Peter schiff: Congress Avoids the Cliff by Selling Us Down the River

 

 

 



By: Peter Schiff       

Thursday, January 3, 2013

 

With the possible exception of the New York Times’ editorial board (and the cast of The Jersey Shore), everyone on the planet understood that the United States Government needs to cut spending, increase taxes, or both. Instead, after months of political posturing and hand wringing, the Federal Government has just delivered the exact opposite, a deal that increases spending and decreases taxes. The move lays bare the emptiness of budget legislation, which can be dismantled far easier than it can be constructed.

One question that should be now asked is whether Moody’s Research will finally join S&P in downgrading the Treasury debt of the United States. After the Budget Control Act of 2011 (which resulted from the Debt Ceiling drama) Moody’s extended its Aaa rating, saying in an August 8 statement:

“…last week’s Budget Control Act was positive for the credit of the United States…. We expect the economic recovery will continue and additional budget deficit reduction initiatives will be put in place by 2013. The political parties now appear to share similar deficit reduction objectives.”

Now that Moody’s has been proven wrong, and the straight jacket that Congress designed for itself has been shown to be illusory (as I always claimed it was), will the rating agency revisit its decision and downgrade the United States? Given the political backlash that greeted S&P’s downgrade in 2011, I doubt that such a move is forthcoming.

For now, the real budget negotiations have been supposedly pushed later into 2013, when the debt ceiling will be confronted anew. But who can really expect anything of substance? The latest deal emerged from a Congress that is nearly two years removed from the next election. As a result, Congressmen were as insulated from political pressures as they could ever expect to be. Nevertheless, they still chose political expediency over sound policy. If Congressional leadership (an oxymoron that should join the ranks of “jumbo shrimp” and “definite maybe”) could not put the national interest in front of political interests now, why would anyone expect them to do so later? They will continue to ignore our fiscal problems until a currency crisis forces their hand. I expect deficits to approach $2 trillion annually before Obama leaves office. Unfortunately, at that point the solutions would be far more draconian than anything economists and politicians are currently considering.

In light of the extensions of the popular middle class tax rates, the loudly trumpeted tax increases on those individuals making more than $400,000 (and couples making more than $450,000) will not be enough to translate into higher tax revenues. Instead they will result in perhaps $60 billion per year in new revenue to the Federal government that will be more than offset by the new spending announced in the agreement. In fact, with the likely passage of the $60 billion Hurricane Sandy aid package, it will have taken Congress less than one week to spend all of the projected revenue.  

But the tax increases will push many individuals in high tax states like California and New York into paying more than 50% of their income in taxes. While many economists are cautioning that higher taxes on the wealthy will take a bite out of spending, in my opinion it is more likely to result in lower business investment, which is far more detrimental to the economy. When faced with diminishing discretionary income, most rich people would sooner cut back on savings and investment than they would on health care, education, home improvements and vacations.

But it should be clear that the rate increases are just the opening crescendo in a symphony of tax hikes on the nation’s entrepreneurial class. President Obama has recently stated that he will consider needed cuts in spending and entitlement programs only if they are coupled with additional tax increases on the wealthy. In other words, as far as the President is concerned, the hikes included in the budget agreement that was just passed didn’t count for anything. 

It cannot, or should not, be denied that Washington’s latest fig leaf will have a major impact on the markets. The New Year’s “relief rally” is understandable given the clear implications that the government will simply print its way out of trouble for as long as it can. In the past, fiscal profligacy was held in check by investors who would sell bonds and push interest rates higher whenever it appeared that the government was not serious about national solvency. But with the Federal Reserve now buying the vast majority of U.S. government debt, no such roadblock exists. With monetary and fiscal stimulus pushing up stock and bond prices, and no immediate fear of a rally-killing spike in interest rates, there is no reason to stay on the sidelines. Markets are now driven by stimulus, not fundamentals, and the stimulus is firmly at the wheel. (For more on this – see the article in the January edition of Euro Pacific’s Global Investment Newsletter). But it is important to look at the nature of the rally. Most significantly we would bring investors’ attention to the increase in gold and oil and other assets that are expected to outperform in an inflationary economy. Our new Newsletter edition also includes an analysis of some of the more promising overseas markets.

But by taking the nominal risk out of investing, the government is insuring that the risks to the U.S. economy will grow exponentially. We are now – and will remain – a debt-fueled economy for as long as the rest of the world permits this to continue. But this is no way to create real, sustainable economic growth. On the contrary, it will simply permit the growth of government, the depletion of economic vitality, and ultimately the collapse of the U.S. dollar.   

In the meantime, President Obama and Congressional leaders will take credit for a tax cut that is in reality a huge tax increase in disguise. Government spending is the real source of taxpayers’ pain and it is only a matter of time before the bill comes due in the form of inflation. See our Newsletter for fresh analysis as to why inflation may already be higher than you think. Because the deficits will grow even larger, more purchasing power will be lost in this manner than would have been lost had all the Bush tax cuts been allowed to expire. In addition, though entitlement cuts were taken off the table, the real value of benefits could be slashed, as cost of living adjustments fail to keep up with skyrocketing consumer prices. That’s a Fiscal Cliff that will not be so easy to avoid.

Read More by Peter Schiff

Four Biggest Banks Have a 50 to 1 Leverage and $235 TRILLION Exposure & Who Cares About the Grandkids...

Okay, like we realy care about about the grandkids...

USA Watchdog
By Greg Hunter
October 3, 2011

I keep hammering away at the fact the Fed doled out $16 trillion in the wake of the credit crisis of 2008. This is an enormous sum that is greater than the all goods and services produced in the U.S. in a single year.

Domestic banks and companies got the money, right along with foreign banks and companies. In effect, the Federal Reserve bailed out the world financial system. Now, we are right back to square one facing another financial meltdown with European banks and sovereign debt. If the Fed spent $16 trillion, why in the heck is this problem not fixed and why isn’t the world economy taking off like a rocket?” The simple answer is it wasn’t enough money.

The Bank of International Settlements pegs the total world over-the-counter (OTC) derivative exposure at around $600 trillion, but many experts say the real figure is more than twice that amount. No matter which figure you use, it is a gargantuan sum. OTC derivatives are an unregulated dark pool of money with no public market.

These are basically debt bets between two entities on things such as credit risk, currencies, interest rates and commodities. According to the latest report from the Comptroller of the Currency, just four U.S. banks have an eye popping $235 trillion of OTC derivative leverage. (Click here for the complete Comptroller of the Currency report.) As a nation, U.S. banks have a total OTC derivative exposure of $250 trillion. So, the fact that just four U.S. banks have this much leverage and risk is astounding! The banks are listed below in order of size and approximate OTC exposure:

1. JP MORGAN CHASE BANK NA OH $78.1 trillion OTC derivatives
2. CITIBANK NATIONAL ASSN $56.1 trillion OTC derivatives
3. BANK OF AMERICA NA NC $53.15 trillion OTC derivatives
4. GOLDMAN SACHS BANK USA NY$47.7 trillion OTC derivatives

Considering that the total assets of these four banks are a little more than $5 trillion, I see a frightening amount of risk with a total derivative exposure of $235 trillion! This is nearly 50 to 1 leverage.

On top of that, assets such as real estate or mortgage-backed securities can be held on the books at whatever value the banks think they can sell them for in the future. I call this government sanctioned accounting fraud, or mark to fantasy accounting. Who knows what the true value of the banks “assets” really are. Leverage Continued

The Fallout From a Frozen Fed (Michael Pento)

Euro Pacific Capital
By: Michael Pento
August 10, 2011

The Federal Reserve ventured into unchartered territory yesterday when announcing that the target for the Federal Funds rate would remain near zero percent for two additional years. That will amount to be, at a minimum, four and a half years in duration. But the move is exactly the wrong strategy and does nothing to heal the structural problems of the economy.

The market rebounded sharply yesterday on the back of the promise of free money in perpetuity. However, it will soon be surprised at how little Bernanke’s largess goes towards rectifying our problems. Zero percent interest rates can’t make European debt solvent. And two more years of free money won’t automatically repair America’s severely damaged public and private sector balance sheets.

Let’s be honest, nobody was expecting the Fed to significantly tighten monetary policy in the near future anyway. Therefore, providing a definite time frame of two years does not add much additional information because it isn’t far off from what most in the investment community had been expecting--especially in light of the recent weakening economic data.

But by punishing savers for a couple more years, it will only decrease the money available to create capital goods and only encourage reckless speculation in high-risk assets and the perpetuation of rolling asset bubbles.

What is also likely to occur will be the economy to become completely addicted to artificially-produced low interest rates. Banks borrow short and lend long and are very susceptible to interest rate shocks, just as occurred during the savings and loan crisis in the 80’s and early 90’s and the credit crisis of 2008. Banks’ assets will be collecting interest on low-yielding, long-term loans that will have been prevalent in the economy for over four years. Those interest rates are now about 500 basis points below the average going back to 1970.

But interest rates must soon significantly rise either due to the overwhelming supply issuance of Treasuries in the pipeline or through the inflation that always occurs from free money and a $2.9 trillion Fed balance sheet. Once rates rise, depositors will earn more than banks’ assets collect, and insolvency will result. Not only will banks' balance sheets be under stress but also the consumer and the government are in for a massive interest rate shock coming from skyrocketing debt service payments.

Years more of free money will result in tremendous economic imbalances, a crumbling currency, rising commodity prices and a ridiculously out of control bond market bubble. And that cannot at all end well.

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.

Bernanke, you have a sacred obligation to continue faking it (Bill Frezza)

Ben, you have a sacred obligation to continue faking it.

Nobody will think less of you if you just brazen it out.

Forbes
By: Bill Frezza
June 28, 2011

The United States economy has weathered countless panics, bubbles, and recessions throughout its history, typically recovering with a vengeance on the way to achieving new heights. One and only one downturn turned into a Great Depression. So far.

Countless scholars have studied exactly how the federal government managed to turn a stock market crash and cyclical recession into a fifteen year nightmare. Only incorrigible ideologues persist in spouting the idea that greed and selfishness caused the Great Depression. After all, these are eternal features of the human condition.

Thinking economists generally blame a combination of the Federal Reserve’s failure to maintain a steady price level and Congress’s insistence on destroying global trade with its protectionist Smoot-Hawley tariffs. Debate continues on the degree to which FDR’s interference in the economy helped or made things worse, but the undeniable fact remains that the country didn’t get back on track until all the economic controls loaded onto businesses were lifted at the end of World War II.

Ben Bernanke devoted his professional life to understanding these failures. Destiny put him at the helm of the Federal Reserve when a real estate bubble fueled by easy money, collapsed lending standards, rash derivatives gambling, and a bipartisan bailout upended the world’s financial system. As the economy teetered at the edge of the abyss Helicopter Ben flew into action, flooding the planet with liquidity determined to smother any hint of demon deflation under mountains of fresh greenbacks.

Hurrah, it worked! Prices are going up, slowly at the moment, but with every indication that we will soon be longing for the days when inflation was only in the single digits. Meanwhile debate continues on whether President Obama’s czar-driven interference in the economy is increasing or decreasing the rate at which things are getting worse.



So, Ben, now that you have saved us from the horror of cheaper stuff why isn’t the economy bouncing back like it has after every other recession?

Cue deer in headlights.

Come on, mumble some sphinx-like inanities to reassure us. It worked for your predecessor. “We don’t have a precise read on why this slower pace of growth is persisting” is not going to cut it. Grab a thesaurus and pull out whatever comes after “temporary factors” and “persistent headwinds.”

Don’t you realize that supporting the illusion that the Chairman of the Federal Reserve knows what the hell he is doing is central to maintaining investor confidence? Do you understand how paralyzed with fear your countrymen will become if they realize that all you economics professors in Washington are merely passengers on a runaway train? What will people make of your promises to know exactly when to soak up all this excess liquidity before it drowns us if it becomes obvious that you haven’t got a clue what is going on or why?

Ben, you have a sacred obligation to continue faking it. Nobody will think less of you if you just brazen it out. Follow the example of the president, go buy yourself a teleprompter and blame everything on the last guy. With a little luck your term in office will be over before voters figure out that turning over the economy to people who have never worked a real job a day in their lives is insane. This is not to belittle the value of waiting tables at South of the Border any more than discounting the lessons one learns as a community organizer. But asking unaccountable bureaucrats to steer a national economy without ever having contributed to it is like asking the Pope to train sex therapists.



We all know that the Federal Reserve rests on a shared illusion. In what other industry can the biggest suppliers collude and fix prices with impunity? Which other businesses can always count on helping themselves to “liquidity” whenever they get themselves in a pickle? Keeping the masses believing that some guy in Washington sets interest rates with a wave of his magic wand only works if all the co-conspirators play along. A fiat currency is only as good as the inordinate faith people place in it.

Ben, maintaining this faith is your sacred obligation. No journalist will call you a liar if your prognostications turn out to be dead wrong; after all there is never any accountability in Washington. But everyone will blame you if you start to look the fool. You are safe for the moment as your boss can’t turn you into a scapegoat without admitting that he’s equally clueless. But if we’re sitting here in the summer of 2012 with 10% unemployment, 10% inflation, and negative economic growth who do you think will be the first to walk the plank?

If you appreciate Bill's perspective,

keep reading: Fixing Too Big To Fail

The Fed is discriminating against the elderly (David Merkel)

 it is reasonable to call Bernanke the enemy of savers,

because he is the enemy of savers

Wall Street Pit
By: David Merkel
June 24, 2011

Today, Charles Rotblut, CFA who is the AAII Journal Editor wrote:

Federal Reserve Chairman Ben Bernanke continues to be the enemy of savers. Yesterday, the Boston Red Sox fan reiterated his belief that interest rates should be kept at rock-bottom levels for an extended period of time. He views this as necessary in order to keep the economy growing.

When you run an investment group that is largely composed of retirees and near-retirees, it is reasonable to call Bernanke the enemy of savers, because he is the enemy of savers. When one can’t earn anything over one year without risk, something is wrong. Better that the economy grow more slowly, than that savers not get their due for not consuming.

Saving deserves a return. Let the Fed raise the Fed funds rate by 1%, and they will see that there is no harm to the banks, and little harm to the economy. Once you have 1% slope between twos and tens you have more than enough oomph to make the economy move. What, does the AARP have to bring a age discrimination lawsuit against the Federal Reserve to make this happen? The Fed is discriminating against the elderly.

But now consider another issue — money market funds. I consider them to be superior to banks because their asset-liability mismatch is so small, and they have generated small losses relative to banks and other depositary institutions.

Prime money market funds in the US have been investing 50% of their assets in the Commercial Paper [CP] of Core Eurozone Banks. Well guess what? If the Greeks and other fringe members of the Eurozone default, and the core governments don’t bail the situation out, those holding CP of core Eurozone banks may take a loss. And this is at a time where French and German Banks are facing liquidity issues. Take time to review your money market funds.

The problems of the US and China are significant, but the problems of the Eurozone are pressing. The endgame there will arrive more rapidly because the underlying structure is unstable. One currency can’t serve multiple cultures. Also, there should have been an Eurozone exit plan designed in from the beginning. It was hubris to think it would never need that level of adjustment.

It seems like the ECB is becoming a repository of euro-fringe debt, and perhaps the IMF as well. After all, it doesn’t cost the ECB anything to absorb those debts, but it indirectly spreads the risk to the euro-core nations if there is ever a default or unfavorable restructuring. A central bank can’t go broke, but it can impose problems on those that use the currency if defending the central bank exacerbates other problems in the economy. (E.g., printing money to cover over bad debts absorbed by the bank, while inflation rolls on.)

On a slightly different level, I’m not sure that the banking regulators in the US or Europe really got the main lesson from the crisis. Risk management is liquidity management. I still think that banks rely too much on short liabilities to finance illiquid, longer assets. One advantage of mark-to-market accounting is that it can reveal those mismatches to investors, or perhaps, to regulators. Extra capital can help, but it is usually not enough when there is a run on short-term liquidity, particularly because capital is the excess of assets over liabilities. If there are not enough liquid assets to meet the redemption of liquid liabilities, the result is insolvency.

“But that’s a liquidity problem, not a solvency problem — just give it time and the market will normalize, the assets are worth more than the liabilities anyway.” But at such a time, no one wants to buy the longer, less liquid, lower quality assets. If the bank could raise liquidity, it would. It can’t, so it is not only illiquid, but insolvent. It’s always cheaper to issue liquid liabilities, because those are attractive to savers and investors, but they a poison in a crisis.

My fear here is that there may be another call on liquidity that forces the Fed or the ECB to backstop banks. Not sure what would cause it; it’s always hard to pick which straw will break the camel’s back.

Thus I say be cautious at present; have some safe assets available in case we have a panic that emanates out of Europe, and has second-order effects on the US.

The Extinction of Retirement (Michael Pento)

As of this writing, the S and P 500 is now no higher than

it was in January of 1999. For over 12 years the major averages

 have gone nowhere in nominal terms and have declined significantly

in real (inflation adjusted) terms. The dreams of becoming rich from

 investments have crashed along with Pets.com and Bernie Madoff.

Euro Pacific Capital
Michael Pento
June 15, 2011

For the better part of a century the foundations for a semi-comfortable retirement for many Americans have rested on the financial pillars of rising real estate and equity prices, positive real interest rates on savings, the continued solvency of public and private pension plans, and the reliability of national entitlement programs (Social Security, Medicaid). But in the last few years, the economic sands have fundamentally shifted and these pillars are no longer sturdy, some have cracked completely. For many Americans, the traditional idea of a comfortable retirement, filled with golf carts, cruises, and fishing trips, is going the way of the dodo bird.

Over the last decade incomes and job growth have stagnated, causing savings rates to drop. According to Jim Quinn author of the Burning Platform, 60% of retirees have less than $50,000 in savings. Such sums won’t last very long, especially when consumer prices are up 3.6%, import prices are up 12.5% and commodity prices are up 35% year over year. What’s worse, any savings placed in a bank will pay next to zero interest and will likely not even pay for the fees associated with the account. With cash savings essentially non-existent, the other pillars of income take on paramount importance. But these former bastions of financial security are being washed away by a torrent of red ink.

For years the essential Ponzi-like structures of Social Security and Medicare were concealed behind positive demographics. But once taxes collected from current payers fall short of the required distribution owed to current recipients, the ruse will be laid bare. That day is now in the foreseeable future. With insolvency a real and present danger, at least a consensus is now forming that Social Security must be structurally altered if it is to survive.

According to the Social Security Administration, in 2008, Social Security provided 50% of all income for 64% of recipients and 90% of all income for 34% of all beneficiaries. With these numbers, it’s not hard to see how even small cuts will spark big protests. Now try cutting the $20 trillion prescription drug program and the $79 trillion Medicare entitlements and watch the political sparks fly! However, given the realities, it’s hard to see how the program can escape deep cuts.

In the past many retirees could count on accumulated stock market wealth to help fund retirement. Not so much anymore. As of this writing, the S and P 500 is now no higher than it was in January of 1999. For over 12 years the major averages have gone nowhere in nominal terms and have declined significantly in real (inflation adjusted) terms. The dreams of becoming rich from investments have crashed along with Pets.com and Bernie Madoff. Then there is always the supposedly safest asset of all—a retiree’s home.

Despite a misguided faith that real estate prices could never fall, they have done just that…with a vengeance. According to S and P/Case-Shiller, the National Home Price Index has declined some 30% to levels not seen since the middle of 2002. And prices are still falling, with the rate of decline accelerating. The National Index dropped 4.2% in Q1 of 2011, after dropping 3.6% during Q4 2010. This means that only those retirees who have owned their homes for at least 10 years have any hope of selling at a profit. Ownership of significantly longer periods may be needed to have built up significant equity.

That leaves public and private pension plans. But here again there are serious issues. Let’s just look at state public pension shortfalls. According to the American Enterprise Institute for Public Policy Research, “States report that their public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assumes plans can earn high investment returns without risk.” Huge returns without risk? Bond yields are the lowest they have been in nearly a century! What world are these states living in? With few options, the states will undoubtedly look to the Federal government (taxpayers) for a bailout. Failing that, cuts are inevitable.

The sad facts are; Americans are broke, the real estate market is still in secular decline, stock prices are in a decade’s long morass, real incomes are falling, public pension plans are insolvent and our entitlement programs are structurally unsound. If the pillars that seniors have relied on in the past fail to miraculously regenerate (and there is certainly no reason to believe they will), all that most retirees will have will be freshly printed greenbacks that come from a never ending policy of federal deficits and an obliging Federal Reserve. Unfortunately, the inflation that will result from such a policy will sap most of the purchasing power that those notes possess. In other words, for most people retirement is now an illusion, and many Americans will find themselves working far longer, for far less real compensation, then they ever imagined. The quicker we realize this, and plan accordingly, the better off we will be.



Debt Ceiling...? We Are Already Defaulting (Jacob Hornberger)

By: Jacob Hornberger
The Future of Freedom Foundation
May 11, 2011

The doomsday crowd claims that the sky will fall in if Congress fails to raise the debt ceiling. If the ceiling isn't raised, they say, the federal government will be forced to default on its debt payments, which apparently will then cause the sky to fall in.



That's, of course, ridiculous. For one thing, just because the federal government isn't permitted to add to its ever-soaring mountain of debt doesn't mean that it will be forced to default on debt payments. With the $2.2 trillion it collects in tax revenues, it can give first priority to debt payments.

But let's assume there is a default. Will the sky fall in, as the doomsayers claim?

Not likely. After all, thanks to the Federal Reserve, the federal government is already defaulting on its debts – and has been for decades.

While the ostensible purpose of the Federal Reserve is to “stabilize” the money supply, its real purpose is to enable public officials to spend as much money as they want by borrowing it and then letting the Federal Reserve pay off its creditors with newly printed, debased, cheapened, devalued dollars.

That's precisely what the Fed is doing now, has been doing recently, and has been doing ever since it was established in 1913. It “monetizes” the government's debt by printing the money to pay it off. The inflated supply of money cheapens the value of the money in circulation, which means that bondholders are being repaid in currency that is worth less than it was when they loaned it.

That's a default.

Let's assume I loan the government $1,000 at 10 percent interest, with the note payable one year from now. The year passes. The government owes me $1,100. The government doesn't have the money to pay me because all of its tax revenues are devoted to welfare and warfare, which the big spenders in Congress are dead-set on continuing.

The members of Congress are reluctant to raise taxes to pay me back for two reasons: one, they know that overtaxed people get upset over more taxes, and, two, they're concerned that more taxes will kill the private sector that funds the welfare-warfare state

No problem. The big spenders simply turn to the Fed to do the dirty work for them. The Fed cranks up the printing presses and starts printing large quantities of new money to pay me and the other creditors whose debts are now due.

The government sends me its newly printed $1,100 to pay off my debt. But there is one big problem: That $1,100 now only buys 90 percent of what it used to. Due to the Fed's expansion of the money supply, the dollar has been debased or devalued by, say, 10 percent.



The government has not complied with its promise to pay me $1,100. It has instead paid me in money now worth $990.

That's a default because the government isn't paying me what I am owed.

That's what the Fed has been doing for decades. That's why the dollar is worth about 5 percent of what it was worth in 1913, when the Fed was established. Decade after decade, the Fed has expanded the money supply to accommodate the big spenders in Congress (and the big-spending President), thereby debasing and devaluing the currency. Throughout most of that time, the government's creditors have been paid off in cheapened, debased, devalued dollars.

While decades of continuous default have brought monetary chaos, the sky has never fallen in.

Needless to say, the big spenders in Congress love the Fed. They know that they can keep spending and borrowing to their hearts' content and not have to incur voter wrath by raising taxes. They know that the Fed will always come to their rescue by printing the money to pay for their big spending and big borrowing.

The citizens, of course, have no idea what is occurring. All they see is soaring prices (initially gold, silver, oil, gasoline, and other commodities, and, later, retail prices in general). Unaware that the government itself – through the Fed – is the culprit, the citizens blame the rising prices on greed, speculation, the banksters, the profiteers, the capitalists, the middle men, the entrepreneurs, and perhaps even the illegal aliens.



Our American ancestors had it right. That's why they lived for more than 100 years with no Federal Reserve and no welfare-warfare state and a way of life based on economic liberty, sound money, private property, the free market, and a limited-government, constitutional republic.

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He is a regular writer for the Foundation's publication, Freedom Daily, and is a co-editor or contributor to the eight books that have been published by the Foundation.

Originally published on April 29, 2011 at CampaignForLiberty.com. Jacob G. Hornberger, the Future of Freedom Foundation, and Campaign for Liberty are not affiliated with Euro Pacific Capital, Inc. Euro Pacific Capital does not guarantee the accuracy and completeness of third-party authored content.

The commentary above is for the benefit of our readers from opinion makers and writers not associated with Euro Pacific. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific, or its president, Peter Schiff.

Bernanke insists on perpetuating this phony recovery (Michael Pento)

Bernanke and Co. prefer to play politics

instead of doing what’s correct.

Thursday, April 7, 2011
 Euro Pacific Capital, Inc.
By: Michael Pento

First time jobless claims dropped by 10k for the week ending April 2nd. But this again was only accomplished by having to revise up by 4k the data from the week prior. So really it was just a drop of 6k to the level of 382k. While the MSM is pointing to this figure as more evidence of “the recovery”, Jean Claude Trichet was reminding Americans that the whole recovery thing is phony and living on borrowed time.

The head of the ECB isn’t conflicted by a dual mandate of stable prices and full employment. His only mandate is to preserve the purchasing power of the Euro. Since European inflation is up 2.6%, which is higher than their 2% maximum rate, Mr. Trichet raised interest rates by a quarter point to 1.25%. “It is essential that recent price developments do not give rise to broad-based inflationary pressures over the medium term,” Trichet said. Compare that to our conflicted and compromised Chairman who assured us that inflation is “transitory”—with the same conviction he proclaimed that the sub-prime mortgage crisis was contained. Yes, Americans are now being schooled by the French on how to run a sound monetary policy.

Gold, oil, the CRB Index, foreign currencies and Treasury yields are all screaming at Bernanke that it’s time to join Mr. Trichet in a fight against inflation. But the sad truth is that the double-dipping real estate market and the onerous U.S. debt levels prohibit interest rate hikes without dire consequences in the short term. So Bernanke and Co. prefer to play politics instead of doing what’s correct. However, what they are missing is that the bond market doesn’t play any games at all. The yield on the 10 year note is up nearly 40 bps since March 16th and has surged nearly 120 bps since October.

So the only real question is whether the Fed will get ahead of inflation and take rates higher now or will it merely watch the market adjust interest rates to reflect rapidly rising inflation. In either case, rising rates will expose the phony recovery for what it was the entire time—one that was based on artificially produced low rates, inflation and debt. The only difference being the longer Bernanke insists on perpetuating this phony recovery, the higher interest rates will eventually have to go and the more damage the economy will have to suffer.

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.

Comstock Partners: investors are in a state of denial, ignoring all of the bad news that is certainly no secret, Looks like 2000/2007 Part Deux

The spread between the percentage bullish

and the percentage bearish soared to 41.6,

the widest since October 2007,

when the market peaked.

Comstock Partners, Inc.
April 7, 2011

In both late 1999 and 2007 we warned against the mentality that caused investors to overlook the dire-looking events that were swirling all around them. The warnings were generally ignored on the grounds that you couldn't fight against a market that was continually rising. Of course, we now know the eventual outcome. Once again the market is rising despite a spate of negative factors that are widely known to the investing public. The main bullish theme is that the economic numbers are improving, corporate earnings are robust and the Fed will guarantee this will continue even if it has to institute QE3 and QE4. Unfortunately, however, a number of factors are indicating that the good fortune is about to end soon. We cite the following.

1. QE2 is ending on June 30th. The program will, by that time, have pumped $600 billion into the economy, meeting Chairman Bernanke's stated goal of jump-starting the stock market. The end of the program means a defacto tightening of monetary policy. This has been the major factor holding up both the stock market and a fragile economy that will not be self-sustaining once the Treasury bond purchases are halted. A continuation of quantitative easing is highly unlikely as it would be politically difficult. Furthermore an increasing number of FOMC members are themselves hinting at a possible imminent tightening.
2. Fiscal policy is about to tighten as well. That is obviously what the discussion in Washington is all about. Whether the government temporarily shuts down or not is a non-issue. The fact is that, one way or another, both sides of the debate are now intent on reducing the federal deficit. So, whatever the merits, both fiscal and monetary policy will be less easy. That is a headwind against the economy and stock market
3. A broad array of commodity prices is rising. This is increasing corporate costs at a time when they will be difficult to pass on as consumers are strapped for income and are paying down debt. This is bound to squeeze profit margins in the period ahead and result in downward earnings guidance.
4. The Mid-East turmoil is continuing and showing no signs of slowing down. Although the eventual outcome is unknown, it is doubtful that it will be market-friendly.
5. The European Union (EU) is another major problem. First the authorities tried to build a firewall around Greece, second around Ireland, and now around Portugal. These are relatively small economies, and the EU can probably "kick the can down the road" one more time with no real solution in sight. Now they are attempting to build a wall protecting Spain, a nation said to be "too big to fail and too big to rescue". If Spain follows the lead of Greece, Ireland and Portugal, the results could be catastrophic to the global financial system. In the midst of these events the EU has also raised interest rates, a move they last made in the summer of 2008 just prior to the credit crisis.
6. China is battling against soaring inflation and has increased interest rates four times in the last five months in an attempt to slow down the economy. No financial bubble has ever been stopped without a recession, and we doubt that this will be the first. This would have major ramifications on the global economy including the commodities markets, emerging market suppliers, multinational corporations and the U.S bond market.
7. The Japanese earthquake is yet another headwind to the economy. Toyota is shutting down all of its American factories, and American vehicle manufactures are facing parts shortages as well. According to AutoNation, "production disruptions will significantly impact product availability from Japanese auto manufacturers in the second and third quarters." We're hearing about supply disruptions in a number of other industries as well. We won't be surprised to hear numerous companies comment on this issue when they report first quarter earnings and give guidance for the rest of the year.

All in all, we see the tailwinds that have helped the economy and markets over the past year suddenly turning into headwinds. We expect to see downward revisions in both economic growth and corporate earnings in the period ahead. At the same time, according to "Investors' Intelligence" , the bears seem to have thrown in the towel as the percentage of bears dropped to 15.7%, the lowest since December 1999. The spread between the percentage bullish and the percentage bearish soared to 41.6, the widest since October 2007, when the market peaked. Just as in early 2000 and late 2007, investors are in a state of denial, ignoring all of the bad news that is certainly no secret. Comstock Partners Bios



Minneapolis Fed. Reserve President Narayana Kocherlakota: housing market has become overly dependent on government guarantees

Federal Reserve Bank of Minneapolis

president Narayana Kocherlakota:

mortgage interest tax deduction

encourages people to take on large

amounts of debt, instead of saving.

(Mr. Kocherlakota, Barney Frank is holding...)

Star Tribune
By: Chris Serres
April 5, 2011

Federal Reserve Bank of Minneapolis president Narayana Kocherlakota criticized government intervention in the housing sector, including federal guarantees of mortgages and the home interest tax deduction, in prepared remarks given at a homeownership workshop today in Minneapolis.

Kocherlakota argued that in the wake of the financial crisis the housing market has become overly dependent on government guarantees. About 90 percent of all mortgages originated over the past two years are guaranteed by government-controlled entities such as Fannie Mae and Freddie Mac, a situation that he referred to as "not a sound long-term strategy."

"Over time, our country needs a mortgage market that returns to greater reliance on private risk-taking and private risk assessment, along with the enhanced regulatory oversight that is already in place," he said.

Kocherlakota, a first-time voting member of the policy-setting Federal Open Market Committee, also questioned the longstanding federal tax deduction of mortgage interest payments. He argued that the deduction encourages people to take on "large amounts of debt," instead of saving.

"If we truly want to encourage home ownership, we should contemplate programs that provide incentives for individuals to save and become equity holders in their homes -- and, by extension, in their communities," Kocherlakota said.

The mortgage interest deduction has become a source of controversy in recent months, as concerns about the federal debt intensify. In December, the co-chairmen of the White House's deficit-reduction commission proposed paring the mortgage-interest deduction as part of a series of proposals to rein in the federal government's swelling debt

Core Incompetency (Michael Pento) and the U.S. Dollar Is in Free Fall

Euro Pacific Capital
By: Michael Pento
April 4, 2011

For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.

If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are rising.

If you talk about the grand sweep of Fed policy, it’s fairly easy to fix the onset of our current monetary period with the onset of the dot.com recession of 2000. To prevent the economy from going further into recession at that time, the Fed began cutting interest rates farther and faster than at any other time in our history. During the ensuing 11 years, interest rates have been held consistently below the rate of inflation. Even when the economy was seemingly robust in the mid years of the last decade, monetary policy was widely considered accommodative.

Over that time annual headline Consumer Price Index (CPI) data has been higher than the Core CPI 9 out of 11 years, or 81% of the time. Looking at the data another way, over that time frame, the U.S. dollar has lost 20% of its purchasing power if depreciated year by year using core inflation, and 24% if depreciated annually with headline inflation. The same pattern held during the inflationary period between 1977 thru 1980, when the Fed’s massive money printing sent the headline inflation rate well above the core reading. The empirical evidence is abundantly clear. When the Fed is debasing the dollar, headline inflation rises faster than core. The reason for this is clear. Food and energy prices are closely exposed to commodity prices which have a strong negative correlation to the falling dollar that is created by expansionary policies.

Data we have seen thus far in 2011 underscores the need to focus on headline inflation and to avoid the trap of relying on the relatively benign core. The difference between the core rate and headline rate of inflation was .6 percent in January and a full percentage point in February. If annualized those relatively small monthly disparities will become enormous.

It is shocking how few Americans, even those with economic degrees and press credentials, fully appreciate the Fed’s vested interest in reporting low inflation. With benign data in hand, Fed policy makers are given a free hand in adopting stimulative policies. Central bankers who shower liquidity on the economy earn the gratitude of their peers and the thanks of their political patrons. But once a central bank goes down the expansionary path to fight recession it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power.

The sad truth is that the Fed’s record low interest rates are once again causing food and energy prices to rise much faster than core items. Bernanke is focusing on the core just as we need him to focus on the headline. It’s time for the Fed to stop hiding behind flimsy statistical juggling and to start protecting the value of our dollar, which unfortunately is in free fall no matter what statistics one chooses to use.

Bernanke has 5 days to give it up on I've Got a Secret

By: Greg Stohr and Bob Ivry

March 21 (Bloomberg) -- The Federal Reserve must disclose details of emergency loans it made to banks in 2008, after the U.S. Supreme Court rejected an industry appeal that aimed to shield the records from public view.

The justices today left intact a court order that gives the Fed five days to release the records, sought by Bloomberg News’s parent company, Bloomberg LP. The Clearing House Association LLC, a group of the nation’s largest commercial banks, had asked the Supreme Court to intervene.

The order marks the first time a court has forced the Fed to reveal the names of banks that borrowed from its oldest lending program, the 98-year-old discount window. The disclosures, together with details of six bailout programs released by the central bank in December under a congressional mandate, would give taxpayers insight into the Fed’s unprecedented $3.5 trillion effort to stem the 2008 financial panic.

“I can’t recall that the Fed was ever sued and forced to release information” in its 98-year history, said Allan H. Meltzer, the author of three books on the U.S central bank and a professor at Carnegie Mellon University in Pittsburgh.

Under the trial judge’s order, the Fed must reveal 231 pages of documents related to borrowers in April and May 2008, along with loan amounts. News Corp.’s Fox News is pressing a bid for 6,186 pages of similar information on loans made from August 2007 to November 2008.

Unprecedented Disclosure

The records were originally requested under FOIA, which allows citizens access to government papers, by the late Bloomberg News reporter Mark Pittman.

As a financial crisis developed in 2007, “The Federal Reserve forgot that it is the central bank for the people of the United States and not a private academy where decisions of great importance may be withheld from public scrutiny,” said Matthew Winkler, editor in chief of Bloomberg News. “The Fed must be accountable to Congress, especially in disclosing what it does with the people’s money.”

The Clearing House Association contended that Bloomberg was seeking an unprecedented disclosure that might dissuade banks from accepting emergency loans in the future.

“Disclosure of this information threatens to harm the borrowing banks by allowing the public to observe their borrowing patterns during the recent financial crisis and draw inferences -- whether justified or not -- about their current financial conditions,” the group said in its appeal.

Obama Administration

A federal trial judge ruled in 2009 that the Fed had to disclose the records in the Bloomberg case, and a New York-based appeals court upheld that ruling.

The Clearing House Association’s chances at getting a Supreme Court hearing suffered a setback when the Obama administration urged the justices not to hear the appeal. The government said the underlying issues had limited practical significance because Congress last year laid out new rules for disclosing Fed loans in the Dodd-Frank law.

“Congress has resolved the question of whether and when the type of information at issue in this case must be disclosed” in the future, the administration said in a brief filed by acting Solicitor General Neal Katyal, President Barack Obama’s top Supreme Court lawyer.

The Fed had previously fought alongside the banks in opposing disclosure. It also sought to join the industry group in seeking high court review, only to be overruled by Katyal, according to court documents. Complete article

The Charles Evans Show (Michael Pento)

Fed policy had little to do with soaring

commodity and food prices

Monday, March 7, 2011
By: Michael Pento

CNBC was competing with viewers from the Comedy Channel this morning when it aired an interview with Charles Evans, the President of the Chicago Federal Reserve. Mr. Evans claimed that U.S. inflation is currently low, even though oil prices were surging past $105 a barrel during his interview. He went on to explain that Fed policy had little to do with soaring commodity and food prices. As it is, of course, global growth that is to blame.

The Fed President didn’t care to opine at all as to why gold was hitting an all time high as he was speaking. I wondered--while struggling to watch the interview--if the record high dollar price in the monetary metal is telling him anything. I guess he would explain that the Fed doesn’t have anything to do with gold prices either and it is probably a sign that this year’s Indian wedding season will be a real gangbuster.

Some more comic relief came from his GDP predictions. Mr. Evans sophomorically stated that he expects 4% GDP growth this year and the next. But contrary to what that previous guess may have you believe, the interview didn’t give much hope for monetary responsibility returning to the country any time soon. In fact, even though the evidence of rampant inflation were scrolling under his feet on the ticker, Evans said that interest rates should stay low for an extended period of time.

Maybe that’s why consumer credit has reversed course and is now growing once again. Total consumer credit (both revolving and non-revolving) has now expanded for the fourth month in a row and is accelerating at a 2.5% annual pace in January. That’s after falling 4.4% in 2009 and dropping 1.6% for 2010. One of the baneful effects of the Fed’s zero percent interest rate policy is that it entices the consumer to borrow when they should be deleveraging. The truth is that Household debt as a percentage of disposable income is still well above historical levels and is now headed back in the wrong direction.

Yes Mr. Evans, the Fed is responsible for rising commodity prices and for encouraging the accumulation of debt. And they may soon share equal blame with the government for inflicting soaring interest rates on the American public.

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. Other Michael Pento Posts

CNBC Transcript of Evans Interview

Bernanke and Federal Reserve: Bubbles "R" Us, 3rd Bubble in 11 Years (Comstock Partners)

It seems incredible that the Fed is creating

the third bubble within 11 years,

but that is what is underway.

Comstock Partners
February 17, 2011

It seems incredible that the Fed is creating the third bubble within 11 years, but that is what is underway. In the late 1990s the Fed kept the pedal on the gas and helped engender the dot-com bubble that collapsed with a 75% decline in the Nasdaq and 50% in the S and P 500. To prevent the economy from correcting the imbalances created in that era, the Fed kept the funds rate at 1% for an extraordinarily long time, thereby fostering the backdrop for the historic housing boom that also collapsed and came dangerously close to bringing down the global economic and financial system.

The initial gargantuan efforts by the Fed and the Administration and Congress to keep the economy from collapsing were necessary and effective. Since then, however, further stimulative programs have resulted in only a tepid economic recovery along with the addition of dangerous amounts of new debt and a soaring stock market that seems doomed to disappointment once again as in 2000-to-2002 and 2008-2009.

The Fed jump-started the stock market with two rounds of massive easing commonly known as QE1 and QE2. Not coincidentally, the market bottomed in March 2009 just as QE1 got underway. When that program, consisting of the Fed's purchase of $1.5 trillion of Treasury Bonds and mortgages, ended in April 2010, stocks dropped 17% in a few months. When stocks declined and the economy faltered Chairman Bernanke, at a late August meeting in Jackson Hole, announced the Fed's intentions to institute QE2, a program to buy $600 billion of 2-to10-year Treasury notes by June 30, 2011. Since that time the market began rising and hasn't stopped since. Notably the program, which actually began in October is pumping about $3.4 billion into the economy and assets every workday of the week.

The stated purpose of QE2, as outlined in a Washington Post op-ed column by Bernanke, is to pump up asset values with the hope that it would feed into the economy and to lower mortgage rates in an effort to aid the housing market. QE2 did goose the stock market, but appears to be failing miserably on a number of other fronts. It has not helped housing, which is still in the doldrums, and has only marginally helped employment. Furthermore the policy has created a lot more commodity inflation with higher prices for energy, food, cotton and a wide number of other items. It has led to inflation in emerging nations that have begun tightening money to slow down their economies. It has also caused a rise in long-term bond and mortgage rates, contrary to initial expectations. In addition let's not overlook the contribution of food price inflation to the unrest in Tunisia, Egypt and the rest of the Mid-East.

Underlying all of these problems is the massive debt, both government and household, built up over the past few decades, particularly in the most recent one. Household debt has averaged about 55% of GDP over the last 60 years, but recently peaked at 98%, and is now down to 91%. As a percent of disposable personal income, household debt has averaged 75%, with a recent top of 130% and is currently at 117%. Similarly, government debt has averaged 66% of GDP and is now at a peak 108%, as government debt has recently risen more than private debt has dropped.

The problem, as everyone belatedly realizes, is that, as a nation we have far too much debt, both public and private. But debt is the fuel that enables economic growth. Without an increasing amount of debt the economy cannot grow and, in fact, shrinks. The hope is that by substituting government debt for household debt we can get the economy back on a normal growth path while also getting consumer balance sheets back into shape.

In our view the chances for success are dim. After all is said and done, debt is debt whether it's the government debt or private debt. And as Greece has shown, even governments cannot keep increasing their debts without severe consequences down the road. It seems the only way out is to reduce total national debt, both public and private. That would have dire consequences for the economy in the short run. On the other hand, continuing to increase debt as we have been doing may work in the very short run but in the end, is unsustainable. And note that QE2 ends in June. After that, any further stimulus is probably politically impossible anyway, given the climate in Washington and the various state governments.

This will all become obvious to the market soon enough,

and once again they will say nobody saw it coming.

Comstock Special Reports

Charles Plosser: monetary policy can't retrain people

This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. "You can't change the carpenter into a nurse easily, and you can't change the mortgage broker into a computer expert in a manufacturing plant very easily.

By Mary Anastasia O'Grady
Wall Street Journal
Philadelphia
2/12/2011

Federal Reserve Chairman Ben Bernanke was on Capitol Hill this week to answer critical questions about monetary policy, amid rising bond yields and sharply higher commodity prices. Mr. Bernanke showed no self-doubt, and Friday's resignation of Fed Governor Kevin Warsh, one of the board's inflation watchdogs, means that Mr. Bernanke's easy-money inclinations will have even fewer internal checks.

Enter Charles Plosser, the president of Philadelphia's Federal Reserve bank. A former dean of the William E. Simon School of Business at Rochester University, Mr. Plosser is widely known as an inflation hawk. And this year he has a vote on the Federal Open Market Committee (FOMC), which sets monetary policy. He's now a man to watch.

One of the most perplexing questions for the Fed these days concerns the continuation of "QE2," its second round of quantitative easing, which will dump $600 billion in new money into our banking system over the first half of this year.

Mr. Plosser doesn't see a deflation risk for the U.S. economy right now. Even those who were worried about deflation six months ago, he says, have begun to change their tune. That means that, with moderate GDP growth and low inflation in the mix, the only thing left as an excuse for QE2 is high unemployment. Can lax monetary policy change that picture?

Mr. Plosser's answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. "You can't change the carpenter into a nurse easily, and you can't change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they'll find jobs in other industries. But monetary policy can't retrain people. Monetary policy can't fix those problems."

Mr. Plosser reminds me that when QE2 was first proposed last year, he wasn't in favor. "I didn't think it was necessary and I thought that the costs outweighed the benefits." He says he thought that "it carried some very significant risks" that "would not be borne today but would be borne down the road when the time comes to unwind what we've been doing."

But last month, when Mr. Plosser got his first chance to vote on the FOMC, he didn't dissent. When I ask why, he launches into a summary of his four principles of good policy-making: "clear communication of objectives," "credible commitments toward achieving those objectives," "transparency" and "independence."

Credibility demands that the bank not "stomp on the brakes and then floor the accelerator," he says. "Why do you want to signal something and then yank it out from under the market? That's just not a good way to conduct policy."

I'm skeptical that policy makers will know when to change course, so I ask Mr. Plosser what signals he'll be looking for. He begins by cautioning that "with food and commodity prices, as well as oil prices for that matter, the challenge you always face is distinguishing relative price movements from price-level movements." For this reason, he tries "to get a feel for the underlying trends." Complete Must Read Article

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