Oil didn’t move yesterday. Neither did gold.

The Wall Street Journal reported that markets were reacting to “mixed data”.

That is to say, some reports were encouraging. Others were not. It was as if one weather forecaster called for a blizzard. The other for sunny skies and warm temperatures. Investors didn’t know how to dress.

Among the dark clouds was an item on the falloff in tax revenues. States are having a hard time balancing their books, because their tax receipts are declining. The WSJ reports that they are running 17% below last year.

Since states cannot print money, they’re forced to make cutbacks – typically reducing hours worked per employee as well as the total number of employees. This is a bad thing, says the report, because it increases unemployment and lowers the wage base. This leads to less consumer spending.

Another little cloud appeared yesterday (in addition to the consumer confidence numbers): the vacation timeshare market is collapsing at a record pace.

Well, don’t worry about it. We met a guy who explained the timeshare business to us.

“What you’re selling is a dream. You bring them to the property. You make sure they have a good time. And then you do to the numbers with them. You show them how much they save by coming to your property rather than on a typical vacation. And then you show them the other properties that they can exchange for. They think they can buy a cheap property and then exchange with an expensive timeshare. But it doesn’t work that way. They get stuck in the cheap unit and the dream gets a little faded… And then, they stop coming… and then they try to sell the timeshare. Timeshares are rarely a good investment.”

Besides, timeshares are a small, quirky part of the housing picture anyway. The real story is in the regular housing market. There, if you believe the forecasters, it’s sunny skies.

House prices seem to be stabilising. In some areas, they are going up. Of course, in some places you can get a house at half the price it sold for two years ago. That lures buyers back into the market. If we wanted a house to live in, we might be tempted too. That’s why we like falling housing prices: we get more for our money. But most people want a rising housing market. They think it makes them richer.

They’re likely to be disappointed. They show up at the beach with their umbrellas and sun-tan lotion… just as a winter storm hits the coast.

Forbes lists eight reasons to “remain worried about housing”.

• The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000 more expensive for first-time buyers.

• The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-backed derivatives. What will happen when it stops?

• Mortgage lending standards are tightening up generally.

• Houses are still not cheap. Forbes cites Shiller’s numbers, putting the average house price 41% higher than it was in 2000. Incomes did not increase during that period; ergo, houses are still too expensive.

• Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market.

• The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, during the school break. Then, sales fall with the autumn leaves.

• There are still huge numbers of houses that will be repossessed. Forbes says only 12% of option ARMs have been reset. More repossessions will increase the supply of desperate sellers and decrease prices.

• There’s a ‘shadow inventory’ hanging over the housing market. It could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilise. As they put their houses up for sale, that too will hold prices down.

Some wiseacre economist has probably already come up with eight reasons why housing prices will go up. But the key thing to recall is that this is a depression. It’s a major restructuring of the economy, not a standard post-war recession. After 64 years, the consumer has finally rung a bell. He has reached his limit. He cannot borrow more. He cannot spend more. He is finally cutting back. That fact will echo through the entire world economy – and through the US housing market – for many years.

Houses, like stocks and corpses, may bounce. But they will not begin a real bull market again for a long, long time.

***Our old friend Marc Faber is “highly confident” that things will turn out badly.

“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,” he writes.

“We have a money-printer at the Fed,” he continues, which guarantees runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well.

Meanwhile, Paul Volcker says that China’s rise merely “highlights the relative decline of the US.”

So there you have it: China on the way up, America on the way down .

That’s the drama that we’re watching every day here at the Daily Reckoning. In our view, the peak of US wealth and power probably came during the period between the fall of the Berlin Wall and the fall of Lehman Brothers. But there are probably a lot more shoes to drop before people are fully aware of what is going on.

The way we see it, almost the entire 20th century was a mistake, a dead end. Europeans were clearly on top of the world when the century began. Then, after WWI the Europeans in America took the lead role. But WWI shook their faith in their evolving political order.

Not long after, German hyperinflation and the Great Depression shook their faith in their economic and financial order. This left a huge vacuum, which was soon filled by ruthless adventurers and ideological schemers. Much of the rest of the century – from 1939 to 1989 – was spent in hot wars and cold wars against these Bolsheviks, Fascists, Stalinists and Maoists.

In the end, the more reasonable and consensual societies of the West won the battle. But they, too, were transformed by 50 years of war and nearly a century of bad ideas .

“Whoever fights monsters should see to it that in the process he does not become a monster. When you look into the abyss, the abyss also looks into you,” Nietzsche warned.

Looking into the abyss created by Mussolini, Hitler, Tojo, Pol Pot and the rest, Western societies decided both to fight them and to join them. Tax rates soared. Regulations multiplied. University professors taught socialism, Freudianism, modernism, cubism, feminism, racism… and every other ‘ism’ they could think of. Parents spent good money to send their children to universities that turned them into mush-heads.

And – perhaps most ominous – in the United States of America, the military grew into a greedy, grasping goliath… the very thing Eisenhower had warned against.

Then, there were counter-trends in the 1980s… led by Margaret Thatcher in England and Ronald Reagan in the US. But these were mostly frauds . Top marginal tax rates were rolled back. And there were some cuts in regulatory procedures. But government spending tended to go up anyway. Worse, Ronald Reagan mistook the Soviet Union for a genuine threat and increased military spending even further to combat it.

And now, the US staggers under the weight of its eternal wars… its imperial illusions … and its everlasting efforts to provide bread and circuses. If it kept its books like a private enterprise, it would be broke. If it were a public corporation, it would be de-listed.

Still, it spends and spends… and there is no stopping the spending. Trillions are spent on wars in Iraq and Afghanistan, for no apparent reason. But who complains? Too much money is at stake. There are too many lobbyists for too many industries and too many special interests involved. Military spending – even in a time when America faces no substantial challengers – cannot be rolled back. Neither can social spending.

Marc Faber is right. There too, there are too many people with too many dogs in this fight. Both military and social spending will continue to expand until the empire is ruined.

Until tomorrow,

Bill Bonner

Source: A Century of Bad Ideas

In a role that would later deem him “the man who broke the back of inflation,” Volcker took the helm of a weakened and disillusioned Fed in August 1979. Known for his no B.S. attitude and blunt, conservative style, Volcker’s appointment was only made under significant pressure on the Carter White House to lick the inflation problem.

After years of wishy-washy policy – and a widespread sense that the Fed simply didn’t have the cojonesto deal with inflation once and for all – the intense pain that Volcker was willing to inflict (via high interest rates) led to the inflation-subdued conditions from which the late, great bull market sprang in 1982.

Volcker was also in the mix on August 15, 1971, when President Nixon shut the gold window. As Tricky Dick informed the world that “We are all Keynesians now,” ushering in a decade of runaway prices and platform shoes, Volcker was dispatched on an urgent, two-year globe-trotting mission in his role as Treasury Under Secretary for Monetary Policy and International Affairs.

The goal of Volcker’s mission: To hold together the long-standing currency exchange system that Nixon had blown apart in 1971… and convince the rest of the world America had not gone mad.

No one has more claim to “been there, done that” than Volcker. Perhaps more importantly, Volcker has shown a capacity to act under pressure – and to make incredibly tough decisions when need be. In his role as Fed Chairman, taking on a dragon (inflation) that many thought unslayable at the time, Paul Volcker endured scathing criticisms and sharp reversals of fortune that would have broken lesser men.

So Where Did He Go?

All this counted as good news when, in 2008, it emerged that Volcker was advising the Obama campaign. Many who had misgivings in regard to team Obama’s unknown and untested political agenda were soothed, at least partially, by the thought of a wise and experienced hand like Volcker’s playing a role.

Alas, on examining the policy put forth by Washington thus far, the man’s fingerprints are nowhere to be found. The White House gave Volcker an impressive sounding title – head of the “Economic Recovery Advisory Board” – and then seemed to ignore him completely from that point on.

It’s true that Volcker, now in his 80s, has a heightened taste for fishing these days. But one has to wonder if there wasn’t a bit of bait and switch going on here. Use a man’s stature to lend gravitas to a fresh-faced political campaign, promise to listen closely and heed his wisdom, and then…

A Wall Street Railroad

We here at Taipan Daily have no special dispensation as to why the meatheads in Washington do what they do.

But we do have the ability to make an educated guess or two… and the guess here is that Volcker wound up getting railroaded. It’s a good bet that Volcker made the mistake (if one could call it a mistake) of being too forthright in his views – not willing enough to “play ball” as it were.

You see, the White House finance team is dominated by a Wall Street mentality. So dominated, in fact, that insider culture permeates the place like the smell of trout guts in a fish market.

One can see this (or rather smell this) in observing team Obama’s top financial pitchmen, Tim Geithner and Larry Summers. As president of the New York Fed, Geithner was a creature of Wall Street, bought, sold and paid for, from day one. Even the staid New York Times has called out Turbo Timmy, noting his exceptional “reliance on bankers, hedge fund managers and others.”

And if Obama advisor Larry Summers didn’t start out aspiring to be top shill on the hill, he certainly wound up settling in to the role quite nicely, having raked in a cool $8 million (give or take) in speaking fees and hedge fund consulting fees these past few years.

In addition to the above, add in the fact that Goldman Sachs is not just a mega-powerful investment bank these days, but a weird sort of temp agency with a quasi-official role in filling all high-level government finance posts.

The net result is a sort of noxious self-interest cocktail that proves toxic to anyone not considered a tried-and-true friend of Wall Street. And that would include Paul Volcker.

Glass-Steagall Blasphemy

In the eyes of Wall Street, Volcker’s apparent sins are twofold. First, he openly endorsed “Glass-Steagall-like” restrictions on Wall Street investment houses. Second, he showed warmth to the idea of banks as utility companies.

The Glass-Steagall Act was passed in two parts in 1932 and 1933. The second half of Glass-Steagall, also known as the Banking Act of 1933, required commercial bank activity and investment bank activity to remain separate by law.

For 66 years, Glass-Steagall was the law of the land. Under Glass-Steagall, investment banks could not take customer deposits or make commercial loans. Commercial banks, meanwhile, could not get involved in high-powered investment bank-type activities.

Glass-Steagall was repealed in 1999 (Thanks Phil Gramm!) by Republican majority vote. Thanks to this move, the blind-idiot-behemoth known as Citigroup was born. Before the repeal, Citi had to more or less stick to its boring customer deposit knitting. After the repeal, Citi was free to gorge on the high-powered stuff, with the leverage of customer bank deposits and FDIC insurance as a backstop… resulting in the quivering mass of financial wreckage now splayed out at our feet.

In suggesting that a new “Glass-Steagall-like” reform would be a good idea, Volcker declared himself an enemy of Wall Street. Through the eyes of the bankers, unfettered leverage is good – even if it blows up the entire country every once in a while – because anything that fattens the kitty at bonus time is good. To return to the days of Glass-Steagall would be a step backward in the banksters’ eyes, as would any maneuver that threatened to permanently reduce their power.

The same thought process applies to Volcker’s endorsement of the “banks as utility companies” idea. This is the notion that any business back-stopped by government should be a safe and boring business by law. The logic runs something like this: “You want to do sexy exotic stuff? You want to take big risks with your own investors’ capital? Fine. Just don’t do it with taxpayer funds, don’t do it as a government-backed entity, and don’t expect a bailout if you blow up. If you want to enjoy FDIC insurance, “too big to fail” support, or any other form of government support or largesse, then you need to take the plain-vanilla restrictions that come with that.”

Seems like a fair trade-off, no? In the eyes of Wall Street, that’s exactly the problem.

Keeping the Deal

Right now Wall Street has a very sweet deal, which some have memorably characterized as “socialism for the rich.” One can also think of it as “I take the upside, you take the downside.” As in, when a cockamamie scheme works out, the players reap tens or hundreds of millions… but when it doesn’t work out, the taxpayer gets socked with the bill.

If the White House were to embrace the idea of making banks more like utility companies, as Volcker suggests, then Wall Street’s sweet deal would disappear. The pleasingly asymmetric nature of the equation – heads Wall Street wins, tails someone else loses – would be lost.

And so, most likely, this is why Volcker has been muzzled. Geithner and Summers live in Wall Street’s back pocket. They are shills or, possibly worse still, moles… tasked with making sure the interests of the true master are served. President Obama seems either not to know or not to care. Either way the result is the same… the financial interests of the United States have more or less been hijacked by a quiet oligarchy. Worse still, when the self-interests of this oligarchy run directly counter to the economic interests of the country, it is the country that loses. Every time.

Paul Volcker, on the other hand, is not a shill. Not a mole. Or at least, he hasn’t shown any clear sign of being such. If Volcker had been “compromised,” he would be out there towing the party line – putting his credibility to work in service of the agenda, à la Colin Powell and the Iraq War.

One can only speculate as to the thoughts in Paul Volcker’s head. Your humble editor’s guess, though, is that the man feels snookered. He may well have been caught up in the bright shining spirit of the 2008 presidential campaign… the thought of a new day, a new broom sweeping clean, and helping America out of a serious jam (as he once did all those years before).

But one can only do so much, and good intentions only stretch so far. On realizing the truth, the 81-year-old Volcker may well have shrugged and gone fishing.

Source:  The Unconscionable Muzzling of Paul Volcker

The source for this claim? Besides syllogism (”The ’70s gave us inflation and a gold bull market; ergo, the opposite must be bad for gold…”) it was apparently Roy Jastram’s The Golden Constant, that dry, dusty study of gold’s enduring stability across the very, very long run by the end of which we will all be deader than disco.

First published by Wiley in 1977, The Golden Constant has just been updated by Jill Leyland, former chief economist at the World Gold Council, for Edward Elgar Publishing. I’ve not seen the re-issue yet (not at £72 a pop, some $120). But unless Jill’s scrapped Jastram’s research entirely and written a wholly new monograph, the conclusions should in fact be precisely the opposite.

Gold, like silver, gained in purchasing power during deflation but lost out to inflation. The only things to rise during commodity-price inflations were commodity prices and social unrest.

Three centuries of data are hard to ignore, but it seems they can be misread – not least when skim-reading for a quick book review. (If you care for the big picture, Jastram’s charts are available at the Golden Sextant.) Those three centuries of data can also prove a real bore to analysts without a library pass, as Jastram apparently makes for “a very dense read” says a Seeking Alpha post today. (Its summary table then misses the very same deflation of 1723-1738 we skipped by mistake and haste in our essay online, Pick a Number, last week.) And all those numbers can also mislead the unwary if the key point’s neglected:

Gold, like silver, rose in value during deflation. But back then, it was still used as money, and it lost out to inflation back when that role applied, too. Since the end of WWII, we’ve not suffered the first and only endured the second…and gold has risen sharply in purchasing power as the supply of what we’ve come to call “money” has swelled by an order of magnitude or ten.

Meantime – and not coincidentally – gold ceased being money beyond offering a store of value (and money that’s free from default risk, as well). Little wonder that inflation really took off after the gold-edged limits to money-supply growth were cut by the Nixon White House at the start of the ’70s.

And we all know where that little trick got us…

“What the press and policymakers are calling ‘disinflation’ is simply deflation, the deterioration of the monetary standard characterized by falling prices,” wrote Jude Wanniski, formerly an associate editor of the Wall Street Journal and advisor to Ronald Reagan, in 1982 – slap bang in the middle of what he’d come to call the “Volcker Deflation” in honor of the tall, cigar-wielding, inflation-fighting Fed chairman.

Paul Volcker took US rates to double-digits and left them there, wringing inflation out of the system and squashing the Gold Price – then (as now) a key marker for the stable value (or not) of money.

“There is a confusion because commodity prices [in 1982] are falling even as the cost of living continues to rise,” wrote Wanniski to his Polyconomics clients. “[But] the price of gold, the ‘commodity money par excellence’, is the surest proxy for all prices, goods and bonds…[and] the recession that threatens to become depression could also swiftly turn into a major bull market if the Fed arrests the Gold Price decline at $300, signaling an end to continued deflation and the monetarist policies that have guided the open-market desk.”

Why the call for active Gold Price intervention? Because just over 10 years after Richard Nixon tried driving a stake through the undead Gold Standard’s heart, “Legally defining the official dollar/gold price and backing it with convertibility [was] the only means by which…the markets can be assured that Volcker’s successors would not be tempted to try another monetarist experiment,” Wanniski believed.

Fast forward the best part of three decades, and here we are again, trying to heat-treat the mutant spawn of a new “monetarist experiment” that’s also broken out of the lab and started to munch bystanders on the corner of Wall Street and Main.

Wanniski’s point back then was that, to prevent the end of the world, the Gold Price should be forced higher, making Dollar devaluation explicit and pumping cash into the economy that could then be lent and spent to unwind that “deterioration of the monetary standard characterized by falling prices.”

Only an idiot would pick a fight with Wanniski’s terms of reference. So please – if you’ll hold my jacket a second…

The vicious disinflation of the early 1980s stemmed the monetary crisis but failed to morph into outright deflation. That defied history as well as economists, since all previous prolonged destructions of monetary value had been naturally righted by falling prices to follow. But by the late 20th century, as today, gold was not money, not as a means of exchange, and nor did its above-ground supply dictate the limits of paper money in issue.

Absent the money-supply limits which the Gold Standard imposed on the world, people rightly guess that double-digit inflation would prove rocket-fuel for the bull market in gold. Yet the purchasing power of gold nearly doubled during the Great Depression, and it’s risen four-fold during this decade’s low consumer-price inflation as well.

Why? Because both those periods of low price-inflation saw the money-issuing authorities devalue the currency, first with explicit reference to gold but now without daring to name it. Roosevelt in the mid-30s slashed the Dollar’s gold content by 40%; the Greenspan/Bernanke Fed devalued the Dollar again to sidestep a DotCom Depression, keeping real interest rates at less than zero between 2002-2005.

The maestro’s apprentice applied the same trick in the back-half of 2008, but so far to no avail. Not on the official CPI measure, now negative for the first time since 1955. Here in the United Kingdom, the same wheeze is being used to try and avert the first fall in retail prices in five decades, and even the “vigilant” European Central Bank is pumping out money – a near half-trillion euros in 1% loans on Wednesday – in a bid to revive bank lending, swamp the FX markets with single currency, and pull Germany out of its first flirt with deflation since the 1930s.

Just such a devaluation – and again, absent any stated reference to gold – was attempted by the Bank of Japan a little less than a decade ago.

Indeed, Japan is the only developed nation since the end of the Gold Standard to have suffered an extended deflation in prices. So far, at least. Germany and Switzerland look set to try for a re-wind, and unless the Dollar can outpace the Euro’s descent, we might yet see truly sub-zero inflation in the United States, too.

But whatever that should mean for Gold Prices, all other things being equal, just doesn’t matter. Because the Gold Price will not get chance, as all other things are not equal, and the policy solution – rank devaluation – can only make gold more appealing to investors and savers, whether the “monetarist experiment” of TARP, Quantitative Easing or a half-trillion euros in 1% loans proves successful or not.

Japan’s slump into deflation coincided with the Bank of Japan’s “zero interest rate policy” (ZIRP) at the start of this decade. It also saw the Gold Price worldwide hit rock-bottom and turn higher – a move that analysts (including us) have typically linked to US monetary moves and investment cash looking for safety as the Dotcom Bubble exploded. But zero-rate money from the world’s second-largest economy shouldn’t be ignored. And today, zero-rate money is all the developed world has to offer.

This trick might not beat deflation. But it might just spur a whole new rush into gold regardless.

Source: Does the Price of Gold Rise or Fall in a Deflation?

In silver, the price spiked down the moment that Globex trading began in New York on Sunday evening…and hit a low of $11.73 before recovering to unchanged around $11.90. There it sat until 9:00 a.m. in London trading where it tacked on 20 cents…and from that point, spent the next 22 hours within a dime of that price.

I’m still not sure what to read into the fact that the boyz haven’t broken through the 200-day moving average in gold…if there is, in fact, anything to read into it at all. We’ve had a triple bottom just above the 200-day m.a…and whether that means we’re moving higher from here, or about to fall off a cliff, is something we’ll discover very soon I would think. The bullion banks are still about 50,000 Comex gold contracts off their lows of last October…and the question still remains whether or not they are finished the liquidation process [Can they? Will they?] …or do we have some more pain to endure? As I said, the price action will tell all. If I was forced to bet a dollar, I’d bet we’re going higher this week…but wouldn’t be surprised if I lost that bet either. Here’s the 1-year gold chart.

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On Friday, gold open interest fell 1,050 contracts to 338,707. Silver o.i. rose 618 contracts to 95,543 contracts. It’s impossible to read much into those numbers…but I would venture a guess and say that bullion banks [in both gold and silver] covered shorts and went long…and the tech funds in the Non-Commercial category [and the small traders in the Nonreportables] pitched longs and went shorter. Monday’s gains in both metals would certainly have cancelled out some of Friday’s activity. Today’s price action should also be in the Commitment of Traders report on Friday. While on the subject of “price action”…the shares did OK yesterday.

The usual N.Y. commentator had the following to report yesterday…”Reuters carried a decisive story this moring: ‘Asia Gold-India soaks up bullion bars: Hong Kong premium at 4-month high’. Singapore, April 20 (Reuters) – Premiums for gold bars were steady at two-month highs in Singapore on Monday and may firm up this week as India buys more before a religious festival, while bullion’s drop to a three-month low spurred buying elsewhere. Gold bars in Hong Kong were quoted at a premium of as much as 80 U.S. cents an ounce to the spot London prices, their highest since December, on weaker gold prices and buying interest from jewelers…’India demand has picked up a lot. They are buying gold bars.’…said a dealer in Singapore. Vietnam physical gold stood $15.45 above world gold today, despite a sharp drop in the unofficial Dong exchange rate. Uncharacteristically careless, The Gartman Letter drew comfort for its short position today from the documentation currently appearing of heavy scrap sales last quarter. This is akin to driving using the rear mirror.”

The Comex Delivery Report for Monday showed that 40 contracts were delivered in gold and 14 contracts in silver. As of yesterday, there were still a bit over 1,300 gold contracts to be delivered for April. They’ve got about a week left to get it over with. Over at the Comex-approved precious metals warehouse, another 496,319 ounces of silver was added yesterday. That goes along with the 600,000+ ounces that was added on Friday [that I neglected to mention in my Saturday rant]. There were no additions to the U.S. Mint’s gold or silver eagles yesterday…and both the GLD and SLV were unchanged.

Across the Atlantic in Switzerland, the good folks at the Zürcher Kantonalbank have updated their gold and silver ETFs for last week. In gold, a smallish 28,487 ounces were added…but in silver, it was a more robust 451,364 ounces. Their platinum and palladium ETFs are also climbing as well. As of the close of business last Friday, the ZKB ETFs held 4.51 million ounces of gold, 557,124 ounces of palladium, 167,306 ounces of platinum and 45.26 million ounces of silver. I thank Carl Loeb for that update.

Moving a little further east, I see that The Central Bank of the Russian Federation added about 200,000 ounces of gold to their stash last month. As of the end of March, they were sitting with 17.1 million “fine troy ounces”.

I note in an e-mail that I received from Craig McCarty over the weekend that “…economists Simon Gilchrist and Vladimir Yankov at Boston University, and Egon Zakrajsek at the Federal Reserve constructed credit spreads over the 1990-2008 period from monthly price data on the corporate debt of about 900 U.S. nonfinancial companies. In a forthcoming paper in the Journal of Monetary Economics they show that spreads on low-to-medium risk corporate bonds, particularly those with 15 or more years until maturity, predicted changes in the economy phenomenally well, forecasting the ups and downs in both hiring and production a year before they occurred. It would be better for everyone if it doesn’t hold in the future. With the massive widening in corporate bond spreads last fall, the economists’ model predicts [U.S.] industrial production will fall 17% by the end of 2009, and the economy will lose another 7.8 million jobs on top of the 5.1 million it has shed since the recession began.” Check the graph below.

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I have a few stories today…as I have some fairly interesting commentary to pass along.

First are a couple of blogs from tjhorton.blogspot.com that were sent to me over the weekend. Neither one is particularly long…but both deserve your attention. The first is titled “[Gold] Head Fakes” and the link is here. The second is “Goldman Sachs (NYSE:GS) manipulating markets” and the link is here.

The second story is from Bloomberg and bears the rather sensational headline…”Volcker Says Fed’s Authority Probably to be Reviwed”. U.S. lawmakers from both political parties have expressed concern in recent months that the central bank has overstepped its authority…” [Note to Volcker: Paul, "The Creature From Jekyll Island" will not take too kindly to losing power. Good luck! - Ed] The link is here.

It’s been a while since I’ve run a story by Ambrose Evans-Pritchard…but Craig McCarty sent one in my direction yesterday that should make you feel better. It is, of course, from the Telegraph in London and bears the headline…”Gold price could hit $1,500″ Evans-Pritchard says…”The aggressive monetary policy of central banks around the world is playing havoc with the structure of the bullion market, creating a chronic shortage of gold that may soon push the metal to fresh records above $1,500 an ounce.” [Note to Ambrose: From your lips...to God's ears! - Ed] The link is here.

And lastly, here is a really interesting article from thedailybell.com. If you’ve ever had questions about the Swiss banking system…and what’s really happening over there…this story answers all of them. I was enthralled from beginning to end. I urge you to find the time and give it the attention it deserves. The article is entitled “The Future of Swiss Banking” and the link is here.

I don’t think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken. – Ex-Federal Reserve Chairman Paul Volcker, 18 April 2009

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Everyone and his dog knows that the equity markets are in the midst [or at the end] of a bear market rally. The bank earnings being reported are complete B.S…and it’s only a matter of time before the next down-leg begins in earnest…and the US$ will go with it.

See you here on Wednesday morning.

Source: And Then There’s This…Tuesday, April 21st, 2009

• President Barack Obama has appointed Former Federal Reserve Chairman Paul Volcker to close tax loopholes and streamline tax laws. The top-to-bottom overhaul of the 96-year-old tax code will reduce tax evasion and “corporate welfare,” budget Director Peter Orszag told Bloomberg.

• Kenneth Lewis, Bank of America Corp.’s (BAC) chief executive, told The Los Angeles Times he wants to begin repaying the $45 billion his company owes the U.S. government next month. He also said that a variety of financial indicators “leads me to think we’re starting to see the bottom” of the recession.

• In a message to its Volvo employees, Ford Motor Co. (F) said it is moving closer to selling the Swedish brand, which has been losing money. “We’ve had contact with a number of parties who’ve expressed interest concerning the future of Volvo. Ford’s been pleased with the number and quality of those parties,” John Gardiner, Ford’s European director of strategic communications, told Reuters.

• Romania became the sixth eastern European country to receive a bailout from the International Monetary Fund. Despite being the European Union’s fastest-growing economy last year, the country received a $27 billion (20 billion-euro) loan from the IMF, Bloomberg reported.

• International Business Machines Corp. (IBM), the world’s biggest computer-services provider, plans to inform a large number of U.S. employees in its global-business services unit that their jobs are being transferred to IBM employees in India, reported the Wall Street Journal, citing people familiar with the situation. IBM had already cut at least 4,000 positions since January, joining technology bellwethers Microsoft Corp. (MSFT) and Intel Corp. (INTC) in trimming payrolls to cope with the recession.  The global division accounts for about one-fifth of sales.

• Orders for U.S. durable goods unexpectedly rose by 3.4% in February, the biggest gain in more than a year, the Commerce Department said yesterday (Wednesday). Increasing demand for machinery, computers and defense equipment, highlighed the figures and indicate the economy is stabilizing after shrinking last quarter at the fastest pace in a quarter century, Bloomberg reported.  Stepped-up efforts by the Obama administration and Federal Reserve to ease the credit crunch may help revive growth later this year.

• Brazil’s stock index climbed to a six-week high on speculation government efforts to bolster the housing industry and reductions in interest rates will boost economic growth, Bloomberg reported. The Bovespa index increased 2.4%, erasing yesterday’s 2.3% decline. The gauge has gained 13% this year on speculation government measures, falling interest rates and a recovery in commodity prices will boost growth.

• Chief Executive Officer Kenneth Lewis said Bank of America Corp (BAC) wants to start repaying $45 billion of federal bailout money next month, after completing a government stress test, the Los Angeles Times reported on Wednesday. Lewis had previously said he hoped to pay back all of the money the largest U.S. bank took from the $700 billion Troubled Asset Relief Program as soon as later this year.

Source: Global Investment News Briefs Thursday March 26, 2009

So I was surprised to read where it starts out with, “Large investors, including some who anticipated deep troubles for the housing and financial sectors, have been buying gold, concerned that moves by governments world-wide to shovel money at problem areas could cripple leading currencies.”

This is exactly true! That is exactly why I am buying gold, and why smart people are buying gold and why large investors are buying gold!

Well, since the WSJ is traditionally concerned with stocks and bonds and so is historically unconcerned and disdainful of gold, I figure that Mr. Zuckerman will follow that “gold bug” news with some disparaging remark like “which only proves how stupid large investors are, since everyone knows that gold is for morons and raving lunatics like, for instance, The Mogambo, who is forever wailing about how you should be buying gold, silver and oil with your very waking breath because the Federal Reserve, which caused all of the world’s problems by their decades-old regimen of constantly over-creating money and credit which produced massive inflations in the prices of stocks, bonds, houses and size of government, is now going to make the money supply go Freaking Super-Nova (FSN) with even MORE excess creation of money and credit to accommodate the panicky, unbelievable, desperate deficit-spending plans measured in the multi-trillions of dollars by the incompetent, brain-damaged Congress and the ridiculous Obama administration comprising, as it does, the worst of the worst, and that means consumer prices are going to explode one day – say people like The Mogambo, within a year or so, and for a long, long time afterward, too.”

Although Mr, Zuckerman does not mention me directly, he says, “For years, big gold fans were fast-moving traders and so-called gold bugs, a crowd of bears ever-convinced that the underpinnings of global economies and markets were set to crumble” which not only describes me to a freaking T, but is exactly what happened!

He also describes me pretty well, too, when he says, “Gold has disappointed some investors because it hasn’t been a home-run investment despite continuing financial ills” which is also the fault of the Federal Reserve, which is on record as saying that “the Fed stands ready” to dump as much gold onto the market as is needed to keep its price from rising.

And the reason they are openly manipulating the price of gold, which is the advice of former Fed chairman Paul Volcker, is because they are concerned about the price of gold rising, which is a clear signal that inflation is raging because the Fed is a bunch of money-maddened morons and the economy is in Big Freaking Inflationary Trouble (BFIT) because of them and their mismanagement of monetary policy with their ridiculous neo-Keynesian econometric stupidities! Hahahaha!

And it is going to get worse, as Junior Mogambo Ranger (JMR) Wayne T. sent a clip from ft.com that announced that “Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a coordinated effort to boost demand and lift the world out of recession.”

And how are we going to do this amazing feat? By engineering a “global demand-led recovery” where everybody starts buying! Buying! Buying!

And in fact, Laughable Larry Summers thinks, “There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”

I cannot believe what I am reading! Perhaps in a feeble attempt to make me shut up my screaming in outrage at the inflation in prices that such irresponsible economic stupidity will cause, he does allow that, as ft.com terms it, “While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now.” Hahaha! Unbelievable!

And why in the hell would anyone in their right mind say such a bizarre thing that is directly contraindicated by the entire stinking corpus of world economic history for the last 4,500 years which proves that, 100% percent of the time, increasing the money supply of a fiat currency with government deficit-spending has been what we in the economics biz officially call a Big, Big, Bad, Bad, Bankrupting Bust (BBBBBB).

Well, don’t look at me for an answer as to why someone would say such a ridiculous thing and make us laugh with scorn and contempt, but, “In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.” Hahahaha!

“Temporarily overrode”! Hahaha! This is the economics of Larry Summers? Hahahaha! No wonder he wound up in the Obama administration! Hahaha! No wonder we are so freaking doomed!

I am struggling to contain my laughter, as I want to make sure that I write this down because people in the future are not going to be satisfied with me merely recalling the moment and laughing and guffawing all over again, but probably drooling more than I do now.

So I officially make note that Larry Summers, “Barack Obama’s top economic adviser” thinks that things will be better by having the government spend more money! Hahahaha!

This is after, I assume, getting it from the Federal Reserve, which can merely push a button to create all the money and credit one can even imagine, at perpetually low interest rates, so that untold trillions of dollars of new money can be borrowed from banks so that untold trillions of dollars in new Treasury bonds can be bought, worsening horrific imbalances that are already so staggering that they could only have been produced during rampant government corruption and/or pandemic stupidity! Hahaha!

I knew I could not get into the interview itself, and, as usual, am stopped long before I can even get near, although sometimes I can break free of the grasp of security guards long enough so that you can barely hear me in the background yelling, “We’re freaking doomed, you morons! The damned increase in the money supply by government deficit-spending will increase prices and produce Really, Really Weird (RRW) economic distortions!”

Well, this is not one of those times, and I couldn’t hear a thing they were saying, and thus they could not hear me, and I had to read in the Financial Times article that Mr. Summers says, in another of those things that must be written down because nobody is going to believe it, that “The US administration had no choice but to take strong public action to ‘save the market system from its own excesses.’” Hahahaha!

“Save the system from its own excesses” with more excesses! Hahahaha!

But this is not about how much disrespect I have for Mr. Summers’ opinion (because, as Milton Berle said, “Never trust the opinion of a man in trouble” as to the necessity of more governmental deficit-spending to correct the bankrupting imbalances of previous governmental deficit-spending until fully half – half! – of the economy is now composed of local, state and federal government spending, which is not even to mention all the borrowing by the local and state governments floating bonds to pay for sewers and fire houses and playgrounds where most of the “children” are probably drug-addled adolescent criminals and brain-damaged mutants, judging by the way they look, dress and act.

No, this is about how you should buy gold; but perhaps the best reason to buy gold is provided by Mr. Zuckerman himself, who says, “Since 1971, the dollar has been backed not by gold but by faith in the U.S. government”! Hahaha! Faith in the U.S. government! Hahahaha!

If anybody has any faith whatsoever in the U.S. government, then they have not been paying attention and deserve to lose their money, as the price of freedom, they say, is eternal vigilance, but that is not exactly true. It looks like the saying should be “The price of freedom is either eternal vigilance or all your money.”

The good news is that the real, lazy man’s secret is that gold is “eternal vigilance” in a handy, compact yellow metal, and sometimes, like now, you will actually get richer in terms of fiat money due to the depreciation of the over-produced fiat money!

Whee! This investing stuff is easy!

Source: There’s No Place Like Gold

I have an alternative theory: After a lull of a couple of months, Paul Volcker is back in the news.

And when Paul Volcker’s in the news, the market feels good.  It’s the Volcker Effect.  He shows up on TV, it’s market Prozac.  A warm glass of milk.  Endorphins flow as traders conjure fuzzy memories of the guy who put the inflation tiger back in its cage  and sparked a secular bull market in stocks.

But don’t take my word for it.  Just look at his “news reference volume” on Google starting late last fall and compare it with a chart of the Dow.  You’ll find a rough but compelling correlation.

Think back to the final weeks of the election cycle last year.  It appeared Obama would emerge the victor. For all the campaign contributions he got from the banksters, the prospect of “change” still unnerved the broader market.  From mid-October the Dow lurched downward about 1000 points in the space of ten days.

But late in the month, Obama started convening pow-wows of assorted worthies to discuss the economy.  And standing right next to the candidate in most of the photo ops was Paul Volcker.  The Dow zoomed up about 1500 points by Election Day.

From there, the Dow fell about 2000 points as Volcker seemed to fade from the scene and attention focused on the overall makeup of Obama’s economic team.  But late in November, as word filtered out that Volcker would be named chief of an “Economic Recovery Advisory Board,” the Dow spiked again — not to the Election Day high, we still haven’t been back to that level — but it was a noticeable movement.

Ever since, the Dow has been range-bound between 8000 and 9000.  And Volcker has been nearly invisible.  According to Bloomberg, he’s been caught up in office politics with Larry Summers, for whom office politics appears to be casual sport.

But on Friday, shortly after the jobless numbers came out, Obama and Volcker showed up on TV again, finally naming the members of Volcker’s panel.  There’s your 3% pop in the Dow.

Not that this market confidence is particularly deserved.  For a panel that’s billed as comprising “outsiders” providing a “fresh perspective,” some of the names look pretty inside and stale.  There’s Bill Donaldson, who as SEC chairman in 2004 went along with Hank Paulson’s demand to let the investment banks jack up their leverage from 12:1 to as much as 40:1.  That turned out well.  There’s Jeff Immelt, who helped transform GE (NYSE:GE) into a company whose primary business was lending money to its customers so they could buy stuff from its now-secondary businesses.  That turned out well.  And there’s Penny Pritzker, subprime lending pioneer who helped blow up Chicago’s Superior Bank years before subprime became front-page news.

Why Volcker wants to tarnish his reputation with this crowd so late in life, at a juncture when the chances he could take credit for a turnaround are so slim, I have no idea.  But there you have it.

Already this morning it appears the Volcker Effect is wearing off because Treasury Secretary Tim Geithner’s scheduled announcement of “Son of TARP” has been put off from today till tomorrow.  The official reason is the administration wants to keep the focus on getting the “stimulus” passed.  But as the Wall Street Journal reports, “The administration hasn’t settled on exactly how [the plan] will work and intends to hash out the structure with the private sector over the next few weeks.”

Not exactly confidence-inspiring.  As I said on Friday, Geithner has only one shot at this.  If he comes back next week or next month to fine-tune or tinker with this thing, markets will write him off as Hank Paulson reincarnated, the Dow could easily slide 2000 points, and the Volcker Effect will be rendered irrelevant.

Source: The Volcker Effect

Testifying after former Fed Chairman Paul Volcker, Geithner told the committee the United States is facing “the mother of all financial crises.” Geithner also urged Congress to quickly pass a robust stimulus plan, Bloomberg News reported.

“If our policy response is tentative and incrementalist, if we do not demonstrate by our actions a clear and consistent commitment to do what is necessary to solve the problem, then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system,” he told the committee at a hearing on his nomination.

The credit crunch and housing market collapse require a “comprehensive plan” that must be coordinated with international partners to effectively relieve global economic conditions, Geithner said.

Promising to reform the TARP program, Geithner said the Obama administration will require banks receiving government money to provide proof of increased lending. Some Senators sitting on the panel are upset at how the Treasury-administered financial rescue program has been run.

“We have to fundamentally reform this program to ensure that there is enough credit available to support recovery,” Geithner said.

He said the administration is considering expanding the system to help small businesses and families that are losing their homes and jobs. Former Treasury Secretary Henry Paulson, so far, has limited the program to injecting capital into banks.

The Obama team is also considering further steps to shore up the banking system, including the possibility of having the government take bad assets off banks’ books, according to people familiar with the thinking of the Obama team, Reuters reported.

Geithner, currently president of the New York Federal Reserve Bank, said it was possible the administration could establish a “bad bank” to soak up toxic assets held by banks that are discouraging them from lending.

Banking Regulations Should Change

Geithner also called for “comprehensive” regulatory changes to prevent a future economic crisis of this magnitude – the worst since the Great Depression – from happening again.

“We need to move quickly to build a stronger, more resilient system now, with much greater protections for consumers and investors, with much stronger tools to prevent and respond to future crises,” he said. “Well-designed financial regulations with strong enforcement are absolutely critical to protecting the integrity of our economy.”

His statements echoed the sentiments of our own Shah Gilani, who provided guidelines on how to implement effective regulatory reform in Monday’s edition of Money Morning.

“The inability of the present system of regulation to deal with the complexities of expanding capitalism and protect us from inordinate concentrations of systemic risk has been tragically demonstrated. It is time that the crumbling walls of regulation are replaced with a new singular, transparent, effective and dynamic regulatory apparatus,”Gilani wrote.

Geithner, president of the Federal Reserve Bank of New York, was also grilled by lawmakers about his failure to pay $34,000 in taxes over several years in the first half of the decade. That issue – as well as a second, regarding the employment of a housekeeper without a work permit – fueled the doubts of some Republicans, who were blocking efforts to fast track Geithner’s nomination.

Geithner said his tax errors were “careless” and unintentional, and he apologized to the committee for the toll they have taken on his confirmation process. As reported by Money Morning on Jan. 19, Geithner actually placed phone calls to individual senators, hoping to persuade them his tax problems were the result of innocent errors.

Apparently it worked. Confirmation appears to be a fait accompli as several Democrat and Republican senators on the Finance Committee voiced strong support for Geithner.

Senate Finance Committee Chairman Max Baucus, D-Mont., said Geithner made “disappointing mistakes” that shouldn’t derail the nomination.
“After discussing them with Mr. Geithner, I believe them to be innocent mistakes,” Baucus said.

Source: Geithner Promises TARP Overhaul, Regulatory Changes to Solve “Mother of All Financial Crises”

It sounds like retailers may be disappointed with the results of this years biggest shopping day, as there really isn’t any ‘must have’ items, and consumers are being a little tighter with their wallets.

Consumer spending as reported in the US on Tuesday slid the most in seven years last month. Another report released by the Commerce department showed business investment also tumbled last month. Orders for US durable goods fell twice as much as forecast. And spending in Europe, the UK, and Japan is also dropping. UK consumer spending dropped the most since 1995 and business investment also fell. The global slowdown has hit consumer and business confidence, encouraging them to reign in their spending. This can become a vicious cycle, as the slowdown in consumer and business spending causes the global economy to continue to slow, bringing confidence levels down even more. I expect the global slowdown to intensify, and look for a major drop in US GDP over the next few quarters.

Leaders hope to break this pattern by increasing government spending and stimulus packages. The European Union proposed $259 billion in stimulus measures and President-elect Barack Obama is pushing for another stimulus package here in the US. While I am talking about Obama, did you see he announced former Fed Reserve Chairman Paul Volcker as his main economic advisor? Both Chuck and I are fans of Mr. Volcker, but then we both figured Paulson and Bernanke were good choices also. I guess we will have to see if Volcker can resurrect another ‘magic bullet’ to get us out of this vicious cycle. Things are just about as bad as they were back in the 70’s and 80’s, but he has ‘been there, done that’. Hopefully his past experiences will help him steer the new administration in the right direction.

Chuck was watching the data print Wednesday morning, and left me these thoughts:

“New-Home Sales Sink 5.3% to Lowest Level in 17 Years U. Mich. Confidence – new low since ‘80 Chicago PMI collapses Consumer Spending Fell to 7-Year Low in October Americans’ Food Stamp Use Nears All-Time High

And can’t imagine what in the world the people that make the official call on a recession the NBER (National Bureau of Economic Research) are thinking… I called this a recession back in January, and they have yet to make the call… Amazing!

Of all that bad data, the only one that will have a good outcome in the end, is the Consumer Spending falling to a 7-year low. We’ve gone on with this spending more than we make, for far too long! Now, if we could just get the Gov’t to do the same!

And I would imagine that course of action for Consumer Spending will be staying steady Eddie for some months to come, and more and more we see +500K numbers each week on the Initial Jobless Claims… It’s going to get ugly folks… And I’m afraid that a lot of pain is going to have to be suffered before this ship gets straightened out… So, be careful out there!”

I agree with Chuck, the decline in consumer spending is actually a good thing. The only problem is that our economy depends on consumers to borrow and spend, so the belt tightening is going to really drag this slowdown out. Even if Obama convinces congress to spend another couple hundred billion, the government can’t make up for consumers who have decided to shut their wallets.

This is what happened in Japan over the past several years, as Japanese consumers stopped spending. This created a deflationary spiral as prices of consumer goods continued to fall, encouraging Japanese shoppers to just wait a while longer, as they were able to purchase goods cheaper in the future. While this helped move Japanese consumer balance sheets back into the black, it was a major drag on the Japanese economy. The BOJ fought against this deflationary spiral by bringing interest rates down to zero and holding them there for a number of years. Japan is still in a low inflation environment, and the Japanese continue to have one of the best saving rates in the world.

But I just don’t think the US consumer will stay away for too long. Sales, offers of ‘lay away’ plans, and spend now pay later programs will likely lure shoppers back into the stores. But I do believe retail sales will continue to be weaker than in the past, and the slowdown of consumer spending will continue to be a drag on the US recovery. Again, I don’t expect the US to recover for a number of years. The US slowdown will continue through 2009 and into 2010.

Chinese officials made the biggest interest rate cut in 11 years in an effort to keep their economy from slowing below their goal of 8%. The interest rate cut follows the announcement of a 4 trillion Yuan ($586 billion) stimulus package earlier this month. There have been some civil unrest and protests by unemployed workers, so this is an attempt by the Chinese leaders to get the economy moving in the right direction again.

I read a story on Bloomberg this morning which predicted China’s foreign exchange reserves would top $2 trillion for the first time later this year. China’s holdings have increased 25% this year, while those of Japan and Russia shrank. Apparently, Russia has been selling off its currency and gold assets in an attempt to prop up the ruble. China continues to build up their reserves, and the huge amount is concerning to the currency markets. China will not hesitate to use these reserves to stimulate their economy, and what currency are a majority of these reserves held? US dollars!! In order for China to put these reserves to work, they will need to sell the dollars and get the money pumped back into the Chinese economy. These reserves are a major risk for holders of US$.

Currencies today 11/28/08: A$ .6528, kiwi .5481, C$ .8073, euro 1.2766, sterling 1.5336, Swiss .8257, ISK (No Quote), rand 10.135 krone 6.9762, SEK 8.0655, forint 203.165, zloty 2.9574, koruna 19.717, yen 95.34, baht 35.53, sing 1.5108, HKD 7.7504, INR 50.10, China 6.8306, pesos 13.243, BRL 2.3274, dollar index 86.49, Oil $53.50, Silver $10.23, and Gold… $813.00

Source: Black Friday

This from The Daily Reckoning:

“Until today or tomorrow, the typical turkey enjoyed a fairly decent life…” commented our friend Nassim Taleb, in Zurich yesterday.

Yesterday [Wednesday], the stock market was quiet. The Dow ended up 36 points. Oil held at $50. Gold too…it stayed right where it was, at $820 an ounce.

But the slaughterhouses and gold mints worked overtime.

“You can understand how fraudulent most economic analysis is,” Nassim explained, “just by looking the life of the turkey. The animal is fed for 1000 days…and then it is killed. So, if you plotted out the turkey’s life on a chart, it would look great for 1,000 days…each day, the food arrived reliably, and each day, the turkey gained weight. The turkeys would look around and say they were enjoying growth and a bull market. Momentum investors would see it as an opportunity. The quants would run linear regressions on the data and prove that the risk was minimal. ”

Ben Bernanke would describe the turkey’s life – with no setbacks – as the product of a “great moderation.” Turkey stockbrokers would assure their clients that nothing had ever gone wrong in the turkey’s life. Turkey econometricians and theorists would come up with explanations for why the turkeys’ growth would continue forever and they’d pat each other on the back for having finally mastered the “turkey cycle.” Turkey politicians would run for re-election on the grounds that they had helped create a better world. And turkey economists would project further weight gains…until the turkey was the size of a hippopotamus

Then, come Thanksgiving, and all of a sudden, something goes wrong. Alas, all the turkeys’ theories, models, and conceits were for the birds.

“Rare events can’t be modeled,” Nassim continued. “Because they are too rare. You can’t get a statistically reliable sample. Alan Greenspan recently explained that he ‘had never seen anything like this before.’ Well, of course he had never seen it before. It never happened before.

“Because these events are so rare, they are also completely unpredictable…and usually much worse than you can expect. Like Thanksgiving Day for the turkey.”

The turkeys are getting the axe…but they’re having some revenge: Americans are getting the axe too.

Unemployment is rising sharply…and tomorrow, when Americans sit down to their turkey dinners, they will be dining in houses worth about 18% less than they were worth a year ago. Not only are their houses worth less…their values are falling faster and faster.

There’s no sign of a bottom to the housing market. In some areas – Los Angeles, Miami, San Diego, and San Francisco – the loss in housing wealth already exceeds 26% from a year earlier.

But don’t worry, dear reader. Houses are not dot.coms. And they’re not turkeys. They won’t go to zero. And they won’t disappear.

Besides, they were never financial assets in the first place. They’re just places to live. If you’re happy with your house…you don’t care what its price is.

On the other hand, if you’re not happy with your house, this is the time to start looking around. Our guess is that house prices will go down another 20-30%. Then, you will be able to get houses at very reasonable prices… Unless you want to live in Detroit – where you’ll be able to get a house at a remarkable price.

Meanwhile, the economy itself is sinking too. GDP faded in the 3rd quarter – down 0.5%. Most likely, the US economy will begin walking backwards faster too. Which means…more businesses will fail…more people will be out of work…and those people with any money in their pockets will be very careful about how they spend it…

…which will, of course, make things worse.

All this is a natural, normal response to a credit bubble. It gets bigger and bigger – and then it blows up. Loans are made…and then they are collected. Mistakes are made…and then they are corrected. People do stupid things…and then they pay for them. People go mad on the way up…then, they go mad again on the way down. What could be simpler?

But if you think the feds are going to stand still and let something natural happen, you have not been reading the papers. They’re “pulling out all the stops” to try to prevent the correction…

So far, the feds’ efforts have been futile. But we have little doubt that they will get the hang of it eventually. If there is one thing the feds can do it is inflate the money supply. Ben Bernanke stakes his reputation on it.

And here is Thomas L. Friedman explaining what is needed:

“…a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets, and most importantly, a huge injection of optimism and confidence…”

Friedman is the voice of the masses. But the intellectuals agree. Bloomberg reports:

“’You want to do everything you can when you’re facing the threat of a deflationary breakdown of the economy,’ says Michael Feroli, a former Fed official who is now an economist at JPMorgan Chase (NYSE:JPM) & Co. in New York. He sees the central bank cutting the overnight lending rate to zero in January and holding it there throughout the year.”

“Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are being forced to pull out the stops because the extraordinary actions they’ve taken so far have failed to gain much traction. Credit markets are collapsing, stock prices are plunging and the world economy is sinking into a recession.”

“The biggest mistake Obama could make,” says Yale economist Jeffrey Garten, “is thinking this problem is smaller than it is. On the other hand, there is far less danger in over-estimating what will be necessary to solve it.”

Yeah…go ahead and err on this side now…. Why not? You erred on the other side. That is about the depth and breadth of thinking on the issue – at least from the people who never understood what the problem was…and now offer to solve it.

And it was to one of these same hacks whom Obama has turned for his secretary of the Treasury – Timothy Geithner. Here is another Hank Paulson. Unlike Hank, he did not work on Wall Street. Instead, he was supposed to be keeping an eye on Wall Street – as head of the New York Fed. “He was in the room,” when all the bailouts and busts happened, said one Wall Street pro. AIG (NYSE:AIG), Bear, Lehman, Citigroup (NYSE:C)– he was in on them all. And he was at least peeping through a keyhole when Wall Street was enjoying its wild party. He saw the deals go down…the leveraged debt…the private equity buyouts…the subprime razzle-dazzle…the quants…the bonuses.

We don’t recall a single word of warning. But then, he’s a young guy…maybe he’s learned something.

But we have a pretty strong hunch he’ll be at the Treasury Department not to further his education…but to play his role in the developing tragedy. He’s meant to try to stop the correction. Rather than examine his lines carefully to see if they really make sense…he’ll speak the speech given him. “Stimulus,” he will say. “Protect jobs…save homes…avoid financial meltdown…,” he has heard them before. He will say them again. And why not? Almost everyone wants to hear them. They all want bailout. Almost everyone wants to be saved. Almost everyone wants to duck the bill collector…and stop the hangman.

We all have to play our roles, dear reader. We are all turkeys…waiting for the axe.

Source: We Are All Turkeys