Some prefatory stories are highly revealing. Bank of America is badly on the ropes. On the same weekend at the end of July, when the Bank For Intl Settlements executed a 340-ton gold swap contract, two other events happened. The London metals exchange apparently suffered coordinated delivery raids, all legal, but painful nonetheless, stripping the embattled exchange of much gold bullion. My source from the German banking fortress shared that the BIS might have rescued the London Bullion Market Assn, and thereby prevented a near default at the exchange. Spurious stories about aiding commercial banks, even the Portuguese central bank, were floated to distract the masses.
The second event was that on the same weekend, Bank of America suffered a failure. But the USFed pulled it out of the fire by Monday morning with fresh huge infusions of funny money. This week, another $13 billion infusion came to BOA by way of much darker corners of USGovt agencies, from nether recesses. It is getting that bad! So BOA had been propped by the USFed and the USCongress in the past, but by the syndicate now. In time, they will remove the valued assets and exit the burning building. Unexpected consequences are sure to come, a fact of nature. The BOA story came after a prompted inquiry as to which banks might next succumb to the rising gold & silver prices. BOA was at the top of the list of banks mentioned, but others were mentioned too. They appear in the September Hat Trick Letter, the usual suspects.
QE2: A JUSTIFIED CANCER
My best description of QE2, the Quantitative Round #2 Launch, is simply stated a monetary cancer, an admission of failure, and the trigger for the next breakdown in the global monetary system. The QE2 Launch is a US flag flying upside down at the central bank command center. Imagine trying to justify printing money to cover debts, and retaining credibility. The belief stated by USFed Chairman Bernanke, that zero cost comes from printing money, is pure heresy with dire consequences. The cost is lost confidence in the monetary system, in the currencies, and in the central bank franchise system. The QE initiatives kill the requisite confidence. Thus the rise in the Gold price in response. The financial news anchors struggle to hide their growing awareness that gold is the safe harbor from a destroyed monetary system, wrecked currencies, discredited central banks, and insolvent banks. They are awakening, as are those in the investment community.
Three additional sides are revealed on the Quantitative Easing desperation. The Bank of England has a US plant residing within. Adam Posen is an American who sits on the Monetary Policy Committee at the bank. He inflamed concerns about monetary instability with a speech to the Chamber of Commerce in Hull on Tuesday. He urged the major central banks to pursue more aggressive bond buying in order to rescue the world economy from stagnation that persists. He spoke of the fear of looking ineffective from inaction, mitigated by usage of extreme tools. He actually said, "Thus, policymakers should not settle for weak growth out of misplaced fear of inflation." So there you have it, inflation full speed ahead. A clarion call to inflate. The risk is hyper-inflation. Their policies in the last cycle produced unforeseen problems. In fact, the central banks, in particular the USFed, fight the last war only to create the most monster, on a consistent basis, in a pattern of serial events. Their colossal monetary inflation is breaking all historical records. It is given political cover by virtue of doctored price inflation statistics to hide its chronic 5% to 7% range. Posen pushed for further monetary easing undertaken in the United Kingdom, even to the extent of corporate debt purchases. Of course, to keep the order, they should begin with simple UKGilt (bond) purchases. He acknowledged that a QE program will not be able to create sustained recovery on its own. He fears a 1990s Japan style scenario, when a collapse of the Western monetary system is the more possible ugly outcome. He advises more effective coordination of large scale asset purchases by the central banks working together. This is a trumpet call to the Competing Currency War, where peace is declared at first, but which will vanish in the din of a threatening crisis.
A second warning came from Bill Gross of PIMCO, the newest target of informal inside trader accusations. His bond funds seem to have been benefiting handsomely from advanced notice of many special USGovt programs to purchase bonds. The PIMCO funds might front-run the USGovt policy, certainly doing very well for their investors. They could be the newest invited player in the fascist business model privileged group. Gross is on record this week as warning that the Quantitative Easing programs, those that involve vast bond purchases with newly printed USDollars, backed by nothing, fully diluting the national currency and undermining the central bank integrity, will lead to a worsening strain on the USDollar and a decline in the American standard of living. That is a slick backdoor way of saying significant price inflation. Nobody on stage wishes to warn of price inflation as a consequence to the current policy. Nobody on stage wishes to contradict the low price inflation environment portrayed falsely by bank officials, which justifies the magnificent monetary inflation being ordered.
The third warning came from Yu Yongding, a former adviser to the Chinese central bank. He called the USDollar as being one step nearer to a crisis while debt levels in the US rise to frightening levels. Yu also called a devaluation of the USDollar inevitable while the USGovt debt rises. He stressed that USTreasurys fail to provide safety or liquidity. Yu openly expressed concern over the safety of its FOREX reserves, including those invested in USTreasurys. China is the largest foreign investor in this sanctioned asset bubble, falsely deemed a safe haven. Its pursuit globally has transformed it to an asset bubble. China is trying to shed USGovt bonds, as they have cut holdings by 10% to $847 billion in the twelve months ended July, according to the USDept Treasury data. The invitation given to Fannie Mae to reside under the same USGovt roof as the USTreasurys has greatly increased the risk to the USDollar. The guarantee has been declared as explicit.
EUROPE’S HAND BID TO DANCE
Any new QE2 chapter will probably have minimal positive effect, but much negative effect. The beneficiary will be gold & silver, but no specific currency, since tied to the same papyrus raft. No cure will come from a prescribed Quantitative Easing Round #2. The first round accomplished nothing. Curiously, the central bankers exhibit a strange sense of caution, as though they realize the great risk of much deeper capital destruction, and heightened risk of triggering price inflation. A selloff of the USDollar might soon motivate a similar QE2 by Europe. Except this time around, the Europeans must admit their Bank Stress Tests were a total fraud and sham staged event. The QE2 will ultimately serve as the catalyst that speeds up the processes riddled in crisis that are already underway. Tremendous destruction of wealth comes next, from the USGovt creditors and US citizens alike.
In order to mitigate the severe damage to the USEconomy and US financial structure, the US will induce Europe to join in the destruction. The cause celebre will be to avoid a fast rising Euro currency. My forecast is that the high risk of a significant USDollar decline will induce European leaders to join in the currency debasement. They will announce a nearly simultaneous rescue soon, a similar EU bank bond redemption initiative, but without much time delay like last time. It will coincide nicely with the USFed QE2 Launch in order to minimize the currency impact and isolated USDollar swoon effect. European leaders will push for a matching QE Launch, since their export trade lies in the line of fire with a higher Euro currency. In joining the deadly tango on the currency dance floor, Europe and the United States will define the primary forces in the Competing Currency War, best described as a race to the bottom. In my view, the hesitation to execute a renewed QE2 program is foreknowledge of its extreme risks and admission of central bank failure at a certain level. It will deplete the central banks of weapons in their toolbag. They will be failure standing naked on the monetary stage in full view.
The advent of the QE2 Launch might have served as the final straw for former USFed Chairman Volcker. The man of extreme stature, perhaps the last effective central banker of US vintage, delivered a scathing tirade to a gathering of bankers and economists, harshly criticizing them in impromptu fashion. He left no financial stone without a stain or dent, in the most ringing, acerbic, rattling harangue qualifying as internal indictment in US history!! That is not an exaggeration, not in the least. Such a shrill speech has never been witnessed in US history. Volcker particularly expressed disappointment that the Financial Regulation Bill actually granted the USFed even more powers, when the original intention was to limit it. That was my stated forecast in the summer Hat Trick Letter reports, since bankers control the USCongress and the reform process. My personal belief is that the QE2 Launch is understood by Volcker as a green light toward a full speed careening downhill ride down into the chasm for the US Economic Ship of State. He must in his mind’s eye realize that the Third World awaits. Isn’t it interesting how the concept of Third World has gained traction in the US alternative press, after the Jackass forecasted it in October 2008? It is mentioned with greater frequency lately.
THE CURRENCY WAR HEATS UP
The competing currency war is ramping up, with gross interventions, open disputes, notable desperation, friction among trade partners, and urgent need to take action. Nations are taking positions against each other increasingly. In defending their economies, they are pitting themselves against allies and foes alike. The number of bilateral squabbles has never been greater. The winner will be Gold, as all paper currencys will circle the toilet and lose. The Gold price acts as a meter; it will rise in spectacular fashion. It rises due to the profound debasement in a death process of the currency system. The undermine is being sanctioned by the major nations. This process follows inevitably after the grotesque insolvency of the US banking system, the UK banking system, and much of the European banking system. Their economies are dying on the vine as a result of the dysfunctional credit systems.
September 30, 2010
