International Forecaster Weekly

Economic Recovery Evades Fed and Congress Efforts

Fed has a clouded vision, close to three years into a deep recession now, expansion in monetary and fiscal policy will produce excessive inflation, and inflation is set to grow to 20%, oil threatened by war and conflict, municipalities in US in deep trouble, Europe beset with inflation, Iceland refusal, higher consumer costs coming as a real threat.

Bob Chapman | April 23, 2011

Economic recovery does not seem to be taking effect in spite of more massive expenditures by Congress and the Fed. The IMF says financial stability has improved, but then again their vision is almost always clouded. US tax revenues are not increasing in a meaningful way, manufacturing struggles to expand and Wall Street flourishes in a cascade of mega salaries and bonuses. In another six months the US will be three years what the government, the media and Wall Street call a deep recession. We call it an inflationary depression, which has existed for 26 months. After eight years of increasing money and credit, and the creation of a real estate bubble, the Fed has been fighting off asset destruction with ever more money and credit accompanied by debt deflation. Part of the Fed’s policy has been zero interest rates, which has helped Wall Street and banking and to a limited extent real estate, but has destroyed the purchasing power of retirees and has driven funds into speculation, which in many cases has ended in ever more losses and less buying power.

The policy left conservative investors no place to turn to other than to join Wall Street and bankers in speculation, something they were not prepared for nor could they compete with. Borrowers have had a field day with virtually free money for which the result has been higher inflation and really major unemployment. You might call this the true Keynesian corporatist fascist model. This has left us with ongoing malinvestment, ridiculous illusions, which have led to the de-capitalizing of the US economy. In that process these interest free loans have given the big hitters the opportunity to enhance their fortunes at the expense of everyone else.

These rates and QE2 at least for the moment have been so powerful that deflation is nowhere in sight, except perhaps in job creation. In fact net inflation has moved up to 9-1/2% and we believe this year it will attain 14%, as government eventually admits to 5-1/2%, as we saw three years ago. If you think we are wrong look at producer prices that are up almost 11% over the past six months. Government and mainline economists are not paying attention. Either the higher costs are passed on or the profits will disappear. Just like in years past, over and over again, the excessive expansionism of monetary and fiscal policy will produce excessive inflation, more inflation than the so-called experts are anticipating.

The bailout of financial institutions by American taxpayers, both in the US, UK and Europe, won’t be allowed to happen again. In the next go-around they will go bankrupt. Those in the US and other stock markets with the exception of gold and silver shares, those in bonds, derivatives and hedge funds, will be wiped out as well. Few will be spared.

A year from this June inflation should be near 20% and that is where panic will set in. The 10-year T-note should be yielding 5-1/4% to 5-1/2% and the 30-year fixed rate mortgage should be 6-1/2% to 6-3/4%. After that interest rates and inflation will more than double, as they did in the late 1970s.

An example that is easily understood is that due to foreclosure and lack of job creation, rents should increase 10% over the next 1-1/2 years. That is known as Homeowner’s Equivalent Rent, which is 23% of total inflation. We believe that is a conservative figure. We won’t deal with core inflation, because it is just a method of obscuring real inflation. That 10% increase would add 4% to net inflation, which is currently about 9-1/2%, not 1.9%, as your faithless government would have you believe. That would put real inflation at 5-1/2%, not to mention increased prices for fuel and food. That is why our estimates are 14% to 25% over that time frame. Don’t forget interest rates will be rising as well. This only includes QE and stimulus 1 & 2. If QE3, by that or some other euphemism occurs, which we believe has too, then 50% inflation and hyperinflation is attainable. Readers have to remember that even if oil prices stopped increasing at $120.00, and food prices stayed at 10% higher levels, it would still rob consumers of $300 billion in purchasing power. That would drop consumers as a part of GDP from 71% to 69% easily. That means GDP growth even with the Fed adding $2.5 trillion to the economy, would at best stay even and may reflect as low as a minus 6%. You have to get the feel of the dynamics of this. Raging inflation, plus perhaps hyperinflation, a falling economy and 30% to 40% unemployment, U6 was 37.6% at the top of the great depression and the birth/death ratio didn’t exist at that time. Presently wages are stagnant, and they have been so for three years. Wages will finally start to rise so you can add rising wages to the inflationary explosion.

As this transpires we have the Middle East and North Africa, which are now a frightening further calamity waiting to happen. Any further violence there could take oil to $150.00 or higher. Will there be war with Iran? Perhaps and if that develops oil could escalate to $200 to $300 a barrel. Such developments would knock the foundation out from under the entire world, except for those fortunately producing oil.

Another factor is the plight of municipalities and states in the US. We have seen a small reduction in employment in these sectors, but the biggest layoffs are yet to come, as well as more than 100 municipal bankruptcies. We will also see debt default by states in relation to their bonds and other debts. Some states, such as Illinois, New York and California could cease functioning. This is not a pretty picture.

Then we have the woeful situation in the UK and Europe, all beset with rising inflation as well. A sovereign debt crisis has been prevalent for months with Greece, Ireland, Portugal, Spain, Belgium and Italy. All are at different stages of failure and nothing has really been resolved. As we wrote months ago the cost of bailout assistance would be $4 trillion, and it was just recently that the Germans and other lenders realized that the bailout cost is insurmountable. The cost will easily bankrupt the solvent lenders. Then there are the banks, all of which are close to insolvency already, which are facing massive bond losses, which will put them out of business. These are the loans they made that they should have never made, from funds created out of thin air.

Iceland has rejected paying off British and Dutch depositors, who had funds in Icelandic banks, which went bankrupt. The depositors do not have a leg to stand on and the citizens of Iceland are correct in their refusal. It was the Icelandic bankers who screwed the depositors.

Recently Finland’s voters rejected the bailout of Greece, Ireland and Portugal and who can blame them.

Wait until Greece goes into default, then things will get real interesting.

We normally do not editorialize regarding silver and gold. As you know we have recommended being long gold and silver shares, coins and bullion since June of 2000. Now that story is getting even better. Not only has gold and silver been a safe haven asset all those years, but is finally again becoming a shelter from inflation. The US, UK and Europe are in serious financial and economic trouble. Over the past 11 years, nine major country’s currencies on average have fallen more than 20% each year versus gold and silver. That is quite an extraordinary return and from our mail our subscribers are quite happy they followed our advice. Our run, including our market shorts, has simply been unbelievable.

Silver prices are on a tear and as we write they have risen to $46.30. In spite of these price levels the mining industry is not increasing production in any meaningful way. About 70% of production comes as a by-product of other types of mining, such as copper. There are no new sizeable projects in the works, and thus it is expected that production could fall 5% annually for the next ten years. The easy finds have already been exploited and new large projects are harder to find. In fact, current mines have only been able to increase production by a paltry 2.5% or so. In 2009 Argentina was the only outstanding exception and that could be a one off occurrence.

As we write gold has broken out to $1,509.30 even as the “Plunge Protection Team” fights viciously to suppress both gold and silver prices. Despite the mantra on Wall Street and in government there is 9-1/2% inflation affecting the US economy and the professionals and the public are finally catching on. In spite of the greatest bull market in gold and silver history, they still do not get it. Less than 1% of Americans own gold and silver related assets.

The QE1 and 2 and stimulus 1 and 2 have done their damage. The inflationary results are in the pipeline. QE and stimulus being reflected this year and the results of QE2 and stimulus 2 next year. We believe we’ll see the results of QE3 the following year, 2013, but it will be called something else. A falling dollar and few buyers of US debt has again set the stage for the Fed taking down 80% or more of Treasury and Agency debt. If they do not do that the whole system will collapse. These programs are like booster rockets aiding an underlying positive fundamental condition for gold and silver. The flip side is the debasement and denigration of the US dollar. As an aside even though the ECB has just raised interest rates they and the UK will continue their own versions of QE, because if they don’t their economies will collapse. That will put even more inflation into the world financial system.


As the possibility of QE3, or its equivalent, lurks in the wings the very solvency of America hangs in the balance. Those who have studied financial and economic history know that the course that is being followed is unworkable, and that certainly includes the staff at the Fed and the Treasury Department. In fact, Mr. Bernanke pointed out that in his and Mr. Baskins’ writings in 1988 after the market collapses of 1987.

At the heart of America’s problems are the insolvency of many financial institutions and the failure of either the Fed or the Treasury to have them liquidated. What the banks have in mind is the liquidation of bad debt held in suspension over the next 50 years. Supposedly as conditions and profits increase part of those profits will be used to lower debt. The problem is that these corporations are bankrupt. There access in the creation of inside information allows them to produce illegal outsized profits, such as 90 days of propriety trading without a loss. We were traders for 25 years and know under normal legal circumstances that that is impossible.

The, of course, there are the giant profits, really theft from other investors, that are used in part to offset previous losses and provide outsized salaries and bonuses to the crooks that run these banks and brokerage firms. These results are aided by the creation of money and credit and zero interest rates. The ability to borrow money created out of thin air at almost no cost. As a result the Fed now has a balance sheet of some $3 trillion loaded with Treasuries, Agencies, toxic waste and if they decide to create more money and credit to keep the government and the economy functioning for another year that figure will become $5.5 to $6 trillion. That is some monetization. There is unfortunately no other way for the Fed to do it, when at best they can only expect 20% to 30% of buyers for Treasuries, as the dollar falls in value. The situation is dire as the US dollar has just fallen 5% versus the Mexican peso, as the Mexican economy grows 4.5% a year, inflation is 3.7% and unemployment is 5%, and they haven’t used stimulus. What are we missing here? Nothing except the Fed and Treasury, as well as Congress and the President are out of their minds as were their predecessors. How bad is it when the largest bond fund in the world, PIMCO, not only sells all its US Treasuries and Agencies, because they see no value and then they proceed to short them? It’s certainly a sad day for the solvency of America. Who can blame PIMCO when government is projecting $1.6 trillion deficits as far as the eye can see. In addition, all the funds paid by Americans for Social Security and Medicare have been squandered by government. Now there is no way to pay the promised benefits. That is $100 trillion that has been stolen, or should we say misappropriated. It is so bad that the US government credit rating may soon be lowered. It was just 1-1/2 years ago we picked August 2011 as the possible time for a downgrading of that AAA credit rating.

The number of states in serious financial trouble has now risen to 40 and unfortunately that number is still climbing.

We wonder what the American public is going to think when the Fed bails JPMorgan Chase and HSBC out of their naked silver short for $100 billion or more? This is called corporate welfare in a corporatist fascist society. They gamble and lose and you get to pay the bill. They get to keep the profits as our retirees starve as their SS is frozen or reduced. Then when they get ill a government panel tells them that their treatment will be too expensive, so they’ll have to die on their own. This is what bankers and Wall Street and their organizations have planned for the elderly. They are considered useless eaters now that their contributions to society have ended. That is what you have allowed America to become – a country run by terrorist, criminal syndicate.

The dollar no longer has stability because few believe that the government possesses more than 8,000 tons of gold. It is called a collapsing fiat currency. The result of profligate fiscal management and monetary madness. The result is in the process of becoming raging inflation that will become hyperinflation. As we write gold and silver have established new highs at $1,505.70 and silver at $46.69 respectively with no top in sight. This is a reflection of dollar and all currency debasement. Do not forget for the past 11 years, nine major currencies on average have fallen more than 20% annually versus gold and silver. As you can see this is not only a dollar policy, but also a policy being pursued by many nations called corporate, fascist, Keynesianism. The result is rising inflation worldwide that is a reflection of rising commodity prices, which are a result of a flight to quality.

The same manifestation has been visited on gold and silver as well. Yes, inflation makes gold and silver rise, and that is important, but the real propelling force is the flight to the only real money in the world and those are gold and silver.


In a sign of the sluggish economy’s devastating impact, state government revenue across the country dropped by nearly one third in 2009 the sharpest decline in 60 years, the Census Bureau said in a new report.

States saw record-breaking losses to their pension funds and in their tax revenues, as the recession wreaked havoc on payrolls and investments,.

Revenues plummeted by 30.8 percent, from $1.6 trillion in 2008 to $1.1 trillion in 2009, according to the report.

It was the most dramatic drop the Census Bureau has seen since it began collecting state revenue data in 1951.

States reported a total $477 billion drop in “insurance trust revenue” – mostly money from pension funds, while tax collections fell by $66 billion.

And the worst may still be to come.

Fiscal 2012 “will actually be the most difficult budget year for states ever,” said Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities, in an interview with The Washington Post.

The center reported last month that states will see budget shortfalls totaling more than $140 billion next year as they continue to wrestle with depressed revenue levels while federal stimulus dollars and reserves run out.


The Minnesota Dept. of Transportation is looking for 500 people to test technology that could someday be used to collect a mileage-based user fee.

Mn/DOT anticipates a fee on road usage might someday be necessary as more fuel efficient and hybrid cars are on the road, decreasing revenue from the gas tax.

"This research will provide important feedback from motorists about the effectiveness of using technology in a car or truck to gather mileage information," said Cory Johnson, project manager.

"We are researching alternative financing methods today that could be used 10 or 20 years from now when the number of fuel efficient and hybrid cars increase and no longer produce enough revenue from a gas tax to build and repair roads."

Recruiting for the Minnesota Road Fee Test will begin in May, with research starting in July. Volunteers must be from Hennepin or Wright County. Drivers will be given smart phones with a GPS application that has been programmed to allow them to submit information. Volunteers will get a small stipend for expenses associated with the test.

The research is scheduled to end by December 2012.

The state of Oregon completed a similar study in November 2007. Iowa, Nevada and Texas are currently researching mileage-based user fees.

Mn/DOT says that if a mileage-based user fee were implemented, motorists would pay a fee based on how many miles they driver, rather than how much gas a vehicle uses, which is how Minnesota's gas tax is currently designed.

The Minnesota Legislature appropriated $5 million from the trunk highway fund for the demonstration in 2007.


Teri Essex retired a year earlier than planned when she was offered $56,000 to leave her elementary-school teaching job in Elk Grove, California.

Instead of accepting a salary cut, larger classes and less money for supplies from spending reductions made last year by California lawmakers closing a $19 billion budget deficit, Essex, 60, took the money over nine years to retire in 2010 after 21 years of teaching.

“The financial buyout was a no-brainer,” said Essex, whose school was 15 miles (24 kilometers) outside Sacramento. Even though she’ll give up about $300 monthly by quitting early, she said, “Once you start thinking about retiring, it was like, ‘Oh yeah, I want to do this.’”

California, Florida and Texas are seeing more retirements as rising benefit costs, pay cuts and looming furloughs prompt workers to leave. Inducements to quit early also boosted departures in New York as U.S. states tackled budget gaps totaling more than $540 billion since fiscal 2009, according to the Center on Budget and Policy Priorities. In New Jersey, Wisconsin and Ohio, added motivation came from attacks on unions over costs that strained budgets.

“These are people electing to retire because they’re worried,” Jeffrey Keefe, who teaches labor and employment relations at Rutgers University in New Brunswick, New Jersey, said in a telephone interview. “They are demoralized by the current public-employee condemnations.”


Sales of U.S. previously owned homes rose in March as a mounting supply of properties in or near foreclosure lured investors.

Purchases increased 3.7 percent to a 5.1 million annual rate, exceeding the 5 million median forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. All-cash deals accounted for 35 percent of transactions, the most on record, the group said.


U.S. home prices fell 1.6% in February compared with January, and were down 5.7% compared with a year earlier, the Federal Housing Finance Agency reported Wednesday. Prices fell a revised 1% in January, much weaker than the initial estimate of a 0.3% drop. The FHFA purchase-only home-price index is down 18.6% from the peak in 2007. Prices fell in all regions in February, led by a 3.7% drop in the Mountain states from Montana down to New Mexico and a 2.6% decline in the East North Central, which stretched from Ohio to Wisconsin. Sales data is based on mortgages sold or guaranteed by Fannie Mae and Freddie Mac.


Applications for U.S. home mortgages rose for the first time in a month last week as interest rates eased and purchase activity picked up, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 5.3 percent in the week ended April 15.

That was driven by a 10 percent increase in the gauge of loan requests for home purchases, sending the purchase index to its highest level since early December. The MBA's seasonally adjusted index of refinancing applications gained 2.7 percent

Fixed 30-year mortgage rates averaged 4.83 percent in the week, down from 4.98 percent the week before.


U.S. households are now getting more in cash handouts from the government than they are paying in taxes for the first time since the Great Depression. Households received $2.3 trillion in some kind of government support in 2010. That includes expanded unemployment benefits, as well as payments for Social Security, Medicare, Medicaid, and stimulus spending, among other things.

But that’s more than the $2.2 trillion households paid in taxes, an amount that has slumped largely due to the recession, according to an analysis by the Fiscal Times…

Also, an estimated 59% of the 308.7 million Americans in this country get at least one federal benefit, according to the Census Bureau, based on 2009 data. An estimated 46.5 million get Social Security; 42.6 million get Medicare; 42.4 million get Medicaid; 36.1 million get food stamps; 12.4 million get housing subsidies; and 3.2 million get Veterans' benefits…

Government cash handouts account for a whopping 79% of household growth since 2007, even as household tax payments--for things like the income and payroll tax, among other taxes--have fallen by $312 billion.


Last year, Fannie acquired 232 properties through foreclosure more than double the amount in 2009 and loans backing another 481 properties were seriously delinquent. The rise is a reminder that despite the rebound in apartment-building prices in leading markets, owners and their lenders are still hurting in many parts of the country… Freddie and Fannie single-handedly kept the multifamily industry from experiencing the credit crunch that walloped the office and retail sectors. The companies own or guarantee around 40% of the market, with $325 billion in multifamily mortgages… Values of buildings owned by real-estate investment trusts are within 10% of their 2007 peak, according to Green Street Advisors, a research firm. But vacancies hit 30-year highs during the recession and still haven't recovered in many markets.


Real estate magnate Donald Trump on Tuesday outlined his plan for dealing with China if he were to be in a position to do so.

If Trump were to run for President - and that remains a big 'if' - and win - which is an even bigger 'if' - a Trump White House would deal with China in the following ways.

"I would tell China, very nicely, fellows, you are my friend, I like you very much. I've made a lot of money on China by the way, a lot of money with China. I would say we are going to put a 25 percent tax on all your products coming in, and that's going to do a number of things," Trump said.

"Number one: as soon as they believe it's going to happen, they will behave so nicely, because it would destroy their economy,” said Trump in an interview with NBC’s Today show on Tuesday.

Playing up to voter fears on the loss of jobs to China, Trump said the transfer of cash to the Chinese was down to Beijing’s controversial currency peg.

"When you see what China is doing to us, what we're going to lose this year, $300 billion to China. And they are taking all of our jobs, and they are doing it through manipulation of their currency," Trump said.

Trump also criticized Saudi Arabia and OPEC, which have said the oil market is oversupplied and cut back on supply despite oil prices sitting well over 100 dollars a barrel.

"OPEC is sapping our strength, we can't pay 108 dollar a barrel oil, it's sapping our country, and by the way, they are going to raise it higher, because now Saudi Arabia said there's plenty of oil, we're going to cut back," Trump said.

As US treasury secretary Tim Geithner told CNBC that Congress would agree on extending the debt ceiling following S&P’s cut in America’s debt outlook, Trump outlined how he would deal with America’s soaring deficit.

"I wouldn't raise it," he said. "You're going to have to make a (political) deal some place. You might as well do it right now. I'd do it right now. I'd stop it right now," he said.


Hedge funds are back and bigger than ever. Fueled by fresh investor demand, these loosely regulated portfolios now manage $2.02 trillion, marking an all-time high for the industry, data released on Tuesday by Hedge Fund Research (HFR) show.

The previous record for assets was $1.93 trillion and was reached in the second quarter of 2008.

Investors added $32 billion in new money during the first three months of 2011, sending the biggest amount of new dollars to hedge funds since the third quarter of 2007, HFR said. For hedge funds the news signals the industry appears to have recovered from the 2008 financial crisis when the average fund lost 19 percent and many managers lost significantly more.

"The current asset level reflects an increase of over 50 percent from the Financial Crisis low of $1.33 trillion in the first quarter of 2009," HFR wrote in a news release.


Not only will the cross-border trucking program with Mexico result in the loss of American jobs, as it turns out, it could wind up costing American taxpayers hundreds of thousands, if not millions of dollars.

Since the U.S. government can't legally force Mexican trucks entering the U.S. to comply with federal emissions regulations, the state of Arizona is taking an entirely different approach.

Under an Environmental Protection Agency grant, the state of Arizona is paying to replace the exhaust system on some Mexican trucks in order to reduce diesel-fuel emissions. The Arizona Department of Environmental Quality is replacing the old muffler system on the trucks with new catalytic converters, which is standard in the U.S.

Arizona officials claim that the program is mutually beneficial to both the U.S. and Mexico. Under the agreement reached by the Obama administration, the trucks are going to have access to U.S. roadways whether they meet U.S. environmental standards or not. By paying for the upgrades, it will vastly improve air quality on the American side of the border.

"It's about establishing this relationship on environmental issues," ADEQ Director Henry Darwin told The Arizona Republic. "It's especially important on air quality because you can't stop the air from moving across the border."

Last year, the state agency replaced the exhaust systems of 55 Mexican trucks, and there are plans to do even more this year.

The cost for the upgrades to each truck is $1,600, all of which is funded by the EPA and, indirectly, the American taxpayers.

Officials say that the improvements can reduce harmful diesel emissions by as much as 30 percent.

Because of the North American Free Trade Agreement, Mexican trucks have had limited access to American roadways for the past 17 years. However, the trade pact was supposed to provide full access.

After the suspension of a pilot program that did just that, Mexican officials protested, and have now won full access to America's roads.

Thousands of trucks already enter the U.S. from Mexico each and every day, but the new deal struck will likely increase that number exponentially.

And it won't be just Arizona that drivers are traveling through to cross into the U.S. Other border states could soon adopt similar programs, which will cost American taxpayers even more.


Manufacturing in the Philadelphia region slowed more than forecast in April as measures of orders and sales fell.

The Federal Reserve Bank of Philadelphia’s general economic index dropped to 18.5, the lowest level since November, from 43.4 the prior month which was the highest level since 1984. Readings greater than zero signal expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.


The index of U.S. leading indicators increased for a ninth month in March, signaling higher fuel costs will fail to derail the expansion.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.4 percent after a revised 1 percent gain in February that was larger than previously estimated, the New York-based group said today. Economists forecast a 0.3 percent March increase, according to the median projection in a Bloomberg News survey.


New applications for unemployment benefits in the U.S. fell less than forecast last week, indicating the labor market will take time to improve.

Jobless claims decreased by 13,000 to 403,000 in the week ended April 16, Labor Department figures showed today in Washington. Economists projected a decline to 390,000, according to the median estimate in a Bloomberg News survey. The number of people on unemployment benefit rolls and those receiving extended payments declined.


Since the Crisis of 2008 government has absorbed a crushing amount of private sector debt, risks and payments. It is a command economy in the US and other countries of record proportions.

But this has put sovereign nations in jeopardy. This will be the ‘real’ crisis.