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Wednesday, April 17, 2013

What If Bernanke Had It Dead Wrong?

Or perhaps even worse, it's all been a lie from the very start.

Dr. Bernanke to the ER! Stat!

After the Friday-Monday meltdown in the metals complex, I've been watching and seeing other cracks develop in commodities. They are all turning down. Some traders are saying, "sell them all."

We live in an isolationist world. We think that somehow, Americans are special and immune from the problems in other parts of the world. Americans in their own arrogant way, dismiss the problems of places like Greece and Cyprus. That couldn't happen here, they think. Yet worldwide financial systems have never been more joined at the hip. We might never have known that piece of information if the Federal Reserve hadn't been forced to divulge who they had made loans to in 2008. The international banking community was almost completely bailed out by the United States Federal Reserve. Here's a piece on the SIXTEEN TRILLION DOLLAR international bail out.

The point being, it is a global financial system. Pure and simple. Now you might be wondering why in the hell the US Federal Reserve Bank is bailing out international banks. I would remind you, that despite the name which was concocted to intentionally deceive you, the US FED is a privately owned international bank. You don't elect it's leadership nor do you nominate it's chairman. That is all done internally. Just like any other business. Pretty much all you'll ever need to know about the FED can be found here in a simple 42 minute video.

You might say that in 1913- our leaders outsourced the job of printing money without even obtaining competing bids. Signing the bill that created the FED, Woodrow Wilson said years later that it was the biggest mistake he ever made as President.

That is the system that spewed forth Ben Bernanke. Bernanke is a genius by all standard measures. He is a Harvard grad (he is a close personal friend of Lloyd Blankfeins', CEO of Goldman Sachs, they met at Harvard) and received his doctorate at MIT. Bernanke allegedly had perfect SAT scores.

I need to add one additional item. Bernanke said he studied the Great Depression at length. Thus he believed that the reason that period was so prolonged- was due to deflation. He is an expert. From wiki: Bernanke succeeded Alan Greenspan on February 1, 2006. In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation entitled "Deflation: Making Sure "It" Doesn't Happen Here."[1] In that speech, he assessed the causes and effects of deflation in the modern economy. Bernanke states:

"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress."
So Bernanke has been printing money hand over fist- convinced that his efforts will stave off or return America to some economic normalcy after the greatest credit expansion of all time. My question is, "What if he is wrong?"

Edison was a genius too. Unfortunately, Edison was forced to try a thousand different methods of inventing the light bulb before he found one that worked.

One of the greatest problems this nation has- is that it attaches far too much credibility on flimsy credentials and attaches it to one man.  The second problem I have with Bernanke's great thesis is a demographic issue. In the 1930's  we had the capacity to recover. We were in the midst of a great technological advance and an industrial revolution. We had a domestic workforce. American business invested in American workers.

And then they got greedy. Millions upon millions of jobs were exported. Things in 1934 looked a helluva lot differently demographically than they did in 2008.

It is almost as though Bernanke didn't figure in those lost 50 million jobs and to be sure- his thesis was finished long before we lost those jobs. So after years of QE this and QE that, Zero Interest Rate Policies, Operation Twist and this latest QEternity- we are still without a recovery.

Why? Because nobody can figure out a way to bring back all those tax paying, buy everything on credit, jobs. We can't even tax or repatriate the trillions that have been made off shore.


Which brings me back to the gold melt down triggered on Friday. What if we suddenly have the great deflationary meltdown that Bernanke has worked so fervently hard to avoid? What if all those trillions of dollars in debt were added in a desperate attempt to escape the inevitable grasp of deflation and yet- deflation comes anyway?

Isn't there an aggregate loss of demand for goods and services when you have no new jobs, deteriorating wages, and new taxes everywhere? Isn't your demand going to go down, Dr. Bernanke? Isn't that your definition of deflation?

There are signs of deflation everywhere. Commodites are all going down. Taxes are going down. Consumer sentiment and purchasing is going down, even the last great investment of the 21st century is starting to tank. Equities, despite all of that QE, are beginning to behave like someone is paying attention to fundamentals. Like bad earnings may actually have a say in the outcome of equites. Even China is starting to drag. People are rushing back into bonds. The 10 year yield is a whopping 1.7%.

Check this out. Here's the FED saying inflation is too low. Can you say deflation?

You gotta love Bullard's response. Well hell, QE hasn't worked for five years, so let's try some more QE! That's real genius.

The FED just can't admit one simple truth. They were always wrong. It was always a giant con to try and restore insolvent international balance sheets. They screwed the pooch and the only solution is for the whole system to deflate, wring out, and re- inflate with some sort of plan in place which they still don't have.

What happens if we have the great deflation now that we have trillions of additional debt? I'm not sure. I'm not even sure I'd waste the time and ask the great credentialed one. At this point, Ben Bernanke sure isn't looking like the great genius he is purported to be. The patient is starting to look rather lifeless, doctor.

The Greatest Invention of the Last 52 Years

A few days ago, I was watching some late night talk show host who was engaged in an interview with a very sharp, 105 year old woman. All I remember was that she was from Santa Barbara.

At any rate, the talk show host asked her what the greatest invention of her life time was and then suggested... "the airplane?" Of course she agreed with that. I did the math in my head. She was born in 1908 which meant she came about 5 years later than the first powered flight. ( I had the original date wrong)

As I listened, I thought...what was the greatest invention in my 52 years? Computers, cellphones, channel changers, garage door openers....the Garden Weasel or the Sham Wow?

The truth was and is, I simply couldn't answer that question until late last night when suddenly I remembered what invention I prize above all other innovations in my brief lifetime. 

You see yesterday, I had to do something I dread with every breath I take. Work. I had a break in my four inch sewer pipe which caused sewage to back up into the downstairs laundry room. Nothing pisses me off more than sewage in my house. So after sending a camera down the pipe, we located the break and then set about the task of digging up 6 feet worth of broken sewer pipe and replacing it. This required hand digging a grave sized hole to a depth of three feet and doing it in very tight quarters next to the house. It is back breaking work, stooped over a hole on your knees, digging a giant sized hole.

After a few hours, I was covered in dirt and sewage because in my mind I still think that I am 21... and somehow my mind plays tricks on me. I forget how painfully slow my recovery is. I can no longer tell the true from the false.

At about 9:30 last night, I gazed into my medicine cabinet. There it was. The greatest invention of my life, something I take virtually every other day, something that has allowed me to stay active for as long as I have.

Ibuprofen. Not far behind and most certainly in 2nd place, Omeprazole, the great stomach acid stopper.

I managed to string together a fairly healthy 7 or 8 years together at the beginning of my life. At some point, right about the time I jumped out of a tree house and onto a board with a nail sticking out of it that went completely through my foot, I was doing ok. Since then, strained knee ligaments and sports related injuries, a destroyed left rotator cuff, broken arms and ribs from various motorcycle accidents, blood clots, swollen legs and veinous insufficiency and the world's flattest feet- have conspired to give me some of the finest top to bottom nagging pain. I am not even counting my teeth which are giving me fits- the last one broke lengthwise about a week ago and I pulled the loose half out with a pair of needlenose pliers. It had already seen a root canal so yanking it out wasn't too bad.

Growing old is not for pussies. And whining about this shit- well it makes you look like an even bigger pussy. So don't do it. I can do it here because a lot of you don't really know who I am- and the ones that do- are worse off than me anyway. Like Troy and Ronnie. 

I can't even imagine how much fun all of this will be by 62. Maybe it will get better.

So last night I popped three of those bad boys and I gazed longingly at my Vicodin which is my emergency back up plan when the ibuprofen fails. They have this kick ass ibuprofen in Canada but you have to smuggle it back in like some sort of nefarious criminal. It has caffeine and codeine in it and it is fantastic but I am out. So I settled for the weaker American version of ibuprofen which worked- it works very well for me. Today, I have been staring at that giant dirt pile. Shit. I just can't bring myself to go fill in that hole- at least not yet. Maybe it will just go away on it's own. 

Monday, April 15, 2013

The Gold Enigma*Updated

First off, I am glad that gold and silver are taking a cliff dive. It has been absolutely breathtaking and it's going to take a lot more than two days worth of diving to shake my resolve. This should have happened long ago. This may be the beginning of deflation. It is the natural by-product of loose credit.

In 2002, Ben Bernanke announced in a speech that he believed deflation was the single greatest problem facing the United States after 1929. It was deflation that Bernanke vilified as the culprit that extended the Great Depression- nowhere did he mention that it was the ridiculous amount of credit being extended by banks. Credit in terms of real money- real money that had never existed to begin with.

By 1933, the government seized American gold so that they could revalue gold higher and issue additional and now unbacked worthless fiat currency. It was one of the greatest thefts in American history accomplished apparently without thought to the fourth amendment which was designed to protect Americans from illegal searches and most importantly- illegal seizures. Depriving a citizen of his privacy and the use of his property used to command the utmost attention- but by 1933 and the usual sales pitch- it meant nothing.

The same thing would re-occur within a few short years when the American government decided to deprive Japanese Americans of their civil rights and property.

It amazes me that our government can simply ignore the law of the land whenever it so chooses. They always have a decent excuse and they will always have a cadre of statist cheerleaders cheering them on. Convince one person beyond a draw and you get a mob rule democracy.

Which brings me to the present day.

With the re-occurrence of the same loose credit conditions that caused the Great Depression- the Federal Reserve has been bailing water on the good ship US Titanic since 2007. By manufacturing money and sticking it in member banks' pockets- the Fed has caused the greatest equity bubble of all time.

Thus the enigma of our time, due to the unprecedented printing of 7 trillion in stimulus, has been trying to figure out how all of this plays out and ends. Having read gobs of economic theory, economists from every school, and watching this drama unfold- has left me with one inescapable conclusion. I am convinced...

That absolutely nobody knows how the hell this is going to turn out. All we do is guess. That's why they call it an enigma. Hell we don't even know when QE will end.

There is only one thing that I have been fairly confident about. Something that has occurred at the end of every credit expansion when the bubble pops. Deflation.

Deflation never had a chance to square it's account. Sure, there was some deflation occurring in late 2008 and that fact is borne out in the BLS stats for that period. Before deflation could take hold and punish the people who deserved punishing- the borrowers- Ben Bernanke swooped in and began the greatest money printing campaign of all time. He created stagflation (with plenty of inflation) to avoid deflation and managed to screw every saver in this country.

Which brings me to the present day. Why am I happy that gold and silver are taking a nosedive?

Quite simply, this may be the start of the deflation that should have occurred in 2008. In fact, there are deflationary signs everywhere. They were simply delayed. I have always believed that a serious round of deflation followed by Fed induced inflation was the only way this fiasco would resolve itself. Think about Japan. They have never accepted their medicine. The best way to describe this is by metaphor.

You can keep a brain dead patient alive indefinitely until such point that the people with standing eventually realize that the life is over. That their loved one is not coming back. This comatose economy is a perfect example of that.

What is skewing our ability to accept that which we have been evading for 5 years- is that we have bought into this idea that this time it is different. The only thing that has been different  this time is the willingness of the FED to QE everything and a government more than happy to help sell the lie by manipulating markets and statistics.

Maybe, this will all unravel soon. The metals, as well as other commodities, are due for a bout of deflation. So are economies and currencies. I'm not sure just how much longer the Fed can keep the patient on life support but then again- that is the great enigma.

None of us are sure anymore.

So you can read all of the gold analysis you want, lord knows I do that everyday. If you are anything like me- it will simply re-enforce your belief that nobody knows what's going to happen and when. The only thing that I know for sure is that I would rather own gold and silver than nothing at all.


*Dave in Denver reported in his comments today that Andrew Maguire's version of what happened seemed the most plausible. I snipped this piece from the KingWorldNews site. The London Bullion Market...

“Entities went to the LBMA and said, ‘We don’t trust anybody anymore.  We want our physical metal.’  They were told they would be cash settled instead by a bullion bank.  The Western governments have been trying to plug holes, and the reason for it has to do with the default that was taking place at the LBMA.

This is why this smash has been orchestrated because of the run that has been taking place on physical metal.  So Western governments had to do this because of an imminent run on the unallocated LBMA system.  The LBMA bullion banks had become so mismatched at one point on their trading positions vs real world demand that they had to orchestrate this smash. 

This orchestrated smash in gold and silver was nothing short of a bailout for the bullion banks.  So there is a run on physical gold that is taking place and the Ponzi scheme the West is running is being threatened because of it.”

Maguire also added: “We are nearing the end of this decline.  Physical demand is already beginning to catch up with leveraged paper.  If gold were to trade into the low $1,300s it would be unsustainable for very long.”