Thread: QE, Hyperinflation & Global Deflationary Depression

Quantitative Easing, Inflation, Hyperinflation and Global Deflationary Depression

Economics / Great Depression II
Oct 17, 2010 - 12:50 PM

By: Bob_Chapman

Today’s great debate basically between the US and Europe is – should the Fed go full bore by implementing a second quantitative easing? In part it is a moot point, because they have been doing just that in the repo market for four months without letting anyone know what they were up too. Their mandate is to reduce inflation and create full employment. Real inflation is 7% and unemployment is 22-3/4%. The Fed for three years has concentrated on bailing out Wall Street, banking, insurance and transnational conglomerates. Little has been done to fulfill their mandated mission. The main recipients of their largess, of course, are the firms that actually own the privately owned Fed.

There are two options left to the Fed. Create a full QE2 by injecting another $2.5 trillion into the economy, as they just did with QE1 with $868 billion in assistance from the Senate and the House, or they can purge the system and have a deflationary depression. That result will be the fate of the Fed eventually if they create QE2 or perhaps QE3. No matter what the Fed does a deflationary collapse, one way or another, is inevitable.

Few pay attention to the fact that the US has been in deflation for 8 years and has been kept afloat by injections of massive amounts of money and credit. Not to be singled out most all nations have been doing the same thing and that is why all currencies have fallen versus gold for the past 9 years. This is how the game has been continued, otherwise we would have all fallen into deflationary depression or a death spiral. This has given us less consumption, zero interest rates and higher unemployment.

Officially inflation is 1.6%, but real inflation is 7% as most of the liquidity injections have been used to beat back the undertow of deflationary depression. That has resulted in a Fed expansion of from $1 trillion to $3 trillion and who knows how much more is being hidden on the books of other foreign central banks. As the Fed has told us it is all a state secret. To their credit the Fed has held off financial collapse, but we ask you how do they believe that they can keep this up indefinitely? The obvious sacrifice is the dollar and that is in progress.

As this increase in money and credit continues at a $2 to $2.5 trillion pace over the next year the vision of hyperinflation looms in the background. The only way to avoid hyperinflation is to allow deflationary depression to proceed. It is going to happen anyway no matter what the Fed does. The chaos of hyperinflation should be avoided at all costs. The owners of the privately owned Fed won’t allow that because they want to hold on to power and control as long as possible. Thus, in all likelihood we will have inflation, then hyperinflation and then deflationary depression. Having been at this for 50 years we now nothing is written in stone. It may not seem sensible to you but it is reality. Our track record for the last 21 years speaks for itself. Correct calls in all sectors 98% of the time.

Wages and salaries and asset prices have been falling with inflation rising, as we have endured a credit crisis for the past three years. The dollar is close to its lowest levels and gold is flirting with $1,360 an ounce. That is a disastrous situation for Americans, except the 2% to 3%, who have had sense enough to invest in gold and silver bullion, coins and shares. That excludes the ETFs, GLD and SLV, which we believe are a disaster waiting to happen.

Thus, there is to be another monetary expansion, which will take inflation up to 14% or more and that will in part cause a flight to quality, which will continue to be boasted by gold, which has replaced the US dollar as the world’s reserve currency. Many question that, but in time people will realize that is what in fact has happened. Monetarily that means that the one-worlder’s dream of a world currency will never be fulfilled. Hyperinflation in the US dollar will spread in varying degrees to all fiat currencies and these elitists will be deprived of issuing any currency that is not backed by gold. The game they have played for so long, the suppression of gold prices, will be lost. That means those who are in control already realize that their war against gold for financial domination has been lost and they will have to concentrate on the survival of what they term, their system.

Inflation is on the way in much higher numbers to be followed by hyperinflation and ultimately deflationary depression.

Presently the US government debt to GDP is about 93% of GDP with an annual debt to GDP of about 10%. QE2 means more of the same along with government debt. Government continues to create debt and the Fed continues to monetize debt. Both are trying to bury the economy, increase demand and to keep deflation at bay. The result they hope is recovery, which in reality is out of their reach. Even with $5 trillion over the next two years the best they can do is to barely stay on the plus side. Over the last two years they have accomplished very little.

Those who have been paying attention have seen the Fed’s targeting of the Treasury market. Not only do they have interest rates at zero, but also they have caused yields on the 2-year bills to fall to 0.36%, but also the 10-year notes are yielding 2.47% and they look like they are headed lower. This makes borrowing very cheap for large corporations and for mortgage rates to be very attractive. This has made treasuries the focal point of Fed policy. The strength or weakness of their program. Most small business and medium sized businesses still cannot get loans and they are the ones that create 70% of the jobs. Thus, it is still Wall Street; banking, insurance and transnational conglomerates that get virtually free money. The intention is that all the elitists survive and the heck with the rest of the country. These same firms are the ones that are still laying off.

The result is that treasuries, in spite of their bogus AAA rating, are the new addition to junk bonds and toxic waste. They are overvalued and the yields ridiculous. We believe in time the Fed will end up with total treasury issuance. That means the US dollar will sink to new unheard of depths, which it is in the process of doing.

Much of the Treasury sales by money managers are sending money into the commodities market and in limited cases in gold and silver and shares. Such switches will put pressure on Treasuries, which will make the Fed’s job more difficult. They will have to create ever more money to control that market. As we move forward the Fed will be forced to create more liquidity by buying more Treasuries than they might have to otherwise. Eventually this will appear to be a bubble, which it in fact it’s becoming as we write, and that is how the Fed will end up with the entire issuance.

The big money center legacy, too big to fail banks, is essentially broke. In fact they have been nationalized via infusions of capital by the Fed plus are being allowed to keep two sets of books. Regulations have been bypassed and they have become a law unto themselves with the help of the federal government, the BIS, The Bank for International Settlements, and the FASB. They borrow funds from the Fed at zero interest rates and then lend it back to the Fed at 2-1/2%, which taxpayers get to pay. This is for a subsidy to try to keep these banks on the edge of solvency. These actions also allow their officers multi-million paychecks that under the circumstances border on the obscene. They hoard funds and have cut lending to small- and medium-sized businesses by 25%, which keeps those funds sterilized. When they monetize these funds it is in the form of loans to the elite corporations and in the purchase of treasuries. This as the Fed buys $1.7 trillion in toxic waste at prices it won’t divulge from these same and other banks. Now they are in the beginning process of selling this toxic waste back to the banks at low prices to allow the losses to be transferred to the taxpayers. This is exactly what is going on. The fed is totally subsidizing these banks, which just happen to own the Fed. We call this an incestuous relationship. We all know what will happen when these banks and the foreign holders all try to exit Treasuries at once – the bubble will break. This time no one will be there to play catcher and yields will climb quickly and furiously.

This scenario brings us to where will all the money go? The first haven has been commodities. That will push prices up and add to price inflation. Those who choose to use ETFs will be jumping from the frying pan into the fire. We all can see that this is in process, especially in gold and silver prices. What is going to surprise you is that this sector change will be relentless in the flight to quality into real things. Yes, there will be wild volatility and corrections, but the upward trajectory will be maintained long beyond what people could have believed. Those owners will have nowhere else to turn. Bonds and the market will be falling along with the dollar and real estate is dead. They will continue to stay long commodities, gold and silver because there is no place else safe to go too. Unfortunately the populace will at this stage be treated to hyperinflation - the process in which people will have lost faith in the dollar and will dump it for goods and services as soon as it is received.

This is why a world meeting is necessary, such as the Smithsonian of the early 1980s, the Plaza Accord of 1985 and the Louvre Accord of 1987. Without such a meeting to realign currencies and to multilaterally default on debt there will be international financial and economic chaos. It would also lead to worldwide hyperinflation, emanating from the US. This would in all likelihood be accompanied by not only a flight to gold, silver and commodities, but also a collapse in treasury markets, particularly in the US Treasury market, which by that time could be totally owned by the Fed. That would push yields up and cause the stock market to fall.

Such events would force the public to use their currencies that they have lost faith in first by buying food and household goods before prices rose higher. Asset prices will collapse. The price of things, such as homes, buildings, cars, trucks, factories, etc. will collapse to 20% to 40% of what they were worth just a month ago. The functioning of the US and world economy would collapse. That is where bartering begins. Using gold and silver coins to complete transactions. You may not think what you are seeing could lead to all this, but it could, unless there is soon an international meeting to settle differences and patch up the existing system. No matter what happens there will be great dislocation and chaos.

Government cannot save us, only international cooperation can. One of the most important events would be a collapse in the Treasury market, accompanied with a stock market collapse. The flip side of that would be skyrocketing prices of commodities, gold and silver. There would be no other options left. Most people were too preoccupied with their lives to notice the advance of such events. America will wake up one morning to Martial law. That will be the only thing left for government to do to try to control the situation. It is not a solution, but it at least for a time will keep order. America is Humpty Dumpty. Such events have an excellent chance of occurring in 2011 and 2012, if a meeting is not held over the next six months. The key to such an accord is to revert to a gold standard for currencies worldwide at a price in excess of $6,000 an ounce; otherwise the scenario will just begin again.

It is obvious we cannot continue to do what we are doing. It is not working. We are all headed toward global deflationary depression, even the most solvent nations, because most have very little or no gold left.

You had best prepare. First for higher inflation, then hyperinflation and than deflationary depression. If you do not prepare you will be very unhappy.

Theinternationalforcaster.com

http://www.marketoracle.co.uk/Article23565.html

Quantitative Easing 2 is a Bad Idea, Market Manipulators Pushing Stocks Higher

Stock-Markets / Quantitative Easing
Oct 17, 2010 - 04:20 AM

By: Robert_McHugh_PhD

Friday's internals were weak, in spite of being a mixed market. The NASDAQ 100 had a huge price move up, but a significant chunk of the price gain came from one stock, Google. Google rose $60.52 per share, or 11.10 percent, in one day, Friday. Google is one of those stocks that a market manipulator can buy to move an index in the hopes it starts bandwagon buying. During the 2003 and 2006 rallies, we saw MMM move the Industrials with bizarre isolated rising price days. At the time, it appeared to us a market manipulator was moving the Industrials higher with 3M purchases. From time to time we see concerted efforts to push markets higher. Now is one of those times. But each time this happens, it causes the subsequent decline to be worse than would otherwise have been the case, like stretching a rubber band too far.

The snapback is nasty. Deep pockets can only delay the inevitable. They cannot stop it. Quantitative Easing talk is raising expectations for liquidity infusions that people think will seep into stock markets. Hedge funds are buying stocks ahead of the actual Quantitative Easing from the Fed. QE2 is simply a fancy name for the Federal Reserve printing U.S. Dollars and buying fixed income securities from large Wall Street firms, buying junk bonds, corporate bonds, mortgage backed securities or Treasuries. It is essentially a fraud on U.S. Dollar holders, is a fraud on the taxpaying U.S. Consumer and Small Business, a fraud on the working person who has to get his money through hard labor. We will discuss this further later, and why this policy will destroy what is left of this fragile economy, and will eventually help drive stock market values down toward zero, and drive the U.S. Dollar down toward 40ish. QE2 is wonderful for large Wall Street firms' short-term profits. They love it. Imagine having a business where the Federal Reserve is interested in helping you make as much money as possible at the expense of everyone else? That is QE2.

We learned Friday that the U.S. Federal Deficit for the Fiscal Year Ending September 30th, 2010, was $1.3 trillion. With a total Federal Budget of $3.5 trillion, this means that for every dollar spent by the Federal Government, they had to borrow 37 cents to cover that expense. Can you imagine running your household or small business like that? You would go bankrupt in short order.

Quantitative Easing will some day be looked back upon as we now look at healing the sick through bleeding back in the 1700s. It is terrible economic policy, in fact should be considered criminal activity. Criminal for many reasons, such as debasing the value of the Dollar, but more importantly because it will be the final nail that destroys our economy. Wall Street is the key beneficiary. Households (consumers) which account for 70 percent of GDP, and small businesses, which account for 70 percent of employment, will not benefit from this fraudulent activity by the Federal Reserve. Where on earth is it right for someone to print trillions of Dollars out of thin air and then buy legitimate legally binding debt instruments in exchange for this printed paper? Anyone else doing this would be arrested and thrown in jail, with the key tossed into the deep blue sea.

But forgetting that this is probably a criminal act, and assuming that it is legally acceptable because the Central Planners enact legislation to permit QE2, let's explore why it is a fraud on pretty much everyone except the sellers of the fixed income securities the Fed will be buying, primarily mega Wall Street firms, surrogates for the president's Working Group (the Plunge Protection Team).

Bernanke suggested in his speech in Boston Friday on the subject of QE2, that he is justified in doing this to raise the inflation rate, which he believes is too low, and to increase employment. His economics are dead wrong. He believes it is perfectly appropriate to print trillions of dollars of U.S. Federal Reserve notes (Dollars) out of thin air, and then send this money from the Fed's print shop across the invisible wall that separates the real economy from the non-economy (the Fed) to the lucky recipients of this cash. Here is the problem: This transfer of printed cash for securities in the market are normally known as open market operations, and the point of this exercise is to lower interest rates in the market to spur lending and filter cash through Wall Street intermediaries to banks to borrowers which would stimulate the economy and multiply the money supply in the market. However, short-term interest rates are already zero, and long-term interest rates are at historic lows. So QE2 will not reduce interest rates. Therefore it will not increase borrowing. Therefore it will not multiply the money supply or spur spending, ergo it will not improve GDP, will not help households or small businesses. The cash will simply move from the Fed to Wall Street where the mega banks can then leverage their investing and trading activities which will improve their short-term profits. There will be no trickle down benefits to households or small businesses. Without benefits to households or small businesses, there will be no improvement in spending (GDP) or employment.

What will result from QE2 is the devaluation of the U.S. Dollar as there will be too many Dollars floating around, in relation to hard assets such as precious metals, and foreign currencies. This reduces the purchasing power of Dollars, and reduces the value of cash in bank accounts. In other words, the consumer gets hurt.

The only way QE2 makes any sense at all is if it is conducted in such a way that the cash being printed by the Fed finds its way directly into the hands of households and small businesses, instead of Wall Street. The only way for this to happen is if newly issued debt from the U.S. Treasury is sold to the Fed for newly printed Dollars, and then the trillions of QE2 Dollars sent to the Treasury from the Fed are sent directly to U.S. Households in the form of a massive income tax rebate, and tax cut, with a minimum amount of $50,000 rebated to every household, since many good folks did not have jobs over the past few years to receive rebated taxes. Then half the income tax rebates, which would be ideally two years worth, would be required to pay down debt, with the other half available to be used at households' discretion. The result would be an immediate improvement in household and bank balance sheets, and an increase in consumer spending (GDP). This would increase small business revenue, which would increase hiring, which would result in an increase in demand for large firms' products and services, which would mean more investment banking business for Wall Street. The economy would grow, increasing the overall pie for all to share and prosper, with a resultant corresponding desirable modest level of inflation. Local, State and Federal governments would benefit immensely as they get an increase in tax revenues from the trickle up economic growth, capturing taxes at every level of spending, which can be used to reduce government deficits and debt. Stock Markets would rise as corporate revenues and profits rise.

If the intent of QE2 fails to include the household, it should not be allowed to happen. Congress must put a stop to QE2 immediately, and require a full explanation of the intended program before Bernanke destroys our economy. There should be an open debate in Congress on the merits of QE2, with testimony from all interested parties, in front of television cameras, for the American public to study before QE2 is effectuated. This is not something the Fed should conduct in secret. This is new turf, new territory for the Fed, and warrants careful scrutiny. The Justice Department needs to study if in fact the Fed is legally empowered to conduct QE2. This is serious stuff, an intentional devaluation of the U.S. Dollar, and thus needs to be treated as such. Intelligent, thoughtful contemplation is essential in an open public forum. Households and small businesses need to be able to weigh in by calling their congressional representatives before QE2 happens. QE2 should require an act of Congress. The Fed should not be allowed to do this on their own.

Unfortunately, the language of the markets, price patterns and indicators, have been warning for months that the U.S. Dollar is headed to 40ish (it knew QE2 was coming), and is telling us the stock market will react very badly once QE2 starts.

It does not look like there is any stopping QE2. The Central Planners are convinced that the more they do, the more control they take, the more they couch their activities with terminology that makes it impossible for the average Joe and Mary to understand what they are doing, the more they involve mega Wall Street firms in their fixes, the better. It is becoming very difficult to know if the Central Planners are simply misguided in their policies, that their intentions are good, that they really care about households and small businesses and the economy, or is this all an intentional game to benefit only the few large and powerful Wall Street banks, to build an oligarchy of Centralized power by design. That is for those who can figure out the schemes to decide for themselves.

The market's language, technical analysis, suggests that regardless of intention, mistakes will be conducted, and the worst will occur.

http://www.marketoracle.co.uk/Article23557.html