International Forecaster Weekly

Fed Ponders Actions While Global Economy Reels

US dollar under pressure, the concerns of inflation with so much liquidity, unbearable pressure will come down on the Fed, will isolationism be brought in to the formula? No new ideas from politicians, fiscal pain for southern Europe, Bernanke Fed to help smaller banks, low consumer confidence, leaving Detroit.

Bob Chapman | March 26, 2011

The US dollar continues under acute pressure, as the world seeks an alternative reserve currency. The days and years of manipulation, fraud and criminal behavior are fast coming to an end. New alliances are evolving, as are outspoken advocates of a new world reserve currency. As a result more and more foreigners are bypassing Treasury and Agency bonds, as well as other US dollar denominated investments. We watch as other major nations accumulate gold and cannot help but think that the new world reserve currency will be gold backed.

Over the past 11 years the Fed and other central banks have increased money and credit by several devices and in the last three years more aggressively by purchasing bonds and via using swaps. QE1’s monetary creation has now begun to affect costs and the entire price structure. As wages lay stagnant the resultant inflation will eventually destroy the middle class, the structure that holds American society together. As the taxpayer saves the financial institutions the middle class is being destroyed. They are funding their own demise. We believe inflation is currently 8% and should be 14% by yearend. That is the result of QE1 and stimulus 1. Next year the US economy will be impacted by QE2 and stimulus 2. If we get QE3 and stimulus 3, 2013 will be impacted. Inflation could range from 25% to 50%, or more, dependent upon what the elitists have in store for us. While this transpires unemployment will rise and government revenues will fall increasing the already colossal debt. That means consumption will fall as a percentage of GDP from 70% to perhaps 64.5%, the long term mean, by the end of 2013 if we get QE3 and stimulus 3. People will only be able to spend on basics. That also means corporate profits will fall, as well as share prices. That, of course, will depend on whether the “Working Group on Financial Markets” is able to hold the markets up and keep them from falling. Deficits will spiral completely out of control, as will personal and corporate insolvencies. That means education will be cut to the bare bones. Instead of 18 to 21 children in a class you will see 36 to 42. Social services and welfare will be cut in half. Extended unemployment will be phased out and no new projects will be funded. It is not surprising that the Fed has to buy 80% of US debt. Few others are willing to purchase it. Most of the foreign buyers are from England and the Cayman Islands. Is this the Fed buying, which we have suspected for years, or is this real buying? We don’t know, but if rep. Ron Paul is successful we could find out, along with all kinds of other law breaking. Don’t forget the result of all the things the Fed has been doing translates into a tax increase on every American. This is another effort to bring the consumer to his knees, so he will be softened up to accept world government. In addition, the dollar is about to approach new depths and a chance exists that it could soon break 71.18, the old all time low and fall to 40 to 55 on the USDX. Many of the items purchased by consumers, that presently represent 70% of GDP, could rise more than 100% in costs, which will cut deeply into consumption. This at this juncture could be in the elitist plan for the destruction of America, as we have known it. Can Weimar or Zimbabwe be far away?

We have seen a rally in bonds due to a recent fall in the stock market from a high yield of 3.74% to 3.23% on the 10-year T-note. If you consider the uproar with Middle East and problems in Japan there are not going to be many foreigners in the market for Treasuries – in fact, they may be sellers. These events will put unbearable pressure on the Fed and force it into QE3. If QE3 does not happen real interest rates will rise, first to 4% to 4-1/2% and then to 5-1/2%. While this transpires in 2011 the municipal bond market will be under tremendous pressure. At the same time the events in Japan and in the Middle East could collapse both bond markets. Even now it is almost impossible to find a decent bid in the muni market, if any bid at all. We would call this a fine kettle of fish.

The budget deficit will run 10% of GDP or $1.6 trillion. This is the third successive year of these horrible deficits, as the President, House and Senate refuse to cut spending. Eventually the result of such profligacy will be an end to the US as world leader. China and Germany in this process are vying for that leadership yet both have serious problems. China has almost hyperinflation, massive unemployment, a weakening stock market, a real estate bubble and yes, $1.17 trillion in US dollar denominated securities. We’ll get into Germany and Europe a little later and the problems in the Eurozone. Japan is out of the running having 20 years of depression, debt to GDP that is enormous, although domestically held, like everyone else, they will have fading exports and they now have to deal with a natural disaster.

We would expect the next natural step would be for the US to erect trade barriers and impose tariffs on goods and services. That would be interpreted as isolationism, as America’s commitments internationally, such as wars, would no longer be affordable or acceptable due to its debt burden. When that will take place remains to be seen, but it is a major possibility. Adversaries will call it protectionism, but the US has allowed the world for years total access to its economy and deliberate currency manipulation and the employment of virtual slave labor, which has undercut the US economy. Over the last 11 years it has lost 8.7 million good paying jobs and 42,500 businesses. The longer America waits to institute tariffs the worse it will be. The same goes for budget cuts.

The answer politically has been the same thus far from both parties. You saw the $862 billion stimulus package passed in December. Another defiance of reality. We have seen two years of boondoggles and ever increasing military spending for the military industrial complex and dreadful domestic policies.

That leads us to Germany and Europe. Germany has changed over the last 50 years. One of the cities we lived in for quite some time had changed so much we actually got lost and had to ask for directions. Germany paid a terrible price to reunify and has finally overcome those difficulties, but at a great price. Again, Germany is about to reassert itself as Europe’s leader and perhaps the world’s leader. In recent years with middle of the road policies they are in part abandoning Keynesianism and probably in the nick of time.

That leads us to the problems of Southern Europe, which are nowhere near solved. They are being covered by the Middle East smokescreen, as are US financial and economic problems; the elitists received a bonus when disaster struck Japan. They all have rolling debt crises and with the exception of Greece and Ireland the rest of the nations say they have no problems, or at least none that would justify intervention. They all will have to be bailed out or they’ll all go under taking the euro with them. Economically the rest, in this order, are on the list to receive aid or fail: Greece, Ireland, Portugal, Belgium, Spain and Italy. Their problems are similar to those in the US. A preponderance of public employees, a semi-or-uncompetitive economy, outrageously low interest rates, low savings, low productivity, perpetually large budget deficits and banks that are virtually bankrupt due to poor real estate loans. In the case of banking, interest rates must eventually rise and when they do the cost of loan servicing become unbearable.

These conditions cut off deposits and bond issuance for banks that are then left with little capital. The temporary solution as we see today are loans by the ECB and the Fed with funds created out of thin air, in order to keep the banking Ponzi scheme in tact. The countries involved are paying bond yields of 5% to 12%. What happens when rates more 2% higher? They cannot service their debt, never mind principal. European banks have lent these six sovereign states more than $2 trillion, which, of course, was in part created out of thin air. That is how we knew log ago it would take $3 to $5 trillion to clean up the mess and that such figures were simply unobtainable without bankrupting the banks and the central banks of these countries. Underwriting part of the debt, as the solvent European countries have thus far chosen to do, just won’t work. They have bought time for a failing system. Eventually the borrowers have to collapse into insolvency, or the lenders will as well. What should have been done was that the lenders should have accepted payment, over time, of 50%, which they were offered, but refused. In the future they’ll at best get 30%, and perhaps nothing at all. The commitment by solvent states in the euro zone has been about $1 trillion, which as we have pointed out, will only impair their own credit. Germans, French, Dutch and Austrian citizens get to pay all the bills. All for the insane dream of one currency for all and eventually world government – it simply won’t work. Greece and Ireland are basket cases and if they survive financially, it will take at least 50 years of poverty to pay off bank debt that was created out of thin air. The bailouts of these two countries have restored little confidence. Anyone who understands what is being done knows it won’t work. Sure, these two insolvent sovereigns have sold debt, but it was sold to countries that had to buy it, or the euro would have collapsed. As an aside the euro is now trading in the above $1.41 range with these terrible problems versus the dollar. That shows you the scale of the US dollar’s problems. Remember as well, that for 11 years the US dollar has fallen close to 20% annually versus gold and for 11 years more than 24% versus silver. The euro has fallen close to 17% versus gold annually and 22% versus silver. These figures tell you gold and silver are in strong long-term bull markets versus all these fiat currencies, and you do not want to be in any currency except for operating purposes. All of your investible funds should be in gold and silver related assets. Once one of the countries goes under the game is over. That is when there will be another big meeting of nations to revalue and devalue currencies, have multilateral debt default and to set a world reserve currency based on 25% gold backing.

Europe is going in exactly the wrong direction, as is the US. In Europe they are calling for loan expansion to the crippled nations, greater integration and common fiscal policy, so they can all drown simultaneously. Sensibly Germany does not want to do that and German citizens certainly don’t want to get any closer to the losers in Southern Europe. In fact, more than 2/3rd’s of Germans want out of the euro zone, never mind getting closer. They do not want to commit to lending and guaranteeing the largest part of an additional $1 trillion or a total of $2 trillion. This is a commitment for the furtherance of one-world government not a bailout of insolvent partners. It is the funding of an insane dream of the mega-rich and the powerful to totally control the world and subject the world population to perpetual servitude. The whole exercise is perverse and deceitful.

Failure of a second $1 trillion tranche of funds for the insolvent would lead to the breakup of the euro as these six nations collapsed into default. You should be mindful as well that $2 trillion won’t solve the problem and will eventually destroy the lenders, mainly Germany. Germans do not want world government, so why should they subject themselves to such commitments. In fact, more than 2/3rd’s of German do not want the euro. They just want to be left alone. The European Stability Mechanism, ESM, is an effort by European bureaucrats to override Germany’s rejection of endless support of insolvent sovereigns. The bureaucrats even have made the ESM an amendment to the Lisbon Treaty, or at least it is in the formative process. This is defying Germany, which is being told you will do what we want you to do. That is being accompanied by collective action causes, which forces lenders to out of hand accept losses no matter how steep on bond issues. This is the most insane financial procedure ever. Lenders are totally at the mercy of debtors and if the debtors do not or cannot repay the debt they just walk away. Policies like this show you how out of their minds the new world order crowd really is.

It is recognition that the debt will never be paid and the lending nations will continue to fool buyers. It buys a couple of years, but lays the plans for future default. There is no way Greece and Ireland will financially survive and they will leave the euro. Portugal and Belgium will probably follow and there won’t be enough funds to bailout Spain and Italy. This could happen by the end of the year. The timing is anyone’s guess. Five of the six of these nations have $500 plus billion debts coming due this year that has to be rolled over plus new debt. Private and corporate debt that has to be replaced is $1.2 trillion. Now we ask you does it look like they’ll all get refunded? We do not believe so, and that means more trouble before the year is over. That also means low to no growth, higher unemployment and perhaps default. Couple these problems with those in the UK and US and you can see why the events in the Middle East had to happen in part as a diversion. We said this from the very beginning and we still believe that was the main reason the region is undergoing major changes. Yes, the powers behind government obviously wanted changes in Tunisia, Egypt and Libya and other countries, plus turmoil in the region, as in all probability, as they set up to invade Iran with Israel’s help.