Keynsianism Fallen Upon Hard Times

Thursday, November 11, 2010
By Paul Martin

Hard times for Keynesianism, no recovery through quantitative easing, Fed not finding the path to sustainable economic growth, policy made in stealth, purging the system a better idea, Bernanke on a suicide mission, when the Fed buys, Treasury debt debases the currency, World Bank wants Gold back into the monetary system.

Bob Chapman
InternationalForecaster.com
November 10 2010

The cult of Keynesianism is about to come upon very hard times. The quantitative easing plan, known as QE1, did not produce a recovery in the American economy. Now one of its staunchest advocated, Fed Chairman Ben Bernanke, has embarked officially on QE2. It is our belief that QE2 will be no more successful than QE1 and it may well be followed by QE3. You might ask why are not other policies being used the answer is the followers of Lord Keynes don’t know what else to do, and they know what they are doing does not work. They certainly must be waiting for their elitist friends to start another war, as they did in 1939 and 1941. The followers of Keynes control today’s central banks and thus have complete control over money.

Several years from now many will see through the fallacies of Keynes and the nostrums that caused its demise. In the case of the Fed its goal is sustainable economic growth and price stability and that long term inflation expectations remain contained. As we have seen stability has been relative and inflation has been with us for many years, particularly since August 15, 1971, when the US dollar, the world reserve currency, abandoned gold backing. The simple conclusion is you cannot have both no matter what Keynes postulated. Central banks, and particularly the Fed, have allowed inflation to always be present, because deflation strikes absolute terror into their hearts. That is why the privately owned Fed demands total control over the US money supply. The Fed contends that they can control the economy via the money supply and manipulation of interest rates. The result is that stable prices are impossible. Growth has to be accompanied by inflation under Keynesianism; there can be no other outcome.

For the past 8 years deflation has been a serious threat and that threat has been met with boatloads of money and credit. If it had been the case deflation would have long ago overwhelmed the US economy. As a result we have had zero interest rates for two years accompanied by quantitative easing. This has been a full throttle attack on deflation, which as usual leaves at least residual inflation. Two years ago official inflation was 5-1/2% at its peak and real inflation was 14%. Recently official inflation has been 1.6% and real inflation 7%. As this new QE2 and continued zero inflation have their affects, inflation on a real basis should climb back to 14% and perhaps higher. Only fiat money and credit created out of thin air has been able to keep the monetary system afloat and in that process savers and non-speculators have been robbed of their wealth. For two years the Fed has purchased a great part of available US treasuries. The Treasury has been funded with fiat funds and no benefit has accrued to the economy. This so-called lender of last resort has exchanged worthless paper for debt for worthless Treasury debt, and whether they like it or not, the slight of hand illusion, the Houdini act, is no longer working. The power structure that really controls the US government, the fed, Wall Street and banking are in a fight to retain their power and control and at the same time take down the world economy and force the world’s inhabitants to accept world government.

They knew the risks and confidently accepted them, but talk radio and the Internet are interrupting their march toward a new world order. The public of the world are learning who is doing what to them, and why they are doing it. They are being as stealth and subtle as possible. They do not want the public to know what they are up too and why. If enough people are informed worldwide their game won’t work, they will lose their power and wealth and perhaps their lives. Presently Mr. Bernanke is telling Americans to expect inflation and it is good, because deflation is worse. He is correct of course, but doesn’t tell his listeners the whole truth. The truth is that the only way the problems can be solved is by purging the system and if that purging is allowed to happen he and his fellow elitists will lose control. The ignorance that shrouded people’s eyes and minds is being lifted by alternative communications and that is the last thing Mr. Bernanke and his friends at the Council on Foreign Relations, the Trilateral Commission and within the worldwide Bilderberg group want. We among others are educating the masses as never before and the knowledge they are accepting is going to be their ticket to freedom from these scoundrels. The elitists believe they can keep the people ignorant, but we disagree and we are going to prove it. An example is the three class action lawsuits, one of which was a RICO suit, versus JPMorgan Chase and HSBC for manipulating the Comex silver market. There will be more suits like this, class actions versus naked shorting and front running. This is part of the educational process of which we speak. The crooks in Wall Street, banking, the CFTC and the SEC will be exposed for what they are. The days of financial ignorance are about to end.

As the creation of an additional $5 trillion in monetary aggregates goes forward over the next two years no one wants to talk about the negative results of such a policy except foreign nations.

In the meantime over the next four months the stock market is up 20%, gold is up 20% and silver 50%, all as a result of the coming creation of monetary aggregates.

Not only is the Fed implementing massive amounts of money and credit into the economy, but so are many other nations to the tune of $1.5 trillion. That means inflation is a problem worldwide as is confidence in the monetary policies of central banks and governments. The dollar is going to fall versus other currencies and all will continue to follow versus gold.

European financial leaders are terrified by what is going on. The dollar is again headed lower and the euro higher. Europe is a big exporter and a higher euro is just what they do not need. ECB President Jean-Claude Trichet is right. The time for stimulus is over, it is now time for all to tighten. This, of course, will purge the system and the elitists do not want that unless they control it and that will be difficult to do. They would rather stimulate more and if unsuccessful at that have another war, as a distraction. We can assure you if the public loses faith in government and confidence in banking the elitists will be in serious trouble and we believe that will happen and it is not to far away.

What the Fed was once capable of doing they cannot do anymore. Mr. Bernanke is on a suicide mission. He faces a dreadful economy and he knows the solutions he is using do not work. It did not work in the 1930s and it won’t work now. Speculation is rife and regulation is almost non-existent. The excesses are again where they were before at banks and brokerage houses. Risk markets worldwide, where good profit opportunities exist, are being inundated with hot dollars and that is why nations such as Brazil have put up financial barriers. They have enough inflation of their own without accommodating US dollar inflation. As one might expect all of this dollar creation forces the value of the dollar lower and dollar holders continue to lose confidence. The official introduction of QE2 and perhaps a QE3 certainly does not instill confidence. You can understand why dollar owners are purchasing gold, silver and commodities. You can also understand how the public is being crushed between higher inflation and inadequate wage increases. At the same time asset value are falling along with wealth and net worth. Bonds and the stock market are high. Can you imagine the anguish when they both eventually fall? When the Fed talks about stability and increasing employment or price stability, it is really talking about stabilizing Wall Street and the banking interest that own the Fed. Current policies will have little impact overall and the stage will be set for QE3 and then more stimulus until the dollar crashes and the game is over.

One of the fascinating aspects of all of this is that finally word is getting around that when the Fed buys, Treasury debt debases the currency. What a novel idea. The Fed has been doing this for many years but few were paying attention. They are now. The claptrap you hear from the IMF that the dollar is overvalued is enough to make one regurgitate. Overvalued against what? Not any currency we are aware of. Dollar creation has continued to aid Wall Street and banking not the US economy.

The Fed has signaled that it will buy bonds, anything they wish to buy. That in turn will force interest rates lower and encourage borrowing by business and individuals. In this process the Fed continues to expand its balance sheet, something that did not work previously. Foreign central banks cannot be counted on to purchase and incur loses and Americans won’t be buyers unless yields rise and the Fed cannot allow that to happen. That means the Fed has to mop up all bond markets and that is where the $2.5 trillion comes in. At the same time commercial banks won’t be buyers because they have to deal with Foreclosurgate and the class action and RICO suits against JPMorgan Chase and HSBC. The Fed has its work cut out for it and the result will be inflation and QE3. The Ponzi scheme goes on based on lies and the greater fool theory. The tulip mania comes to mind. The scheme is simply brazen beyond belief. Unfortunately the scheme is the only alterative for the Fed and they know it won’t work. If we are correct, then that big meeting will be held to devalue, revalue and to default on a multilateral basis. If the US has the gold they say they own then it can return to the gold standard and remain the world’s reserve currency with all dollar holders paying the price. Revealing a Keynesian system that doesn’t work, but has kept the elitist bankers and Wall Street in power for almost 100 years. This meeting will also bring down world stock markets and a 30-year bull market in bonds. The losses will be gigantic and crippling.

Last week the Dow rose 2.9%, S&P 3.6%, the Russell 2000 4.7% and the Nasdaq 100 was up 2.9%. Banks rose 7%; broker/dealers 6%; cyclicals 5.2%; transports 3.6%; consumers 2%; utilities 1%; high tech 2.5%; semis 5.2%; Internets 2.4% and biotechs 0.5%. Gold bullion rose $35, quickly bringing a $60 correction to an end. The HUI gained 5.3% and the USDX fell 0.9% to 76.58.

The 2-year US T-bills rose 3 bps to 0.36%, the 10-year notes fell 6 bps to 2.54% and the 10-year German bund fell 10 bps to 2.42%.

The Freddie Mac 30-year fixed rate mortgage rose 1 bps to 4.24%, the 15’s fell 3 bps to 3.63%, one-year ARMs fell 4 bps to 3.26% and the 30-year fixed jumbos fell 7 bps to 5.11%.

Fed credit declined $8.5 billion to $2.28 trillion, Fed foreign holdings of Treasury and Agency bonds surged again $21.6 billion to a record $3.316 trillion. Custody holdings for foreign central banks have increased $310.4 billion YTD, or 14.4% annualized, and YOY it is up 13.9%.

M2 narrow money supply declined $9.6 billion to $8,764 trillion, or 3.3% annualized and YOY 3%.

Total money market fund assets fell $6.6 billion to $2.800 trillion. The YTD decline is $494 billion, or YOY $539 billion, or 16.1%.

Total commercial paper fell $22.5 billion to $1.145 trillion. CP is off $24.7 billion YTD, and down $170 billion YOY.

In August those on food stamps increased by more than 500,000 Americans to 42.4 million, a 17% YOY increase.

The employment situation is bad and we see no reason for it to improve under QE2. The estimate of the Fed creating $600 billion out of thin air is ludicrous at best. The projection of 250,000 new jobs is equally inane. The funds are going into the financial markets as they did last time. More money will be lent for business and mortgages, but not enough to create employment. We believe the Fed will create four times $600 billion or $2.4 trillion to inject into the system. That will increase FDP by 1.2%. You add that to 1% natural growth and you get 2.2% GDP growth for a cost of $2.4 trillion for the year. QE3 would produce the same results,. In passing you have to throw in real inflation rates of 14% to 25%, as a cost of doing business.

Just to give you an idea where we now officially stand with unemployment. We can start off by saying U6 is 17.1% and if you remove the bogus birth/death ratio you have 22-3/4%. Let us remind you that during the great depression it was 25%.

Household employment fell 330,000 officially last month. Unemployment remained steady only because 254,000 gave up trying to find a job and left the workforce. They forget to mention that. The participation rate fell to a new low of 64.5%, which means more and more workers believe no jobs are available. Thus, the employment-to-population ratio fell to 58.3%, the lowest in almost 30 years.

The small business sector, which creates most jobs, only created 61,000 jobs. The worst part of the report was the economy lost an additional 124,000 full-time jobs, bringing the 5-month loss to 1.1 million, the result of free trade, globalization, offshoring and outsourcing. That puts full-time employment at a level of 11 years ago.

World Bank president Robert Zoellick has called on bickering G20 nations to bring gold back into the global monetary system as an anchor to guide currency movements.

Ahead of a G20 summit this week in Seoul, Zoellick wrote in Monday’s Financial Times that an updated gold standard could contribute to retooling the world economy at a time of tensions over currencies and US monetary policy.

Zoellick said the world needed a new regime to succeed what he called the “Bretton Woods II” system of floating currencies, which has been in place since the fixed-rate currency system linked to gold broke down in 1971.

“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” Zoellick wrote in a commentary for the FT.

The new system “is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi (Chinese yuan) that moves towards internationalisation and then an open capital account,” he said.

“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values,” Zoellick added.

His comments came amid worries of a so-called “currency war”, when countries jostle for trade advantage by massaging their exchange rates lower.

The United States has led accusations that China cheats in world trade by artificially weakening its currency.

But Washington also stands accused of tolerating a weak dollar, roiling emerging markets whose own currencies are rising strongly, hurting their export competitiveness.

The complaints have intensified since the Federal Reserve last week announced a 600-billion-dollar shot of monetary stimulus — in effect printing money that other economies worry will flood their markets.

Zoellick also called on the Group of 20, whose leaders meet in the South Korean capital on Thursday and Friday, to forge structural reforms, including more domestic demand in China and more debt-reduction in the United States.

Major economies “should agree to forego currency intervention, except in rare circumstances agreed to by others”, he added.

The G20 could work out tools to help emerging economies cope with the kinds of hot-money flows that are now driving up their currencies and creating fears of asset bubbles.

And the G20 should “support growth by focusing on supply-side bottlenecks in developing countries”, such as infrastructure, agriculture and a lack of skilled labour, Zoellick said.

“Perhaps most importantly, this package could get governments ahead of problems instead of reacting to economic, political and social storms,” the World Bank chief argued.

The Federal Reserve’s plan to buy an additional $600 billion of Treasuries will spark another influx of money to emerging markets, underscoring the need for South Korea to consider capital controls, the finance ministry said. Less than nine hours after the Federal Open Market Committee issued its statement on securities purchases, the Bank of Korea said excessive foreign capital flows into the stock market pose a risk as the rising value of the won attracts overseas investors. Nation’s from South Korea to Brazil are struggling to manage the flows, which are driving up the value of their currencies and reducing the competitiveness of exporters… ‘Our country will actively consider implementing capital control measures to improve the macro-economy,” Kim Ik Joo, a director general of South Korea’s finance ministry, said.

An inflationary tide is beginning to ripple through America’s supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades. Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald’s Corp., Kellogg Co. and Kroger Co. have begun to signal that they’ll try to make consumers shoulder more of the higher costs for ingredients.

U.S. infrastructure-spending plans are ‘too little, too late’ and should be increased in preference to quantitative easing, said Zhou Yuan, head of asset allocation at China’s $300 billion sovereign wealth fund. Proposed spending of about $500 billion over six years on infrastructure should be doubled, Zhou said.

Bankruptcy filings by U.S. consumers totaled 132,173 last month, 1.4% more than in September, keeping Americans on track to file 1.6 million bankruptcies this year, the American Bankruptcy Institute said. October’s total fell 2.8% from the same month last year.

The U.S. homeownership rate was unchanged at a 10-year low in the third quarter. The homeownership rate was 66.9 percent. The homeowner vacancy rate, or the share of properties vacant and for sale, was unchanged at 2.5%.

U.S. Rep. Ron Paul on Thursday said he will push to examine the Federal Reserve’s monetary policy decisions if, as expected, he takes control of the congressional subcommittee that oversees the central bank in January.
“I think they’re way too independent. They just shouldn’t have this power,” Paul, a longtime Fed critic, said in an interview with Reuters. “Up until recently it has been modest but now it’s totally out of control.” Paul is currently the top Republican on the House of Representatives subcommittee that oversees domestic monetary policy and is likely to head the panel when Republicans take control of the chamber in January.
That could create a giant headache for the Fed, which earlier this year fended off an effort headed by Paul to open up its internal deliberations on interest rates and monetary easing to congressional scrutiny.

Paul, who has written a book called “End the Fed,” has been a fierce critic of the central bank’s efforts to boost the economy through monetary policy.
“It’s an outrage, what is happening, and the Congress more or less has not said much about it,” he said.

Paul said his subcommittee would also push to examine the country’s gold reserves and highlight the views of economists who believe that economic downturns are caused by bad monetary policy, not the vagaries of the free market.
Global organizations like the International Monetary Fund also will come under scrutiny, he said.

“Eventually we’re going to have monetary reform. I do not believe the dollar can be the reserve standard of the world,” said Paul, who has called for returning the United States to a currency backed by gold or silver.

Many economists say that the Fed’s decisive actions during the 2008 financial crisis prevented the deep recession that followed from turning into a depression. But grassroots outrage over the bank bailouts and other Fed actions helped propel many Republican candidates to victory in Tuesday’s congressional elections — including Paul’s son, Rand Paul, who will represent Kentucky in the Senate.

“With a lot of new members coming and the problems getting worse rather better, there’s going to be a lot more people who are going to be looking for answers,” Paul said.

Regulators shut down four more banks Friday, bringing the 2010 total to 143, topping the 140 shuttered last year and the most in a year since the savings-and-loan crisis two decades ago.

The Federal Deposit Insurance Corp. took over K Bank, based in Randallstown, Maryland, with $538.3 million in assets, and Pierce Commercial Bank, based in Tacoma, Washington, with $221.1 million in assets. The FDIC also seized two California banks: Western Commercial Bank in Woodland Hills, with $98.6 million in assets, and First Vietnamese American Bank in Westminster, with assets of $48 million.

M&T Bank, based in Buffalo, N.Y., agreed to assume the deposits and $410.8 million of the assets of K Bank. First California Bank, based in Westlake Village, Calif., is acquiring the assets and deposits of Western Commercial Bank. Heritage Bank, based in Olympia, Wash., is taking the assets and deposits of Pierce Commercial Bank, while Los Angeles-based Grandpoint Bank is assuming the assets and deposits of First Vietnamese American Bank.

In addition, the FDIC and M&T Bank agreed to share losses on $289 million of K Bank’s loans and other assets. The FDIC and First California Bank are sharing losses on $83.9 million of Western Commercial Bank’s assets.

The failure of K Bank is expected to cost the deposit insurance fund $198.4 million. That of Western Commercial Bank is expected to cost $25.2 million; Pierce Commercial Bank, $21.3 million, and First Vietnamese American Bank, $9.6 million.

Like these four financial institutions, the banks that have failed this year are smaller, on average, than those that succumbed in 2009. That has meant the deposit insurance fund has suffered a milder loss, which has reached about $21 billion so far this year, compared with $36 billion in 2009.

Still, banks, especially small community institutions, are falling as soured loans have mounted and the economy has sputtered. The wave of closings points to the lingering power of the recession more than a year after its official end.

Florida, Georgia, Illinois and California have each seen bank failures in the double digits this year. Some communities in those states are still reeling from the financial meltdown that brought an avalanche of bad loans, especially for commercial real estate.

The closures have compounded the problems in areas already straining under high unemployment, foreclosed homes and vacant malls and office buildings.

The pace of failures has accelerated as banks’ losses on loans for commercial property and development have mounted. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans. That has brought delinquent loan payments and defaults by commercial developers.

The 2009 total of bank failures had been the highest annual toll since 1992, at the height of the savings and loan crisis. More than 1,000 banks went under in the savings-and-loan crisis of 1987-1992.

Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007.

The growing bank failures have sapped billions of dollars out of the FDIC’s deposit insurance fund. It fell into the red last year, and its deficit stood at $15.2 billion as of June 30.

The FDIC expects the cost of resolving failed banks to total around $52 billion from 2010 through 2014.

Depositors’ money insured up to $250,000 per account is not at risk, with the FDIC backed by the government. That insurance cap was made permanent in the financial overhaul law enacted in July.

When James Renfro had to stop making payments on his two-story fixer-upper in Parma, Ohio, a suburb of Cleveland, he triggered events that were supposed to result in the forced sale of his home.

That Nov. 15 auction has been canceled because of defects in documents submitted by his loan servicer, Ally Financial Inc.’s GMAC Mortgage unit. Two affidavits about Renfro’s home were signed by Jeffrey Stephan, a GMAC employee who said in sworn depositions in Florida and Maine that he hadn’t read thousands of affidavits he’d signed.

Renfro’s case has created a showdown between GMAC and Ohio’s Attorney General Richard Cordray. Cordray has asked Cuyahoga County Court of Common Pleas Judge Nancy Russo not to let GMAC simply submit new documents to cure defects without consequences. He’s taken the same stand against Wells Fargo & Co., which has said it found defects in 55,000 foreclosures.

“This is just the first,” said Cordray, who has filed an amicus or friend-of-the-court brief in the Renfro case. The judge will consider Cordray’s views today in Cleveland. Cordray will ask Russo to punish GMAC, the fourth-largest U.S. mortgage lender, for its conduct, he said in an interview.

The precedent set by the case might hasten a settlement between home lenders and the attorneys general of the 50 U.S. states, who are investigating allegations of fraud in foreclosure filings. Those being probed include San-Francisco- based Wells Fargo, which has said it will re-file foreclosure affidavits involving statements that “did not strictly adhere to the required procedures.”

Goldman Sachs Group Inc. defended Federal Reserve Chairman Ben S. Bernanke’s decision to pump money into the U.S. economy after officials in Germany, China and Brazil criticized the plan.

The move will spur gross domestic product growth and reduce the risk of deflation, Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. Because the Fed’s target for overnight loans between banks is near zero, the central bank is doing “the next best thing,” according to Goldman, one of the 18 primary dealers that are authorized to trade directly with the central bank.

“The widespread hostility to the Fed’s actions is misplaced,” Hatzius wrote. “Downside risks to the economic outlook have declined significantly. U.S. inflation is unlikely to become a problem for years.” [From Hatzius’ lips to God’s ears. All he is doing is God’s work. We wonder how God will accept his lies to justify more profit and power. Bob]

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