“The Chicago Fed’s national activity index,” notes our macro adviser and fellow data dork Rob Parenteau, “continues to point to a second-half 2009 real GDP recovery. With the September release, investors focused on the index — a composite of more than 80 monthly indicators that provides a reasonably good proxy for real GDP momentum — slipping to -0.9 from -0.46 the month before. We have never seen this index climb consistently straight up after a recession month after month, and this decline is well within the range of monthly variation we tend to observe in this series.

“To be sure, growth above the long-term real GDP trend is not signaled until this index crosses the zero threshold. Typically, it takes until year two of a recovery to get there. Right now, all we are shooting for is growth, rather than recession. As displayed below, year-over-year growth at a 1.5-2% real GDP pace is within reach by year-end, given the sharp V-shaped recovery in the Chicago Fed index to date. We believe this will be sufficient to bring actual inventory accumulation into view in Q1, which can carry the economy in to midyear 2010 or so, at which point the unwinding of the fiscal stimulus becomes more of an issue.

“We continue to believe that is much more of a second-half 2010 concern, when the fiscal tide starts to go out, revealing a U.S. private sector that will still be leery of adding to its existing debt and will still be very keen on keeping spending growth below income growth.”

Source: We’re Back to Growth… For Now

Good day… And a Terrific Tuesday to you! A Tuesday morning that is seeing a HUGE currency rally VS the dollar on the news that the Reserve Bank of Australia (RBA) opted to go ahead and hike rates now, and not wait for November’s meeting, as I had thought they would do! WOW!

The first hike… It has opened Pandora’s Box of interest rate hikes around the world… For, if the RBA went this soon, then we can expect Norway’s Norges Bank to push their rate hike earlier on the calendar, maybe even later this month! And they won’t be the only ones! Look for New Zealand to hike rates this year, and who knows what other country (Brazil?) will follow after that… But I see them coming, and they’re marching the death march of the dollar!

OK, that was a little dramatic, while I don’t believe, although I have more doubts every day, that the dollar would collapse to nothing, I do believe it has a long way to go when it comes to weakening. How else will the U.S. pay pack their debts in the future? It sure won’t be because of a cut in Gov’t Spending! That is… Unless all this deficit spending can be reversed and Gov’t is cut (in size) to resemble something from 50 years ago! But, that’s like asking for the moon and sky, eh?

Let’s get back to the Aussie rate hike, that’s more exciting and upbeat than talking about what’s going to be needed in the future here in the U.S! The statement that followed the RBA rate hike, was very upbeat… So… I totally expect another rate hike next month from the RBA!

OK… The dollar’s weakness this morning isn’t all due to the Aussie rate hike, and prospects for other rate hikes around the world… In 2001 I wrote a white paper called, “The Demise of the Dollar”… This was the thesis for all the things I talk about almost daily regarding the reasons the dollar would got into a secular bear market… And this was one year, let me repeat that, one year, BEFORE the dollar entered into a weak dollar trend in Feb of 2002!

The reason I bring this up here in 2009, is that there is an article in the U.K. Independent that’s making the rounds, that’s called… “The Demise of the dollar”! This report though is about secret meetings with the Gulf Arabs along with China, Russia, Japan and France, and they are planning to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

Uh-Oh… That’s serious stuff folks… And that death march I talked about above? Well, if this story is true, that death march just became much louder!

Right now, however, the markets are not taking the story hook, line and sinker, just yet… Yes, the dollar has been sold, but not like you would think, if traders had taken the story to heart… I think some digestion time needs to be had first… I mean the currency traders had the first rate hike and then this story on their plates all at one meal… That’s a lot to digest! And Besides.. The Saudi Bank Gov. is denying that any of these meetings took place… Of course to conspiracy buffs like me, that’s akin to saying, “These meetings DID take place, and we’re just covering up the evidence” HA!

Now… Some might be cursing these countries right now, for dealing this rumored blow to the dollar… But, it’s not like the dollar didn’t have it coming! The Deficit Spending… For instance, is one thing that people that “know better” realize that the U.S. will not be able to climb out from under the deficit rock… And those knuckleheads who said “Deficits don’t matter”? Well… I’ve said this many times before, but I can’t talk about the Deficits don’t matter crowd without talking about how these people remind me of a guy… He’s standing on top of the Empire State Building, and decides to jump off… As he passes the 56th floor, he says… “So far… So good!”

Well, unfortunately for our “Deficits don’t matter” guy falling to the ground, the sidewalk is coming at him very quickly now…

And here’s another thing that should just tick you off to no end, but you have to think that the people that have loaned us money, are wondering if they’ll ever get paid back… What I’m talking about here is the story from yesterday, regarding the TARP funds… You might want to sit down for this one folks…

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), says that despite multiple statements on Oct. 14 of last year that these nine banks were healthy and only receiving government funds for the good of the country’s economy, federal officials knew otherwise. He went on to say that “the Treasury Dept. and the Federal Reserve lied to the American public last fall when they said the first nine banks to receive government bailout funds were healthy.”

That’s right… They LIED TO US! Now, doesn’t that just tick you off? It sure ticks me off!

So… You can see some of the reasons the countries mentioned above might be thinking about removing the dollar as the pricing mechanism when it comes to oil…

OK… We started up beat, then got brought down, let’s get back to upbeat! Hey! How about Gold? When I turned on the screen this morning, Gold was $1,020! You would think that even if the U.K. Independent story is just a rumor, that Gold would gain on the rumors…

I read a story last night, while waiting for the so-called “Epic Battle” between the Vikings and Packers on Monday Night Football, that one analyst was of the belief that Gold was about to return to its link to the price of Oil… Hmmm… Well, I personally hope that’s not the case, as I certainly don’t want to see the price of Oil rise to the levels I think Gold is going to rise to!

Yesterday, I did a presentation on the DTI network… (I had given you all the link to it last week) My power point presentation didn’t work, so I had to just “wing it” (yeah, like talking for 30 minutes on how we got here, what’s going on, and why one needs the power of portfolio diversification was difficult for me! HA!) I think they want me to come back next week… DTI educates investors / traders/ and people that just want to know how the markets work, so it’s all for a good cause, because… An educated investor, is a good investor!

OK… Let’s see… OH! I wanted to talk about this yesterday and totally forgot, but it’s not too late today to talk about it…

One thing that we’ll begin to see this month is the earnings season…
You might recall that in previous quarter ends I thought that stocks would get taken to the woodshed, because of lousy earnings, only to be surprised at the earnings that were posted… But trying not to be the boy who cried wolf, I’ll once again say that I just don’t see the earnings to support stock prices. This time I think we’ll see that the method used in previous quarters by Corporations to produce the earnings was cost cutting… One would have to think that the Corporations have cut to the bone… And now, we’ll get to the cheese that binds for earnings… A lack of revenue…

I really liked the reaction of the non-dollar currencies, led by the Aussie dollar, after the RBA rate hike… It was like “old days”… Uh-Oh, I have a song in my head… “Old days Good times I remember, Fun days, Filled with simple pleasures, Drive-in movies, Comic books and blue jeans, Howdy doody, Baseball cards and birthdays, Take me back, To a world gone away,
Memories, Seem like yesterday….

Yes, the “old days”… Well, in this case I was talking about currencies trading on “Fundamentals” not stupid trading themes, not flights to safety, not deleveraging, but plain and simple fundamentals, things that ordinary people, like me, can understand, and place a value on a currency based on the fundamentals!

But… We’ve not really seen a fundamental trend since July of 2008… However, if we begin to see the rate hikes that I think we’ll begin to see, it could be the harbinger of a return to fundamentals… And that, my friends, and dear readers would be like manna from heaven for your Pfennig writer!

Well… Since I came in this morning, Gold has gained $5 more, to $1,025! Looks like the all-time high of $1,033.90 that came in March of 2008, could be in jeopardy… My love’s in jeopardy, baby… Oooh, ooh, ooh, ooh…

Maybe Gold moving higher can get Silver going too! My friend, the Mogambo Guru, reported yesterday that silver analyst, Ted Butler, reports that in the last 10 months, “some 150 million ounces of silver can easily be documented to have been bought by investors.
Undocumented purchases would add tens of millions more ounces.”

In fact, when you add it all up, “Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout.”

Chuck here… Back from a trip to the Mogambo’s letter… I just love the way the Mogambo ends his letter each week… He talks about how people should be buying Gold, Silver, and Oil, and then says… “Hey! This investing stuff is easy! Whee!”

OK… To recap… The RBA did raise rates 25 BPS last night, and sounded quite upbeat in their after rate hike statement. Look for other countries to follow now that Pandora’s Box of rate hikes has been opened. There’s a story going around about countries banding together to remove the dollar as the pricing mechanism for Oil trades… It’s being denied, but there’s smoke… And you know what I say when there’s smoke… And Gold is pushing the envelope on its all-time high of $1,033.90…

Currencies today 10/6/09: A$ .8875, kiwi .7355, C$ .9395, euro 1.4730, sterling 1.59, Swiss .9745, rand 7.4230, krone 5.6920, SEK 6.97, forint 181.15, zloty 2.8370, koruna 17.3360, RUB 29.81, yen 89, sing 1.4025, HKD 7.75, INR 46.99, China 6.8263, pesos 13.56, BRL 1.7593, dollar index 76.35, Oil $71.13, 10-year 3.22%, Silver $16.99, and Gold… $1,025.45

That’s it for today… Hope your Tuesday is Terrific!

Chuck Butler

Source: RBA Raises Rates!

Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

In fact, the recent weakness in the US dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn’s panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.

Now, unlike some of the die-hard gold bugs, I don’t believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this ‘stimulus’ money hasn’t permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

Long-term clients and subscribers will recall that about two years ago, I highlighted gold’s tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold’s bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

Figure 1: Is gold about to shine?

So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold’s bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.

Regards,

Puru Saxena

Source:Inflation is Our Future

We said we were doing some serious thinking this week. Maybe it is the season. But more and more, our thoughts become grayer. Less black. Less white. Less hard. Less soft.

A few years ago, it looked to us as though the world financial system had gone to war. We cheerfully awaited the victory parade. We figured Mr. Market would whup the feds good and hard. It hasn’t happened so far.

On one side, are the forces of a natural market correction… following a long, long period of expansion. The easier money gets, the more people tend to mis-spend and mis-invest it. Then, inevitably, their mistakes must be corrected. That’s what bear markets and recessions are for.

But the feds don’t like bear markets or recessions. And at least since Keynes outlined his general theory back in the early 20 th century, they’ve believed that they don’t have to put up with them. Keynes took a page from the Old Testament. Government should act like an enlightened Egyptian Pharaoh, he didn’t say, but should have. It should run surpluses in the fat years and deficits in the lean years… thus flattening out the pattern of boom and bust.

Pharaoh was no dope. He stored up grain for 7 years, when the harvests were bountiful. Then, when the 7 lean years came, he released the grain to the people. Problem solved.

Keynes believed that modern government could do the same thing. But Pharaoh was not running a democracy. He had no voters to answer to. So, if he wanted to store grain in the fat years, he could do so.

In theory, the US government could do the same. But in fact it never runs significant surpluses. There are too many people who want too much bread and too many circuses. And you don’t win votes by denying the voters what they want. So, in practice, the feds run deficits even in the fat years! Last year, before the downturn really started to bite, the US federal government ran the biggest deficit in history – nearly half a trillion dollars.

Now, let’s imagine how that would work for a bad Pharaoh. He would give out grain in the fat years. This would encourage farmers to produce less grain. Then, when the lean years came, Pharaoh would have no grain to give out… and the farmers would have less grain stored up themselves, since they grew less during the boom years. The famine would be worse than ever.

Then, if we can imagine that Egypt was trading with China at the time, perhaps Pharaoh could borrow grain from the Zhou dynasty to help ease the peoples’ pain. Perhaps he could mortgage the pyramids. Whatever, he – and the Egyptian people – would have been in much better position if he had done as Joseph told him in the first place… lay up stores in good times, draw then down in bad times. How difficult is that?

But Bernanke didn’t see the famine coming. Neither did Geithner. Or Greenspan. Or any of the other savants Pharaoh interpret his dreams . None of them expected hard times. None of them warned the public. None of them encouraged the government to save money for the recession. Nassim Taleb asks why Bernanke was reappointed after he clearly failed the most critical test. But heck… the federal government is an equal opportunity employer. Employees aren’t let go just become they’re incompetent.

Anyway, getting back to our thoughts…

… it looked like a battle to us – between the forces of inflation (the feds)… and the forces of deflation (the market). But battles usually have clear winners. One side is master of the field; the other retreats. One side is victorious; the other is defeated.

Alas, some wars produce no hozannahs of success… and no wailing widows of failure. Some end in draws… or in confusion… or in disgrace and bankruptcy for both sides.

Like the bad Pharaoh, the feds saved nothing. Now, they have to try to work their Keynesian magic on credit. This puts them in a weak position; like a government that wages war on borrowed money. They can continue their campaign only as long as lenders allow them. They can’t wage the war as effectively as they’d like. Then again, maybe they can’t lose it as spectacularly as they might.

For the moment, their credit is still good. The bond market foresees an inflation rate of less than 2%. Bankers, taking money from the government, are happy to lend it back to them.

But the forces of the correction are giving up little ground. While stocks rally, the real economy remains in a funk.

“Sharp drop in start-ups,” is a news headline from yesterday. New business start-ups are a major source of new jobs. Bad omen.

Even glamour publisher Conde Nast is forced to make cut-backs. It has told employees that they may not spend more than $1,000 a night when they are travelling.

A Pimco economist says savings rates are still going up… and may exceed 8%. This represents hundreds of billions of dollars taken out of the consumer economy. Oddly, while it makes the slump worse, it also helps finance the government’s battle against it. Savers buy US debt (albeit indirectly).

So, the battle is still going on… and the outcome is still in doubt.

*** Racehorse prices are in freefall, says a report out yesterday. But collectible cars are still doing well.

Yesterday, we saw someone drive by in a huge, gaudy pink Cadillac from the 1960s. It had magnificent fins and enough chrome to stagger a blind man. In it were a middle-aged man and woman, looking very comfortable and proud. They were travelling in style… in a rolling sculpture.

Old cars are not only holding their values, they’re still going up. But not all old cars. Detroit’s muscle cars have been falling in price for the last three years. Not very green?

*** And here’s a report we received over the internet, from Aaron Trask:

“Everyone is right to fret about inflation but the “deflation scare” isn’t over yet, says Charles Nenner, founder of the Charles Nenner Research Center.

“Renowned for his cycle work, Nenner sees deflation remaining dominant until year-end and inflation not picking up for another 18 months. But that will be the start of a 30-year (yes, year) upcycle for inflation says Nenner, who spent 12 years as a market-timing consultant for Goldman Sachs.

“The investing implications of this scenario are clear: Nenner is bullish on gold for the long-term and even more bullish on gold mining stocks, which he says are currently cheap relative to bullion. After a secular decline, Treasury yields are set to rise, with Nenner predicting the 10-year yield will reach 5.50% by Spring 2013, a 45% rise from Friday’s close of 3.78%.

“What’s less clear is the timing of this trade. Nenner believes the “deflation trade” is about to reassert itself in the short-term, meaning strength in the dollar and Treasuries, and weakness in commodities and equities, as we’ll discuss in more detail in a forthcoming segment.

“For those who believe the dollar is doomed, Nenner notes “all currencies are bad.” In other words, currency trading will be a game of relative bets vs. a one-way trade against the greenback, as so many expect.”

Until tomorrow,

Bill Bonner

Source: The Battle Continues

Today, we light a candle and try to interpret the shadows on the wall…

Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.

Will the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency in a time of deflationary trouble?

According to the papers, the feds have already done it. “Fed says recovery underway,” says a headline from yesterday’s press.

Another headline tells us that the feds are considering how and when to ease themselves out of their interventions. But what would the economy look like after they stopped meddling? Just look at auto sales. People bought cars when the feds bribed them to do so. When the bribes stopped, so did car sales. Now, the clunker program has ended and spiders are busy building their webs in showrooms again. Sales fell 38% from August to September… to a 28-year low.

House sales too have been goosed up by the feds’ tax credits. According to an estimate we reported yesterday, 350,000 new house sales since January were assisted by federal intervention – about 80% of the total. What will happen when this program ends in November? Hey… let’s guess… uh… housing sales will fall, right?

And speculators are worried about what will happen when the feds stop their intervention in the financial industry, scheduled for December. Thanks to taxpayer money, the bankers were spared the consequences of their own stupidity. Instead, taxpayers will pay for their mistakes. No one is particularly upset about it. The taxpayers don’t know what is going on. And bankers are happy to continue living in the style to which they have become accustomed. Reuters reports:

“You wouldn’t know it by his pay stubs, but Jiang Jianqing heads the world’s largest bank.

“Jiang, chairman of Indus trial and Commercial Bank of China, made just $234,700 in 2008. That’s less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth-largest bank, JPMorgan Chase & Co.

“The contrast illustrates the massive differences in pay among the CEOs of the world’s top banks. The compensation of the CEOs of the largest U.S. banks towers above what’s paid to banking chiefs in other parts of the world, according to a Reuters analysis of pay at the 18 biggest banks by market value.

“The United States is home to four of the nine largest banks in the world — JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs.

“China, for example, boasts three of the world’s four biggest banks, yet the leaders of those banks — Industrial and Commercial Bank of China, China Construction Bank Corp and Bank of China — are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per year.”

If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that’s their business. A pox on all of them. But in come the feds… and now we’re all paying the price. And if the program ends in December, as scheduled, we’ll get to see how far the economy goes without taxpayers’ money in the gas tank. Let’s see… it comes to a complete stop?

But no matter how malign and imbecilic the feds are, the public is rooting for them. People think Bernanke has avoided a ‘second great depression,’ and that the government has rescued the economy. Now they see nothing but clear highway ahead… perhaps with a little bump from time to time.

What’s ahead? We don’t know. Neither does anyone else. There is no precedent. Never before has a major central bank reacted so recklessly to a market correction. Never before has the monetary base exploded so violently. Never before have so many people with so many bills to pay had to face such a downturn.

But amid all the confusion, uncertainty and noise… your editor is calmly, cheerfully and confidently awaiting a depression. Yes, dear reader, we don’t know what markets will do. We don’t know how much gold will sell for next year… or what the actual GDP will be. But when we look at the shadows… we have a strong hunch that we are entering a depression… and that we won’t get out of it soon.

That said, we caution readers not to expect soup lines or people selling apples on the street corners. This is a depression à la 21 st century. A depression with Iphones and Twitter. This is NOT your grandfather’s depression.

It’s not your grandfather’s depression, but it has many elements that your grandfather would recognize. This from David Rosenberg:

“FRUGALITY THEME IS SECULAR, NOT JUST CYCLICAL

We came across two articles that truly resonated on this score — about how U.S. households are changing their entire approach to the family budget and this transformation cuts a wide swath on a socio-demographic basis. See Census: Recession Had Sweeping Impact on U.S. Life on Bloomberg news (by Hope Yen) as well as Consumer Spending Cuts Reach Across Incomes in the Associated Press business news section (by Eileen Connelly).”

With so much noise… and so many distortions… it’s hard to tell what is really going on… and impossible to know how the markets will react. Still, there are some patterns that make sense. After a long period of credit growth, credit is now shrinking. At least in the private sector. And that is not likely to change. Well, it’s not likely to change unless the Fed goes nuclear. If they push the hyperinflation button, the whole picture changes radically and immediately. But that’s not likely to happen any time soon… so let’s ignore it for the present.

What we have before us now is a consumer economy where the consumer is cutting back. Despite the odd shadow shapes on the wall, that means a slowdown in hiring, business revenues and real prices… and tax revenues.

New York says its budget deficit will grow to $3 billion. And over on the sunny West Coast, California is selling $8.8 billion in notes to try to close its deficit.

Apartment rents in New York City are falling. Credit card defaults hit a new record. And the Wall Street Journal says that holiday jobs in the retail sector are likely to be scarce.

All of those things are about what you’d expect.

Another thing you’d expect is a decline in America’s relative economic power and political influence. Richard Duncan, along with your editor, has been following the story. Bloomberg reports:

“Sept. 23 (Bloomberg) — U.S. budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of “The Dollar Crisis.”

“The U.S. has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.

In “The Dollar Crisis,” first published in 2003, Duncan argued that persistent current account deficits by the U.S. were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.

“The bad news is at the end of a 10-year period we’re still not going to have fixed the problem,” Duncan said in an interview in Hong Kong yesterday.

“Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of ‘Fall of Rome’ scenario.”

*** Fall of Rome? Hey, Addison Wiggin and your editor wrote the book on the fall of Rome idea. “Empire of Debt,” we called it. It was such a hit that the publisher asked us for a new edition… which was released this summer.

[Editor’s note: You can get Bill’s book here.]

Richard Duncan, with Bloomberg on lead guitar, was singing our song:

“The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.

“The U.S. has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of U.S. debt has propped up the dollar and allowed a credit-fueled spending boom by the nation’s consumers, according to Duncan.

“ U.S. workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation’s jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.

“As unemployment remains above 10 percent well into the foreseeable future, it won’t be long before Americans start voting for protectionism,” Duncan said.

“That’s going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity.”

Once the U.S. debt burden becomes too large and the government can no longer sell debt to the public, the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he said.

Source: Awaiting the Depression

We began having doubts about the ‘feds inflate… gold soars’ hypothesis last year. It was too easy… too obvious. And if it were that easy to inflate a nation’s currency, how come the Japanese couldn’t get the hang of it in the ‘90s?

So, we moved towards a contrarian position – inflation, yes… but not for a while. And gold? Well, we are in it for the long run. In the short run, anything could happen.

To clarify our view on gold, the Daily Reckoning is not bearish on the metal. It is not bullish on the metal either. It is buggish. We are gold bugs. In the long run, gold will retain its value. Since that’s all we ask of it, we are always satisfied. Even if it is down in the short run – and it went through an 18-year down cycle from 1980 to 1998 – it will come back in the long run.

Gold is not a speculation for us; it is a means of saving money. As Richard Russell says, a man should count his wealth neither in dollars nor in euros; he should count it in ounces.

Our views on gold are still contrarian. But our views on the gold market have become commonplace. Now… everyone’s a contrarian. As we read the opinions and the blogs, it has become common to forecast a dip in the gold price… followed by a new, big bull market after inflation has found its footing.

And so what does gold do? It goes up!

Yesterday, gold rose $11 – still comfortably above the $1,000 mark. Is gold going up because people fear inflation? Apparently not. If they were afraid of inflation we’d see it in the bond market. But instead of selling off – which is what Treasuries should do if there were any hint of inflation – bonds are going up.

Is gold going up because people are afraid of the dollar going down? Well, maybe. But that is like saying that the dollar is going down because people are afraid the price of gold is going up. Where’s the chicken? Where’s the egg? Which is the cause? Which is the effect?

The dollar is still going down… as gold rises. Yesterday, it closed just below $1.48 per euro. It is so low now that Americans’ cost of living is among the lowest in the world. The average house sells for just $160,000. That’s just over 100,000 euros. Even out in the country… you would have to do some serious searching for a nice house anywhere in Europe that you could buy for $100,000 euros.

And what about the economy? Our contrarian position has remained unchanged. As we put it last week, there are few problems that enlightened central banking can solve; a credit contraction is not one of them. All the bankers can do is to make it worse – by delaying it, disguising it or diverting it in another direction (such as converting deflation into hyperinflation).

Yesterday, the Dow rose again – up 51 points. As far as we can tell, the rally is still on. And now, the news media and the statisticians are in full support.

House prices rose 0.3% in July. Hooray! Of course, the government is giving huge tax credits to new house buyers. Since that program began in January an estimated 350,000 houses have been bought thanks to the program.

Household net worth also is going up – at least, that’s what the papers say. For the first time in 2 years. Of course, what do you expect? The feds are pushing up asset prices – giving them the biggest push in the history of man. But remember, the market is also doing its usual post-crash bounce. When the bounce ends… so does the temporary wealth effect…

Is this still a contrarian view? Seems to us that it’s becoming more contrarian every day. The longer the rally goes on, the more people think it is the real McCoy.

If we are right, the massive effort by the feds will make things massively worse. That is the position taken by Arthur Laffer in a recent Wall Street Journal editorial, by the way:

“The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s.

“The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products… beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That’s not a misprint!)… By the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That’s one helluva tax….

“Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon…”

“The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that’s the story.”

We had no doubt that inflation can occur during a depression; hey, we read the papers. Anyone who has followed the Zimbabwe story knows that you can have a deadly depression… and dizzying levels of inflation at the same time.

But there’s always more to the story. Devaluing the dollar in terms of gold had the immediate effect of increasing the money supply – it was like adding zeros to the currency.

In our wallet is a Ten Trillion dollar Zimbabwean bill, with a picture of stones on it. Those words – ‘ten trillion’ – did not get printed on that bill by accident. We assume they got printed on there by a printer in the employ of a government that figured that the cost of printing a ten trillion dollar bill was less than the cost of not printing it.

That is, by a desperate government that had so fouled-up the economy that a period of hyperinflation might seem like an improvement. Besides, hyperinflation might have a therapeutic, purgative effect.

But let us not get sidetracked by hyperinflation. It is nowhere in sight. Nor is its more civilized cousin – normal, polite inflation. The money supply in America – as measured by M2 – is contracting. The banks get money from the feds, but they don’t pass it along. The chain of reflation is broken – or at least temporarily stretched. Currently, it takes a long time for money to get from one end to the other. The cash tends to get waylaid –either by the bankers… or by consumers themselves. It stays in bank vaults… or in bank accounts. Money is not being multiplied by the speed by which it changes hands. Instead, it is divided by immobility. It sits. It shrinks. It waits for a real boom.

Until tomorrow,

Bill Bonner

Source: Waiting for a Real Boom

“US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about ‘getting small’ and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata – Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.

“Not only are the rich trading down, but the article quotes a high net worth financial advisor who said ‘many of our clients are very happy to be sitting on bond portfolios and cash reserves.’ And see the article on page 2 of the Sunday NYT – Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the ‘natural look’ – “some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores.”

Right on, David!

And here’s the CEO of Pepsico:

“The age of thrift is here.”

Even in Japan, after 20 years of coughing and sneezing, people have caught “the thrift bug,” says The New York Times.

What’s a consumer economy need in order to keep growing?

Uh…it’s needs consumer spending.

What do consumers need in order to boost spending?

Uh…they need more money!

Oh, there’s where it all starts to come apart, doesn’t it? Where do they get more money? They either earn it…or they borrow it. And right now, they can’t earn it – not with 12% unemployment in California! Workers have no bargaining power. And they can’t borrow it either. The banks won’t lend – not with the value of their collateral still falling.

Word comes this morning that mortgage delinquencies have hit a new record. And here’s a headline warning of worse to come:

“$30 billion home loan time bomb set for 2010.”

Even solvent homeowners who aren’t forced into foreclosure still find it beneficial to walk away from their houses. “Strategic defaults,’ says The Los Angeles Times, are becoming a problem for mortgage lenders.

We didn’t read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy…walk away from it. Then, buy it back at auction!

Desperate consumers do what they have to do. Canny consumers do what’s smart. And now it’s smart to walk away from any debt that you don’t actually have to pay.

As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They’ve seen what happens when they go too far into debt. They’re older and wiser than they were in the bubble years. It’s been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing – zero. And now houses are falling too.

So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.

Americans aren’t so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.

Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find ‘solutions’ to the ‘problem.’

Actually, there is no problem at all. It’s just the way capitalism works. There are booms. And there are busts. Periods of growth…and periods when the mistakes made during the boom are corrected. There’s a time for every purpose under heaven. That’s the way it works. The economy breathes in and it breathes out.

And there’s always some dumb economist trying to smother it with a pillow!

A report from the world’s biggest bank, HSBC (NYSE:HBC), tells us the dollar’s days are numbered.

“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.

“The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP,” he said

The Telegraph reports:

“Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s ‘mercantilist mindset’ of recent decades is about to be broken by the spectre of an inflation spiral.

“The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

“A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

“What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.”

That said, we repeat a headline from Seeking Alpha:

“Dollar shorts should look out.”

We agree with HSBC and the Telegraph: the dollar will probably slide – especially against Asian currencies – for the next few decades.

But that’s the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens – and it could happen in a ‘Red October’ – the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn’t be surprised by a replay of that ‘flight to safety’ we saw at the end of last year.

But we know what you’re thinking: what? When did the dollar become a ‘safe currency?’ Of course, it’s not safe. But when the end of the world approaches, it will seem safe.

For a while.

Until tomorrow,

Bill Bonner

Source: There’s No Flu Shot for the Thrift Bug

Good day… And a Marvelous Monday to you! Here we go… Starting a new week all over again… I have a blank page to start each day, and then 2 hours later… The Fabulous Pfennig! A work of art, I must say! HAHAHAHAHAHAHAHA!

Well… Recall on Friday, I said that the non-dollar currencies would probably just follow whatever the stocks did, since the data cupboard was empty? Well, the non-dollar currencies didn’t even follow that theme, as stocks pretty much wallowed around in the mud all day… The dollar began to push back at the gains the other currencies had made during the week… And overnight, the dollar has continued pushing back.

And… I don’t really have a problem with that, as long as it remains, short-lived, for the non-dollar currencies had really moved higher without any push-back from the dollar… I love it when the markets create dips, so that investors that can’t make up their minds, can finally get in!

The BIG NEWS this week surrounds the 2-day FOMC meeting that begins tomorrow… Long time readers know that I’ve always wondered what the heck the Fed Heads need 2-days to flip a coin and decide whether to raise rates or cut them (HA!)… In fact, I’ve always contended that the Fed Heads sit around and play board games… No not Candy land… But something like Battleship! By Joe, you’ve sunk my battleship!

Seriously though, the markets are of the belief that the Fed will keep rates near zero, but will announce that they will begin to remove stimulus, as Head Fed Honcho, Big Ben Bernanke, believes the recession is over…

I think this is wishful thinking on the markets’ part, as I really don’t see the Fed Heads doing anything, but talking about doing this, that and the other thing. You see, the Fed Heads know all too well that the Commercial Real Estate problems are just beginning and with Unemployment near 10%, to remove stimulus now could be disastrous…

In addition to the 2-day FOMC meeting, we will also see the Treasury auction off $112 Billion of 2, 5, and 7-year Treasury Notes, which just happens to be a record amount for that combination of notes… The previous record was $109 Billion about a month ago…

So… Here’s what I see going on here… The Treasury sees that $109 Billion was taken up a month ago (remember, this is the one that the Fed bought back a few billion from Primary Dealers), and just like a baseball pitcher that gets a strike called for him on the outside of the plate, he’ll just throw it a couple of inches further outside, and see if the umpire will call that a strike too… The Treasury is simply pushing the strike zone… What’s another $3 Billion? “The foreigners will take them”, you can hear the Treasury dudes saying… Hmmm… When do you think foreigners will simply say “no mas”? I really don’t think the Treasury dudes, or the current administration believes that will or can happen, so why not continue to push the deficit higher and higher? That’s what those dudes are saying folks… Not me!

Like Sly Stone, as Woodstock… I want to take you higher!

OK… I had better go on to something else, before I begin to throw rotten fruit and vegetables at these guys for doing this to our country and our grandkids!

The other Big thing going on this week is a G-20 meeting in Pittsburgh that begins Friday ( I think!) When a French official that was going to attend the G-20 meeting was asked about what would be talked about, he said that currencies would NOT be on the agenda…

I guess that’s because Brazil, Russia, India and China aren’t going to be there! For I believe if there were… Currencies, specifically the dollar would be a heated discussion!

No… You know the G-20 members have far “more important” (NOT!) things to talk about, like how bankers get paid! Mental giants all of them! Again… NOT!

On Wednesday, when the Fed Head finally get around to putting their board games away, and give their statement and rate announcement, Norway’s Central Bank, the Norges Bank will also be making a rate announcement… And for my money, I’d rather hear what the Norges Bank has to say, for they won’t be speaking out of the side of their collective mouths… I do expect the Norges Bank to leave rates unchanged, but look for them to give some indication of when they expect to begin their rate hike cycle… I’m sure they have to keep as much cold water on their statement as possible, as to not get the markets all lathered up too soon…

Most of Asia is on holiday today… And, the currency guys took that opportunity to sell yen, bringing it back to 92 and change, which is where yen was before the big move in the currencies last Tuesday / Wednesday… As I said above, this is welcome, as it keeps the non-dollar currencies from going too far, too fast… I truly do not believe this is a short-term strong dollar trend, but a mini-correction, if you will…

In New Zealand, the country will print their 2nd QTR GDP tomorrow… The forecast is for a drop in economic growth, which would not allow the Reserve Bank of New Zealand (RBNZ) the opportunity to follow Australia’s lead, when Australia gets around to hiking rates before the end of this year… And that, will allow the Australian dollar (A$) to outperform kiwi… At least, that’s how I see it!

Kiwi is already feeling the heat, dropping 1/2-cent overnight…

In Germany this week, we’ll see this month’s Business Sentiment as measured by the think tank IFO on Wednesday… Business Sentiment is expected to reach a high since September of last year… That should help underpin the euro.

Gold and Silver have also backed off their highs of last Tues/ Wednesday… Gold is hanging by the skin of its teeth to $1,000, as I write, but I doubt it will be able to hold on, as of right now, it just appears that risk taking has waned a bit with the FOMC coming…

Remember though… I said a couple of weeks ago, that I might have to raise the bar with Gold… Remember how I used to give you the wink and nod whenever Gold would fall below $900? I said that I might have to change that to whenever Gold falls below $1,000…

The data cupboard has a few items this week worthy of our viewing… Like today, we’ll see the latest Leading Indicators, which I think will be good short-term, but long term would show some cracks in the economic growth foundation. Then we don’t really see anything with the FOMC going on Tuesday and Wednesday, till Thursday, when Existing Home Sales print… So, we might as well wait until later in the week, to talk about the Friday stuff!

And then there was this… Over in Germany, campaigning for the election of Chancellor is going on… And the opposition has proposed a tax increase for the wealthiest, and a value added tax… The current chancellor, Angela Merkel, saw that, and proposed a “tax cut”! Talk about a great campaign move! Even if she never cuts taxes in her next term, this is a great campaign move…

OK… And one more thing, although it doesn’t have anything to do with currencies or economies, well, maybe with spending in the U.S…. But… The top U.S. and NATO commander in Afghanistan warns in an urgent, confidential assessment of the war that he needs more forces within the next year and bluntly states that without them, the eight-year conflict “will likely result in failure.” Just one word come to mind when I read that in the Wall Street Journal this morning… Vietnam…

So… To recap… The dollar has pushed back VS the other currencies, but doesn’t appear to be taking any step toward a new short-term strong dollar trend. The FOMC meets this week, along with Norway’s Norges Bank, and G-20 later in the week. Gold and Silver have also backed off their highs last week, as risk taking has waned…

Currencies today 9/21/09: A$ .8615, kiwi .7040, C$ .9280, euro 1.4660, sterling 1.6185, Swiss .9665, rand 7.5275, krone 5.90, SEK 6.9150, forint 185.60, zloty 2.8350, koruna 17.1925, RUB 30.37, yen 92.20, sing 1.4185, HKD 7.7505, INR 48.14, China 6.8289, pesos 13.33, BRL 1.8080, dollar index 76.85, Oil $70.53, 10-year 3.46%, Silver $16.77, and Gold… $1,001.85

That’s it for today…Time to get this Marvelous Monday going!

Chuck Butler

Source: FOMC Week…

Good day… And a Wonderful Wednesday to you! Good news for me this morning, the pain in my left knee has subsided… Now, If I could just get that swelling to go down, I’d be in tall cotton! This has been quite the ordeal on the old Pfennig writer, and one that I will be glad to put in the rear view mirror!

Well… When I turned on the currency screens this morning, the euro was trading with a 1.47 handle! WOW! It just skipped to my Lou right through the 1.46 handle, eh? It began yesterday afternoon, the dollar was getting sold on the news of a strong Retail Sales figure, more on that in a minute, and the euro was edging up the 1.46 ladder… The move to get it past 1.47 came in the overnight markets… Now, having gotten you all lathered up about 1.47, I have to say that since I turned on the currency screens, the euro has lost ground back to 1.4688, but still… That’s quite an impressive move from yesterday morning, eh?

OK… The issue with the Retail Sales figure causing dollar weakness is a time honored tradition… NOT! Well, it is if you only count the last 9 months… But traditionally, a figure like the one that printed yesterday, would have attracted buyers for the dollar, not the opposite that occurred… Here’s the skinny, as I see it…

Retail Sales for August were quite strong, and showed signs that the move was more than the Cash for Clunkers program, and Back to School buying… There are quite a few people/ economists/ analysts out there now jumping on the President’s bandwagon that the recession is over based on this report… For those of you at home keeping score, Retail Sales for August printed at +2.7%!

Does one Retail Sales report that’s being trumped up with a Government Deficit Spending program, and Back to School buying really tell us that the recession is over? Was it over when the Germans bombed Pearl Harbor? HA! (from Animal House, I know very well the Japanese bombed Pearl Harbor)… You know, it kind of ruins the funny line when you have to make disclaimers… But… I’ve had people send me emails before telling me, that I should know better that the Germans didn’t bomb Pearl Harbor!

OK, I went off on a tangent there, eh? Any way… I wonder if all those people wearing the President endorsed end of the recession rose colored glasses ever stopped to wonder if gas purchases might have helped trump up this figure? Well, I did, you knew I would! And I found that rising gasoline prices sent service station receipts up 5.1% in the month. If we had journalists like we used to have, they would have known to go look at the rising gas price component of the report, since just last week the Trade Deficit jumped by 16% in one month due to rising oil prices!

So… With Retail Sales shooting toward the moon, the dollar selling increased… Because, if the thought here (and not my thought!) is that if Retail Sales are jumping again, it must mean the U.S. Consumer is buying again, and that will help kick the global recession in the rear, and the risk takers come out of the walls, the U.S. Treasury “safe haven” buyers sell to get out of their losses, and they all go to better investments… It may be what they think, to be better… Stocks… But for the most part, these investors seek out higher yielding or better income potential investments… And you won’t find those on the Big Board… You won’t find them at the local bond house… You’ll only find them abroad, in foreign deposit rates, and foreign bond yields…

Now… That everyone is all lathered up about this euphoria going on in the markets… I’m still keeping a light on for a HUGE stock market sell off, which would adversely affect the values of all these risk assets that risk takers have been going into… Commodities, currencies, stocks would all be affected…

However, if that HUGE sell off never comes… Who wants to stand in front of the bus that has Gold above $1,000 and the euro posting a nearly 17% gains since March 1st… But that’s nothing folks! The New Zealand dollar (kiwi) has gained 44% since March 1st… The list of currency gains since March 1st is amazing… Simply amazing… Here’s a sample… Aussie dollars +38%, Norway +23%, loonies +21%, and so on… So, now you see the bus that I’m talking about!

Big Ben Bernanke had this to say yesterday… “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.” He also said that he “may have to accept a slow recovery and high unemployment as the price for defending my inflation fighting credentials.”

Ok.. Excuse me for a minute, I have to go in the other room and either laugh my rear off or, throw up! Big Ben has “inflation fighting credentials”? Since when? And just where is he hiding these credentials? Or… Maybe his description of “inflation fighting credentials” is different from mine! Hmmm… I shake my head in disgust…

Speaking of the Fed and inflation… My good friend, David Galland, who writes an absolutely fabulous daily letter regarding the goings on in the world called “Casey’s Daily Dispatch”, and can be found here: http://www.caseyresearch.com/casey-services/free-publications/caseys-daily-dispatch/ , had this to say yesterday regarding this subject of the Fed and inflation…

“Reason Magazine is one of the few magazines I read with any regularity. In the current edition, they had a couple of items that I thought were especially interesting. Ironic, actually.

The first was about a comic book the Fed has published discussing inflation, as well as defending its autonomy. You can view it by following the link below. What you should find interesting is that they make several clear mistakes in describing inflation – for instance, by saying that if the price of oil goes up, that causes inflation. And on the very first page, they state that “The dictionary defines inflation as a substantial and continuing rise in the general price level.”

But that is not what the dictionary says – every entry I checked always includes “… related to an increase in the volume of money,” or words to that effect. Kind of scary, when the organization charged with fighting inflation doesn’t actually know what it is.

You can read the comic yourself here, straight off the New York Fed’s website. http://ia301540.us.archive.org/2/items/gov.frb.ny.comic.inflation/gov.frb.ny.comic.inflation.pdf

OK… I’m back now… I saw a report last night that showed the results of a survey that showed the Chinese are very interested in investing in Canada… It was reported that China sees energy, natural resources, agriculture and biotechnology as the most promising areas of Canada’s economy… Hmmm… Isn’t that the same things I’ve listed over the years? (well minus the biotechnology) Any way… The report also showed China having interest in the U.S. and Australia…

Money flow is a very important thing to watch in the investment world… And if money is going to be flowing into Canada and Australia from China, that will be good for those countries and their respective currencies. As far as the U.S. is concerned… Forgetaboutit! Remember when China wanted to buy that oil company in California a couple of years ago? I doubt that China will want to get dragged through a mile of broken glass and razor blades again!

Yesterday, I told you about the dollar denominated bonds being issued by Germany, and how I viewed it as a green light from Big Ben Bernanke for other countries to take over the destruction of the dollar, that the Fed has carried the flag for since 1913… I told you I had another frightening thing that I would bring to you this morning… So with no further delay…

The Chinese government has told Chinese companies they do not have to honor derivatives and commodity futures contracts made with Western financial institutions. Ruh-Roh…

This appears to be one of those things that passes in the night, and then one day smacks us right between the eyes, and we say, “Where did that come from?” Well… If came from the Chinese Gov’t that told Chinese companies that they did not have to honor derivatives and commodity futures contracts made with Western financial institutions… That’s where!

Ok, I can hear you saying, How can they do that, Chuck? Well… When you’re a 200 pound gorilla, you can sit where you want, and you can do what you want! China is taking the stance that you come get us, if you think you were wronged!

What does this do to the institutions that wrote these contracts with China, Chuck? Well… That’s the cheese that binds folks… It’s going to hurt… And it’s going to hurt bad… But, nobody really knows just how many or how much risk is out there… But, if one day you wake up and hear on the news that the financial markets here are melting down once again, you’ll be able to say… Ahhh, it must be that Chinese announcement that Chuck talked about!

Big Al Greenspan was back in the news last night… First, I want to quiz you on something…
Who said, “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

Well… You’ll never guess who, so I might as well tell you, but when you hear it you’ll bust a gut, given the whole low interest rate, high money supply environment he created at the Fed… It was….. Drum roll please… Alan Greenspan, from an article written in 1966 entitled “Gold and Economic Freedom”

Any way… Big Al was back in the news, and said that he’s worried that lawmakers will hamper the Fed’s efforts to rein in its monetary stimulus, and that inflation might “swamp” the bond market. See, how Big Al is sticking up for the Fed, and putting down the groundwork now, to blame lawmakers when inflation is soaring on the other side of the recession?

Big Al is dastardly… I wouldn’t be surprised to see a Commie flag nailed to the wall of his garage! HA! Long time readers know my dislike for this guy as a Fed Head, and how he might now have paved the road to this mess we’ve been in, but he laid the foundation!

OK… The data cupboard will yield a boat load of data today, and it will interesting to see how the dollar reacts to it… Leading off for the data cupboard today is the stupid CPI data for August… Batting second is the Current Account Deficit, and in the all important third position in the batting order we have The Tic Flows, batting clean-up is Chuck’s faves Industrial Production and Capacity Utilization… WOW! What a line-up! A Murderer’s Row for data if you will!

Since no one but me and my friends over at the Daily Reckoning and 5-minute Forecast, seem to care about the Deficits, the markets will probably wax over the Current Account Deficit… And I don’t care about CPI… So that brings us the TIC Flows for July, and I’m fearful that this data will be harmful to our future… And the experts are forecasting a bump up in Industrial Production and Capacity Utilization, which would indicate a stronger economy, and given what we saw yesterday with the stronger Retail Sales, one would think that a bump up in Industrial Production and Capacity Utilization would be bad for the dollar…

Finally… Someone with some brains! I was beginning to think that these guys were all kin to the scarecrow! Yesterday, I told you about how the new governing party in Japan is calling for increased currency intervention… Well, finally someone that understands! Japanese Finance Minister, Fujii, said that he is “against intervention if their moves are gradual, and that I don’t think they are fluctuating rapidly now.”

It looks like currency traders in the overnight markets were paying attention, and immediately began buying up Japanese yen… The yen is pushing the envelope once again to a sub 90 level… And that! Would be a very good thing for yen holders!

While I’m on “feel good stories”… I might as well mention that Gold has finally made a strong move above $1,000, moving to $1,018 as I write! Silver is kicking tail and taking names later too, with a strong move to $17.35! The Retail Sales data in the U.S. yesterday kicked off a new phase of “inflation protection buying”

OK… To recap today… Retail Sales in the U.S. were very strong, setting off a new wave of dollar selling, to currencies and precious metals. China likes Canada and Australia, and China tells their companies not to honor derivative contracts with Western institutions. And we have a boat load of data to get through today in the U.S.

Currencies today 9/16: A$ .8720, kiwi .7135, C$ .9365, euro 1.4680, sterling 1.6525, Swiss .9665, rand 7.3625, krone 5.8615, SEK 6.9070, forint 184, zloty 2.8240, koruna 17.27, RUB 30.61, yen 90.30, sing 1.4120, HKD 7.75, INR 48.24, China 6.8260, pesos 13.24, BRL 1.8030, dollar index 76.30, Oil $70.75, 10-year 3.40%, Silver $17.35, and Gold… $1,017.50

That’s it for today…I sure hope your Wednesday is Wonderful!

Chuck Butler

Source: Retail Sales Soar!

And remember… This is the Federal Reserve! This is a lousy private bank operating irresponsibly, at the behest of the Congress, and whose shadowy owners include, to one degree or another, foreigners and foreign central banks that are operating by the grace of their own governments which are just as corrupt and desperate as our own, but it was the Fed that created enough money to buy a trillion dollar’s worth of US government bonds for itself! A trillion!

It’s called “monetizing the debt”, which Ben Bernanke said, in response to a direct question about it recently, that the Fed would “never” do! “Never” has now been re-defined to mean “continually?” Hahaha! Too much!

As an astute observer, you figure this must be pretty bad, gauging by the way I make a Very Loud Mogambo Fuss (VLMF) about it and droplets of spittle are flying from my flapping lips at supersonic speed as a throbbing vein is bulging out on my forehead.

And since a lot of this money was spent to buy government debt, how big was the federal budget deficit? You will be sorry you asked, and if you want to know the actual size of the actual federal deficit for the actual last year because you are pretty sure that the government is lying to you about the real size of their deficit-spending, then you have also come to the right place, because Treasury Public Debt is, as of last Friday, $11.797 trillion, whereas 12 lousy months ago it was $9.667 trillion, meaning that even if you are not sober enough to get this damned calculator to work or see those tiny little numbers, you can do the subtraction in your head!

The actual, in-your-face federal deficit was $2.130 trillion in the last 12 months! The deficit-spending by Congress is a whopping 15.2% of GDP, for crying out loud!

And if you are collecting unemployment, then you will be interested to know that the federal contribution to your check could have been painlessly almost doubled, as, according to Wikipedia, the 2009 federal budget had $360 billion for “Unemployment/Welfare/Other”, while the budget also had another $260 billion that could be used to help you out, but had to be spent for “Interest on National Debt.”

In short, if the damned government did not borrow and spend us into the poorhouse, causing your unemployment and impoverishment, the government would have had another $260 billion to help you and the other unemployed instead of only being able to budget $350 billion!

And this brings up the interesting point that since the national debt is $11,790 billion and this “interest on the national debt” is $260 billion, this means that the government is paying an average of 2.2% interest! Wow!

And remember that this $2.130 trillion increase in the national debt is just the deficit in Congressional spending, which doesn’t even include the $2.6 trillion in the budget that was “paid for” by offsetting revenues!

So, being the cantankerous sort that I am, suspecting treachery at every turn and disaster at the hands of the corrupt, the ignorant and the stupid that we lovingly call “Congress”, let me note that the morons of Congress have spent $2.6 trillion, plus $2.1 trillion equals $4.7 trillion, which they spent in a $14 trillion economy! The government is spending the equivalent of 34% of GDP! Gaaahh!

And it is going to get worse and worse because the Fed is doing the more and more of the same thing that created the economic problem in the first place! Gaaahhh! We’re freaking doomed!

But this time, instead of over-reacting, I sigh in relief – aaaaaahhhhhh! – as I remember the last 4,500 years of history when governments acted monetarily and fiscally irresponsible, and how owners of gold, silver and energy did very, very well, which is the whole point of this investing stuff!

And the fact that it is so easy makes you say, “Whee!”

Source: Never Say Never to Monetization