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G M
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« Reply #100 on: November 08, 2010, 03:46:42 PM »

http://blog.atimes.net/?p=1607

Dave’s Top 10 Reasons Why QE Won’t Help the Economy
November 4th, 2010
By David Goldman

10. No-one to whom banks want to lend wants to borrow.

9.  The kind of businesses that create jobs, namely start-ups, need equity rather than debt in any case.

8.  The Fed will flatten the yield curve out to five years, competing against the banks, reducing their profitability and their capacity to lend.

7.  The deflationary tendency in the US, such as it is, is mainly demographic: as the Boomers retire, they sell real assets (the US may have a 40% oversupply of large-lot family homes by 2020), and buy financial assets, just like the Japanese during their great retirement wave of 1990-2000 (which coincided with the lost decade). It has nothing to do with monetary policy which has been extremely lax throughout.

6. If you keep interest rate slow in the advent of an enormous retirement wave, then people will save more and spend less, because they expect to earn less income on their savings.

5. If you increase the inflation rate, prospective retirees will save more and spend less, because they expect to have less future purchasing power. That is the opposite of what the Keynesian short-term model predicts, namely that inflation prompts people to spend money (why keep it in the bank if its value is falling)? That’s the trouble with the Keynesian approach: it’s a blindered, short-term view of things. But some times the long-term, for example demographics and the retirement cycle, affects the short term.

4. QE has raised inflation expectations without causing much inflation: the price of insurance against inflation, e.g. TIPS and gold, has risen, while housing prices, wages, and so forth continue to fall. That’s the worst of both worlds. Rather than shift portfolios from “safe” assets like Treasury bonds into real assets, which the Fed hopes, investors may simply shift their portfolios into stores of value like gold and foreign currencies (which is precisely what I have been doing).

3. Inflation, as even the Fed will admit, helps some people and hurts others. The idea is that it will help more people than it hurts by forcing investors to buy real assets. The kind of inflation that QE is likely to cause will have an almost entirely damaging impacta on the US. In fact, the devaluation of the dollar and the rise in raw materials prices will hurt every American household and most American businesses; it will benefit Middle East oil producers, Vladimir Putin, Aussie mining companies, and all sorts of people who don’t live in the United States.

2. With 22% of the adult non-institutional population unable to find full-time work (according to the estimable Shadow Government Statistics website, no reduction in interest rates will persuade Americans to go back to the borrowing binge of the 2000s.

and Dave’s Top Reason why QE won’t work is:

1. It undermines the dollar’s world reserve currency role. That’s why gold keeps going up. If the US were Greece or Ireland, we’d be in front of the International Monetary Fund in sackcloth and ashes right now. But we’re the world’s only superpower, and the central banks of the rest of the world have to hold their reserves in dollars. Why? Because there isn’t enough of anything else (unless the price of gold were to go to $10,000 an ounce, which I doubt) and because they hate each other more than they hate us — at least for the moment. With Obama shrinking America’s strategic footprint and the Fed behaving like the neighbor whose septic tank overflows onto everyone else’s lawn, Washington is testing the world’s patience. It will have consequences.
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DougMacG
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« Reply #101 on: November 08, 2010, 10:36:41 PM »

I'm sure about all of those specifics, but in general I agree - ten times.
----
"7.  The deflationary tendency in the US, such as it is, is mainly demographic: as the Boomers retire, they sell real assets (the US may have a 40% oversupply of large-lot family homes by 2020)"

This one in particular scares me.  I don't know about the percentage, but the concept is true and 2020 is right around the corner.
----
"unless the price of gold were to go to $10,000 an ounce"

There you have it.  It didn't occur to me that there is enough gold in world the to back up the dollar - once the dollar falls to nothing.
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Crafty_Dog
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« Reply #102 on: November 09, 2010, 06:17:57 AM »

Doug:

While I place great importance on demographics (indeed, we have a thread here on exactly that) and recognize the role baby boomers in the US economy, I would ascribe the over-supply of large lot family homes to government intervention into the market place.   We may not yet fully realize just how heavy the misallocation of resources due to this intervention has been.
============
All:

It would be hard to find two more unlikely intellectual comrades than Robert Zoellick, the World Bank technocrat, and Sarah Palin, the populist conservative politician. But in separate interventions yesterday, the pair roiled the global monetary debate in complementary and timely fashion.

The former Alaskan Governor showed sound political and economic instincts by inveighing forcefully against the Federal Reserve's latest round of quantitative easing. According to the prepared text of remarks that she released to National Review online, Mrs. Palin also exhibited a more sophisticated knowledge of monetary policy than any major Republican this side of Wisconsin Representative Paul Ryan.

View Full Image

Associated Press
 
Former Alaska governor Sarah Palin
.Stressing the risks of Fed "pump priming," Mrs. Palin zeroed in on the connection between a "weak dollar—a direct result of the Fed's decision to dump more dollars onto the market"—and rising oil and food prices. She also noted the rising world alarm about the Fed's actions, which by now includes blunt comments by Germany, Brazil, China and most of Asia, among many others.

"We don't want temporary, artificial economic growth brought at the expense of permanently higher inflation which will erode the value of our incomes and our savings," the former GOP Vice Presidential nominee said. "We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track."

Mrs. Palin's remarks may have the beneficial effect of bringing the dollar back to the center of the American political debate, not to mention of the GOP economic platform. Republican economic reformers of the 1970s and 1980s—especially Ronald Reagan and Jack Kemp—understood the importance of stable money to U.S. prosperity.

On the other hand, the Bush Administration was clueless. Its succession of Treasury Secretaries promoted dollar devaluation little different from that of the current Administration, while the White House ignored or applauded an over-easy Fed policy that created the credit boom and housing bubble that led to financial panic.

Misguided monetary policy can ruin an Administration as thoroughly as higher taxes and destructive regulation, and the new GOP majority in the House and especially the next GOP President need to be alert to the dangers. Mrs. Palin is way ahead of her potential Presidential competitors on this policy point, and she shows a talent for putting a technical subject in language that average Americans can understand.

Which brings us to Mr. Zoellick, who exceeded even Mrs. Palin's daring yesterday by mentioning the word "gold" in the orthodox Keynesian company of the Financial Times. This is like mentioning the name "Palin" in the Princeton faculty lounge.

Mr. Zoellick, who worked at the Treasury under James Baker in the 1980s, laid out an agenda for a new global monetary regime to reduce currency turmoil and spur growth: "This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves toward internalization and then an open capital account," he wrote, in an echo of what we've been saying for some time.

And here's Mr. Zoellick's sound-money kicker: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." Mr. Zoellick's last observation will not be news to investors, who have traded gold up to $1,400 an ounce, its highest level in real terms since the 1970s, as a hedge against the risk of future inflation.

However, his point will shock many of the world's financial policy makers, who still think of gold as a barbarous relic rather than as an important price signal. Lest they faint in the halls of the International Monetary Fund, we don't think Mr. Zoellick is calling for a return to a full-fledged gold standard. His nonetheless useful point is that a system of global monetary cooperation needs a North Star to judge when it is running off course. The Bretton Woods accord used gold as such a reference until the U.S. failed to heed its discipline in the late 1960s and in 1971 revoked the pledge to sell other central banks gold at $35 an ounce.

One big problem in the world economy today is the frequent and sharp movement in exchange rates, especially between the euro and dollar. This distorts trade and investment flows and leads to a misallocation of capital and trade tensions. A second and related problem is the desire of the Obama Administration and Federal Reserve Chairman Ben Bernanke to devalue the dollar to boost exports as a way to compensate for the failed spending stimulus.

As recently as this week in India, Mr. Obama said that "We can't continue situations where some countries maintain massive [trade] surpluses, other countries have massive deficits and never is there an adjustment with respect to currency that would lead to a more balanced growth pattern."

If this isn't a plea for a weaker dollar in the name of balancing trade flows, what is it? The world knows the Fed can always win such a currency race to the bottom in the short run because it can print an unlimited supply of dollars. But the risks of currency war and economic instability are enormous.

***
In their different ways, Mrs. Palin and Mr. Zoellick are offering a better policy path: More careful monetary policy in the U.S., and more U.S. leadership abroad with a goal of greater monetary cooperation and less volatile exchange rates. If Mr. Obama is looking for advice on this beyond Mr. Zoellick, he might consult Paul Volcker or Nobel laureate Robert Mundell. A chance for monetary reform is a terrible thing to waste.



« Last Edit: November 09, 2010, 06:40:54 AM by Crafty_Dog » Logged
DougMacG
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« Reply #103 on: November 09, 2010, 12:04:27 PM »

"While I place great importance on demographics (indeed, we have a thread here on exactly that) and recognize the role baby boomers in the US economy, I would ascribe the over-supply of large lot family homes to government intervention into the market place.   We may not yet fully realize just how heavy the misallocation of resources due to this intervention has been."

 - I will buy that, though I would say people were building and living further out because they wanted to (distance from decaying core became a good thing), but they borrowing and spending absurd amounts for those homes because of artificially and temporarily low rates.  Then of course the over-construction due to failed monetary policy is necessarily followed by total unemployment of that sector for both labor and capital, while the Fed chief claims that full employment is half of his dual mission.  What else did they think would follow artificial stimulation?

Booms and busts are NOT the natural business cycle.  They are the direct result of governments trying to avoid and delay the effects of constant and ongoing natural corrections.
-----

Palin and Zoellick (President of World Bank) may be ahead of the curve on this, but we were all over it 3 days ahead of them.  Again, nice to see famous people are reading and paying attention to the Dog Brothers Public Forum.   smiley
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Crafty_Dog
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« Reply #104 on: November 10, 2010, 02:38:16 PM »

Dispatch: Currency War and the G-20
November 10, 2010 | 2018 GMT
Click on image below to watch video:



Analyst Peter Zeihan examines the potential for currency war between the United States and China and what is expected to emerge from the G-20 summit.

Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.

The G-20 summit begins in Seoul, South Korea on Thursday. The topic of the day is currency appreciation, manipulation in the ongoing global economic issues. Every state is coming with their own plan but really there’s only two that matter.

The first is the United States. The United States is the world’s largest importer, the holder of the global currency, it’s the largest economy by a factor of three, and that has actually been this state of affairs in now going back to at least World War II. The United States has been large and in charge for that long, and none of the tools the United States has for manipulating its economic system and therefore the globe have changed. The kicker is the United States only depends on international trade for about 15% of its GDP. So should the United States manipulate the dollar to achieve any of its economic aims, it will be the country that suffers the least as a consequence from any sort of international chaos that follows.

The last time the United States did this was in 1985. The agreement that was signed was called the Plaza Accords, and in it the United States threatened Germany and Japan with retaliatory tariffs unless they purposefully, deliberately over the course of several years steadily change the exchange rate of their currencies versus the dollar. Japan and Germany - two major global event powers - caved.

Country number two is China. China is if anything actually more vulnerable to American currency manipulation than either Germany or Japan was in 1985. It’s much more dependent on exports, its capital structure is much less flexible and more vulnerable to outside intervention. The United States could easily quite easily crush China currency war if push came to shove. However, the Chinese have influence in the international system that the U.S. needs right now. The United States is trying to prevent conflicts in Iraq and Afghanistan from spinning out of control. It needs Chinese influence in Iran in order to make sanctions there work, and it certainly doesn’t want problems in North Korea just to top everything off.

So the most likely outcome from the G-20 summit is some sort of American-Chinese partnership on currency issues that does not require the Chinese to actually do very much. To have those two powers on the same page, there is really nothing else than anyone else in the world can do about it. So it looks like the two of them are edging toward some sort of compromise that doesn’t require a lot of actual action and to revisit this issue in 6-12 months.

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G M
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« Reply #105 on: November 11, 2010, 09:40:48 PM »

http://www.gainspainscapital.com/index.php?option=com_content&view=article&id=185:emerging-market-mania-china-thanks-for-the-jobs-uncle-sam-but-well-pass-on-the-inflation-&catid=39:stocks&Itemid=70

Emerging Market Mania:

CHINA, “Thanks for the Jobs Uncle Sam, But We’ll Pass On the Inflation”

The US re-opened formal trade with China in 1971.

This, in turn, kicked off two major trends:

1.     The US’s economic shift from manufacturing to services (mainly financial)

2.     The dramatic rise in Chinese quality of life

In plain terms, the US began shifting manufacturing jobs offshore. Charting the full impact of this trend on US employment is difficult. However, Robert Scott, an economist at the Economic Policy Institute, estimates that between 2001 and 2008 2.4 million American jobs were lost as a result of increased trade with China alone. Bear in mind, this doesn’t account for the jobs lost in the 30 years from 1971 to 2001.

As for our shift to a financial services economy, consider that from 1970 until 2003, financials’ market capitalizations as a percentage of the S&P 500 rose from less than 5% to 22%. Over the same period, financials’ earnings as a percentage of the S&P 500’s total earnings rose from less than 10% to 31%.

Put another way, by 2003 nearly one in every three dollars of corporate profits came from the financial sector.

Meanwhile, China was experiencing an unprecedented level of growth thanks to our renewed trade: Chinese per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.

In those 20 years, more than 300 million Chinese ascended out of poverty with accompanying dramatic changes in lifestyle, professions, and diet: between 1985 and 2008, average Chinese meat consumption more than doubled from 44 pounds to 110 per annum.

So here were are in 2010 and the US and China are now butting heads in a major way. The US (debtor, consumer, declining empire) wants to devalue the Dollar and export inflation to China. China (creditor, producer, rising empire) doesn’t care for this arrangement as its hurts profit margins at Chinese companies, increases food inflation (food is a higher percentage of income for the average China compared to the average American), which in turn means civil unrest.

How this situation plays out will determine the monetary and financial trends for 2011. Already we’ve begun seeing financial warning shots between the two super powers. Have a look at the timeline:

-April-October 17: Geithner vilifies China, calls it a currency manipulator

-October 17: China issues surprise interest rate hike

-October 20: Geithner says world currencies are in “alignment.”

-November 3: Bernanke announced QE 2

-November 8-9: China says QE 2 “imperils” emerging economies and calls US Dollar as reserve currency “absurd”

-November 8: Geithner backtracks from former call for balanced trade

-November 10: Fed announces QE 2 details

-November 10: China hikes bank reserve requirements

This dynamic is the, and I mean THE, key issue for ALL financial markets moving forward. The US Fed wants Dollar devaluation. China doesn’t. How this conflict is resolved will determine the fate of stocks, commodities, bonds, even the US dollar.
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G M
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« Reply #106 on: November 12, 2010, 11:29:39 AM »

http://hotair.com/archives/2010/11/12/obama-fails-to-get-g-20-to-scold-china-for-what-obama-is-doing-with-qe2/

Obama fails to get G-20 to scold China for what Obama is doing with QE2

posted at 10:12 am on November 12, 2010 by Ed Morrissey


For years, the US has protested China’s policy of keeping the value of its currency artificially low to boost exports and gain a competitive edge over domestic production throughout the West.  Until recently, the US had a coalition of allies at the G-20 to stand firm against the manipulation of the yuan.  However, much to Barack Obama’s shock, they’re not as interested in scolding China for manipulating its currency while the Obama administration has done the same with its second round of “quantitative easing”:

    Leaders of 20 major economies on Friday refused to endorse a U.S. push to get China to let its currency rise, keeping alive a dispute that has raised the specter of a global trade war amid criticism that cheap Chinese exports are costing American jobs. …

    The biggest disappointment for the United States was the pledge by the leaders to refrain from “competitive devaluation” of currencies. Such a statement is of little consequence since countries usually only devalue their currencies — making it less worth against the dollar — in extreme situations like a severe financial crisis.

The AP report takes six paragraphs to explain why the G-20 essentially laughed in Obama’s face:

    The crux of the dispute is Washington’s allegations that Beijing is artificially keeping its currency, the yuan, weak to gain a trade advantage. But the U.S. position has been undermined by its own recent policy of printing money to boost a sluggish economy, which is weakening the dollar.

    The G-20′s failure to adopt the U.S. stand has also underlined Washington’s reduced influence on the international stage, especially on economic matters. Obama also failed to conclude a free trade agreement this week with South Korea.

Yes, it does make it difficult to get allies in an effort to stop China from manipulating its currency to gain advantage on exports when we’re explicitly doing the same thing ourselves.  The G-20 didn’t do much before now anyway to fight back against China, but at least they gave the effort lip service.  With the Obama administration attempting to undermine the Eurozone on exports, even that modicum of support has evaporated.

The G-20 just delivered a big message to Obama, which is that American leadership on economics is sailing away on the QE2.  Did he get the message?  Not exactly.  Obama tried to spin this into some sort of victory, saying that “sometimes we’re going to hit singles” rather than home runs.  This was neither; it was a whiff.

As the AP makes clear, it was a bad omen, and perhaps the echoes of a larger disaster:

    The dispute over whether China and the United States are manipulating their currencies is threatening to resurrect destructive protectionist policies like those that worsened the Great Depression in the 1930s. The biggest fear is that trade barriers will send the global economy back into recession. A law the United States passed in 1930 that raised tariffs on imports is widely thought to have deepened the Great Depression by stifling trade.

Instead of a Smoot-Hawley on tariffs, we may get a currency war that ends up having the same effect.  The US just threw gasoline instead of water on those embers.  We’ll have to rest our hopes on the equanimity and good sense of the Europeans and pray they don’t follow suit.
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G M
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« Reply #107 on: November 12, 2010, 10:32:28 PM »

http://www.europac.net/commentaries/bad_plan_poorly_disguised

A Bad Plan Poorly Disguised
November 12, 2010 - 5:28am — europac admin
By:
John Browne
Friday, November 12, 2010

With our economy sagging and our international clout waning, one of the few assets upon which the United States can rely is the confidence that the rest of the world has traditionally showered upon us. That confidence is the reason why the US dollar was elevated to global reserve status more than 65 years ago.

With so much riding on perception, Treasury Secretary Tim Geithner’s recent statements denying the existence of a dollar debasement campaign could not be seen as anything less than foolhardy.

Responding to a critique made in a Financial Times opinion piece by former Fed Chairman Alan Greenspan, Geithner asserted, " We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.” Instead, he attributed recent dollar weakness to the reversal of  “safe haven” capital flows that had been legion during the financial crisis but which have abated as the global economy has recovered.

One must scour the earth with great care to find an individual who would agree with Mr. Geithner on this point. It’s clear from myriad other actions that the Administration sees a weaker dollar as a panacea for our economic problems. The blatant misinformation relayed by the Treasury Secretary can only serve to further increase already high tensions at the G-20 summit now underway in Seoul, South Korea. 

Over at the Federal Reserve, Chairman Bernanke doesn’t talk about currency debasement. Instead, he extols the virtues of “pushing up inflation to levels consistent with our mandate.” He hopes that no one will understand that he is using different adjectives to describe the same action. With the possible exception of the New York Times editorial board, he is fooling no one.

Given that the Administration and the Fed are prepared to sacrifice precious credibility for the goal of currency debasement, many may assume that there is some benefit for America that would be derived from a weaker dollar. Unfortunately, there isn’t.

Advocates of a weaker dollar point to two claimed advantages offered by a falling currency.

First, and most obviously, proponents claim that cheap dollars would reduce the prices of US exports, making them increasingly competitive. That is partially correct. While lowering prices may help to spur sales in the short-term, it does not necessarily improve the long-term prospects of the seller.

Exporters (and all other businesses for that matter) that focus on selling on price competitiveness alone ignore other vital elements of the marketing mix, such as innovation, design, quality, delivery, and after-sales service. For example, Germany and Japan have developed world leading export volumes without relying on price as their primary advantage.

History shows that, over the medium- to long-term, a devalued currency leads to increased trade deficits. Furthermore, a currency debasement policy for the US dollar, still the world’s reserve currency, is bound to spark a climate of international competitive devaluation – a currency war – as each nation fights to protect its balance of trade. If not corrected, such currency battles lead all too easily to trade wars, and they, in turn, often result in armed conflict.

The second, and more compelling, argument for Washington to pursue currency debasement is that a devalued dollar would wipe out large amounts of dollar debt. This amounts to a huge subsidy to debtors at the expense of savers, and no one owes more than the US government. 

When measured against the standard basket of currencies, the US dollar has fallen by some 30 percent over the past decade. However, most of those currencies are also depreciating in real terms. So what is real? Most likely, precious metals’ prices, discounted somewhat to allow for investor speculation, represent an absolute measure. Silver has risen by some 56 percent in the past 10 months. Gold has gained some 30 percent this year, and some 400 percent over the past decade!

So if we assume a conservative 40 percent devaluation of the US dollar over the past ten years, our current $13.4 trillion federal debt is equivalent to an only $8 trillion liability in 2001 dollars – the rest is just inflation. The $189 trillion of unfunded obligations to Social Security, Medicare, government pensions, etc. would appear as $113 trillion a decade ago!

It is clear that a debased currency suits the US government, but what of Americans? The 40 percent devaluation equates to a 40 percent tax on every holder of US dollars, rich and poor alike. It has hindered, rather than encouraged, consumer spending. It forces Americans to make do with less, purchase shoddier products, and deal with inferior service. Sometimes it’s hard to perceive slowly ebbing living standards, but take a look around and think whether you feel richer than a decade ago.

If dollar devaluation becomes too pronounced, Washington threatens to kill the goose that lays the golden eggs: namely, the dollar’s reserve status. If that were to happen, a global financial crisis of staggering intensity would surely erupt, the resolution of which would not favor the United States.

Whether or not it is openly acknowledged, the US government is pursuing a policy of great risk that offers no reward at the end of the tunnel. It’s the worst of all possible worlds. Wise investors will reduce still further their exposure to US dollars and debt, while increasing their allocations to precious metals, key commodities, hard currencies, and emerging markets. Wise governments are already doing so.


This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. Please feel free to repost with proper attribution and all links included.
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Crafty_Dog
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« Reply #108 on: November 14, 2010, 11:28:53 AM »

By JAMES GRANT
Published: November 13, 2010
BY disclosing a plan to conjure $600 billion to support the sagging economy, the Federal Reserve affirmed the interesting fact that dollars can be conjured. In the digital age, you don’t even need a printing press.

This was on Nov. 3. A general uproar ensued, with the dollar exchange rate weakening and the price of gold surging. And when, last Monday, the president of the World Bank suggested, almost diffidently, that there might be a place for gold in today’s international monetary arrangements, you could hear a pin drop.
Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it.

It was simplicity itself. National currencies were backed by gold. If you didn’t like the currency you could exchange it for shiny coins (money was “sound” if it rang when dropped on a counter). Borders were open and money was footloose. It went where it was treated well. In gold-standard countries, government budgets were mainly balanced. Central banks had the single public function of exchanging gold for paper or paper for gold. The public decided which it wanted.

“You can’t go back,” today’s central bankers are wont to protest, before adding, “And you shouldn’t, anyway.” They seem to forget that we are forever going back (and forth, too), because nothing about money is really new. “Quantitative easing,” a k a money-printing, is as old as the hills. Draftsmen of the United States Constitution, well recalling the overproduction of the Continental paper dollar, defined money as “coin.” “To coin money” and “regulate the value thereof” was a Congressional power they joined in the same constitutional phrase with that of fixing “the standard of weights and measures.” For most of the next 200 years, the dollar was, in fact, defined as a weight of metal. The pure paper era did not begin until 1971.

The Federal Reserve was created in 1913 — by coincidence, the final full year of the original gold standard. (Less functional variants followed in the 1920s and ’40s; no longer could just anybody demand gold for paper, or paper for gold.) At the outset, the Fed was a gold standard central bank. It could not have conjured money even if it had wanted to, as the value of the dollar was fixed under law as one 20.67th of an ounce of gold.

Neither was the Fed concerned with managing the national economy. Fast forward 65 years or so, to the late 1970s, and the Fed would have been unrecognizable to the men who voted it into existence. It was now held responsible for ensuring full employment and stable prices alike.

Today, the Fed’s hundreds of Ph.D.’s conduct research at the frontiers of economic science. “The Two-Period Rational Inattention Model: Accelerations and Analyses” is the title of one of the treatises the monetary scholars have recently produced. “Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering” is another. You can’t blame the learned authors for preferring the life they lead to the careers they would have under a true-blue gold standard. Rather than writing monographs for each other, they would be standing behind a counter exchanging paper for gold and vice versa.

If only they gave it some thought, though, the economists — nothing if not smart — would fairly jump at the chance for counter duty. For a convertible currency is a sophisticated, self-contained information system. By choosing to hold it, or instead the gold that stands behind it, the people tell the central bank if it has issued too much money or too little. It’s democracy in money, rather than mandarin rule.

Today, it’s the mandarins at the Federal Reserve who decide what interest rate to impose, and what volume of currency to conjure.

The Bank of England once had an unhappy experience with this method of operation. To fight the Napoleonic wars of the early 19th century, Britain traded in its gold pound for a scrip, and the bank had to decide unilaterally how many pounds to print. Lacking the information encased in the gold standard, it printed too many. A great inflation bubbled.

Later, a parliamentary inquest determined that no institution should again be entrusted with such powers as the suspension of gold convertibility had dumped in the lap of those bank directors. They had meant well enough, the parliamentarians concluded, but even the most minute knowledge of the British economy, “combined with the profound science in all the principles of money and circulation,” would not enable anyone to circulate the exact amount of money needed for “the wants of trade.”

The same is true now at the Fed. The chairman, Ben Bernanke, and his minions have taken it upon themselves to decide that a lot more money should circulate. According to the Consumer Price Index, which is showing year-over-year gains of less than 1.5 percent, prices are essentially stable.

=====

In the inflationary 1970s, people had prayed for exactly this. But the Fed today finds it unacceptable. We need more inflation, it insists (seeming not to remember that prices showed year-over-year declines for 12 consecutive months in 1954 and ’55 or that, in the first half of the 1960s, the Consumer Price Index never registered year-over-year gains of as much as 2 percent). This is why Mr. Bernanke has set out to materialize an additional $600 billion in the next eight months.

The intended consequences of this intervention include lower interest rates, higher stock prices, a perkier Consumer Price Index and more hiring. The unintended consequences remain to be seen. A partial list of unwanted possibilities includes an overvalued stock market (followed by a crash), a collapsing dollar, an unscripted surge in consumer prices (followed by higher interest rates), a populist revolt against zero-percent savings rates and wall-to-wall European tourists on the sidewalks of Manhattan.
As for interest rates, they are already low enough to coax another cycle of imprudent lending and borrowing. It gives one pause that the Fed, with all its massed brain power, failed to anticipate even a little of the troubles of 2007-09.

At last week’s world economic summit meeting in South Korea, finance ministers and central bankers chewed over the perennial problem of “imbalances.” America consumes much more than it produces (and has done so over 25 consecutive years). Asia produces more than it consumes. Merchandise moves east across the Pacific; dollars fly west in payment. For Americans, the system could hardly be improved on, because the dollars do not remain in Asia. They rather obligingly fly eastward again in the shape of investments in United States government securities. It’s as if the money never left the 50 states.

So it is under the paper-dollar system that we Americans enjoy “deficits without tears,” in the words of the French economist Jacques Rueff. We could not have done so under the classical gold standard. Deficits then were ultimately settled in gold. We could not have printed it, but would have had to dig for it, or adjusted our economy to make ourselves more internationally competitive. Adjustments under the gold standard took place continuously and smoothly — not, like today, wrenchingly and at great intervals.

Gold is a metal made for monetary service. It is scarce (just 0.004 parts per million in the earth’s crust), pliable and easy on the eye. It has tended to hold its purchasing power over the years and centuries. You don’t consume it, as you do tin or copper. Somewhere, probably, in some coin or ingot, is the gold that adorned Cleopatra.

And because it is indestructible, no one year’s new production is of any great consequence in comparison with the store of above-ground metal. From 1900 to 2009, at much lower nominal gold prices than those prevailing today, the worldwide stock of gold grew at 1.5 percent a year, according to the United States Geological Survey and the World Gold Council.

The first time the United States abandoned the gold standard — to fight the Civil War — it took until 1879, 14 years after Appomattox, to again link the dollar to gold.

To reinstitute a modern gold standard today would take time, too. The United States would first have to call an international monetary conference. A chastened Ben Bernanke would have to announce that, in fact, he cannot see into the future and needs the information that the convertibility feature of a gold dollar would impart.

That humbling chore completed, the delegates could get down to the technical work of proposing a rate of exchange between gold and the dollar (probably it would be even higher than the current price of gold, the better to encourage new exploration and production).

Other countries, thunderstruck, would then have to follow suit. The main thing, Mr. Bernanke would emphasize, would be to create a monetary system that synchronizes national economies rather than driving them apart.

If the classical gold standard in its every Edwardian feature could not, after all, be teleported into the 21st century, there would be plenty of scope for adaptation and, perhaps, improvement. Let the author of “The Two-Period Rational Inattention Model: Accelerations and Analyses” have a crack at it.
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G M
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« Reply #109 on: November 14, 2010, 11:41:36 AM »

I can't see how we get to a gold standard without the dollar totally crashing and burning. Of course, we appear to be well into the process of doing just that.
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DougMacG
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« Reply #110 on: November 14, 2010, 12:09:11 PM »

Not a gold standard (IMO) as in the past with dollars redeemable, putting toothpaste back in a tube, but a basket of goods where gold and commodities play a large role at telling us how we are doing with value of the dollar.  They already look at that and then just choose a different path.  Bernancke gave it all away in his recent explanation.  His "dual mission" is dollar and employment.  But the employment problem is not monetary. Re-write his mission.  Bad management of the Fed is no reason to have no management or no real currency IMHO.

Elsewhere I hear hindsighters whine that Greenspan was a Republican chosen by Reagan and Bernancke was George W's choice.  But Greenspan was selected for his opposition and skepticism to Reaganomics, and Bernancke was the institutional, status quo choice, not a supply sider whatsoever.  His viewpoint from his last writing seems to be more from the Krugman camp, that $3 trillion in Keynesian stimulus is failing because it too small, and nothing else needs addressing. 

How about selecting the best and the brightest instead and making their mission crystal clear:  We want a stable currency that the whole world can count on.
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« Reply #111 on: November 15, 2010, 10:03:25 AM »

"We think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus."

 - I couldn't agree more

The Fed response hit the exact same note Bernancke hit earlier, referring to their dual mission, employment and currency. [The Fed]"is confident that it has the tools to unwind these policies at the appropriate time".

Right. Don't suppose anyone there remembers 10.8% unemployment of 1981-1983 while we used those 'tools' to 'unwind' the previously excessive, expansionary policies.  If we have those types of increases coming on top of this type of underlying unemployment, 12.5% unemployment looks possible to me in the aftermath of this fool's game.
--------------
http://blogs.wsj.com/economics/2010/11/15/open-letter-to-ben-bernanke/

The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Cliff Asness
AQR Capital

Michael J. Boskin
Stanford University
Former Chairman, President’s Council of Economic Advisors (George H.W. Bush Administration)

Richard X. Bove
Rochdale Securities

Charles W. Calomiris
Columbia University Graduate School of Business

Jim Chanos
Kynikos Associates

John F. Cogan
Stanford University
Former Associate Director, U.S. Office of Management and Budget (Reagan Administration)

Niall Ferguson
Harvard University
Author, The Ascent of Money: A Financial History of the World

Nicole Gelinas
Manhattan Institute & e21
Author, After the Fall: Saving Capitalism from Wall Street—and Washington

James Grant
Grant’s Interest Rate Observer

Kevin A. Hassett
American Enterprise Institute
Former Senior Economist, Board of Governors of the Federal Reserve

Roger Hertog
The Hertog Foundation

Gregory Hess
Claremont McKenna College

Douglas Holtz-Eakin
Former Director, Congressional Budget Office

Seth Klarman
Baupost Group

William Kristol
Editor, The Weekly Standard

David Malpass
GroPac
Former Deputy Assistant Treasury Secretary (Reagan Administration)

Ronald I. McKinnon
Stanford University

Dan Senor
Council on Foreign Relations
Co-Author, Start-Up Nation: The Story of Israel’s Economic Miracle

Amity Shlaes
Council on Foreign Relations
Author, The Forgotten Man: A New History of the Great Depression

Paul E. Singer
Elliott Associates

John B. Taylor
Stanford University
Former Undersecretary of Treasury for International Affairs (George W. Bush Administration)

Peter J. Wallison
American Enterprise Institute
Former Treasury and White House Counsel (Reagan Administration)

Geoffrey Wood
Cass Business School at City University London

A spokeswoman for the Fed responded:

“As the Chairman has said, the Federal Reserve has Congressionally-mandated objectives to help promote both increased employment and price stability. In light of persistently weak job creation and declining inflation, the Federal Open Market Committee’s recent actions reflect those mandates.  The Federal Reserve will regularly review its program in light of incoming information and is prepared to make adjustments as necessary.  The Federal Reserve is committed to both parts of its dual mandate and will take all measures to keep inflation low and stable as well as promote growth in employment.  In particular, the Fed has made all necessary preparations and is confident that it has the tools to unwind these policies at the appropriate time. The Chairman has also noted that the Federal Reserve does not believe it can solve the economy’s problems on its own.  That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators, and the private sector.”
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« Reply #112 on: November 15, 2010, 10:16:49 AM »


Right. Don't suppose anyone there remembers 10.8% unemployment of 1981-1983 while we used those 'tools' to 'unwind' the previously excessive, expansionary policies.  If we have those types of increases coming on top of this type of underlying unemployment, 12.5% unemployment looks possible to me in the aftermath of this fool's game.
--------------

**I think that's the best case scenario. I'm expecting Weimar Germany-like effects.**
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DougMacG
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« Reply #113 on: November 15, 2010, 11:35:42 PM »

Sometimes we get so quickly and deeply into a technical issue that no one ever slows down and backs up to explain it all in simple and direct terms.  This should take care of it: http://www.youtube.com/watch?v=jiadcgYQguo
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DougMacG
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« Reply #114 on: November 18, 2010, 02:27:10 PM »

"The Federal Reserve should focus exclusively on price stability and protecting the dollar," said House Republican Conference Chairman Mike Pence of Indiana, author of legislation to narrow the Fed's mission, which he plans to push in the next Congress when Republicans control the House.
http://www.washingtontimes.com/news/2010/nov/17/fed-chief-grilled-on-hill-over-policies/
----------------

George Will today in the Washington Post:
"The trap of the Federal Reserve's dual mandate"

[I believe we were all over this a week ago.  Another famous person caught reading the dogbrothers public forum.]

http://www.washingtonpost.com/wp-dyn/content/article/2010/11/17/AR2010111705316.html?hpid=opinionsbox1

The trap of the Federal Reserve's dual mandate
   
By George F. Will
Thursday, November 18, 2010

This lame-duck Congress - its mandate exhausted, many of its members repudiated - should merely fund the government for a few months at current spending levels with a "continuing resolution," then apologize for almost everything else it has done and depart. If, however, the 111th Congress wants to make amends, it should repeal something the 95th did.

In 1977, Congress gave the Federal Reserve a "dual mandate." Although the central bank is a creature of Congress, it is, in trying to fulfill this mandate, becoming a fourth branch of government.

The Fed's large, and sufficient, original mission was to maintain price stability - to preserve the currency as a store of value. "Mission creep" usually results from a metabolic urge of government agencies. The Fed, however, had institutional imperialism thrust upon it when Congress - forgetting, not for the first or last time, its core functions - directed the Fed "to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." The last two goals are really one. In the pursuit of the first, which requires the Fed to attempt to manage short-term economic growth, the Fed has started printing $600 billion - this is the meaning of what is called, with calculated opacity, "quantitative easing."

Those running the Fed, says Rep. Paul Ryan (R-Wis.) dryly, "are really putting the fiat in fiat money" - money backed by nothing but trust in the judgment and good faith of the government creating it. The Fed is doing what the executive branch wants done but that the legislative branch will not do - creating another stimulus.

By seeming to do the president's bidding, the Fed stumbled into a diplomatic thicket. While the president was impotently accusing China of keeping the value of its currency low in order to facilitate exports, many nations were construing America's quantitative easing as similarly motivated currency manipulation. The primary purpose of quantitative easing might be to force down the yields of government bonds in order to induce investors to invest in corporate bonds and stocks. But when a predictable result of the policy is to devalue the dollar, it is a pointless parsing of words for Treasury Secretary Timothy Geithner, who serves a president who has vowed to double U.S. exports in five years, to say that America will never weaken its currency "as a tool to gain competitive advantage."

In a 2007 speech, Frederic S. Mishkin, then of the Fed's Board of Governors, lauded the dual mandate as "consistent with" the Fed's "ultimate purpose of fostering economic prosperity and social welfare." Note how easily the mandate to "maximize employment" becomes the grandiose, and certainly political, function of promoting, and therefore defining, "social welfare."

Mishkin said "the rationale for maximizing employment is fairly obvious": "The alternative situation - high unemployment - is associated with human misery, including lower living standards and increases in poverty as well as social pathologies such as loss of self-esteem, a higher incidence of divorce, increased rates of violent crime, and even suicide." Obviously, some of the central bank's governors have been encouraged by Congress to think of themselves as more than mere bankers - as wizards of social control, even regulating society's reservoirs of self-esteem.

The Fed cannot perform such a fundamentally political function and forever remain insulated from politics. Only repeal of the dual mandate can rescue the Fed from the ruinous - immediately to its reputation; eventually to its independence - role as the savior of the economy, or of any distressed sector (e.g., housing) that clamors for lower interest rates. Ryan has introduced repeal legislation before and will do so again in January.

Fed Chairman Ben Bernanke has wistfully imagined a day when economists might get "themselves thought of as humble, competent people on a level with dentists." But that day will not dawn as long as the dual mandate makes it almost mandatory for him to vow that the Fed "can assist keeping employment close to its maximum level through adroit policies." Even defining "maximum employment" is a political as well as technical act.

Ryan, incoming chairman of the House Budget Committee, says the Fed thinks it can adroitly "put the cruise missile through the goal posts." But how adroit can Fed management of the economy be? No complex economy can be both managed and efficient, meaning dynamic. To think otherwise is what Friedrich Hayek called "the fatal conceit." That conceit can be fatal to the Fed's independence.
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« Reply #115 on: November 24, 2010, 03:09:09 PM »

This is what comes of following deranged policies:

China, Russia quit dollar

--------------------------------------------------------------------------------

St. Petersburg, Russia - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

"About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

"That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries," he said.

Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.

The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communiqu. Details of the documents have yet to be released.

Putin said one of the pacts between the two countries is about the purchase of two nuclear reactors from Russia by China's Tianwan nuclear power plant, the most advanced nuclear power complex in China.

Putin has called for boosting sales of natural resources - Russia's main export - to China, but price has proven to be a sticking point.

Russian Deputy Prime Minister Igor Sechin, who holds sway over Russia's energy sector, said following a meeting with Chinese representatives that Moscow and Beijing are unlikely to agree on the price of Russian gas supplies to China before the middle of next year.

Russia is looking for China to pay prices similar to those Russian gas giant Gazprom charges its European customers, but Beijing wants a discount. The two sides were about $100 per 1,000 cubic meters apart, according to Chinese officials last week.

Wen's trip follows Russian President Dmitry Medvedev's three-day visit to China in September, during which he and President Hu Jintao launched a cross-border pipeline linking the world's biggest energy producer with the largest energy consumer.

Wen said at the press conference that the partnership between Beijing and Moscow has "reached an unprecedented level" and pledged the two countries will "never become each other's enemy".

Over the past year, "our strategic cooperative partnership endured strenuous tests and reached an unprecedented level," Wen said, adding the two nations are now more confident and determined to defend their mutual interests.

"China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power," he said.

"The modernization of China will not affect other countries' interests, while a solid and strong Sino-Russian relationship is in line with the fundamental interests of both countries."

Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a "fair and reasonable new order" in international politics and the economy.

Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.

He left St. Petersburg for Moscow late on Tuesday and is set to meet with Russian President Dmitry Medvedev on Wednesday.

http://www.chinadaily.com.cn/china/2010-11/24/content_11599087.htm
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« Reply #116 on: November 26, 2010, 02:11:58 AM »

By LIAM PLEVEN and CAROLYN CUI
The innovation that opened gold investing to the masses and helped spur this
year's record-breaking bull market was hatched in an act of desperation by a
little-known gold-mining trade group.

The World Gold Council, created to promote gold, was fighting for survival.
Its members—global gold-mining companies—were frustrated with the council's
inability to stem two decades of depressed prices and find buyers for a
growing glut of the yellow metal. Eight years ago, they were considering
withdrawing funding from the trade group, a move that would have effectively
shut it down.


Chris Thompson, the group's chairman, figured the council needed to expand
the pool of gold buyers, particularly in the U.S. The idea of trading gold
on an exchange had been floating around for years, but various hurdles had
prevented it from taking off in America.

What the council eventually managed to create in those dark days surpassed
its wildest dreams: SPDR Gold Shares, the exchange-traded fund launched in
November 2004. The fund, known by its ticker symbol GLD, has ballooned into
a $56.7 billion behemoth.

Today, GLD is the fastest-growing major investment fund ever, according to
research company Lipper Inc., and one of the most active gold traders in the
market. Its presence has helped gold—which settled down 0.33% in New York
trading Wednesday, at $1,372.90 a troy ounce—triple in price in recent years
to fresh all-time highs this month.

As the world's largest private owner of bullion, GLD is soaking up $30
million of gold daily, stored in a London vault that now holds the
equivalent of about six months' worth of the world's entire gold-mining
production.

 The revolution that opened gold investing to the masses and helped spur a
record-breaking bull market was hatched in an act of desperation by an
obscure gold-mining trade group. WSJ's Emma Moody explains SPDR Gold Shares.
GLD has won fans who say it has democratized the gold market, paving the way
for investors of all stripes to get direct exposure to the precious metal.
Its nearly 1 million investors include ordinary individuals, institutions
like Northern Trust Corp. and billionaire hedge-fund managers like John
Paulson.

But skeptics argue GLD could become a Godzilla-like beast if the gold rally
reverses sharply. They say its buying has already turbo-charged gold prices,
exposing the market, and legions of small investors, to a rapid fall.
Smaller copycat funds add to the risk.

"We tell our clients to watch out for it, because it's there, and it's a
real risk," said Jeffrey Christian, founder of CPM Group, which advises
major investors worldwide on gold.

The questions come as ETFs in general are coming under heightened scrutiny
about whether they distort markets. ETFs are wildly popular and growing
fast, spanning stocks, bonds and hard assets. But they have made it possible
for far more money to rush in and out of previously illiquid markets.

GLD shares trade on the New York Stock Exchange, as well as in Tokyo, Hong
Kong, Singapore and Mexico City. Each share represents one-tenth of an ounce
of gold. That, in effect, gives shareholders the right to their share of
proceeds from selling a full bar, minus fees. Before GLD issues new shares,
it takes in the necessary gold to back them. On days when there are more
sellers than buyers of GLD shares, the fund offloads some of its gold.


Created under the auspices of the World Gold Council, the fund relies on a
number of partners. It is marketed under the banner of State Street Global
Advisors, which has fund-selling expertise. HSBC PLC stores and protects the
gold bars. Bank of New York Mellon Corp. handles daily operations, such as
calculating the fund's net asset value. For all its size and breadth, fund
managers say, it's relatively simple to operate. BNY Mellon, for instance,
needs roughly a dozen employees to run the fund day-to-day.

That has helped make it a windfall for all involved. The gold council, which
spent $14 million developing the fund, has reaped about $150 million from
its inception through Sept. 30. Its revenue is a percentage of net asset
value, set at 0.15%. State Street has the same terms and also collected
about $150 million in that time. Both are on track to bring in more than $80
million in the coming year if GLD stays at today's size.

The success owes much to timing. The council launched the fund as interest
in gold was picking up, first because of inflation worries and then as a
safe-haven against financial disasters. Since then gold prices have more
than tripled from $444.80, setting a record high—though not adjusted for
inflation—of $1,409.80 on Nov. 9.


The recent rally has been driven by many factors, of which GLD is just one.
The U.S. dollar has steadily lost value, so some investors have bought gold
as a hedge against the greenback. Tapping new ore veins is getting harder.
Gold has benefited at once from fears of economic stagnation after the
financial crisis and concern that government spending on the recovery will
trigger inflation.

GLD, though, is widely seen as amplifying those trends.

Buying fund shares is easier and cheaper than investing in gold futures or
buying coins. And GLD has now locked up nearly 1,300 metric tons of the
world's gold supply, making the market tighter. The fund's impact has won it
a following in the gold industry.

"It's got the gold price up," said Nick Holland, chief executive of Gold
Fields Ltd., a major mining company and a member of the gold council.
"That's got to be good."

Access thousands of business sources not available on the free web. Learn
More
Calculating the impact of GLD and its brethren is far from an exact science.
But industry observers including Mr. Christian and Philip Klapwijk of GFMS
Ltd. estimate gold-backed ETFs have probably added about $100 to $150 an
ounce to the price of gold as a result of the incremental increase in
demand.

Translated, that would mean gold-backed ETFs have increased the value of the
bullion that gold miners will produce this year by up to $9 billion.

Many investors believe gold has much further to rise. But after a 10-year,
one-way ride, others worry there could be a violent reversal down the road.
The gold market hasn't been severely tested since GLD and similar, but far
smaller, bullion-backed funds were launched.

And many GLD investors aren't experienced in gold investing. Between 60% and
80% of GLD investors had never bought gold before, estimates Jason
Toussaint, managing director of the council. No one knows how those
newcomers might react in a sharp downturn.

If GLD shareholders get spooked by drops in the gold price and sell en
masse, the fund would have to dump metal to meet redemptions, possibly
accelerating declines by prompting others to sell even more. Because GLD
trades on an exchange, any selloff would be immediately visible, unlike
typically opaque bullion sales.

"We are more concerned about these issues than we were initially," said
Scott Malpass, chief investment officer for University of Notre Dame Asset
Management, which started buying GLD shares in 2005 and now has about $70
million invested. "It can turn on a dime. It can happen very quickly." For
now, Mr. Malpass thinks the advantages of investing in gold outweigh the
risks and the fund is properly managed.

In the fund's planning stages, the world's miners had modest ambitions.

Gold prices were just starting to stir from a 20-year bear market and many
companies were struggling to break even. Hurdles to gold abounded. It was
hard to purchase, store and insure. Some investors chose to own stocks of
gold miners.

The council had long focused on gold jewelry, which represented over 80% of
demand but exposed the industry to economic downturns. In 2002, after the
Sept. 11 terrorist attacks, jewelry demand for gold dropped 11%.

Attracting investors, the industry concluded, was the way to go. Mr.
Thompson, the chairman, wanted a CEO for the council who would have
credibility with American investors to help implement the vision. He zeroed
in on James Burton, who at the time headed the California Public Employees'
Retirement System, one of the biggest institutional investors in the world.
Calpers had no direct investments in gold.

In July 2002, Mr. Burton flew to meet Mr. Thompson in London. Mr. Burton was
skeptical, but curious. Their discussions lasted 12 hours—including talks
over a round of golf, two rounds of beers and meals. Mr. Thompson gave an
overview of the gold market, and a pitch for why the moment was ripe to
attract retail investors. By the end, Mr. Burton was hooked.

In August 2002, Mr. Burton, who had left Calpers, took over the gold council
and immediately slashed 60% of the 108-person staff, closed half of the 22
offices and set about creating what became GLD.

The gold council wanted a product that ordinary investors could buy and sell
just like a stock. The challenge was to make shares track the gold price,
much like an index fund. The eventual solution was to create a trust to
serve as the legal owner of GLD's gold bars.

Products were launched in Australia and the U.K. But getting a U.S. version
took longer than the council expected.

The mining community backed the idea, but worried it might cannibalize
demand for gold-mining stocks. Since it was to be the first U.S. fund
entirely backed by a physical commodity, regulators also sought to
understand how the concept would work. The Securities and Exchange
Commission spent months seeking information about the product and the gold
market, say Mr. Burton and Mr. Thompson.

The gold council also needed to hire assorted players—a trustee, a marketing
agent and a vault operator. That process wasn't seamless, either.

Barclays PLC worked for months on the project, then withdrew and built its
own fund, the iShares Gold Trust, which also holds bullion. Barclays sold
the iShares exchange-traded fund business to BlackRock in June 2009, and its
smaller gold fund has since become an intense competitor.

The council also wasn't sure how successful the fund would be, and paid UBS
Securities $4 million for underwriting the first 2.3 million shares of GLD,
according to regulatory filings. UBS declined to comment.

"I thought it would take a lot more marketing effort to convince people to
buy gold in a securitized form," said Mr. Burton.

But as GLD opened, the pent-up investor demand erupted. The fund hit $1
billion in assets in three trading days, and $10 billion in just over two
years.

"It grew pretty quickly," said Jim Ross, head of exchange-traded funds for
State Street. The firm manages 120 exchange-traded funds, as of Sept. 30,
and the SPDR S&P 500 fund is the only one larger than GLD. "The fact that's
our second-most successful product is still surprising to me, frankly," Mr.
Ross said.

The sniping at GLD also began early. Some gold investors questioned whether
the fund held as much bullion as it said it did, eventually prompting the
council to post on its website audit reports by an independent firm,
Inspectorate International Ltd., which conducts two counts each year of
GLD's gold bars in London.

A segment of the gold-investing community still prefers to secure a personal
stash. Some want to be able to get their hands on their bullion in a hurry,
particularly in the event of a severe crisis. Gold-vault operators are
cutting fees to lure such investors.

Rivals also highlight worst-case scenarios the fund could face. Ben Davies,
chief executive of London-based Hinde Capital, which oversees a gold fund,
noted that GLD's bullion isn't insured. If the gold "is lost, damaged,
stolen or destroyed," the trust "may not have adequate sources of recovery,"
according to the prospectus.

Mr. Toussaint said the council believes HSBC's security measures and the
bank's other liability coverage provide protection. "That's the whole reason
we put it in a vault in the first place," he said.

Despite GLD's success, even those involved in the fund acknowledge the rally
will eventually end. "We don't believe gold is always going to go up," said
State Street's Mr. Ross. "No investment does."
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Crafty_Dog
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« Reply #117 on: November 26, 2010, 11:04:17 AM »

In a WaPo article, the head of the FDIC writes

"With more than 70 percent of U.S. Treasury obligations held by private investors scheduled to mature in the next five years, an erosion of investor confidence would lead to sharp increases in government and private borrowing costs."

I knew that we have been doing a lot of short term stuff in financing our deficit, but this datum puts a hard number on it.  70% is one fg scary number.  The FDIC agrees with what I have been saying on this point-- when interest rates begin to rise, it is going to be far faster and far more than people with cranial-rectal interface-itis imagine.
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« Reply #118 on: November 26, 2010, 11:09:03 AM »

The success of Gold as a traded stock for one thing reminds me of the  Qualcomm exhuberance in Jan.2000 after it had gone up 2400% percent.  How could anyone buy anything other than that stock.  It is still a great company but the people who bought afterward didn't fare the same.

Investing in gold is a withdrawal of resources from the productive economy and a bet against the economy, the country and the dollar.  Looks great now and during these runups, but the gold price now already reflects the current state of affairs.  At the end when you want out, they will give you back dollars, not gold - and those will be devalued dollars, not the kind you started with.  Then they will report that 'gain' which was 100% inflationary - not a gain, and it will also be 100% taxable at both the federal and state levels before the remainder is yours (in devalued dollars).  Good luck.

From my friends betting on total collapse, I liked the idea of buying silver dimes better.  Gold in paper at an investment house or a big block of it at home won't buy you a loaf of bread in an emergency unless the bakery can make change.

I write with zero confidence as I continue to buy homes at 15 cents on the dollar of most recent purchase with no idea which direction it will go from here.
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"China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday. Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies."

But the yuan 元 is pegged to the dollar $ and the ruble рубль tries to follow the $ and the euro € and the € may collapse ahead of the $ so it all looks to me a lot like rearranging the deck chairs on the titanic rather than anyone changing course to go around an iceberg. 
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DougMacG
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« Reply #119 on: November 26, 2010, 11:23:57 AM »

'when interest rates begin to rise, it is going to be far faster and far more than people... imagine."

You are correct.  Remember that the Clinton budget balance was accomplished partially by financing long term debt with short term borrowings.  That it worked out in that instance does not mean it was a wise bet.  Recall also that China recently 'downgraded' America so we won't be selling new debt at the same risk level even if interest rates stayed the same.  sad 

The parties in a worse position than the sellers of our debt are the holders of our debt.
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« Reply #120 on: December 08, 2010, 10:56:43 AM »


http://www.thedailyshow.com/watch/tue-december-7-2010/the-big-bank-theory
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« Reply #121 on: December 08, 2010, 11:49:52 AM »

No idea if this is accurate or not, but I heard a figure that we could go back to the gold standard if gold hits 49,000USD an oz. shocked

I hope we don't see anything like that.
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« Reply #122 on: December 10, 2010, 10:27:13 AM »

An internet friend wrote this:

http://lessonsfromfreemarketeconomics.blogspot.com/2009/05/trouble-with-our-banking-system.html
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Freki
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« Reply #123 on: December 11, 2010, 09:16:50 AM »

I googled the quote of Alan Greenspan in Crafty's post above to verify it and found this article by Greenspan from 1967

http://www.constitution.org/mon/greenspan_gold.htm

Gold and Economic Freedom

by Alan Greenspan

Published in Ayn Rand's "Objectivist" newsletter in 1966, and reprinted in her book, Capitalism: The Unknown Ideal, in 1967.

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

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Crafty_Dog
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« Reply #124 on: December 11, 2010, 11:35:12 AM »

Nice find.  It is more than a little too bad for all of us that AG badly lost his way.
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« Reply #125 on: December 11, 2010, 12:38:34 PM »

Last several posts in this thread are excellent.  Where else can you go and find a good conversation about monetary policy? Smiley

Sad, not funny, to see Jon Stewart more honest and with a better understanding of monetary affairs than ... Ben Bernanke!

GM, I don't know the number either, no one knows the exact number because our money supply has multiple measures M1, M2, M3 etc.  and all are mere estimates, but the toothpaste is not going back in the tube!

Freki, amazing piece by Greenspan.  Greenspan is a subject in himself. He was chosen by Reagan as an opponent of so-called Reaganomics, a 'root canal' Republican, as a check and balance on Reaganomics.  (He probably wrote or inspired the voodoo line for Bush Sr.)  He was always the skeptic of the Clinton- Gingrich boom he called 'irrational exuberance' which in the end did crash and then I think his friendship with Cheney tainted his expansionary policies during Bush where he should have come down harder on the Republican spending as the check and balance on that power.  The immediate post-911 emergency expansionary policies perhaps made sense but not for a decade or permanent without an exit strategy.  I am not surprised to find changes in his thinking, besides that the world is quite different and the 'mission' of the Fed is different than in 1967.  The Peter Principle comes to mind.  Greenspan and Bernanke I'm sure were very accomplished mortals whose responsibilities rose past to their level of competence - and now seem reduced to babbling idiots. (Crafty nailed that while I was typing: Greenspan 'lost his way')

It's the dual mission, that's the problem, and eliminating it is the monetary component of the solution.  Paul Volcker did not let employment concerns stop him when he began tightening down monetary policy to save the nation's currency.  Yes those should have coincided with the stimulative effect of the tax cuts, but that was the fault of congress for downsizing them, delaying them and implementing them piecemeal when any economist should have known the stimulative effect does not kick in during the early years when everyone knows their tax rate will be lower the next year.  But Volcker's job was to stabilize a runaway dollar right then, not let another decade of inflation continue.  The people through their elected officials had the power to fix the other side of the economic mess and avoid catastrophic unemployment if they wanted to or understood it.  Same thing goes for today.

Bernanke admits he is working on employment in America instead of sanity for the dollar.  But everything that is wrong with employment in America has NOTHING to do with monetary problems or policy so he is off winging it on his own.

The new congress needs to re-write the mission of the Fed.  The sole primary mission is stability and predictability of the currency - over periods of decades and centuries, not through business cycles, election cycles, fiscal cycles, policy cycles, government failures or terms of congresses or administrations.  After stability of the dollar, then the Fed can have secondary goals, first of those IMO is stability and rightsizing of interest rates across the economy, still monetary policy.  Then can come a look at coordinating and cooperating with other economic concerns like employment, growth, trade, etc.

We don't need a return to a true gold standard, there isn't enough gold to do that.  Re-writing the Fed mission can do exactly what is needed.  They already know how to look at the price of gold, follow gold, tie policies to the price of gold, as well as to other commodities, price points and the proverbial basket of goods that includes gold front and center.  They know how to do it, they are already tracking it, but then they just go off barking up the wrong tree because their mission statement put them in charge of something where they have no control.  Why would printing more money improve long term employment??

We did not fire or dismantle the Supreme Court when they wrongly decided Dred Scott, Roe v. Wade or Kelo.  There is no better apparatus ready to take its place if we end the Fed.  We already separate it from the political branches the best we can with terms out of cycle with election cycles.  We already confiscate all Fed profits to the Treasury - oops, those are now losses.  We already bring these people back for oversight and re-appointment and re-confirmation.  But we need to clarify and unify the mission of the Fed. (MHO)
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« Reply #126 on: December 12, 2010, 10:24:39 AM »



Bernanke Wants A $10 Three-Piece Chicken Meal
 

Eighteen months ago I decided to get fit and lose weight. I bought a racing bike and hit the roads. I also bought a 2hp Vitamix blender that whips up fruit and protein smoothies faster than you can say Jamba ( JMBA - news - people ) Juice. The payoff has been great. I've lost 15 pounds and with it all kinds of petty inflammations in the ankles, knees and lower back. (I'll share the details of my diet and exercise regimen if you email me at rkarlgaard@forbes.com. Put "Diet" in the subject line.)

But no one is perfect, least of all me. Every once in a while I get a powerful urge to eat greasy food. Not long ago I drove by the window of the local KFC and ordered a three-piece Kentucky Fried Chicken meal, all dark, original recipe, with coleslaw, beans and a root beer. The order came to $9.47.

Let's stop here. Nine and a half bucks for a KFC meal? Seriously? KFC is a fast-food retailer. Fast food is supposed to be cheap. But $9.47 for one ordinary meal is not cheap. What's going on?
Facts such as higher KFC prices reflect the world as it is. These facts contradict recent headlines about Consumer Price Index inflation. The October CPI rose just 0.6% at an annualized rate, the lowest since records began in 1957. Bear in mind that the official scorekeeper for CPI inflation is the U.S. Department of Labor, whose head is politically appointed. At the same time the independent Federal Reserve has its own inflation target, rumored to be 1.5% to 2%.

There you have it. The Fed thinks prices are too low. It wants higher prices--$10 for a chicken dinner at KFC; $40 for a family of four.

Where, oh where, do you start with such destructive nonsense?

For one, it boggles the mind to think the Fed goes along with the Labor Department's exclusion of food and energy prices in the CPI. Good lord, people have to eat. And go places. Gas prices are certainly not cheap. They are low only compared with the summer of 2008.

But the CPI is flawed in other ways that bear no resemblance to the way people actually live. As the always savvy Scott Grannis points out in his Calafia Beach Pundit blog: "If there is any deflation out there, it can be found mainly in the energy and housing sectors, both of which experienced a huge run-up in price in the years prior to 2008. In my book that's not deflation, it's payback. Almost anywhere else you look, prices are rising."

Are you listening, Ben Bernanke? Do you actually get out in the world? The swift backlash against Bernanke's QE2 is borne out in the fact that prices, in real life, are rising faster than most people's wages. QE2 will only take us further down the stagflation path--and will hurt the poor the hardest. There are 40 million Americans already on food stamps. Higher food prices will increase that shameful number.

Ironically, for a Democratic Administration that fancies itself a greater friend of the poor, a cheap dollar slams the working poor the hardest. The working poor--those striving to stay off unemployment and/or welfare--pay the highest percentage of their wages for food. They tend to have the longest commutes in older, gas-guzzling cars. Higher gas prices slam them. Many working poor don't have smartphones or computers or the time and know-how to bargain shop on the Internet. Finally, they have most of their meager assets in cash: paychecks, tips, checking accounts and small savings accounts.

In a misguided attempt to prop up house prices and prevent the next wave of bank failures, the Fed is destroying the value of the working poor's cash.

A crushed dollar hurts the majority of Americans and the economy in general. But the rich--especially the younger affluent--do relatively well. The majority of their assets are in things that hold their value when the dollar goes down: stocks, gold, commodities, beachfront property, etc. The rich can hold just enough cash to take advantage of bargains when they appear. They can also invest in smartphones, 4G mobility and software that facilitate price shopping for the best bargain.
You might like Ben Bernanke if you're 35 years old, made a ton of money on Wall Street and your diversified assets are inflating. You don't like him if you're 60 years old and own a KFC franchise--or eat at one.

A soft dollar will not lift America from its economic doldrums. The opposite is needed. A strong dollar would redirect capital to worthy entrepreneurs--and out of ruinous commodity speculation. For the rest of us it would restore the purchasing power we thought we'd earned in the first place.

http://www.forbes.com/forbes/2010/1220/opinions-rich-karlgaard-digital-rules-bernanke-chicken-meal.html
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« Reply #127 on: December 14, 2010, 10:44:45 AM »

--------------------------------------------------------------------------------
The Producer Price Index (PPI) increased 0.8% in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/14/2010


The Producer Price Index (PPI) increased 0.8% in November, beating the consensus expected gain of 0.6%.  Producer prices are up 3.5% versus a year ago.

The November rise in the PPI was mostly due to energy and food. Energy prices increased 2.1% while food prices rose 1.0%. The “core” PPI, which excludes food and energy, increased 0.3%, beating the consensus expected increase of 0.2%.
 
Consumer goods prices rose 1.0% in November and are up 4.7% versus last year.  Capital equipment prices were up 0.2% in November and are up 0.3% in the past year.
 
Intermediate goods prices increased 1.1% in November and are up 6.3% versus a year ago.  Crude prices increased 0.6% in November and are up 13.0% in the past twelve months.
 
Implications:  Overly loose monetary policy from the Federal Reserve isn’t just going to cause more inflation down the road, it’s causing higher inflation today. Anyone still talking about a deflation threat needs to re-examine their economic models. Mostly due to increases in food and energy, producer prices increased 0.8% in November, the largest gain since March. Core prices increased 0.3%, a partial rebound from the 0.6% drop last month. What’s even more troubling is that measures of producer price inflation are more intense deeper in the production process, and that’s the case with both overall prices and core prices. In the past year, prices for intermediate goods are up 6.3% overall and 4.7% core; prices for crude goods are up 13% overall and 30.2% core. Over time, some of these increases should filter through to prices for finished goods.  It’s important to note that all these inflation figures are all the result of monetary policy before the Fed embarked on its second round of quantitative easing, which implies the potential for even higher readings in the next two years.
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« Reply #128 on: December 14, 2010, 05:46:05 PM »

second post of the day

Fed Keeps Monetary Spigot Wide Open To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/14/2010


As widely anticipated, the Federal Reserve’s statement on monetary policy was almost a carbon copy of last month’s statement, when it embarked on a new round of “quantitative easing.”

The Fed made no direct changes to the stance of monetary policy today, leaving the target range for the federal funds rate at 0% to 0.25%. In addition, the Fed maintained its pledge to keep the funds rate at this level for an “extended period.” The Fed also reiterated its commitment – initially made in early November – to purchase $600 billion in long-term Treasury securities by mid-2011. These purchases are on top of reinvesting (into long-term Treasury securities) principal payments on its pre-existing portfolio of mortgage securities.
 
The Fed only made minor changes to its statement. Last month it said the recovery was “slow.” This is now changed to growth being “insufficient to bring down the rate of unemployment.” Last month the Fed said consumer spending was growing “gradually.” Now the Fed says it’s growing at a “moderate” rate. The Fed made no changes to its language on inflation.
 
Please click on the link above to view the entire commentary.
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« Reply #129 on: December 22, 2010, 08:21:58 PM »

Since Jan 2008 bank reserves up from 33 bil to 995.  Fed not printing?  So, where's the money coming from? 
 
 http://blogs.wsj.com/economics/2010/12/22/is-the-fed-printing-money/
 
December 22, 2010, 4:15 PM ET
Is the Fed Printing Money?
Is the Federal Reserve printing money to finance its bond buying? Or isn’t it? Ben Bernanke has given inconsistent answers, at times saying it is and at times saying it isn’t.
 
In an exchange with readers on Time magazine’s website this past weekend, a reader asked Mr. Bernanke why the Fed is creating dollars “out of thin air.” Mr. Bernanke said it wasn’t. “These policies are not leading to increases in the amount of currency in circulation,” he said.
He made a similar argument to CBS News’s Scott Pelley earlier this month in defense of the Fed’s plan to purchase $600 billion of U.S. Treasury bonds with money that the Fed creates. “People talk about the printing press. That’s not what this is about. This policy does not increase the amount of currency in circulation. It does not increase in any significant way the amount of money in broader terms, say, as measured by bank deposits,” he said.

  Yet back in March 2009 Mr. Bernanke told Mr. Pelley that the Fed was printing money to fund an earlier bond buying program. “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing,” he said.
Comedian Jon Stewart made much of this obvious contradiction.
 
Here is an attempt to sort it out:
 
The Fed has been buying bonds since early 2009. When a private investor buys bonds, the investor uses cash or sells some existing asset to raise cash and uses that money to buy bonds. The investor might also borrow money from a bank and use the borrowed funds to buy securities on margin. The Fed can do something else. It has the power to electronically credit money to the bank accounts of sellers who in turn sell government securities or mortgage backed securities to the Fed. The banks get the money and the Fed gets the securities. The Fed isn’t literally printing $100 dollar bills when it does this. But it is creating money, electronically, that wasn’t in the financial system before. In that sense, it is printing money.
 
But as Mr. Bernanke has been trying to emphasize lately — perhaps clumsily — most of the money that the Fed has created isn’t circulating much through the financial system. It’s mostly sitting idly, often in deposits — also known as reserves — that banks keep with the Fed itself. Broader measures of the money supply haven’t grown that much because the money isn’t being lent on. Since January 2008, the amount of Federal Reserve notes, i.e. currency, in circulation has increased 18%, to $980 billion. During the same stretch, the reserves banks keep with the Fed has increased more than 30-fold to $995 billion from $33 billion.
 
Meantime, in the 12 months between November 2009 and November 2010, M2 money supply, a broad measure of money including bank deposits, retail money market fund deposits and other measures of short-term money, are up just 3.3%.
 
The Fed chairman seems to be trying to emphasize two points: 1) The Fed isn’t literally printing money; and 2) The money that it is creating isn’t flooding through the financial system in a way that would be inflationary.
 
Mr. Bernanke might be a little sensitive about the first point. Critics have called him “Helicopter Ben” ever since he cited Milton Friedman in a November 2002 speech saying that in a crisis the Fed could flood the economy with money to avoid deflation, as if it were dropping bills from helicopters. Ironically, it was Friedman, not Bernanke, who came up with the helicopter analogy. But Mr. Bernanke is the one who got stuck with the reputation as a serial money dropper.
He’s trying to shoot down the idea by saying, “Hey, I’m not actually printing money.” More broadly, the chairman is trying to dispel the worry that the Fed is sowing the seeds of an inflationary mess by flooding the system with so much cash.
 
The point is that there’s not as much money out there as you might think. Mr. Bernanke and his colleagues are also confident they can soak it up when needed. One way the Fed plans to do this is by paying banks interest on the reserves they keep with it. It only pays 0.25% now. If the economy heats up, it can increase that rate and keep all of those reserve from being lent too aggressively and overheating the economy. (We’re a long way from that moment.)
Reassuring the public on that point is important because if people begin to expect a lot more inflation, it could become a self-fulfilling prophecy. Unfortunately for the Fed chairman, instead of clarifying, he has confused the issue by failing to flesh out the distinction in more detail.

 
 
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« Reply #130 on: December 22, 2010, 08:24:26 PM »

http://scottgrannis.blogspot.com/2010/11/assessing-impact-of-quantitative-easing.html
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« Reply #131 on: January 14, 2011, 11:54:03 AM »

Data Watch

--------------------------------------------------------------------------------
The Consumer Price Index (CPI) increased 0.5% in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/14/2011


The Consumer Price Index (CPI) increased 0.5% in December, slightly above the consensus expected gain of 0.4%. The CPI is up 1.5% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was up 0.6% in December and is up 1.7% in the past year.
 
Most of the increase in the CPI in December can be attributed to energy prices, which increased 4.6%. Food prices were up 0.1%.  Excluding food and energy, the “core” CPI increased 0.1%, matching consensus expectations. Core prices are up 0.6% versus last year.
 
Real average hourly earnings – the cash earnings of production workers, adjusted for inflation – fell 0.4% in December but are up 0.4% in the past year. Due to an increase in work hours, real weekly earnings are up 1.9% in the past year.
 
Implications:  Prices have been escalating at the producer level and are now starting to show up at the consumer level. Consumer prices came in higher than expected, much due to the 4.6% increase in energy prices. Increases in the CPI are likely to persist throughout 2011 as commodity prices continue to rise and monetary policy remains easy. Although consumer prices are up only 1.5% from a year ago, they are up at a 3.1% annual rate in the past six months and up at an even faster 3.5% annual rate in the past three months. In addition, one of the factors that has held inflation down in the past year is now heading back up. Owners’ equivalent rent (OER), which is the government’s estimate of what homeowners would pay if they rented their own homes, mostly fell in late 2009 and early 2010 but is now up 0.3% versus a year ago, up at a 1.2% annual rate in the past three months and up at a 1.1% annual rate in December. This is important because OER accounts for about 25% of all the goods and services in the CPI.
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« Reply #132 on: January 26, 2011, 12:11:33 PM »

"Countries that do not have a gold standard; which, at this point in history,
includes all of them; must still back their currencies with something. "
-----
Crafty already posted this piece (Wesbury) on "US-China' so I will only excerpt points here about the dollar as the reserve currency that go beyond the implications specific to China.

Make no mistake, the dollar and our country itself are troubled entities that need rescuing from within, but both are better and stronger than the alternatives.  Giving Wesbury credit, but this is a point I tried to make earlier in this thread.  Date is Jan. 16 2011, so when he says "There is simply no other instrument issued by anyone that has the liquidity and certainty of payment of US Treasury debt", he means that in the context of all our current struggles.
-----
"Countries that do not have a gold standard; which, at this point in history,
includes all of them; must still back their currencies with something. These
reserves create confidence. The Federal Reserve typically uses US
Treasury securities as reserves, although it also holds many mortgage-backed
securities these days. The Fed makes a profit on these holdings and turns them over
to the government. The European Central Bank also holds the sovereign debt of its
member countries and turns their earnings over to member governments.
 
Emerging market central banks have a choice of what to hold as reserves, and they
will always make the one that maximizes earnings and creates the most confidence in
their currencies. That's why China links its currency to the dollar and holds
mostly US Treasury debt as reserves.
 
No one forces a foreign central bank to buy US Treasury debt. Each country would
prefer to have their central bank buy their own local government debt as reserves.
But who would trust these currencies if they were backed up by local government
debt? Imagine Thailand trying to encourage the use of its currency if it was backed
only by Thai government debt. And if fewer people held the currency, the central
bank would generate lower profits to hand over to the government.
 
In other words, the international role of the dollar is a by-product of
profit-seeking central banks pursuing their own self-interest. And that's not
going to change anytime soon. There is simply no other instrument issued by anyone
that has the liquidity and certainty of payment of US Treasury debt.
 
Moreover, as emerging markets keep growing, their central banks will issue more
local currency, which will continue to elevate the demand for Treasury debt. So
while other countries must learn to accept the US dollar's role, Americans
must learn to accept that, over time, the share of our debt owned by foreigners is
likely to keep rising. And, that the demand for US debt helps generate large US
trade deficits.
 
Many assume large foreign ownership of US debt makes the US vulnerable to foreign
governments. We think the vulnerability is the other way around. For example, the US
could protect Taiwan with its Navy. Or, instead, the US could send a message that
any attack would mean no payments on our debt to the attacking country until it
withdraws and makes reparations. The US did something similar when World War II
began. No wonder Hu Jintao told the Washington Post “the
current international currency system is a product of the past.”
China realizes it’s vulnerable.  But, any major changes are
decades in the future. The dollar will remain the world's reserve currency for a long time to come."
 
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« Reply #133 on: February 13, 2011, 11:55:30 AM »

A couple key points:  Ryan has called for the end of the 'dual mission' (again, more famous people caught reading the forum).

Bernanke said: "Bernanke said a Federal Reserve study found that the QE policy has created or saved as many as 3 million jobs."  - Right out of the Krugman Obama school of economics.  A Nobel Prize coming?

(Next is inspired by Clapper calling the MB secular), Bernanke said that the QE policy did not represent “a permanent increase in the money supply,” calling it a “temporary measure that will be reversed.”

Either that statement is true and a relief to know we worried for no reason, or he should be tried (and hanged) for treason. I'm not seeing middle ground here.

http://dailycaller.com/2011/02/09/ryan-confronts-bernanke-over-feds-purchases-of-u-s-debt-raises-concerns-about-the-dollar/
http://www.youtube.com/watch?v=GbbhS8zPIOU
Warning, Federal Reserve hearings aren't like seeing Allen West speeches.
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« Reply #134 on: February 13, 2011, 12:52:08 PM »

"Bernanke said a Federal Reserve study found that the QE policy has created or saved as many as 3 million jobs."

If I have my zeros correct, that is $200,000 per job?!? shocked
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« Reply #135 on: February 13, 2011, 01:33:50 PM »

"If I have my zeros correct, that is $200,000 per job?!?"

Even then, 3 million jobs saved meant unchanged 10.3% unemployment, so there is no multiple of $200,000 investments that would brings the rate down to 4-5% where it started.

I hate to one-up Bernanke but while he was saving 3 million jobs and record unemployment remained unchanged, I was helping to keep the sky blue and making sure the sun rose;I have similar proof of results.  Good grief.
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« Reply #136 on: February 18, 2011, 09:52:02 AM »

http://online.wsj.com/article/SB10001424052748703843004576140762706032294.html?mod=WSJ_hpp_sections_personalfinance

'Biflation' Bernanke

By AL LEWIS         * FEBRUARY 13, 2011

Ben Bernanke remarked last week on one of the few things that is still made here in America.

"Inflation made here in the U.S. is very, very low," the Federal Reserve chairman told Congress on Wednesday.

"Over the 12 months ending in December, prices for all the goods and services consumed by households increased by only 1.2%," he said.

Around the globe, people are rioting in the streets because of skyrocketing food prices. Health-care costs in the U.S. rise annually by double digits. College, insurance, utilities, the fees bailed-out banks charge their customers, various taxes from nearly bankrupt states and municipalities, basic commodities from pork bellies to gold, and, oh, gasoline -- all of this keeps going up.

But don't worry, Mr. Bernanke swears inflation -- at least as the U.S. government measures it -- will remain low because wages are stagnant. See, there's no need to worry about rising prices, because you're not getting a raise.

On the day Mr. Bernanke spoke, The Wall Street Journal's lead headline read "Inflation Worries Spread." But the story was about rampant inflation in other countries.

Mr. Bernanke swore this inflation would not spread here. But then Mr. Bernanke once predicted the subprime mortgage mess would not spread, either. I swear, if he shaved off his white beard, he would not look like an economist at all.

Mr. Bernanke defended the unprecedented actions he has taken to save us from the economic calamity he helped cause. Holding interest rates at zero to prop up the stock market, and buying up Treasurys and worthless paper from banks, seems to be working for now. But what price will we pay when the next bubble pops?

Republicans gave Mr. Bernanke a pretty hard time, challenging his boast that as soon as higher inflation inevitably rears its head, he'll guillotine it with a gentle pull of his interest-rate lever.

House Budget Committee Chairman Paul Ryan (R., Wis.), deploying a common Dairy State analogy, said he didn't think the Fed would even notice inflation until "the cow is out of the barn." But it's difficult to believe Mr. Bernanke would ever let a cow out of the barn without first allowing the bankers to milk it dry.

To Mr. Bernanke's point, though, plenty of things have either fallen in price or stayed flat to keep consumer prices from spiking: furniture, appliances, electronics, automobiles and stuff you find at all those going-out-of-business sales.

"It's cheaper to buy a new home today," notes Charles Farrell, author of "Your Money Ratio: 8 Simple Tools for Financial Security" and a principal at Northstar Investment Advisors in Denver. "You could benefit from that...if you could sell your old home."

Yeah, if.

A new form of inflation is increasingly described in the blogosphere. It better explains the pricing paradox Mr. Bernanke has failed to embrace.

It's called "biflation."

Everything you already own -- a house, a car, a stock portfolio -- has rapidly declined in value. Everything you actually need to buy -- food, gasoline, medicine, education -- is going up.

Biflation is apparently what happens when the Fed creates trillions of new dollars out of nothing, but mostly just gives it to the banks.
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« Reply #137 on: March 15, 2011, 06:36:45 AM »

http://www.nationalreview.com/exchequer/262054/first-pimco-then-opec-then

First PIMCO, Then OPEC, Then . . . ?
March 13, 2011 10:03 P.M.
By Kevin D. Williamson

Tags: Anemic Fiat Dollars, Bonds, Debt, Deficits, Despair

This remind you of anything?

    March 14 (Bloomberg) — Oil exporting countries are cutting holdings of U.S. government debt as energy prices rise, helping depress the dollar, the worst performing major currency of the past six months.

    Treasuries owned by oil producers and institutions such as U.K. banks that are proxies for Middle East nations fell 9 percent in the second half of 2010 to $654.6 billion, the first decline in the final six months of a year since the Treasury Department began compiling the data in 2006. The sales may continue, if history is any guide, because Barclays Plc says Middle East petroleum exporting nations have traditionally placed only 25 percent of their savings in dollar-based assets.

PIMCO, OPEC: not buying what we’re selling.

And does anybody think that the No. 3 U.S. government debt buyer, Japan, is going to be in the market for a while?

Here’s a little piece of knowledge:

    “I moved my clients out of any mutual funds that held Treasuries 12 to 18 months ago, including the Pimco Total Return Fund,” said Steven Tibbitts, owner of Tibbitts Financial Consulting, a $50 million advisory firm.

    In place of Treasuries, he has moved clients into floating-rate-bank-loan funds and international bonds, including emerging-markets debt.

    “It’s not a matter of whether rates rise, because they will, and when they do, it will be negative for longer-term bonds, especially longer-term government bonds,” Mr. Tibbitts said.

Question: Who thinks the U.S. government will still have a AAA rating in five years? Answer in the comments and tell me why/why not.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.
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« Reply #138 on: March 15, 2011, 08:17:36 PM »

Research Reports

--------------------------------------------------------------------------------
Fed Pays Lip Service to Better Economy and Higher Inflation To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 3/15/2011


The Federal Reserve made several changes to the language of its statement today, acknowledging an improving economy and higher overall inflation.  However, the Fed also made it clear it does not think any of this warrants a change in the stance of monetary policy. 

The Fed was more bullish on the economy, saying it was on a “firmer footing” and that the labor market was “improving gradually.”  Previously the Fed had said economic growth was not enough to generate “significant improvement” in the labor market.  The Fed recognized faster growth in household spending and, importantly, finally omitted long-used language that household spending was being constrained by high unemployment, modest income growth, declining housing wealth and tight credit.   
 
On inflation, the Fed noted the rapid rise in commodity prices, such as oil, and said it would pay attention to these prices.  However, the Fed also said the higher inflation related to commodity prices was likely to be “transitory” and that underlying inflation is trending downward.  This is even more dovish than the prior language that said underlying inflation is “subdued.”  In other words, the Fed will watch commodity prices but is not going to change policy because of them.  In essence, the Fed thinks it’s a spectator of, not a participant in, commodity price changes, even though it controls the supply of the currency in which these commodities are denominated.
 
One subtle change in the statement was that the Fed took out a reference to “slow progress” toward its objectives of maximum employment and price stability. 
Otherwise, as everyone expected, the Fed made no direct changes to the stance of monetary policy today, leaving the target range for the federal funds rate at 0% to 0.25%.  In addition, the Fed maintained its pledge to keep the funds rate at this level for an “extended period.”  The Fed also reiterated its commitment – initially made in early November – to purchase $600 billion in long-term Treasury securities by mid-2011.  These purchases are on top of reinvesting (into long-term Treasury securities) principal payments on its pre-existing portfolio of mortgage securities.
 
The Fed is not going to raise rates in 2011 but continued economic improvement and gradual increases in the “core” inflation measures the Fed watches should put the Fed in the position to start raising rates early next year.
   
Please click the link above to view the entire commentary.
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« Reply #139 on: March 15, 2011, 08:26:24 PM »

http://www.lesjones.com/2011/03/14/normal-interest-rates-would-be-a-disaster-for-u-s-debt/

Normal Interest Rates Would be a Disaster for U.S. Debt
Monday, March 14th, 2011 | Economics | ShareThis

‘The Most Predictable Economic Crisis in History’:

    If fewer people are willing to lend us money, the more we’ll have to shell out in higher interest payments. And if bond buyers lose confidence in our ability to make good on that debt, things could get really ugly, really fast.

    As Sen. Tom Coburn (R., Okla.), who served on the deficit commission and supported its recommendations, pointed out at a press conference this week, the United States has, historically, paid an average of 6 percent interest on its debt. It currently pays about 2 percent. If rates were to return simply to that historical average, it would involve an increase to our overall interest bill of $640 billion — to be paid immediately. “An impossible situation,” in Coburn’s words.

And that’s why the Federal Reserve is buying U.S. Treasuries. If they didn’t, the U.S. would have to pay higher interest rates on its debt, and we can’t afford to.

None of this can go on forever. The Fed can’t print money forever. The U.S. can’t borrow huge fractions of GDP forever. Austerity is coming. The only question in my mind now is whether we’ll have a currency collapse and hyperinflation first.

Previously – Bonus 2011 Deficit FAQ: Why is the Federal Reserve buying U.S. Treasuries?
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« Reply #140 on: March 16, 2011, 07:25:18 AM »

http://www.europac.net/pentonomics/tic_data_makes_you_nervous

Pentonomics - Tic Data that Makes you Nervous
March 15, 2011 - 9:24am — mpento
Tuesday, March 15, 2011
By:
Michael Pento

One has to wonder how many more blows the U.S. Treasury market can withstand. We all are aware of the inflation created by Bernanke’s Fed. And we are also painfully cognizant about the exploding burden of U.S. debt. Those two factors alone will help usher in dramatically higher interest rates in the months and years to come. But in recent days there has been even more fuel dumped upon the pyre of burning Treasuries.

China announced last month that they posted a $7.3 billion trade deficit, which was the largest in seven years. It was the fifth consecutive month that imports outpaced exports (exports gained 2.4% while imports were up 19.4%). Without having a trade surplus, China will have less money to dump into U.S. debt.

Japan is now facing a massive increase in debt accumulation in order to reconstruct their country. The rebuilding efforts will soak up all their available savings plus whole lot more. Therefore, their participation in the U.S. debt market should diminish significantly. Excluding the Fed, Japan is the second largest holder of U.S. debt outside of China.

Evidence of the waning appetite for U.S. debt came from today’s release of Treasuries International Capital Data. Global demand for U.S. stocks, bonds and other financial assets fell in January from a month earlier on declines in purchases of U.S. Treasury securities. Net buying of long-term equities, notes and bonds totaled $51.5 billion during January compared with net buying of $62.5 billion in December, according to the TICS data released today in Washington by the Treasury Department.

China saw its portfolio fall by $5.4 billion to $1.15 trillion in January. Hong Kong, which is counted separately from China, reduced its holdings to $128.1 billion from $134.2 billion. Total foreign purchases of Treasury notes and bonds were $46.5 billion in January compared with purchases of $54.6 billion in December.

Either by choice or by an alarm clock, foreigners are waking up and losing their appetite for U.S. debt. Maybe domestic investors should set their alarms too.


Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
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« Reply #141 on: March 16, 2011, 11:35:57 AM »

That seems rather clear to me  tongue shocked cry   I fear when the reversal in low rates comes it will be far faster and more brutal than Ben "Helicopter" Bernanke, BO, et al realize.
===============
The Producer Price Index (PPI) increased 1.6% in February To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 3/16/2011


The Producer Price Index (PPI) increased 1.6% in February, smashing the consensus expected gain of 0.7%.  Producer prices are up 5.6% versus a year ago.

The February rise in the PPI was led by food and energy prices. Food prices increased 3.9% while energy increased 3.3%. The “core” PPI, which excludes food and energy, increased 0.2%, matching consensus expectations.
 
Consumer goods prices rose 2.1% in February and are up 7.3% versus last year.  Capital equipment prices were up 0.1% in February and are up 0.8% in the past year.
 
Core intermediate goods prices increased 1.1% in February and are up 5.4% versus a year ago.  Core crude prices increased 2.3% in February and are up 28.4% in the past twelve months.
 
Implications: The inflation problem at the producer level continues to worsen. In the past year producer prices are up 5.6%, and the data clearly show accelerating inflation. Producer prices are up at a 10% annual rate in the past six months and a 13.8% rate in the past three months. Although the Federal Reserve can still claim “core” inflation is low for consumers, they can’t say the same at the producer level. While much of the gain was due to food and energy, the core PPI, which excludes food and energy, still increased 0.2% in February and is up at a 4% annual rate in the past three months. Meanwhile, further up the production pipeline, core intermediate prices increased 1.1% in February and are up at a 10.9% annual pace in the past three months; core crude prices increased 2.3% in February and are up at a staggering 47% rate in the past three months. Based on these inflation signals and the current state of the economy, the Fed’s monetary policy is completely inappropriate. In other recent inflation news, import prices increased 1.5% in February and are up 5.3% versus a year ago.  This is not all due to oil.  Ex-petroleum, import prices were up 1.1% in February and up 3.2% in the past year.  Export prices increased 1.2% in February and are up 6.8% versus a year ago.  Excluding agriculture, export prices were up 0.9% in February and 5.3% in the past year.
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« Reply #142 on: March 17, 2011, 07:39:36 AM »

Is TurboTax-Tim trying to kill off the dollar?

http://www.telegraph.co.uk/finance/economics/5050407/US-backing-for-world-currency-stuns-markets.html

US backing for world currency stuns markets
US Treasury Secretary Tim Geithner shocked global markets by revealing that Washington is "quite open" to Chinese proposals for the gradual development of a global reserve currency run by the International Monetary Fund.

By Ambrose Evans-Pritchard 6:05PM GMT 25 Mar 2009



The dollar plunged instantly against the euro, yen, and sterling as the comments flashed across trading screens. David Bloom, currency chief at HSBC, said the apparent policy shift amounts to an earthquake in geo-finance.

"The mere fact that the US Treasury Secretary is even entertaining thoughts that the dollar may cease being the anchor of the global monetary system has caused consternation," he said.

Mr Geithner later qualified his remarks, insisting that the dollar would remain the "world's dominant reserve currency ... for a long period of time" but the seeds of doubt have been sown.

The markets appear baffled by the confused statements emanating from Washington. President Barack Obama told a new conference hours earlier that there was no threat to the reserve status of the dollar.

"I don't believe that there is a need for a global currency. The reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world," he said.
Related Articles



      Gold price spikes as dollar falls
      25 Mar 2009

The Chinese proposal, outlined this week by central bank governor Zhou Xiaochuan, calls for a "super-sovereign reserve currency" under IMF management, turning the Fund into a sort of world central bank.

The idea is that the IMF should activate its dormant powers to issue Special Drawing Rights. These SDRs would expand their role over time, becoming a "widely-accepted means of payments".

Mr Bloom said that any switch towards use of SDRs has direct implications for the currency markets. At the moment, 65pc of the world's $6.8 trillion stash of foreign reserves is held in dollars. But the dollar makes up just 42pc of the basket weighting of SDRs. So any SDR purchase under current rules must favour the euro, yen and sterling.

NOTE: Drudge had this link in red this A.M., turns out to be from 2009, it seems.
« Last Edit: March 17, 2011, 07:59:59 AM by G M » Logged
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« Reply #143 on: March 17, 2011, 10:53:54 AM »

Why would Drudge do that?
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« Reply #144 on: March 17, 2011, 11:14:47 AM »

Drudge has it now listed as a flashback, below this article.

http://www.reuters.com/article/2011/03/16/us-usa-treasury-geithner-debt-idUSTRE72F7WQ20110316

(Reuters) - Treasury Secretary Timothy Geithner said on Wednesday that there was no alternative except for Congress to raise the debt ceiling so that the government can keep borrowing.

"Congress has to do it. There's no alternative," he said in response to questions at a House of Representatives appropriations subcommittee.

He repeated a warning that it would be have "catastrophic" consequences for the economy if the debt ceiling was not raised and the country defaulted on its debt obligations.
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« Reply #145 on: March 17, 2011, 11:47:26 AM »

Geithner: "there was no alternative except for Congress to raise the debt ceiling so that the government can keep borrowing."

The alternative for a country that knows how to take in $2.6 Trillion in revenues, would be to argue about how to spend that $2.6 Trillion  - if we aren't paying back the other 14 Trillion, not argue about spending between 3.799 and 3.8 Trillion. 

It used to be that markets would flinch and panic on just body language of people like a Fed chair or Treasury Secretary.  Markets today seem to know about the hoax theory. The flashback shows that for people like Geithner and Joe Biden, when their lips move, meaningless words can come out.  If these people have no idea what they mean by what they say, how can the markets guess.

I wrote then that countries like China, Saudi etc. do not use the US dollar as a favor to us, it is solely from the lack of a better alternative.  I wonder what an IMF currency backed by Greece, Italy and a nuclear-free Germany would look like without US backing.
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« Reply #146 on: March 17, 2011, 01:47:59 PM »

Some numbers in here that disconcert: some because they are so much cheerier than my sense of reality and some because even these numbers are starting to admit a real serious problem.


The Consumer Price Index (CPI) increased 0.5% in February To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 3/17/2011


The Consumer Price Index (CPI) increased 0.5% in February, more than the consensus expected gain of 0.4%. The CPI is up 2.1% versus a year ago.

“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was up 0.7% in February and is up 2.6% in the past year.
 
The majority of the increase in the CPI in February was due to energy, which increased 3.4%.  Food prices were up 0.6%.  Excluding food and energy, the “core” CPI increased 0.2%, higher than consensus expectations. Core prices are up 1.1% versus last year.
 
Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – fell 0.5% in February and are down 0.4% in the past year. Due to an increase in work hours, real weekly earnings are up 0.2% in the past year.
 
Implications:  Consumer price inflation is accelerating, rising 0.5% in February. Although consumer prices are up only 2.1% in the past year, they’re up at a 3.9% annual rate in the past six months and a 5.6% rate in the past three months. We like to follow “cash inflation,” which is everything in the CPI except for owners’ equivalent rent (the government’s estimate of what homeowners would pay if they rented their own homes). Cash inflation increased 0.6% in January and is up at a 7% annual rate in the past three months.  shocked shocked shocked Even “core” inflation, which excludes food and energy, is accelerating. Core prices rose 0.2% for the second straight month and are up at a 1.8% annual rate in the past three months. With easy money from the Fed, we expect persistent increases in the CPI throughout 2011 and beyond. In other news this morning, new claims for unemployment insurance declined 16,000 last week to 385,000.  The four-week moving average fell to 386,000, the lowest since July 2008.  Continuing claims for regular benefits declined 80,000 to 3.71 million.  The labor market continues to improve and private sector payrolls will continue to move higher.
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« Reply #147 on: March 17, 2011, 06:30:21 PM »

http://www.europac.net/commentaries/japanese_fallout_may_hit_treasuries

Japanese Fallout May Hit Treasuries
March 17, 2011 - 8:28am — europac admin
By:
John Browne
Thursday, March 17, 2011

Japan is facing two meltdowns in the wake of its devastating earthquake. The first, and more critical, is the meltdown at the Fukushima I Nuclear Plant, 150 miles north of Tokyo. Surely, this is the greater near-term threat. But long-term, another threat looms, having to do with the Japanese government’s response to the former.

As the fourth largest economy in the world, behind the EU, US, and China, any major setback in Japan likely will have widespread repercussions. Japan is also the third largest holder of US Treasuries, behind the United States and China. While it is too early even to assess the Japanese damage accurately – let alone to forecast the full implications – it is possible to see the potential for a meltdown of the US Treasury market and international monetary system.

Current estimates hold that the Japanese disaster has already lowered world economic growth by a full percentage point for the year.

Leaving aside massive international aid, a complete nuclear meltdown, or other escalations, Japan already will have to spend a massive amount of money to cope with the current disaster. This raises the question: from where will such an enormous amount of money come?

Japan could borrow. However, with a debt-to-GDP ratio of some 200 percent, or twice as bad as that of the United States, and with the main credit rating agencies exercising more scrutiny than before the Credit Crunch, raising funds will be difficult at an economic rate of interest. Moreover, Japan will likely be spending a large chunk of its foreign exchange reserves to buy oil to replace its lost nuclear power generating capacity – diminishing its collateral in the eyes of creditors.

Japan could follow the US example and “paper over” its problems. But without the benefits of being the international reserve currency, the Japaneses would immediately feel the effects of domestic inflation. The Bank of Japan has already pumped out ¥8 trillion ($98 billion) in the wake of the earthquake, but it is unlikely to try to match the Fed's $600 billion printing spree this quarter.

So, if Japan is limited in its ability to borrow or print money, it may have to sell part of its vast holdings of US Treasuries.

At the end of last month, the US Treasury had outstanding debt worth some $14.19 trillion. This represents 96.8 percent of the total $14.66 trillion value of business generated within the United States for the entire year of 2010. It is just short of the $14.294 trillion debt limit set in 2010 by a profligate Democrat Congress. To put it in perspective, the US government now owes $91,400 for every working American. However, this represents only some 22 percent of Washington's $62 trillion of unfunded obligations, which include Social Security, Medicare, housing, and other guarantees.

Japan is the third largest holder of US Treasuries ($877 billion), behind China ($896 billion) and the Fed ($1.108 trillion). Should Japan start selling Treasuries in large amounts to fund the repair of its economy, it could have a serious effect on US interest rates and the market value of Treasuries the world over. US bonds are widely held by central banks, international banks, and insurance companies, which already are concerned about their funding of loss claims arising from the damage in Japan.

Thus, a Japanese selloff could trigger a liquidity crisis like the one following the collapse of Lehman Bros. and AIG. Large institutions may not be willing or able to bear with US bonds through a steep correction.

Western economies are on thin ice as it is, even without a shock in their presumed “safe” asset.

Stock markets in the EU and US are weakening, destroying large amounts of private wealth and potential consumer confidence.

Further, the EU is facing the reality that the financial rescue programs it organized to save some of its members are not working. China and Japan offered to help. Now Japan may not be able to fulfill its promises. This could reignite further speculative downward pressure on the euro.

It seems that while we are all concerned about the effects of nuclear meltdown on the residents of Japan, we should also be aware that the fallout could spread further in the financial markets than it does in the atmosphere. Just as Californians are stocking up on iodide pills as a precautionary measure, investors should be stocking up on hard assets. After health, it's vital to guard your wealth – especially in emergency times like these.
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Crafty_Dog
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« Reply #148 on: March 17, 2011, 07:37:17 PM »

Group of 7 Plans Intervention in Currency Markets to Stabilize Yen

The United States and other major economies will join Japan
in a highly unusual effort to stabilize the value of the yen
by intervening in currency markets, the Group of 7 nations
announced Thursday night in a joint statement.

Read More:
http://www.nytimes.com?emc=na
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G M
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« Reply #149 on: March 17, 2011, 07:39:05 PM »

So, who thinks that Japan may be the final straw?
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