The Fed’s Monetary Politburo Is Finally Catching Some Flack

End the Fed.  They pose as high priests of finance, when they are merely sophisticated scoundrels, liars, cheats, and thieves.

http://davidstockmanscontracorner.com/the-feds-monetary-politburo-is-finally-catching-some-flack/

Game of chicken between fiscal and monetary authorities

http://www.zerohedge.com/article/willem-buiters-game-theoretical-explanation-interaction-between-central-banks-and-treasuries

To sovereign debt holders, the game is more like "musical chairs."

Morgan Stanley: inflation is biggest risk

http://www.moneynews.com/StreetTalk/Morgan-Stanley-Inflation-Risk--Double-Dip/2010/07/30/id/366105

Inflation is the biggest risk to emerging economies, but it helps reduce the debt burdens of developed countries, including the US.

My investment thesis is that US government monetary officials will declare war on deflation in an attempt to ward off another (deeper) recession and curb high unemployment. This will justify the Fed deploying another round of fiscal and monetary stimulus, Quantitative Easing 2.0. This will stoke inflation globally, even if it could appear dormant in the US for a while longer.

Ron Paul on monetary and fiscal policies

http://www.youtube.com/watch?v=CD6d_oHxQ4U&feature=player_embedded

Gold is no longer a fringe asset

http://www.pinnacledigest.com/blog/fastfoot/gold-no-longer-fringe-now-mainstream?#comment-47178

Here's something on price from Ian McAvity, a longtime and respected gold market watcher, in his latest Deliberations on World Markets newsletter: "Gold is about 50 percent above (its) 1980 peak, while total U.S. credit market debt has increased 12-fold and the S&P 500 is about 10X where it was in 1980... it would take a rush to $5,479 to replicate the 1980 peak (I repeat that is not a forecast, it's a technical observation from an overlay of the cycle of the 1970s on the cycle from 2001) Simply put, any talk of a gold bubble is utter nonsense... While the markets toss the inflation/deflation debate back and forth, I believe the key driver of gold is monetary."

And for an even bigger number, I turn to Barry Cooper at CIBC in Toronto. The chart above shows the relationship of the gold price and U.S. government debt. He says that if somehow a new gold standard were to be created, the gold price would have to be $46,000 per ounce if all U.S. government debt had to be backed by bullion. We don't believe that a Bretton Woods II agreement is coming, but for those strict monetarists who support a return to the gold standard, this estimate provides one view on how it could impact gold.

IMF recommends raising inflation target to 4%

I wonder if the IMF's top economist is buying gold for his own personal stash. Okay, that was an irreverent dig, but Olivier Blanchard (on leave from MIT coincidentally) advises the IMF should raise their inflation target from 2% to 4%. He believes with zero interest policies already in place, central banks worldwide have no more bullets to stimulate their respective economies.

This is what they call in the feature film industry "foreshadowing."

http://online.wsj.com/article/SB20001424052748704337004575059542325748142.html

von Mises vs. Keynes

John Maynard Keynes has more followers (inside the US government and its banking cartel), and has an economic theory named after him. Ludwig von Mises is largely forgotten by the mainstream financial press, even though his track record of predictions has been much better. A disciple of the Austrian School of Economics, von Mises was a libertarian who predicted in the 1920's that government intervention created distortions in credit and financial markets, causing asset bubbles that would eventually burst. Does that sound familiar?

In any case, his prediction came true in 1929, yet he was marginalized yet again with the emergence of Keynes in 1936, who espoused printing currency and running deficits in order to escape the throes of a Great Depression. Again, does that sound familiar?

Many from the intelligentsia mistakenly believe we are in the midst of a war of ideaologies, i.e., GOP vs. Democrats, conservatives vs. liberals, etc. In regards to financial policies, it's partially true, but not completely, because Administrations and legislators from both sides of the aisle have run up enormous budget deficits, while resorting to printing currency to fund the deficits. They have borrowed trillions from foreign sovereign funds, and contributed to the insolvency of entitlement programs such as Social Security and Medicare. We are simply a country that spends money we don't have.

In short, our government's fiscal and monetary policies have been reckless and irresponsible. President Obama and Congress are following the wrong playbook.

http://online.wsj.com/article/SB10001424052748704471504574443600711779692.html (you may need a subscription to read this article)

Gold bugs

Whether gold bugs are government and central bank conspiracy theorists--or monetary realists, is debateable, but their bullish stance on the precious metal has paid off handsomely since the millenium. The following article postulates why the price of gold may continue to rise going forward.

http://www.ft.com/cms/s/0/f149a1a8-b4fe-11de-8b17-00144feab49a.html

The case for owning gold...

Monetary inflationists from the Austrian School of Economics are in direct opposition to Keynesian economics largely accepted by our Administration, Congress, bankers, central bankers, academics, and mainstream economists.

Hence, the vast majority believe the only escape out of a financial meltdown is to flood the markets with liquidity. Essentially, they mistakenly believe solving a debt crisis with even more debt is the corrective action. It's analogous to offering greater amounts of booze to an alcoholic, and hoping that somehow cures him of his alcoholism. Our current and previous Fed Chairmen, Secretaries of Treasury, Presidents and Congressmen have all espoused these fiscal and monetary policies--some more than others.

So guess who wrote this in their essay back in the day--before he climbed several pay levels within our government:

But the opposition to the gold standard in any form – from a growing number of welfare-state advocates – was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale… Thus, government deficit spending under a gold standard is severely limited.
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which – through a complex series of steps – the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold…
The law of supply and demand is not to be conned. As the supply of money increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold… The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirade against gold. Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

Ready for the answer? It was former Fed Chairman Alan Greenspan, who is commonly roasted today for causing the real estate bubble by implementing easy-money policies earlier this decade. With hindsight, his critics point out that Greenspan caused the mortgage crisis by artificially creating a bubble in real assets, while our country amassed billions in deficit. What those same critics don't mention is that Bernanke, Geithner, Obama, and Congress are all colluding to construct those same deficits--only on a much larger scale. After all, deficits of a few trillion here or there are minor inconveniences, right?

Age and power seem to have corrupted the former Fed Chairman. Although his critics are quick to denounce his policies of the past, they are advocating the same strategy which they are criticizing. The difference this time is that the numbers are horrifically astronomical.

Ludwig von Mises--why you should know him

The great Austrian School Economist, Ludwig von Mises wrote, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

In other words, Mises, unlike the followers of economist John Maynard Keynes, is of the opinion that governments (and central banks) should stop trying to interfere with market forces. Government intervention via fiscal and monetary policy cannot "control" markets, and cannot prevent booms or busts--they occur naturally, and hence, should be allowed to run their course. All intervention will do is compound and exacerbate said credit expansions and subsequent busts. In other words, they not only create bubbles--they make them bigger, and when they pop, they create bigger busts.

Obama, as bright and insightful as he is, is naturally bending to human nature--the consensus is to solve this huge private, corporation, and institutional debt crisis by replacing it with much larger government debt. In other words, we are compounding a billion dollar debt problem into a trillion dollar debt problem.

While stimulative short-term (public and private works, for instance), it is detrimental long-term, as our generation and future generations are saddled with huge debts and high taxation. Despite cosmetic rhetoric, we are merely deferring out debts into the future, letting them compound at an alarming rate.

The resulting inflation reduces that debt amount into the future, but inflation also punishes savers and investors. Eventually, investors will demand higher rates of return. The combination of capital flooding the markets, and said capital chasing fewer resources (commodities, crops, oil, basic metals, and precious metals), will also cause interest rates to rise.

Inflation is the furthest worry of policymakers and the general public right now, but it will eventually rear its ugly head.

In the immortal words of the recently mortal Milton Friedman: "Inflation is taxation without legislation."

Why "quantitative easing" will work, but at what cost?

The tandem of the Federal Reserve and the Treasury have taken extraordinary measures to solve the credit crisis. They've lowered interest rates as low as they can go (Treasury bills temporarily dipped below 0% yield recently), providing the markets with plenty of credit. The problem was no lenders were lending, and no borrowers were borrowing. Lenders used the swaps to shore up their balance sheets, dumping bad assets for Treasuries, but they weren't lending.

The Treasury stepped up by pumping the system with trillions of dollars, injecting capital in hopes of stimulating spending. It worked, so we can expect them to step up their efforts. It's one thing to extend credit; now the government is literally printing money out of thin air.

This is, by definition, inflationary. It's necessary to avert a category 5 Great Depression, but it will prove to be problematic down the road when hyperinflation rears its ugly head. Printing money also debases the local currency, as the US Dollar continues to plummet. This flight to quality and perceived safety (short-term T-Bills and long-term T-Bonds) is bumping interest rates down to historical lows, due to the high demand for Treasuries. The operative word is "perceived" as I will soon explain.

My investment thesis is that this low-interest environment will eventually reverse course, as investors demand higher rates of return once they realize how flimsy the US Dollar is. Parking money in Treasuries at such low rates will prove to be disastrous, as inflation asserts itself, accompanied by higher interest rates. Finance 101: when interest rates rise, bond prices decrease.

With borrowing costs so low, we are to the point where any asset other than cash seems too irresistible to pass up. Having said that, with fears of deflation and blood in the streets, temporary irrational pessimism could cause markets to undershoot more than they have. Therefore, despite snapback rallies, further lows could be tested in equities and real estate in this secular bear market.

It is impossible to time market bottoms or tops, but there is value for the patient. My contention is that inflationary monetary policy will eventually lead to inflation, and that precious metals will resume their secular bull market. Equities and other commodities will follow suit within the new couple years, and real estate will recover within 3 - 5 years. I am unsure of the timing, but the direction will reverse course eventually. In other words, I can't call the bottom, but we are closer to the bottom than a top, as many have already taken a 50% haircut on their portfolios and 30% on their home values.

Hence, my current positions are long gold, long the Japanese yen (short the US Dollar), short Treasury Bonds (10 - 30-year maturities). With inflation and rising interest rates, bond prices will plummet going forward.

For those favoring income and dividends, I believe high-quality corporate bonds are extremely attractive relative to Treasuries. A handful of shares are attractive, including companies with leading market share, high cash reserves, strong cash flow, and no debt. For the non-faint of heart, some high-yielding (junk) bonds may also be profitable due to their extreme spreads (20 points above Treasury yields). But be prepared for high default rates.

Please consult your investment and tax professional before investing.