QE2 and the Great Economic Misdiagnosis, Insolvency Not Illiquidity

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The backdrop
has turned dire on several front simultaneously. The great millstone
around the USEconomy’s neck continues to drag it down. CoreLogic
reported 2.1 million units have created a swamp in Shadow inventory
of the housing market. That equates to 23 months inventory, whereas
normal is 7 months. They tallied the growing tumor of bank owned
properties as a result of home foreclosures, also called the REOs
(real estate owned). Look for no housing market recovery for at
least another two years. Starting in summer 2007, the Jackass forecast
each year has been for another two years of housing market declines,
all correct. Ireland might be squarely in the news, but the big
enchalada is Spain. The Irish banks have presented a grand headache
for the European banks, with a $150 billion exposure. Ironically,
Ireland has done more to reduce its budget spending effectively
than any EU member nation, yet is left to twist in the soft rain.
They cut their government budget by 20%.

The USGovt
budget grows every year without remedy or remorse. Few seem to remember
that Irish fund managers lost the German civil service pension funds
a couple years ago, a source of hidden tension and great resentment.
Spain will rock Europe and the Euro currency in the springtime.
The gold price consolidation will center on the Spain debt crisis
hitting fever pitch, with the Euro hit. Thenagain, perhaps a mammoth
new wave of European gold demand will neutralize any USDollar stability.
On Tuesday this week, the Euro fell by 200 basis points, but the
gold price was stable like a rock. That is notable strength. But
the bigger story of strength is with silver. The round robin of
destruction to major currencies that makes the Competing Currency
War, the race to the bottom in rotated currency debasement, it will
lift gold & silver in a round robin of strong demand.

MISDIAGNOSIS:
INSOLVENCY NOT ILLIQUIDITY

The US bankers
often go home to mommy and order a giant slosh of monetary inflation
whenever in deep intractable trouble, like after the previous mistake
in QE1 when ordering a giant slosh of monetary inflation. The
USFed, led by the academic professor with no business experience,
has ordered a fresh supply of gasoline from a lit fire hose, but
he does so on a collapsing building. Bernanke has very erroneously
diagnosed lack of liquidity within the system to be the underlying
problem. He has prescribed a huge swath of ‘free money’
to be sent into the bond market as a solution. He has prescribed
that cheap money continue to be delivered to the USEconomy. Bernanke
has failed to notice the insolvency in banks, and has failed to
notice that 0% has yet to prompt any revival in lending among banks.
Bernanke is fighting INSOLVENCY with LIQUIDITY for a
second time after learning nothing the first time.

The USTreasury
10-year yield has risen from a grand bond market dare, not at all
from evidence of growth. Bond players dare the USFed to create another
$1 trillion in new money. In no way does another lift in retail
spending constitute a recovery. Household insolvency rises every
month from worsening home loan balances. The USFed wants
households to spend more on borrowed funds, yet they have depleted
home equity and vanished income security. No, US bankers
are confused with their wrecked financial engineering aftermath
and the broad banking system insolvency that they refuse to acknowledge
or discuss. Ever since the April 2009 decision by the USCongress
to bless the falsified accounting practices by the Financial Accounting
Standards Board, the big US banks have masked their ruined balance
sheets, sold stock for their dead entities, and pretended to act
as banks. Instead they are mere carry trade shells taking advantage
of the USTreasury yield differentials, and storing the cash profits
in the USFed, where it earns interest.

Finance minister
Wolfgang Schauble from Germany was hostile in public remarks toward
the desperate monetary decisions. At the recent G-20 Meeting, Schauble
called USFed Chairman clueless openly (his word), describing his
policies as reckless (his word). He ridiculed the USGovt approach
to urge China and Germany to reduce their trade surpluses. Take
surpluses as signs of success and competent industrial and policy
management, where the US is void. He gives his nation credit for
a strong competitive industry. He cites a direct contradiction.
Schauble said, "The American growth model, on the
other hand, is in a deep crisis. The United States lived on borrowed
money for too long, inflating its financial sector unnecessarily,
and neglecting its small and mid-sized industrial companies. There
is no lack of liquidity in the USEconomy, which is why I do not
recognize the economic argument behind this measure."
Exactly on both counts!!! The USFed is fighting insolvency with
liquidity rather than debt restructure for a second time, after
learning nothing the first time. The US economists have lost their
way so badly, that they no longer comprehend the concept of legitimate
income. The US counselors push for putting more cash in consumer
hands, regardless of where it comes from. Call it heresy, or call
it incompetence, or call it blindness from the Keynesian bright
lights that burn bright in the inflation laboratory.

New money does
not cure an insolvent banking system or insolvent households. No
sterilization of QE2 is in the plan, to serve as protection for
the USEconomy. Not in QE2!! My forecast is for the hollowing out
of the USEconomy from a massive cost drain with puny export benefit,
compounded by continued income erosion. Price inflation will be
labeled as growth, even income growth, the chronic sins. The
borrowing costs have been near 0% for 18 months with no economic
response, making Bernanke’s points again vacant, myopic, and deficient.
He is fighting an endemic insolvency problem with amplified monetary
inflation. A voice with hint of wisdom came from former
New York Fed President E Gerald Corrigan Corrigan. He said, "Even
in the face of substantial margins of under-utilization of human
and capital resources, efforts to achieve an upward nudge in today’s
very low inflation rate make me somewhat uncomfortable."
His experience came under ex-USFed Chairman Volcker during the late
1970 decade, who raised interest rates to 20% to combat inflation,
pushing the economy into the 1981-82 recession. That was the final
chapter of anti-bubble USFed chieftain linneage. Since the Greenspan
Era, it has been full speed ahead with inflation engineering, asset
bubble creation, erudite apologists, permitted bond fraud, careful
collusion, and reckless management. They have systemic failure to
show for it.

The claim by
Bernanke and a supporting chorus of economists that QE2 will bolster
USEconomic competitiveness is fallacious, and patently backwards
as usual. It will push the US further into a wasteland, a vestibule
to the Third World. The higher cost structure uniformly imposed
will render great damage in a profit squeeze for businesses and
discretionary spending squeeze for households. New money
does not cure an insolvent banking system or insolvent households.
It presents a new problem of significiant price inflation.
They want it, so they can call it growth!! Producing high value
products efficiently and cost effectively makes the nation competitive.
Imposing a fair tax structure that is stable, reasonable, and with
proper incentives makes it competitive. Having an active legal prosecution
staff to combat bond fraud and defense appropriation fraud makes
it competitive. Having a strong education system makes it competitive.
A weaker currency raises the cost structure, increases import costs,
and assists the export trade if a nation has one. The United States
has shipped a large segment of it away in the last 10 years to China,
after having shipped a larger segment away in the 1980 decade to
the Pacific Rim. Not only did the US promote its financial sector,
but it denigrated the industrial sector as dirty. By removing a
significant portion of the nation’s capacity to generate legitimate
added value income, the USEconomy was left vulnerable to debt overload
and insolvency. The US Ship of State was hoisted on its own petard.
For those ignorant of naval terminology, that means the US killed
itself in a great display of cannon backfire in recoil. The QE2
initiative will be disastrous from many angles, certain to push
the nation into an Inflationary Depression, from the current chronic
Deep Recession.

MARGIN
HIKE AS FINAL LIMP WEAPON

Increases to
the silver margin requirement in futures contracts should be viewed
as the final act of desperation. It is a device to control price
within the paper silver arena. However, in a grand backfire,
a higher margin produces a lower price for the physical buyers,
who eagerly step up to place and fill orders. The margin
maintenance hike on November 9th was six times greater for silver
than for gold. The Big Four US banks are caught in an historically
unprecedented short squeeze, bleeding $billions. Tuesday November
9th saw a powerful gold & silver price downdraft. The COMEX
raised the silver margin requirement in a bland attempt to slow
a raging bull market amidst a broken global monetary system. One
week later they raised the margin again for both monetary metals.
The price downdraft continued. But some calmer winds in Europe enabled
precious metals prices to recover. Silver has snapped back much
more than gold.

The Chicago
Mercantile Exchange raised the margin requirements for silver on
November 9th. It was highly motivated. They wanted to prevent a
blowout upside move in silver past $30 before Christmas, and to
relieve some of the pain to the Big Four US banks. Unlike
gold & silver, no margin hikes were doled out for soybeans,
corn, sugar, or cotton despite their concurrent price gains.
The message is clear, that desperation has set in relative to precious
metals, as conditions are breaking down badly. The CME sent
out a memo raising the margin maintenance requirements for silver
futures by up to 29%, from $5000 to $6500 per contract.
Initial positions have a slightly higher margin. It is their right,
being the market maker. Let not their fast disappearing silver inventory
deter their path. Less than two weeks later, the CME raised
the silver margin maintenance requirement another 11.5% to $7250
in a sign of desperation. They also raised the gold margin,
but only by 6% from $4251 to $4500 in a symbolic gesture. The CME
motive is less about risk mitigation concerns and more driven by
the desire to restrain the bull market movement. The investment
world will regroup long before Christmas, like in the next week
or two. Just when the European woes focused on Ireland, and a rescue
aid package seemed in the offing, the silver price jumped upward
by $2.00 on a single day, November 18th, a strong telegraph across
the paper-physical silver table. The Powerz cannot halt the silver
juggernaut, which will see $30/oz by January. If a double hike in
the silver margin is the best they have, then they are truly whistling
in the grave yard.

The demand
for gold is global, diverse, and motivated by the gradual disintegration
of the monetary system. Sovereign bonds that support the major currencies
are in deep trouble the world over.
The consensus actions toward
Quantitative Easing, also known as hyper monetary inflation, have
boosted demand for gold & silver monumentally in a natural offset.
Dozens of nations and billions of people around the world are slowly
awakening to the grand deception of money itself and the crumbly
foundation that make up fiat currencies. They are losing money in
supposedly safe government bonds, a trend without precedent. Most
of Southern European nations will declare debt default within two
years. Foreign central banks are attempting to diversify their oversized
US$-based reserves without causing a run on the USDollar. Gold is
gradually being seen as part of the solution, at least in private
wealth preservation. Gold is the new reserve safe haven asset, since
it is true money.

Read
the rest of the article

November
26, 2010

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