Governments Everywhere Having Deep Money Problems

An excerpt from Bob Chapman's weekly publication.

April 11 2012: Capital controls, IRS runs the US police state, no third round of quantitative easing, Royal Bank in royal trouble, payrolls down, Stocton in hock, the recession of 1937 revisited, debt growing faster than gdp, still more austerity plans for Greece.

It was 13 months ago we disclosed that the administration passed a stimulus bill known as the $17.5 billion “Hiring Incentives Act” to restore employment. It required that foreign banks not only withhold 30% of all outgoing capital flows, and disclosure of the full details of transactions of non-exempt holders to the Internal Revenue Service. They want the structure of how money ended up at that bank. In addition banks, particularly in Switzerland are required to close the account. That is equivalent to capital controls, so in future it will be easy to put currency controls of all funds entering or leaving the US.

Now we have a new gem on our hands, Senate Bill 1813, which was presented by California Senator Barbara Boxer. The bill has been passed in the Senate 74-23 under the “Moving ahead for progress legislation in the 21st Century Act.”

Section 4034 of the legislation states that any individual who owes more than $50,000 to the IRS will have their passport confiscated, revoked, or put on special terms and they will be denied exit or entry, out or into the US. The bill is loosely written, so as usual the interpretation is left up to bureaucrats in Washington. Hopefully this inclusion will be struck down in the House. Inasmuch almost all our Congress is bought and paid for – you will have to lobby very hard to eliminate it from the bill. This is not about tax evasion; it is about people control and their assets. E-mail, fax, write and call all House members to stop another nail being put in our coffin.

As we pointed out in past issues, Operation Twist, was just another surreptitious attempt to mask a QE 3 operation the Fed sold the short end of the bond market and bought the long end in order to keep mortgage rate down, which we find was unsuccessful. Thus, the regular QE 3 is ready to be launched.

ADP and BLS employment figures are totally bogus, so we’ll stick with John Williams’ 22.4%.

The Fed is not going to lower interest rates, they can’t. If they increase them the bond market would collapse and all confidence in the system would be gone.

We continue to believe if any military action is going to happen regarding Iran, it won’t happen until next year. This day by day will be negative for the US petrol dollar.

These zero interest rates are killing mutual funds and pension plans. Public pension plans are short $327 billion. Having really nowhere to go to they are buying bonds. The 2011 shortfall was $85 billion and that should worsen unless the stock market reaches substantial new highs.

The FOMC meeting minutes said a QE 3 was not in the offering. Keep remembering they can change their minds in the wink of an eye. We can then refer to the trillions that have been poured into the system over the past few years. They are at work, whereas what about the trillions in the system, that have not been as yet lent. Do they really need QE 3 if banks decide to lend to offset a recovery? Not really, but they believe saving the financial system is more important. Once money creation occurs it is very difficult to stop. This tactic has been employed since 2000 and shows no evidence of stopping. In both Europe, the US and UK interest rates are headed substantially higher and bond players as well as banks are painfully aware of it. As a result CDS rates are climbing as well.

Since 2000 the Fed has entrapped itself in perpetual issuance of money and credit and now the ECB has done the same thing. Once begun there is no going back. It either works or the system collapses. It is our opinion that the ECB is out of control and this is only the beginning. If the $1.4 trillion the ECB dispensed isn’t enough and it won’t be, then we will have lots more currency swaps in the future and that means higher inflation.

Last week the Dow fell 1.1%, S&P fell 0.7%, the Russell 2000 fell 1.5% and the Nasdaq 100 gained 0.3%. Transports gained 0.6%, consumers rose 0.2% and utilities fell 0.4%. Banks fell 1.7% and broker/dealers 2.5%. High tech fell 1.9%; semis 3.5% and Internets fell 1.9%, along with semis at off 3.5%. Internets off 2.0% and biotech’s off 1.7%. Gold bullion fell $30, as the HUI fell 6.7%. The USDX was up slightly.

Two-year T-bills fell 1 bps to 0.32%, 10-year T-notes fell 15 bps to 2.06% and the 10-year German bunds fell 6 bps to 1.73%.

Freddie Mac 30-year fixed mortgages were off 1 bps to 3.98%. The 15’s were off 2 bps, the one-year ARM's were unchanged at 2.78% and the 30’s fell 3 bps to 4.58%.

Fed credit fell $29.5 billion and that is up 8.5% yoy. The Fed holdings of foreign and agency debt jumped $13.3 billion to $3.481 trillion and custody holdings for foreign central banks were up $67.3 billion ytd and an $80.1 billion yoy, or 4%.

M2, narrow, money supply jumped $37.6 billion to a record $9.825 trillion. Money market funds fell $15.2 billion to $2.590 billion.

Total commercial paper outstanding fell $6.1 billion to $931 billion.

Royal Bank of Canada has chosen to challenge the Commodity Futures Trading Commission in court instead of settling over allegations it engaged in illegal futures trades because it said it didn’t break any rules.

“It was a conscious decision to defend ourselves vigorously and we made that decision because we believe we didn’t do anything wrong,” said Arthur Hahn, a Chicago-based lawyer defending Canada’s biggest bank.

Royal Bank is being sued by the regulator over claims it engaged in illegal futures trades worth hundreds of millions of dollars to garner tax benefits tied to equities. The Toronto- based lender made false and misleading statements about “wash trades” from 2007 to 2010 in which affiliates traded among themselves in a way that undermined competition and price discovery on the OneChicago LLC exchange, the CFTC said in a complaint filed April 2 in Manhattan federal court.

“All of the transactions in question here were within standard rules and the guidances put out by the commission,” Hahn said in an interview. “We don’t think we did anything wrong, it’s that simple.”

Royal Bank enlisted affiliates to help carry out hundreds of futures transactions done off-exchange and then reported to OneChicago as block trades between independent affiliates, according to the CFTC.

“These were legitimate block trades, these were legitimate trades between affiliates,” said Hahn, a partner with Katten Muchin Rosenman LLP (1161L).
“No Injury”

The trades, which resulted in Royal Bank not having a financial position in a market, were conducted for Canadian tax benefits tied to holding certain stocks, the CFTC said in its statement. The transactions, involving single-stock futures and narrow-based indexes, were used to hedge the risk of holding the equities, according to the statement.

“The trades all took place at absolutely appropriate calculable market prices,” Hahn said. “There was no injury to anyone and we followed the rules.”

Between 2006 and 2010, the narrow-based index trades between a Toronto-based bank account and RBC Europe Ltd., a London-based bank subsidiary, represented all of the narrow- based index volume on OneChicago, the CFTC said in the complaint. Senior members of the bank’s Central Funding Group determined the prices and contracts traded.

From 2005 to 2010, RBC concealed material information and made false statements about the trades to CME Group Inc. (CME), which had regulatory oversight of the exchange, according to the CFTC. RBC’s responses to CME questions about the trades “concealed information concerning the central role” of the Central Funding Group employee and the bank’s single-stock futures trades, CFTC said.

“We believe we followed the rules and to be absolutely certain we explained what we were doing before we started doing it,” Hahn said. “And we disclosed it to the exchange, who communicated to the commission.”

Regulators Operate Differently

Julie Dickson, who heads Canada’s Office of the Superintendent of Financial Institutions, which is monitoring the RBC case, declined to comment.

“The only thing I’ll say about the Royal Bank case is, when you look at the press releases, both sides are pretty convinced that they’re right, so we’ll see how that plays out in court,” Dickson told reporters after giving a speech in Toronto April 5.

She said while solvency regulators such as OSFI cooperate and communicate with one another, securities regulators such as the CFTC operate differently.

“In my experience, you don’t get warning,” Dickson said. “If you do get advance notification, it’s virtually close to the hour when something’s being announced. And that’s not unusual. Securities regulators operate under a different framework.”

Royal Bank has 60 days to file its statement of defense in the U.S. court.

Bob Chapman - Free American Hour - April 6, 2012
Bob Chapman - Free American Hour - April 6, 2012 - YouTube

Interview 493 – The International Forecaster with Bob Chapman
The Corbett Report | Interview 493 – The International Forecaster with Bob Chapman

U.S. local-government payrolls fell to the lowest level in more than six years in a sign that municipalities still face fiscal strains almost three years after the end of the recession. Employment by local governments… dropped by 3,000 in March to 14.1 million, the lowest since February 2006… State payrolls helped offset the loss, showing a third straight month of gains, rising 2,000 to 5.1 million. It’s the longest streak of job increases at that level since 2008.

In 2005, Stockton, California, unveiled a gleaming new arena and ballpark on its riverfront, part of a $145 million plan to draw people downtown. The city east of San Francisco, a shipping hub for wine and almonds, is now negotiating with creditors to stave off bankruptcy. The 10,000-seat arena, a glass-walled symbol of the city’s fight against a soaring crime rate and downtown blight, was one piece of a redevelopment boom that also saw the addition of a 5,000-seat minor league ballfield, a 650-space parking garage, a 66-slip marina and the purchase of an eight-story City Hall. …Today the new City Hall stands empty because the government can’t afford to move in. The parking garage may be seized by creditors because the city defaulted on $32.8 million in bonds.

The Chicago Fed: The recession of 1937—A cautionary tale (November 9, 2009)

According to one interpretation, the 1937 recession was caused by premature tightening of monetary policy and fiscal policy prompted by inflation concerns.

The lesson to be drawn is that policymakers should err on the side of caution. An alternative explanation is that the recession was caused by increases in labor costs due to the industrial policies that formed part of the New Deal—the policies of social and economic reform introduced in the 1930s by President Franklin D. Roosevelt. If a policy lesson can be drawn from this, it might have more to do with the dangers of interfering with market mechanisms.

The goal of this article is to present the relevant facts about the recession of 1937 and assess the competing explanations

The NY Fed (June 1, 2011):

Commodity Prices and the Mistake of 1937: Would Modern Economists Make the Same Mistake?

In 1937, on the eve of a major policy mistake, U.S. economic conditions were surprisingly similar to those in the nation today. Consider, for example, the following summary of economic conditions:
(1) Signs indicate that the recession is finally over.
(2) Short-term interest rates have been close to zero for years but are now expected to rise.
(3) Some are concerned about excessive inflation.
(4) Inflation concerns are partly driven by a large expansion in the monetary base in recent years and by banks’ massive holding of excess reserves.
(5) Furthermore, some are worried that the recent rally in commodity prices threatens to ignite an inflation spiral.

While this summary arguably describes current trends, it is taken from an account of conditions in 1937 that appears in “The Mistake of 1937: A General Equilibrium Analysis,” an article I coauthored with Benjamin Pugsley. What we call “the Mistake of 1937” was, in broad terms, a decision by the Fed and the administration to implement a series of contractionary policies that choked off the recovery of 1933-37 and brought on the recession of 1937-38, one of the worst on record. What is particularly noteworthy is that the inflation fears that triggered the Mistake of 1937 were largely driven by a rally in commodity prices. These circumstances invite direct comparison with our own time, when a substantial recent rise in commodity prices (which now seems to be abating somewhat) stoked inflation fears and led some commentators to call for an increase in the federal funds rate…

That 1937 Feeling Paul Krugman (January 3, 2010)

Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against reenacting the events of 1937…

Bruce Krasting (February 28, 2012): Ben Bernanke has said many times that Marriner Eccles, the head of the Federal Reserve in 1936/37 made a mistake by tightening credit (raising reserve requirements).

Bernanke blames Eccles’s actions for the 50% stock market collapse in 1937 and the second leg of the depression that followed.

Bernanke’s interpretation of Eccles’s actions is widely held by historians. It was FDR who first (conveniently) blamed the Fed. I think that Bernanke is also (conveniently) blaming Eccles. He is using history's interpretation to support his position that monetary policy must be set on MAX for the next three years. He has said that he will not make the same mistake that poor old Eccles made.

Eccles was in a bind. His job at the Fed was to maintain relative stability of prices and the stock of money. In the years prior to 1937 money flowed into the USA from Europe. This "flight capital" fled to the USA in the form of gold shipments. The money came because the holders of wealth were anticipating a major war. With gold reserves rising, so did the supply of money. M1 increased 55%, and money in demand accounts rose 71% from 1933 to 1936. More troubling were rising inflationary pressures. In the first six-months of 1936, wages rose by 11%. Wages in the critical steel industry rose by 33%. These conditions would scare any reasonable Central Banker.

U.S. government debt is growing faster than the nation’s gross domestic product, a reason that spurred the rating firm’s sovereign debt downgrade last week, according to Sean Egan of Egan-Jones Ratings Co.

The immutable laws of math clearly show that if debt grows faster than GDP, kaboom!
It’s funny and telling that the usual suspects are now asserting or prophesying that gasoline prices have peaked due to the recent three-day decline. Funny, they aren’t asking if stock prices have peaked.

Nevertheless, front-running the drive season is endemic due to the proliferation of wise guy trading.

In 2008, we opined that gasoline and oil would peak in July or August because China was stockpiling commodities for the Olympics (August) and gasoline tends to peak around the 4th of July… In 2008, July 11 was the peak for gasoline.

Here are the gasoline peaks of recent years:
2009 – June 16
2010 – May 3
2011 – April 29

So the odds of a gasoline peak in the coming month or two are high.

Last night Ben Bernanke spoke on regulatory issues. Ben claims that he and the Fed are regulating the big banks just marvelously; but shadow banking needs more regulating…It’s always about pleasing and appeasing the big zombie banks.

Getting on to the bigger picture we find that the economic and financial difficulties of the past two years have laid the groundwork for a hyperinflationary event of 30% or higher. The worst hit will be the US, UK and Europe. No one will be left out of the equation. We believe countries such as Australia, Canada, Mexico and Chile will endure half the pain of the US, UK and Europe.

All those quantitative easing, currency swaps, etc., will turn into 30% or more of hyperinflation.

It will be 1975 to 1981 all over again. The US government shortfall annually is really running at over $4 trillion. Government cannot collect enough taxes to contain such a deficit. Even if taxes were increased to 75% and there were deep operating cuts the US dollar would still be subject to collapse. That is how bad it is. We all know what the Fed and other central banks have done to keep their financial entities afloat. They cannot continue to get growth of 2% to 3% even with accelerating money and credit. Then we can also include states and municipalities all standing in line for funds, because incompetence and crooks ran their entities. A global depression has been averted, but for how long?

As we have said, over and over no paper currency is any match for gold and silver. Others say diversify – into what? All other accepted methods are all too dangerous.

Greece’s Parliament begs for more near worthless Euros to keep their economy afloat from the very bankers who caused the problem in the first place. Bankers, who via controlled politicians, have destroyed the cradle of modern democracy, only to be replaced by one-world criminals. Parliament is putting together another austerity plan to further their enemies, the bankers. All over Greece and Europe seeing nothing but a bleak future many have and will commit suicide. We are sure you have all heard of the 77-year old retired pharmacist who suicided himself in front of Parliament. His retirement was all he had and that has been bargained away to please the Illuminist bankers. In exchange for $1.4 trillion Greece traded the life of a 77-year old man.

We will know better how Greece and the euro zone are going in May. They’ll be fireworks, but just how big remains to be seen.

The verbal battle rages regarding what kind of foreclosures we are looking at over the next three years. Presently at 6.8 million homes we are looking for 9.8 million by the end of 2014.
New foreclosures at Wells Fargo rose 68% and at Deutsche Bank 47%. Now that their paltry $25 billion in fines have been paid they will start putting more homes on the market, which means a further drop of that period of 10% to 20%. Actually 2011 was a good year with prices only off 4%. There will be no or little gains because of this inventory overhang for years to come. It is what it is and we will have to lie with it.

Inventories at U.S. wholesalers rose more than forecast in February as companies tried to keep pace with stronger demand.

The 0.9 percent advance in stockpiles followed a 0.6 percent gain in January that was more than initially estimated, the Commerce Department reported today in Washington.

Economists projected a 0.5 percent rise, according to the median estimate in a Bloomberg News survey. Sales climbed 1.2 percent in February after no change a month earlier.

At the current sales pace, wholesalers had enough goods on hand to last 1.17 months, the same as in the prior four months, the report showed. Inventory rebuilding, which helped the economy grow in the fourth quarter at the fastest pace in more than a year, may still contribute less to the expansion in early 2012.

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