This is called inflationism, a particularly decreased element of Keynesianism. It is like elixir that cures all ills. Raise rates and increase money and credit simultaneously. You have seen them in action when they are really needed. They cut rates and provide the needed credit. They can solve anything economic or financial. Do not sacrifice and save, spend to your heart’s content. Why not our banks are doing the same thing. Will it stop–of course not? It is now the only way the system can function.
Japan was forced to do the same thing in 1992 as its real estate and stock markets imploded. They spun into depression and contrary to public belief they have never recovered. This is where America and the rest of the world is headed. In the end monetary policy cannot deal with bubbles. No matter what they do to prolong the agony the system has to be purged. This is the worst example of financial profligacy in modern history and it will lead to financial chaos not just financial instability. Again, Japan is an excellent example. It didn’t go into total collapse because it was aided by the open door of the US economy. The cause in Japan, as it is the cause today in America, is bad loans. Today its personal debt over extension via credit cards, revolving credit, car loans, adjustable rate mortgages, ARMS, excessive borrowing in commercial real estate and loans and leverage by institutions and hedge funds, never mind official unpayable government debt.
The official opinion today is that Japan didn’t ease monetary policy sufficiently or rapidly enough. That is not the way it was. The Fed told the Japanese what to do and they did it and it didn’t work. Japan kept afloat by being able to export cheaply to the US. They have managed a cheap currency for 15 years. It is called currency manipulation. The Japanese paid down $1 trillion in bad debt and the result was deflation in spite of the increase in official debt, money and credit, not to mention zero interest rates and we can eventually expect the same in America. In today’s scene in America there will come a time when commercial and business borrowers will cease to borrow. Consumers are already showing signs of pulling back. We expect consumers to pull back from 70% of GDP to 64.5%, which is the long-term norm. The banking system looks solvent with excellent earnings. The problem is the profits and stability are the result of highly leveraged hedge fund business and the existence of $400 trillion in derivatives. One or two major problems and the roof falls in. The system is far from being stable. The banks are fountains of credit amply supplied by the Fed and other central banks. Just look at the figures we publish twice a week.
The housing market has been stabilizing and falling for 1-1/2 years. The psychology has been broken. There has been a rush to extract equity before prices recede further. This will continue as unemployment rises, but more importantly as purchasing power continues to fall. In 2006 consumers lost 6% in purchasing power via the lack of increased wages and higher inflation. Aggregate demand is falling, as is employment in construction and real estate, the source of some 40% of demand growth over the previous four years. The wealth effect is dying. Credit expansion, liquidity excess and speculative dynamics are now centered in global finance by use of derivates and the leverage use by hedge funds. This is far more dangerous than seeing a house increase 100% in value over five years. Housing inflation is only one facet of speculative finance. The Fed instead of being chastised for its megalomania is lauded for escalating lending, leverage and speculation in all areas of finance. The mad hatter is running the insane asylum. Accommodation is not problem solving – it’s a temporary safety blanket. The Fed refuses to appropriately deal with the problem and faces the consequences of what they created. Bubbles are created – they just don’t happen. These bankers have done this over and over again for centuries and gotten away with it. They have always controlled what passes for media in each era. The Fed knew exactly what it was doing starting in 1998 until now in increasing mortgage debt growth by 8% to 12%. They had to offset the collapse of the stock market – another bubble they had created. As experts you do not sit idly by as mortgage debt expands 20% in two years, unless you are responsible for it. Our only question now is how bad is it going to be? When are the public and the professionals going to discover that in this cover-up that the Fed and our government are intervening in the marketplace via manipulation. Market dynamics no longer work as the unseen hand shapes how markets will perform. Each time this manipulation takes place and it is going on 24/7, its deleterious efforts on the financial and economic structure worsen. This creates cumulative excesses and imbalances that deepen the underlying problems.
The fed was created to end recessions and depressions at which it has been totally unsuccessful. It was not the intention of those who allowed the Fed to born in 1913 to stimulate the economy and assist prices. It was not supposed to create leveraged speculation and be a liquidity-creating policy mechanism. It was supposed to bring tranquility to markets to smooth out the bumps, not create them. This function has been decidedly the opposite and again they have put us in harms way. We hope when this cycle is finally over that Americans finally put an end to the privately owned Fed and eject the moneychangers from our lives.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
Early Monday gold was coming into the Comex opening off $2.60 and silver down $0.09. In a reverse of what normally happens on the opening, gold rose $1.00, silver rose $0.11 and copper went from a minus to a plus $0.01. The pound had been down .0022 and rose .0022 upon opening. The euro remained off .0022 on a very high German PPI, which means the ECB is bound to raise interest rates another quarter point in March to stifle inflation. That caused the dollar index to start the day up .18. The Dow fell 30 points off lower earnings with Citigroup the strong standout. Interest rates are inching higher with the 2-year Treasury up to 4.92% and the 10’s at 4.77%. If it wasn’t for the sea of liquidity interest rates would be 2% to 3% higher.
Blanchard & Company has learned that the IMF has adopted a landmark accounting change to the way Central Banks account for their gold loans, giving this sector of the commodities more transparency than it has ever had. This is a huge step forward and a major victory for the gold market investor. Not since the Washington Agreement in 1999 and the legalization of gold ownership for Chinese citizens in 2004 has there been such an important event.
The previous IMF accounting rules have allowed central banks and bullion banks to inaccurately account for their gold loans, and the newly adopted accounting change means that central banks will no longer include the amount of gold they have loaned and sold into the market as part of their reserve total assets.
This is a wonderful development for the gold market because of the additional transparency that is created by the changes in the IMF accounting regulations.
Our only question is will they tell the truth? They never have in the past.
On Monday from a plus $2.50, gold was beaten down to a minus $2.00 to $633.40 and silver rose $0.06 to $12.87 after having been up $0.16. Oddly the February gold contract fell $2.30 to $633.10 slightly below spot. Silver rose $0.08 to $13.00 and copper tacked on $0.01 to $2.53. Gold open interest fell 8,849 contracts to 340,626 and silver rose 1,094 contracts to 105,230. Friday on Tocom the big shorts covered 322 shorts to total 98,497 contracts. The same group increased net silver shorts by 113 contracts to 4,682 total. On Monday the XAU lost 1.04 to 131.32 and the HUI gave up 3.24 to 315.04.
The Dow was off over 105 but ended up off 88 at 12,477, S&P fell 69 Dow points and Nasdaq fell 120 Dow points, another miracle. Oil was up $1.50 and ended down $0.86 to $51.13, gas fell $0.02 to $1.38 and natural gas rose $0.43 to $7.32 on the rumors that Russia was trying to form a natural gas cartel. The euro rallied toward the end at .0011 to $.12952, the pound rose .0034 to $1.9762 and the Canadian dollar ended at 84.63, up .07. The 2-year Treasury note closed at 4.91% and the 10’s ended at 4.75%.
Gold is telling us it doesn’t want to go down. Since the beginning of the year oil is off more than 13%, the dollar index is up 2% and gold has held its own. Quality gold shares are off 8% as pros and the gold suppression cartel try to force gold lower by hitting the shares. The gold market is strong and is being help up by physical buying. This has been going on for months. Yields on bonds are rising and the stock market is getting ready for a correction. As we said earlier bond yields have to go higher. If mortgage rates move ½% to 1% higher you can kiss the housing market goodbye. All these changes and difficulties add up to higher gold prices. Remember, if you are not in the game you cannot win.
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