July 6, 2022

Financial Repression and QE Guarantee A Bleak Future for Retirees

1986-gold-eagleBy: GE Christenson

A mid 60s woman was chatting with two friends at a Starbucks. I overheard the conversation. It went something like this…

“When my husband and I retired, our financial advisor said we had enough money to last until we were both 95 years old. Now he is concerned that our savings might not last until we are 80.”

It gets worse.

“But if either of us dies then our pension income is reduced and the survivor has to make a choice – pay the mortgage or eat.”

It gets worse.

“And we still have to worry about healthcare.” She went on about sky-high health care costs, Obamacare, and her pre-existing conditions that prevented her from changing insurance.”

She probably does not see how much worse it can become.

What is the Problem?

In simple terms the Federal Reserve has lowered short term interest rates to nearly zero (ZIRP – Zero Interest Rate Policy) and is “printing” $85 Billion per month (QE) to bail out bankers and our politicians who can’t balance the government budget or even pass a budget.

So What? Aren’t low interest rates good for the economy and for home prices?

Well, maybe in the short term they appear to be beneficial. The politicians and bankers have assured us of such. But politicians and bankers are benefitting from QE so perhaps we should question their assessment. Consider these points:

Would you loan your money for 30 years to an insolvent government that chronically spends far more than it collects in taxes? Would you consider that 30 year bond a wise investment if the government paid you less than 4% per year? Think back to what your expenses for gasoline, housing, food, and health care were in 1983 to help determine if 4% per year is enough to compensate for your guaranteed higher expenses and for the decline in the value of the dollar in the years to come. (Hint: NO!)

Retirement systems, life insurance policies, annuities, city and state government pensions and so much more depend upon the interest earned from government and corporate bonds, saving accounts, and Certificates of Deposit. If the interest earned over the past five years has been about 1% to 3.5% per year and most pension plans have assumed earnings in the (typical) 7% to 9% range, those pension plans have been underfunded by a larger amount each year. Think California public employees, Chicago public employees, New Jersey, Detroit and so on. Most pension plans for city and state employees are currently underfunded while they are optimistically assuming future interest earnings much higher than the Federal Reserve has repeatedly assured us will be possible.

mount-rushmore1

Conclusion

The ZIRP and QE are causing the retirement funds for many governments and corporations to be more underfunded each year. If your retirement comes from a government pension, it is less secure each year. It can’t remain underfunded forever. Ask the retirees from Detroit!

Corporate pension systems invest similarly. If your retirement comes from a corporate pension, it is less secure each year. Ask the retirees from a bankrupt airline or from Enron Corporation.

If your retirement is funded by your personal savings and you have been earning perhaps 1% per year for the past five years, you already know the devastation that ZIRP and QE have caused in your personal finances.

CPI INFLATION

The lady mentioned at the beginning understands that she and her husband are earning much less money in their retirement accounts than their financial advisor had projected, and so their retirement money will not last as long as originally hoped. What she probably does not realize is that her interest income will be kept low for the foreseeable future while her living expenses are very likely to substantially increase. In short, their retirement funds probably will be depleted well before she and her husband reach 80 years old. That is not a happy thought for her family and for millions of others who expected more “normal” interest earnings before the government and The Federal Reserve chose to bail out the financial industry. That bailout occurred at the direct expense of the taxpayers and at the indirect expense of savers, pension plans, and other retirement systems because of the unexpectedly low interest earnings created by the ZIRP and QE.

Karl Denninger has written a highly intelligent piece describing this process and the consequences. Read it for new insights. From that article:

“The bottom line is that QE produces what looks like a ‘benefit’ without cost at the start of the program, but that appearance is a con job.”

“In short at best QE is nothing more than pulling forward the ability to spend paid interest from tomorrow into today but for each dollar pulled forward to today it is taken from tomorrow’s spending.”

“How much harm are we talking about? Well, that’s difficult to determine, because you’d need a blended rate of interest across the entire lending continuum to figure it out. But it is certain that the $3 Trillion added to the Fed’s balance sheet is less than the actual amount pulled forward over that time.”

bernanke's paper

Summary

The Fed, through ZIRP and QE, has created $Trillions of benefits for the financial industry and much of that benefit has been created at the expense of government pension plans and individuals who depend upon interest earnings. This has a direct and negative consequence to many retirement plans, especially city and state public pensions.

It is especially destructive to those individuals who depend upon interest earnings to fund their cost of living.

Your savings are unlikely to last as long as you hoped.

Further Considerations

The Fed is “creating” $85 Billion per month for QE. This boosts the financial industry, the stock market and the bond market but the average person realizes little benefit from those markets. The average person is actually hurt by the lower than expected interest earnings in his personal accounts and in the pension accounts from which his pension is paid.

SILVER: The silver market is tiny. In very round numbers about a billion ounces are mined, worldwide, each year. This is approximately $20 Billion per year or only about one week of QE for bond monetization.

GOLD: The gold market is much larger than the silver market but still small compared to the QE process. In round numbers the worldwide annual gold mining market is 3,000 – 4,000 tons or about $ 130 – $170 Billion per year. Two months of QE “money printing” is enough to purchase all the gold mined each year in the whole world.

Does it seem “right or moral” to you that a privately owned central bank prints enough money each WEEK to buy the equivalent of all the silver mined worldwide in a year, or that TWO MONTHS of “printing” would purchase all the gold mined in a year? The politicians and bankers will not change this process but we can adapt to the consequences.

Does it seem likely that dollars, which are printed in excess every month, will retain their value against gold and silver?

Stated another way, does it seem likely that while gold and silver are limited in supply, and while the dollars used to purchase those metals are increasingly debased by both the central bank and the government, that the prices for gold and silver will remain stable or even decline?

The bullish case for gold and silver is reported in the alternate media and by numerous gold and silver “bugs” such as myself. The bearish viewpoint is easily obtained from the mainstream media, Goldman Sachs, and the Federal Reserve. Other intelligent individuals, such as Harry Dent and Robert Prechter, also promote the bearish viewpoint. I find the bearish analysis for gold and silver rather unlikely and often self-serving for those in the financial industry who make their living selling “paper.” But often it is valuable to analyze the perspective of those who disagree with you.

Decide for yourself! Your financial well-being and your retirement may depend on an intelligent assessment of the consequences of more QE, higher or lower gold and silver prices, and booms and busts in the stock and bond markets.

My vote is with gold and silver. Five thousand years of history support that viewpoint. Paper money does not retain its value or purchasing power. Hundreds of years of history support that viewpoint. Further, QE and ZIRP accelerate the decline in the value of paper dollars.

Gold and silver have been moving down, on average, for about 2.5 years. They might even be down another year, however I doubt it. In five years you might earn a total of 5 – 10% in a Certificate of Deposit. By contrast you are likely to double (quadruple or more) your savings if they are invested in gold or silver. Which will be more beneficial to your retirement?

Which sounds safer – gold or paper? Would you prefer something that has retained its value for 5,000 years or unbacked paper money – which has eventually and always declined in value to near zero?

GE Christenson
aka Deviant Investor

The Hard Facts About Gold, the Fed, and the U.S. Government

gold & barLet’s back away from the “smaller” questions like:

  • Will the Fed taper or not?
  • Is Obamacare a disaster or just a huge problem?
  • Is the S&P 500 index due for a correction?
  • Is the U.S. economy improving?
  • Why is most of the rest of the world angry with the U.S.?
  • If inflation is so low, why are my expenses increasing so rapidly?
  • Is the NSA spying on everyone’s cell phone and computer?

Let’s look at the really big picture!

  • The Fed wants higher stock prices. The Fed serves the needs of the wealthy and the wealthy have a large chunk of their wealth invested in stocks.
  • The Fed wants low interest rates, which keep bond prices high, because the wealthy are heavily invested in bonds.
  • The Fed and the U.S. government need low interest rates so the U.S. government’s debt service costs remain low, real estate is attractive, credit is inexpensive, and investors are forced to reach for yield, buy stocks, and maintain the bond and dollar bubbles.
  • The U.S. government wants to spend money, lots of money, and avoid the consequences. Congress lives to buy votes, increase their power, and collect “contributions.” Lobbyists want a piece of the action for themselves. Corporations want to “influence” legislation to increase their profits. Business as usual. Spend. Spend. Spend!
  • Central banks, especially the Fed, and western governments want lower gold prices, so their unbacked paper money still appears valuable, so the U.S. dollar retains relative value against other currencies, and so the world will continue sending goods and commodities to the U.S. in exchange for paper dollars and T-bonds.

Can the Fed and the U.S. government manage the markets to achieve low interest rates, higher stocks, low inflation, low gold prices, and a strong dollar, all while spending much more than revenues support and thereby running the national debt up to insane levels? My assessment is NO!

What does the data indicate?

  1. Assume that the world changed around the 9th month of 2001. Stocks had peaked and crashed, the Twin Towers came down, government expanded, and the U.S. declared a War on Terror. There were bubbles to be inflated, massive debts to be incurred, no-bid contracts to be awarded, huge profits to be generated, and stories to tell.
  2. Assume that the spending, increasing debt, bubble blowing, and military-industrial profit generating machine have been operating more intensely since 2001.
  3. Assume that “this time is NOT different” and that our current fiscal and monetary trends will continue for several more years.

Gold and the S&P 500 Index

american-gold-eagle

Graph 1 shows 25 years of the smoothed* monthly price of gold divided by the smoothed value of the S&P 500 index. The ratio went down from the 1980s to about 2001 and rose thereafter. Until 2001 investors wanted financial assets more than real assets like gold and silver. Since then the price of gold has risen more rapidly than the S&P 500 index. The Fed wants the S&P to keep rising and so we should expect QE will continue in the hope that it will levitate the stock markets. Unless this time is different, gold will continue to rise.

Gold and the National Debt

Graph 2 shows 25 years of the smoothed* monthly price of gold divided by the official national debt in tens of $Billions. The ratio went down from the 1980s to about 2001 and then started rising. Even though debt has been increasing rapidly since 9-11, the price of gold has increased even more rapidly since its bear market lows in 1999/2001. Knowing that politicians, corporations, and banks need the spending and debt to continue increasing, we should expect massive deficits and ever-increasing national debt – growing about 10 – 12% per year. Unless this time is different, gold will also continue to rise.

Gold and the Dollar Index

Graph 3 shows 25 years of the dollar index multiplied by smoothed monthly gold prices. In broad terms a higher dollar usually goes with lower gold prices (when priced in dollars) and vice-versa. The product removes most of the currency variation and shows the big picture trend for gold. Since about 2001 the trend has been upward. Unless this time is different, gold will continue to rise.

The Fed has incentive to continue QE – to levitate the stock and bond markets and keep interest rates low. But QE will eventually weaken the dollar with excess supply, reduced demand and reduced value. Expect gold to rise in price.

The politicians want to spend money, lots of money, and will borrow and print until they can’t. The national debt and the price of gold will increase.

Summary

Unless the financial world has materially changed, we can expect that an increasing S&P index will correlate with higher gold prices, and an increasing national debt will correlate with higher gold prices. Similarly, continued QE will correlate with a lower dollar and higher gold prices.

They say “don’t fight the Fed” and “don’t fight the administration.” Even if it looks like a train wreck during amateur hour, the incentives motivating both the Fed and the government all align with higher gold prices.

Maybe the Fed and the politicians can’t get everything they want, but we expect they will be happy with strong bond prices, higher stock prices, and more spending. Those conditions will co-exist with higher gold prices. Consequently we expect the Fed and the politicians understand that the price of gold must go much higher. Sacrifices, such as higher gold prices, must be made to maintain the “full steam ahead” status of our national train wreck in progress – deficit spending, ever-increasing debt, QE-forever, more wars and currency debasement.

Do you own a sufficient quantity of physical gold and silver?

More Thoughts:
Created Currencies…Are NOT GOLD

GE Christenson
aka Deviant Investor

Yellen Will Make Bernanke Look Like an Amateur When It Comes to Printing Money

2013-gold-eagleAxel Merk, Merk Investments

Fed Chair nominee Janet Yellen will take over where her predecessor Ben Bernanke leaves off. Not just operationally, but also philosophically. To understand where the Fed and the U.S. dollar may be heading, we take a closer look at where Bernanke and Yellen are coming from.

Bernanke has always considered himself a student of the Great Depression. He argued many times that one of the biggest mistakes made during the period was to raise interest rates too early. When faced with a credit bust, major deflationary forces are unleashed; in our assessment of Bernanke’s thinking, he believes the right policy response is to push back with accommodative monetary policy. But there’s more to it than low short-term rates.

Notably, Bernanke was faced with a crash in home prices, leaving many homeowners owing more on their homes than they were worth. Such “under water” homeowners had a couple of choices:

  • Downsize to homes they could afford. While this approach might be the best for long-term sustainable growth, it’s politically the most difficult one, as it embraces foreclosures and bankruptcy as a necessary evil.
  • Pay down their debt. That’s more easily said than done in an era where real wages stagnate.
  • Cross fingers in hopes the Federal Reserve would help to push up the prices, so fewer homeowners are under water.

To help push up home prices, the Bernanke Fed worked hard to lower longer-term rates by:

  • Talking down interest rates
  • Lowering interest rates
  • Purchasing Treasuries & Mortgage-Backed Securities
  • Engaging in Operation Twist
  • Introducing an inflation target
  • Introducing an employment target

Each one of these policy moves is an escalation from the previous one. Most notably, the introduction of an employment target signals to the market that rates may not be raised until employment has picked up sufficiently. In theory, longer-term rates stay lower the longer investors expect short-term rates to stay low, the introduction of an employment target to keep mortgage rates and other longer-term interest rates low is akin to using a sledgehammer to hang a picture frame.

peace dollar 1921-580x287

At the end of this road then came the “taper” talk. Even though “tapering” merely referred to a pause in additional easing, markets, never shy of jumping to conclusions, immediately started to price in a complete unwinding of the nonstandard policy measures. Since then, Bernanke’s taper talk has been tapered. Bernanke’s strategy hasn’t been helped by the fact that communicating an employment target isn’t all that easy, given the array of metrics, such as the labor force participation rate, that help provide a picture of how healthy an economy truly is. The most important market based gauge, the relationship between short-term and long-term rates (the yield curve), is so manipulated by the Fed, that policy decisions are ever more “data dependent.” And to make matters worse, the government shutdown has made access to reliable data a scarce resource.

With Bernanke out of ideas, out of steam, and out of data, it’s time for fresh blood. Yellen does not need to look back to the 1930s to arrive at her policy goal. It’s her starting point. In her speech accepting the nomination to succeed Bernanke, the first goal she stated was maximum employment.

Starting with an employment target is really much more than a signal interest rates will stay lower for longer. Historically, the Fed’s realm is monetary policy, controlling levers such as interest rates and/or money supply. However, once the Fed started to buy mortgage-backed securities (MBS), it started allocating money to a specific sector of the economy. That’s supposed to be in the realm of Congress. When the Fed engages in fiscal policy, powerful dynamics may be unleashed, not least of which is political backlash.

Yellen’s frame of reference, we believe focusing on an employment target suggests the Fed will be willing to cover for perceived shortfalls of fiscal policy. Of course, such “perceived shortfalls” are in the eyes of the beholder. Not being accountable to voters to make such decisions is, in our assessment, problematic. Needless to say, our elected officials appear to be at odds on how to run this economy. In fact, we would argue that our elected officials would only get their act together to engage in serious entitlement reform if pressured to do so. As voters appear to veer towards ever more populist politicians the one power that has shown effective in Europe to convince policy makers to engage in structural reform, is the power of the bond market. Once the bond market started to act up, governments in the Eurozone made tough choices to cut costly benefits that were no longer affordable.

I’m hopeful we will engage in structural reform in the U.S. as well, but it may also take the pressure of the bond market to convince policy makers it’s time to act to make deficits sustainable. With the Fed pursuing extraordinary measures that pressure may not come as quickly as it might otherwise, allowing policy makers to squander time bickering over a discretionary budget. The discretionary budget may matter little in a few years, as the cost of serving the nation’s debt along with entitlement spending may entirely crowd out the discretionary budget.

An employment target encourages social engineering. Yellen appears to be encouraged to pursue growth-oriented policies to help those that have not yet been able to participate in the economic growth of late. Never mind that substantial distortions might be caused in other segments of the economy, where those that have benefitted may be encouraged to engage in ever more speculative investments.

Investors may want to consider diversifying out of the dollar to see how this unfolds. Unlike the Eurozone, the U.S. has a current account deficit. That means should the bond market impose reform, the greenback might be more vulnerable than the euro has ever been. And in case Yellen keeps a lid on yields, the valve may well be the dollar. Just look at Japan: what will happen should yields rise? Will the Bank of Japan stand by, allowing the government to drown in its debt? In the U.S., while debt levels aren’t as extreme as in Japan, the ultimate dynamics may be related should central banks be increasingly lured into financing government deficits.

Please subscribe to Merk Insights and follow me on Twitter to learn how the “mania of policy makers” impact investors.

Axel Merk
Axel Merk is President and Chief Investment Officer, Merk Investments,
Manager of the Merk Funds

Ron Paul Talks About Economic Collapse and Lack of Federal Reserve Transparency

dickensIn an interview with CNBC, former GOP presidential candidate Ron Paul endorsed the efforts of his son, Senator Rand Paul, to hold up the nomination of Janet Yellen as Federal Reserve Chairman until laws are passed requiring more transparency from the Fed.

Senator Rand Paul has introduced legislation for an “Audit the Fed” bill which would require the Federal Reserve to disclose the details involving trillions of dollars the Fed has provided to both domestic and international financial institutions.

According to Ron Paul, “We don’t know the details of the trillions of dollars that were used to bail out banks and central banks around the world and corporations during the crisis.  The numbers that they give you I don’t think are all that revealing.”

Ron Paul has been one of the few voices in the American government pushing for financial responsibility by both the Federal government and the Federal Reserve.

After the most recent capitulation by Republicans to reduce the exponential increase in Federal government debt and spending, Ron Paul lamented the hypocrisy of the deal to end the government shutdown.

The latest spending-and-debt deal was negotiated by Congressional leaders behind closed doors, and was rushed through Congress before most members had time to read it. Now that the bill is passed, we can see that it is a victory for the political class and special interests, but a defeat for the American people.

The debt ceiling deal increases spending above the levels set by the “sequester.” The sequester cuts were minuscule, and in many cases used the old DC trick of calling reductions in planned spending increases a cut. But even minuscule and phony cuts are unacceptable to the bipartisan welfare-warfare spending collation. The bill also does nothing to protect the American people from the Obamacare disaster.

US debt to gdp

Members of Congress and the public were told the debt ceiling increase was necessary to prevent a government default and an economic crisis. This manufactured fear supposedly justified voting on legislation without allowing members time to even read it, much less to remove the special deals or even debate the wisdom of intervening in overseas military conflicts because of a YouTube video.

Congress surrendered more power to the president in this bill. Instead of setting a new debt ceiling, it simply “suspended” the debt ceiling until February. This gives the administration a blank check to run up as much debt as it pleases from now until February 7th. Congress can “disapprove” the debt ceiling suspension, but only if it passes a resolution of disapproval by a two-thirds majority. How long before Congress totally abdicates its constitutional authority over spending by allowing the Treasury permanent and unlimited authority to borrow money without seeking Congressional approval?

private debt gdp

Hopefully, those of us who understand sound economics can convince enough of our fellow citizens to pressure Congress to make serious spending cuts before Congress’s reckless actions cause a total economic collapse.

debt monster

Sound advice Mr. Paul, but the odds of preventing an economic collapse decline with each additional dollar borrowed by the government and each additional dollar printed by the Federal Reserve.  Debt at all levels is out of control and has overcome the ability of the nation to service the debt. Ironically, the only way to prevent a collapse today is through the Ponzi scheme method of further printing and borrowing which puts off the day of reckoning.

Realistically, Ron Paul has been ignored by the public and his fellow legislators for decades.  The odds of controlling the growth of debt by the U.S. and other major industrialized countries is almost zero since legislators are elected based on promises to extend the social welfare state and serve special interests.

The odds of central banks reducing quantitative easing is even more remote since an absence of money printing would hasten the economic collapse Mr. Paul warns about.  The future collapse predicted by Mr. Paul seems inevitable at some point and the only concern of an investor should be finding a safe haven for wealth preservation.

Global Debt Bubble Will Push Gold and Silver Prices Higher

money printingBy: GE Christenson

To paraphrase William Shakespeare, “the debt ceiling drama is a tale told by idiots, full of sound and political fury, signifying nothing.” We now have a reprieve for three months – the 11th hour deal, complete with payoffs and the usual corruption, will keep the world safe for more ineptitude, deficit spending, administrative hypocrisy and the guarantee of a sequel. All is well! Celebration! Champagne! Cut to a prime-time commercial promoting big government and Obamacare…

And back in the real world where people work and support their families, life goes on, few noticed the lack of government “services,” and in three months we will be blessed with another episode of our “Congressional Reality Show.”

Gold, Silver, and National Debt

Examine the following graph. It is a graph of smoothed* annual gold and silver prices and the official U.S. national debt since 1971 when the dollar lost all gold backing and was “temporarily” allowed to float against all other unbacked debt based currencies. All values start at 1.0 in 1971.

The legend does not show which line represents gold, silver, or the national debt. Why? Because it hardly matters! Government spends too much money to perform a few essential services and to buy votes, wars, and welfare, and thereby increases its debt almost every year, while gold and silver prices, on average, match the increases in accumulated national debt.

Our 435 representatives, 100 senators, and the administration listened to their corporate backers and chose to increase the debt ceiling, continue spending as usual, not “rock the boat,” and carry on with the serious business of politics and payoffs for another three months. It is safe to say that, on average, gold and silver will continue rising, along with the national debt, as they all have for the past 42 years. Further, like the national debt, both gold and silver (and probably most consumer prices) will increase substantially from here, until some traumatic “reset” occurs. What sort of reset?

  • A “black swan” event that is unpredictable, by definition.
  • Middle East war escalation.
  • Derivative melt-down.
  • A dollar collapse when foreigners say “enough” to the dollar debasement policies pursued by the Fed and the US government.
  • A collapse of the Euro or Yen for any number of reasons.
  • A banker admits that most of the official gold supposedly held in New York, London, and Fort Knox is gone and has been sold to China, India, and Russia.
  • You name the false flag operation.

My guess: Gold and silver prices will rise gradually for a while, and then quite rapidly after one of the above “financial icebergs” smashes into our “Titanic” world monetary system. Further, we will have difficulty locating physical gold available for sale after such an event occurs, even at much higher prices. Now would be a good time to purchase physical gold and silver for storage in a secure storage facility. Paper gold will not be safe…

Congress has acted. The President has spoken. The Federal Reserve will continue “printing” dollars to increase banker profitability, fund the government, and fight the forces of deflation. This is business as usual – as it has been for the past 42 years.

Here is the second version of the graph with gold, silver, and national debt labeled. Note how relatively undervalued silver is at the present time! Dashed lines indicate guesses for the future normalized values for gold, silver, and the national debt.

The debt ceiling drama and “Congressional Reality Show” will return to prime time in January and February, right after “Dancing with the Senators” and just before “House Wives of Salt Lake City.” Expect sound and fury signifying nothing.

Further commentary on the case for gold and silver:

The Reality of Gold and the Nightmare of Paper Silver: The Noise is Deafening
GE Christenson
aka Deviant Investor

* Gold and silver prices were smoothed by taking monthly closing prices and a 24 month simple moving average. Annual prices graphed are the average of the 12 average monthly prices per year.

The Term “Easy Janet” Is About to Become Part of the American Lexicon

By: Axel Merk

courtesy: www.michaelianblack.net

courtesy: www.michaelianblack.netBy: Axel Merk

While Democrats and Republicans fight with water pistols, the President may be readying a bazooka by nominating Janet Yellen to succeed Ben Bernanke as Fed Chair. You may want to hold on to your wallet; let me explain.

Our reference to water pistols refers to our assessment that bickering over discretionary spending is distracting from the real issue, entitlement reform. For details as to what we believe will happen if we don’t get entitlement reform done, please read our recent Merk Insight “The Most Predictable Economic Crisis”.

Bernanke Fed

Central banks in developed countries are generally considered independent, even if their members are appointed by politicians. In the U.S., however, there’s an added element: aside from a mandate for price stability, the Federal Reserve is tasked with promoting maximum sustainable employment. This simple concept might have been put in place with the best of intentions – who wouldn’t want to have maximum employment? Central banks that have a single focus on price stability, such as the European Central Bank, point out that the best way to foster sustainable growth is by keeping inflation low. The U.S., even with an employment mandate, had pursued the same practice.

That is, until Ben Bernanke appeared to run out of options to lower borrowing costs. Bernanke’s frame of reference had been the Great Depression; he had frequently cautioned that the biggest mistake during the Great Depression was to raise interest rates too early. After a credit bust, as central banks push against deflationary market forces, premature tightening might undo the progress to reflate the economy. In today’s world, it’s not just short term, but also longer-term interest rates that Bernanke has been concerned about – partially because Bernanke has always considered it important to keep mortgage rates low. To achieve his goal, the Bernanke Fed:

  • Talked down interest rates;
  • Lowered interest rates;
  • Purchased Treasury and Mortgage-Backed Securities
  • Engaged in Operation Twist
  • Introduced an employment target

Introducing an employment target was nothing but an extension of existing policies, as it signals the Fed might keep rates low independent of where inflation might be.

Yellen Fed

With Janet Yellen coming in, the concept of promoting employment is raised to a new level. Long gone is the Great Depression, but what remains may be a conviction that monetary policy should make up for the shortfalls of fiscal policy. That’s problematic for a couple of reasons:

  • When the Fed meddles with fiscal policy, Congress will want to meddle with monetary policy. For example, when the Fed buys mortgage-backed securities it allocates money to a specific sector of the economy (favoring the housing market); that’s not what the Fed ought to do – it’s the role of Congress to channel money through tax and regulatory policy. One can disagree whether even Congress should be picking winners and losers in an economy, but that’s a political determination to be made by elected officials.
  • When the Fed keeps rates low to promote employment, there’s a fair risk that important cues are removed from the market that would encourage Congress to show fiscal restraint. Congress has always loved to have a printing press in the back yard, but an employment target suggests that this printing press is going to be moved into the kitchen. The Eurozone may be proof that policy makers only make the tough decisions when forced to do so by the bond market; if, however, the Fed works hard to prevent this “dialogue” between the bond market and politicians, the most effective incentive to show fiscal restraint might be gone.
  • Inflation is a clear risk when the Fed emphasizes employment. In our assessment, inflation may well be the goal rather than the risk in the eyes of some policy makers, as inflation lowers the value of outstanding government debt.

Hold on to your wallet

In a democracy, it’s all too tempting to introduce ever more entitlements. As obligations mount, however, servicing these obligations might become ever more challenging. It’s nothing new that governments tax their citizens. But when deficits are no longer sustainable, governments may be tempted to engage in trickery. Structural reform, that is taking away entitlements, to lower expenditures would be the most prudent path to regain fiscal sustainability. Raising taxes is all too often the preferred alternative; while politically difficult, raising taxes is a strategy that’s all too often politically viable. Yet the path of least resistance may well be to inflate the debt away. Central banks ought to be independent to take this option away from policy makers. We have seen in the Eurozone that it can be most painful when the printing press is not at the disposal of politicians.

In our assessment, a central bank pursing an employment target is a central bank that has given up its independence. It’s only ironic that outgoing Fed Chair Bernanke recently praised Mexico’s central bank for gaining “independence.”

Whatever happened to the government being the representative of the people? Interests of the government and its citizens are no longer aligned when a government has too much debt. The government’s incentive will be to debase the value of the debt. The U.S. may have an easier time debasing the value of its debt than some other countries, as much U.S. debt is held by foreigners who can’t vote in the U.S. Differently said, promoting a weaker dollar is another potential avenue for U.S. policy makers to kick the can down the road. But fear not, whatever policy is coming to a neighborhood near you shall be done in the name of fostering maximum employment.

Axel Merk
Axel Merk is President and Chief Investment Officer, Merk Investments, Manager of the Merk Funds.

More on this topic:

After getting rid of their crazed central bankers, Zimbabwe Achieves Economic Growth by Destroying Ability of Government to Print Money.

obama_zimbabwe

So the good news is that once the economic collapse kicks in and the dollar becomes worthless preventing Hillary Chelsea Clinton Obama III, our 79th President from just printing more money, we too can have an actual economic recovery. Just like Zimbabwe.

“Having a multi-currency economy with no Zimbabwe dollars is primarily good news for Zimbabwe because government can’t print its way out of a deficit,” said John Robertson, an independent economist, in an interview from Harare. “They can’t just print more if they need it, as was happening in 2008.”

So there’s hope for America yet. Our current dictator could learn some lessons from the plight of Zimbabwe, but I suppose destroying the economy is a better means of wealth redistribution, than actually repairing the economy. Until then we’ll go on printing imaginary money.

In Four Years the Amount of Money Printed By the Fed Will Exceed the Value of All Gold Ever Mined

paper moneyMost people can’t begin to comprehend how much a trillion dollars is.

Try asking someone how much $1,000,000,000,000 (one trillion) is and you are likely to get a blank stare.

To put things into perspective, when the government spends one trillion dollars and pays for it with taxes, the government would have to seize the entire wealth of one million millionaires.  Since the government would very soon run out of millionaires, government spending has become largely financed through borrowings and printed money.

Money printing or QE as the Fed likes to call it has reached levels that bring back visions of the Weimar Republic and unlike the average citizen, the Fed has no problem dealing with dollars in the trillions.

Money printing by the Federal Reserve has gotten so out of hand that within four short years (probably less) the amount of dollars conjured out of thin air will exceed the value of all gold ever mined in human history.

The world’s entire gold stock is about 170,000 metric tons currently valued at about $7.7 trillion.  The Fed is currently holding $3.7 trillion of securities purchased with printed money and the run rate of $85 billion per month weighs in at another $1.02 trillion dollars per year.  If the economy tanks, expect the monthly money printing to really ramp up.

gold-demandFed’s money printing to date stands at $3.7 trillion.  Another four years of money printing at the current rate would pile up another $4.1 trillion for a total of $7.8 trillion printed dollars compared to the value of all gold at $7.7 trillion.

When all of this starts to sink into the public consciousness, the safe bet is that people will start to avoid dollars (which the Fed is manufacturing in almost unlimited quantities) and turn to gold which has been used as a currency and store of value since the dawn of human history.  Another safe bet is to ignore short term price corrections in gold and use the opportunity to increase positions.

Fed’s Inflate or Die Monetary Policy Guarantees A Monumental Financial Crisis

economic collapseBy: GE Christenson

The U.S. economy is being overwhelmed by a loss of faith and trust in politicians, government, and bankers, excessive debts, artificially low interest rates, unsustainable deficit spending, expensive wars, QE (money printing) to infinity, “Inflate or Die” monetary policy, potential derivatives implosion, Obamacare and so much more.

If you believe that total government debt can grow FOREVER and more rapidly than the underlying economy, this article is NOT for you.

If you believe that governmental deficit spending, QE, and bond monetization can continue FOREVER without major consequences, this article is NOT for you.

But if you are sane enough to know that our current economic policies will produce a “train wreck,” read on…
A slow-motion collapse is occurring and most of us do not see it.

Consider these thoughts from insightful writers: –
Collapse Indicated by Stalling Growth in Global Financial Reserves

Hugo Salinas Price:

“As it is, the US can only continue to monetize government debt. Higher dollar interest rates are inevitable and will cause further government deficits; the debt overhang in both the US and Euro Zone is so great that a rise of a few points in interest rates will explode the deficits, and so on and so forth.

Bottom line: Stalling growth in International Reserves tells me that a world financial collapse is in the offing.”

Collapse Indicated by Loss of Trust in Western Economic Systems

David Stockman:

“There is no honest pricing left at all anywhere in the world because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore because so much of it depends not on market forces, but on the whims of people at the Fed.”

“The Blackberry Panic of September 2008, in which Washington policy makers led by former Goldman Sachs CEO Hank Paulson, panicked as they saw Wall Street stock prices plummet on their mobile devices, had very little to do with the Main Street economy in the United States. The panic and bailouts that followed were really about protecting the bonuses and incomes of very wealthy and politically well-connected managers at banks and other heavily leveraged businesses that were eventually deemed too big to fail. What followed was a massive transfer of wealth from the taxpayers and middle-class savers, in the form of bailouts and zero interest rates on bank deposits imposed by the Fed, to the so-called One Percent.”

“I think the political realities of the situation make the most likely scenario one in which there will be some kind of real financial collapse and disorder that will require a total reconstruction of the system.”

The Burning Platform:

“Despite the frantic efforts of the financial elite, their politician puppets, and their media propaganda outlets, collapse of this aristocracy of the moneyed is a mathematical certainty. Faith in the system is rapidly diminishing, as the issuance of debt to create the appearance of growth has reached the point of diminishing returns.”

“We are witnessing the beginning stages of political collapse. The government and its leaders are being discredited on a daily basis. The mismanagement of fiscal policy, foreign policy and domestic policy, along with the revelations of the NSA conducting mass surveillance against all Americans has led critical thinking Americans to question the legitimacy of the politicians running the show on behalf of the bankers, corporations and arms dealers.”

“We are supposedly five years past the great crisis. Magazine covers proclaimed Bernanke a hero. If we are well past the crisis, why are the extreme emergency measures still in effect? If the economy is growing and jobs are being created, why do we need $85 Billion of government debt to be monetized each and every month?”

“Just the slowing of debt creation will lead to collapse. Bernanke needs a Syrian crisis to postpone the taper talk. Those in control need an endless number of real or false flag crises to provide cover for their printing presses to keep rolling.”

Bill Fleckenstein:

“Since April, the 10-Year has gone from about 1.6% to as high as 3% recently. Now we have to see when this rally in bonds stops. The bond market will then roll over and then the Fed won’t have the tapering as an excuse. It means the bond market has ceased to price in the scenario that the Fed wants, and the bond market is not responding to the Fed’s moves in the short-run. In the old days we would call that ‘losing control of the bond market.’ And if that starts to happen, all hell is going to break loose.”

Michael Pento:

“The 10-Year went from 1.4% to 3%, and that made Mr. Bernanke panic. The average on that (10-Year) yield is 7% in the modern era since 1971 when we closed the ‘gold window.’ So, if the average is 7%, and the United States of America, this once great land, can’t (even) tolerate a 3% yield on the 10-Year Note, that means the Fed can never unwind QE.

That’s enough to cuff Mr. Bernanke’s hands. So the Fed is indeed trapped as you indicated. They cannot significantly bring down QE. That means a perpetual increase in the Fed’s balance sheet. That (also) means an inexorable rise in asset bubbles like stocks, bonds, and real estate, and it’s going to end (very) badly.”

Hank Paulson Interview:

“Paulson believes there will be another financial crisis.”

“It’s a certainty. As long as we have markets, as long as we have banks, no matter what the regulatory system is, there will be flawed government policies. Those policies will create bubbles.”

Alternate Interpretation: As long as we have Treasury Secretaries who represent the interests of Goldman Sachs and Wall Street bankers instead of the US economy, then we can be certain of another financial crisis.
Collapse in Retirement Income

Dennis Miller:

“While the Federal Reserve holds down interest rates and floods the banking system with money, it’s destroying the retirement dreams of several generations. The Employee Benefit Research Organization reports that 25 – 27% of baby boomers and Generation Xers who would have had adequate retirement income – under return assumptions based on historical averages – will run out of money if today’s low interest rates are permanent.”

In addition to the problem of low yielding investments caused by the historically low interest rates created by the Fed, even more retirees will run out of money, much sooner, when the inevitable inflation in food and energy prices smacks the U.S. economy, and especially retirees.
Discussion

It seems clear that we are losing faith in our politicians, our leaders, and our financial systems. Approval levels for congress and the President of the United States are low. Too-Big-To-Fail banks and “banksters” are despised and openly criticized.

The Federal Reserve is losing credibility; more and more people are realizing that QE is good for the bankers and the wealthy, but that it does little for “Main Street” people except drive up the prices they pay for food and energy.

The American public is generally opposed to war in the Middle East but that seems to matter little to the political and financial elite who will profit from the war.

Most people, so it appears, know that inflation is much higher than officially stated, and that inflation will become far worse than it is today. (When was the last time you saw a cup of premium coffee or a gallon of gasoline for less than $1?)

Read: Going Dark! Economic Cycles Point Downward

GE Christenson
aka Deviant Investor

Physical Gold Bar and Coin Sales Soar 78% To All Time High

1988-olympic-goldPurchases of physical gold have been hitting new all time records.  Demand has been fueled by the recent pullback in gold prices and the massive amount of money printing being conducted by central banks in Europe, Japan and the United States.  The recent decision by the Federal Reserve to postpone any curtailment of its $85 billion per month of money printing could mark the end of the correction in gold and silver.  The Fed’s refusal to reduce the ongoing program of securities purchases signals that QE has morphed from an emergency measure to a permanent Fed policy.

The demand for gold has been particularly intense in Asia as Thai Gold Buyer Doubles Imports After Bear Slump.

YLG Bullion International, Thailand’s biggest domestic gold importer, expects to more than double purchases this year after the bear market in prices spurred a surge in demand for physical metal.

The company may import as much as 200 metric tons in 2013, from 92 tons last year, Chief Executive Officer Pawan Nawawattanasub said in an interview yesterday. First-half shipments advanced to 112 tons, accounting for 60 percent of the country’s total, she said. A ton is valued at $42.6 million.

Gold tumbled 21 percent this year, heading for the first annual retreat since 2000, as some investors lost faith in the metal as a store of wealth. With prices now 32 percent below the record reached in September 2011, the rout is boosting demand for bullion bars and coins, global sales of which surged 78 percent to an all-time high in the second quarter, according to the London-based World Gold Council.

“Cheaper prices are attracting customers to buy bullion bars as they see it as money better spent than on something like a Hermes bag,” said Pawan, whose Bangkok-based company supplies retailers and investors in Southeast Asia’s second-biggest economy. “Demand in Thailand can continue to grow, partly because collecting gold is in our culture.”

Golden Buddha of Bangkok, World’s Largest Gold Statue -estimated gold value $250 million

Gold demand in Thailand is exceeded only by China and India.  Total gold demand in China and India in the form of jewelry, bars and coins is expected to reach 1,000 tons this year and gold demand in Thailand should reach 200 tons.  Total Asian gold demand from China, India and Thailand could amount to half of total world gold production of approximately 2,400 tons in 2013.

Even more astonishing is the fact that the entire world’s production of gold this year will be purchased by only three sources.  According to King World News, total gold buying by central banks, China and India is “almost equivalent to the annualized gold production of the entire world.”  It is only  a matter of time before a shortage of physical gold based on huge demand results in significantly higher prices.

Will The Fed’s “Beautiful Money Printing” Lead to Economic Recovery?

The End GameBridgewater’s Ray Dalio, one of the world’s most successful hedge fund investors, has put out a neat video explaining how the economic system works and how the suffocating burden of unmanageable debts can be reduced without propelling the world into uncontrollable inflation or a deflationary depression.

According to Dalio, every deleveraging  in history has involved a combination of cutting spending, reducing debt through defaults and restructuring, redistributing wealth and the printing of money by central banks.

Each method of deleveraging must be done in just the right amount to avoid tipping the economy into either deflation or inflation.  For example, spending cuts, also know as austerity, leads to falling incomes as less money is spent and debt burdens becomes even more untenable as deflation sets in.  Fewer jobs and higher unemployment from spending cuts require even further spending cuts and this vicious cycle of lower incomes and higher debts ultimately leads to a severe economic contraction known as a depression.  Increased taxes on the wealthy to redistribute spending power to the poor and debt write offs must also be conducted in measured amounts to avoid social unrest between the “haves and have nots.”

Money printing by the central bank is also essential in Dalio’s view since interest rates are already at zero and printed money is necessary to make up for disappearing credit.   If money printing along with spending cuts, wealth distribution and debt restructuring are done in just the right proportions, a “beautiful deleveraging” occurs resulting in declining debts and strongly positive economic growth.  If the four factors of develeraging are done properly, money printing will not cause inflation since the printed money merely offsets the credit destruction triggered by reduced lending and borrowing and debt restructurings.

Dalio does not explain how the central bank and central government can accurately determine how to precisely apply his four develeraging factors to get the economy back on track.  In addition, Dalio admits that the whole system winds up falling apart if incomes do not grow faster than debt.  If debts continue to grow at 4% and incomes increase by only 2%, the debt burdens continue to grow, the economic problems compound and banks continue to cut back on lending until incomes increase.

Income growth can outpace debt growth, according to Dalio, if the Fed prints “just the right amount of money.”  Good luck with that – the members of the Fed can’t even agree on whether or not money printing is causing more harm than good and the Fed’s money printing efforts have been totally counterproductive in attempting to increase incomes as Household Incomes Remain Flat.

Over a longer perspective, the figures reveal that the income of the median American household today, adjusted for inflation, is no higher than it was for the equivalent household in the late 1980s.

For all but the most highly educated and affluent Americans, incomes have stagnated, or worse, for more than a decade. The census report found that median household income, adjusted for inflation, was $51,017 in 2012, down about 9 percent from an inflation-adjusted peak of $56,080 in 1999, mostly as a result of the longest and most damaging recession since the Depression. Most people have had no gains since the economy hit bottom in 2009.

Government programs remain a lifeline for millions. Unemployment insurance, whose eligibility the federal government expanded in response to the downturn, kept 1.7 million people out of poverty last year. Food stamps, if counted as income, would have kept out four million.

Since the recession ended in 2009, income gains have accrued almost entirely to the top earners, the Census Bureau found. The top 5 percent of earners — households making more than about $191,000 a year — have recovered their losses and earned about as much in 2012 as they did before the recession. But those in the bottom 80 percent of the income distribution are generally making considerably less than they had been, hit by high rates of unemployment and nonexistent wage growth.

The Fed’s money printing rampage has done nothing but inflate the cost of living for the average American even as wages continue to spiral downward.  What will the Fed do next?  There is every reason to believe that the money printing will continue to expand as it did in the Weimar Republic as explained in The Economic Collapse.

There is a reason why every fiat currency in the history of the world has eventually failed.  At some point, those issuing fiat currencies always find themselves giving in to the temptation to wildly print more money.  Sometimes, the motivation for doing this is good.  When an economy is really struggling, those that have been entrusted with the management of that economy can easily fall for the lie that things would be better if people just had “more money”.  Today, the Federal Reserve finds itself faced with a scenario that is very similar to what the Weimar Republic was facing nearly 100 years ago.  Like the Weimar Republic, the U.S. economy is also struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt.  Unfortunately, the Federal Reserve has decided to adopt the same solution that the Weimar Republic chose.  The Federal Reserve is recklessly printing money out of thin air, and in the short-term some positive things have come out of it.  But quantitative easing worked for the Weimar Republic for a little while too.  At first, more money caused economic activity to increase and unemployment was low.  But all of that money printing destroyed faith in German currency and in the German financial system and ultimately Germany experienced an economic meltdown that the world is still talking about today.  This is the path that the Federal Reserve is taking America down, but most Americans have absolutely no idea what is happening. It is really easy to start printing money, but it is incredibly hard to stop.  Like any addict, the Fed is promising that they can quit at any time, but this month they refused to even start tapering their money printing a little bit.

Long term investors in gold and silver should continue to accumulate positions at current bargain prices as part of a long term wealth preservation strategy.