Don't Ignore Bernanke's Bell

There is an old adage on Wall Street that no one rings a bell at major market tops or bottoms. That may be true in normal times, but as many have noticed, we are now completely through the looking glass. In this parallel reality, Ben Bernanke has just rung the loudest bell ever heard in the foreign exchange and government debt markets. Investors who ignore the clanging do so at their own peril. The bell's reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine.

While nearly every facet of America's economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S dollar has been the beneficiary of the global economic crises which the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.

This week the Federal Reserve finally made clear what should have been obvious for some time - the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the Fed's printing presses. Few can doubt that they will persist with these operations until the economy returns to its former health. Whether or not this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.

Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market's attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.

Now that the Fed has recklessly shown its hand, the mad dash to get out of Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (read China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.

Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt then it expects as it becomes the only buyer in a seller's market.

Just last week, Chinese premier Wen Jiabao voiced concern about his country's massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan which it then uses to buy treasurers. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

With such a policy in place, America has now become a banana republic. It won't be too long before our living standards reflect our new status. Got Gold?

Comments

[Ned S:]

There would seem to be a solution. The Swedes applied it successfully in the early 1990's. And do seem to believe it would work on the much larger scale required now. (Google "Bo Lundgren Banking Crisis")
It involves nationalising banks. And it does wipe out the shareholders. This was being widely touted only 4 weeks ago. But the market responded very badly and the powers that be made soothing noises along the lines of bank nationalisations not being an option they favour.
So Bernanke is buying time and pumping the markets and happily forcing the USD down which he wants anyway - Until he and Geithner can make a very clear case for nationalising specific banks based on America's general financial woes - Oh dear, look at how much the dollar is down! We really must do something - Gee, we have to nationalise the insolvent banks - Even though it was not what we wanted to do.
Do you think the banks could be awake to them - I notice both Citigroup and BofA are very keen for everyone to know how profitable they've suddenly become. (Or am I just too cynical?)
Anyway, I'm not buying gold. But I am relying on Bernanke to be a pragmatic little central banker the moment his QE measures have pushed the dollar down to a point where he wants it and the markets up to a point where they can take the hit of banks being nationalised without pushing them too far below the lows they've already experienced and catastrophically destroying what remains of American's 401(k)s.

Mar 22 01:33 AM

[Ned S:]

Free markets are dead. Investing is dead. The world has been reduced to gambling on guesses as to what might be going on inside one balding, bearded academic's skull "this" week and contemplating what virtually amount to conspiracy theories.
It's all a bit of a hoot really. But I watch the Baltic Dry Index with a grain of salt as well.
As to America's underfunded long term pension and health plans - I've stopped counting those in the equation. If necessary sick people die and old people eat cat food until they die as well. Sad but true.

Mar 22 01:49 AM

[fatcat:]

Most of the stimulus money going out now is going for stabilizing industries and institutions...everything from cities and states,to auto parts makers.A very large portion of this money is being used to service debt and maintain status quo.There is no new hiring or spending, at all.

No inflation in that scenario....not saying it won't come,just not yet...

Mar 22 02:56 AM

[Dave Wrixon:]

Does the Velocity of Money theory hold in Zimbabwe?

If it does they must have the most vibrant economy in the World? No?


On Mar 21 08:28 PM northstar10000 wrote:

> It' s the movement of money not the total in existence. The real
> problem is to get that giant stack of bills to move. It takes a ton
> of bucks eaten by the deflationary beast before you can wake it up.
> Once the beast is annoyed enough it is a bigger beast to get him
> to sit back down. There is no way to control the process once it
> starts on the scale we will need to get things moving. the politicians
> will enjoy a brief ride which they will use to spend more on social
> programs as a reward for the brilliant policy which they will claim
> got us back to recovery. Unfortunately there will be a big blow up
> world wide (war) pick your spot. It will be the result of seeing
> the Dems as weak. Middle East-Korea-Mexico-China you can add many
> potential hot spots. We are seen as weak and rudderless. Watch the
> dictators of the world take advantage.

Mar 22 03:25 AM

[Dave Wrixon:]

I think you should be more concerned that a US in a total state of collapse will end up with its own dictator. We currently have the Capitalism has Failed Argument. Next year we could see the emergence of the Democracy has Failed Argument. And to some extent that is true. When you have poorly educated electorates selecting governments largely on the basis of how much TV exposure they can buy, because Joe Six Pack cannot understand the arguments so he just votes for the most Macho guy, Democracy is definitely failing.


On Mar 21 09:51 PM robert99 wrote:

>
>
> We are seen as weak and rudderless. Watch the

Mar 22 03:30 AM

[Dave Wrixon:]

Oh, but there is , because you are disassociating the industry from the market. Workers are being paid because it is politically expedient for them to be paid, not because they are or will produce something that actually has a valid place in the market. If you don't think that is inflationary then you need to check out the British Leyland story.


On Mar 22 02:56 AM fatcat wrote:

> Most of the stimulus money going out now is going for stabilizing
> industries and institutions...everything from cities and states,to
> auto parts makers.A very large portion of this money is being used
> to service debt and maintain status quo.There is no new hiring or
> spending, at all.
>
> No inflation in that scenario....not saying it won't come,just not
> yet...

Mar 22 03:33 AM

[Bill Jencks:]

Peter,
I read all your stuff avidly - all accurate and good. I'm only writing this to pass on some information to you that I have learned - which should confirm how right you were about the dollar, gold etc. I hope you read this.

Here is some recent, significant and startling news about the world reserve dollar that might interest you:

slowsmile.hypocrisy.co.../

This news will officially be released on Monday.

Mar 22 08:28 AM

[Chris Lau:]

The world has no other currency for which to hold. It might hold commodities like gold and silver and even oil...but what's better? Holding US currency or holding commodities which in itself must fall when global growth currently does not exist. Look at what happened to oil -it collapsed - in this scenario now playing out.



On Mar 21 10:31 PM @TexasER wrote:

> The problem from the beginning with Peter's analysis is that it assumes
> the world abandons the dollar. They won't. Everyone is going to
> devalue their currencies together.
>
> Yes, we will hopefully have high inflation soon. Gold and commodities
> will do very well. That won't end the world, nor America's place
> in it.
>
> Sorry to disappoint some of you.

Mar 22 10:08 AM

[xb74:]

Obama is essentially a dictator with no effective opposition he can ram his adjenda through congress with relative ease and his adjenda has little to do with the econmy.


On Mar 22 03:30 AM Dave Wrixon wrote:

> I think you should be more concerned that a US in a total state of
> collapse will end up with its own dictator. We currently have the
> Capitalism has Failed Argument. Next year we could see the emergence
> of the Democracy has Failed Argument. And to some extent that is
> true. When you have poorly educated electorates selecting governments
> largely on the basis of how much TV exposure they can buy, because
> Joe Six Pack cannot understand the arguments so he just votes for
> the most Macho guy, Democracy is definitely failing.

Mar 22 11:47 AM

[325757:]

I have been reading and watching a lot videos of those telling us we are in for a collapse of our economy and the US dollar and to buy gold and precious metals. I just read Michael Panzner's book When Giants Fall and it pretty well is saying the same thing as Peter. I am off to get Crash Proof to read it and hopefully it gives some insight into what to do...knowing what is likely coming. I would much rather listen to someone who has already proved they were right ahead of the curve. Look up tv interview with Peter Schiff on Fox tv with Steve Forbes (and George Gilder). You can clearly see the Dow numbers of 12,000 plus in the background and these guys are talking to Peter like they know more than he does. It is very interesting to watch given where we are now.
If I am all in $Can and have no debt, should I be spending it all on things that are going to get more expensive later? OK, yeah buy gold, but it isnt going to pay your taxes when the gov. starts to raise taxes for higher income earners. If a depression is coming, and inflation is coming to the US, food is going to get more expensive as are other commodity items. Is it time NOW to start hoarding food?
On one of Peter's videos he says Dow may go to 2,000 and on another, he says gold should double this year! Last year I watched a video of a guy named Lindsay Williams talking about oil dropping to $25 due to being manipulated. And the reason was to be part of a plan to cause mass bankruptcies of companies so the government can come in and buy all the airlines, banks, real estate etc as cheap as can be done. It sounded far fetched back then, but what the Fed is doing now buying treasuries and printing money
is either clueless or with another master plan such as just mentioned. Things do not usually unfold as most people predict, and there are just too many people saying buy gold for my liking. However, since I would rather buy some gold and be wrong than ignore the advice and then watch gold spike up to $2000 plus, (and have my dollars become worthless) I just may buy some gold and silver anyway. Other than gold, what should we be doing with our money before the governments try to grab it?

Mar 22 01:38 PM

[Rob Viglione:]

Debt is ultimately servitude. Not only will Americans' living standards contract, but so too will our influence around the world. The Chinese know this, as evidenced by recent military aggression the South China Sea.

Wait, is "aggression" really the word when all they did was stop our spy ship from spying on them in their own territory?

Bottom line: Expect the Chinese to be increasingly hostile to U.S. encroachment on their territorial ambitions. They will likely be increasingly so as they start losing hundreds of billions in paper value of U.S. debt instruments.

Mar 22 03:49 PM

[granger:]

what is the best means of tracking the velocity of money?


On Mar 21 08:28 PM northstar10000 wrote:

> It' s the movement of money not the total in existence. The real
> problem is to get that giant stack of bills to move. It takes a ton
> of bucks eaten by the deflationary beast before you can wake it up.
> Once the beast is annoyed enough it is a bigger beast to get him
> to sit back down. There is no way to control the process once it
> starts on the scale we will need to get things moving. the politicians
> will enjoy a brief ride which they will use to spend more on social
> programs as a reward for the brilliant policy which they will claim
> got us back to recovery. Unfortunately there will be a big blow up
> world wide (war) pick your spot. It will be the result of seeing
> the Dems as weak. Middle East-Korea-Mexico-China you can add many
> potential hot spots. We are seen as weak and rudderless. Watch the
> dictators of the world take advantage.

Mar 22 04:01 PM

[Bill Jencks:]

I'm pretty amazed at some people's posts here. In my last post here I put up direct evidence - FACT - that a specialist UN economic panel, working with the American govt., has recommended(with full agreement from the US govt.) that the US dollar no longer be the World Reserve Currency. This is all based on a Reuter's news article.

It seems that alot of people out there are in denial and "disagree". How can you disagree with reported fact?

When this news gets out, the world stock markets will plunge like a stone.

Mar 22 08:14 PM

[Michael_Cohen:]

Gold/silver will be good plays during the inflation. Hopefully, Congress doesn't view those that make money off precious metals as evil bankers and tax gains at 90%.

If FDR could seize people's gold, then I wouldn't put this past our president that fashions himself as FDR and Congressmen who want to lynch everyone.

At least this economic meltdown of ours is fun to watch....it would just be more fun to watch if it were at a distance.

Mar 22 08:51 PM

[SageNot:]

Pls don' apologize @TexasER, basically you're right, Peter is wrong as usual. He never replies to my inquiries either, imagine that?

Too many posters here are drinking the same kool-Aid
that nourishes Peter & the Wolf. There's never been 'nuff gold around to replace our dollar, maybe Hugo Chavez's money, but not ours.

The Euro will tank if anything like what Peter indicates is coming, the Swiss Franc looks weaker if indeed Switz. is shadow boxing with BK. Read it right here at Seeking Alpha, would they fabricate such a happening?

Talking your book (Schiff is a broker you know) is not new, but the extremes he's willing to go sound DESPERATE to me. Follow him at your own peril.

Finis!



On Mar 22 10:08 AM chrispycrunch wrote:

> The world has no other currency for which to hold. It might hold
> commodities like gold and silver and even oil...but what's better?
> Holding US currency or holding commodities which in itself must fall
> when global growth currently does not exist. Look at what happened
> to oil -it collapsed - in this scenario now playing out.
>

Mar 23 11:58 AM

[Domenico:]

Peter,

I'm wondering if you'll ever turn bullish on America and stocks. Do you really believe that you can short stocks to the bottom and ride gold to the top, and then switch right at the peaks?

What signs, oh guru, should we be looking for? When will we know that it's over? As you are still sitting in your posh American office, charging commissions in American dollars, buying and selling American-based investments for American clients, I assume you believe that we have a future...

I admit -- Jim Rogers is a brilliant investor, but that doesn't mean that one should republish everything he says as your own and then proclaim to be a guru. A guru, in fact, would have moved to cash and/or short positions two years ago. Maybe you should check out this article -- globaleconomicanalysis... -- showing how some of your clients allegedly fared during this downturn. Down 50%? 70%?

Doesn't sound too crash proof to me...

Mar 23 08:58 PM

[Econ 101:]

Coffee, lead and Whiskey - buy them, hold them.

Better than gold or Silver. Think about it!

Mar 24 11:00 PM

[Dean M:]

There is no analogy for the situation we're in now and trying to apply lessons from previous crises like the depression is a waste of time. The Chinese are not so powerful, we turned their greed against them and now all the dollars they pillaged are becoming worthless. And I don't see the increased money supply has precipitated a rush to hard assets yet. Not that it couldn't happen, but lets see the evidence first.

Mar 25 02:18 PM

[oldgoldbug:]

The different and often opposing posts to this article parallel the actions of the markets. Massive amounts of money move into gold (see increases in holdings of GLD, now #6 in the world) yet gold price is falling. For all the buying there is huge selling. Who? and why? Silver and platinum strengthening vs gold - nascent economic recovery coming? Treasury market seems to be holding its own (barely) as Fed starts buying. Big rush into the stock market since March 12 may be stalling. Profit taking for sure, but ...... Huge amounts of money on the sidelines waiting to see which way to go. All in all not an easy time to get a handle on, and any misstep, including keeping assets in cash for too long, could have far reaching negative consequences.

Mar 28 10:24 AM

[msgtb:]

Remember Larry Summers was one of the creators of this mess and has Obama's ear. He should be going to jail with Bernake, Paulson, Gietner what they have done is criminal and should be punished with jail time. The American people understand that Goldman Sachs is now controling the stock markets and the US Government and we don't like it.

Good luck and good trading

Dave

May 31 12:59 AM