Why Larry gets it wrong. World heads to financial meltdown.

Financial reporting in the US has gone in the same direction as the reporting of other news: part facts, part distorted facts and part fantasy. Let's dissect the issues one by one.

1. The employment picture.
The "conventional wisdom" (i.e. what is reported by the Media) is that the economy is getting better as can be seen in the employment numbers. For the sixth time since 2010, the Media see green shoots: signs of a robust and sustainable recovery. This will be followed by activating an exit strategy by the FED and things will return to normal. What is this based on? Why, none other than the ajusted numbers of the Labor Department. Initial jobless claims (on the adjusted basis) had dropped to 335,000 - the lowest since 2008. Unadjusted numbers tell a different story: the actual number was 437,000. The average work week decreased and the % of companies reporting an employment decrease (16%) exceeded the companies reporting an increase (11%). Thus, the siting of green shoots is once again a fantasy.

2. Is there an exit strategy for the FED?
The short answer is NO. The FED can not allow interest rates to return to what the market would dictate. The National Debt is now 16.4T and growing. If this were financed by 30Year Treasuries at 3% the payments on it are 480B, at 4% it is 640B and at 5% it is 800B. The Liberals claim that  the debt does not matter because we owe it to ourselves. But, that's not how it works. The Treasury prints the Treasury bills and sells it to private interests. That includes private individuals and banks. The FED then digitizes the Dollars to buy some of this and pays interest on it (by digitizing more dollars). Whether, the FED pays the interest to the banks or the Treasury Dept, the new money is added to the money supply. The reason we do not see inflation is because the new money is tied up in banks reserves or Treasuries. The FED owes about 1.7T in Treasuries, so the majority of Treasuries is owned by someone else. Larry believes that at some point people will dump Treasuries and go into gold.

3. The Chinese put for gold.
The Chinese are smart buyers of gold. Every time gold drops, they buy more and insist on delivery. Official figures put Chinese acquisition at 1,000 tons for 2012. Since, US gold holdings are reported as about 8,000 tons, at some point China's gold reserves will top ours. Where is all that gold coming from? Good question.

4. The looming shorts squeeze in gold and silver.
It is esimated that the amount of gold contracts exceeds the available gold by a factor as large as 100, maybe 150. People who own gold bars and coins own gold.  The rest own papers promising delivery. Supply of silver is getting short. A shorts squeeze is building. The longer the FED gets us into this Ponzi scheme, the greater the danger when the scheme unwounds.

5. Daren Jonescu, writing in American Thinker, explains the Liberal/Progressive march into the abyss. "Hillary Clinton's angry blurting out of the truth is applicable to much more than just the Benghazi fiasco. With that revealing little qualification -- "at this point" -- she actually gave away the entire progressive game that has been played on Western civilization for more than a hundred years, and has now all but shut the door on the five hundred year adventure the West has dubbed "modernity."

This is the big secret at the core of the progressives' conception of "progress": You cannot justify the unjustifiable in advance, or persuade people of the rationally unpersuasive. Rather, you must simply push "forward" into ever-deepening waters, repeatedly building reserves of social pressure and then releasing them in little thrusts of propelling energy to carry civilization ever nearer the vortex -- all the while promising to save men from the frightening depths, if only they will hold on tight, and follow you, the progressive, just a little farther forward, just a little farther forward.

The key to the progressive "ratchet," as it is often, correctly, called, is that no step forward may ever be retraced. Each stage of degradation is to be rationalized after the fact, precisely by the means exemplified in Hillary Clinton's stark question: "What difference -- at this point -- does it make?"

As the Treasury keeps printing and the FED keeps digitizing, we are pushed nearer the abyss every day. Th failure of Democratic Socialism is no longer just a theoretical possibility far on the horizon. At this point, we can hear the roar of the waters as the whirlpool of chaos sucks in the nations of the world. That's the difference it makes.

Some details of why FED prescriptions are't working.

Keynesian Policies Are a Flop

Dear Laissez Faire Today Reader,

Douglas French

World unemployment is on the verge of breaking new records. This trend will continue until 2017. That's the news from the International Labour Organization (ILO) in their annual employment report.

Currently, 2009 is the record year for world joblessness, at 198 million. In its 2012 Global Employment Trends report (source), the ILO believes unemployment numbers will rise by over 5 million this year to reach 202 million, topping 2009's record.

The report goes on to predict that unemployment will rise further in 2014, to reach 205 million. "Unemployment remains as dire as it was during the crisis in 2009," Ekkehard Ernst, chief of the ILO's employment trends unit, told CNBC.

 

But how could this be? More Keynesian monetary power has been thrown at the global meltdown than ever in history. And why? To bring down unemployment. That's the problem that the Keynesian prescription is supposed to fix.

The U.S. central bank has increased its balance sheet from less than $900 billion pre-crash to a new record of $2.946 trillion on Jan. 16. The growth is expected to continue to $4 trillion with its latest plan to purchase $85 billion in Treasury and mortgage debt each and every month until the headline unemployment rate in the U.S. falls to 6.5%.

The Japanese government insists it's a major change that the Bank of Japan agreed recently to launch an "open-ended" commitment to ending deflation through asset purchases and adopted, for the first time, a firm 2% inflation target in a document jointly issued with political leaders. Somehow, everyone forgets the Japanese central bank has been stimulating that economy for more than two decades to no avail.

ECB chairman Mario Draghi has become the leader of the European Union. He wasn't elected by the people, but was elevated as such when he vowed to do "whatever it takes" to preserve the euro. He's now the face of the ECU. The Daily Bell writes,

"Therein lies the evidence of Draghi's divinity. He has vowed, like Beowulf pursuing Grendel, to slay the beast of European dissonance. His weapon is currency debasement, and his lair is the magnificence of the ECB headquarters.

He is, according to Reuters, a hero for the ages, at once modest and savvy, confident and yet inclusive. He is a leader of men and a wonderful wielder of the public purse."

Draghi was the Financial Times person of the year last year, the same honor bestowed on Ben Bernanke by Time magazine in 2009. In fact, Time called Draghi the "savior of Europe" last year, while Bernanke's picture graced the cover of The Atlantic above bold letters "THE HERO."

Yes, Keynesians believe more money and lower rates equal less unemployment. Central bankers have been elevated to godlike status, but the BOJ's, Bernanke's, and Draghi's not-so-secret sauce clearly hasn't worked.

Sure, many of the newly unemployed live outside the developed world, but when Ben and Mario start printing, the effects are felt all over the world.

"The main transmission mechanism of global spillovers has been through international trade, but regions such as Latin America and the Caribbean have also suffered from increased volatility of international capital flows," the CNBC report said.

The ILO also added, "The indecision of policymakers in several countries has led to uncertainty about future conditions and reinforced corporate tendencies to increase cash holdings or pay dividends, rather than expand capacity and hire new workers."

Indecisive? Hardly. Central bankers have one tool -- money printing. They do it either fast or slow. They already collectively have the pedal to the metal and are on the verge of flipping the jet propulsion switch.

However, Christina Romer, former chairwoman of President Obama's Council of Economic Advisers, writes in the Gray Lady that the Fed has moved slowly, and wonders, "Why are some policymakers threatening to undo the recent actions?" She's referring to comments by presidents at two Midwestern Federal Reserve banks.

"It is a very aggressive policy, and it is making me a little bit nervous that we are overcommitting to the easy policy," St. Louis Fed President James Bullard told reporters after a speech to the Wisconsin Bankers Association. "We are taking risk."

Kansas City Federal Reserve President Esther George, sounding almost Austrian, said, "Monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it."

Romer and her husband, professor David Romer, believe pessimistic attitudes have hampered the central bank's effectiveness. The Romers write in a paper titled "The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn't Matter" that pessimists at the Fed during the early 1930s led to "inaction in the face of the largest downturn in American history."

That sounds good, except the Fed did all it could to expand the money supply. In his book America's Great Depression, Murray Rothbard chronicles the Fed's continued actions from after the stock market crash of 1929 to 1932. Jeffrey Tucker quoted Rothbard at length in a recent article.

Following the stock market crash, Rothbard writes that the government's easy money program dropped rediscount rates 42%. Despite this move, the money supply remained constant while production and employment fell.

In 1931, the Fed did its best to inflate by raising controlled reserves. Citizens foiled this plan by converting their bank accounts to currency. Rothbard writes that "the will of the public caused bank reserves to decline by $400 million in the latter half of 1931, and the money supply, as a consequence, fell by over $4 billion in the same period."

The next year, while the Fed stimulated, banks did not lend the money out, but instead piled up excess reserves. Just as banks have done in the current crisis. "Naturally," Rothbard continues, "the banks, deeply worried by the bank failures that had been and were still taking place, were reluctant to expand their deposits further, and failed to do so."

Rothbard, evidently, isn't on the Romers' reading list. Today, the Fed is peddling as fast as it can, but commercial bankers and their regulators have their feet on the brakes. Maybe borrowers want to borrow when rates are low, but lenders sure don't want to lend, especially while they are still licking their wounds from the real estate crash.

It was the same in the early 1930s. As Rothbard summarized:

"In a time of depression and financial crisis, banks will be reluctant to lend or invest, (a) to avoid endangering the confidence of their customers, and (b) to avoid the risk of lending to or investing in ventures that might default. The artificial cheap money policy in 1932 greatly lowered interest rates all around, and, therefore, further discouraged the banks from making loans or investments."

Businesses are storing cash, waiting for the smoke to clear. Hiring people is expensive, and the Fed has trampled the primary signaling mechanism to the market. Austrian economists would say that these low rates only serve to deceive entrepreneurs into believing that people have saved more than they really have and that money should be invested in higher-order goods, such as factories and equipment.

In that case, these low rates only prop up the prices of real estate and other capital assets that likely need more downward adjustment from the boom. A normalization of rates will hasten that process and get people back to work.

But don't hold your breath. After all, Romer isn't reading Rothbard, and central bankers aren't perusing this space. They'll keep printing money that goes only to Wall Street speculation, the press will call them heroes, and you'll still be stuck trying to find your way out of their mess.

How do you navigate the topsy-turvy world created by these superhuman central banker heroes? Addison Wiggin has seen this train coming for years. Here are 47 ways you can protect yourself from a shrinking dollar.

More unemployment will mean more money printing, which will mean more unemployment, which will mean... surely you have it by now.

Sincerely,

Doug French

P.S. Readers of F.A. Hayek's great book A Tiger by the Tail could easily have predicted this quagmire. Decades ago, Hayek showed how central banking policy designed to correct unemployment only ends in creating more. He shows precisely how this happens too. Hayek's analysis is like a decoder ring for the world macroeconomic environment today.

If you are a Club member, it is free. If you are not, join today and get this book, plus 30 other essential reads, curated just for you.

Western countries face poor economy.

The economic tinkerers of the developed world have met in Davos. Much wringing of hands and flapping of jaws. No one has the courage to name the roots of the problem: 1. too much debt to finance what the politicians have promised and 2. two many things that politicians have promised. One person (Guria) is quoted who admits: "This incipient, hesitant recovery needs to be consolidated. We ran out of room on the monetary side, we've run out of room on the fiscal policy side, so what you need is to go structural. " "You need to go for education, for innovation, for more competition, for tax structures that are conducive to investments and job creation, you need to go for flexibility in the labor markets, for flexibility in the product markets," he said. "These are the things that are going to keep you going long term." In other words - get rid of Social Democracy and have a freer market. Unfortunately, England is now ready to slip into a 'threepeat' a third recession. Back in the US, the propaganda machine of the Obama communists is getting in gear to: 1. tell us how well off we are and 2. whose fault it is that we aren't. We are starting to see articles by the likes of Dr Stieglitz that employment is going to be hard hit by the use of intelligent machines. In other words, employment is poor, because of future use of intelligent machines. Nice try.

Greeks shiver in smog, Spain hits record joblessness.

Socialists never learn that actions have consequences. They just assume that you can adjust taxes and subsidies up and down and that this will little effect people's behavior. Case in point is Greece's change in subsidies for heating oil and taxes on fuels. As wages plunged and benefits were cut, heating oil prices went up till it is now 50% cheaper to use wood than heating oil. So, all of a sudden Greece is inundated with problems that come from using wood in cities as heating fuel. Respiratory problems, smog and illegal logging have been added to Greece's economic problems.

On the other end of the Mediterranean, Spain's unemployment hit a record 26% and 60% for the young. It is fitting, because the young were the biggest supporters of putting Spain on track for failure that comes from Socialism.

Is 2013 the year?

• Larry Edelson's thesis is that a drop in the value of 30 year Treasuries will set off a scramble into gold, silver, real estate and out of bonds. So, here is the graph of 30 year Treasuries. The bond is indeed heading down, yet the yield has been increasing. This validates Larry, up to a point. He expect Treasuries to drop to 135.

 

 

European chill and the currency wars.

Kids in Beijing are making snow pandas and Russia is having record snows. French, British and German airports are canceling some flights because of snow. The cold of the Midwest is heading to the East. Australia had a heat wave and fires and Mongolians are losing their animals in the bitter cold. Yet the environmentalist whackoes of Lower Saxony(the Greens) and the Socialists of Germany had managed to eek out a one vote victory against Merkel's coalition. It's January across the globe.

While temperatures had dropped, currency wars are heating up. Foremost currency manipulator is Japan and the Yen hit a new low. South Koreans are complaining and getting ready to react or retaliate. The Euro had appreciated 11% against the Dollar and Sweden and Norway are lowering their interest rates. The whole Western world is ruining their currencies in the mistaken belief that this will compensate for government overspending and over regulation.

In the US, the little Satan was inaugurated to the delight of our Socialists. And the Republicans caved already and raised the debt ceiling. Time to run out my favorite Russian joke. Russian Pessimist: Things are so bad they can't get any worse. Russian Optimist: Oh, yes they can.

Gold and silver: Is the jig up?

1. I have given you the outline of how the price of gold and silver is suppressed;

2. I have also said that this scheme will unravel - one of these days.

3. The unraveling has started.

Now some comments.
a) People have wised up to the gold price suppression scheme. The scheme needs willing suckers who buy paper contracts on margin. Smart investors are buying the actual metal, or, buying the paper contract without margin and insist on taking delivery.

b) Actual metal supply has gotten short, especially the supply of silver. The US Mint and the Canadian Mint had to stop minting silver coins because they ran out of silver. (Would you have thought that paper silver can not be used in minting actual coins?) Even 90% silver coins are in short supply.

c) Other precious metals (especially platinum) have also started to increase in price.

d) As you can see, Larry's prediction about a crash in gold and silver prices are not coming true. Why? - you might wonder. It is due to the difference between Chartists ans Fundamentalists. Chartists believe that the chart tells all, so it does not matter why prices change, what matters is that prices change on volume changes. Fundamentalists believe that it is the fundamentals of an issue that will ultimately set the price. The precious metal market has been distorted and the distortion is now being overwhelmed.