The Fed’s Inflation Play

June 8, 2011, at 7:43 am
by Greg Hunter 

 

By Greg Hunter’s USAWatchdog.com

Dear CIGAs,

I have been saying repeatedly that the one thing you can count on is inflation.  If you take housing out of the picture, that is exactly what we have been getting.  The Fed wants inflation and loathes deflation.  Ben Bernanke and other Fed officials have consistently said they want to support “asset prices.” In an October statement from the Federal Reserve Bank of New York, it attempted to explain its bloated balance sheet and explain why it was buying government bonds and mortgage-backed securities.  The Fed said in part, “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” (Click here to read the entire Fed statement from October 2010.)
According to financial expert James Rickards, the Federal Reserve is playing an inflation game called “financial repression.”  The goal is to get the U.S. out from under at least $77 trillion in debt and future liabilities.  The Fed would like to cut the deficit in half in 10 years.  How do you do that without actually cutting anything?  Rickards said in a recent interview on King World News, “The answer is 4% inflation.  It doesn’t have to be that high, it just has to be persistent.  It’s like holding an ice cube in your hand.  It just melts away.  Well that’s what the Fed is doing, and that’s what financial repression is all about.” (Click here for the complete King World News interview with Mr. Rickards.) (Click here for James Rickards’ bio.)
In simple terms, in order for this to work, the Fed needs both inflation and growth.  This has been implemented in the past, and a great example is the post WWII economy.  There was growth because the U.S. was helping to rebuild the world after the carnage in Europe and the South Pacific. There was also some inflation, but not so much that would alarm the public because back then, everyone had a job and wages rose.  By the 60’s, the debt overhang from the war was largely in check.
More…

In The News Today

June 8, 2011, at 7:02 am
by Jim Sinclair 

 

"It’s taken almost two centuries for bankers to pull the wool over Americans’ eyes, but today you and I are working for intrinsically worthless paper that can be created by bureaucrats-created without sweat, without creative ability, without work, without anything but a decision by the Federal Reserve. This is the disease at the base of today’s monetary system. And like a cancer, it will spread until the system ultimately falls apart. This is the tragedy of the great lie. The great lie is that fiat paper represents a store of value, money of lasting wealth." - Richard Russell




Europe: the Break-Up is About to Begin








The Bernank - "There is no inflation"

 

 

 

 

Nomura FX: "Mr. Bernanke: You Are Trapped!" 

Submitted by Tyler Durden on 06/08/2011 09:35 -0400

From Nomura: "The way the data and psychology has turned down just as QE2 is ending is no coincidence – just like it was no coincidence when the same thing happened at the end of QE1. To use the Fed Chairman's preferred term these days – the impact of QE is transitory. Much like fiscal stimulus, QE has a temporary impact but as soon as the extraordinary intervention ends, the patient begins to wither again. This is the trap that Bernanke fully understands and it seems like the endless monetization prophecies of Zerohedge and The Daily Dirtnap are at risk of coming true." 

 

 

 

 

 

Muni Defaults Still Coming, But Timing Unclear: Whitney

 

 

 

Greek CDS Surges To All Time Record On Talk Accord For Greek Bailout Faces Major Obstacles 

Submitted by Tyler Durden on 06/08/2011 09:59 -0400

Nobody could have seen this coming. According to RanSquawk, there is "Market talk that accord on new Greek bailout faces major obstacles." Whether true or not is irrelevant: the market sells first. Greek CDS just hit 1,474, +63 bps and an all time record high. Elsewhere, the EURUSD is dropping as the house of cards appears to be finally on the edge. Per Market News: "Despite public declarations last Friday that an agreement in principle had been reached, two major problems threaten to block a deal, the sources said. One is the highly sensitive issue of private sector contribution. The other is the insistence of European officials and the International Monetary Fund that the Greek parliament pass significant new deficit-cutting measures before EU leaders meet at the end of June as a condition for new money. That task appears Herculean, given the rapidly growing domestic political and social resistance. "

Greek Economy Grinding To A Halt As Daily Protests Cripple Industrial Production 

Submitted by Tyler Durden on 06/08/2011 09:11 -0400

One thing that the brilliant Eurozone Keynesian shamans appear to have missed is that with the Greek economic production base (read its population) offline and protesting now virtually every day, thus completely unmotivated to actually generate incremental output, the entire Greek economy will soon grind to a halt: the latest confirmation - plunging Industrial Production, which dropped by 11% Y/Y in April, the worst economic performance since the first half of 2009. Guardian reports: "Esa, the state statistics agency, said the decline was caused by falls in the main sectors of Greek production - mining, manufacturing, electricity and water supply production. Mining fell by 6.4pc, manufacturing decreased by 11.3pc, electricity production dropped 12.2pc, while the water supply declined by 6.8pc. Greece's economy is struggling to emerge from a deep recession fueled by austerity measures taken to rescue the economy from near-bankruptcy last year." And these are the economic conditions that according to the Troica deserve a passing grade? One wonders what would force the Greek economy to get an F in Keynesianism. One also wonders how the Greek economy is supposed to rebound and cut its deficit to IMF-mandated thresholds as more and more economic capacity is eliminated and the Greek workers simply fall back on their socialized benefits and lieu of a 9 to 5 job (and retire as soon as possible to be grandfathered by existing clauses in advance of what Bailout #1298 will dictate will soon be a 100 year old retirement age).

Republicans Are Pushing For A "Brief" Default As China Warns US Is "Playing With Fire" 

Submitted by Tyler Durden on 06/08/2011 07:30 -0400

Yesterday Reuters reported that a troubling, yet potentially inevitable development may be imminent: the default of the US, granted, a short-lived one (though we are not sure just how the world's "reserve" currency will be backed by a national that is technically insolvent). Luckily for the US, everyone else (except China) is just as bankrupt. Yet if there is one thing pushing Lehman into competitive bankruptcy just so that Goldman would have a monopoly in the US fixed income sales and trading market, it is that any such action will have massive downstream consequences, and in the pyramid of "unpredictable downstream effects", the insolvency of the US is at the very top. And just to make it clear, now that a default is becoming a palpable option, China announced that the United States is "playing with fire" if it opts to briefly default on its debt, which could undermine the dollar, Li Daokui, an adviser to China's central bank said on Wednesday. Yet the statement could very well backfire after Li, speaking on the sidelines of a forum, said China needs to dissuade the United States from defaulting on its debt, but he believed China may hang on to its investment in U.S. Treasuries in any case. This is precisely the case made by Stanley Druckenmiller: in fact, should there be a technical default, US bonds will become a true safe haven investment as America will for the first time take a step to indicate that it believes the relentless abuse of its fiscal situation is coming to an end.

Guest Post: Keep The Faith.... 

Submitted by Tyler Durden on 06/08/2011 07:02 -0400

What happens if energy and food prices keep going up? Can we be sure that this won’t happen? No of course not so these markets are far too complacent in my view and are not pricing enough risk premium. I am not even convinced that a lot of higher input prices have been passed on yet so the consumer will either face higher prices or the producer will see margins collapse and neither is good for equities. Europe is in a mess and it looks increasingly likely that a restructuring WILL happen somewhere at some point, whilst Trichet seems determined to jack up rates on principle. Don’t forget that even though European politicians want to help for fear of the consequences, ultimately the outcome will be decided by backbench politicians in PM Papandreou's parliamentary party. If austerity measures are not approved by parliament on Jun 28, then all hell could break loose. And just look at the EUR; what’s it doing up here? There is little risk priced here it seems and yet the risks are huge. Central banks are sucking volatility from these markets in a bid to create a false sense of security. This covert intervention is very clever as it’s tough to fight. Without doubt G20 is behind this and the accord is strong. They need a stable equity markets and stable FX markets to help buy time. Very clever. 

 

 

 

 

 

Moody’s Warns UK’s AAA Rating at Risk - Sterling Lower and Remains Near Record Nominal Gold High 

Submitted by Tyler Durden on 06/08/2011 06:58 -0400

Gold and silver are lower today despite European equities falling for a sixth day on sovereign debt and economic growth concerns. Bernanke’s failure to even suggest that the Federal Reserve will embark on further stimulus and QE3, after QE1 and QE2 failed to kick start the US economy, has markets jittery. Moody’s warned that the UK was at risk of losing its AAA rating if growth remained weak and the government failed to meet its budget deficit reduction targets. This is almost certain as the UK is now seeing a new bout of weakness in the housing market, and stagflation. Gold remains near record highs in sterling (£949.82/oz) and looks well both fundamentally (given the risks posed to the UK economy and sterling) and technically. Gold looks well supported above £900/oz and may be consolidating over £900/oz prior to a move to £1,000/oz. 

 

 

 

 

 

Rosenberg's Takeaways From Bernanke's Speech: "Cause For Pause" 

Submitted by Tyler Durden on 06/08/2011 11:17 -0400

Yesterday we brought you Goldman's quite bearish takeway on Bernanke's speech (excluding the highly irrelevant Jamie Dimon monolog detour: we can't wait to hear what the JPM CEO once it is announced that Glass-Steagall is being renstated). Below we present Rosie's key takeaways on Bernanke's remarks. "Bernanke said the 'jobs situation remains far from normal" and as such, this recovery cannot be regarded as being "truly established." That is quite an admission — free money, a tripling of the Fed's balance sheets and 10% deficit/GDP ratios have fallen short of establishing an established recovery. Cause for pause."