Peter Schiff wraps up 2010

Year end wrap up (video)

Schiff says home prices are still too high & would have to decline 20% to get back to historical trendline.

Student debt threatens US economy

International Business Times notes outstanding student debt at $875 billion is a problem larger than credit card debt. The national cohort default rate on federal student loans is 7% (for borrowers entering repayment in 2008) - compared to 8.8% default for credit cards, & 9.1% for home mortgages.

The situation is made worse by the economic recession making jobs scarce for graduates. Project on Student Debt reports unemployment rate for recent graduates at  8.7% in 2009.

Lacking employment, inability to refinance, being unable to wipe out the debt in bankruptcy leaves students with a lifelong burden affecting their credit histories and thus spending capabilities - this will depress the economy.

Humpty Dumpty

Humpty Dumpty sat on a wall
Humpty Dumpty had a great fall
All the king's horses and all the king's men
Couldn't put Humpty together again



Oh well, it's Christmas ...

Risks to Economy

Overhanging risks to the economy :

1. China is overheating
2. Europe is crumbling
3. QE creating uncertainty
4. US housing double dip
5. Major austerity in state & local level
6. Currency wars
7. Military skirmish in Korea
8. Economists are too optimistic
9. Canadian housing bust
10. Canadian household leverage
11. Canadian economy is weak
12. Canadian dollar overvalued

US vs China : who goes down first ?

Andy Xie :  One could describe the global economy as a race between US and China, to see who goes down first.

The global economy may be coming up for a breath of fresh air in 2011. Fiscal and monetary policies around the world have been highly stimulated for three years. The additional monetary and fiscal stimulus measures by the U.S. could generate an upside surprise to its 2011 growth rate. Most emerging economies continue to grow rapidly. By the middle of 2011, most analysts may declare that the world has finally put the financial crisis behind it.

The reality is quite different. The global economy is kept afloat by massive monetary and fiscal stimulus around the world. The main problem in the global economy — high costs and declining competitiveness in the developed world, and inflation plus asset bubbles in the developing world continue unabated. Either inflation in the developing world or unsustainable sovereign debt in the developed world will spark the next crisis.

Deficit dagger pointing at heart of economy

CNN   "It is a racket what is going on in Washington. Here we had a deficit commission, we discussed these issues for months and all of the sudden the President and the Republicans get together and there’s another trillion dollars given away over 2 years. It’s really shocking stuff actually"
- Jeffrey Sachs, Columbia professor & special adviser to United Nations.

 “These debts are essentially a dagger pointed at the heart of the economy and sooner or later that dagger is going to strike so we now sort of justify this [tax package] in the short run because nobody thinks in the long run”
- Mort Zuckerman, real estate billionaire.

"We have basically two parties, two free lunch parties, competing in a fiscal arena that is non-functional"

- David Stockman, Ronald Reagan's director of Office of Management & Budget.

Chaos in future ?

Have we entered a period of chaos in financial & commodities markets?

Christopher Laird argues that the world has transitioned from an industrial to a post-industrial economy, causing massive population shifts & job losses.

China not the economic replacement to US

He says that China will not be the economic wonder set to take over as the world's leading nation. China is not the US and does not follow the free market entreprise model of the US. China is a hybrid system of socialism/communism combined with capitalism. He thinks China's experiment with capitalism is doomed to fail, & might lead to wars over resources.

He contends that the Chinese economy is a huge bubble & growing out of control. The nature of the Chinese economy with endemic government corruption leads to wasteful allocation of resources, risking vast amounts of money at moral hazard. Examples are overbuilding of infrastructure - Ghost Cities of unoccupied buildings.

China not economic powerhouse

Christopher Laird (7 Nov 2008) : The China situation  

We hear that China has this great economic growth, still on the order of 8% a year, a number any nation would kill for. But, China needs to ADD 15 million jobs a year merely to keep up with population growth, having 1.3 billion people!

So, this 8% growth in China is mandatory, not merely a luxury since China still has 800 million peasants in the rural areas all clamoring to move to the cities for better pay. Even at the lowest levels, Chinese city pay is three times the basic rural income which is starvation wages.

And then consider that there are 130 million undocumented Chinese who flocked to the cities for work (not residents of the city) who have nowhere to go now that their export dependent economy is slowing rapidly. The recipe here is for a revolution in China if they cannot keep 800 plus million people working… and this is just beginning to happen. And this issue is widely known to scare the hell out of the Chinese government.

But, to avoid a revolution, they MUST have 8% economic growth indefinitely? That is not going to happen. The party is about over in China.

The point here of emphasizing China's demographics is that, without big exports to the West, they cannot sustain stability economically or politically. They are the poster child to what happens when the export economies slow drastically when the US export markets slow significantly.

Hyperinflation is Very Near

James Turk - Writing on the Wall, Hyperinflation is Very Near
KingWorldNews interviews James Turk in Spain
About recent gains in gold & silver :
“Rising interest rates along with the surge in commodity prices that we have been seeing in the back half of this year is writing on the wall that hyperinflation is very near. If anyone needs further proof just look at what QE2 is already doing. The Fed is turning government debt that the market doesn’t want into currency which is the cause of all hyperinflation.”

“2010 was another good year for the precious metals. Although we still have two weeks to go, gold will be up for the tenth year in a row against the dollar. The significant change this year is that a lot more people are paying attention to gold’s rise. Because we are in stage II of a bull market now, as I said, you are seeing many more people take notice of both gold and silver’s rise. The continuing talk about gold being in a bubble is complete nonsense, the stage III speculative phase is still far into the future.

The theme for the balance of this year and into next will be determined accumulation of physical gold and silver. The reason for that is that the drivers for gold and silver remain the same, monetary problems around the world. Individuals and institutions need a safe haven because of all of the monetary turmoil as well as ongoing crises. With physical gold and silver they know their money is safe.

The interesting point is that I think all of these crises are going to come to a head in 2011. So far they have been developing serially, but everything is shaping up for a big bang. The reason is that debt holders are finally waking up to the risks and demanding higher interest rates, which is something over-leveraged debtors cannot afford to pay.

So the way I see it, we need gold and silver now more than ever, which is the same message the mining shares are telling us. The strong accumulation that we are seeing in the mining shares bodes well for next year in terms of performance both for the metals, but in particular the mining shares.”

Turk is correct, we are seeing tremendous accumulation in mining shares. It’s not that the commercials can’t wiggle some of these mining shares lower in price from time to time. It’s just that the commercials & other professionals will be buying the shares from weak-handed sellers in each of those dips. This is just the reality of massive professional accumulation as we move through phase II. That’s just the way bull markets work.
James Turk on Goldseek Radio 17 Dec 2010
GoldMoney.com

States financial woes threaten whole economy

(CBS) Besides the federal deficit, another crisis looms that media has not yet focused on.

States are collectively in deficit to half-trillion dollars since recession wrecked economies & reduced their income. Their pension funds also have a shortfall of a trillion dollars.

The debt crisis is making Wall St nervous, & some believe it could derail the recovery. A million public employees could lose their jobs. Another big bailout might be needed.
 
Meredith Whitney made her reputation warning that big banks were in trouble before the 2008 collapse. Now she's warning about state & local governments : "It has tentacles as wide as anything I've seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the US economy."  
"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars' worth of defaults."

Her 600-page report The Tragedy of the Commons (economic parable of selfish farmers who graze sheep on common pasture till barren) released 28 Sept 2010, rates states on 4 criteria: Economy, Fiscal health, Housing, Tax.
The worst states are: 1. California, 2. New Jersey, Illinois & Ohio (tie), 3. Michigan, 4. Georgia, 5. New York, 6. Florida; & best states: 1. Texas, 2. Virginia, 3. Washington, 4. North Carolina.

Guardian 20 Dec 2010 Elena Moya :
Overdrawn American cities could face financial collapse in 2011, defaulting on hundreds of billions of dollars of borrowings and derailing the US economic recovery. Nor are European cities safe – Florence, Barcelona, Madrid, Venice: all are in trouble

Euro at risk of unraveling or modification

Expect major changes to Euro
Desmond Lachman of Washington's American Enterprise Institute, a former investment banker & IMF official, foresees a european banking crisis next year & thinks the Euro is in the process of unraveling. America should “get ready for the European economic tsunami” that could derail the US recovery.

German & French banks hold the bulk of the $2 trillion of sovereign debt owed by Portugal, Ireland, Greece & Spain.

Eurozone's structural flaw is : unlike the US, it has a single monetary policy but no common fiscal policy. This means disparate spending and tax policies among each member government.

Edwin Truman of Peterson Institute for International Economics says eurozone faces “a collective run on the financial institutions & governments”.

Significantly, the German finance minister & the head of the ECB have broached the issue of member states ceding some fiscal authority to a eurozone entity.

Europe collapse could hurt US Economy

As the European Union braces for the possibility of Greece defaulting on its debt, American Enterprise Institute resident fellow Desmond Lachman writes in his International Economic Outlook (Sep 2010), that the crisis involving Greece, Spain, & other heavily indebted European countries will only intensify in the months ahead.

Lachman asserts that intractable solvency & competitiveness issues confront these European nations as they face a choice between leaving the eurozone or implementing painful austerity measures that will only deepen their economic plight. Either course threatens Europe's already-troubled banking system & the global economic recovery.

Among the key points :

1. A substantial write-down of Greece's debt would have a major impact on Western Europe's already-enfeebled banking system. While the Greek economy accounts for only 2% of Europe's GDP, Greece's sovereign debt amounts to around US$420 billion, and a large portion of this debt sits on the books of French & German banks.
2. The combined sovereign debt of Greece, Spain, Portugal, & Ireland is around US$2 trillion, and a major part of that debt also sits on the European banks' balance sheets. France has lent the equivalent of 37% of its GDP to those countries. As much as 37% of the European Central Bank's loan book is made up of loans to Greece, Spain, Portugal & Ireland.
3. As the recession deepens and unemployment rises with no end in sight in Europe's periphery, Lachman asks whether these countries might be better served by restructuring their debts and exiting the euro.
4. From a US perspective, a deepening in the eurozone sovereign-debt crisis could threaten the feeble US economic recovery now underway. In part, it would do so by weakening the Euro against the Dollar and by clouding European growth, both of which would diminish US export prospects.
5. The more threatening channel through which it could impact the US economy would be by increasing overall financial-market risk aversion and by precipitating another global credit-market crunch akin to what occurred in the aftermath of the Lehman bankruptcy in September 2008. This is possible because global financial institutions are now closely integrated, and US banks have around US$1.5 trillion in loans outstanding to Europe.

Bonds for wild 2011

Expect volatility in government bonds

Asymmetric recovery in US

The Fed's responses to the financial crisis has contrasting effects on various segments of society. The rich have seen their stock portfolios stage a spectacular recovery, but the poor experience no apparent benefit amid job losses whilst contending with inflation.
Response to banking crisis exarcebated class chasm

Confidence in US Bonds wavering ?

Given recent debacles, investor confidence in US government debt might be shaky, and if eventually the market refuses to buy US government debt, financial catastrophe may ensue.

When the world loses faith in US Treasuries, interest rates on US Treasuries will have to keep going up until enough investors are found to buy them. Higher interest rates means higher interest on the national debt and thus greater federal budget deficits. That will erode confidence in US Treasuries even further.

A vicious cycle of eroding confidence and higher interest rates could lead to hyperinflation as the US government and the Fed flood the economy with more and more paper money to try keep the system solvent.

10 signs that Confidence in US Treasuries is dying & Financial Armageddon may be approaching
Peter Schiff: Commodities, Dollar, Interest Rates, Chinese Inflation, US Deficits

US & Europe headed for years of decline

Jim Rogers inverview on Reuters 2011 Investment Summit :
We're going to have more crises down the road.
The politicians keep delaying the problems rather than dealing with them.
Things may look better for a while, but I'm very worried about the longer term.
Both the US & Europe are headed for years of decline because of their loose monetary policies & rescue tactics.
Investment in productive capacity is what leads to long term growth.
The Pound is worse than the Dollar. 

UK is bankrupt

Jim Rogers : UK is bankrupt - merely making the situation worse slower.

Balance of Trade has been in deficit for over 25 years.
Revenues from North Sea Oil & City of London are drying up.
Britain has huge international & domestic debt.

Yet government is not cutting spending but adding to the debt : fighting wars & a generous welfare state.

Stocks good for now - huge decline eventually

MarketWatch :  Aden Forecast expects eventual hyperinflationary collapse.

However they note the Federal Reserve's ability to stave off catastrophe, in the short term.

“It's important to remember that the markets lead. They look ahead. They're not reacting to what's currently happening, but to what lies ahead and for now they're telling us that better times are coming.”

“Also important, the markets usually take a more near-term view, looking out to the next few quarters or so. And they often don't focus on the underlying fundamentals, especially when it comes to the very long mega trends, which overpower the near-term trends. But megatrends take years or decades to evolve. In the meantime, other factors will come to center stage, as we're currently seeing [with Fed stimulation]”.

Right now Aden thinks near-term trends are positive for stocks :
“This positive action will be further reinforced if the Dow Jones Industrials also reaches a new high by rising and staying above 11,440”.

However Aden see signs of the megatrend impacting bonds :
“Bond investors are seeing inflation ahead and there's a good chance the bond bubble is coming to an end”.

Aden thinks the megatrend has definitely arrived for Gold :
“The gold price is incredibly strong above $1,340 and as long as it stays above this level, we could see higher prices. A decline to the $1,300 level would take the froth out of the rise, but even then it would only be an 8% decline. The point is, a 10-15% correction would actually be healthy, but times are not normal and we must watch it closely.”

Their forecast for stocks in the longer term are bleak :
“We expect gold to continue higher in the years ahead as its mega rise evolves, stocks probably won't. At some point, we suspect the rise will stall and it's quite possible that the sideways action since 2000 could end up being a big top that precedes a huge stock market decline.

Time will tell. But this is a scenario that cannot be ruled out considering the big picture fundamentals, like the debt load and its repercussions in the years ahead.”

Gold vs Silver : which to buy

Kurt Brouwer's Fundmastery blog MarketWatch Dec 12, 2010

When comparing gold to silver in terms of value, the Gold-Silver Ratio is a good tool - comparing the price of an ounce of gold to silver. Over the last 10 years, GCR has swung widely between a high of 80 to a low of 40.

Source: Bespoke Investment Group

Dividing the current price of gold ($1,385) by silver ($29) yields a ratio of 48. It measures the relative priciness of silver compared to gold.

The chart shows low of 40 since early 1980s. The upper end is about 80 (barring the odd spike >80 in early 1990s).

When the price line is heading up, it means GCR is widening – thus gold is relatively more expensive. When the price line moves down, it indicates silver is becoming more expensive relative to gold.

Or, when the line is rising, gold is outperforming silver, & vice versa. When the ratio hit 80 silver started to outperform, & when the ratio hit 40 gold started to outperform.

For the last 6 months, GCR has trended down from high 60s to about 48 now.

If history is a guide, this indicates silver is getting overbought versus gold.

Gold vs Silver - Bespoke Investment Group

-----------------------------------

Gold & Silver demand up 

Gold's recent rise is believed to be due to Chinese demand for the precious metal amid uncertainties over the economy & inflation fears. Following the Fed's QE2, investors are concerned European central bankers could similarly resort to Quantitative Easing, thus driving demand for Gold & Silver as the traditional inflation hedges. 

China might be buying gold for :

1.  Hedge against Inflation

2.  Alternative to US Treasuries

3.  Loss of faith in paper currencies

4.  Preparing for coming Financial Collapse

Eurozone near insolvent

Nouriel Roubini fears Eurozone's problems with insolvent or nearly-insolvent countries in it, may not just be liquidity but also the huge debts in the private sector & banks.

Backstopping of the financial systems by governments has made them near-insolvent – so the provision of liquidity might not be sufficient. Eventually, there might be forced restructuring of public debt for Greece & Ireland.

Problems are spreading to Portugal, & possibly Spain, and perhaps to other parts of eurozone.

Competitiveness is another problem.

Furthermore, there is restoring of large stocks of public debt and also private liabilities owned by organisations.

Hyperinflation in 2011

John Williams of Shadow Stats predicts hyperinflation for America in 2011, sparing Canada & Australia

Dollar & Euro collapse scenario

What if Dollar & Euro both collapse ?

Avoid Stocks till Banks crash

Stocks are sucker bets against a rigged insider's game.
Avoid buying stocks for the next decade.
Wall Street Banks will trigger the next meltdown, causing mass bankruptcy.

10 reasons to shun stocks till banks crash :

1. American stocks are a high-risk sucker bet
2. New 'big short' ahead : Derivatives con game will crash again
3. Hedge funds shorting China : warning - US faces collateral damage
4. New insider trading indictments killing Main Street confidence
5. Bankster's perfect gambling record proves stocks a rigged game
6. Wall Street is socially worthless, existing only to make insiders rich
7. The Fed is America's worst nightmare, a $3.3 trillion moral hazard
8. Wake up to a new normal : no growth, deflation
9. Privatize Social Security : new GOP Congress loves dumb ideas
10. Warning : Wall Street will lose another 20% of your money by 2020

Euro crisis threatens Financial Armageddon III

Christopher Laird : Rapidly escalating Euro crisis threatens Financial Armageddon III
In Fall/Winter 2007, then a year later in Fall 2008, the general bank crisis spreading first in US banks with the Bear Sterns and Lehman failures led to two almost total world bank collapses.

Now the world faces the 3rd challenge in the form of the EU bond crisis.

The 1.2 trillion Euro rescue package during the Greek crisis isn't working, & EU pledge of $110 billion aid for Ireland has litlle effect.

With the Euro breaking down, France & Germany are in a quandary over what to do. If they agree to more bailouts, investors barely yawn. Then the selling begins anew.
If the EU decision makers, including Germany especially, don’t do more bailouts, and try to get investors to take losses, then the bond markets will dump the troubled countries’ bonds. Germany & France and the EU proponents are in an impossible situation.

What is that situation and how bad is it for the Euro?

Markets are now facing their worst sovereign debt crisis, centered in the EU, since WW2. The IMF and other authorities are saying they are facing many of the same bank and credit collapse situations they faced in the 1930s - a banking and solvency crisis.

Deflation not Inflation is coming

Some think Inflation bugs like Peter Schiff, Marc Faber, & Ron Paul are wrong. Deflation not hyperinflation is coming to America. This will result in a Great Depression. Watch this xtranormal video

What would happen if USD collapsed ?

Read 24 June 2006 public article by Christopher Laird :
What would happen if the USD collapsed ?

Marc Faber : Bernanke sinking US ship

Marc Faber : We have to distinguish between the stock market & the economy. As you know the real economy began a recession in late 2007 and then between September 2008 & March 2009 we fell off the cliff, and then we were at a very low level of economic activity. Then the huge stimulus packages kicked in and the money printing kicked in. In other words Zero interest rates & Quantitative Easing by the Federal Reserve & also other central banks. That then stabilized the global economy, and when you have car sales dropping 50% and more, then you're going of course to have a rebound - but the question is how sustainable the rebound will be? Or is this rebound at the present time actually borrowed from the future. And in my sense, here I am talking about the economy, that the economy near term can recover. Maybe the recovery will be somewhat lengthier than expected, then crack up boom because the first stimulus package in the US probably will be followed by a Second one and money printing will lead to even more money printing next years so it could last say 12 to 18 months. And then we will get another set of problems arising from each government action has unintended consequences.

QE creates staggering amount of New $

By 'Quantitative Easing' the Fed simply creates new money to "inject cash into the system".

The scale is enormous: since 2008, QE created $1.7 trillion, & another $600 billion via QE2. The Fed's balance sheet has ballooned from $900 billion of assets in August 2008, to $2.3 trillion.

Before QE, assets on the Fed's balance sheet was 6% of GDP. Now it's a massive 16% of GDP!

Can that really leave no adverse effects ?

Economists criticise Fed's plan
Fed doesn't understand risk of QE (YouTube)

Bond Bubble about to burst ?

Fed battles deflation but people battle inflation.

While the world is focused elsewhere ...

related videos by VisionV

QE will starve middle-class

World decries US Dollar moves

Obama's appeal for economic stimulus via monetary injection was viewed as debasement of the US Dollar & considered a currency war by other countries. They don't want the US to monetize its past sins at their expense.

The World Shorts the Dollar (Ron Paul)

Fed's double-speak

The Fed claims they are not trying to weaken the Dollar, but prevent deflation ..... that really means promote inflation.
Fed's QE2 raises more Q's than A's (Bob Auer)

Gold won't go below $1,000 - Marc Faber

Despite gold rising nearly 30% this year, Marc Faber ("Dr. Doom") predicted :

"We will not see less than the $1,000 level again ..... Central banks are all the same. They are printers."

Economists condemn QE2

[WSJ] open letter to Ben Bernanke :

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Global Currency Devaluation - Inflation for all

As countries competitively depreciate currencies to promote exports, the eventual result is inflationary – weaker currencies lead to higher prices against all goods & services.
Currency Wars - by Robert Murphy [Mises Daily: 15 Nov 2010]

China slams US for QE2

China being the largest holder of US government debt, not surprisingly reacted angrily at the Fed's unabashed money-printing - which is sure to devalue their large reserves of US Dollar-denominated assets.

“As long as the world exercises no restraint in issuing global currencies such as the dollar ... then the occurrence of another crisis is inevitable” - Xia Bin, advisor to China's central bank.

"As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets." - Finance Vice Minister Zhu Guangyao

China chides "deteriorating debt repayment capability" & "fundamentally lowering ... national solvency"


China caught in a bind :

China cannot just dump the US Dollar, being the only international reserve currency, for now. It can't switch out of Dollar into Gold in a big way - that would drive up the gold price dramatically. It can't transfer to high-growth currencies like Aussie Dollar or Brazilian Real - that would cause such appreciation of these currencies that China's imports of natural resources become more expensive.

Therefore, China's central bank is left with these options :

1. buy Euro or Yen assets - but that would drive these currencies up and the chinese Yuan down & provoke Europe and Japan to accuse China of currency manipulation
2. buy natural assets like oil, gas, mines in other countries - but this stirs nationalist sentiments against foreign ownership of natural resources
3. equity investment or partnership with strong companies - like Berkshire Hathaway, Goldman Sachs, JP Morgan etc

Beyond the immediate term, it's more likely China would further its proposal of an alternative international monetary system - one not based on the paper currency of a single country.

Is the Dollar sound ?

James Grant - New York Times (Nov 13) :
 

"By disclosing a plan to conjure $600 billion to support a sagging economy, the Federal Reserve affirmed the interesting fact that dollars can be conjured" !

QE2 - Last gasp of Monetary System

Unrestrained creation of Dollars will destroy its purchasing power & lead to high inflation.

The Fed has just raised cost of living not just on all americans, but the world.


[watch on YouTube]

National Inflation Association :
Fed's QE will starve middle-class americans

QE is creating 3rd and last bubble

Harry Dent : Quantitative Easing is creating another & probably final bubble.

Lowering short term rates merely makes borrowing and lending more attractive without expanding money supply directly. It also encourages banks to borrow short term and invest in longer term Treasuries which keeps rates lower. Quantitative easing literally prints money out of nothing and buys Treasury bonds (and now mortgage securities). That both puts money directly into the system and pushes down longer term rates which are more critical to both borrowing and asset prices. QE is much more potent and like “crack” compared to the “speed” of lowering short term rates. The first “side effect” is the sudden drop in the dollar which raises food and gas costs for everyday consumers. The second is a return of bubble-like market activity from stocks to junk bonds to commodities which will burst again and critically injure aging investors and retirement funds. The third is lower returns on retirement portfolios which lowers the earnings and spending of the largest segment of aging consumers. We can’t be far from a crisis that forces Treasury yields and all bond yields sharply up as occurred in Europe in April of 2010. And down the road when the Fed sells those bonds, it will cause interest rates to rise again as you don’t get something for nothing.
.....
 The Fed has now stimulated a third and even more perverse bubble, which is the first bear market bubble we have ever seen. At least the previous bubbles had rapidly growing productivity and demographic growth to fuel them. The current bubbles only have government stimulus as their fuel despite slowing economic trends and the obvious failure of such stimulus. The current bubbles in stocks, gold, commodities and junk bonds will burst and greatly injure investors, retirees and pension/retirement plans again. The greatest risk is that a falling dollar prompts foreign countries and investors to stop buying and/or start selling U.S. Treasury bonds and that forces a sharp spike in long term interest rates across the board. In addition, the bond markets could simply continue to observe deteriorating economic activity with mushrooming stimulus and start worrying about rising U.S. deficits and raise interest rates suddenly as they did with Europe in April of 2010.

QE's crippling cost to developing countries

QE2 caused other countries to bemoan the knock-on effects on their own economies & brace for measures to try protect themselves.

With globalized finance, lower US interest rates accentuates the carry trade – investors borrow cheaply in the US and invest in other countries where interest rates & anticipated returns are higher.

Massive inflows of “hot money” into emerging markets cause their currency to appreciate strongly thus inhibiting exports, & stoke asset bubbles. For example, Brazil's Real rose a stark 35% from 2008.

Developing countries have to shield their currencies by accumulating reserves or imposing capital controls, perhaps both. Accumulating reserves is costly as these funds are withheld from investing in their own economies. Capital controls on the other hand are difficult to implement, attracting critical sentiments.

Amidst global frustration, exasperated governments have little choice but to competitively devalue their currencies to support exports.

What then can we expect to see from the looming specter of “currency wars” ?

Who pays the bill for Fed's QE2

QUANTITATIVE EASING explained

Quantitative Easing is economic manipulation by simply creating money out of nothing !

Although there is more money in circulation, there is still the same amount of goods & services - this risks higher prices, or inflation.

Chanos says China to implode

Short seller James Chanos thinks the Chinese economy is the next Enron.
Bears think China falsifies economic data & has overheated its economy with over-construction of malls, luxury stores, & infrastructure.

A Chinese collapse will affect America - limiting their ability to buy US debt, & provoking unknown political regime change.

However Shaun Rein thinks Chanos is wrong, & agrees with Jim Rogers being bullish about China : 3 reasons why Rogers is right & Chanos is wrong.

Jeremy Grantham criticizes Fed policy

Fund manager Jeremy Grantham notes in GMO Quarterly Letter Oct 2010 :

1. Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
2. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
3. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
4. In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

CNBC interviews Jeremy Grantham (video)

QE condemns world to inflation

Andy Xie : QE numberless oblivion
- world currency war : If you print a trillion, I'll print a trillion. No change in exchange rate after a trillion? Let's do it again, QE2 ...

It seems that nobody wants to appreciate. Most major economies will do something to keep their currencies down. That is checkmate for the US. Without the devaluation benefit on rising exports, QE just leads to inflation, first through rising oil prices. The American people are suffering from declining housing prices and high unemployment. If the gasoline price doubles, the country may not be stable. How would the elite react? Probably more of the same.

The world is heading towards high inflation and political instability. It's only a matter of time before there is another global crisis. The first sign would be a collapsing treasury market. The Fed is controlling the yield curve through its QE program. But, it is irrational for other investors to play this game. The only reason to stay in is that the Fed won't let the market fall. But, the underlying value is evaporating with rising money supply and the inflationary consequences. When all the investors realize this, they will run for the exits and the Fed won't be able to stop the stampede. If it prints enough money to take over the whole market, the people with freshly minted dollars would surely want to convert their money into other assets. The dollar would collapse too.

The world seems on course for another crisis in 2012. The same people who caused the last crisis are still in charge. They'll get us into another. Iceland is sending its former prime minister to court for causing the banking crisis. A worse fate awaits the people who are causing the next crisis.

Gold further to run - Aden

GOLD: FURTHER TO RUN  -  By Mary Anne & Pamela Aden, October 25, 2010

 It's been an exciting month. Gold rose, surging well above the $1300 level. Silver and gold shares soared even more.

We hear that gold is in a bubble, it can't rise much further and so on. Many wonder, why it's even risen so much? For that, you again have to look at history from a global perspective and it'll provide the answer.

LOOKING BACK…

We've often pointed out that gold is money. It has been for thousands of years. Paper money is not really money and there isn't one paper currency that has survived over time. Gold, on the other hand, has. It can't be created at will, it's durable and it's always maintained its purchasing power.

In 1971 when foreign nations (particularly France) demanded that the U.S. settle its deficits with gold, Nixon, who was worried about the disappearing gold reserves, said "no." In doing so, he shut the gold window. So the time honored link between the U.S. dollar and gold was broken, the world went off the gold standard and the U.S. dollar became the world's reserve currency. The U.S. then created a false prosperity via inflation, and ever larger quantities of money and debt. But this was a fantasy that's now meeting head on with reality.

ABUSED DOLLAR IS THE CULPRIT

Since the U.S. is now going overboard with massive deficit spending and out of control debts, the world is starting to want real money, which is gold. And that's why the dollar is falling and gold is soaring.

Naturally, there will be corrections along the way. No market goes straight up, or straight down and the hardest part is to stay with it. We've been consistently recommending gold since 2002 and yes, there have been ups and downs.

In fact, gold's exceptional rise has now reached our temporary target level. It's been a super rise, up 55% since April 2009… or you could say, gold has soared 17% in recent weeks alone! By any standard, the surge is due for a rest, which is likely now beginning, and this could last for a few months.

Gold, however, is still far from the mania, bubble stage. Average investors are just starting to appreciate the rise in gold. They know things aren't right and they are learning that gold is a safe haven. They see the dollar falling, the economy dragging with debt and the Fed trying to keep it together. The public is concerned, but they're not yet buying gold. When they do, gold will surge to even far higher levels.

MEGA BULL MARKET

It's important to keep in mind that great bull markets in gold occur one or two times in a lifetime. The last one ended in 1980. It took 20 years before the next (and current) bull market to begin.

It began at a moment when most thought gold was dead and buried. Central banks couldn't sell their gold fast enough. The Bank of England sold theirs at the major low in 2001. Meanwhile, gold producers had been hedging their production in order to stay afloat. This despair marked the low.

But now 10 years later, we've seen the gold price produce consecutive annual gains. And with gold up more than 20% this year, 2010 will mark 10 full years of gains. This is the longest winning streak since the 1920s!

Times have changed. But it took the financial crisis and the ongoing aftermath to change the way people view gold. Confidence is growing and the change in the central banks' actions and attitude toward gold was key in giving a green light to investors.

Central banks stopped selling gold and they've become net buyers this year for the first time in two decades. They're expected to buy 15 metric tones of gold this year, which is a major turnaround. Gold is becoming an important reservable asset and again, this bull market has further to run. So use weakness in the weeks ahead as an opportunity to buy at a better price… and then plan to hold on for the long haul.
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Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to http://www.adenforecast.com/

Gold & Silver prices signal destruction of Dollar

InflationUS (video)
The Federal Reserve is Responsible for the last 2 Decades of Economic Turmoil

1. Beginning with the Savings & Loan crisis in 1990, each engineered crisis is growing in intensity and carnage. First, there was the Internet bubble crash then the Real Estate bubble meltdown and now we are at the footsteps of an unprecedented acceleration of price increases in food and energy.

In 2007, commodity prices soared when there was actually a slowdown in the global economy. There was no reason for commodity prices to go ballistic at that time, except for federal reserve intervention. The price of oil went from $78 to $147. High gas prices actually burdened the average US consumer with an additional "tax" of five hundred billion dollars.

That 500 billion dollar "hidden tax" was ONE of many reasons, we are IN the current Great (NON) Recession.

(The US Dollar Index is Worthless)
2. On CNBC they often point to the dollar index and state that a weaker dollar is good for the export economy. Currently US Dollar index looks bad - but it actually means nothing because it is being compared to other world wide fiat currencies undergoing massive debasement. Worldwide central banks, seem to be in a currency death dance, racing each other to the bottom in the name of international competitiveness.

Gold and Silver is the Only way to test the Strength of our Currency.

The dollar is weakening against other currencies but when compared against the price of precious metals and raw materials we can see THE THE TRUE VALUE OF A US FEDERAL RESERVE NOTE

(GOLD AND SILVER ARE NOT EXPENSIVE)
3. The truth is Gold and Silver prices are just Getting Started. If you pay attention the public is selling not buying gold (cash4gold commercial)

What happened during the Internet bubble? The average Joe was piling into tech stocks and many individuals were giving up there jobs to day trade full time

And we all know what transpired during the last death throws of the Real estate bubble. People were buying at the peak 3, 4, 5, 10 home and flipping every WHICH way to make AS LITTLE AS 20,000

The common JOE, BUYS into manias...When all your neighbors are hoarding and trading gold, and telling you real estate is a waste of time and money, it may be the time to look at diversifying some your investments out of gold and silver.

WHAT I SEE PERSONALLY IS :

• 10 years of Real Estate Stagnation & Depreciation &
• 10 years of Gold & Silver Appreciation

4 (JOBS ARE NOT COMING BACK TO THE US)
TO QUOTE Dr. Marc Faber: "COMPANIES would be out of THEIR minds, with health care reforms, government interventions and the uncertainty about future taxes in the US, to even consider expanding in the US.

Corporations are expanding in China, India, Vietnam, Bangladesh, Africa and Brazil. The business world is an international place today, and if you run a corporation, whether you employ 50 or 10,000 PEOPLE, you can choose where you invest your money in terms of capital spending.

Where do you want to expand factories? If I employed people in the US, I would rather think of reducing the 50 employees RATHER THEN HIRING MORE.

Top Debtor Nations

CNBC :                                    External debt (as % of GDP)

1.   Ireland                    1,352%                       
2.   United Kingdom        427.6%                     
3.   Netherlands              395.6%                     
4.   Switzerland               390%                        
5.   Belgium                    345.6%                     
6.   Denmark                   315.2%                     
7.   Sweden                     275%                      
8.   Austria                      268.9%                   
9.   France                       247.2%                   
10.  Portugal                    231.5%                 

11.   Hong Kong               218.8%
12.   Norway                     208.9%
13.   Finland                     205.7%
14.   Germany                  189.4%
15.   Spain                       184.7%
16.   Greece                     175.3%
17.   Italy                        154.6%
18.   Hungary                   124.2%
19.   Australia                   108.8%
20.   United States             95.9%

External debt is a measure of a nation's foreign liabilities, capital plus interest that the government and institutions within a nation's borders must eventually pay. This number not only includes government debt, but also debt owed by corporations and individuals to entities outside their home country.

Below is a different statistic : Central Government Debt-GDP ratio

Gold - final refuge against universal currency debasement

Ambrose Evans-Pritchard writes in The Telegraph 26 Sep 2010 :

States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.

“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Collapse of western capitalistic society

Marc Faber - The Gloom, Doom & Boom Report Sep 2009 :
The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society.

Who is not in fiscal disaster ?

Christopher Laird : Who is not in fiscal disaster ?  
Japan is a fiscal disaster. The US is a fiscal disaster. The UK is a fiscal disaster. The EU is a fiscal disaster. All of these bond markets will be next on the firing line, after the EU mess deconstructs into chaos. We already have partial paralysis in the EU and chaos in Greece fighting the cutbacks of the public sector. The Unions are paralyzing the efforts to stem the fatal Greek fiscal situation, which is impossible to fix with cuts. The cuts needed are too large to tolerate.

The whole world that we know is turning upside down. The only thing that prevented two - yes two - world banking collapses and bank holidays was an unlimited US Fed checkbook. And the US is the last bastion of credit salvation for countries in fiscal chaos. I have no doubt the US will be central in any final bailout plans for Greece and Spain and whomever else. But the US cannot bail out every market under the sun.

The only solution anyone is willing to try is more public borrowing. That is not working and will only result in much higher taxes in two years across the world. The public will not tolerate budget cuts either in the US, in the UK, in Japan, in China, and especially in the weaker EU club med economies. Our entire world order is changing for the worse, and is again reaching a crisis stage. One or more of the above building crises will pop in 2010 and it will be 'Oh no, here we go again!'. The others will follow in the next two years.

2010 certainly will go down as a final chapter before all hell breaks loose around the world. And, when the bond markets finally rebel on the last big borrowers who can still get money (the US and others), everything ends badly.

Full Article : Interesting Times & stepping up the game

New Rules of Money - Robert Kiyosaki

Robert Kiyosaki explains New Rules of Money :
why savers lose to inflation in the current economic system,
& why hedging with gold, silver, oil is appropriate.