International Forecaster Weekly

The Impact of Endless Liquidity

Feds gaming their own system, correction warnings, Britain facing stagflation, railroad justice for Omar Khadr, Floating prisons for thousands of prisoners, women more pessimistic than men

Bob Chapman | June 4, 2008

Since 1987, the money, credit and interest rate policies of the Fed have been to supply endless liquidity. In supplying it they cannot direct where those funds should go, like into plant, equipment and research or into different forms of speculation. Thus, in spite of the myriad players the liquidity comes from the Fed. That means there should be controls on Fed and bank lending to stop speculation. We all know that isn’t going to happen because the Fed owns the system. Another aspect of cutting off speculation is that it would be deflationary and the Fed has enough trouble with inflation already. That is why money and credit is being created at an 18% rate. A sharp drop in commodity prices could overwhelm the system and the Fed would then have to increase M3 by perhaps 25%. Can you imagine 20% plus inflation? Again the Fed is in a box and cannot get out. Commodity speculation is here to stay no matter what politicians and the Fed do. It is the lending system that is the problem. The liquidity is going into all the wrong places. It is feeding more speculation. The intervention of Congress then presents no guarantee that speculation in commodities will end. As we said, funds will go offshore to other commodity markets and the legislation will not solve an insolvable problem created by the Fed. As you can see, every which way you look, the Fed is responsible for all our financial and economic problems. The speculative investors are only to blame in a small way.


The system has worked reasonably well in our commodity markets - that is when the Fed, the CFTC and the “Working Group on Financial Markets” isn’t rigging the markets. You cannot regulate speculators without almost totally destroying the markets.


Again, the Fed supplies the loans or credit and banks sell a swap for a specific commodity and there is no limit on the amount of the commodity that can be hedged. Thus, funds can accumulate positions far in excess of what they could do directly by working with an investment bank. The bank in effect is creating a futures trade. The bank guarantees the trade and bypasses the futures market leaving no trace of the trade. They can do this with any commodity. The bank selling the swap is a hedger and there is no limit as to what they can do. That is not true though because they’ll never have to deliver the hedge as a producer would. Commodity speculators could be up against regulators and politicians, so we believe you should temporarily be out of these markets in case they correct further. That does not include gold and silver, which you should stay long. Who knows what these two groups of idiots may do.


CEO of Analog Devices, Jerold Fishman, neither admitted or denied and made a settlement for backdating options for a fine and penalties of $4.5 million. Fishman was not charged with wrongdoing. The SEC’s only function is to collect fines and let the crooks go for paying off. We have two cases where CEO’s wouldn’t cooperate and they ended up in prison. Those who payoff, and are Illuminists, go right on stealing from the public.


The Fed is only interested in saving banks and Wall Street – not caring about the value and fate of the dollar or the inflationary consequences of the wild expansion of money and credit. This decision to cut interest rates to a negative official minus 2% has brought about hyperinflation, so it is no wonder commodities are on a tear. As far as we can see thus far lower interest rates have been a bust. The credit made available by the Fed to the banks, which have in turn lent it out, have seen a good part of those funds go into speculation, a part of which has gone into commodities. The Fed and the bankers gave the speculators the money to run commodity prices up with reckless abandon and terrible inflationary consequences, as well as putting downward pressure on the dollar. As the dollar falls commodities prices rise. Oil is a perfect example. The head of OPEC, Chakeb Khelil says every time the dollar falls 1% oil rises $4.00. That is why it is going to be hard to get oil below $100 a barrel as we don’t see any sustained dollar rallies. After G7 they tried to rally the dollar and got really nowhere. Demand in the US for oil has slid via conservation but demand continues to rise in Russia, India and China. Instead of trying to move the dollar index, the USDX, 10% to 80 from 73, the Fed is saving Wall Street instead. They do not seem to understand the dollar and oil are synonymous. The same phenomenon has beset the British pound. After 3, ¼% cuts in their interest rates the pound fell 20% versus the euro. Thus in pound terms oil is more expensive as the pound falls. Further rate cuts by the BoE due to a falling real estate market and a slowing economy will only make energy more expensive. Britain is on the edge of recession and stagflation is just now taking hold. Not only are citizens of the US and UK going to pay higher energy cuts, but so will China, which has had price controls on gasoline since November, as prices have risen elsewhere by 35%. India has done the same as China for 20-months as their inflation heads up strongly. Year-on-year India’s oil imports have risen by 9%, India’s increase in M3 has been 22% and China’s has been about 18%.


As a summation to our problem called the Federal Reserve, we quote the famous Chevalier Harry D. Schultz, editor of the Harry Schultz Letter, “part of the purpose of the Fed, (a privately owned-by elitists-corporation) is to prevent markets from functioning, via supply and demand.”


This past weekend Illuminist Treasury Secretary Henry Paulson was in Jeddah, Saudi Arabia, on his knees, convincing their finance minister, Ibrahim al-Assaf, that the Saudis should keep their dollar peg. As a result the Saudi will keep the peg for now at least, and there will be no revaluation. As a result of the Saudi decision their 10.5% yoy inflation has a good chance of moving up to 13 to 15 percent by yearend.


Paulson’s trip to the region was to get more OPEC nations in the region to help bail US financial institutions and to get them to keep buying US bonds, notes and bills. Last week he said it was speculators pushing up oil prices. This week he says it is supply and demand.


The state of jurisprudence in America is aptly described in the following. A judge hearing a war crimes case at Guantanamo Bay who publicly expressed frustration with military prosecutors’ refusal to give evidence to the defense has been dismissed, because he refused to allow prosecutors to railroad Canadian detainee Omar Khadr. There are 17 whom the government intends to railroad at this time and who knows how many more. In Khadr’s case prosecutors even refused to turnover to the judge medical and interrogation records. This is the modern version of a “Star Chamber” proceeding. Khadr, 21, did as a 16-year-old kill an American Sergeant in comb at, but government wants to set precedent that any insurgent anywhere can be tried and executed if captured. If successful they can use this against American citizens if an insurgency happens in the US. You do not get captured.


George and the neocons are operating 17 floating prisons to house people who were kidnapped in the war on terror. There is nothing the neocons won’t do to increase their power. There are more than 200 more cases of rendition since 2006, after our president said it had been stopped. Covertly the Illuminists are holding 26,000 prisoners without charges on trials. Some 80,000 have been through the system since 2001. The government of our country is run by monsters.


The scheme of mitigating inflationary expectations even when inflation reality is drastically different by crafting fraudulent CPI and Core is ending. Few people cared or paid attention to the various ways and means that fraudulent economic data was manufactured for most of the past two decades. But over the past few years, roaring food and energy inflation has enlightened many people.


As a rule, women are more pessimistic than men. The pattern has been among the most consistent across years of tracking U.S. consumer sentiment in the Reuters/University of Michigan survey. Since the survey began tracking gender differences in outlook in January 1978, women have shown a higher sentiment reading just twice. Things changed this month.


The long-term trend continued in May as overall consumer sentiment dropped to a 28-year low. Yet the mood among women improved slightly whereas sentiment for men soured for a fourth consecutive month, dropping to the lowest since 1980 (second graphic above). Moods darkened for men by the biggest margin in nearly three years, since the aftermath of Hurricane Katrina.


Democrats in Congress want to nationalize a chunk of the insurance business that covers major storm-damage claims.


The proposal -- backed by giant insurers Allstate Corp. and State Farm Mutual Automobile Insurance Co., as well as Florida lawmakers -- focuses on "reinsurance," the policies bought by insurers themselves to protect against catastrophic losses. The proposal envisions a taxpayer-financed reinsurance program covering all 50 states, which would essentially backstop the giant insurers in case of disaster.