International Forecaster Weekly

Fed Exit Strategy Doesnt Exist

Quantitative easing plans have accomplished little or nothing, tax increases coming as wages lay stagnant, inflation rises, and purchasing power fails... no easy solutions to fix the problems at hand, so we may still face deflationary depression... problems with Mortgage industry will have affect the global economy, other countries adjusting their currency values against US dollar.

Bob Chapman | February 19, 2011

The Fed tells us there is no inflation. Somewhere down the road we are told interest rates will be allowed to rise. After nine months of monetary injections employment is yet to really improve. The concept of an exit strategy seems to have been lost in the shuffle. It isn’t mentioned anymore. As a result of these failures QE2 continues and talk of QE3 is heard on Wall Street. After three years of QE1, QE2 and stimulus all that has been accomplished is the bailout in the financial sectors of the US and Europe and the purchase of Treasury and Agency securities.

As we have just seen some monetary experts do not like what the see and as a result they are leaving. Bundesbank President Axel Weber and Ken Worsh, a regional Fed President, do not like what they see and its affect on the future and they have resigned their posts. They obviously don’t want to be part of the fiasco they see in the future. We are sure the lack of reform and change figured in their resignations, as well.

It was eight years ago that we wrote about the insolvency of Fannie Mae and Freddie Mac. We said it was only a matter of time before the government would have to take them and their mounting debt over. We also predicted that it was the design of government to nationalize housing, being forced to do so due to the failure of lenders. Whether that will happen we leave to the future. Today the domination of the housing market by Fannie, Freddie, Ginnie and the FHA is a sad reality. A white paper on the GSE’s and reform has been presented, but when will it happen, 10 or 20 years from now? A paper and oversight but nothing with teeth in it as all of these entities, still in spite of object failure, are still making subprime and ALT-A loans, which they know full well will have a 50% failure rate in the future. The chicanery continues, and as we said eight years ago, everyone in the beltway knows it. The complicity among politicians and bureaucrats just shows you that there really is no exit strategy, just as the Fed’s vaunted exit strategy really doesn’t exist. The GSE losses are in the trillions as are the losses at the Fed and the taxpayer gets to pay that debt. That is why the current administration is proposing massive tax increases, as wages lay stagnant, inflation begins to rage and purchasing power falls. In this process both political parties hear, see, and speak no evil. The platform is continuing resolution and compromise so that no one can get blamed for radical changes, which are needed to solve these problems. Like at the Fed, this is all about stalling, to throw the problems into the future. What all of these people probably recognize is that there are no easy solutions and fixing the system is impossible without purging it, and that means deflationary depression. The system will be put on autopilot and when it crashes, it crashes. In fact at the Fed they have simply abandoned an exit strategy and won’t talk about it – like it never was discussed and never existed. This is the world of banking, Wall Street and Washington – just ignore it and it will go away. We have the major media covering for them. The continuation of the creation of money and credit, no interest rates and ongoing stimulus has got to continue or the system collapses. There is nothing on the horizon that gives us an inkling that anything is going to be done to deal with a worsening mortgage problem and the outrageous conduct of the Fed. That is because those behind the scenes own just about everyone in Washington and they do not want anything done. That is because they are getting richer and richer in the current system and could care less how much the people suffer. All they are interested in are money and power and the evolution of world government. A $1.6 trillion fiscal deficit to these characters is just another number the public will have to deal with.

The numbers are all there. The economy is again faltering as the $862 billion stimulus pork package wears off and the Fed services the Treasury and Agencies. By June rumors of QE3 will emerge to be implemented in late 2011 or early 2012. The economy and the country cannot survive without almost $1 trillion in stimulus a year and zero interest rates. In just the past 14 weeks Fed credit has expanded by just under $200 billion. Do not forget they started QE2 unbeknownst to you, last June. Did you also notice as well that there is no talk of exit strategy – it is all hush-hush? There is little Wall Street or official talk about the monetizing of staggering quantities of federal debt. The binge continues, and commodities and gold and silver relentlessly move higher.

Builders continue to build 530,000 to 600,000 houses a year. What can they be thinking of with the biggest unsold inventory of homes in history? When JPMorgan’s CEO James Dimon refers to Fannie Mae and Freddie Mac as “the biggest disasters of all time” we believe him. The players all knew about it, they all worried about it, but no one did anything about it. Now we hear about the GSE exit strategy, but on whose watch and when? Perhaps ten years from now.

The effect of mortgage credit risk for 20 years has been horrible and it has as well had a very negative affect on this structure of the global economy. We have seen the nationalization of $10 trillion of US mortgage debt, which we believe will be followed by the nationalization of housing as part of the corporatist fascist structure. The excuse is they or it are too big to fail just like banking, Wall Street and insurance. The bottom line is this legacy from the 1930s and 1950s should have never been created in the first place. It is obvious that residential housing cannot stand on its own and has to be subsidized by government, otherwise the cost of home ownership rises and the ability to buy falls. Mortgages are at 5.17%. Where would they be without zero interest rates, at 10%? As real interest rates and empty inventory rises you can bet millions of homes will lie vacant for years to come. That means the owners, the government, will become the world’s largest renter and landlord. Do not forget the taxpayer pays the bill. Once QE and stimulus ends the bottom will further fall out of the housing market and from lack of funding alone from a bankrupt government the sector will disintegrate. This problem will persist for years. There cannot be meaningful reform under the present circumstances and government and Wall Street hopes the debt will be inflated away.

We have been in an inflationary depression for two years as a result of the collapse of the real estate bubble created by the Fed. We have faced strong deflationary forces since the collapse of the dotcom stock market collapse of April 2000. The Fed, in order to keep the system from collapsing created the real estate bubble, which failed and created an even stronger deflationary pull. For 12 years different methods have been used to offset this strong deflation, particularly the creation of monetized money and credit. The struggle is now manifest in higher real inflation, some 7%. Not the sanitized official version of 1.5%. Soon inflation will strongly move higher and by the end of the year it will officially be 5-1/2% and in reality 14%. Look at England; it officially says inflation is 4.5% when in reality it is about 12%.

Globalization and free trade have brought many negative results and one of them is the export of part of US inflation to those who depreciate their currencies and export to the US. As an example, as China prints yuan to buy dollars to suppress its currency’s value it floods China with inflationary dollars. We have seen two recent increases in Chinese interest rates and several instances of increases in reserve requirements, but that doesn’t solve the dollar inflation problem. That can only be stopped by ceasing suppressing the value of the yuan. A higher yuan is a natural occurrence under the circumstances and it must rise or domestic and dollar borne inflation will worsen. The average Chinese have this figured out and are taking their yuan and dollars and buying gold and silver. The government has been telling them for two years to do this and they are doing it. Incidentally, all of Asia and many other areas are suffering from the same problem.

The time lag for heavy inflation from QE1 is starting to show up with a vengeance. It has been two years in the coming, but it is here and it will continue from QE2 aided by government stimulus. That means three years of high inflation is in the pipeline for 2011, 2012 and 2013. If we have a QE3 and fiscal stimulus you can add another year of hyperinflation. That is when there is a loss of faith in currencies similar to an inflationary environment, except under hyperinflation people want to escape their currency, because the longer they hold it the less it is worth. They immediately, upon being paid buy food, clothing, goods and gold and silver. Gold and silver assets are the only long-term depositories for excess funds. As currencies fall gold and silver rise. We have shown you what has happened over the past ten years against nine major currencies, annually gold has risen on average by 15-1/4% and versus silver by 20-3/8%. What will hyperinflation look like if it comes? At the beginning probably 25%, then 50% and it could go exponential as it did during the Weimer Republic in the early 1920s and in today’s Zimbabwe, where we lived for three years, prior to today’s problems. Will we have hyperinflation? We probably will and the outcome is a collapse and a deflationary depression. In such circumstances the only thing that can save your assets are gold and silver shares, coins and bullion. It is as simple as that.

Stronger economies revalue their currencies and weaker economies devalue against the weaker currencies, and that is usually accompanied by partial or total default. The problems of the US are shared in varying degrees by many other countries, which have followed the same path. That is shy using the dollar index, the USD, can be very misleading. If all countries are making the same errors then comparison is deceiving. You have to compare the currency’s value versus gold and silver, even though the US government and the Fed and other central banks have suppressed their values versus currencies for the past 22 years. Their prices are presently like a coiled spring. Sooner or later the pressure on the spring will be released and prices will go exponential revealing just how damaged currencies are. Essentially what we have seen in gold and silver are price controls, which always ultimately fail. In the wings China realizes that they cannot do what they are doing forever. They certainly will have to revalue the yuan. Once that happens they send less exports to the US and they will be more expensive causing another source of inflation. They will also be buying and making via exports far less than before. Eventually they’ll be developing their domestic economy, because the US will be forced to erect trade tariffs on goods and services. This is where this is all headed, so prepare for it. Price inflation is coming with a vengeance. The Fed cannot hold back the tide of deflation forever. The CFTC and Comex cannot hold back higher gold and silver prices by raising margin requirements forever either. It just shows you how rigged our markets are.


Bernard L. Madoff said he never thought the collapse of his Ponzi scheme would cause the sort of destruction that has befallen his family.

In his first interview for publication since his arrest in December 2008, Madoff thinner and rumpled in khaki prison garb maintained family members knew nothing about his crimes.

But he said unidentified banks and hedge funds were “complicit’’ in his fraud, an about-face from earlier claims he was the only one involved.

Madoff, who is serving a 150-year sentence, seemed frail and a bit agitated, perhaps burdened by sadness over the suicide of his son Mark in December. He spoke with great intensity. In asserting the complicity of others, Madoff pointed to the “willful blindness’’ of many banks and hedge funds who dealt with his investment advisory business and their failure to examine discrepancies between his regulatory filings and other information available to them.

“They had to know,’’ Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ’’

While he acknowledged his guilt and said nothing could excuse his crimes, he focused his comments on the big investors and giant institutions he dealt with, not on the financial pain he caused thousands of his more modest investors. In an e-mail, he observed many long-term clients made more in legitimate profits from him in the years before the fraud than they could have elsewhere.

“I would have loved for them to not lose anything but that was a risk they were well aware of by investing in the market,’’ he wrote.

Madoff said he was startled to learn of some of the e-mails and messages raising doubts about his results now emerging in lawsuits that bankers were passing around before his scheme collapsed.

“I’m reading more now about how suspicious they were than I ever realized at the time,’’ he said.

He did not assert that any specific bank or fund knew about or was an accomplice in his Ponzi scheme, which lasted at least 16 years and consumed about $20 billion in lost cash and almost $65 billion in paper wealth. Rather, he cited a failure to conduct normal scrutiny.

He also claimed he was helping the court-appointed trustee who is seeking to recover lost billions on behalf of his swindled clients. In e-mails, Madoff said repeatedly that he provided useful information to Irving H. Picard, the trustee.

In an e-mail message, he was explicit about what he told the trustee: “I am saying that the banks and funds were complicit in one form or another and my information to Picard when he was here established this.’’

Madoff acknowledged he had not shared his information with federal criminal prosecutors.

Picard declined to comment on whether his team had interviewed Madoff.

Picard has recovered $10 billion through asset sales and settlements with foreign banks and Madoff clients, including the estate of a private investor, Jeffry Picower, and the family of Carl Shapiro, a Boston philanthropist.

The settlements with the Shapiro family and a Swiss bank came after Picard’s trip to the prison in Butner. It is unclear if information from Madoff was a factor. Neither Shapiro nor the bank has been accused of complicity in a crime.