Riding Into the Sunset or a Brick Wall?
A month ago, I presented the case for why Fed Chairman Bernanke would have strong motivation to launch another round of quantitative easing (QE) before the election. In short, it would save him his job. Now, I didn't predict with certainty that he would do so − only the few men at the FOMC knew that for sure − but it seemed likely. Shortly thereafter, Bernanke not only announced more stimulus, but promised to keep it flowing to the tune of an additional $40 billion a month until conditions improve. As I had written, this is essentially the election platform of the Obama-Bernanke ticket: We will keep the party going indefinitely.
Unfortunately, though these are two powerful men, they are not above the law of economics. While critics have dubbed this program "QEternity" or "QE-Infinity," it will end much before that. We are witnessing a massive bubble in US government debt, and we've reached the point where no one in charge believes it will ever end − an excellent contra-indicator.
Rather than going on for eternity, this third round of QE is only hastening the day when there is a flight of confidence from the dollar and US Treasuries. This will cause a sharp rise in market interest rates and surging consumer prices across America. If you think $4 a gallon gas is bad, wait till you see it going up by 25¢ or more per week.
At this point, the Fed Chairman will have a choice to make: keep printing, which will push the dollar into uncontrollable hyperinflation, or begin tightening, which will bankrupt the US government and banking system.
I have long written about this Sophie's choice confronting the Fed, but so far the printing option has been too easy. With the world only slowly abandoning the dollar as the reserve currency and the euro crisis offering a distraction, the Fed has been able to more than double the money supply without US consumers seeing out-of-control price hikes at the store. Not that there hasn't been inflation − look at housing, gas, or the stock market − but it hasn't reached crisis proportions. When prices start rising fast enough for the average person to figure out he's being screwed, then there will be riots in the streets.
The good news for precious metals investors is that either scenario is bullish for gold and silver.
If the Fed pushes this insanity to the point of hyperinflation, precious metals will quickly be seen as a form of money that can purchase the same amount of goods week-after-week, month-after-month.
If there is tightening, prices might stabilize, but the federal government and its banking cartel will likely go bankrupt in tandem. That means no bailout money will be forthcoming, no FDIC insurance can be paid, and banks may go on holiday for lack of reserves. This is what happened in Iceland in 2008, when its big banks had debts 10X the size of the country's GDP. There was no way for the government to offer a bailout, so the whole edifice came crashing down. While the 320 thousand citizens of Iceland didn't make a big dent in the currency markets during this transition, you better bet the 320 million citizens of the United States will.
As we've seen in cases like Argentina's in the '90s and Hungary's in the '40s, when the banking system freezes, hard assets trade at a premium. Gold and silver coins may be at a disadvantage in terms of convenience in an era of credit cards and Paypal, but what happens when those funds are no longer available? Already, regulations and lower profit margins have driven banks to add fees to debit card transactions. Not to mention that every digital transaction is traceable by the tax authorities.
If everyone starts to carry rolls of cash everywhere, it's not a big leap to carry coins. A silver coin the size of a dime is currently worth about $3.50. Two could buy you lunch.
While I believe a tightening and national default would put the US on the road to recovery, the transition period will be messy. Bread lines, rampant foreclosures, and a spike in crime are likely results. In this situation, gold and silver may be the only things people can count on. In fact, they are likely to not only hold their value, but dramatically appreciate as millions of people flood the metals market and the dollar economy deleverages. In plain English: maybe it will only take one of those dime-sized silver coins to buy lunch. Maybe that coin will buy lunch for you and a friend.
Bernanke and his Wall Street supporters see cheap money until the horizon − but that horizon is really a painted brick wall. So it's not QE-Infinity, it's QE until the Fed either recognizes the brick wall and slams on the brakes, or doesn't and crashes into it. Either way, the only way to get off this locomotive is to invest in hard assets.
Posted by mava on 10/09/12 05:58 PM
"Bernanke and his Wall Street supporters see cheap money until the horizon - but that horizon is really a painted brick wall."
These are profoundly exact and prophetic words, and I just love the way Mr. Schiff had put the situation in this poetic description.
What I worry about is this:
Will the interest rates rise if Ben keeps printing? We assume they will, as Schiff says, this will happen because international investors will eventually recognize that the value of the dollar is fading if not dropping, and choose not to use it.
However, if I were to suggest, that the interest rates may not start rising even if this happens, then the strongest argument against me would be that "no scheme can go on forever", with which I wholeheartedly agree.
Schemes stop when the resources are exhausted. Are they? I think not yet. There is still plenty of capital throughout the world to be stolen and eaten up. I think this is the plan that Ben is going for. Collapse, but not for another 5 maybe 10 years.
How exactly can this work?
Well, typically, all those "lesser" governments (yes, because their currency is not the reserve currency), are too, want to print money non stop. Wouldn't you want to have an endless checkbook? But, they can't. The only time when they can do that is when the overlords in the FED give them the green light. How? By printing dollars. At such time, these lesser governments can too, print their own currencies with abandon, so, they can spend it, and most importantly, convert some of it to gold and real estate and secured accounts in foreign lands and tropical islands. They print with abandon, because they have the easily working explanation: "We need to keep the rate of exchange stable, or we will lose our exports!"
So, one more time: The only time when these lesser governments can print (steal) with abandon, is when the US prints with abandon. This is their chance.
I believe they will take it. I believe that Ben at the FED knows they will take it. So, my forecast is that everyone will print with abandon, for a while. I am really not argueing with Peter Schiff on the point of final collapse. All I am saying is that if other countries withdraw now, this would be unrealistically easy, because not whole world would lie in ruins! This is no way for a great scam to stop.
I think everyone will keep playing the game. Everyone will keep printing, thus keeping the exchange stable, thus not allowing the rates in US to rise.
This universal printing process will have a physical meaning of vacuuming all the wealth of the world to the end. Not just the US, but everywhere. It will stop only when all those countries erupt in revolt, their governments stepping off happily satisfied (having stacked their personal hideouts with gold and other assets), the new governments come it en force, and stopping the madness, because that would be their mandate. Then, finally, the leading industrial countries will erupt, and then finally the grand master of all, the US. By the time our rates rise, there will be nowhere to run.
Do I have any evidence to support my theory? I think I do. I think this is primarily wy we have invaded several countries lately. Because those very countries were identified as the ones most likely to refuse to keep the rates stable before others. So, what we are doing is we are replacing their governments with the goal of insuring that the new puppet understands this single point perfectly: do whatever you want, but keep printing, keep that exchange rate stable. What we are trying to create now is some sort of world-wide block of printing countries, and the idea is that not only that this will push the inevitable collapse beyond the time-line necessary for our own leadership to secure their future, but may-be even create the situation where it would be possible to make life unbearable for some countries that cannot be invaded, but decide not to print.
What do you think?
Posted by Danny B on 10/09/12 09:55 PM
@ mava, good analysis.
It does appear that the PTB want to do a giant "reset". Various people talk about investors deserting the bond market. Jim Willie says that the FED is already buying 81% of issuance. The Caribbean banks are doing some buying but, that's just CIA money. Evidently, investors have already deserted the bond market. Actual GOV liabilities increase about $ 5 trillion a year.
Strangely enough, there is a shortage of treasury debt for sale. This has driven down borrowing costs even more.
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The flight from the Euro may buoy the U.S. for quite a while. The bond market may chug on for a while.
The stock market is reportedly in great danger. Who Knows?
It's mostly black-box trading and it could fail spectacularly.
"Somebody there has the bright idea to just reboot the system. It takes NASDAQ offline a full seventeen seconds. Nothing coming out of NASDAQ. Not a peep in any stock, market wide, for seventeen seconds. When NASDAQ finally did reappear -- what happened? The orders that were resting in the book all that time immediately disappeared. Like 60%-70% of all liquidity within 200 milliseconds was gone:"
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Who knows,, maybe somebody wants to take it down;
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It's bound to be interesting.
Posted by venkat on 10/10/12 02:50 PM
Folks in USA have been inward looking and therefore are not aware of how it is outside of USA borders. In India we are seeing since a couple of years regular hikes in fuel and gas prices every 3 months or so, and the inflation price hikes are inevitably followed by protests and strikes, and the common folks do not understand that $ has died. USA mops up more and more of their $'s with each oil import bill other countries pay, and this is a perverse way of sterilizing all the keyboard entered $'s. All these countries will not allow USA free oil anymore and definitely people are spinning when they talk in time frames of 10 or 20 years for the NWO. Expect a reset anytime overnight and clearly not a good morning to wake up to.
Posted by mava on 10/10/12 04:28 PM
I hear you. You are correct that you are paying for our oil.
Te question is, how much longer your government is going to make you pay for our stuff? I think you can count on few more years. Why?
Because, if your government really cared for it's own people, it would have not inflated to begin with. It would allow the dollar to sink. But, by helping the dollar, it is stealing the wealth of Indian people and sending it to US. In the process, it's keeping some of it for themselves (the government). It hides it in a way the people will never be able to find it.
So, can it do it forever? No. At some point the people will have no more wealth. This is how you can estimate when this is going to stop.
At current rates of wealth theft, how long do you think it is going to take until everyone loses all they had? 5 Years? 10 Years?
I know you want it to stop now. But, you can't. The democracy is designed so that your desires do not count at all. It can only stop because there is nothing left, not because people want it to stop.
As long as you are using your currency, the Rupie(?), you are making your wealth available for your government confiscation, - this is the sole reason the governments through the world insist on their people using their paper currencies, and not gold.
May-be you do understand this. But how many people in India understand that? I think that if you were to call for all Indians to stop using paper money, there would be millions that would call you unpatriotic and a lot of other terms. People believe in colored paper with their symbols.
Let them walk to the end of their superstition. Let them end up with nothing but a bunch of that paper. Then, may-be, they put 2 and 2 together.
Posted by mava on 10/10/12 04:34 PM
Exactly. I see some of the very similar numbers describing how much of the treasury paper is currently being bought simply by freshly printed money.
So, if this is correct, then is it realistic to believe that say, the market for treasuries being satisfied 80% by fresh print is allowing the rates to stay at 0%, but should fresh print start buying 100% of treasuries, then, suddenly, the rates are going to skyrocket?
Posted by Danny B on 10/10/12 11:48 PM
@ Mava, I suspect that the FED can keep interest rates low for years. Dunno.
John Williams says hyperinflation in one year.Dunno. It seems that the PTB are worried that investors will take their money away from the table;
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I picture the FED comparable to a breast-implant in an old dying woman. The FED may be in fine shape on paper, even when the economy is a corpse.
The same is true for the ECB. They print like crazy and don't seem to worry about it;
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Make that 2 breast implants.
The economy is dying around them.
The economy may just go into a stall no matter what the FED does.
As Heinlein said, "After three missed meals, most men are willing to kill for food."
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I suspect that the banks will fail before GOV fails. They've increased derivative exposure by $ 39 trillion. Something is bound to smack them.