Will There Be Another 2008 Style Crash?

I think there is going to be a point where QE will become ineffective. There will be a point when countries with a more sane approach, like China, stop buying US bonds and instead start selling them. That would lead to higher interest rates and have a negative impact on stocks. We have already seen the effects of the rise in interest rates on home and auto sales – the two biggest motors of the US economy since the beginning of QE3.

On top of that, I believe that the US government is insolvent. In fact, everybody knows the US is broke but people will stand by and let it happen.

An analogy for the Federal government is the city of Detroit. Five years ago, they already knew that they were broke. But it is not until they finally had to write a check that they could not write that they declared bankruptcy.

Even though the bankruptcy was inevitable, it shocked people. The City of Detroit recently announced that pensioners would get 16 cents on the dollar. Had Detroit faced its budget problems five years earlier, pensioners may have gotten 60 cents on the dollar. Allowing the situation to get worse led to great disappointment and damage.

The Federal government looks about as bad as Detroit five years ago. In financial year 2013 it brought in $2.8 trillion in revenues and spent 3.5 trillion, as reported by the Treasury department. Their current liabilities are something like 87 trillion with a national debt of 17 trillion. The situation is hopeless.

It is propped up by the Fed. When the Fed does an open-market operation, the stocks go up. When they are not doing any such operations, overall, they go down.

- Source, Eric Sprott:

http://sprottgroup.com/thoughts/

The Story Of Inequality In The US: Past, Present And Future

In this far-reaching documentary, we are first treated to a history lesson from the early 80s to the present day - a story of lust, debt, and largesse; from Reagan deficits to cell phones to day trading to real estate... and then 2008 is explained (as reality started to peek through). The clip projects the next few years - from failed bond auctions to QE9 and social unrest - "but it doesn't have to be this way," the narrator notes. Breaking Inequality is a documentary film about the corruption between Washington and Wall Street that has resulted in the largest inequality gap in the history of America.
It is a film that exposes the truth behind the single event that occurred back in the early 70's that set us off on this perilous journey that we are currently on. The inequality gap is presently the worst that it has ever been and there is no solution in place to repair this crippling problem.

Should Bernanke Park the Helicopter?

by Frank Shostak

According to Ben Bernanke, pulling back on aggressive policy measures too soon would pose a real risk of damaging a still-fragile recovery.
The Fed chief is of the view that, for the purposes of financial stability, a continuation of the central bank’s aggressive stimulus, conducted through purchases of Treasury and mortgage securities, remains the optimal approach.
In response to the financial crisis and the deep recession of 2007–09, the Fed not only lowered official rates effectively to zero, but also bought more than $2.5 trillion in assets in an effort to keep long-term rates low.

The Petro Business Cycle

By James J Puplava CFP

 

 

 

 

 

Oil is the lifeblood of modern society, powering over 90% of our transportation fleet on land, sea, and air. Oil is also responsible for 95% of the production of all goods we buy and ultimately drives the natural rhythms of recession and recovery. We define this as the "Petro Business Cycle".

The post-crash world we have inhabited since the credit crisis of 2008 has been defined as "The New Normal"—a phrase used to describe an economic and market environment much different than the three decades that preceded it. In contrast to the past, the "New Normal" will mean a lower living standard for most Americans. It will be a world of lower economic growth, higher unemployment, stagnant corporate profits, and the heavy hand of government intervention in all aspects in the economy. For investors it will be an environment marked by volatility, zero interest rates, and disappointing equity returns.
The age of leverage is coming to an end as consumers, businesses, and governments are forced to rein in their balance sheets. For consumers it will mean less discretionary spending as higher taxes and inflation erode the purchasing power of wages. Businesses will have fewer profit opportunities and find it more difficult to replicate the growth rates of the booming '80s and '90s. Governments will struggle with the illusion that their fiscal and monetary stimulus will produce long lasting effects on the economy. Eventually profligate government spending will give way to an age of austerity now beginning to spread across Europe. It will either be done voluntarily or involuntarily by the heavy hand of the market.

Did These Hidden Forces 'Elect' the President?

by Bill Bonner

 
Today, on the Ides of February, we hold our hat in our hand... we bow our head... and let our mouth fall open in amazement. Our Lenten program of fasting, prayer and meditation is producing results. We are lightheaded from near-starvation and alcohol deprivation. But our thoughts are clear. Or else, we are hallucinating.
In the last two days, we've taken a look at what promises to be the biggest bust-up of all time.
It began in stealth when a small group of big bankers boarded an unlisted train in the middle of the night. They all knew each other. All were from powerful New York banking families. But they didn't even use their own names when talking to one another... so afraid were they that word of their meeting would leak out.
Then the strange little group traveled in complete secrecy to a small island compound off the coast of Georgia. There they could talk freely. But the conversation wasn't about hunting or sports... or politics... or religion.

The End of Honest Money

by Bill Bonner

You shall not crucify mankind upon a cross of gold.

~ William Jennings Bryan

The season of fasting is upon us. No more high living. It's time to cinch up our belts... to put on a gaunt face and a smug look. Alone among friends and associates, we will keep Lent.
So neglected is Lent that even Google has forgotten about it. When we searched for it, it proposed "lentil soup."
Lent is meant to rehearse the 40 days and nights that Jesus spent fasting in the desert before going public. We remember the lean days with prayer, meditation and self-denial. No alcohol will cross our lips from Ash Wednesday till Easter Sunday. (Except on Sundays. And saints' days. And national holidays. And days that begin the letter "T" or have a date that is a prime number.)
Yes, dear reader, we will be true to the church calendar, with a few emendations of our own.

The Fed in 2012

by David Howden

The Federal Reserve Board recently announced the preliminary and unaudited results of its 2012 operations. For those of us cautioning against the Fed’s increasingly dramatic operations, the results come as no big surprise. For those who think the Fed is fighting to save the economy, the results deserve a closer look.

Currency Vs Money

The Fed Doubles The Dosage

On December 12th, the Federal Reserve announced the most aggressive program of monetary stimulus ever undertaken in peacetime. Beginning in January, the Fed will more than double the amount of fiat money it creates each month from $40 billion to $85 billion. On an annualized basis that amounts to more than $1 trillion a year. This week we will consider 1) What they did; 2) Why they did it; and, 3) What impact it will have on asset prices over the short-term.
What They Did:
In a nutshell, the Fed announced it will more than double the amount of fiat money it creates each month and that it will use that money to buy government bonds and mortgage-backed securities until the unemployment rate drops substantially or until the inflation rate accelerates. The press release stated:
 “…the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities … initially at a pace of $45 billion per month.”

The Historic Inversion In Shadow Banking Is Now Complete

Back in June, we wrote an article titled "On The Verge Of A Historic Inversion In Shadow Banking" in which we showed that for the first time since December 1995, the total "shadow liabilities" in the United States - the deposit-free funding instruments that serve as credit to those unregulated institutions that are financial banks in all but name (i.e., they perform maturity, credit and liquidity transformations) - were on the verge of being once more eclipsed by traditional bank funding liabilities. As of Thursday, this inversion is now a fact, with Shadow Bank liabilities representing less in notional than traditional liabilities.
In other words, in Q3 total shadow liabilities, using the Zoltan Poszar definition, and excluding hedge fund repo-funded, collateral-chain explicit leverage, declined to $14.8 trillion, a drop of $104 billion in the quarter. When one considers that this is a decline of $6.2 trillion since the all time peak of $21 trillion in Q1 2008, it becomes immediately obvious what the true source of deleveraging in the modern financial system is, and why the Fed continues to have no choice but to offset the shadow deleveraging by injecting new Flow via traditional pathways, i.e. engaging in virtually endless QE.
What is more important, the ongoing deleveraging in shadow banking, now in its 18th consecutive quarter, dwarfs any deleveraging that may have happened in the financial non-corporate sector, or even in the household sector (credit cards, net of the surge in student and car loans of course) and is the biggest flow drain in the fungible credit market system in which the only real source of new credit continues to be either the Fed (via QE following repo transformations courtesy of the custodial banks), or the Treasury of course,via direct government-guaranteed loans.

No Way Out

by Peter Schiff - Europac   By upping the ante once again in its gamble to revive the lethargic economy through monetary action, the Federal Reserve's Open Market Committee is now compelling the rest of us to buy into a game that we may not be able to afford. At his press conference this week, Fed Chairman Bernanke explained how the easiest policy stance in Fed history has just gotten that much easier. First it gave us zero interest rates, then QEs I and II, Operation Twist, and finally "unlimited" QE3. Now that those moves have failed to deliver economic health, the Fed has doubled the size of its open-ended money printing and has announced a program of data flexibility that virtually insures that they will never bump into limitations, until it's too late. Although their new policies will create numerous long-term challenges for the economy, the biggest near-term challenge for the Fed will be how to keep the momentum going by upping the ante even higher their next meeting.

Paul Krugman's Dangerous Misconceptions

by zerohedge.com

How to Deal with Economic History

 

In a recent article at the NYT entitled 'Incredible Credibility', Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government's debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs.

Among the evidence he ignores we find e.g. the 'stagflation' of the 1970's, or the inability of Japan to revive its economy in spite of having embarked on the biggest government deficit spending spree ever in a modern industrialized economy. Evidence he likes to frequently disparage is the evident success of austerity policies in the Baltic nations (evident to all but Krugman, one might say).

As readers of this blog know, we are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ. This is why we listed the evidence he ignores or disparages: the fact that there exists both plenty of evidence that contradicts his views and a much smaller body of evidence that seems to support them at an unreflected first glance, already shows that the positivist approach to economic theory must be flawed.

An economist must in fact approach things exactly the other way around, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (examples for this would be the idea that one can consume oneself to economic wealth instead of saving and investing toward that goal, or that employment creates growth; it is exactly the other way around in both cases).

What the Road to Hell is Paved With....

by Bill Bonner

Improving the world costs money. When you have it, your efforts either bear fruit. Or they don’t. But when you don’t have it, when you have to change the world on credit, then what?

John Maynard Keynes revolutionized the economics profession in the early 20th century. It was he more than anyone who changed it from a being a refuge for observers and willowy philosophers into a hard-charging phalanx for men of action. But Keynes’ big insight, like all the useful insights of economics, was based on a story with a moral.

In the Book of Genesis, Pharaoh had a dream. In it, he was standing by the river. Out came 7 fat cattle. Then, 7 lean cattle came up out of the river and ate the fat cattle. A similar dream involved ears of corn, with the good ones devoured by the thin ears.

Pharaoh was troubled. His dream interpreters were stumped. So, they sent for the Hebrew man who was said to be good at this sort of thing — Joseph. Pharaoh described what had happened in his dreams. Without missing a beat, Joseph told him what they meant. The 7 fat cattle and 7 fat ears of corn represented years of plenty with bountiful harvests. The 7 lean cattle and thin ears of corn represented years of famine. Joseph wasn’t asked his opinion, but he gave his advice anyway: Pharaoh should put into place an activist, counter-cyclical economic policy. He should tax 20% of the output during the fat years and then he would be ready with some grain to sell when the famine came. Genesis reports what happened next:

Central bank policies and the Ireland and Iceland 2008-12 financial crises

By Dr Frank Shostak.

There were a lot of commentaries regarding the Ireland and Iceland 2008-12 financial crises. Most of the commentaries were confined to the description of the events without addressing the essential causes of the crises. We suggest that providing a detailed description of events cannot be a substitute for economic analysis, which should be based on the essential causes behind a crisis. The essential cause is the primary driving force that gives rise to various events such as reckless bank lending (blamed by most commentators as the key cause behind the crisis) and a so called overheated economy.

Now in terms of real GDP both Ireland and Iceland displayed strong performance prior to the onset of the crisis in 2008. During 2000 to 2007 the average growth in Ireland stood at 5.9% versus 4.6% in Iceland. So what triggered the sudden collapse of these economies?

Central bank policy the key trigger for economic boom



What set in motion the economic boom (i.e. a strong real GDP rate of growth) in both Ireland and Iceland was an aggressive lowering of interest rates by the respective central banks of Ireland and Iceland. In Ireland the policy rate was lowered from 13.75% in November 1992 to 2% by November 2005. In Iceland the policy rate was lowered from 10.8% in November 2000 to 5.2% by April 2004.

This Is A Moment In Time That’s Never Been Seen Before

by kingworldnews.com

“Greece is a serial bailout, restructuring, can-kick, and I guess this is going to continue as long as the riots don’t get worse. Maybe eventually Greece will get ejected from the euro. The question (in Europe) is, is Draghi going to get serious about the OMT or not?”

“My suspicion is he is going to. They are going to use the central bank there to make sure the euro doesn’t fracture, in the same way Greenspan and Bernanke have used the printing press to make sure that the United States financial markets don’t collapse.

I suspect Europe will muddle through as long as Draghi is willing to keep buying the government debt and keep the whole process moving.
“The (US) fiscal cliff, near as I can tell, is mostly just a boatload of tax hikes and some proposed spending cuts. But at the end of the day, there is a mood of class warfare in the country which is being fomented by the Democratic Party.
Part of the reason for the disparity of wealth in the country is because the policies of the Federal Reserve have helped eviscerate the middle class, both through losing money in bubbles and inflation, and the misallocation of capital and the ensuing destruction of jobs. So the Fed’s policies have hammered the middle class.

Carlo Ponzi, Alias Uncle Sam

by  Gary North

Carlo "Charles" Ponzi was a con man who was the Bernie Madoff of his era. For two years, 1918 to 1920, he sold an impossible dream: a scheme to earn investors 50% profit in 45 days. He paid off old investors with money generated from new investors. The scheme has been imitated ever since.

Every Ponzi scheme involves five elements:
1. A promise of statistically impossible high returns
2. An investment story that makes no sense economically
3. Greedy investors who want something for nothing
4. A willing suspension of disbelief by investors
5. Investors' angry rejection of exposures by investigators

Strangely, most Ponzi schemes involve a sixth element: the unwillingness of the con man to quit and flee when he still can. Bernie Madoff is the supreme example. But Ponzi himself established the tradition.

Jim Rogers Economic Collapse Martial Law Alex Jones

How Central Bank Policy Impacts Asset Prices Part 5: How Far Can They Go?

by Tyler Durden  source : www.zerohedge.com
With the unlimited asset purchase announcements by the Fed and ECB recently, the limits of balance sheet expansion will be put to the test. The current levels would have been seen as inconceivable a mere few years ago and now it seems business-as-usual as investors have become heuristically biased away from the remarkable growth. The problem is - central banks are missing inflation targets and credit growth is still declining - need moar easing, forget the consequences.

Via SocGen:

Balance sheet expansion resumes in advanced countries
Following the unlimited asset purchases announcements by the ECB and the Fed, the limits of balance sheet expansion will be put to the test once again.

Let the Markets Clear!

by Ron Paul - Daily Paul

French businessman and economist Jean-Baptiste Say is credited with identifying the fundamental economic principle that aggregate demand for goods in an economy will equal the aggregate supply of goods when markets are permitted to operate. Or in Say’s words, “products are paid for with products.”

English classical economist David Ricardo, among others, more fully developed this principle into what has become known as “Say’s Law.” Say’s Law, according to Ricardo, leads us to understand that market equilibrium for goods is constant. This simply means that markets, when left alone by government planners or other fraudulent actors, inexorably tend toward an “equilibrium price” which eventually balances supply and demand for any particular good. Thus markets will clearthemselves of any surpluses or shortages in the form of excess supply and demand.

How Central Bank Policy Impacts Asset Prices Part 2: Bonds

by Tyler Durden

The Fed sees the need to reduce interest rates as it takes over the US Treasury and MBS markets; but the ECB's actions are more aimed at reducing divergences between peripheral nations and the core. As SocGen notes, it remains unclear how and when the Fed would exit this situation and in Europe, bond market volatility remains notably elevated relative to the US and Japan as policy action absent a political, fiscal, and banking union remains considerably less potent.

Via SocGen:

Fed action pushes rates to record lows

The Fed bought around $2tn of securities since November 2008, pushing rates to historical lows (US treasuries becoming popular safe havens also contributed to lowering rates).



It remains unclear how and when the Fed would exit this situation. Operation Twist expires at year-end and any extension seems to be put on hold until after the presidential elections.

A potential Romney victory could bring an end to low QE rates in 2014 (when Mr Bernanke’s term expires).

As a result of the very low rate environment, the US equity risk premium is currently extremely high (6.3% in October 2012).

Hurdles in transmission of ECB monetary policy