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One of the most bothersome
questions from 2005 to 2007 used to be whether the Untied States would
ultimately submit to inflation or deflation. This is actually the wrong
question. Many analysts in my view are incorrect in their conclusion that the
US suffers from a powerful deflation episode, since they
endorse the wrong definition, confuse effect with cause (as usual), do not
properly monitor the money flow, and then draw improper conclusions from
prices. They suffer from a type of Keynesian Tunnel Vision. They are
confused, and fail to adapt certain key measures after the financial sector
highjacked the entire national system in the last two decades. If the
tail controls the dog, then the movement of the tail must be properly
monitored in the data. They add to the murky waters emanating from USFed
marble-laden offices, and from USGovt agencies marred by clownish ineptitude.
A divorce has occurred by the paper price of gold from the pure physical
price. That is your loud unmistakable late signal of a system in a very
important transition, where past indicators MUST be adjusted, so as to adapt
to a new bizarre corrupt system. If deflation has won, the gold price would
be closer to $500/oz than $800/oz, and surely would be to the 1995 price levels,
like the housing sector. The iron rule of paper is in the process of yielding
to a new power. It will be dictated by foreigners, and will involve a new
monetary system linked to gold & silver just like before 1971 when the
fatal schism occurred.
In my view, the entire topic of
inflation is intentionally obfuscated by the economists at work across the
entire financial sector spectrum. They prefer to maintain a high level of
ignorance among the public, and of confusion even among the analysts, so that
the USGovt officials and Wall Street bankers can continue to steal savings
via confiscation by inflation, all without any formal tax levy and without
any legislation in support. Worse, inflation is blessed as good, which
actually enables those Elite in Power to continue vast counterfeit rings. Their
vehicles are USTreasury Bonds, Fannie Mae bonds, Congressional
appropriations, and sacred USMilitary budgets, each of which has had almost
zero enforcement. It is my contention that each has been a principal part of
syndicate activity, sanctioned and protected by USGovt agencies and US
Financial titans, along with lapdog regulators. Generally, the dumber the
nation remains, the more the Elite can continue to ply their privileged
trade. The era of paper pusher domination is gone, as Wall Street
gradually will resemble a Ghost Town that mirrors suburban residential
foreclosure blight. The nation has probably never been more ignorant on
matters pertaining to inflation in its history, as it is now. The next stage
will feature grand exposure of lies, fraud, deceit, and corrupt relationships
including routine bribery, insider trading, and counterfeit rings.
The penalty suffered is a wrecked nation, and
inevitable lost sovereignty. When foreigners own over half the national debt,
and the USEconomy is in tatters, and the US banking system is both dysfunctional and in failure
mode, foreigners have the right to take control. They will do so. The
arrogant will be swept aside as thoroughly as the billionaires will be ruined.
If you think such words are wild and silly, just wait and watch! Receivership
committees are being formed in foreign lands, but they must contend with
military threats. Numerous bilateral trade agreements are being hammered out,
designed to circumvent the corrupt paper price systems in US & UK control. Times are changing, and the door is open for
some degree of colonization. Wealth will flow in the direction of those
prepared. Owners of actual gold & silver, as well as crude oil &
natural gas, will lead the next era.
INFLATION OR
DEFLATION ?
Most one-word answers are
replete with ignorance, usually revealing big blind spots. The simple
answer is that the overall USEconomy, complete with its cancerous Financial
System, is enduring both inflation and deflation simultaneously. Inflation
is defined as the growth of the monetary base (money supply) beyond the
growth of the economy itself. Why smart people cannot grasp this is beyond
me. Many smart analysts often forget it, or unlearned it. They insist on the official
distraction definition of rising prices, which is NOT inflation. Instead,
fast rising prices is a typical symptom of inflation, one of its effects, but
not during a credit collapse like now. If focus is given to various classes,
then the contrast of rising and falling prices is more clearly seen. Until
late 2006 and early 2007, residential property was rising in price. But since
then, property prices have been falling. Energy prices experienced a blowoff
top in summer 2008, but now are in decline. Wages were rising gradually also,
but now are somewhat flat. Stocks peaked in value in October 2007, and have
crashed worse than any 12-16 month period since the Great Depression. Asset
backed bonds were rising in value until 2006 also, as in mortgages, but have
fallen in a manner better described as a tumultuous tragic crash. Prices are
indeed falling for many groups, but from credit collapse and credit
restriction. However, inflation continues, as in monetary inflation. But the
two chambers of the real tangible economy and financial sector expose a split
in inflation symptoms recently.
The most queer asset class
nowadays involves the USTreasury Bonds. They are now experiencing their own
blowoff top, closely associated with what my analysis has called The Dollar
Death Dance. As long as the USEconomy continues in decline, as long as the
corporate failures continue, the USDollar will show strength. Given the
colossal amount of funding necessary for the wide assortment of bailouts,
rescues, stimulus packages, and nationalizations, with price tag over $8500
billion, the USGovt and USFed have a powerful motive to doctor a USTreasury
rally. This accomplishes two purposes. It encourages a flight into the frying
pan, errrr flight to quality, which renders the supply as huge. It also lifts
the bond principal prices, and reduces the yields paid to investors both
domestic and foreign. The USTBond complex exposes an utterly huge money
flow, which must be incorporated into money velocity data. It probably is
not, by deflationist theory advocates.
Never overlook the corruptive
influence at the COMEX for setting prices for important commodities like
crude oil, natural gas, gasoline, gold, copper, and more. What used to be a
formal price discovery mechanism and market system has turned into a
thoroughly corrupt system of price control with leverage, fully ordained,
fully approved, and fully protected by the titans who run USGovt financial
policy. See Goldman Sachs and JPMorgan, two firms more responsible for the
near collapse of the nation than any others. These two firms still remain
highly revered, and remain fixed in control of bailout funds despite their
responsibility in massive fraud. This juxtaposition in my view serves as
loud confirmation of both investment community ignorance and controlled news
reporting. These two firms are agents to control and interfere with market
price systems, with full privilege both to benefit from insider trading and
control most policies regarding rescues. They in all likelihood manage either
the counterfeit operations or the money flow spun from them. This comes with
the right to determine which firms are saved, which are killed, together with
which hedge funds are denied credit and liquidated, when positions oppose the
titans. They made orders to halt shorting of bank stocks illegally. They
objected to naked shorting, when they are prime perpetrators. Some call this
a free market. Actually, the US financial system has never been more distorted,
controlled, tampered, doctored, corrupted, and coordinated with official
policy in the nation’s entire history. The officials from the
USGovt in charge of financial policy have given blessing to the titans at
Goldman Sachs and JPMorgan to engage in financial genocide, directed against
both the public investment accounts and hedge fund accounts. At times they
employ the regulators for big assists. One should suspect that their detailed
and protracted efforts are aligned closely with the consolidation of bank
power. Refer to the nine select banks as part of the US Federal Reserve
system. Rare is criticism on financial networks. The worst one might see is
criticism over losses, not deeply engrained corruption.
My longer answer, more like
filling in the background, is that inflation is the PRIME DIRECTIVE of the US
Federal Reserve, whose chairman deserves the title of Secretary of Inflation.
Inflation is still the order of the day. One can actually argue that
the entire USEconomy is a gigantic Ponzi Scheme, fueled by USTreasurys, now
come unglued. In fact, with the Weimar-like explosion of monetary
inflation has come more confusion, even within its proper definition. The
private sector, often called Main Street, where people live and work, businesses operate,
commerce directed, is being drained of money supply to some extent. Credit
flow is being restricted, by order. Despite all the hoopla of the USFed
flooding the system with money, the august central bank is draining the
private sector in order to subsidize Wall Street in a final explosion of
fraud, before the New Administration. Git while the gittin’ is
good! Expect very little in the way of change, and never confuse transition
with change. With an insider Geithner at Treasury Secy, and with Bernanke to
continue as USFed Chairman, expect little change. Also, with Gates continuing
as Defense Secy, an unprecedented decision, expect only cosmetic change to
the war effort. At least the shady but revered Goldman Sachs is not in charge
at Treasury anymore, an event whose importance has yet to be determined.
The nation is slowly coming to
grips with how broadly the dependence upon home equity was for several
business sectors. My view all along has been that the USEconomy had a lethal
dependence upon the housing bubble, and when it burst, the entire USEconomy would
enter seizures, suffer from vicious cycles, and next enter a powerful
disintegration phase. Retail centers, travel agencies, boating ventures,
education, furniture stores, home supply centers, restaurants, bookstores,
these are all facing near death experiences. The car industry plight has
captured most of the current attention. A sad factor has come to light. If
countless car supply firms are not bailed out, given massive assistance, and
kept alive, then the Detroit carmakers will die anyway from lost industrial supply chain
starvation. Few are associated with the United Auto Worker union in the new Delphi was.
DRAINAGE & MORAL HAZARD
Over $700 billion in Cash Management Bills have
been sold into the credit market, which is testimony to the drain of funds to
cover some of the lending facilities, which have to date subsidized massive
fraud and failure on Wall Street. The other phenomenon important in the
process has been the informal order by the USFed not to lend. Just this week,
a subscriber to the Hat Trick Letter wrote to share information that his son
in North Texas cannot obtain a development
loan from his bank. The bank actually told him that land cannot be used as
collateral in loans, BY ORDER FROM THE USFED ITSELF. Where is such
information promulgated on the news networks? Banks are accumulating large
amounts of funds, and not lending them to the people. My conclusion is
that the USFed and the Federal Reserve Banks themselves are orchestrating a
collapse of sorts for the USEconomy. Their purpose is unknown, but if the
Great Depression Era is any teacher, this elite group of banksters harbors
great lust for consolidated power. My conjecture is that they will
purchase large slices of various asset groups at cheap distressed properties.
The other purpose is to encourage the many private banks to engage in a basic
form of carry trade. From their vast growing hoard, they borrow short-term
money at the official near 0% rate, and invest in long-term USTreasurys at
the higher rate. This carry trade has pushed the long rates down from 4% to
2% in amazing fashion. Like the 2002 episode urged by Greenspan, long-term
rates are being directed lower, in order to aid the mortgage industry and
housing market.
Moral hazard has permeated all chambers once
again, a totally embraced policy, the inexorable step that Bernanke promised
would never happen.
Refer to the near 0% official rate. The US is so so so lost on a path into darkness. Why? Because
the very cause of bubbles and their bust is once again official policy for
remedy. What lunacy amidst desperation!!! Jack Daniels is served for free
once again, to supply the hopeless alcoholic. Few seem to realize that the
climax of a fiat system is the proliferation of crime syndicates engaged in
counterfeit and fraud, whose assured systemic ruin assures myriad seeds
planted. The new shoots lean toward the sunlight but coupled with violent
change. Those who push for change will be labeled enemies of the state. We
are witnessing the failure of the nation.
DEAD BANKS
THE END RESULT ON THE PRIVATE SECTOR SIDE IS THAT
THE MONETARY BASE IS FLAT, FROM OFFICIAL NUMBERS. THE MECHANISMS THAT CONVERT
BANK RESERVES INTO BORROWED MONEY, THEN LENT IN LOANS, PRODUCING ECONOMIC
ACTIVITY, IS EITHER BROKEN OR SUSPENDED. Be sure to know that the new hoard
of bank reserves is a pure USFed donation, from swapping worthless garbage
bonds for USTBond mere paper. This is only half the story though.
For a concise interview, see the
iTulip article entitled “Major US Banks Worse Than Japan’s Zombies” (CLICK HERE on Fred’s
piece). An anonymous industry insider Dr Banker is interviewed. The guest
claims the massive blood infusions have failed to revive the defunct
banking system. “The transfusions usually take two to six
months, and typically six months or so after the crisis is over, are
gradually withdrawn over a period of several months to return total money in
the system to pre-crisis levels. My theory is, and I admit not everyone will
agree with it, is this: the patient is dead… They can
keep the intravenous tube hooked up to a pint bottle or a 100-gallon drum of
blood, but it does not matter if the blood is not circulating through
the patient, so he can take it in… Note that many smaller banks
that do not operate as part of the Fed system are working just fine… The
reason: Credit Default Swaps. It is now well understood that CDS are at the
root of today’s financial crisis. Your readers have known that risk
since 1999… Some have suggested the simple expedient of canceling them
all, declaring all of the CDS contracts null and void. CDSwaps certainly
killed [the patient] but removing them is no cure.” Dr Banker went
on to explain how in the last ten years, Credit Default Swaps have sustained
the US banking system. Their liquidation would require the
writedown losses of between $5 and $10 trillion. See the transfusions in the
chart below. Bank loans are not forthcoming. The system is defunct.
CDSwap trades are integral to
the USEconomy. Do deflation theory advocates acknowledge this or factor them
into their data? Certainly not. They are often Keynesians who do not adapt to
changing times. Imagine not counting a flow of funds in the money velocity
data. Such practice is simply bad arithmetic. It is like not counting the
midnight raids to the fridge for ice cream in the calorie intake calculus.
COMMENTS TO THE
DEFLATIONISTS
Deflationists are totally
pre-occupied by the standard sources of data. They are overly focused on the
tangible economy, with a blind eye on the financial sector. Times have
changed in a revolutionary manner, enough to require the entire deflation
topic to widen its scope for detailed study. The ordinary economic manuals
should be either updated, or sent to the dustbin. The entire economic and
financial system has been turned upside down. This requires analytical
methods to adapt or become useless, giving off entirely wrong indicators,
resulting in downright wrong conclusions. Most analysts, even the best, have
not adapted. They are thus wrong-footed, since the landscape has shifted from
under their fixed feet.
Rick Ackerman is held in high
regard, a fine analyst, a great technician. He is on my short list of
required reading, who lifts my level of comprehension without exception. He
has indeed been warning about severe price declines in broad asset classes
for a full decade. However, that aint deflation. He has warned also
about credit collapse, with full accuracy. However, that would qualify as
deflation if not for over $8 trillion in expanded bond creations. Amidst
a decade of huge monetary inflation and spectacular unbridled credit
expansion, the fools at the US Federal Reserve, US Dept Treasury, and leading
Wall Street firms have succeeded in producing a crash that has destroyed at
least $6 trillion of value in financial assets, which offset the additional
$6 trillion at least in property equity value. They also killed Wall Street
itself. The nature of their fool status is a unique combination of
stupidity (no learning from the past), reckless risk management, corruption,
bond fraud, and arrogance that is closely linked with running a monopoly of
power and influence. One might better describe them as parasites inflicting a
cancer upon the nation, having taken control of brain functions. Their
risk models have served as phony brain synapses within the banking system. THESE
CORRUPT INFLATION ENGINEERS HAVE KILLED ASSET VALUES WHILE CONTINUING TO PUMP
PRIME VIA THE INFLATION MACHINERY. The system is near dead, if not dead. The
banks are insolvent, and the households are insolvent. A failed state is
emerging.
Ackerman states steadily in his
work that the money supply is flat to down. Ackerman also points out that
money velocity has slowed considerably. He relies upon these two pillars to
make his argument for deflation as the prevailing phenomenon, pointing to
prices fallen in a broad sense. Pardon my very succinct summary. It is not
for me to cite his work in full. My motive is to cite a position that is
gaining popularity, wrong-footed in my view. In his private work, he takes
exception to being called a ‘Wrong-Footed Deflationist’ in
response to my recent article in late December. He claims our differences are
semantics, to which another disagreement comes.
Three big phenomena on my radar
must be identified in order to present the titanic struggle accurately. The
second cited item exposes the primary flaw in the deflationist argument
concerning the monetary aggregate. The third item exposes a paradoxical flaw
since it centers upon gold itself. My role is not to take umbrage, but rather
to engage the debate. Mike Shedlock also has too narrow a view of events, and
regards deflation as having taken victory laps. He too makes improper
interpretations, since too focused on the tangible real economy, without
valid incorporation of unorthodox financial data. The analysis of
monetary matters, such as inflation versus deflation, must take into account
the ‘Double Booking Economics’ very carefully. See the Shadow
Banking System, and bring them into the analysis. CONCEPTS LIKE MONEY
VELOCITY MUST ADAPT OR BECOME IRRELEVANT. Many monetary tectonic shifts
have occurred, which must alter the analysis.
First is the reduction of
money flow within the private sector, as a result of sharp reduction in
credit creation in packaged loans. This applies to the sector outside Wall
Street and the satellite markets upon which they exert their criminal
fraudulent influence. No dispute here, since evidence abounds on reduced bank
credit to both households and businesses. The loss of home equity, like $6
trillion in two years, has led to a truly mindboggling reduction of
collateral to extract spendable money. The loss of stock valuation has also
removed a key source from which to extract cash. The entire Cash Mgmt Bill
activity has worked to neutralize the flood of USFed Lending Facility
activity for the benefit of New York firms. The public seems totally unaware of the huge
drainage.
Second is the staggering
explosive growth in the credit derivative market since the mid-1990 decade. In
just the last few years, the growth of credit derivatives, traded over the
counter, has been enormous. This is widely recognized. The annual growth
levels lie in the 40% to 60% annual range. How can the deflationists ignore
this? THIS IS MONEY IN FLOW, NOT COUNTED BY DEFLATIONISTS IN MONEY SUPPLY
DATA. It is an important blind spot of theirs! Do they not call it money when
gigantic swaths in the billions are traded, and enter the bank systems via
the back door, recorded off balance sheet (read: double booking), but used in
the flow of operations? Dr Banker claims the entire US banking system has depended vitally upon such flow of
funds in order to conduct a decade of bank operations! Furthermore, the
credit derivatives contracts represent a perverse cancer of money itself. Cancer
must be accounted for. Does a sick man weigh less officially, after
discounting the cancer tissue? No!
Third is the continuing
powerful upward thrust in the open interest and trading activity of gold
& silver futures contracts. During the summer and autumn of 2008, the
gold & silver phony paper prices declined by 25% and 50% respectively. Price
movements were dominated by heavy futures contract activity by the elite Wall
Street firms. See JPMorgan, which registered a 50% rise in their short
positions. THIS IS MONEY FLOW, NOT COUNTED BY DEFLATIONISTS IN MONEY SUPPLY
DATA. It is an important blind spot of theirs! Do they not call gold money? What
irony! They argue the merits of a gold-based system. They decry the corrupt
monetary base in a debt foundation. Yet they fail to recognize gold trading
hands in mammoth transactions, not acknowledged as money flow. In fact, the
trading of gold is 10 times in turnover per ounce of gold (see LBMA data),
generating fees, and forcing tax payments. Its commerce is undeniable.
Movement of metal to and from vaults is evidence of money flow.
GOLD DENIES DEFLATION
The picture presented in the
gold chart does not confirm the deflation thesis. If deflation were a
powerful new force, then the resistance at 700 to 730 would not
have held ground. In fact, the gold price has fluctuated around the mid-level
profitaking zone between 790 and 830, set in late 2007. The deflationists
observe a broad liquidation of hedge funds, of speculative positions, in an
environment of tighter credit and profound bank system distress, and conclude
a deflation event, in total confusion. They must explain why the gold price
has not returned to the 2004 price, like crude oil has! We are seeing mammoth
monetary inflation amidst mammoth assaults in commodity prices, enforced by
mammoth assaults on private accounts (hedge funds), during a period of
mammoth credit restriction. THAT AINT DEFLATION. Notice how the gold price
has risen precisely when industry collapse has hit the newswires in the last
few weeks. See the retail and car industries. If deflation were in the
driver’s seat, gold would be closer to 700 than 900, and technicals
would be showing bearish signals, not bullish.
Meanwhile, the buck is stuck in
the middle of nowhere. The USEconomy stinks on ice, having entered a zone
better described as disintegration, with numerous sectors hoping to avert
actual collapse. The banking system stinks on ice, unsure of its solvency,
hoping it can resort to sanctioned fraudulent accounting in order to continue
zombie lending operations. The newest bubble on the endless highway of US
bubbles is the US Treasury Bond itself. It is inconceivable that
foreigners will be willing to pay top prices for bonds yielding nearly 0%
anchored to a USDollar grossly overvalued. The USDollar will offer very
little to prevent the gold price from moving higher, step by step, as the
switch is turned on by the Elite in Power. The clutch is soon to be
released. Traction from the monetary inflation engine will result in long
ugly black rubber tire patches. Gold will respond to the switch turned on.
Then the deflationists will be silent, and their wrong-footed analysis will
be forgotten.
Jim Willie CB
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