International Forecaster Weekly

QE2 Is a Total Failure and Bernanke Is Delusional About Inflation

Quantitative Easing 2 has harsh critics for good reason, Mubarak finally gone, US trade deficit with China at record high, middle east revolutions warn of food crises around the world, Fed balance sheet now above 2.5 trillion due.

Bob Chapman | February 12, 2011

The discontent and seeds of rebellion existed for a long time in Egypt as it has in many other countries. The major powers of the world were content with Mr. Mubarak, especially the US, which gave him $60 billion over 30 years and allowed him to move $70 billion over that period into secret bank accounts in England, Switzerland and Europe, while Egyptians lived on the edge of starvation over that time frame. Both the US and UK never saw a dictator they didn’t like. This was their dictator, as was his predecessor. Mubarak did exactly as he was told including doing everything Israel desired. Mubarak represented stability even though his subjects barely survived. Most of the aid sent by the US was used to keep the military and Secret Police strong to enforce his powerful hold over the people. Thus, the US was happy to have such a “moderate” in power. He helped keep Egypt and Israel in a sea of tranquility in the desert. Mr. Mubarak was a model dictator.

Hunger and tyranny only last for so long and then one way or another they come to an end. You might say that the rebellion in Tunisia against another dictator was the catalyst or forerunner of what happened in Egypt. This was to be where it would all begin. We had seen many such operations over the past 50 years. In both countries the groundwork was all there, poverty, lack of proper food and spiriling food and other costs. All of the change agents were on the scene coordinating the well prepared uprising. The president and his entourage left the country of course accompanied by 1-1/2 tons of gold. Mubarak in Egypt was better prepared. He had been moving out the wealth of the starving Egyptian people systematically for years having been well schooled by his handlers in London and Washington. This planned uprising was not what the planners had expected, particularly in Egypt. More violence was expected. Mubarak is out, although he hangs on to the visages of power, but the real problem for these planners is that their chosen successor, Mr. Suleiman will not be accepted by the people. This is the man who ran the CIA’s retention operation in Egypt and oversaw the torture of innocent people. We can understand why they would not want such an inhuman person to lead them. Just more of the same. There are 25 million young men under 20 years old in Egypt. Does the military want to attempt to kill them? We do not think so. Those are insurmountable odds. People in Egypt are fed up and threatening them with death for demonstrating in the streets in the worst thing the Vice President could have done. The gauntlet has been thrown down to the people and that was a very bad idea by those who prefer force to persuasion. It seems the current government doesn’t at all understand that it’s their job to safeguard the people not to threaten them.

If you have any doubt as to who planned this episode we refer to secret meetings in Washington set up to decide who was going to replace Murbarak and how quickly it could be accomplished. That was a week ago and no headway has been made by the US, because all of their replacements are unacceptable to the people. After causing this fiasco the US and UK find they have lost control, at least for the moment, in their effort to retain Egypt aa a client state. We think that this diversion is going to be very expensive for both parties. They jeopardized power over Egypt to distract Europeans and Americans from their terrible economic and financial situations. The choice has turned out to be a very poor one and even if they cobble together a solution the relationship with Egypt will never be the same. Who ever planned this caper should have their head examined. That said, the discontent was obvious and the US stepped in for what they saw as an opportunity to distract fears in the US and Europe over the financial situation there and it backfired. Part of the American colonial empire could be lost here in a foolish gamble. This is all about power and the misuse of power, as well as the subjugation of 80 million people. America was a partner in Egyptian despotism long before Murbarak came to power 30 years ago. Blowback has begun and short of sending US troops in the US has lost the game. The risk reward for the US in this operation was without foundation. The odds had to be 20-1 it would be a loser and it looks like it is going to be. The White House has admitted their plan is out of their control and much worse the world sees control is slipping away, just as they see the US, UK and European control of the financial nightmare slipping away.

You might ask why did all this happen in Tunisia and Egypt? It was a distraction pure and simple and an expensive one. The elitists behind the scenes are trying to find a way to deal with the eminent collapse of the municipal bond market as hundreds of municipalities choose bankruptcy. Newt Gingrich, neocon Bilderberger, wants to pass legislation to allow states to go bankrupt. That would allow the states to dispense with all or part of their pension and benefit obligations changing their financial obligations dramatically. The concept is horrible for people who worked all their lives for a pension.

The Fed continues to buy all the new Treasury bonds and others in circulation. This is a policy that cannot continue indefinitely because it will lead to hyperinflation. Europe has similar problems. The healthier countries have pledged $1 trillion to rescue the spend thrifts. There is a problem, as we sited last May, and that is that they are going to need $3 trillion plus to accomplish rescue - a sum that will bankrupt solvent European states and bring depression to the entire region. Yes, China and Japan have ridden to the rescue in an effort to dump Treasuries and buy the euro bonds of Greece, Portugal and Spain. This is an exercise in futility. Do the Chinese and Japanese intend on coming up with $2 trillion? We don’t think so, and if they did, by selling treasuries, the US dollar would collapse. Another short-term stopgap measure doomed to failure.

By early May Congress has to pass an extension of the debt limit. The Republicans do not want a new extension unless there are major cuts in the budget deficit. In the interim solutions presented to Treasury Secretary Geithner have been found by him to be unworkable. Things are going to come to a head in this game of chicken. Wall Street and banking want the extension, so their game of looting can continue. No extension means financial chaos, which had to come sooner or later. Monetization of debt is inflationary and destructive. The quicker we bite the bullet the better.

That should have happened three years ago. We have reminded you of the problems faced by the US, UK and Europe, because they were the reason for the distractions in Tunisia and Egypt. They are extremely serious problems indeed, but the risks for distraction were too high and now we are witnessing that in a scenario where the US, UK and Israel could lose a key element of control in the Middle East. We will soon find out who wins – the people or the elitists.

Switching over to China we find a country with long experience in using money of all kinds. Copper, iron and paper – they tried it all. About a thousand years ago government took over control and issuance of paper money. Today China still likes to create money and in fact the increase in M2 has been close to 20%, that is similar to what the US Fed was doing a couple of years ago. The US and others have stopped doing so, but China continues on its merry way. China has followed such a course for hundreds of years, as has Europe. They all know that from long experience that the creation of superfluous amounts of money and credit lead to inflation, hyperinflation and economic and political chaos, yet they all do the same thing over and over again with the same tragic results. Obviously many people in China are aware of monetary history and they are purchasing gold and silver at an ever-increasing rate.

Today in China inflation rages, but it varies from province to province. Some areas have a net 5% inflation and some average 35%. Subscribers returning from China have varying and differing accounts of what is happening there financially. China like the US has negative real interest rates, particularly when matched up with real inflation. The government says inflation is 4.6%. That should average out to about 12% and we might add that is a guess. Either way, whatever it is, it is not good.

Ongoing inflation such as China is experiencing will perpetually lead to an accelerating purchasing of gold and silver. That has been part of Chinese culture for centuries, as a result demand has been unbelievable. This year China could import 1,000 tons of gold, which is hard to believe, when China is the world’s top gold producer. That is because the government has been purchasing production for a number of years and at the same time has been buying gold and silver in international markets, usually by using a go between. Gold and silver have not been the only refuge for the average Chinese. They have been accumulating other physical assets, food, commodities and real estate. Illiquidity in today’s overpriced real estate market has forced more and more money into food, gold and silver. China is faced with the same runaway inflation as the US and like the US they do not know what to do about it. They have become enmeshed in a Keynesianism trap from which there is no escape. Very simply, food prices have gone through the roof and this is only the beginning. What is stunning in both cases, China and the US, is that they both know what the end result will be. It’s a matter of history, yet they both still march toward financial oblivion.

In China and the US we see the producer price index at more than 14%. Are the producers, manufactures and distributors going to let these price increases eat into profit? We do not believe so. Prices are advancing at about 8% a month, although for now we do not expect that to continue.

On another note, if in fact higher food prices caused revolt in Tunisia, Egypt, Yemen and Jordan could it be that such conditions could cause worldwide revolt? It is possible and it is probable. Most certainly it is possible in China and perhaps in the US as well. We are often asked on radio programs what will finally wake the people up and spur them to action, and we have always said empty bellies. Thus, a classic syndrome is developing worldwide – a syndrome of revolt and we are now witnessing the beginning of it. Food prices are going substantially higher, because of floods and drought and the flight from currencies to some thing real such as commodities and gold and silver. All of what you are seeing is classic response. Just read history – it is all there, but then again only 8% of Americans are readers today – how sad.

In the late 1970s gold and silver prices rocketed due to 14-3/8% official inflation. That is in the process of happening again. Yes, the run in both metals over the past 2-1/2 years has been due to a flight to quality to gold and silver – the only real money in the world. This segment or phase for gold and silver will be propelled by inflation. This time it will make the 1970s look like child’s play. Just do not forget history is fully on your side. The upside in gold and silver is a lock.

In a brief announcement, Omar Suleiman said on Friday that Mubarak had "abandoned the presidency," handing over the power to the Supreme Council of the Egyptian Armed Forces, which is headed by Defense Minister Gen. Mohammed Tantawi.

The transition of power to the military comes while Mubarak, Suleiman and Prime Minister Ahmad Shafiq are all former military men. Analysts believe despite the transition Mubarak would still remain in power.

The transition means that Egypt, which has been under a state of emergency for the past 30 years, will continue to be ruled by the military.

This is while millions of Egyptians have for the past 18 days called for the departure of Mubarak and the establishment of a democratic government.

Egyptians poured into the streets to celebrate the toppling of the 82-year old dictator.

Meanwhile, the main opposition party Muslim Brotherhood, has called on the military to swiftly hand over power to a civilian-led government.

Muslim Brotherhood has also called for the establishment of a constitution that "guarantees freedom and human Rights."

Earlier in the day vigilantes opened fire on pro-democracy protesters in Egypt in a move unprecedented over the past couple of days.

The shooting in El-Kharga came as protesters took over several government buildings in major cities across Egypt on Friday. The last time that live bullets were used against protesters was on Wednesday, when six protesters were killed and hundreds of others were injured some of them critically.

Reports say protesters have also clashed with security forces and attacked police stations in El-Arish. About 1,000 protesters attacked the police station in El-Arish in an attempt to free political prisoners held by the regime for their anti-Mubarak stance.

More than 20,000 Egyptians have marched toward the City Council in the port city.

Millions of protesters in various cities across Egypt are calling on President Hosni Mubarak to step down.

A large number of Egyptians have surrounded the Presidential Palace and the state Radio and Television building in Cairo as the Mubarak regime dispatches scores of vigilantes to attack pro-democracy protesters. The Army, however, has prevented protesters from entering the buildings.

According to a Press TV correspondent, the republican guards have been deployed around the palace with snipers positioned on the rooftop of the building.

The measure was taken after protesters began gathering outside the presidential palace following the Friday Prayers.

This is while, a huge crowd of pro-democracy protesters have already gathered in Cairo's Liberation Square.

Reports say protesters have marched to the US Embassy, which is under tight security. The families of US diplomats have already been evacuated from Cairo.

Aside from Cairo, Alexandria and the port city of Suez have also been the scene of large protests since the country's pro-democracy rallies began 18 days ago.

Suez has also seen some of the most violent clashes in the same timescale.

Police have used tear gas and rubber bullets to disperse protesters.

More than one million pro-democracy protesters have taken to the streets of Alexandria. Protests have also broken out in Mansura, Port Said and Beni Suef. About 10,000 people took to the streets of Ismailia.

The US trade deficit with China has hit a record high, fuelling tensions between the countries over currency imbalances.

The gap between US imports from China and what it sold to the country rose to $273.1bn (£170bn) last year, the largest trade imbalance the US has ever recorded with a single country. While US exports to China grew by a third last year to an all-time high of $91.9bn, imports worth $364.9bn travelled in the other direction, an increase of 23.1%. Some US politicians blame Beijing for the size of the trade gap between the nations, claiming it is unfairly keeping the yuan's value too low. On Thursday a bipartisan group in Congress proposed a bill that would allow the US to impose emergency tariffs against China if its currency was found to be undervalued.

China, though, has long denied that it is responsible for American exports lagging so far behind its imports.

The overall US trade deficit jumped by a third during 2010 to $497.8bn as the US economy recovered following the trauma of the financial crisis. This is the largest annual percentage rise since 2000. The rising cost of oil was a key driver in pushing up the total cost of imports. In December, the US trade deficit widened by 5.9% to $40.6bn, the commerce department reported.

Economists warned the US deficit was likely to keep growing in 2011, although manufacturers may benefit from a weaker dollar. "Exports remain strong and are a bright spot in the US expansion," said Cary Leahey, at Decision Economics.


Ken Warsh, who opposed Bloody Ben’s QE 2.0 resigned his Fed Governor post. Inquiring minds wonder if this is a protest move. Regardless, another inflation hawk has resigned a key post. On Wednesday Germany’s Axel Weber resigned from the ECB. [They see real trouble ahead.]

His departure may give Bernanke a stronger hand to complete or potentially expand $600 billion in Treasury purchases through June. At the same time, Bernanke loses a link to Wall Street executives and Republican politicians as he carries out Congress’s overhaul of financial regulation and faces criticism from a political party that in the midterm election gained control of the U.S. House.

In January 2009, Warsh was passed over for the presidency of the New York Fed in favor of William Dudley, a former Goldman Sachs Group Inc. economist and leading advocate of the Fed’s stimulus that’s been dubbed QE2 by investors for a second round of quantitative easing.

Kevin M. Warsh, who helped manage the Federal Reserves response to the financial crisis and was Chairman Ben S. Bernanke's liaison to Wall Street and conservative Republicans, plans to leave the bank's board of governors around March 31. The departure of Mr. Warsh, 40, gives President Obama another opportunity to leave his stamp on the Fed. In addition to naming Mr. Bernanke to another four-year term last year, Mr. Obama has named three others to the seven-member board; a fourth nominee is awaiting Senate confirmation.

Mr. Warsh, a former investment banker at Morgan Stanley, was had pivotal role in the Fed's response to the financial crisis in 2008: arranging the sale of Bear Stearns to JPMorgan Chase, allowing Lehman Brothers to go into bankruptcy (the Fed maintains there was no other option), and then bailing out the American International Group, the insurance giant. In a statement, Mr. Bernanke praised Mr. Warsh for "exemplary service" and said "his intimate knowledge of financial markets and institutions proved invaluable during the recent crisis."

"I deeply appreciate his insights and wise counsel and, most especially, his fortitude and friendship during the difficult days, nights and weekends of the crisis," Mr. Bernanke said in the statement. In recent months, Mr. Warsh has at times distanced himself from Mr. Bernanke, who has pushed the Fed to take extraordinary measures to speed the recovery. Five days after the Fed's policy-marking arm voted on Nov. 3 to buy $600 billion in Treasury securities the second round of a strategy intended to lower long-term interest rates The Wall Street Journal published an op-ed article by Mr. Warsh expressing considerable doubt.

Though Mr. Warsh voted for the bond-buying plan by Fed tradition, members of the board almost never vote against the chairman he said he considered the strategy a "necessarily limited, circumscribed, and subject to regular review," and added that "policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialize."

In his resignation letter to Mr. Obama on Thursday, Mr. Warsh wrote, "I am honored to have served at a time of great consequence."


The Fed’s balance sheet is now above $2.5 trillion due. It increased over $31B due to $28.9B of debt monetization.

For January, the Fed’s H8 statement shows ‘Bank Credit’ has declined $53B or 0.0058% (6.6% annualized). But ‘Derivatives’ have increased $11.8B or 0.0284% (39% annualized).

Good thing the big banks were bailed out by taxpayers and QE is lowering rates for consumers. On Wednesday, Bloody Ben told the House Budget Com. that he’s not worried about inflation because the Fed has the means to reduce its $2.5+ trillion portfolio and hike rates “at the appropriate time.”

This is preposterous! If the Fed tries to sell $10B of bonds, the bond market would tank or collapse. If the Fed sold $25B of bonds per week, it would take 2 years to purge the Fed’s portfolio. How would the US Treasury sell bonds? How would states & municipalities sell bonds? What about companies?


QE2 is a "total failure," except for those folks who work on Wall Street," Rep. Paul says. "It hasn't done anything for Main Street; hasn't done anything to give us real jobs; hasn't done anything for people who are losing their houses."

As for inflation, "I think there's plenty," Rep. Paul says, citing "skyrocketing" commodity prices and rising food prices. One problem is the Fed's reliance on core CPI, which famously excludes food and energy and relies on hedonic adjustments. "They rig that number," he says. "[Bernanke] looks at government stats that are fudged to reassure him he doesn't have to do anything."

With the Republicans controlling the House and Rep. Paul's views now more mainstream, the Texas Congressman has somewhat toned down his public criticisms of the Fed lately. Still, he hasn't changed a fundamental view that central economic policymaking via the Fed is doomed to fail.

"We're trying to correct the massive problems we had this decade with more" of the same policies, he laments. "He's supposed to give us full employment and stable prices and we have neither. How did the Fed do?"

Rep. Paul says he'd support stripping the Fed of its dual mandate - full employment and price stability - as others in Congress have discussed. But he doesn't think it will do much good and continue to push for a full audit of the Fed and some "competition" for the dollar, as you'll see in part 2 of this interview.


Ron Paul: QE2 Is a Total Failure and Bernanke Is Delusional About Inflation

QE2 is a "total failure," except for those folks who work on Wall Street," Rep. Paul says. "It hasn't done anything for Main Street; hasn't done anything to give us real jobs; hasn't done anything for people."

As for inflation, "I think there's plenty," Rep. Paul says, citing "skyrocketing" commodity prices and rising food prices. One problem is the Fed's reliance on core CPI, which famously excludes food and energy and relies on hedonic adjustments. "They rig that number," he says. "[Bernanke] looks at government stats that are fudged to reassure him he doesn't have to do anything."


Ben Bernanke faced some tough questions at the House Budget Committee hearing Wednesday. Still, the Fed chairman is probably glad he wasn't before the House Domestic Monetary Policy and Technology Subcommittee, which is chaired by Rep. Ron Paul (R-Tx.)

Rep. Paul joined Dan Gross and me Wednesday afternoon to discuss Bernanke's testimony and his subcommittee's hearing. As you might expect, the longtime Fed critic took umbrage with Bernanke's testimony, most notably the chairman's claims that QE2 is working and that inflation isn't brewing. (See: Under Pressure: Bernanke-Ryan Square Off as Ron Paul Waits in the Wings.)


Treasuries Drop as $16 Billion 30-Year Bond Sale Demand Slips. Indirect bidders, a class of investors that includes foreign central banks, bought 43.1 percent of the bonds, compared with 37.8 percent in January. The average for the past 10 sales is 38.29 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8% of the debt, compared with 12.4% at the January offering and a 10-sale average of 15.10 percent.

After the Treasury auction, the Fed announced its new POMOs (Permanent Open Market Operations).

The latest scheme calls for $97B: $80B of QE2 and $17B of MBS. This is $15B less than last time.


U.S. Treasury Secretary Timothy F. Geithner will present Congress with three options for reducing the government’s role in the nation’s decades-old housing finance system and shrinking the footprint of mortgage companies Fannie Mae and Freddie Mac, according to two people familiar with the plan.

Geithner will release the proposal as soon as Friday, according to an administration official, who spoke on condition of anonymity yesterday because the proposal isn’t public. One option would eliminate the two firms and their government-backed guarantee of mortgages while another would hew closer to the present system, according to the two people familiar with the plan.

President Barack Obama met with Geithner and other top aides at the White House yesterday to put final touches on the proposal, according to the administration official. Under the Dodd-Frank financial regulatory overhaul enacted in July, the administration was required to submit to lawmakers a plan for ending taxpayer support for Fannie Mae and Freddie Mac. The government took control of the companies in September 2008 and they since have drawn more than $150 billion from the Treasury to cover losses linked to sub-prime mortgages.