International Forecaster Weekly

Keynsianism Fallen Upon Hard Times

Hard times for Keynesianism, no recovery through quantitative easing,  Fed not finding the path to sustainable economic growth, policy made in stealth, purging the system a better idea, Bernanke on a suicide mission, when the Fed buys, Treasury debt debases the currency, World Bank wants Gold back into the monetary system.

Bob Chapman | November 10, 2010

The cult of Keynesianism is about to come upon very hard times. The quantitative easing plan, known as QE1, did not produce a recovery in the American economy. Now one of its staunchest advocated, Fed Chairman Ben Bernanke, has embarked officially on QE2. It is our belief that QE2 will be no more successful than QE1 and it may well be followed by QE3. You might ask why are not other policies being used the answer is the followers of Lord Keynes don’t know what else to do, and they know what they are doing does not work. They certainly must be waiting for their elitist friends to start another war, as they did in 1939 and 1941. The followers of Keynes control today’s central banks and thus have complete control over money.

Several years from now many will see through the fallacies of Keynes and the nostrums that caused its demise. In the case of the Fed its goal is sustainable economic growth and price stability and that long term inflation expectations remain contained. As we have seen stability has been relative and inflation has been with us for many years, particularly since August 15, 1971, when the US dollar, the world reserve currency, abandoned gold backing. The simple conclusion is you cannot have both no matter what Keynes postulated. Central banks, and particularly the Fed, have allowed inflation to always be present, because deflation strikes absolute terror into their hearts. That is why the privately owned Fed demands total control over the US money supply. The Fed contends that they can control the economy via the money supply and manipulation of interest rates. The result is that stable prices are impossible. Growth has to be accompanied by inflation under Keynesianism; there can be no other outcome.

For the past 8 years deflation has been a serious threat and that threat has been met with boatloads of money and credit. If it had been the case deflation would have long ago overwhelmed the US economy. As a result we have had zero interest rates for two years accompanied by quantitative easing. This has been a full throttle attack on deflation, which as usual leaves at least residual inflation. Two years ago official inflation was 5-1/2% at its peak and real inflation was 14%. Recently official inflation has been 1.6% and real inflation 7%. As this new QE2 and continued zero inflation have their affects, inflation on a real basis should climb back to 14% and perhaps higher. Only fiat money and credit created out of thin air has been able to keep the monetary system afloat and in that process savers and non-speculators have been robbed of their wealth. For two years the Fed has purchased a great part of available US treasuries. The Treasury has been funded with fiat funds and no benefit has accrued to the economy. This so-called lender of last resort has exchanged worthless paper for debt for worthless Treasury debt, and whether they like it or not, the slight of hand illusion, the Houdini act, is no longer working. The power structure that really controls the US government, the fed, Wall Street and banking are in a fight to retain their power and control and at the same time take down the world economy and force the world’s inhabitants to accept world government.

They knew the risks and confidently accepted them, but talk radio and the Internet are interrupting their march toward a new world order. The public of the world are learning who is doing what to them, and why they are doing it. They are being as stealth and subtle as possible. They do not want the public to know what they are up too and why. If enough people are informed worldwide their game won’t work, they will lose their power and wealth and perhaps their lives. Presently Mr. Bernanke is telling Americans to expect inflation and it is good, because deflation is worse. He is correct of course, but doesn’t tell his listeners the whole truth. The truth is that the only way the problems can be solved is by purging the system and if that purging is allowed to happen he and his fellow elitists will lose control. The ignorance that shrouded people’s eyes and minds is being lifted by alternative communications and that is the last thing Mr. Bernanke and his friends at the Council on Foreign Relations, the Trilateral Commission and within the worldwide Bilderberg group want. We among others are educating the masses as never before and the knowledge they are accepting is going to be their ticket to freedom from these scoundrels. The elitists believe they can keep the people ignorant, but we disagree and we are going to prove it. An example is the three class action lawsuits, one of which was a RICO suit, versus JPMorgan Chase and HSBC for manipulating the Comex silver market. There will be more suits like this, class actions versus naked shorting and front running. This is part of the educational process of which we speak. The crooks in Wall Street, banking, the CFTC and the SEC will be exposed for what they are. The days of financial ignorance are about to end.

As the creation of an additional $5 trillion in monetary aggregates goes forward over the next two years no one wants to talk about the negative results of such a policy except foreign nations.

In the meantime over the next four months the stock market is up 20%, gold is up 20% and silver 50%, all as a result of the coming creation of monetary aggregates.

Not only is the Fed implementing massive amounts of money and credit into the economy, but so are many other nations to the tune of $1.5 trillion. That means inflation is a problem worldwide as is confidence in the monetary policies of central banks and governments. The dollar is going to fall versus other currencies and all will continue to follow versus gold.

European financial leaders are terrified by what is going on. The dollar is again headed lower and the euro higher. Europe is a big exporter and a higher euro is just what they do not need. ECB President Jean-Claude Trichet is right. The time for stimulus is over, it is now time for all to tighten. This, of course, will purge the system and the elitists do not want that unless they control it and that will be difficult to do. They would rather stimulate more and if unsuccessful at that have another war, as a distraction. We can assure you if the public loses faith in government and confidence in banking the elitists will be in serious trouble and we believe that will happen and it is not to far away.

What the Fed was once capable of doing they cannot do anymore. Mr. Bernanke is on a suicide mission. He faces a dreadful economy and he knows the solutions he is using do not work. It did not work in the 1930s and it won’t work now. Speculation is rife and regulation is almost non-existent. The excesses are again where they were before at banks and brokerage houses. Risk markets worldwide, where good profit opportunities exist, are being inundated with hot dollars and that is why nations such as Brazil have put up financial barriers. They have enough inflation of their own without accommodating US dollar inflation. As one might expect all of this dollar creation forces the value of the dollar lower and dollar holders continue to lose confidence. The official introduction of QE2 and perhaps a QE3 certainly does not instill confidence. You can understand why dollar owners are purchasing gold, silver and commodities. You can also understand how the public is being crushed between higher inflation and inadequate wage increases. At the same time asset value are falling along with wealth and net worth. Bonds and the stock market are high. Can you imagine the anguish when they both eventually fall? When the Fed talks about stability and increasing employment or price stability, it is really talking about stabilizing Wall Street and the banking interest that own the Fed. Current policies will have little impact overall and the stage will be set for QE3 and then more stimulus until the dollar crashes and the game is over.

One of the fascinating aspects of all of this is that finally word is getting around that when the Fed buys, Treasury debt debases the currency. What a novel idea. The Fed has been doing this for many years but few were paying attention. They are now. The claptrap you hear from the IMF that the dollar is overvalued is enough to make one regurgitate. Overvalued against what? Not any currency we are aware of. Dollar creation has continued to aid Wall Street and banking not the US economy.

The Fed has signaled that it will buy bonds, anything they wish to buy. That in turn will force interest rates lower and encourage borrowing by business and individuals. In this process the Fed continues to expand its balance sheet, something that did not work previously. Foreign central banks cannot be counted on to purchase and incur loses and Americans won’t be buyers unless yields rise and the Fed cannot allow that to happen. That means the Fed has to mop up all bond markets and that is where the $2.5 trillion comes in. At the same time commercial banks won’t be buyers because they have to deal with Foreclosurgate and the class action and RICO suits against JPMorgan Chase and HSBC. The Fed has its work cut out for it and the result will be inflation and QE3. The Ponzi scheme goes on based on lies and the greater fool theory. The tulip mania comes to mind. The scheme is simply brazen beyond belief. Unfortunately the scheme is the only alterative for the Fed and they know it won’t work. If we are correct, then that big meeting will be held to devalue, revalue and to default on a multilateral basis. If the US has the gold they say they own then it can return to the gold standard and remain the world’s reserve currency with all dollar holders paying the price. Revealing a Keynesian system that doesn’t work, but has kept the elitist bankers and Wall Street in power for almost 100 years. This meeting will also bring down world stock markets and a 30-year bull market in bonds. The losses will be gigantic and crippling.

Last week the Dow rose 2.9%, S&P 3.6%, the Russell 2000 4.7% and the Nasdaq 100 was up 2.9%. Banks rose 7%; broker/dealers 6%; cyclicals 5.2%; transports 3.6%; consumers 2%; utilities 1%; high tech 2.5%; semis 5.2%; Internets 2.4% and biotechs 0.5%. Gold bullion rose $35, quickly bringing a $60 correction to an end. The HUI gained 5.3% and the USDX fell 0.9% to 76.58.

The 2-year US T-bills rose 3 bps to 0.36%, the 10-year notes fell 6 bps to 2.54% and the 10-year German bund fell 10 bps to 2.42%.

The Freddie Mac 30-year fixed rate mortgage rose 1 bps to 4.24%, the 15’s fell 3 bps to 3.63%, one-year ARMs fell 4 bps to 3.26% and the 30-year fixed jumbos fell 7 bps to 5.11%.

Fed credit declined $8.5 billion to $2.28 trillion, Fed foreign holdings of Treasury and Agency bonds surged again $21.6 billion to a record $3.316 trillion. Custody holdings for foreign central banks have increased $310.4 billion YTD, or 14.4% annualized, and YOY it is up 13.9%.

M2 narrow money supply declined $9.6 billion to $8,764 trillion, or 3.3% annualized and YOY 3%.

Total money market fund assets fell $6.6 billion to $2.800 trillion. The YTD decline is $494 billion, or YOY $539 billion, or 16.1%.

Total commercial paper fell $22.5 billion to $1.145 trillion. CP is off $24.7 billion YTD, and down $170 billion YOY.

In August those on food stamps increased by more than 500,000 Americans to 42.4 million, a 17% YOY increase.

The employment situation is bad and we see no reason for it to improve under QE2. The estimate of the Fed creating $600 billion out of thin air is ludicrous at best. The projection of 250,000 new jobs is equally inane. The funds are going into the financial markets as they did last time. More money will be lent for business and mortgages, but not enough to create employment. We believe the Fed will create four times $600 billion or $2.4 trillion to inject into the system. That will increase FDP by 1.2%. You add that to 1% natural growth and you get 2.2% GDP growth for a cost of $2.4 trillion for the year. QE3 would produce the same results,. In passing you have to throw in real inflation rates of 14% to 25%, as a cost of doing business.

Just to give you an idea where we now officially stand with unemployment. We can start off by saying U6 is 17.1% and if you remove the bogus birth/death ratio you have 22-3/4%. Let us remind you that during the great depression it was 25%.

Household employment fell 330,000 officially last month. Unemployment remained steady only because 254,000 gave up trying to find a job and left the workforce. They forget to mention that. The participation rate fell to a new low of 64.5%, which means more and more workers believe no jobs are available. Thus, the employment-to-population ratio fell to 58.3%, the lowest in almost 30 years.