International Forecaster Weekly

A Rudderless Fed Navigating The Sea Of Liquidity

A rudderless Fed  navigating the sea of liquidity... two sets of stats for the books... the Refco debacle... and what really happened at the Bildeberger meeting in Ottawa last week....

Bob Chapman | June 17, 2006

The Federal Reserve, a privately owned corporation, is floating aimlessly at sea, rudderless. All they can now do is create money and credit and hope for the best. Our present administration in Washington is clueless, so much so that they just had to bring in a Wall Street heavyweight to begin to plan damage control. At the same time, except for a handful of legislators, Congress is clueless to what is happening. It would be nice if we could get Congress to listen, but we see little hope of that. Most of them are economic and financial illiterates. They believe a law degree makes them expert on just about everything. There is little hope of reform from either quarter. The Fed created our current situation and they knew the path they have chosen is economic stagnation and inflation, better known as stagflation.


    The world is now in the beginning stages of a hyperinflationary collapse. We see a very good likelihood that the dollar, which is currently 86 on the dollar index, could break long term support of 80 before the year is over. If we are correct the value of the dollar versus other major currencies would go into freefall ending up somewhere between 50 and 60. That would put the euro currently at 1.26 to the dollar at 1.90 to 2.00. That would put gold at $1,700 an ounce. It is currently trading at $610.00. This madness began in 1987 when Sir Alan Greenspan inflated us into a recession that began in 1989. Had we been allowed to have a severe correction then we wouldn’t be facing what we are today. Obviously Alan’s orders were, inflate us out. That has gone on ever since.


    Any serious student of economic history knows that we are facing all the classic indications of collapse. Falling stock markets worldwide, a fall in international liquidity and high commodity and gold and silver prices. You may think these prices are high, but they are not. Over the past seven years house prices have gone from $100,000 to $300,000, so why is it impossible as a reflection of 25 years of inflation, for commodities to triple or for gold to go to $1,700? The simple answer is that it is normal for them to rise. Due to sustained low interest rates we have a bubble in housing that is in the process of being corrected. In time that may very well happen to commodities, gold and silver, but we are a long way away from that presently. Essentially what Greenspan did was bail the banks out in 1987. He then set the stage in the early 1990s, though excess liquidity, for the dot.com boom and then he moved to low interest rates and exotic loans to perpetuate the real estate and stock recoveries. In the former he had Fannie Mae and Freddie Mac launder the mortgage-based securities.


    When the hyperinflationary process ends we will enter a new economic and financial dark age that could last for many years, not unlike the collapse of the Venetian banking system in 1348, the collapse of the Lombard League in the 1500s and that of the Hanseatic League of the 1600s. As you can see this is nothing new. All you have to do is read history.


    We reported on the accumulation of base and precious metals during the early 1990s and onward. We also reported on the accumulation of gold, which was sold by central banks during the 1980s and 1990s, and into the new century, by Illuminist interests. Investors do not have the funds to buy tons of gold bullion, only the mega-rich do.


    We are told by some that world markets are falling because of the withdrawal of liquidity. Only one entity is withdrawing liquidity and that is the Bank of Japan. That is part of the reason emerging markets have been hit for 20% to 28% losses off their highs. Most major western economies are increasing liquidity by more than 10%. The major reason for these corrections in addition to the end of the yen carry trade is that these markets were way overbought if not bubbles.


    Official US inflation is over 4% and European inflation is over 2%. The real numbers are 10% and 5% respectively. That is one of the reasons interest rates will go higher. It is inevitable that interest rates will rise worldwide. In the US ½% is reasonable. That is inflation related as well as to try to protect the value and the decent of the dollar. While that is transpiring the Fed is trying to suppress the 10-year Treasury yield so the housing market won’t collapse. That has led us again to the inverted yield curve that leads to recession. As you can see, monetary-financial markets are trapped. There is absolutely no fear the Fed will go too far with interest rates and that is because inflation has been over 10% for a long time and is headed into overdrive. Soon mortgage rates will be 7% and construction will slow and unemployment will build. That also means cash out financing will cease to be the factor it has been in consumption and the economy will lose 1 ½ to 2 percent of GDP growth. That means real growth will be 2% or less. In the last run in the 1990s, 24 million jobs were created. Since 2001, only some 4 million were created. In the 90s, 7% were in construction and in the 2000s, 20% were in construction. Unfortunately, the employment numbers are lies and probably less than two million were created.


The bankruptcy at Refco has turned into a real can of worms. 17,000 customers in the currency-trading unit, Refco Fx, have not been able to withdraw their money since last October, which is an outrage. Although the accounts were frozen, Refco allowed the customers to trade their accounts and Refco told them the profits and losses are theirs. Now they’ve been told all their trading profits or losses don’t go to them. Not only that, part of their account funds will go to creditors. When it comes to criminality Wall Street knows no bounds.


    Madness in America continues at all levels. In Buffalo, NY, a new policy lets students skip class, still pass-with district final exams eliminated, if a student gets an 80 in the first half of the year, even no-shows can earn a 65. On some days and some classes only 3 or 25 students show up.


    The question is starting to appear here and there. Can we survive the next recession/depression? The simple answer is no. The system has to be purged.


    The gross federal debt now exceeds $8.30 trillion. The much larger unfinanced liabilities are $66 trillion according to calculations by economists Jagadeesh Gokhale & Kent Smetters. That is almost eight times the size of the official gross federal debt.


    At St. Petersburg, Russia this past week the G-8 said the world economy could be derailed by the US’s huge trade deficit or the ill-effects of high energy prices.


    Last Friday, the secret Bilderberg meeting got underway. Alex Jones calls them the Mafia. We call them elitist Illuminists. In previous years no mainline news coverage was available, but this year is different. Already the Ottawa Citizen, Ottawa Sun and the Toronto Globe & Mail have pumped out several articles on the conclave. Let’s hope they do more. At least they reported. The American press certainly hasn’t. It could be New York Governor George Pataki is being lined up for the Republican presidential nomination, as he was an attendee as were Queen Beatrix, David Rockefeller, Henry Kissinger, the World Bank’s Jim Wolfensohn and the Prince of Darkness Richard Pearle.


    Sam Palmisano, head of IBM, has called on transnational, multinational fellow elitist corporations to evolve into a new type of corporation if they are to avoid an anti-globalization backlash that leads to the election of governments hostile to the interests of big business. He says the almost colonial approach to operations has to be abandoned. His solution is to move the entire corporation out of the US and Europe in what he believes will avoid sanctions. Trade protectionism and tariffs would apply to all outside the US, thus, Mr. Palmisano is not going to beat tariffs if they are enacted by the US and Europe.