Ben Bernanke's Latest Quip: One for the Ages?

Last month, we posted this You Tube medley of Ben Bernanke's "Greatest Hits" from the last 2+ years. The video's title "Bernanke: Why are we still listening to this guy?" probably says it all.

Well get ready, because Ben's hopping up on his soap box yet again. Check out this Wall Street Journal headline from today: Bernanke Sees Recovery, Defends Fed's Actions.

From a technical point, the "recession is very likely over at this point," Mr. Bernanke said in a question-and-answer session at the Brookings Institution.

I guess that makes it official - get ready for the next dip down in this recession/depression!

Ben Bernanke: The Ultimate Contrarian Indicator?

Why Do People Still Listen to Ben Bernanke?

A little bit of Friday fun for you...pull up a chair, grab some popcorn, and enjoy Ben Bernanke's Greatest Hits!

Is Deflation “So 2008”? Hyperinflation Trade Looking Crowded

As the Federal Reserve continues to print money, the “hyperinflation trade” seems to be a crowded one.

The premise seems sound and reasonable – whenever a government prints money and devalues its own currency, rising prices follow. A deflationary environment cannot hold for a sustained period of time, because the government will print money, or drop dollars from helicopters, or do whatever it needs to do to create price inflation.

But is it really that simple?

If so, then gold is playing one hell of a rope-a-dope on all of us. Why has gold not been able to crank past the $1,000 mark decisively if inflation, and perhaps hyperinflation, are in the cards? After all, the market is supposed to be a forward looking mechanism!

Perhaps gold is merely climbing the “wall of worry” on the way to the final mania stage... doing a fine job at shaking out the weak hands and non-believers before ultimately skyrocketing to $1500…$2000…or higher.

Gold has risen each of the last eight years versus the dollar, and appears poised to extend that streak again this year, so maybe I’m being overly harsh.

However thus far, plays on hyperinflation have mostly disappointed. Sure, gold has rallied off it’s lows, but so have the broader markets, in what appears to be a textbook bear market rally.

Recently I’ve started wondering if there’s something fundamentally wrong with the hyperinflation hypothesis. A few weeks ago, I mused that the “buy gold” trade seemed a little overdone, at least in the short term…punctuated by Northwest Mutual’s purchase of gold for the 1st time in the company’s 152 year history.

When insurance companies are rolling up to the party, you can bet the cops are also on the way and ready to shut the joint down!

So please indulge me for a moment, and let’s ponder “what if” Helicopter Ben can’t print dollars fast enough.

Here’s what could gum up the efforts of the money printers says Robert Prechter in the June 2009 edition of The Elliott Wave Theorist:

“You can’t beat deflation in a credit based system.”

Prechter says that growth in money supply requires activity on the part of lenders and borrowers. And once a credit bubble implodes, there is no way to restart the engine.
Japan’s recent deflationary recession is a classic example of this – despite unprecedented efforts by the Japanese government to devalue the Yen and generate inflation, they weren’t able to do either!

No amount of public works projects, increases in federal spending, and monetization of debt has yet been able to snap Japan out of its deflationary nightmare. When its credit bubble popped in 1989, it stayed popped for good.

Was Japan an anomaly? With the US employing the same “hair of the dog” tactics, we’re going to find out soon!

If we had a cash based economy, then printing money would indeed cause price inflation, Prechter says. But in a credit based economy, credit is being destroyed at a much faster rate than the Fed can print.

(Roughly $14 trillion in credit down the drains so far, versus $2 trillion in deficit spending and monetization…so quite a large gap).

Eventually, enough credit is destroyed that the Fed will be able to affect the money supply. So, ironically, we could see hyperinflation at the end of this all…of whatever little money is remaining!

As engaging as this intellectual exercise is, at the end of the day we need to figure out where to put our money! There is no safe haven, after all – even if you’ve got your money in cash, you’re “long cash”…and “long” the currency you’re stocking it in!
So what are we to do?

Well, I think we’ve got to watch the charts, and listen to what the market is telling us. This is a time to protect our capital, not to reach for extra yield. If an asset class is getting taken to the cleaners…get out! That was the biggest mistake I made during the Great Deleveraging of 2008…that was the time to follow your stops, go to the beach, and catch a little R&R while the world fell apart.

That said – if we see gold smoke past $1050, $1100, etc – we probably want to be in gold. We’ll take that as a cue that our musings about credit based systems, while fun, were perhaps wrong!
For now, I think cash is not a bad place to be. With gold not yet able to break through, and the hyperinflation trade getting more crowded by the day, another burst of deflation could catch most folks with their pants down.

Remember, in a deflationary environment, cash is king…so don’t worry about yield. Cash gains purchasing power as prices deflate around it…so if you’re able to preserve your capital in nominal terms, we could do quite well in real terms!

Quick Reader Survey - Please Share Your Thoughs!

I tossed together a quick 3-question reader survey, and I'd appreciate it if you could take a minute or two to share your thoughts and suggestions with me using the survey link here.

It's always great to connect with you, and your feedback and input help me figure out where to focus my energies...namely on stuff you like, and stuff you'd like to see more of.

The Week's 5 Most Popular Posts...

1. Why Jim Rogers Has Covered All His Short Positions
2. Why Silver and Gold "in the Ground" is Seriously Undervalued Right Now
3. What's the Best Month to Buy Gold?
4. Trend Following - Your Only Hope for Investment Survival
5. What Stage is This Depression At?

Positions Update

We bought the sugar breakout this week...I don't know how much legs this rally could have - and honestly, I don't care - it's a 3-year high for sugar, so we gotta buy this breakout!

OK, if you want a fundamental reason - we've got a global deficit this year - and these can always be fun on the upside!

Current Account Value: $31,385.06

Cashed out: $20,000.00

Total value: $51,385.06

Weekly return: About even

2009 YTD return: -38.0%

Prior year's results:

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

It's Still a "Bull Market" in Money Creation

The bull market in money creation is still intact!

After a short "correction" a few months ago, the printing presses are revved up and running faster than ever before.

The continued strength in equity and asset prices...much to the surprise of many smart traders...seems to be validating the theory that this bear market rally is on the inflation juice!

I would exercise extreme caution with any short positions, as this "money printing" could very well cause asset prices to go to the moon in nominal terms...even as they are being trashed in real terms!

Remember - inflation is a "hidden tax" on your savings, and one of the preferred techniques used by governments throughout the history of the world to get themselves out of deficit problems.

Related reading: A Bear Market Rally on 'Roids?

Deflation Risks Subsiding...Goldilocks Has Been Achieved

Ben Bernanke was right – if you put your mind to it, and print enough money, you CAN prevent deflation.

New CPI numbers show that the core CPI (excluding food and energy, which nobody really uses anymore) actually jumped 0.3% last month, their largest increase since June 2008. About 40% of that increase came from tobacco taxes though, so you can bet our economic leaders are congratulating themselves on a “Goldilocks” inflation/deflation scenario.

Now they just have to figure out a way to put all that newly printed money away – shove all that toothpaste right back in the tube - and we’re all set.

Recommended reading: Andy Kessler on why Bernanke should spell out plans to combat hyperinflation.

Andy Kessler: Bernanke Should Spell Out Plans to Combat Hyperinflation

Andy Kessler, famed hedge fund manager, investor, author, and one of my favorite guys to listen to live, writes that Ben Bernanke needs to spell out very soon how he plans to combat hyperinflation.

With all the extra money being created (printed, via "quantitative easing") shloshing around, Kessler believes, as we do, that this could get out of hand real fast if and when the economy starts to pick up again.

I have no idea how Bernanke is going to do it - my guess is that he won't.  I don't believe there's ever been a time in history where this amount of rapid money creation has not led to severe inflation.  If anyone can correct me, please drop a comment below.

Click here for more recent articles from Andy Kessler.

Why Obama's Stimulus Package Is Doomed to Failure

On Wednesday I came across this fascinating analysis about the debt spiral the US now finds itself in, written by Professor Antal E. Fekete at the San Francisco School of Economics.  I asked Prof. Fekete permission to republish his article here, and he was kind enough to grant my request.

Hope you enjoy this piece.  Prof. Fekete has a very unique perspective, and presents an extremely well thought out argument.  I always try to read thorough analysis that counters my current way of thinking, to challenge my assumptions - this piece sure did that, and I hope it does for you as well.

Copyright © 2009
A. E. Fekete
All rights reserved

THE MARGINAL PRODUCTIVITY OF DEBT

Why Obama's Stimulus Package Is Doomed to Failure

Antal E. Fekete

Professor of Money and Banking

San Francisco School of Economics

E-mail: aefekete@hotmail.com

Paper mill on the Potomac

The paper mill on the Potomac is furiously spewing up new money. According to the manager of the mill, as indeed according to the Quantity Theory of Money, this should stop prices from falling and the economy from contracting.

In this article I present an argument why this conclusion is not valid. On the contrary, I shall show that new money created on the strength of a flood of new debt, is tantamount to pouring gasoline on the fire, making prices fall and the economy contract even more. The Obama administration has missed its historic opportunity to stop the deflation and depression inherited from the Bush administration because it entrusted the same people with the task of damage-control who had caused the disaster in the first place: the Keynesian and Friedmanite money doctors in the Fed and the Treasury.

Watching the wrong ratio

The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 in the United States while it is 100 and perhaps even more in some other countries. However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place.

Conversely, a serious fall in that ratio is a danger sign that the quality of debt is deteriorating, and contracting additional debt has no economic justification. The volume of debt is rising faster than national income, and capital supporting production is eroding fast. If, as in the worst-case scenario, the ratio falls into negative territory, the message is that the economy is on a collision course and crash in imminent. Not only does more debt add nothing to the GDP, in fact, it causes economic contraction, including greater unemployment. The country is eating the seed corn with the result that accumulated capital may be gone before you know it. Immediate action is absolutely necessary to stop the hemorrhage, or the patient will bleed to death.

Keynesians are watching the wrong ratio, that of debt-to-GDP. No wonder they constantly go astray as they miss one danger signal after another. They are sailing in the dark with the aid of the wrong navigational equipment. They are administering the wrong medicine. Their ambulance is unable to diagnose internal hemorrhage that must be stopped lest the patient be dead upon arrival.

Melchior Palyi's early warning

In the 1950's when the dollar was still redeemable in the sense that foreign governments and central banks could convert their short-term dollar balances into gold at the fixed statutory rate of $35 per ounce, the marginal productivity of debt was 3 or higher, meaning that the addition of $1 in new debt caused the GDP to increase by at least $3. By August, 1971, when Nixon defaulted on the international gold obligations of the United States (following in the footsteps of F.D. Roosevelt who had defaulted on its domestic gold obligations 35 years earlier) the marginal productivity of debt has fallen below the crucial level 1. When marginal productivity fell below $1 but was still positive, it meant that total debt (always 'net') was rising faster than GDP. For example, if the marginal productivity of debt was ½, then $2 in debt had to be incurred in order to increase the nation's output of goods and services by $1. An increase in total debt by $1 could no longer reproduce its cost in the form of an equivalent increase in the GDP. Debt lost whatever economic justification it may have once had.

The decline in the marginal productivity of debt has continued without interruption thereafter. Nobody took action, in fact, the Keynesian managers of the monetary system and the economy stone-walled this information, keeping the public in the dark. Nor did Keynesian and Friedmanite economists at the universities pay attention to the danger sign. Cheerleaders kept chanting: "Gimme more credit!"

I learned about the importance of the marginal productivity of debt from the privately circulated Bulletin of Hungarian-born Chicago economist Melchior Palyi in 1969. (There were altogether 640 issues of the Bulletin; they are available in the University of Chicago Library). Palyi warned that the tendency of this most important indicator was down and something should be done about it before the debt-behemoth devoured the economy. Palyi died a few years later and did not live to see the devastation that he so astutely predicted.

Others have come to the same conclusion in other ways. Peter Warburton in his book Debt and Delusion: Central Bank Follies That Threaten Economic Disaster (see references below) envisages the same outcome, although without the benefit of the concept of the marginal productivity of debt.

The watershed year of 2006

As long debt was constrained by the centripetal force of gold in the system, tenuous though this constraint may have been, deterioration in the quality of debt was relatively slow. Quality caved in, and quantity took a flight to the stratosphere, when the centripetal force was cut and gold, the only ultimate extinguisher of debt there is, was exiled from the monetary system. Still, it took 35 years before the capital of society was eroded and consumed through a steadily deteriorating marginal productivity of debt.

The year 2006 was the watershed. Late in that year the marginal productivity of debt dropped to zero and went negative for the first time ever, switching on the red alert sign to warn of an imminent economic catastrophe. Indeed, in February, 2007, the risk of debt default as measured by the skyrocketing cost of CDS (credit default swaps) exploded and, as the saying goes, the rest is history.

Negative marginal productivity

Why is a negative marginal productivity of debt a sign of an imminent economic catastrophe? Because it indicates that any further increase in indebtedness would necessarily cause economic contraction. Capital is gone; further production is no longer supported by the prerequisite quantity and quality of tools and equipment. The economy is literally devouring itself through debt. The message, namely that unbridled breeding of debt through the serial cutting of the rate of interest to zero was destroying society's capital, has been ignored. The budding financial crisis was explained away through ad hoc reasoning, such as blaming it on loose credit standards, subprime mortgages, and the like. Nothing was done to stop the real cause of the disaster, the fast-breeder of debt. On the contrary, debt-breeding was further accelerated through bailouts and stimulus packages.

In view of the fact that the marginal productivity of debt is now negative we can see that the damage-control measures of the Obama administration, which are financed through creating unprecedented amounts of new debt, are counter-productive. Nay, they are the direct cause of further economic contraction of an already prostrate economy, including unemployment.

The head of the European Union and Czech prime minister Mirek Topolanek has publicly characterized president Obama's plan to spend nearly $2 trillion to push the U.S. economy out of recession as "road to hell". There is absolutely no reason to castigate Mr. Topolanek for this characterization. True, it would have been more polite and diplomatic if he had couched his comments in words to the effect that "the Obama plan was made in blissful ignorance of the marginal productivity of debt which was now negative and falling. In consequence more spending on stimulus packages would only stimulate deflation and economic contraction."

Hyper-inflation or hyper-deflation?

Most critics the Obama plan suggest that the punishment for the bailouts and stimulus-packages will be a serious loss of purchasing power of the dollar and, ultimately, hyperinflation, as evidenced by the Quantity Theory of Money. However, the quantity theory is a linear model that may be valid as a first approximation, but fails in most cases as the real world is highly non-linear. My own theory, relying on the concept of marginal productivity of debt, predicts that it is not hyperinflation but a vicious deflation which is in store. Here is the argument.

While prices of primary products such as crude oil and foodstuffs may initially rise, there is no purchasing power in the hands of the consumers, nor can they borrow as they used to in order to pay the higher prices much as though they would have liked to do. The newly created money has gone into bailing out banks, and much of it was diverted to continue paying bloated bonuses to bankers. Very little, if any of it has "trickled down" to the ordinary consumers who are squeezed relentlessly on their debts contracted in the past.

It follows that price rises are unsustainable, as the consumer is unable to pay them. As a consequence the retail and wholesale merchants are also squeezed. They have to retrench. Pressure from vanishing demand is passed on further to the producers who have to retrench as well. All of them are experiencing an ebb in their operating cash flow. They lay off more people, aggravating the crisis further as cash in the hand of the consumers is diminished even more through increased unemployment. The vicious spiral is on.

But what is happening to the unprecedented tide of new money flooding the economy? Well, it is used to pay off debt by the people who are desperately scrambling to get out of debt. Businessmen in general are lethargic; every cut in the rate of interest hits them by eroding the value of their previous investments. In my other writings I have explained how falling interest rates make the liquidation value of debt rise, which becomes a negative item in the profit/loss statement eating into capital that has to be replenished as a consequence. Worse still, there is no way businessmen can be induced to make new investments as long as further reductions in the rate of interest are in the cards. They are aware that their investments would go up in smoke as the rate of interest fell further in the wake of "quantitative easing".

Self-fulfilling speculation on falling interest rates

The only enterprise prospering in this deflationary environment is bond speculation. Speculators use new money, made available by the Fed, to expand their activities further in bidding up bond prices. They pre-empt the Fed: buy the bonds first before the Fed has a chance; then turn around and dump them in the lap of the Fed. This activity is risk-free. Speculators are told in advance that the Fed is going to move its operations from the short to the long end of the yield curve. It will buy $300 billion worth of long dated Treasury issues during the next six months, and probably much more after that. Speculation on falling interest rates becomes self-fulfilling, thanks to the insane idea of open market operations of the Fed making bond speculation risk-free. Deflation is made self-sustaining. (For another view of risk-free bond speculation, see the article by Carl Gutierrez' in Forbes mentioned in the References below.)

Note also the crescendo of the dumping of equities and the desperate attempt to redeem toxic assets by private parties, sending the demand for cash sky high. The dollar, at least the Federal Reserve note variety of it, will be increasingly scarce. Rather than falling through the floor as under the hyper-inflationary scenario, the purchasing power of the dollar will soar. You say that Ben Bernanke and his printing presses will take care of that? Well, just consider this. The market will separate vintage Federal Reserve notes from the new issues with Bernanke's signature on them. In a classic application of Gresham's Law people will hoard the first, bestowing a premium on it relative to the second variety, which will fall by the wayside.

Bernanke can create money but cannot make it flow uphill

Already some tip sheets openly advise people to hoard Federal Reserve notes in amounts up to twenty-four months of estimated household expenditure, while cleaning out all deposit accounts. Depositors are urged to forget about the $250,000 limit on deposit insurance, which is rendered literally worthless as the resources of the F.D.I.C. have been hijacked by Geithner and diverted to guaranteeing the investments of private parties that were foolish enough to buy into toxic debt at the behest of the Obama administration.

Karl Denninger envisages unemployment in excess of 20%, with cities going "feral" as showcased by downtown Detroit (see References below).

What has all this got to do with the marginal productivity of debt? Well, once it is negative, any further addition of new debt will make the economy shrink more, increasing unemployment and squeezing prices. Bernanke can create all the money he wants and more, but he cannot make it flow uphill.

Bernanke is risking something worse than a depression

The newly created money will follow the laws of gravity and flow downhill to the bond market where the fun is. Risk-free bond speculation will further reinforce the deflationary spiral until final exhaustion occurs: the economy will collapse as a pricked balloon. Instead of hyperinflation and the destruction of the dollar, you've got deflation and the destruction of the economy.

Denninger says that the "death spiral" will lead to fire sales of assets in a mad liquidation dash and, ultimately, to the collapse of both the monetary and political system in the United States as tax revenues evaporate. He opines that probably not one member of Congress understands the seriousness of the situation. Bernanke is risking something much worse than a Depression. He is literally risking the end of America as a political, economic, and military power.

Indeed, the financial and economic collapse of the last two years must be seen as part of the progressive disintegration of Western civilization that started with government sabotage of the gold standard early in the twentieth century. Ben Bernanke, who should have been fired by the new president on the day after Inauguration for his part in causing irreparable damage to the American republic may, in the end, have the honor to administer the coup de grace to our civilization.

March 28, 2009

References

No Time for T-Bonds by Carl Gutierrez, March 28, 2009, www.forbes.com

Bernanke Inserts Gun in Mouth, by Carl Denninger, March 20, 2009, http://market-ticker.denninger.net

Debt and Delusion: Central Bank Follies That Threaten Economic Disaster, by Peter Warburton, first published in 1999; WorldMetaView Press (2005)

Ben Bernanke: The Ultimate Contrarian Indicator

Looking for a contrarian indicator you can take to the bank?  Look no further than our faithful Fed Chairman Ben Bernanke.  In this guest piece, the folks at Casey Research revisit Big Ben's Greatest Hits, while casting an eye towards investment opportunities that arise from taking the opposite of Ben's words at face value.

When Bernanke Says All Is Well, It’s Time to Duck and Cover
By the editors of Casey Research

“We’ve averted” the risk of a depression, Federal Reserve Chairman Ben Bernanke said this week. “Now the problem is to get the thing working properly again.”

Appearing on CBS network’s 60 Minutes, Bernanke told correspondent Scott Pelley that concerted efforts by the government likely averted a depression similar to the 1930s. He also stated the nation’s largest banks are solvent and that he doesn’t expect any of them to fail; and that the U.S. recession will come to an end “probably this year.”

Is this finally the light at the end of the tunnel for the U.S. economy?

We don’t want to appear as perpetual gloom-and-doomers, but fact is, when Bernanke tries to predict the future, he’s usually wrong.

Prediction: The subprime mess is grave but largely contained, Bernanke reassured the Federal Reserve Bank of Chicago in a speech on March 15, 2007.

While rising delinquencies and foreclosures will continue to weigh heavily on the housing market, it will not cripple the U.S. economy, he said. “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”

Reality: The median price of a home sold in the U.S. fell to $170,300 in January 2009, down 26% from a year and a half earlier, according to the National Association of Realtors. This housing crash has spread pain more widely than any before it. Home prices fell about 30% during the Great Depression, according to calculations by Yale University economist Robert Shiller. But back then, the nation was less concentrated in urban centers, and much fewer Americans owned homes.

Other housing downturns in recent decades have been regional; this one is national. Prices in the fourth quarter of 2008 fell in nearly 90% of the top 150 metro areas, according to the Realtors group. And 5.4 million homeowners, about 12%, were in foreclosure or behind on mortgage payments at the end of last year. The Federal Reserve now estimates home prices could fall 18%-29% more by the end of 2010.

Prediction: “I expect there will be some failures” of smaller banks, said Bernanke in February 2008. “Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system

Reality: IndyMac Bank failed in July 2008, with $32 billion in assets. Washington Mutual failed in September 2008, the largest bank failure in history with $307 billion in assets. Wachovia was sold to Wells Fargo in October 2008, amid concerns about its financial health, and Citigroup still scrambles to raise cash from both the government and private sources.

Fortunately for Bernanke, and unlike us at Casey Research, he doesn’t make a living by being right about the future. If he did, we strongly suspect that by this time, he would find himself without subscribers.

Thus, it is a mystery to us why the mainstream media still seem to eagerly soak up his every word, much like a devout Catholic would absorb a papal ex cathedra proclamation. But until the last American has woken up to Bernanke’s fallibility, that likely won’t change.

In the meantime, we recommend using the Fed chair’s economic outlooks as a contrarian indicator – if he says the market looks good, run for cover as fast as you can.

***

Bernanke may be wrong more often than not and still keep his job – we at Casey Research cannot afford that luxury. Our subscribers depend on us researching, correctly analyzing, and predicting market currents and emerging trends… which also includes the movements and changing policy decisions of Big Politics.

Our fresh-off-the-presses, FREE special report Obama’s Newer Deal, Part 2 tells you all about the president’s Stimulus Plan, its impact on and implications for your personal life and finances. Don’t miss it – click here now!

New Disney Exhibit Focused on Depression Economics

Walt Disney announced the creation of a new exhibit at EPCOT Center entitled called "The Great Piggy Bank Adventure."

According to the press release, The Great Piggy Bank Adventure will offer advice on four key financial themes:

1. Setting goals
   
2. Saving and spending smartly
   
3. Staying ahead of inflation
   
4. Diversifying your investments

According to my unofficial, imaginary sources, Theme #3 will be focused around kids stuffing money under a mattress as fast as they can as the world around them collapses into a deflationary spiral.

Disney officials are also reportedly toying with the idea of dropping newly printed money from the sky, to show kids that there is nothing you can do when your government decides to debase your own currency.

For Theme #4, I'm going to offer up a suggestion - why not have the kids carefully diversify their hard earned money into uncorrelated asset classes.  Then drop every asset class by 50% at the same time, and ask them how diversification worked out.

Shout out to my friend and regular reader Marc for pointing out this gem of a news story.

Ron Paul Grills Bernanke About Gold Standard - Video

He asks Bernanke at the end, and he skirts the gold standard question.

Just got done reading the latest Casey Report, which has an interview with Ron Paul. He recites a story about Paul Volcker, who in the early 80's, came into a room 1st thing one morning and immediately asked one of his staffers: "What's the price of gold?"

Bottom line - central bankers HATE gold!

Fed Out of Ammo; Dollar is Toast

Everbank's Chris Gaffney comments that the Fed is now out of ammo and into uncharted territory, trying to employ untested methods which are likely to lead to higher inflation.

So Chairman Bernanke has used up all of his remaining ammunition for the main weapon against the economic crisis, and now has to move to other less proven methods to combat the crisis. These 'quantitative' easing methods which the Fed will now use are unproven, but they are all that they have left. The Fed pulled the first new weapon out yesterday with a pledge to buy unlimited quantities of mortgage backed securities. They hope that by purchasing these securities, they will be able to force mortgage rates lower. But as Chuck points out above, it isn't the cost of credit, but the availability that is the big problem.

The problem with these new untested financial weapons is that their longer term impacts are not known. I can assure you of one thing, the new methods suggested by the FOMC will all lead to higher inflation. Most of the press surrounding the announcement suggested that inflation is no longer a problem. And the data released yesterday supports this view, as CPI fell 1.7% MOM in November, bringing the annual change in core prices to just 2%. So US policy makers have decided to concentrate on getting the US economy growing again, with no consideration of the long term inflationary effects of their policies. The Fed is pushing the printing presses to their limit, and while oil prices have kept prices down for now, inflation is still alive, and is waiting just around the corner.

It looks like the markets have figured this out already - the dollar is being taken to the woodshed.

Thanks, Ben and Co.


Editor's Note: If you're interested in diversifying some of your savings, I'd recommend checking out some of Everbank's foreign currency offerings.

Jim Rogers Covers His US Treasury Short Positions - For Now

A short Jim Rogers interview on Bloomberg - I believe from December 11, 2008. He says he has covered his short position in US Treasuries for the time being, because the trade was going against him.

He's waiting to short them again, and describes US Treasuries as "the last bubble left."

Other thoughts from Jim:

• It's idiotic for Bernanke to purchase long-dated US government bonds.
  
• Let the auto companies go into bankruptcy.
• "The government has been taking the assets away from the competent people and giving them to the incompetent people...that's bad economics and bad morality."
• These bailouts will be a "disaster for America", leading to the demise of the dollar, higher interest rates, and higher inflation.

Weekly Futures Positions Review - December 14, 2008

Top posts from the past week:

• Marc Faber: The 2009 Global Economy Will Be A "Total Disaster"
  
• US Bailout Price Tag Heading for $10+ Trillion(!)
  
• Yearly Oil Demand Drops for 1st Time in 25 Years
  
• Consumer Credit Crisis: The Next Shoe to Drop
  

A review of my futures trades from the previous week:

• Covered my British Pound short. British Pound futures have been trading sideways over the last few weeks. And it looks like the US dollar rally is starting to run out of steam.
  

Existing positions I've got:

• None!

My wish list...and it looks like these commodities are at least starting to form a bottom, at last:

• Sugar
• Coffee
• Cotton
  
• Natural Gas
• Silver
• Crude Oil
• Wheat
• Corn
  

Account Balances

Current Cash Balance	$49,196.88
Open Trade Equity	$0.00
Total Equity	$49,196.88
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$49,196.88

Cashed out: $20,000.00
Total value: $69,196.88
Weekly return: -2.7%
YTD return: -10.2%

***"Cash out" mostly means taxes, but lately I've also been using it for living expenses, and also to finance a cool new time management software startup that is starting to lift off.

Bud Conrad Radio Interview on Gold, The Fed, and Oil

Bud Conrad, Chief Economist at Casey Research, voices his opinion on Gold, the Fed using borrowed money from the Treasury, and Oil as a limited resource.

"There's not enough gold for everybody."

http://www.bizradio.org/wp-content/uploads/podcasts/december/wss-dec11c.mp3

http://www.bizradio.org/wp-content/uploads/podcasts/december/wss-dec11d.mp3