Can The Fed Stop Quantitative Easing?

By Paul Craig Roberts

June 28, 2011 “Information Clearing House” – If the Fed stops QE, confidence in the US dollar would rise. Money would flow into US investments, both supporting the US stock market and helping to finance the large US budget deficit. Gold and silver prices would decline. Negative dollar expectations would be squeezed out of oil and grain prices, although drought, flood, and supply factors would continue to impact grain prices and the administration’s wars can impact oil prices.

If a halt to QE coincided with more European sovereign debt problems, the dollar might regain a lot of the ground that it has lost.

Looked at from this perspective, the Fed should halt its bond purchases, and people should bail out of their bullion investments and commodity speculations.

But there are other factors in play–the economy and continuing solvency worries about financial institutions. At a June 22 news conference, Federal Reserve chairman Ben Bernanke said: “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

Despite the fiscal stimulus of the large federal budget deficit and Obama’s $700 billion stimulus program, the economy’s growth and employment performance is not up to expectations. Indeed, as John Williams says, if inflation were fully measured, the economy’s growth could be negative, and if unemployment were correctly reported, the current rate would be over 22%.

An economy this weak offers no support to US-derived corporate profits or to the outlook for financial organizations. US corporations have made large investments abroad in the production of goods and services to sell to US consumers who have neither the income nor borrowing capacity to purchase. People without jobs and those with the low paid jobs provided by domestic service, such as hospital orderlies, bartenders, and waitresses, cannot afford to buy a house even at the depressed current prices. To the extent that financial institutions’ books remain filled with real estate paper, the financial crisis is not over.

Moreover, it is unlikely that the Dow Jones average can be sustained without growth in employment and GDP.

Can the Fed afford to sacrifice recovery, employment, and Obama’s reelection to save the dollar and price stability? This is the unasked and unanswered question.

The Day the Dollar Died

The Day the Dollar Died

Video

A hypothetical look at how the collapse of the US dollar may affect the world.

The first 12 hours of a U.S. dollar collapse! http://inflation.us

Posted November 28, 2010

 

Bernanke vs. Keynes

By Mike Whitney

November 23, 2010 “Information Clearing House” – Investment drives the economy. It creates jobs, builds factories, develops technology, and stimulates growth.  When investment falls, spending slows, unemployment rises, and the economy languishes in persistent stagnation.  

Currently, businesses are sitting on nearly $2 trillion, a record amount of cash. The corporate coffers are full because business leaders cannot find profitable outlets for investment. That’s because demand is weak. Consumers and households are unable to spend at precrisis levels because much of their personal wealth was wiped out when the housing bubble burst.  So, spending is down and borrowing is flat. There’s little demand for the products sold by big business, which is why they are sitting on so much money.

At the same time, retail investors continue to exit the markets. Last week marked “the 27th consecutive week of domestic fund outflows.” (zero hedge) Investors have been drawing-down their investments ever since the May  “Flash Crash” when the stock market plunged nearly 1,000 points in a matter of minutes. The credibility of the equities markets has been severely damaged by high-frequency traders who have been gaming the system with supercomputers that give them an edge over “mom and pop” investors.  Consider this:  “70% of the stocks that are traded are held for just 11 seconds”. This is not a market; it is a casino, which is why retail investors are leaving.

So, corporations are sitting on a mountain of cash and private investors are fleeing the market. Both of these will stunt future growth. Even so, the  markets have continued to edge upwards due to liquidity injections from the Fed, historic low interest rates, and the lightening-fast exchange of paper assets between high-frequency players. Meanwhile, the real economy has reset at a lower level of activity–the “new normal”.

The stock market is an important gauge of economic vitality. When stocks soar, the public becomes more optimistic and confidence grows. When confidence grows, consumers are more likely to spend which increases economic activity and boosts demand. It is a virtuous circle. Here’s what British economist John Maynard Keynes had to say on the topic:

“The state of confidence, as they term it, is a matter to which practical men always pay the closest attention. But economists have not analyzed it carefully.”

 Fed chairman Ben Bernanke’s efforts to restore droopy confidence have fallen short because he has taken the approach of a technician rather than a psychologist. Quantitative easing (QE) does not address the fears that people have regarding investment. Rather, it’s an attempt to push down long-term interest rates in the hope that it will lead to another credit expansion. But that assumes that the obstacle to investment is interest rates and not something more elusive, like fear or uncertainty. This is the basic flaw in Bernanke’s approach, he doesn’t see that investment requires confidence in one’s long-term expectations and that those expectations change when markets are in turmoil and outcomes are affected more by policy than fundamentals. When that happens, uncertainty deepens and investors pull back. Here’s an excerpt from Robert Skidelsy’s “The Remedist” (in the NY Times) which sheds a bit of  light on the question of uncertainty:  

“Keynes created an economics whose starting point was that not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty, and this made disaster an ever-present possibility, not a once-in-a-lifetime “shock.” Investment was more an act of faith than a scientific calculation of probabilities.”

Central bankers ignore the psychological aspects of investing at their own peril. Confidence matters. It’s Bernanke’s job to restore confidence via regulation, price stability and job-generating monetary policy. But the Fed chairman has failed in this regard and there are metrics within the system for measuring the magnitude of his failure.  They’re called bond yields and they show that investors are clinging to cash today as ferociously as they did on the day Lehman Brothers collapsed 2 years ago. Nothing has changed.  Bernanke has neither reduced widespread uncertainty or persuaded investors that it’s safe enough to test the water.

Quantitative easing is just more of the same; more fiddling with the financial plumbing instead of striking at the heart of the problem. Bernanke plans to purchase nearly $900 billion in US Treasuries from the banks (Note–$300 billion will come from the proceeds of maturing mortgage-backed securities) to push down long-term interest rates and, perhaps, stimulate some additional spending. More than 90% of the Fed’s purchases will be short-dated maturities. (6 month, 2-year, 5-year, 7-year, 10-year) Why? Because Bernanke wants to push investors out of “risk free” bonds into riskier assets, like stocks. It’s the Fed’s version of social engineering, like  zapping lab-rats onto the flywheel to earn their kernel of corn. This is not the role of the central bank. Bernanke’s mandate is “price stability and full employment”. It’s not his job to reconfigure the economy to suit the objectives of his bank constituents.

Private investment is flagging because ordinary working people were fleeced for nearly $13 trillion in a gigantic mortgage laundering scam. They need time to recoup their losses and rebuild their balance sheets. Many of them are still afraid to invest because they don’t think that Congress’s new financial regulations have fixed the system which they think is still rigged. So, they continue to  stuff money into their mattresses instead of putting it in the market.  Keynes explored why people hang on to their money (even when they are getting nothing in return) and here’s what he found:

  “The desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. . . . The possession of actual money lulls our disquietude; and the premium we require to make us part with money is a measure of the degree of our disquietude.” The same reliance on “conventional” thinking that leads investors to spend profligately at certain times leads them to be highly cautious at others. Even a relatively weak dollar may, at moments of high uncertainty, seem more “secure” than any other asset….

 It is this flight into cash that makes interest rate policy an uncertain agent of recovery. If managers of banks and companies hold pessimistic views about the future, they will raise the price they charge for “giving up liquidity,” even though the central bank might be flooding the economy with cash. That is why Keynes did not think cutting the central bank’s interest rate would necessarily — and certainly not quickly — lower the interest rates charged on different types of loans. This was his main argument for the use of government stimulus to fight a depression. There was only one sure way to get an increase in spending in the face of an extreme private-sector reluctance to spend, and that was for the government to spend the money itself.” (“John Maynard Keynes”, Robert Skidelsky, New York Times)

Repeat: “It is this flight into cash that makes interest rate policy an uncertain agent of recovery.”

Keynes was familiar with quantitative easing (although it was called something else at the time) and supported it as part of a larger fiscal strategy. But QE won’t work by itself nor will lower interest rates. The transmission mechanism (the banks) for implementing policy is broken, which means that stimulus must bypass the normal channels and go directly to the source—consumers, workers and households. There’s no need to nibble at the edges of the problem with fancy asset shuffling operations (QE) that achieve nothing. Fiscal remedies have been used for over a half century and they work just fine. And, there’s no need to reinvent the wheel either. What’s needed is a second round of stimulus. That’s all. Just drop the pretense, and get on with it. Time’s a wasting.

Link to original article

Economic Recovery: The View From Bernanke’s Helicopter

Joel Bowman, reporting from Buenos Aires, Argentina…

This week, the world caught a glimpse of what Henry Hazlitt might have called the “seen” – the primary, most conspicuous consequence of a preposterous economic policy. Of course, it is the “unseen,” what comes next, that we ought to be worried about.

We are referring here to the dawning of the QE2 era. In the shadow of the midterm elections, Federal Reserve Chairman Ben “full steam ahead” Bernanke announced the second round of quantitative easing, or, for us non econo-scholars, “money printing.”

In a nutshell, Bernanke committed the Fed to purchase $600 billion in Treasuries over the next 8 months. In addition, those nasty mortgage securities the Fed gobbled up during operation QE1 will continue to be rolled over into Treasuries. All in, the total price tag comes to $875 billion brand spankin’ new dollars…with the option to open the spigots further should inflation (the CPI version) come in under what the Fed deems as “healthy.”

Markets rejoiced over the news, sending the major indexes up 2…3…4%. Gold rallied to within $3 of the $1,400 per ounce mark yesterday. Silver leapt out of the gates too…as did just about everything else priced in dollars. Oil made a charge towards $90 per barrel and the “ags,” already on a blistering run this year, continued to soar.

Behind the scenes, the dollar took it firmly on the chin. Our mates over at The 5 provided the following chart, showing the once-mighty greenback’s response to Bernanke’s systematic currency debasement:

The dollar is now more or less at parity with the Canadian loonie, the Aussie dollar and the Swiss franc.

But not everyone was pleased with the Fed’s magic monetary potion.

Brazil’s central bank president, Henrique Meirelles, said “excess liquidity” in the US economy is creating “risks for everyone.” The Chinese, who hold an uncomfortably large quantity of ever-depreciating dollars, were equally miffed. Vice Foreign Minister Cui Tiankai said, “many countries are worried about the impact of the policy on their economies.” Tiankai went on to say that the US “owes us some explanation on their decision on quantitative easing.”

Bernanke defended his position to a group of college students in Jacksonville, Florida, on Friday. “Our first objective, the first goal that we have, is to meet our mandate to get price stability and maximum employment in the United States,” he said. “A strong US economy, a recovering economy, is critical not just for Americans but it’s also critical for the global recovery.”

Has Bernanke stumbled upon the ultimate formula for wealth everlasting? Has the man who once said he would drop money from helicopters if the need arose cracked the code to eternal, effortless prosperity? Just print money and be happy?

“If this were true,” ventured Bill Bonner earlier this week, “it was a giant step forward for humanity, at least equal to discovering fire, creating Facebook or blowing up Nagasaki. Jesus Christ multiplied loaves and fishes. But He had something to work with. The Federal Reserve multiplies zeros…creating money – out of nothing at all. If it can really do the trick, we are saved. The legislature can go home. It no longer needs to worry about raising taxes or allocating public resources. Government can now buy all the loaves and fishes it wants. And give every voter a quart of whiskey on Election Day.”

Readers may feel a healthy welling of skepticism here. To be sure, a strong economy, a recovering economy, is important…but debasing the nation’s currency won’t get you there. If a country could grow rich and prosperous by simply allocating printed money to troubled sectors of its economy, Zimbabwe would be the jewel of the African continent and there would be a statue of Gideon Gono, her former central banker, in Harare’s town square. If the Weimar Republic had been able to make WWI reparations in 50 billion mark notes, the world may have avoided the unmitigated catastrophe of WWII. And, to belabor the point, if the Romans were allowed to finance their foreign escapades by simply handing out I.O.U.s, Edward Gibbon’s classic, The Decline and Fall of the Roman Empire, might seem a little odd on the bookshelf of history.

For the moment, the markets have awarded Bernanke’s stimulus plans a vote of confidence. That is the immediate, seen, effect. Like an athlete on steroids, they are looking to break records, to rewrite their own history books. The Fed has them off to a flying start, but pretty soon the effect of the drug will wear off. Reality will kick in. It is then that the “unseen” effects of trying to cheat the system will come into plane view. The global economy, built on the back of a strong, stable world currency, will once again come to realize that history makes no excuses and does no man any favors.

Regards,

Joel Bowman
for The Daily Reckoning

Quick Post-Election Thought

Should be interesting to see the impact on business now that the election’s over.  Businesses hate making decisions in a vacuum, and now that the election’s over maybe they’ll loosen up a little.  Plus, the results should be business-positive.  Basically, I expect to see a lot of gridlock in Washington, which I think businesses will like at this juncture.  The Federal Reserve will still be running amok printing dollars, but at least maybe we’ll see some cost-cutting out of Washington; and maybe Obama’s & the liberal Democrats’ zeal to raise taxes will be held in check by the Republican conservatives.

At some point I expect another “surprise” as the banks come to grips with the massive underwater derivative positions they’re still sitting on (positions that are hidden by the phoney-baloney accounting the government’s letting them use to hide the losses on their balance sheets).  Increasing home foreclosures will just put more pressure on the banks as the derivative values plummet further and the banks find themselves sitting on a large inventory of unsellable homes. I’m just not sure of the timing of this “surprise”, but I expect it this year or early next year.  Naturally, the banks and the government are doing everything they can behind the scenes to hide the mess; but it’s there and it’s not going to go away.  Just look at all the bank failures we’ve had.  I expect to see some big bank names added to the failure list this year.

WARNING SIGNALS FLASHING!

“August New Orders for Durable Goods Remained in Great Depression Territory…

Economic and Liquidity Crises Remain Ongoing
No Recovery in New Orders or Housing
Fed Pushes Monetary Base to Record High

From the series peak in 2006, the current order level is down by 28.6%, within great depression territory per SGS definition of a greater than 25% peak-to-trough decline in economic activity…”

BLS Revision Nightmare: March 2009 Payrolls Overstated by 824,000
Birth-Death Model Falsely Boosting Jobs Reporting in Recession Environment
Monthly Jobs Loss of 263,000 (Payroll Survey) versus Monthly Employment Decline of – 710,000 (Household Survey)

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
FLASH UPDATES – September 25 and October 2, 2009

“The Recession is Over” talk has become Chic among the Trendy Big Media Talking Heads.

The Fundamentals, Technicals, and Interventionals for the Equities Markets, and certain key Commodities, tell a different story.

Let’s consider certain of these Realities, and how we might best protect and profit.

Given that U.S. Consumer/Taxpayers, and, often, Mortgage holders, are 70% of the U.S. Economy, their present and prospective Economic Condition is quite relevant to future Economic and Markets’ Performance. This Sector has relied on and still to a large degree does still rely on credit, But:

“Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation…

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

“There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.” ”

US credit shrinks at Great Depression rate prompting fears of double-dip recession
Ambrose Evans-Pritchard, International Business Editor, 14 Sep 2009

And from a Deepcaster reader:

“Evans-Pritchard suggests that the Fed has been forced to stop wholesale money creation [out of thin air] because of pressure from China, which fears dollar devaluation on account of its huge dollar holdings. Why don’t I believe that the Fed has slowed down its ‘quantitative easing’?

It’s because the US government is still spending far in excess of revenues, and where does it get the money to make up the difference except from selling bonds?

And who believes that foreigners and domestic buyers continue to be so stupid that they are buying those bonds in the required quantity? Since the Treasury has abdicated from printing its own money [Lincoln’s and JFK’s greenbacks], the Fed has to create money [out of thin air] to buy the bonds.

I think the Fed is still doing it, only more secretly, thus giving rise to the probably-false rumor that M3 is shrinking, or at least is rising at a slower pace. I am confident that increasing tons of electronic US$s are in central bank and banker hands, even if Main Street, USA, is hurting for lack of credit.

The risk of a double-dip Depressions is very real. Nevertheless, the assumption that it will be accompanied by price deflation may be misplaced. A double-dip Depression in an INFLATIONARY price environment seems as likely.”

This Astute Deepcaster Reader has got it right.

But a key consideration is that the Inflation we are Now (still!) experiencing is Hidden by the gimmicking of Official Statistics.

Shadowstats.com calculates the numbers the old-fashioned way they were calculated before the era of “Political Statistics” began in earnest in the 1980’s and 1990’s. An apparent goal of this distortion of key Statistical Realities is to hide Unpleasant Facts (e.g. the dramatic reduction in $U.S. Dollar purchasing power) from Investors world-wide.

Indeed, it is essential for Investors today to get the Real Numbers versus the gimmicked Official Statistics.

Consider, for example, the Official Statistics versus the Real Statistics courtesy of Shadowstats.com

Official Numbers	vs.	Real Numbers
Annual Consumer Price Inflation reported September 16, 2009
-3%		5.5% (annualized September Rate)
U.S. Unemployment reported October 2, 2009
9.8%		21.4%
U.S. GDP Annual Growth/Decline reported September 30, 2009
-3.9%		-6%

So we are facing the worst of both Worlds – living with the deflation-like consequences of an increasingly slowing and deleveraging economy, but in a fundamentally price-inflationary environment. In other words we are facing a Hyperinflationary Depression and it is hard to see how it can be avoided given the following overview courtesy of Ambrose Evans-Pritchard.

“Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise…

Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects. The jobless army in Spain will be reduced to E100 a week; in Estonia to E15…

Car sales were up 28 percent in August, but only by stealing from the future…

Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9 percent in August. New house sales are stuck near 430,000 — down 70 percent from their peak — despite an $8,000 tax credit for first-time buyers. It expires in November.

We are moving into a phase when most OECD states must retrench to head off debt-compound traps.

Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.

If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China’s exports were down 23 percent in August; Japan’s were down 36 percent; industrial production has dropped by 23 percent in Japan, 18 percent in Italy, 17 percent in Germany, 13 percent in France and Russia, and 11 percent in the US.

Call this a “V-shaped” recovery if you want. Markets are pricing in economic growth that is not occurring.

The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world…

Fed chairman Ben Bernanke spoke in April 2008 of “a return to growth in the second half of this year”, and again in July 2008 that growth would “pick up gradually over the next two years.”

He could have thought such a thing only if he was ignoring the money data. Key aggregates had been in free-fall for months.

I cited monetarists in July 2008 warning that the lifeblood of the Western credit was “draining away.” For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal…

But you ignore the data at your peril.

Draw your own conclusion. Western central banks will have to “monetize” deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.”

Huge monetizing still needed to avert debt deflation
Ambrose Evans-Pritchard, The Telegraph, London
Saturday, September 26, 2009

Indeed! … Central Banks will have to Monetize Debts on a huge Scale to Stave off Crises!

But one critical “Hooker” is that it is now Apparent that certain Leading Central Banks — primarily The Fed – have for years already been monetizing debt covertly.

This Monetization is Part and Parcel of their Overall Scheme of Overt and Covert Markets Intervention and Manipulation.

But in conducting this increased monetization The private for-profit Fed (doubtless with cooperation from its Cartel* of key Central Bankers and Favored Financial Institutions) appears to have cleverly used the Monetization as yet another tool to continue to manipulate the Markets, especially Equities, to their Fed-desired levels.

*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2008 Letter containing a summary overview of Intervention entitled “A Strategy for Profiting from the Cartel’s Dark Interventions & Evolving Techniques” and Deepcaster’s July, 2009 Letter entitled “A Strategy For Profiting From The Cartel’s Dark Interventions & Evolving Techniques – II” in the “Latest Letter” Cache at http://www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”

It is not too much of an oversimplification to say that throughout the Summer, 2009 the Fundamentals and, often, key Technicals, signaled that the Equities Markets should take a dive.

Yet The Cartel Intervenors have kept Equities headed up, riding on massive sugary injections of liquidity and Intervention. Indeed there is a remarkable correlation between the rallying performance of the Equities Markets since March, 2009 and The overt implementation of the Fed’s monetization, which also began in earnest in mid-March, 2009. (The evidence indicates that Covert Monetization has been going on for years.)

Recall that “quantitative easing” just means Fed monetization of U.S. Treasury Debt – the private for-profit Fed prints (keystrokes) money out of thin air to buy U.S. debt thus keeping interest rates lower than they would otherwise be. But while very negative long-term financial and economic systemic consequences flow from this monetization, in the short-term the consequences can appear beneficial. Witness the Equities Markets Rally.

To be numerate about it, consider the Key correlation between the post mid-March, 2009 Equities Market Rally and Monetization. Since the beginning of the overt Quantitative Easing (March, 2009) the value of Total Securities Held Outright on the Fed’s Balance Sheet (the public Balance Sheet, that is, — even Congress has not been able to coax The Fed to reveal its private balance sheet) has increased by $917 billon – from $580 billion to about $1.5 Trillion as we write.

In the same period the S&P increased from 720ish to over 1025 as we write.

How has this monetization likely become reflected in the S&P?

The Fed’s Primary Dealers (read Goldman Sachs, J.P. Morgan Chase et. al.) “rent” U.S. government securities and then collateralize them. They use the proceeds to make the Equities Markets indices rise (since Mid-March, 2009) in spite of Fundamentals and Technicals which, sans Interventions, would dictate otherwise.

Thus it appears the Fed is using Monetization as yet another Tool – in addition to TOMO’s, POMO’s, the TARP, and the TALF etc. (see Deepcaster July, 2009 letter in the ‘Latest Letter’ cache at www.deepcaster.com for more details) – to manipulate the Markets.

Of course, this chicanery is lethally detrimental to the U.S. Dollar in the long run and to the financial system and economy as a whole. It is Moral Hazard in spades.

In particular, it is injurious to holders of the U.S. Dollar-denominated assets such as investors world-wide, and U.S. dollar-reliant retirees. The purchasing power of their Dollars continues to diminish, as Rep. Ron Paul has pointed out, but is somewhat masked by the gimmicking of Official Statistics. (see below)

On the other hand, those who are aware of the Cartel Manipulation “Game” can use the knowledge to their advantage in profiting and in protecting wealth.

The Strategy – Guidelines for Identifying Opportunities for Profit and Protection

1. 1. Get the Real Data. As many Investors suspect, Crucial Official Government and Agency Economic and Financial Data are of highly questionable validity. The Data set forth above from shadowstats.com is a good starting point.Educate yourself about the realities of the marketplace using Alternative Data Sources such as Deepcaster, Gold Anti-Trust Committee (www.gata.org), and shadowstats.com. Gathering and staying attuned to authentic information regarding the marketplace can save one much financial grief as well as position one for profit.
2. 2. Take Account of both Overt and Covert Cartel Intervention. Many of these same investors who suspect Official Statistics also rightly suspect that the private-for-profit U.S. Federal Reserve in conjunction with certain other Central Banks and Favored Financial Institutions overtly and covertly manipulate Major Markets. But they might not be aware that covert Market Interventions and Data Manipulation are likely far more pervasive than generally believed, as detailed in Deepcaster’s articles mentioned above.As well, such investors may not have thought systematically about how one copes with and profits from such Intervention and Data Manipulation.

   Consider one example of Cartel Intervention: the Traditional and Legitimate Safe Haven from inflation, deflation, and risk, is Gold. Yet, Gold has, during the recent periods of extreme financial market turmoil, been taken down in price from its highs of over $1000/oz down to around the mid-$700 level (e.g. in 2008) when it should have skyrocketed.

   For example, in early March, 2008 Gold was over $1000/oz. when the Bear Stearns Crisis revealed the fragility of the Financial System. Gold should surely have skyrocketed then. Instead, it was brutally taken down. Were its price not manipulated, Deepcaster’s view is that its price would be over $3,000.00 per ounce today.

   Deepcaster and others, including the Gold AntiTrust Action Committee, have offered considerable evidence that the Cartel* of Central Bankers and Favored Financial Institutions are the culprits behind these dramatic and devastating Takedowns. See Deepcaster’s Alert of 12/25/07 “A Strategy for Profiting from Cartel Intervention in Gold, Silver, Crude Oil and Other Tangible Assets Markets” in the Alerts Cache at www.deepcaster.com, which inter alia provides a Strategy for insulating oneself from Cartel Takedowns and building a Core Position in Gold and Silver.

   But there is a Profitable Refuge from Market Intervention and Data Manipulation. That Profitable Refuge lies in the Strategy described in the aforementioned Alert, certain characteristics of which we outline here:

3. 3. Recognize that the “Buy and Hold” strategy rarely succeeds anymore. The Eminence Grise of Newsletter writers, Harry Schultz perhaps put it the best when he stated that “buy and hold no longer works anymore, even with Gold.” Recent Market Developments should suffice to demonstrate this principle!
4. 4. Track the Covert Interventionals as well as the Technicals and Fundamentals and Overt Interventionals. Tracking the Footprints, as it were, of the Covert Interventionals (e.g. the Repo and TSLF Pools) daily can often, but not always, give one excellent clues about The Cartel’s next likely Interventional Move – - such clues are essential to preserving wealth and making profits. Deepcaster’s tracking of The Interventionals, for example, allowed him to recommend five short positions going into September, 2008, (i.e. before the Market Crash) all of which he has subsequently recommended be profitably liquidated. Deepcaster’s recent article “Cartel Angst Equals Investor Advantage” (9/18/2009 can be found in the ‘Articles by Deepcaster’ cache at http://www.deepcaster.com) lays out a specific strategy for use in investing and trading in the heavily manipulated Gold and Silver Market.
5. 5. Perhaps most important, be prepared to go both long and short Major Market Sectors – - long near the bottoms of Interim Takedowns and short near Sector Tops. The Interventionals are essential to helping identify these tops and bottoms. In Deepcaster’s view, it will be increasingly difficult to achieve a net profit for one’s portfolio if one is unwilling and/or unable to “go short” as well as “long”.The Blossoming of the 200% and 300% (and other) leveraged ‘short’ and ‘long’ ETF’s described above provide a superb opportunity to go short and long with ease, but not, as we explain in recent articles, without risk.
6. 6. Be aware of and Active in the overall Geopolitical Landscape in order to gain an adequate understanding of how that Landscape might affect the present and future direction of the Markets. It is essential that one understand the motivations of the major players in the market and the resources at their disposal.For example, a Major Motivation of the U.S. Federal Reserve and other key Central Banks is the protection and enhancement of the legitimacy of their Treasury Securities and Fiat Currencies as Measures and Stores of Value. Therefore, one can understand that one of their Major Goals will be to attempt de-legitimize Gold, Silver and the Strategic Commodities, including especially Crude Oil, as Stores and Measures of Value. With this in mind, the periodic takedowns of Gold and Silver prices and, since July, 2008, of Crude Oil, become understandable. Moreover, such an insight applied daily to the market can result in a tremendous edge in understanding market performance, present and future.

   As well, regarding the assets at The Cartel’s disposal, if one tracks the Repurchase Agreement and TSLF Pools regularly, as Deepcaster does, and is aware of the other Interventional tools that The Cartel has at its disposal, then one gains a considerable edge.

7. 7. Finally, Hard Assets Partisans have the opportunity to become involved in Political Action to diminish the power of The Cartel. It is truly outrageous that the average unsuspecting citizen, and prospective retiree, can and does put his hard won assets in Tangible Assets and/or Retirement Accounts only to have those assets effectively de-valued by Cartel Takedowns, U.S. Dollar Devaluation and other Cartel actions. This is extremely injurious to many average citizens in many countries who are saving for the rainy day or retirement and have their retirement and/or reserves effectively taken from them. In order to help prevent this and similar outrages, we recommend taking three steps:a) Become involved in the movement to Audit and then abolish the private-for-profit U.S. Federal Reserve as Deepcaster, former Presidential candidate Rep. Ron Paul, and legendary investor Jim Rogers, all have advocated. The ‘Audit The Fed’ Bill is H.R. 1207 (and has over 280 co-sponsors in the House) and S604 in the Senate; and The Abolish The Fed Bill is H.R. 2755. www.carryingcapacity.org is a nonprofit organization which actively supports these bills.

   b) Join the Gold AntiTrust Action Committee, which works to eliminate the manipulation of the Gold and Silver markets (www.gata.org). GATA is a nonprofit organization, which makes a great contribution by gathering evidence regarding the suppression of prices of Gold, Silver and other commodities.

   c) Work to defeat The Cartel ‘End Game.’ Deepcaster has laid out the evidence regarding the Ominous Cartel “End Game” in “Coping with Power Moves in the Cartel’s ‘End Game’ “ (04/24/2009) in the ‘Articles by Deepcaster’ cache at http://www.deepcaster.com. Clearly The Cartel is sacrificing the U.S. Dollar to prop up Favored International Financial Institutions and to maintain its power. But this sacrifice cannot continue forever. See Deepcaster’s July 2008 Letter in the ‘Latest Letter’ Archives at http://www.deepcaster.com.

 

Conclusion:

If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable profit along the way.

Additional insights and details regarding this Strategy, which are essential to profiting from The Cartel’s Policies, are laid out in Deepcaster’s article of 3/06/09 entitled “Investor Advantage: Revisiting The Cartel’s ‘End Game’ ” in the ‘Articles by Deepcaster’ cache at www.deepcaster.com.

Protection and profit require Proactivity and attention to the Interventionals, Fundamentals and Technicals, not “Buy and Hold.” We reiterate, “Buying and Holding” for the long term rarely succeeds anymore as current market conditions attest. The one exception to this is physical Gold and Silver acquired near the Interim bottoms of Cartel Takedowns and intended to be held for the long term as a part of one’s Core position.

Indeed, the Key Point of the Strategy for Protection and Profit is careful attention not only to the Fundamentals and Technicals but also to the Interventionals. These Overt and Covert Cartel-generated Interventions have the power to move markets as those who study the matter can attest.

Thus, the Key to Profit and Protection is a Strategy: Successful Investors must become Long-Term Position Traders, with their trading choices informed by the Interventionals, as well as the Fundamentals and Technicals. Moreover engaging in the Actions suggested above can help prevent The Cartel’s obtaining Superpower status, and aid in achieving wealth protection and profits as well.

“The only thing more certain than Death and Taxes is that when anyone from the Federal Reserve speaks or writes, it is with the specific purpose of misguiding the public.”

John Pugsley, Chairman, The Sovereign Society

Best Regards,
Deepcaster

Bernanke’s Remedy: Pump More Blood Into a Corpse

By Mike WhitneyInformation Clearing House” — Credit is everything. Without credit expansion there’s no recovery because there’s no pick-up in overall demand. But credit growth is going backwards. The banks have tightened lending standards and the pool of credit-worthy applicants has vanished. Bank lending is off 14 per cent since October 2008. Private credit is presently decreasing at a 10.5 per cent annual rate. The situation is getting worse, not better.

October 05, 2009 “

From the UK Telegraph:

“Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation…

“Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an ‘epic’ 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

“’For the first time in the post-Second World War era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,’he said. (Ambrose Evans-Pritchard, “US credit shrinks at Great Depression rate prompting fears of double-dip recession”, UK Telegraph)

Foreclosures, delinquencies and defaults are all up. Foreclosure activity is currently at 300,000-plus per month and rising. A huge shadow inventory is being kept off-market to maintain prices. The drip, drip, drip-effect of excess inventory dumped onto the market will keep housing in the doldrums for a decade. Homeowners are unable to borrow on underwater homes. Everything points to a long-term slump in spending.

Corporations are finding it harder to roll over their debt, bank loans are defaulting at a historic pace, and commercial real estate is imploding. Credit destruction is unprecedented, massive and ongoing. The capital hole is bigger than the Fed and bigger than the Treasury. It can’t be plugged with liquidity alone.

For now, the government can fiddle GDP with $800 billion infusion of stimulus, but what happens when the political will for more deficit spending dissipates? What happens when foreign investors demand the Fed stop writing checks on an overdrawn account?

The Fed has fixed nothing. The banks are still underwater, output is at record lows, and unemployment is climbing towards 10 per cent. Fed chair Ben Bernanke’s multi-trillion dollar rescue programs have kept a wobbly system upright, but nothing more. The economy’s underlying problems are still the same. The Fed’s quantitative easing (monetization) program has sent stocks surging, but done nothing to stimulate the economy. That’s because equities bubbles have negligible impact on aggregate demand; there’s no knock-on effect. The real economy is still flatlining while Wall Street parties on. Bernanke’s plan has been a total wash.

The government cannot deficit spend forever. Eventually, GDP will have to depend on wage growth and credit expansion. Given the political and institutional bias against labor, (and opposition to wages that rise with productivity) the only way to fuel the economy is through credit growth. And there’s the rub. Households have lost nearly $14 trillion in wealth since the crisis began and are in no position to resume borrowing at pre-crisis levels. Consumers are cutting back on spending and paying down debt. They have no other choice.

This is from Bloomberg News:

“Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.

“Only 8 per cent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 per cent expect to ‘stay the course,’ a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.

“Underscoring consumers’ austere attitudes, 77 per cent of respondents said they have cut back on spending during the past year, 59 percent said they have made a bigger effort to pay off debts and 48 percent have put more money aside as savings.” (Bloomberg News)

Savings are up and spending is down. The economy is headed into a long-term funk; the “new normal”. The Fed’s sleight-of-hand programs and Obama’s stimulus elixir haven’t changed the prevailing downward trend. If anything, they have made matters worse. Consider this from Janet Tavakoli, author of “Dear Mr. Buffett” in an interview with Max Keiser:

“Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I’ve been correct, and the government has been wrong. Here’s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we’ve seen history’s greatest fiscal and monetary expansion, but it hasn’t worked. Debt levels of consumers and business exceed the capacity to repay.” (Janet Tavakoli On The Edge With Max Keiser)

The Fed has done nothing to restructure the financial system so the same problems which killed Lehman and thrust the global economy into a tailspin, persist today. When the stimulus runs out and the Fed ends its $1.25 trillion purchase of (Fannie and Freddie) mortgage-backed securities and $300 billion in US Treasuries, interest rates will rise, housing prices will tumble, and the economy will nosedive. Bernanke will be forced back to the printing presses, the only hope for reversing the deflationary spiral. This will trigger the next crisis, a run on the dollar.

This is from an article by Alice Schroeder of Bloomberg News:

“In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed……Right now, the American economy is worth less than the value implied by the market value of its obligations.” (Gold Tells You U.S. Bubble Hasn’t Popped Yet: Alice Schroeder, Bloomberg)

The system crashed because it was built on the false assumption that an unregulated shadow banking system could generate an infinite amount of credit without sufficient capital. This proved to be wrong. Capitalism requires capital. The trillions of dollars in loans, complex debt-instruments, off-balance sheet operations and derivatives contracts were all stacked atop a tiny scrap of capital which eventually collapsed beneath the weight of the debt. This system (securitization) which created the mess, cannot be restored. It required a strong currency, artificially low interest rates, and credulous investors who were unaware of the inherent risks of illiquid assets. Those conditions no longer exist, nor have they for more than two years. Even so, the Fed continues to pump blood into a corpse hoping for some fleeting sign of life. This is why an even bigger crisis cannot be too far off.

Link to Article

Where Has all the Money Gone? … This is a Recovery?

By Mike Whitney

The slight rebound in housing looks a lot different when one considers how much the Fed is meddling in the market. Fed chair Ben Bernanke has purchased $240 billion in US Treasuries to keep long-term interest rates artificially low while–at the same time–buying $740 billion in Fannie Mae and Freddie Mac mortgage-backed securities (MBS) to provide the financing for new home buyers. It’s the double-whammy; and that’s not all. Bernanke plans to continue buying agency MBS (monetization) until he reaches $1.45 trillion, which will make Uncle Sam the biggest player in the housing market by far. How’s that for central planning?

Ironically, the funds for Bernanke’s housing market rescue plan were never approved by Congress, which means that the Fed committed nearly-$2 trillion with “no down” payment. That makes the Fed’s Treasury buyback program the biggest subprime loan of all time. 

   The fact is, all the recent gains in home sales are all the result of direct government intervention. If interest rates were allowed to rise (as the would naturally) or if  Congress withdrew its $8,000 first-time home-buyer subsidy, or if FHA tightened its loosey-goosey financing (which requires just 3.5% down payment and low FICO scores, the same as subprime!) home prices and sales would continue to drop at a 10 to 15 percent year-over-year rate. Housing has stopped plummeting for one reason alone; the Fed bought the market.

  The same rule applies to the stock market, where the Fed’s quantitative easing (QE) and liquidity injections have sparked a 6-month bear market rally sending equities to the moon. It’s all Fed intervention. A recent report by Egan-Jones Ratings And Analytics traces the Fed’s lavish liquidity handouts pointing out the precise sectors of the market that have been most effected:

  “Massive monetary stimulus is good for asset prices (stocks, bonds, houses, commodities) in a weak pricing environment and soft economy. The Federal Reserve has doubled its balance sheet from $1 Trillion to $2 Trillion effectively adding $1 Trillion to our economy. In addition, the Fed has through an alphabet soup of facilities i.e. Term Auction credit, Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Term Asset Backed Securities Loan Facility, Primary Dealer and other Broker Dealer Credit, Other Credit Extensions, Term Facility, Maiden Lane LLC one, two and three, Money Market Investor Facility, added approximately $3 Trillion in loans and over $5.5 Trillion in guarantees of private investments. While these latter funds are technically loans, they get renewed regularly.

So where has all the money gone? The chart below shows the rise in the stock market causing the valuation to be somewhat extended in our view – some liquidity found a home here. Large rises in just the last month in small cap stocks, plus 17%; most shorted stocks, plus 17%; stocks with the lowest analyst rating out performing those with the highest rating by 380 basis points, all suggest some speculation……
Commodities have had a nice rebound from their lows with copper hitting new highs. High yield bonds have out performed investment rated bonds as investors are willing to bet on a faster recovery and start to reach for yield.
These are indications of excess liquidity finding outlets.” ( “Fundamentally…Disconnected”  Egan-Jones Ratings And Analytics, hat tip zero hedge.com)

Let’s summarize: The Fed is goosing the stock market and subsidizing the housing market. Bernanke has slashed interest rates to zero percent, underwritten the entire financial system with $12.8 trillion in loans and guarantees, and flooded the financial system with liquidity. The Fed has  also doubled its balance sheet to $2.08 trillion which is the equivalent of dropping the Fed Funds rate to -1 percent.  As Mark Gongloff of the Wall Street Journal opines, “The Fed is essentially paying people to borrow money.”

Indeed, the Fed has done its level-best to keep the market from correcting, but isn’t it a bit of a stretch to call it a “recovery”?

In truth,  Bernanke is in a pitch-battle with deflation and the outcome is still uncertain. Deflation has spread to every sector of the economy; retail, travel, luxury items, autos, building supplies, home furnishings, electronics. No business has been spared. The C.P.I. inflation-gauge has slipped into negative territory and is now at -2.1 percent. Prices are headed down and spending is falling fast. Unemployment is soaring, wages are dropping, and the average work-week has been sliced to just 33 hrs. And, as we noted, housing prices have flattened out, but only because of unprecedented government intervention into the market. Otherwise, real estate would still be stretched out on a marble slab.

  Most people think it should be easy to beat deflation. They think all the Fed has to do is flip a switch and print more money. But there’s more to it than that, especially when trillions of dollars in credit suddenly vanishes in a poof of smoke. That’s what happened last September when Lehman Bros imploded and reduced the financial system to rubble. Global stock markets crashed, interbank lending collapsed, capital flows stopped, and payrolls and inventories were slashed. The gigantic credit-purge thrust the economy into deflation, a condition which persists to this day.

 Economist Irving Fisher tackled the problem of deflation 76 years ago  in his masterpiece “Debt-Deflation Theory of the Great Depression”. Fisher showed how over-indebtedness eventually triggers a chain of events beginning with debt liquidation and ending in distress selling, huge capital losses, and violent economic contraction; the same challenge that Bernanke faces today.

Irving Fisher:

“Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized….

On the other hand, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.” (Irving Fisher)

Clearly,  Bernanke is following Fisher’s advice and doing everything in his power  to reflate asset prices and avoid a bigger crash. But it’s still too soon to tell whether his strategy will work. We’re still in the early innings of a humongous system wide credit-implosion event.  
 
 The term “deflation” relates to a drop in the general price level, something not seen in the United States since the Great Depression. As economist John Bellamy Foster points out,  deflation squeezes corporate profits even if costs and productivity remain the same.  When profits fall, heavy layoffs and wage reductions ensue.  

John Bellamy Foster:  “But the real fear of deflation has to do with the enormously bloated financial structure and the huge debt load of the economy…  In a deflationary economy,  debt has to be paid back with bigger dollars (worth more over time).  This then creates a debt-deflation spiral, enormously accelerating financial meltdown.  As Fisher put it, “deflation caused by the debt reacts on the debt.  Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which it causes.”  Stated differently, quoting from The Great Financial Crisis (p. 116), “prices fall as debtors sell assets to pay their debts, and as prices fall the remaining debts must be repaid in dollars more valuable than the ones borrowed, causing more defaults, leading to yet lower prices, and thus a deflationary spiral.” (Interview of John Bellamy Foster on the Great Financial Crisis, Monthly Review) http://www.monthlyreview.org/mrzine/foster270209.html

It is this “deflationary spiral” that Bernanke is trying to avoid at all cost, even if he destroys the currency in the process. (Which he appears to be doing) Despite the Fed chairman’s steely resolve, the economy has continued its historic nosedive. Consumer spending is falling and households are limiting themselves to the bare essentials. (US households lost $14 trillion in wealth in the last year alone.) Families everywhere are paring back their credit, paying down their debts and rebuilding their nest eggs with what’s left from their skimpy paychecks. Unfortunately, what’s good for the family balance sheet is poison for the economy.

From Bloomberg News: “U.S. consumer credit plunged more than five times as much as forecast in July as banks maintained more restrictive lending terms and job losses made households reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991. (Bloomberg)

US households and consumers have never been as strapped as they are today. They’re dealing with recession the only way they can, by pulling back and hunkering down. That will make it even harder for Bernanke to resuscitate the economy. There’s simply no way to force people to borrow when they’re not interested.  

Bernanke’s deflation-fighting strategy needs to be revamped. The country doesn’t need another credit bubble. The surge in delinquencies, defaults and personal bankruptcies all suggest that the era of easy money and lax lending standards is over. Why not “hang it up” for good. The Fed should be focused on rebuilding the economy from the ground up, paying particular attention to aggregate demand. Demand is what keeps the mighty GDP-flywheel in motion. Wall Street likes to stimulate demand through credit expansion and bubblenomics so they can skim fat bonuses on the front end and then bail out before stocks crash. But this perennial “boom and bust” cycle get’s old for ordinary working people, who just want a little stability and a paycheck that keeps pace with inflation. The best way to avoid “demand shock”–which is at the heart of every recession–is through wage growth and full employment. It’s that simple. When workers get better pay, they buy more more stuff and the economy thrives. Everybody wins!

European Economic Recovery – The ECB May Have Got It Right

I have read a number of articles and research report which throw darts at the European Central bank for not being more aggressive with ‘quantitative easing’ and stimulus efforts. These latest reports indicate to me that the ECB may have played it ‘just right’. I know it won’t be clear sailing from here, and that the European recovery will still have some bumps, but the ECB left some powder dry and will be able to step in again if needed. And if the recovery sticks in Europe, the ECB won’t have near as much manufactured liquidity to pull in from the markets.

And I’m sure some readers will question how I can trumpet the recovery in Europe while at the same time believing the recovery here in the US won’t have legs. The main difference is what is fueling these recoveries. While many, including your current Pfennig writer, are in the opinion that the nascent recovery here in the US has mainly been driven by government stimulus; you can’t say the recovery in Germany and France is being driven by government intervention. Digging into the recent positive data here in the US shows the government is responsible for most of the spending; the private sector has largely stayed on the sidelines. The recovery in Europe, on the other hand, is being fueled by increased consumer confidence and internal private sector demand. In fact, many of the dollar bulls have continually chastised the European governments for not taking a more aggressive role in providing stimulus to their economies.

England and the US have yet to feel the inflationary impact of their budget busting ‘quantitative easing’ programs; but believe me, inflation is lurking just around the corner. While the US’s Bernanke and UK’s Darling have chosen to ignore the future consequences of these programs, Trichet and the ECB always kept a hawkish eye looking toward the future.

Chris Gaffney, CFA
Vice President
EverBank World Markets

Unemployment… Auto Sector… Retail Sector… Inflation Down the Road?… Credit Freeze… More Economic Stilumus?… Bank of England (BOE) Says No!

Chris Gaffney, CFA, Vice President, EverBank World Markets…

Weekly jobless claims released in the US yesterday morning fell below 600k for the first time since January but the continuing claims continue to rise, hitting another record. The slight improvement in the weekly numbers was distorted by the automotive sector. Car companies typically shut down plants in early July in order to change over to the new model year. Bankruptcy forced many of these plants to shut down much earlier than normal, and some temporarily started up production again during the past few weeks.

Chuck would have a field day with the jobless claims, as the government economists were hard at work ‘massaging’ the numbers to give everyone a more ‘clear’ picture of the data (why can’t they just report the actual number of people filing for unemployment?). As Chuck has pointed out, the Labor Department adjusts the figures using seasonal and demographic trends, creating ‘ghost jobs’. Since automobile plants typically shut down in the first weeks of July, the labor department expected a large increase in claims during this time. In order to offset these ‘seasonal factors’, the brain trust at the Labor Department added back a number of jobs in order to balance out the expected temporary layoffs in the auto sector. You would think the Labor Department would realize that most of these automobile workers were already idled, and therefore keep the adjustments to a minimum. But that would be too logical, so they just went ahead and ‘seasonally adjusted’ the claims as if this was a typical July for the auto sector.

The continuing claims illustrate a much clearer picture of the US job market, with unemployment spiking up to 9.5% in the US. The news from the retail sector was also gloomy, as the ICSC Chain Store Sales fell another 5.1% YOY during the month of June. Inventories also continued to shrink for a ninth month in a row in May to just over $400 billion. This is the lowest level since August of 2007, and raises some longer term inflationary concerns. Some of you are probably questioning this last statement, so I will explain.

Lower retail sales have forced stores to keep inventories down. I was in a local Walmart store the other day and noticed the shelves were emptier than what I have seen in the past, items weren’t stacked 5 deep and didn’t reach toward the ceiling. US consumers have been buying less and saving more, a very good thing! But stores have reacted by dropping the amount of inventory they are carrying (again a smart thing for retailers). Against this backdrop, the US government continues to flood the economy with cash, trying to get consumers to start spending again to jumpstart the economy. For now, the cash has been hoarded by banks and used by consumers to pay down some of their massive debt. Eventually the ‘all clear’ horn will sound, and consumers will start looking to make purchases again, but will find empty shelves. Inflation will follow, as too much cash will be chasing too few goods.

But our government has a much shorter term view, and continues to pump money into our economy with no real regard for future inflationary concerns. And some very smart economists seem to agree with the administration. Both Nouriel Roubini and Robert Shiller, respected economists, are calling for additional stimulus. In a radio interview yesterday, Roubini predicted the US recession will last another six months and be followed by a ‘shallow’ recovery. On the same radio show, Shiller said the economic crisis would continue despite the $12.8 trillion pledged by the US government and Federal Reserve.

The BOE shook up the markets with a surprise announcement not to increase its quantitative easing program. The Bank’s Monetary Policy Committee put the program designed to pump extra cash into the markets by purchasing its own debt on hold after announcing it would also keep interest rates steady at .5%. The move was a major surprise to the markets, and sent the price of gilts (the UK’s treasury bonds) falling and the price of the Pound Sterling higher. The BOE was the first of the western central banks to begin the controversial program in which it monetizes its debt; hitting the overdrive button on the printing presses by monetizing its debt. We’ve never been a fan of the Quantitative Easing programs, as they are short sighted with total disregard for the future inflationary pressures the exert on the economy. But several other central banks, desperate for a way to get cash into their economies have followed the BOE’s lead.

The move by the BOE was even more surprising given the fact that the Chancellor has authorized another 25 billion pounds to be added to the program. Perhaps the Bank’s Monetary Policy Committee is finally starting to realize all of the QE which it has done hasn’t really had the desired impact. Much of the extra cash being created by the program is simply being hoarded by banks and is not making its way out into the economy via loans. Sound familiar? We have a similar situation occurring here in the US, with banks sitting on a majority of the stimulus monies which they have received. They have used the funds to shore up their balance sheets, a good thing long term, but not what the central banks intended with the introduction of the QE programs.