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“Oh what a tangled web we weave when first we practice to
deceive,” said Sir Walter Scott. The Republican Party enjoyed a
major victory in the congressional midterm elections, winning back control of
the House of Representatives and gaining seats in the Senate.
Republican leaders are giving the Tea Party movement a lot of credit for
their success, and one of its high profile leaders, Kentucky’s
Senator-elect, Rand Paul declared, “We’ve come to take our
government back.”
The Tea Party is a grassroots, conservative, and libertarian
movement dedicated to reducing the power of Washington DC’s politicians
in the lives of ordinary Americans. Tea Party supporters view the
nations’ $14-trillion debt as the biggest danger facing the economy. The US federal
budget has gone from a surplus of $236-billion the year President George Bush
took office to a $1.5-trillion deficit during President Barack Obama’s
first year. The Tea Party’s revulsion against the spending binge in
Washington has hit a chord with the American public.
Also, the hostility toward the Federal Reserve is very strong
among the followers of the Tea Party, with 55% of its supporters
demanding that the Fed should be abolished or radically overhauled. The Tea Party
aims to audit the Fed’s secret operations, and wants to break the link
between the Fed and a small group of Wall Street Oligarchs that are making
lots of money at the expense of US-taxpayers.
“I think that private individuals are making money with
the transactions that the Fed is involved with, and US-taxpayers deserve to
know, if someone is making hundreds of million dollars buying and selling
these new US-assets. We also need to know who they are, and what are they
paying for these assets, and if this being done honestly,” said
Kentucky’s next Senator Rand Paul.
Randall Paul opposes the Fed’s control of the money supply
and interest rates, and instead, wants the free market to set interest rates.
Additionally, Paul supports “restoring the value of the US-dollar that
has devalued by 95% since the Fed’s inception in 1913.” Another
Tea Party favorite, Sarah Palin, former Alaska governor, has accused the Fed of conducting
“dangerous experiments with our currency.”
In an extraordinary turn of events, the Fed’s scheme to
devalue the US-dollar, and monetize the government’s debts, through a
radical process known as QE-2, has become a political lightning rod, pitting
liberal Democrats and supporters of QE-2, against conservative Republicans
and Tea Party opponents of QE-2. In the battle for public opinion, President
Barack Obama has sided with the clandestine group of bankers, who control the
Fed.
And while the Fed justifies QE-2 in the name of stimulating job creation, its
main aim is to increase the supply of virtually free credit to the Wall
Street Oligarchs and fuel bubbles in the stock market.
During a visit to India on Nov 10th, Obama argued
that QE-2 is in the world’s best interests. “I will say that the
Fed’s mandate, my mandate, is to grow our economy. And that’s not
just good for the United States, that’s good for the world as a whole.
And the worst thing that could happen to the world economy, not just ours, is
if we end up being stuck with no growth or very limited growth,” Obama
argued. But left out from Obama’s remarks was the Fed’s mandate
to control inflation.
Tea Party favorite Sarah Palin weighed in the debate over the
Fed’s QE-2-scheme, calling upon Fed chief Ben Bernanke to “cease
and desist” from his suicidal addiction to printing money. “We
shouldn’t be playing around with inflation. We don’t want
temporary, artificial economic growth bought at the expense of permanently higher
inflation which will erode the value of our incomes and our savings. We want
a stable dollar combined with real economic reform. It’s the only way
we can get our economy back on the right track,” Palin said.
Palin went on to say, “What’s the end game here?
Where will all this money printing on an unprecedented scale take us? Do we
have any guarantees that QE-2 won’t be followed by QE-3, QE-4, and
QE-5, until eventually, - inevitably, - no one will want to buy our debt
anymore?” Palin asked. However, the unelected officials, who were
appointed to the Bernanke Fed aren’t listening. They have a hidden agenda.
The Fed first began telegraphing its intention to unleash QE-2
upon the world money markets, at its annual conference in Jackson Hole,
Wyoming, on August 28th. In the background, the Dow Jones
Industrials had just tumbled below the psychological 10,000-level, after
falling 700-points over the previous three weeks. The stock market was beset
by fears of a “double-dip” recession, and a “deflationary
spiral.” The US economy’s growth rate slowed to an annual pace of
+1.6%, and less than half the +3.7% rate in the previous quarter. The U-6
jobless rate, measuring unemployed, discouraged, or involuntarily part-time
workers rose to 25-million, or 16.5% of the labor force, or one in six
Americans.
In order to arrest the slide in the stock market, Fed chief
Bernanke signaled that the central bank was ready to cross the Rubicon into
the world of QE-2. “The issue at this stage is not whether we have the
tools to help support economic activity and guard against disinflation. We
do! Should further action prove necessary, policy options are available. The
Fed will strongly resist deviations from price stability in the downward
direction,” he told a gathering of central bankers and economists.
Bernanke’s suggestion that QE-2 was necessary to stave off
a “double-dip” recession roiled world currency markets, sending
the US-dollar sharply lower against the Euro, the yen, and emerging
currencies, and propelling gold to record highs. New York Fed chief William
Dudley, explained to the media on October 1st, that printing
$500-billion under the guise of QE-2, would be the equivalent of the Fed
lowering the federal funds rate, by a half-percent. In other words, the Fed
aims to drive the fed funds rate below zero-percent for the first time in
history.
The Fed’s QE-2 scheme is portrayed by its propaganda
artists, as an insurance policy against the possibility of a
“deflationary spiral.” Yet in fact, the prospect of QE-2 set in
motion a buying frenzy into a broad array of commodities and precious metals.
The Continuous Commodity Index (CCI) climbed +23% higher in just ten-weeks,
elevating to within 5% of its all-time highs. However, the Bernanke Fed
doesn’t interpret booming commodity markets as harbinger of
accelerating inflation.
In fact, food and energy prices aren’t even included in
the Fed’s preferred model of the consumer price index. Instead, the Fed
blames booming commodity prices on voracious demand by rapidly growing
nations, such as China and India, and will never admit that its cheap
US-dollar policy is fueling global inflation. Above all else, the Fed is
determined to insure the massive flow of cheap credit to the Wall Street
Oligarchs, which are recording bumper profits of $19-billion this year, the
fourth highest total ever, helped by the Fed’s efforts to jig stock
prices higher.
So far, the biggest casualty of the Fed’s QE-2 scheme is
the Treasury’s 30-year bond. Its yield has zoomed 100-basis points
higher since late August, to as high as 4.42% this week. Long bonds were
priced for the probability of a “double-dip” recession and a
“deflationary spiral.” Instead, the Fed’s shift to QE-2 has
whipped up fears of accelerating inflation, and has stirred the animal
spirits among traders to bid-up commodities and precious metals.
The Fed’s QE-2 scheme, “introduces significant
uncertainty regarding the future strength of the US-dollar and could result
both in hard-to-control, long-term inflation and potentially generate
artificial asset bubbles that could cause further economic
disruptions,” Republican leaders of the House and Senate wrote on Nov
17th.
Economists at the St Louis Fed figure that for every
$100-billion pumped into the Treasury market under the Fed’s QE-2
operations, it would lower the yield on the US T-Note by 10-basis points.
However, such fanciful calculations have gone awry. Trying to push T-bond
yields lower, while trying to generate faster inflation at the same time, is
like trying to submerge a helium filled balloon under water. Instead, 10-year
T-Note yields jumped 40-bps higher. The yield spread between 30-year and
10-year bond widened to a record high of +160-basis points. In other words,
QE-2 has boomeranged, and is leading to sharply higher bond yields.
“Simply running the printing presses in order to pay-off
your debts is no way for a great nation to behave,” warns Ms Palin.
Indeed, another way to understand the hidden meaning of QE-2 is that the
market’s worst fears are being realized – the US-government is
essentially bankrupt, and can no longer service its debt, by running a
balanced budget. Instead, the only thing standing in the way of an outright
default by the US-government on its debts, - is the Fed’s electronic
printing press. Still, China and Japan were net buyers of $43-billion of US
T-Notes in September, - and so, the shell game goes on awhile longer.
Last week, yields on Ireland’s 10-year bond soared to as
high as 9.25% from around 6.05% a month ago. Ireland has begun preliminary
talks with the European Union, trying to securing a financial bailout to
avert state bankruptcy. Dublin is thought to require €60-80 billion in
emergency loans. If correct, borrowing on such a scale would push
Ireland’s gross debt towards 115% of its GDP. Yet the temporary bailout
would come at a cost of piling spending cuts and tax increases on the Irish
economy, which is already subject to the most savage austerity measures in
Europe.
The latest upward spiral in Greek and Irish bond yields were
triggered by German Chancellor Angela Merkel, who called upon on Euro-zone
banks to restructure the debts of Greece, Ireland, and other troubled
debtors, - and agree to take a big “haircut.” “Creditors
need to be involved in the costs of restructuring,” Merkel said.
“There may be a conflict here between the interests of the financial
world and the interests of politicians. We can’t constantly explain to
our voters that taxpayers have to be on the hook for certain risks, rather
than those who make a lot of money taking those risks. I ask the markets
sometimes to bear politicians in mind, too.”
Investing in Greek and Irish bonds is very risky. Athens and
Dublin would lack the funds to pay their debts at full face value, once the
EU’s emergency funds run dry in May 2013. As a member of the Euro
currency, Ireland’s central bank cannot print money to monetize its
debts. Likewise, if foreign bond holders start to grow weary of the
Fed’s QE schemes, and begin to realize that the US government is
essentially bankrupt, and can only pay off its debts by printing dollars,
then the upward climb in US Treasury bond yields has only just begun. An
upward spike in T-bond yields could deal a sharp blow to the highly indebted US-economy,
and its fragile housing sector.
There was so much euphoria on Wall Street, after reading Mr
Bernanke’s Nov 3rd, Op-Ed piece in the Washington Post, that
made it very clear, - the Fed’s primary goal is to artificially jig-up
the stock market, as a tool to reduce unemployment. Higher stock values,
according to the “wealth effect,” will restore confidence as
Americans see their savings rebound. Improved confidence leads to additional
spending, which could ultimately lower unemployment. However, in order for
that magic trick to work, the Fed must show its ability to keep the bond
vigilantes under wraps.
It was unclear how successful Bernanke will be in placating a
growing number of his critics. “Basically, what he is doing is
experimenting,” said Richard Shelby, Republican of Alabama. “He
basically admitted that he’s tinkering.” Furthermore, Fed
officials appear to be out of sync with market psychology. Soon after St.
Louis Fed chief James Bullard told the media, the Fed would utilize its fill
$600-billion allotment of QE-2, the US-Treasury’s 30-bond plunged a
full point.
The S&P-500 Index hasn’t acted according to the
Fed’s script either. It tumbled 50-points from its QE-2 peak high of 1,224.
Jittery stock market bulls must now grapple with threats on three fronts
– ranging from an unrelenting slide in US T-bonds, and the upward
spiral in Greek and Irish bond yields. To make matters worse, the Chinese
central bank is tightening its monetary policy, and lifting interest rates,
trying to slowdown the locomotive of the world economy, in order to combat an
inflationary spiral that was fueled by the Fed’s QE-2 scheme.
With the Fed determined to inject $600-billion into the world
economy, the task of combating its inflationary effects, have fallen on the
shoulders of Beijing. Chinese consumer prices were +4.4% higher in October
than a year ago, and Chinese banks extended 588-billion yuan ($88-billion) of
new yuan loans in October. The broad M2 money supply was +19.3% higher than a
year ago. Strong credit and M2 expansion, combined with the Fed’s QE-2
scheme, suggests a massive pool of liquidity would still buoy the commodity
markets in the months ahead. On Nov 11th, the People’s Bank
of China (PBoC) hiked required reserve ratios (RRR) by 50-basis points for
all lenders to 18%, and took an extra tightening step, lifting the required
reserve ratio to a record 18.5% for the country’s biggest banks, -
draining.
Beijing guided the 7-year Chinese T-bond yield 90-basis points
higher over the past few weeks to 3.80% today, in a belated move to rein-in
speculation in the Dalian and Zhengzhou commodity markets. The PBoC
has mostly relied on adjusting its RRR to control its money supply, but the
strategy is flawed, since Chinese interest rates are still positioned far
below the inflation rate, - thus negative bond yields encourages speculation
in commodities, precious metals, and Shanghai red-chips.
Shanghai and Hong Kong stocks fell to multi-week lows on Nov 17th,
on reports that Beijing is willing to hike interest rates again, in order to
tackle the country’s accelerating inflation rate. The tumble that
started on Nov 12th shaved 11% off the Shanghai red-chip index.
The Chinese Politburo is utilizing almost all of its weapons for combating
inflation, except for the one that Washington advocates, - lifting the yuan
against the US-dollar at a quicker pace.
However, on Nov 17th, Zhou Qiren a key adviser to the
PBoC said Chinese rate hikes are no panacea for curbing inflation.
“Loose monetary policy in 2009 has created excessive liquidity and
helped fuel prices of various products. Too much liquidity and fewer goods is
the reason behind inflation. Raising interest rates cannot change such a
situation,” he told the China Securities Journal. Thus, if Chinese and
Chicago commodity markets manage to rebound strongly from their latest
shake-out, it would signal that inflationary pressures are deeply entrenched.
The PBoC would be faced with the biggest inflation threat to its economy in
decades.
Meanwhile, the Fed is scheduled to buy $105-billion of Treasury
securities from Nov 12th, through Dec 9th, which in
turn, might fuel another tidal wave of liquidity into the global commodities
and metals markets. Gold and Silver have tumbled from their recent highs,
spooked by hefty increases in margin requirements, set by the US-exchange
operators, for agricultural and metal futures.
Given the extraordinary efforts of the bond market vigilantes in
jacking-up US Treasury yields, and the upward drift in Chinese yields, the
mountain that the precious metals’ bulls must climb has gotten steeper.
However, one should also keep in mind, that Chinese bond yields are still far
below the inflation rate, and therefore, offering a negative rate of return.
In regards to the US T-bond market, if there’s a growing realization
that the US-government is bankrupt, and can only pay back its debts by
printing paper, then precious metals are a safe haven.
So far, the actual results of the Fed’s QE-2 scheme are
horrifying. Monetizing the Treasury’s debt on such a massive scale has
only reawakened the bond vigilantes from their slumber. If the Fed cannot
stop the slide in T-bond prices, and bond yields ratchet sharply higher, the
euphoria in the stock markets over QE-2 is misguided. A similar example is
the events leading up to Back Monday, October 1987. At best, the results of
QE-2 would simply guide the US-economy into the “Stagflation” trap.
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Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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