks, and pretty much everyone with a lobbyist – except the American people – to get people sympathetic to their cause on that commission. Go figure that 300 million Americans have not one single suite on K Street. Not even a single kiosk. Nothing.

Priming Demand for GBonds

On cue, USEquity markets have deteriorated over the past several weeks, pushing investor money across the aisle into Treasuries. I have made the case both anecdotally and factually in our paid publication for almost 2 years that the small investor is largely out of markets. Much of Middle America’s investments are in managed plans such as 401s, pension plans, and the like. Funds and banks have been driving the markets for quite some time now, shaving pennies off each other each day, with everyone claiming victory at the end of the quarter. I’ve chronicled how several firms have bragged on quarter long winning streaks. When you look at all the information, it becomes very clear that the big banks are running that show now more than ever. So why the recent selloff?  There are a couple of reasons really, and the first is the easiest to understand. The general public, for the most part, regards the stock market as the economy itself. Running down the markets was one way of making the fear campaign launched by Washington stick. Thanks to subterfuge and disinformation, Main Street really doesn’t understand most of the economic reporting other than unemployment, and perhaps GDP, but it certainly understands the stock market.  Dropping the markets was part of the psyop against the American people over the past several weeks. Secondly, there is typically a flow from more risky to less risky assets. Let me be clear that I preface both of those qualifiers with ‘perceived’. Perceived increased risk in the equity markets will push money into bonds and vice versa. That has been a basic paradigm for many years now and is fairly well understood by most investors. That paradigm is going to be ending in the not-too-distant future, but that is another article for another week.

The mere fact that so much money is piling into the long end of the yield curve reeks of manipulation since it simply defies common sense. A stay of execution is not a pardon, and the ridiculous spending spree in Washington will continue, albeit, most likely to a lesser extent in Middle America’s direction. There will be plenty of money for wars, regulation, and plenty of money for the next bailout when the banksters get zapped (most likely by design) by the derivatives time bomb they’ve created on a global scale. Nothing has been done to alter the trillions that SocSec and Medicare pass onto the nation’s plate in terms of unfunded liabilities each year. Perhaps the plan is simply to make the liabilities go away, and then there will be no need for funding. The supercongress could easily have that as its mandate. It will not be comprised of Ron and Rand Paul types, that is for sure, or even main line fiscal conservatives. Or advocates for the people. I wouldn’t be surprised if General Electric CEO Jeff Immelt wasn’t given a spot despite the fact that he isn’t even a Congressman.

Gold Smells the Rat(s)

In short, the run-up of the bond market is to push the perception that US government bonds are safe. There is likely a minor residual effect from the ongoing (and worsening) crisis in Europe, which is spreading well beyond Greece. Gold is properly responding to the debt and derivatives mess globally. At this point, it is one of the few markets that is ‘working’ yet the mainstream press calls the rally ‘ludicrous’.  And make no mistake, the roiling of markets is just as much about derivatives as anything else. Remember all the credit default swaps that were written on junk US mortgages? There are plenty of those written against various European (and American) government bonds, banks, and pretty much anything else that isn’t bolted down. And the nature of the derivatives time bomb is such that it will not matter where it begins, once the avalanche starts, it will take the entire financial system with it. That is the magnitude of the greed that has been poured into this rather unknown and virtually unregulated arena.

Ratings Russian Roulette

Another benefit to pushing up the bond market is to cover what declines may occur if a ratings agency actually does something other than talk about downgrading USGovt bonds. At this point at least it would appear to be a rather safe bet that this will not happen. Moody’s has already affirmed the top rating while saying everything negative they possible can in a vain attempt to save face. These agencies are merely political animals, serving the masters who pay their exorbitant fees. Nothing more. They are not independent by any stretch, because as anyone can understand, your allegiance is to who pays you. When a bank pays the agency to rate its mortgage tranches, the rating agency has a choice. Make the rating pleasing to the customer or lose the business. It is very simple. Amazingly the agencies essentially admit this, claiming their sovereign ratings are ‘more independent’. More independent than what? Than the AAA ratings slapped on C mortgage tranches?

If the Eurozone nations want the ratings agencies to stop arbitrarily and capriciously downgrading them, then they’d better take some of that rescue fund and send a large check. That is what appears to work best with these firms – a large application of money. There is also a little talked about motivator in there for the ratings agencies to keep the USGovt’s rating sterling. If they cut it that could very well mean that fewer bonds will be issued, and therefore diminished demand for ratings. When in doubt, always, always, follow the money.

There was certainly a lot of borrowed money to be followed today as the debt curve resumed its relentless upward climb to oblivion and the loss of the American standard of living we’ve come to enjoy. Meanwhile, awful economic reports continue to flow out of the various reporting agencies and if nothing else, maybe this time folks will come to understand you just can’t put humpty dumpty back together with endless monetary and fiscal stimulus; it is truly the ultimate exercise in financial futility.

If you haven’t taken an opportunity to download our free report entitled ‘If You Have Paper Assets… There are Three Things You Must Consider’, think about doing so now. As debt contagion swirls in Europe and now on our shores, it is more important than ever to take a protective stance towards the entirety of your assets. Simply Click Here to go to the download page. No obligations, no hassles, just common sense investing wisdom. There are also several other compilations available by clicking the above link as well.

By way of introduction, let me say first that palladium does not have a rich heritage as a monetary metal like gold and silver. Rather, it is akin to platinum in that you can buy coins (Maple Leafs and bars) rather easily, but they will not be as recognizable by and large as their gold and silver counterparts. The metal is more of an industrial metal, which one might immediately think is bad because by definition, it is susceptible to swings in economic output. This would be true, however, as is the case with energy and other products, we must keep in mind the interlocking nature of the global economy and that we need to be focused on aggregate demand as in global demand, not aggregate demand as in sub-regional or regional demand. Palladium is also not an effective inflation hedge. Looking at historical prices through 2006, you’ll quickly notice that the peak was in 2001, hardly the pinnacle of dollar destruction. However, over the past several years, palladium, like most other commodities, has trended upwards as the dollar has come under increased attack.

Palladium’s Uses

Probably the most well known use of palladium is in autocatalysts or catalytic converters. These can be made of platinum as well, however, palladium has several advantages over its top-shelf counterpart. It is more resistant to oxidation, meaning it will last longer in catalytic applications, is softer and more ductile, and is generally cheaper than platinum. Auto-catalysts are by far the biggest use for palladium at the moment and such catalysts are even present in hybrid cars as well, meaning demand is not likely to be adversely affected even as many car owners switch to hybrids in the coming years. One possible risk to palladium demand would be a revolutionary breakthrough on the electric/solar/LNG side, which would make it feasible for a large amount of car owners to affordably switch to the new technology. There are certainly examples of these, but they are by no means a threat at this point and I wouldn’t foresee such developments becoming an issue over the next several years at a minimum. These types of major changes are generally slow to occur. As of 2009, roughly 45% of palladium was used in autocatalysts. This number was down from over 53% in 2003, which bodes well for the diversity of uses for the metal.

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A second popular use for palladium is in electronics. Its metallic characteristics make it a very suitable substitute for gold in plating of sensitive electronic components. The fact that it costs roughly half that of gold makes is a shining example of the substitution effect in practice. As of 2009, around 15% of palladium

consumed went into electronic components. Jewelry accounted for roughly 14% of palladium used in 2009. Investment in the metal accounted for 10% of 2009 demand. This is very important because in the earlier part of the decade, investment in palladium was trivial at best despite the fact that the metal had very recently been at a record high. Interest has been multiplying significantly, however, most metals investors still have yet to make their first purchases of palladium.

Rounding out the balance of Pd’s uses are dentistry and chemical refining, where it is used to develop raw materials for use in synthetic rubber, polyester, and nylon. It is also utilized in oil refining where it is present in several types of hydrocracking applications, photography, water treatment, hydrogen purification, and medicine. Like silver, there are many diverse uses for palladium and this fact alone bodes well in that it serves to insulate prices somewhat from the stagnating USEconomy.

Palladium Supply and Demand

As of 2003, the situation with regards to palladium was eerily similar to that of the rare earth metals in that much of the globe’s resource base was concentrated into a very small oligopoly of producers. In that year, nearly 80% of global palladium production came either from the Russian Federation or South Africa. By 2010, Russia was largely tapped out of palladium. Its purported massive stockpiles were diminished to nothing and its three biggest mining projects were all in advanced stages of decline. Russia has been supplementing mine production from its Norilsk mining company with sales from Gokhran, the state repository (a stockpile), and the Russian Central Bank – obviously another stockpile. In early 2010 Anton Berlin, a director of Norilsk, stated that there would likely be no sales from the Russian repositories in 2011.

While the exact content of Russia’s stockpiles is not for public consumption, Mr. Berlin did confirm that sales out of the stockpiles have been declining since early in the decade. At this point, the largest palladium deposit on earth exists in South Africa in the form of the Bushveld Complex. Currently, the only other producing nation that has significant upside potential in terms of production is Zimbabwe. However, it is a locale that is loaded with political risk among other things at this stage of the game. There are currently several projects going on in North America, the most promising of which exists at Thunder Bay, which could end up producing nearly 40 million ounces of palladium. It must also be understood that the projects in the Thunder Bay area are for the most part in their infancy and real production is likely several years down the road.

The market will need every ounce from these projects because light vehicle production is set to increase through 2016. If you’re worried about a worsening of the US recession killing off demand, consider the fact that China is outpacing America in terms of putting new cars on the road. There are several other jurisdictions like India and Brazil where more stable economic environments will lead to growth in middle classes that will take to the road as well. Remember; consider aggregate demand, not just regional demand. Other factors that will provide upward pressure on palladium usage are increases in investment demand, medical uses, and, in particular, the petroleum industry as shrinking supplies of crude oil demand even more efficient refining techniques. Palladium has also been a part of many of the early work in fuel cell technology and while it is impossible to gauge what the impact will be at this stage, fuel cells will clearly be in focus as the world comes to grips with peak oil and seeks suitable alternatives.

Summary and Outlook

Palladium has several big advantages over many of the other metals in the commodity space. First, it is practical in terms of holding a physical position should one desire. Compare it to copper, for example, where a $1000 position requires you to hold over 200 pounds of metal. Or consider oil where it is not practical for the average investor to hold a physical position at all. As I outlined above, supply and demand dynamics favor higher prices in the future, and while it was not the focus of this article, there are some very significant opportunities in the palladium mining space for those who wish to take advantage in that manner. The obvious risks to palladium are the same as the other industrial metals. Another severe global recession would likely dampen demand enough to keep prices in check. Such a recession/crisis, if it were to impact the capital markets as we saw in 2008, would likely impair mining firms (especially exploration/development types) from getting the necessary capital to fund their continuing operations. Innovation, especially in the automobile space, represents a risk to the current demand profile for palladium, but innovation also presents more potential uses for the metal as well.

The bottom line on palladium is that while it is certainly not the sole answer to protection against dollar destruction, there are some very compelling aspects to the market that make it worthy of serious consideration. It is yet another tool that we can use to operate in a world that is becoming increasingly wary of paper monetary instruments and will likely benefit as the world continues the quiet, but relentless push to ‘get real’ by acquiring tangible assets.

If you haven’t taken an opportunity to download our free report entitled ‘If You Have Paper Assets… There are Three Things You Must Consider’, think about doing so now. As debt contagion swirls in Europe and now on our shores, it is more important than ever to take a protective stance towards the entirety of your assets. Simply Click Here to go to the download page. No obligations, no hassles, just common sense investing wisdom.