International Forecaster Weekly

The Public Should Not Pay For Policymakers Mistakes

Policy makers work to delay, Gold and Silver movements, no rescues for Europe, Bernanke has no exit strategy, Inflation predictions, Fed crushes defaulting homeowners, economy barely expanding.

Bob Chapman | December 8, 2010

Policy makers within the Treasury and the Fed are only interested in delaying and extending the timeline trying to find and extricate themselves from one of the most dangerous fiscal and monetary failures of all time. They know they and their controllers have no solution. QE1 and QE2 have temporally saved them financially, but have not saved any economy, especially the American economy. In addition it has added to the severity of the crisis.

As a result gold, silver and commodities have traded higher over the past few years, albeit in a rollercoaster fashion, as a result of de-leveraging, a once in a century event. Foreign and domestic markets have remained relatively high due to the large liquidity injections of the period. That means without continued liquidity they could be in serious trouble. In addition in the US the real estate markets have not yet hit bottom, unemployment is high and will eventually go higher. As Keynes said you can’t have a recovery unless employment increases and we have some 20 major countries on the edge of insolvency. Those problems are worsening and that is borne out by the ECBs decision to restart its version of QE2. The main players know what they are doing is not going to work. Just look at the monetary policy of the last three years. It bailed out the financial sectors, allowed giant bonuses to be handed out to the people responsible for the debacle and we saw only a few crumbs thrown to the public. In the US the government extended the real estate failure by having Fannie Mae, Freddie Mac, Ginnie Mae and FHA engage in a new round of subprime and ALT-A mortgages. Trillions were thrown into a market that has become an even worse basket case than it was if that was possible.

Europe is worse than it has ever been in spite of so-called rescues. While on radio and TV and in the press in Greece, England, Ireland, France and Germany, we told listeners long ago that the only way for Greece, Ireland, Portugal and Spain to go was via default, leave the euro, bring back their old currencies at low levels and leave the euro zone as they cut domestic spending by 1/3 and raise taxes slowly. That way they would have a five-year depression. By taking a bailout they will be slaves of the banks for the next 30 to 50 years. These are the banks that should have never made the loans and bought the bonds in the first place, because they knew it was imprudent, and that the funds for these purchases in part were created out of thin air. All that is being done for Greece and Ireland is that governments are lending them money, so these countries can pay off the banks, so the banks won’t go under. As you can see there is no exit strategy in the US or Europe. They are all entrapped in Keynesianism, which we believe is no more or less than corporatist fascism.

It looks like Fed Chairman Ben Bernanke’s QE2 will be limited to about $1 trillion, but he indicates, as we predicted, that QE3 could be on the way. Again exit strategy for now is dead. Mr. Bernanke and Europe continue in denial and their efforts thus far have been political, pathetic and have hinged on only one thing, saving a corrupted financial sector elite.

As a result of demand, interest rates have begun to rise in the US. The US 10-year note has risen some 5/8% to more than 3%. It could be that ultra low mortgage rates are a thing of the past. Corporations have been taking advantage of low rates and issuing trillions of dollars of bonds to build a cash war chest to face a further depression. We wonder what they will do when the banks go under and their uninsured hoards of dollars disappear with the banks? At the same time the US stock market rallies on the liquidity crated by QE2, which allows the financial institutions to gamble even more. Over three years, trillions have been thrown at the markets and the economy and the results have been dismal. Not only are interest, mortgage rates and unemployment rising, but also the economy is not responding. The stock market is being manipulated upward by government to extend a feeling of well being, because once the stock market collapses the game is over. It is the only place not currently under great pressure save gold, silver and commodities. The Democrats continue their political game on tax cuts as income is starting to be taken in 2010, not knowing if tax cuts will remain in place. That could cause massive selling in the market, as Ben Bernanke tells us 5% to 6% unemployment is many years away.

As far as recovery is concerned we are barely to the plus side in spite of trillions being poured into the economy. Only the speculators in banking and on Wall Street are having a good time. This is the same monetary and fiscal management that was witnessed in the late 1920s. Credit growth and financial flows increased exponentially. Almost all economies are making the same mistakes, thus, no one is going to escape. The damage by country will vary, but the fallout will be unmistakable.

Inflation officially is 1.2%. Real inflation is 6% to 7%, but that is not the real current reason for gold, silver and commodities rising. It is the fall and fiat nature of all other currencies. Gold has been telling us that it is now the premier currency in the world. That is what is causing a flight to quality. The dollar rally is again weakening in spite of the plight of Greece, Ireland, Portugal and Spain. This shows an inherent weakness that cannot be overcome soon or easily. Even America’s municipal bond market is a shambles. Major states are in the same straight as the PIIGS in Europe. Only the US federal government can bail them out with more deficit spending. What a tragic state of affairs. Thank goodness we recommended selling municipals more than three years ago. Incidentally, as interest rates rise, which they must do eventually, munis will fall even lower. States are still madly selling debt and have to pay higher yields. They are desperate and they are happy to pay up.

Focus will now again stretch to the dollar, QE2 or QE3, and the state of the US economy. The elitists must be desperate to put academic Bernanke on 60-Minutes. What a bonehead play. He has no presence and is an introvert like so many of those from the ivory towers. A salesman he is not, and he has no real life business experience. It has been a long time coming but high inflation is on its way to compound all the trouble we have just mentioned. It is not going to be pretty as prices rise, wages stagnate and unemployment grows. The punchbowl of extended unemployment benefits looks to be extended and Democrats would like to leave tax cuts in place. The global finance and debt bubbles are growing worldwide as the problems are extended, which can only mean worse results in the end.

Now that Jean Claude Trichet has submitted to quantitative easing Europe is going to be a different place over the next year or two. The past three years have been difficult for the 27 European Union members and of those the 16-euro zone participants. Economies have held up due to a generally lower euro, but even that hasn’t been enough to bring European countries a sustainable recovery. Europe’s present crisis is a bond crisis and now with more money and credit creation on an unlimited basis there is going to be rising inflation. There is now no question that European debt is out of control. As we said long ago the connection between gold and the dollar is now only about 30%. That is why now when the US dollar rallies, so do gold and silver. Gold has broken away from the dollar, because over the past two years in a titanic struggle, which almost all professionals have missed completely, gold has proven again to be the international reserve currency. It is now only a matter of time before any currency calling itself a world reserve currency or trading unit will have to be backed 15% to 25% gold. This needless to say deeply affects Europe and the euro, which is probably now only 5% backed by gold, down from 15% just ten years ago. The fall in reserves is the result of the European Central Bank, participating in a deliberate policy of joining the US Treasury is systematically suppressing gold prices. As it turns out that has not been a very good idea.

The weak euro zone countries are slated for a $1 trillion bailout if necessary, and it probably will be necessary. The ECB and others now want to increase this commitment to an open-ended guarantee of funds. France, Germany and the Netherlands are not very happy about that idea, because they know, as we predicted months ago, that the bailout will cost more than $3 trillion and in that process they too could go bankrupt.

These financially healthy benefactor countries know the present rescues of Greece and Ireland are not working, just as we said they would not work. Even another more than $100 billion commitment by the European Union has not convinced bond buyers that they should continue to be buyers. Overall, Europe, taking in all its parts, is insolvent. The bond vigilantes believe that is the case. That means, as we explained a year ago that the only way to solve Europe’s problems, which are similar to those of many other countries, including the US and the UK, is to default in whole or in part, leave the euro and return to their original currencies, and in a moderate time frame cut government spending by 30% and increase taxes by 30%. This purging should last about five years and normality should then return. The problem with such a classical economic formula is that many banks will become insolvent and that is really what all the bailouts are all about. Under fractional banking these banks have imprudently made poor loans some 40 times their capital asset base, and they are currently insolvent. Now the bankers that caused these problems expect taxpayers of many countries to bail them out. It doesn’t work that way and shouldn‘t work that way. Banks and other financial entities should be allowed to go under. That is the way the system was constructed and it should be allowed to do its work. The elitists who run these financial entities and control governments do not want this to happen. They believe the public should pay for their mistakes. Today we live in a different world of the Internet and talk radio, which dispenses the truth worldwide, so these elitists have a serous problem and that is the public, is not going to let them get away with it this time.

The outcome will be a massive dumping of bonds that will include all bonds, because the system is broken. More money and credit provided by the ECB, the Fed and the Bank of England will only buy time. It won’t create a solution. That is being reflected in the euro, the pound and eventually the US dollar in their relationship with gold. The bond selling will be relentless and endless as buyers disappear. The same thing is in process in the US in regard to municipal bonds from a number of states whose economies are far larger then some European countries.

The reaction was another US dollar rally, which is most likely in its final stages and the same goes for the US stock market. Starting tomorrow, Thursday, there are only 9 days left to affect legislation before the lame duck session ends. That is merciful, because it means less dreadful legislation will be passed. In the meantime gold and silver are warning us that gold is now the world currency that the European, UK and US financial sector crises are not by any means over and the day of reckoning is at hand. The first six months of next year are going to be terrible. The euro zone’s problems are going to be recognized as insurmountable. The days of another international meeting are drawing close. It can be said that if nations do not have such a meeting similar to those at the Smithsonian in the early 1970s, the Plaza Accord of 1985, and the Louvre Accord of 1987 they are doomed. The longer they wait the worse it will be. Both the euro and the dollar are in a declining mode. The euro will in all likelihood not survive the dollar may. The great differences in Europe are the size of the countries and the historical lack of commonality, interest and culture. You may not think so, but the differences are tribal and cultural. An unnatural combination. What you are seeing today we forecasted in 1964, but few were listening.

What should be going on in Europe is bankruptcy for the losers and the deliberately strengthening of the countries that did the right thing and are strong. Why beat a dead horse? The bailouts are to allow the strong in Europe to bailout the bankers. The debt involved in the bailouts can never be paid, just as the US and UK debts can never be paid. What these bureaucrats don’t understand is that the banks have to be allowed to go under and until that happens the situation will worsen.

We know a reconstituted dollar will work albeit painfully, the life of the euro will soon be over. The failure of all three currencies will have a profound impact on the entire world. In the end the winners will be gold and silver. They are the only safe places to be. Not only will you be able to keep your assets, you may become wealthy in the process.

The US manufacturing and services sectors will grow in 2011, with manufacturing revenue expected to increase by 5.6%, the Institute for Supply Management said in a semi-annual forecast released on Tuesday.

Revenue in the non-manufacturing sector, which comprises mostly service sector businesses, is expected to increase by 3.4% next year, ISM said in a statement.

Manufacturing sector capital investment should jump by 14.5% in the year, while noon-manufacturing sector capital investment is expected to rise by 3.7%.

Last week the Dow gained 2.6%, S&P 3%, the Nasdaq 100 1.7% and the Russell 2000 3.2%. This was the result of quantitative easing by the ECB, the European Central Bank. Banks rose 7.7%; broker/dealers 5.2%; cyclicals 5% and transports 3.9%. Consumers rose 2.1%; utilities 1.3%; high tech 2.1%; semis 4.1%; internets 0.8% and biotechs 0.4%. Gold bullion gained $51.00, the HUI gold index rose 7.7%, up 35.3% and the USDX fell 1.5% to 79.14. It fell three days and again failed to surmount .84. It broke out over .80 but was unable to maintain momentum and slid back into decline. Technically this could be telling. Considering the troubles in Europe it is not a good performance.

The 2-year T-bill fell 4 bps to 0.46%, the 10-year T-note rose 14 bps to 3.01% and the 10-year German bund rose 12 bps to 2.85%.

Fed credit increased 0.4 billion to $2.318 trillion. It is up 4.8% annualized and 6% yoy. Fed foreign holdings of Treasury, Agency debt rose $0.5 billion to $3.341 trillion. Custody holdings have increased $386 billion ytd and 14.1% yoy.

M2 narrow money supply grew $10.3 billion to a record $8.809 trillion.

Total money market fund assets fell $3.3 billion to $2.810 trillion. Year-to-date assets have fallen $483 billion, with a one-year decline of $509 billion, or 15.3%.

Total commercial paper outstanding fell $44 billion to $1.021 trillion – it is off $149 billion ytd and $215 billion yoy.


Tentative deal that would extend for two years all the Bush-era income tax breaks set to expire on Dec. 31, continue unemployment benefits for an additional 13 months and a 2 percent employee payroll tax cut and extensions of several tax credits aimed at working families that were included in the stimulus bill.

Outgoing California Governor Arnold Schwarzenegger declared a fiscal emergency on Monday, unveiling a package of proposals of mostly spending cuts aimed at closing the state's current-year shortfall of $6 billion.

The Republican governor also called lawmakers into a special session on the budget, but Democrats who control the Legislature have signaled they are likely to ignore his plan, as Democratic Governor elect Jerry Brown will assume office next month and present his own budget.


As Americans continue to lose their homes in record numbers, the Federal Reserve is considering making it much harder for homeowners to stop foreclosures and escape predatory home loans with onerous terms.

The Fed's proposal to amend a 42-year-old provision of the federal Truth in Lending Act has angered labor, civil rights and consumer advocacy groups along with a slew of foreclosure defense attorneys.

They're not only asking the Fed to withdraw the proposal, they also want any future changes to the law to be handled by the new Consumer Financial Protection Bureau, which begins its work next year.

In a letter to the Fed's Board of Governors, dozens of groups that oppose the measure, including the National Consumer Law Center, the NAACP and the Service Employees International Union, say the proposal is bad medicine at the wrong time.

"At the depths of the worst foreclosure crisis since the Great Depression, we are surprised that the Fed has proposed rules that would eviscerate the primary protection homeowners currently have to escape abusive loans and avoid foreclosure: the extended right of rescission."

The trustee seeking assets for victims of Bernard L. Madoff’s global Ponzi scheme filed a lawsuit yesterday seeking $9 billion from a roster of defendants headed by HSBC, the London-based financial giant with hedge fund clients that fed piles of cash into the enormous fraud.

According to the complaint, a hedge fund official once attributed Madoff’s stellar performance which later turned out to be purely fictional to a “magic formula’’ no one else could replicate.