Leprechauns, the Tooth Fairy and Stagflation (Michael Pento)

Euro Pacific Capital
by Michael Pento
August 18, 2011

Three things that Ben Bernanke doesn’t believe exist are Leprechauns, the Tooth Fairy and Stagflation. He has totally relied on specious theories like output gaps and a very high unemployment rate to keep inflation in check. What he fails to realize is that an increase in the money supply doesn’t always engender job growth or put fallow resources back into production. However, what it does always achieve is to increase the aggregate level of prices in our economy.



More evidence of our battle with stagflation was found in today’s economic data. Jobless claims for the week ending August 13^th rose by 9k to 408k. Existing Home sales fell 3.5% in the month of July, while the median price decreased to $174,000 from $182,100. And the Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July.

However, the continued weakness in the real estate market and in employment figures didn’t serve to squelch the increase in prices. On the consumer level prices increased .5% in July and were up 3.6% YOY. Data released on Tuesday showed import prices were up 14% YOY and yesterday’s Producer Price Index showed inflation on the wholesale level surged 7.2% from the previous twelve months.

The message from the markets corroborates the economic data. Industrial commodities like copper have severely corrected in price and the Ten year Treasury note yield has collapsed to nearly below two percent in a sign that recession is here. Meanwhile, the monetary metal gold is up $25 today and trading at well over $1,800 an ounce.

The Fed, along with the European Central Bank (ECB), has decided that since debt levels have become so intractable they must monetize a massive quantity of government bonds. Analysts at the Royal Bank of Scotland have predicted the ECB will buy €2.5 billion worth of Spanish and Italian bonds each day, which is equivalent to €600 billion a year. And eventually the bank could wind up purchasing €850 billion ($1.2 trillion) of Spanish and Italian debt. Not to be outdone, the Fed Chairman has indicated that his $2.9 trillion balance sheet would remain intact (at a minimum) for an additional two years.

The Central Banks’ actions from the planet’s two largest economies have forced investors into the gold market. And their deliberate debasement of their currencies has led to a hallowing out of savings, productive investment and the middle class--leading to an exacerbated and prolonged economic malaise. Bernanke may ascribe to stagflation the same credibility as fairy tale creatures, but that doesn’t make it any less a reality.

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.

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.

The Chinese Have Stopped Laughing (Michael Pento)

Euro Pacific Capital
Friday, July 29, 2011

By: Michael Pento       

 

The economy continues to prove that it didn’t need a stalemate between democrats and republicans over whether or not we should expand our credit limit in order to poop the bed. Gross Domestic Product climbed a paltry 1.3% in the second quarter of this year following a severely downgraded Q1 print of just 0.4%. Growth in the first quarter was revised down from a 1.9% prior estimate. Also today, the Institute for Supply Management-Chicago Inc. said its business barometer fell to 58.8 in July, from 61.1 in the prior month. And the Thomson Reuters/University of Michigan final index of consumer sentiment fell to 63.7 this month, which was the weakest since March 2009, from 71.5 in June.

 

Where are all those shills who assured us last year that 2011 would display a “V” shaped recovery in jobs and the economy? I know, I heard some of them today saying that the second half of this year is going to be great! Their reasoning was the same as it always is. Earnings are going to be wonderful because half of S&P 500 companies' earnings are in foreign currencies. Then, thanks to our crumbling currency, those foreign earnings translate into a ton of U.S. dollars—those dollars don’t buy you very much, but who cares as long as we are able to say we beat Wall St. expectations.

 

The poor, lonely Tea Party is vilified as being inhuman and behaving as insane children for not allowing the country to bankrupt itself as quickly as possible—even by members of their own party (read here what John McCain had to say for yourself). I guess the philosophy of McCain and his friends is that we should raise the debt ceiling to infinity and beyond and just pay our creditors back with more printed money. After all, the National Debt has grown from $400 billion in 1971 to $14.4 trillion today, so what’s a few more trillion between now and 2013? The dollar has lost 98% of its purchasing power in the last 40 years, so why not keep on defaulting on our debt through inflation and destroy the last few vestiges of the middle class. Sounds like a plan to me. It’s just business as usual. They urge us to keep up the spirit of cooperation and goodwill that has served to render this country insolvent.

 

The only problem is that the Chinese have stopped laughing at Geithner’s so called “strong dollar policy” and are now allowing the Renminbi to rise against the greenback (up nearly 6% in the last year). If we continue down this road much longer the only buyer of U.S. debt will be the Fed. That’s the real down grade to come. Not from the credit rating agencies, but from our foreign creditors. Once we have a failed Treasury auction, it will engender a vicious cycle. Debt service expense will soar, which causes out of control deficits. The Fed will be forced to purchase more of the debt and inflation rates become intractable, thus destroying GDP growth. Runaway debt, interest rates and inflation is what the Tea Party is trying so hard to avoid and it is a cause worth fighting for!

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.

Credibility of the nation’s ability to pay its bills will be tarnished (Michael Pento)

Euro Pacific Capital
Tuesday, July 26, 2011

By: Michael Pento

 

The U.S. economy may suffer an abrupt blow of austerity come August 2^nd. Indeed, that is what we truly need to bring lasting prosperity to this great country. But even if the republicans and democrats find a way to hold hands in the next few days, it won’t mean clear sailing is in store. A credit rating downgrade seems unavoidable at this juncture because a grand deal to cut over $4 trillion in spending is impossible to achieve by the deadline.

 

Therefore, whether it is a small deal or no deal, the credibility of the nation’s ability to pay its bills will be tarnished.

 

So no matter what happens after the deadline passes the economy will still be mired in trillions of dollars in debt that has to be serviced and rolled over. And since higher interest rates are virtually guaranteed to manifest because of inexorable debt issuance and inflation, the solvency of the U.S. is sadly, just ephemeral.

 

An increased cost of borrowing won’t help our comatose housing market either. But even before that inevitable increase occurs, data on New Home sales released today showed a declined for a second month in a row. Purchases dropped 1% to a 312,000 annual pace, which is a three-month low. And while the S&P/Case-Shiller index rose 1.1% and 1.0% for the 10 and 20 city index respectively, the YOY decline in home prices was still 3.6% and 4.5% for the 10 and 20 city index.

 

Mr. Case of the famous Case-Shiller Home Price Index explained the reason for weak sales data was the fact that household formation is negative. I’ve said over and over again that the cheerleaders and shills were wrong when saying the increasing U.S. population would solve our real estate problem. That’s because Population growth doesn’t equate to household formation. You need a job, savings and access to credit to afford a house.

 

I think most markets are far too complacent about the prospect of higher interest rates and the damage they will wrought. The Gold market has it correct and investors shouldn’t take solace in quiescent bond prices. The two biggest mistakes in the history of global financial markets are that the U.S. dollar will always be the world’s reserve currency and that U.S. sovereign debt is the ultimate safe haven.

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.

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.



Bernanke is Hopelss (Michael Pento)

But Bernanke actually believes that

high oil prices drive the dollar lower,

not that dollar destruction drives

commodity prices up.

Euro Pacific Capital
By: Michael Pento
June 8, 2011

Mr. Bernanke appears to be getting either worse at economics or better at lying. During yesterday’s speech at the International Monetary Conference in Atlanta GA., the Fed Chairman played the role of a consummate politician with perfection. Almost every line of his speech constituted economic heresy. Below are some brief takeaways from his speech that are imperative for investors to know and understand.

He said it is absolutely imperative that the U.S. address its fiscal imbalances; but the time for doing so just isn’t now. What that really means is that he believes the U.S. must keep the Keynesian spending in place now, but in order to placate the bond market vigilantes, congress should agree to make some cuts in entitlements a decade or more down the road. Of course, Bernanke’s models continue to function with uncanny inaccuracy. By the end of this decade we will most likely have at least $20 trillion in publicly traded debt outstanding and debt service costs will eat up the majority of Federal revenue. We simply no longer have the luxury of waiting years to deal with our deficits.

His speech was also choc-full of platitudes and economic snake oil. One of the most egregious parts of his speech was his profound misunderstanding of inflation, which was on full display. While he acknowledged the surge in commodity prices and the duress they placed on consumers, he blamed the rise not on his own monetary policy but on, “strong gains in global demand that have not been met with commensurate increases in supply.”

Here was his answer to those Fed critics (like me) who have the audacity to blame low interest rates and excessive money creation as the cause of inflation: “…some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar.”

How absurd! He measures the purchasing power of the dollar mostly against the Euro—which is a currency in utter turmoil. If the European Union completely falls apart the dollar would rally on the U.S. Dollar Index. Therefore, even if Bernanke continues to massively dilute the currency and keep interest rates at near zero percent, the dollar’s decline may not ever fully manifest itself against another flawed fiat currency. However, it will always manifest itself against hard assets like gold and oil. When the Fed created negative real interest rates by printing money and buying debt, investors flocked to tangible assets that kept pace with inflation. That is the main reason why energy prices have surged.

But Bernanke actually believes that high oil prices drive the dollar lower, not that dollar destruction drives commodity prices up. Again, in his own words; “...the United States is a major oil importer; any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around.” Exactly backwards yet again Ben; the inflation you create drives investors away from fixed income and into commodities as a hedge against a falling dollar. Not some exogenous shock that he conjured up in his head.

Finally, does Mr. Bernanke regret his actions that have caused a decline in the purchasing power of the dollar and a lowering of living standards in the United States? Read the grade he gave himself and the Fed: “…the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.”

Did you get that, no cost to the budget or the taxpayer? Since he has exculpated the Fed from driving up commodity prices, he can’t be blamed for the destructive and regressive tax of inflation that is crushing the middle class. And in buying $1.5 trillion in Federal debt, he contends our central bank hasn’t facilitated the increased borrowing being done by the government by keeping interest rates artificially low!

During the Q&A session following his speech, the Chairman said that the Fed has kept inflation low since the early 80’s and that is the reason why the dollar is and will continue to be strong. He has the temerity to claim that inflation has been low for the last 30 years, even though the Fed helped create two massive bubbles in equities and real estate and has now dovetailed them both into the biggest bubble of all—the U.S. bond market. Ben Bernanke is hopeless and should be removed from office as expeditiously as possible.

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.

Mc Rescue as Ronald McDonald Throws the Middle Class a Lifeline (Michael Pento)

The middle class has been thrown a lifeline

from Ronald McDonald

Wednesday, May 4, 2011
Euro Pacific Capital
By: Michael Pento


The non-manufacturing portion of the U.S. economy dropped precipitously in the month of April. According to the ISM Index, the service sector of the economy—which unfortunately accounts for 90% of GDP—plunged to 52.8 last month from 57.3 in March. The measurement of new orders dropped by the most since records began in 1997. New orders at service providers decreased to 52.7, which was the lowest reading since December 2009, from 64.1 in the prior month. Meanwhile, the employment index dropped to 51.9, from 53.7 a month earlier.

More data confirming the slowing economy came from the release this morning of the ADP employment report. The private payroll survey indicated that 179,000 jobs were created in April, down from the revised 207,000 reported in March. The BLS reported that 216,000 net jobs were added in March.

The rapidly rising cost of food and energy is starting to vastly curtail consumer spending on non-discretionary purchases. Therefore, inflation is well on the way to eroding employment and GDP growth just as it always has throughout economic history.

But not to worry all of you who are out of work or significantly under-employed. The middle class has been thrown a lifeline from Ronald McDonald. The restaurant chain announced on April 19th that it is looking to add 50,000 U.S. workers. Thus is the sad future for U.S. employment.

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.


Read about McDonald's Hiring

Bernanke's Strong Dollar Policy (Michael Pento)

U.S. dollar has lost 40% of its

purchasing power as measured

against a basket of foreign currencies

in the last decade alone.

Thursday, April 28, 2011
Euro Pacific Capital
By: Michael Pento

Thank God the Fed has a Strong Dollar Policy

The Fed has kept interest rates at zero percent for 27 months and has created--out of the blue--2 trillion new dollars in the last few years alone. If these actions constitute a strong dollar policy, Americans can only cringe at the thought of what a weak dollar policy on the part of the Fed would possibly look like!

Ben Bernanke’s hour-long press conference was packed full of an amazing quantity of contradictions, and economic fallacies. For example, the price of gold soared by $25 during the conference as the dollar was falling to a new 52 week low. In fact, the U.S. dollar has lost 40% of its purchasing power as measured against a basket of foreign currencies in the last decade alone. And the price of gold has risen 400% during that same time frame. Yet somehow Bernanke wanted investors to believe that these conditions are just transitory even though they have been in place for the last 10 years. How could they possibly be transitory if the Fed maintains its zero percent interest rate policy and refuses to reduce the size of its balance sheet?

He also had the temerity to suggest that stable prices actually engender rising unemployment and that inflation needs to be near 2% for an economy to function properly without the threat of deflation. But the former Princeton Professor never explained the economics behind how a strong and stable dollar can ever lead to increasing layoffs. Could it be that Bernanke is unaware that a stable dollar is absolutely necessary for a vibrant middle class and to have an economy that is balanced with the appropriate amount of savings and investment?

The Fed head finally uttered a truth when he correctly stated that low and contained inflation expectations are essential for a strong economy and that the FOMC would closely monitor those expectations of rising prices. However, Bernanke fails to understand that he is doing everything in his power to make sure those inflation fears become intractable. He blamed the uptick in inflation on rising commodity prices that are again supposedly “transitory”. But he fails to associate those rapidly rising commodity prices with the fall of the dollar, which is directly the result of the Fed’s monetary policy. He instead blames the 30% rise of the CRB Index in the last year on “global factors.”

But the most egregious error made during the press conference was Bernanke’s failure to acknowledge the Fed’s aiding and abetting of our huge budget deficits. Although he correctly identified the biggest problem facing our nation is our overwhelming debt, he failed to realize that it is the Fed’s sponsorship of an ever expanding money supply that enables our government to run up massive debts without sending interest rates so high that they render the nation insolvent.

The sad truth, however, is what will be transitory is the U.S. dollar’s status as the world’s reserve currency. The end of that condition coupled with rapidly rising inflation will eventually send interest rates much higher than any economic model Bernanke has ever seen.

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.

My Invitation to Bernanke's Press Conference (Michael Pento)

Tuesday, April 26, 2011
Euro Pacific Capital
By: Michael Pento

Fed Head Bernanke will say in his first press conference tomorrow that QE II will end as scheduled in June. The Chairman will also stipulate that he will maintain the size of the Fed’s balance sheet and that interest rates will remain exceptionally low for an extended period of time. The main reason why he will continue to overlook the crumbling currency and rising rates of inflation is the double-dipping housing market.

The S&P/Case-Shiller home price index of 20 cities fell 3.3% from February 2010, which is the biggest year-over-year decrease since November 2009. Home prices fell 0.2% in February from the prior month on a seasonally adjusted basis and on an unadjusted basis dropped 1.1% from the prior month. The 20-city index fell in February to 139.27, which is perilously close to its post-bubble low of 139.26 reached in April 2009.

The Commerce Department reported yesterday that new home sales were down 21.9% from the year ago period and that prices fell by 4.9% in the twelve months prior. The National Association of Realtors reported that sales were down 6.3% from the year ago period and that prices also fell 5.9% from the March 2010 period.

A vibrant and healthy banking sector is the primary goal of the Fed. Creating inflation in the housing market is thought of as the only permanent solution to bailing out the financial services sector and the economy. Therefore, the idea that the Fed is close to a significant increase in interest rates and substantially selling assets is preposterous.

Unfortunately, their goal to rescue the real estate market at any and all cost comes with a few of those unintended consequences. One is the destruction of the country’s middle class and the other is the end of the U.S. dollar as the world’s reserve currency.

So I have some important questions to ask Mr. Bernanke right now—seeing that my invitation to his press conference seems to have been lost in the mail. “Which mandate takes precedence; full employment or stable prices? Since initial jobless claims are now rising along with inflation, what battle are you going to fight?” “Mr. Bernanke, if you were to raise interest rates and sell the MBS and Treasuries on your balance sheet—thus lowering their value--would the Fed become insolvent?” And lastly, “If raising interest rates in the middle of the last decade caused asset bubbles to pop and a global credit crisis to ensue, why would it be a different outcome this time around, since the overall level of debt in the nation remains at an all-time high?

Maybe it is better that they didn’t invite me to ask Bernanke these questions after all.

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.

Inflation Destroys Real Wages (Michael Pento)

By: Michael Pento
Euro Pacific Capital
Monday, April 18, 2011

In the same vein as medieval physicians believed bloodletting would cure illness, modern snake-oil economists still perilously cling to their claim that rising wages and salaries are the cause of inflation. With my recent debates with these mainstream economists, I’ve heard the following: “without rising wages, where does the money come from to push prices higher?” I was tempted to respond, “where do the employers get the money to pay those higher wages?” But economists tend to get a little nasty when you make them feel stupid.

It is actually the predominant belief that wages and salaries rise before aggregate price levels in the economy and thus during periods of rising inflation, real wages are always increasing. However, economic history has proven over and over again that real wages actually decrease during periods of rising inflation. Nominal incomes do increase, but this is merely a response to the inflation that has already been created.

The essence of this folly is that modern economists don’t have a firm grasp on the mechanics of inflation. At the most basic level, inflation comes from too much money chasing too few goods. The battle against rapidly rising inflation always has its genesis from a central bank that prints money in order to monetize the nation’s debt.

And because the central bank typically only gives this new money to the nation's creditors—half of which aren’t Americans--the money created is never evenly distributed into the wages and salaries of the people. It goes first into the hands of those bondholders who receive interest and principal payments. In addition, the rapid expansion of the money supply causes the currency to lose value against hard assets and foreign currencies. Nominal wages and salaries eventually respond to soaring commodity prices and a crumbling currency, but always with a lag that causes their purchasing power to fall relative to other asset classes. Have you ever tried to ask your boss for a raise simply because living expenses cost 10% more than a year prior? As you are laughed out of the office, you can see the wage lag in action.

Recent economic data provides clear proof that the “wage-price spiral” alleged by Keynesian economists is plainly wrong.

The Consumer Price Index (CPI) has now increased for nine consecutive months. It increased by 0.5% in March from February and is up 2.7% year-over-year. The YOY increase in the prior month was 2.1%. It appears the increase in consumer prices is accelerating—and quickly. Meanwhile, in the last 12 months, the US Dollar Index has lost 8% of its value against a basket of our 6 largest trading partners. The dollar has also lost 29% of its value since April 2010 when measured against the 19 commodities contained in the CRB Index. If you needed more evidence of the dollar devaluation, producer prices are up 5.8% and import prices surged 9.7% YOY.

So there’s your inflation. But was it caused by rising wages and full employment? The unemployment rate has dropped a bit from 10.1% to 8.8% – but this is mostly due to discouraged workers dropping out of the labor force altogether. However, even if the decrease came from legitimate employment gains, it would be hard to argue that an 8.8% unemployment rate would put upward pressure on wages. And, in fact, it hasn't. Real average hourly earnings dropped 0.6% in March, the most since June 2009, after falling 0.5% the prior month. Over the past 12 months they were down 1%, the biggest annual drop since September 2008!

The conclusion is clear: rising wages cannot be the cause of inflation.

Alas, there is a predictable path for newly created money as it snakes its way through an economy. It is always reflected first in the falling purchasing power of a currency and in the rising prices of hard assets. That's because debt holders move their newly minted proceeds into commodities to protect against the general rise in price levels and as an alternate store of wealth. Food and energy prices have a higher negative correlation to the falling dollar than the items that exist in the core rate. They are the first warning bell in an inflationary period, which may be exactly why they are left out of the headline measure.

Nominal wages and salaries eventually rise but always slower than the rate of inflation, causing real wages to fall. If rising wages increased faster than aggregate prices, inflation would always lead to a rise in living standards. Is that what we've seen in Peron's Argentina or Weimar Germany? The reason why the unemployment rate soars and the economy falls into a depression is precisely because the middle class has their discretionary purchasing power stolen from them.

Mark my words: if the Fed and Obama Administration place their faith in stagnant incomes to contain inflation, they will sit idly by while the country collapses in front of their eyes. Because of their medieval understanding of economics, these central planners are going to bring us right back to the Dark Ages.

Goodbye Middle Class (Michael Pento)

But please keep in mind; this is what is

is known as a recovery in the

eyes of our government.

Thursday, April 14, 2011
Euro Pacific Capital
By: MIchael Pento

Surprise! Bernanke now has to make a difficult choice. Despite the Fed’s best laid plans, inflation is soaring but the housing and job markets are dead in the water. I have been warning from the start of Quantitative Counterfeiting that the economy, housing market and the unemployment would not significantly improve—however, inflation would become a significant problem.

Today we received data on Initial Claims and inflation. Producer Prices increased by .7% from February to March and jumped 5.8% YOY. Meanwhile, the number of individuals filing first time jobless claims jumped by 27k to 412k for the week ended April 9th. Significantly rising prices and an anemic job market are the products of the Fed’s desire to crumble the currency. One of the so called unintended consequences of bailing out the banks is the destruction of America’s middle class.

For example, the average price of regular gasoline at the pump rose 11 cents to $3.77 a gallon in the week ended April 10, according to AAA. It climbed to $3.81 yesterday, the highest since September 2008. Yep, the highest gas prices since the market and economy crumbled in the summer of 2008. Real incomes are falling along with consumers’ discretionary purchasing power. But please keep in mind; this is what is known as a recovery in the eyes of our government.

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 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.

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.

Hey Ben; You're Inflation Blind fold Needs Another Layer (Michael Pento)

Thursday, March 31, 2011
By: Michael Pento

While the Fed continues its quest to save us from the horrors of deflation, the middle class is being swallowed by a tsunami of rising prices.

Wall Mart, the world’s largest retailer and second largest employer in the U.S., is warning that inflation is “going to be serious”. CEO Bill Simon told the editorial board of USA Today; "We’re seeing cost increases starting to come through at a pretty rapid rate." Wall Mart up until now has largely insulated American consumers from inflation by supplying them with low cost goods produced abroad. However, rising labor costs in China and soaring raw material costs are causing sharp price increases in imported goods.

Meanwhile, Hershey’s is raising wholesale prices on most of its candy by 10%. The company sites the reason being higher costs for raw materials, fuel, utilities and transportation. Sound familiar?

The Fed now is on record saying they aren’t comfortable with inflation being anything less than 2%. Now I’m not a mathematician, but I believe 10% is higher than 2%. Does 10% inflation make Ben happy? Is it enough inflation to calm his fears over deflation?

If you’re thinking 10% inflation courtesy of the Hershey Co. doesn’t represent the real rate of inflation, you would also have to believe it’s a pure coincidence that Shadow Stats calculates inflation at just about the same deadly rate.

The Keynesians are scratching their heads about now. They are saying, “How can this be”? “Inflation is impossible without rising wages and since there is a huge labor slack and capacity utilization is so low, we will just have to ignore the empirical evidence in front of our faces.” To that I’d say: Inflation comes from the central bank creating money to pay principal and interest on the national debt that the country was unable to provide via legitimate taxation. And, if inflation came from rising wages, real incomes would always increase and inflation would be a wonderful thing.

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.

Don't Stub Your Toe (Michael Pento)

Wednesday, March 16, 2011
By: Michael Pento

While Bernanke is busy closing his eyes and his mind to everything related to inflation, the Producer Price Index was screaming at him this morning. The PPI for February increased by 1.6% month over month and surged 5.6% year over year. But please allow the Fed to divert your attention to the meaningless core rate, which was up just 0.2% from the January reading. The cost of food increased 3.9% in just one month, the most since November 1974. But apparently, according to the Fed, food is a discretionary luxury and is something that should be overlooked.

It’s simply getting more and more absurd and difficult for the Fed to claim inflation is quiescent. Very soon they will either have to decide to sell 100’s of billions of dollars in bonds and aggressively raise interest rates—thus crushing this nascent recovery—or allow inflation to cause the dollar and the bond market to crater.

Meanwhile, we had a breath of fresh air on the housing front. New home construction rates fell 22.5% in the month of February to a 479k annual rate. While most in the MSM view this as bad news, they once again miss the point. New home construction companies should be building virtually zero homes until the market clears the overhang of existing inventory. Less new construction will help expedite the healing process.

Not only are exogenous natural catastrophes hurting global GDP growth but the global sovereign debt crisis hasn’t gone away either. The Moody’s ratings agency cut Portuguese debt by two notches from A1 to A3 and kept the rating on a negative outlook, suggesting more downgrades may follow. The downgrade is likely to make it even more expensive for Portugal to raise money on the international debt markets. The country's 10-year cost of borrowing hit a new high of nearly 8% last week.

The global problems haven’t gone away; they have as simply been kicked down the road along with the U.S. recession. Only now the can has morphed into a giant aluminum boulder. The next kick will do a lot more than just stub your toe.

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.

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

Trade Deficit Woes (Michael Pento)

Friday, February 11, 2011
By: Michael Pento

The U.S. trade deficit increased by 5.9% to $40.6 billion during the month of December, which was up $38.3 billion from the prior month. For the year 2010, the trade gap surged 43%, which was the biggest jump in a decade, as our government’s efforts to reignite consumer borrowing and spending led to a record number of imported consumer goods. For all of 2010, the trade gap climbed to $497.8 billion, up from $374.9 billion in 2009. The Commerce Department reported that consumer spending rose at an annual rate of 4.4% in the fourth quarter of 2009. That increase—which was the biggest in four years—was led by a surge in imports and helped send the trade gap back onto its unsustainable trajectory.

Despite the fact that the U.S. dollar has fallen 8% since June of last year, the trade deficit has continued to widen. That’s because the inflation caused by a falling dollar has made it more expensive for foreigners to importer U.S. made goods—thus offsetting the increased purchasing power of their currencies. And, of course, the cost of U.S. imports has increased because there is no immediate domestically produced alternative to foreign made goods. Therefore, the U.S. trade imbalance continues to climb higher.

That economic truth ushers in the fear over how much wider the trade gap will grow once the dollar actually crashes, as it inevitable must. Why must it crash you ask? Simply because the U.S. is incapable of paying its debts without a massive dilution to the currency. Once the greenback loses its place as the world’s reserve currency, prices will skyrocket for our imported goods, thus sending many more dollars into foreign control. And send the red ink associated with our trade imbalance beyond the limits of what most economists could ever conceive to be possible. And before anybody tells you that a trade deficit isn't something to be concerned about, ask them if they don't mind selling a great proportion of the assets and the sovereignty of the nation to another country. Add'l Michael Pento Posts

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.

The Return of the Misery Index (Michael Pento)

Consumers that don’t happen to have

direct access to a government bailout

or who aren’t in line to receive a huge

Wall Street bonus are indeed feeling the pain.

Wednesday, February 9, 2011
By: Michael Pento

The website Zillow.com reported today that YOY home price declines were 5.9% and that of those homeowners with a mortgage, 27% were underwater on their property. Maybe this concrete evidence of a double-dip in the real estate market has something to do with surging borrowing costs. Today, the cost of a 30 year mortgage hit 5.13%, up 32bps in just one week

Not only is the cost of homeownership rising but so is the cost of food. Thanks to the government’s genius decision to burn 40% of the corn crop on ethanol production, corn stocks are now the lowest in 15 years—with a stock to use ratio of just 5%. That means corn prices are set to increase yet again from their already lofty levels.

Consumers that don’t happen to have direct access to a government bailout or who aren’t in line to receive a huge Wall Street bonus are indeed feeling the pain. In fact, the Misery Index hit a 26 year high for 2010. The index—which is simply the addition of the unemployment and inflation rate—reached 11.29. You have to go all the way back to 1984 to eclipse such a level of pain. Only back then, inflation was calculated without the “benefit” of the manipulations of the Boskin Commission. Therefore, the Misery Index should be, in reality, much higher than 11.29 and is probably closer to the pain we felt under Jimmy Carter.

America’s citizenry are experiencing rising food and commodity prices, rising interest rates, falling home prices and stagnate wages and job growth. But so far Mr. Bernanke has only managed to bail out his buddies on Wall Street and in Washington. Maybe he just doesn’t realize that he is in the process of wiping out the middle class by destroying the value of our currency and rendering those without financial means, helpless to guard themselves against inflation. Too bad questions regarding the benefits of a sound currency weren’t on his SAT exam. Link to other Michael Pento Posts-worth the visit

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.

The GDP Joke (Michael Pento)

Friday, January 28, 2011



By: Michael Pento


The Main Street Media is running around today applauding our 4th quarter GDP report, which increased at a 3.2% annual rate. However, the current dollar or nominal GDP growth rate was 3.4%. That’s correct; the BEA is suggesting that inflation grew at just over a .2% annual growth rate in Q4 2010! Does anybody that’s not a politician or central banker really believe that the rate of inflation for goods produced domestically was growing at a .2% annual rate?

To make matters worse, personal consumption expenditures were up 4.4% and final sales surged 7.1%. I say worse because the savings rate is dropping as consumers and business ramp back up their borrowing. Household purchases, which account for about 70 % of the economy, rose at a 4.4% pace last quarter, the most since the first three months of 2006. The increase added 3 percentage points to GDP.

To be able to consume one must first have produced. If you consume without having produced, you are spending either borrowed or printed money. And the money that is being spent isn’t used to purchase capital goods, which can expand the productive output of the economy. Consumer credit is up two months in a row and we are spending borrowed and printed money, not money earned from growing real incomes.

The Fed’s preferred inflation metric, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.4% annual pace, the smallest gain in data going back to 1959. So we should expect more borrowing and more Fed printing, as Mr. Bernanke feels inflation is perilously low.

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.

Debt and the Fed (Michael Pento)

Wednesday, January 26, 2011
By: Michael Pento

The salient news of today is undoubtedly the new estimate for the 2011 deficit. The Dow Jones Industrial average has crossed above the 12k mark once again and the MSM is busy clamoring over that. However, the real news of the day is that the Congressional Budget Office (CBO) raised its deficit projection for this year’s shortfall to $1.48 trillion from $1.07 trillion. That’s an increase of over $400 billion!

Maybe not so coincidentally, President Obama vowed to cut spending by $400 billion over 10 years during last night’s State of the Union Speech. I say big deal! Even if he was successful in cutting red ink by that entire amount immediately, the deficit would still be over $1 trillion. It is only a matter of time before the bond vigilantes turn their eyes away from Europe and over to America.

The CBO’s update also indicated that the U.S. economy will expand 3.1 percent this year and 2.8 percent in 2012, with real gross domestic product growing an average of 3.4 percent in 2013-2016. CBO Director Douglas Elmendorf also indicated that "…debt held by the public will probably jump from 40 percent of GDP at the end of fiscal year 2008 to nearly 70 percent at the end of fiscal year 2011."

But the really bad news here is that their estimate for growth is most likely way too high. The Fed has now kept interest rates at near 0% for 25 months. And government debt is growing at well over a trillion dollars per year. The process of returning to a market based economy instead of one based on inflation and debt is very painful in the beginning. The end of debt monetization—if such a strategy is ever implemented—will bring asset prices much lower. And balancing the budget will temporarily bring down GDP growth and government revenue in a significant manner. Therefore, the CBO has most likely overestimated GDP or grossly underestimated inflation and deficits.

The Fed’s decision to keep interest rates unchanged didn’t surprise anyone. However, what was a surprise is that Messrs Plosser and Fischer didn’t dissent from the Fed’s zero interest rate policy. In addition, the Fed continues to concentrate on the core rate of inflation and ignore rising commodity prices and a falling dollar. Their statement indicated that they will complete the $600 billion in bond purchases even though it is causing long term yields to rise. And that the central bank will keep rates “exceptionally low for an extended period of time.”

It’s should now be clear to everyone by now that their intention is to facilitate government deficit spending by monetizing the debt.

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.