The Fed Is Trapped, Gold Is the Exit

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47% of US investors dependent on the Fed believe they are victimized by government, who believe they are entitled to enough liquidity to profit when risk is laid-off onto others, to society, to you-name-it…

On September 13th, the Fed announced QE3, a policy of open-ended bond purchases which would add $1 trillion annually to the Fed’s balance sheet. The Fed’s decision to provide liquidity ad infinitum, i.e. QE etc, was framed in reasonable and carefully chosen language:

…These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative… Read here.

The measured wording gave the Fed sufficient cover to mask its increasingly desperate condition, i.e. how to keep its fatally-wounded credit and debt ponzi-scheme functioning while searching for a solution that doesn’t exist.

CAPITALISM’S CONSTANTLY COMPOUNDING DEBT IS THE DEVIL’S WHIP OF GROWTH

In capitalist economies, capital, i.e. money, is introduced by central banks into the economy in the form of loans; and because interest constantly compounds, economies must constantly expand in order to pay down and/or service those loans. This is why economists in capitalist systems are obsessed with growth.

Capitalism is, in actuality, a smoke and mirrors shell game where credit and debt have been substituted for money; and, as long as capitalism expands no one is the wiser because the fraud is so subtle. Capitalism, however, is no longer expanding. It is contracting.

Capitalism reached its peak in 2008 when Greenspan’s historic credit bubble burst. What investors believed was a finely-tuned balancing act between credit and debt orchestrated by Fed Chairman Alan Greenspan turned out instead to be a speculative bubble fed by Easy Al’s easy credit from the Fed’s 24/7 discount window.

While Greenspan presided over the greatest credit expansion in the history of capitalism, Greenspan also presided over two of its largest speculative bubbles – the 1996-2000 dot.com bubble and 2002-2007 US real estate bubble. Greenspan would later refer to evidence of these bubbles as ‘froth’; to those who lost homes and fortunes, it was blood.

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THE 1990 JAPANESE NIKKEI – THE MOTHRA OF ALL BUBBLES

The collapse of Greenspan’s two massive bubbles followed the spectacular collapse of the Japanese Nikkei. The catastrophic crash of Japan’s stock market in 1990 was the world’s largest since the US stock market had collapsed in 1929.

In Time of the Vulture: How to Survive the Crisis and Prosper in the Process, I wrote: …fueled by excessive amounts of liquidity, [the price of Japanese real estate and stocks] exploded upwards. Japanese real estate prices increased 70 times over and stock prices increased over 100-fold, with the Nikkei reaching a market top at 38,992 in January 1990.

As with all speculative bubbles, the Nikkei collapsed – and the collapse of the Nikkei in 1990 unleashed deflationary forces not seen since the Great Depression of the 1930s. Prices of stocks and real estate in Japan began a long and steep multi-year descent.

Commercial real estate lost 80% of its value in the next decade and the Nikkei fell from 38,992 in 1990 to 8,237 in 2003. Deflationary cycles are long and protracted and if not stopped will become deflationary depressions, an economic phenomenon for which there are no ready answers.

In 1990, Japan escaped a complete deflationary collapse only because Easy Al’s credit bubble was underway in the West. Rising credit-driven Western demand combined with Japan’s high savings rate helped slow Japan’s inexorable descent into deflation. Nonetheless, after 1990, Japan would need to borrow increasingly large amounts of money in order to survive and borrow it did.

After the 2008 economic rendering, the central banks of the US, the UK and Europe have joined Japan in the desperate need to constantly increase money-printing to keep their economies afloat; and while reviving growth is their announced goal, the unspoken intent is to avoid a fatal deflationary collapse in demand.

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