Week in Review with Jerry Robinson (8/23-8/29)

By Jerry Robinson | FTMDaily.com

Federal Reserve Confusion… Last week offered much in the way of understanding how things may be beginning to unfold at the Federal Reserve. After the August 10 Fed Board meeting where tensions reportedly flared among members over when to begin a new round of quantitative easing, came the Fed’s annual retreat to Jackson Hole where Bernanke undoubtedly revealed the Fed’s stance as a deflation fighter. You can read his entire speech here.

Five Facts That Every Investor in China Should Know… Money manager Puru Saxena joined me on my radio show last weekend from his office in Hong Kong to talk about why he is more bullish than ever on investing in China. He talks about the specific areas and sectors in China where he and his clients are investing. Listen to the two-part interview below.

Tail-spinning USD… In other news, China’s drive to provide its currency with international reserve status got a boost last week. Many of the world’s biggest banks – including JP Morgan and Citibank – have launched international roadshows promoting the use of the renminbi (the Chinese currency) instead of the U.S. Dollar to their corporate customers engaging in trade deals with China.

Citibank also made news last week when a foreign exchange report was released warning that another round of quantitative easing from the Federal Reserve was be the “endgame” for the U.S. Dollar. Here’s a brief excerpt from the Citibank report:

A second round of QE will likely put sharp downward pressure on the USD, to some degree versus the euro
and other G10 currencies, with potential for a broader USD sell-off. Foreign investors are likely to view the renewed direct intervention as indicating that the Fed’s balance sheet expansion and implicit monetization of fiscal expenditures are first line approaches to dealing with disappointing recovery prospects, rather than the exceptional measures they were meant to be initially. This could have severe implications for foreign perceptions of the quality of the US assets that they are accumulating in private and official portfolios, and may lead them to draw the conclusion that USD weakness is less a by-product than a desired outcome of these measures.

Inside Job… A new film about the 2008 financial crisis that looks excellent. Watch the trailer below.

Housing Crisis Deepens… The  residential real estate market took it in the chin in July. According to a report conducted the National Association of Realtors:

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

For a good article about the July home sales report with some startling charts, click here.

How Hyperinflation Will Happen… Gonzalo Lira wrote an interesting blog post called “How Hyperinflation Will Happen.” It is an enlightening article. You can read it here.

China Will Force the World Off Oil… The Council on Foreign Relations warned last week of China’s growing demand. You can read the report here.

401(k) and IRA Confiscation? I have been warning you for some time that government-controlled assets like 401(k)’s and IRA’s are ripe for seizure by the Federal government. This seizure will likely take the form of higher distribution taxes on the income received from these qualified plans. Here’s a new article about the topic from the European press.

Still Bullish on Silver… Silver continues its price rise. And when you consider the fundamentals driving the metal, the future looks even more bright. Here’s five trends that will drive silver even higher in the coming years.

About Jerry Robinson

Jerry Robinson is an economist, published author, columnist, international conference speaker, and the editor of the financial website, FTMDaily.com. In addition, Robinson hosts a weekly radio program entitled Follow the Money Weekly, an hour long radio show dedicated to deciphering the week’s economic news.

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Getting Ready For A Dollar Collapse? (Wall Street Journal)

By Alen Mattich | WallStreetJournal.com

August 23, 2010, 1:26 PM GMT

Could the Federal Reserve’s decision to restart its quantitative easing program trigger a dollar collapse?

That’s what John Hussman, a fund manager, argues in his latest weekly note to investors. And the case he makes is strong… as long as one ignores the fact that other central banks don’t want and are unlikely to accept a big dollar devaluation.

Hussman notes that while, longer term, currencies tend to move to equalize purchasing power between different countries, most short-term foreign exchange fluctuations hinge on interest-rate differentials. Here, differences in inflation rates and yields on offer between countries will determine the flow of capital, which, in turn, will affect relative changes in currencies. So countries with relatively high interest rates can see their currencies trade well above where they should do according to purchasing power parity arguments.

So much for the theoretical background.

Hussman then notes that two thirds of the Fed’s balance sheet is made up of securities issued by government-sponsored enterprises, namely Fannie Mae and Freddie Mac, that are being bailed out by the Treasury, which is to say these are holdings the Fed won’t be able to reverse easily. In other words, this represents the more or less permanent printing of new money.

When set against the fact that the government has lost control of its finances, the long-run inflationary threat posed by fiscal and monetary policy is huge. But the dollar’s position is made even more precarious by the zero interest rates being pursued by the Fed in response to economic weakness.

On an interest-rate parity basis, then, the dollar needs to depreciate rapidly and considerably–in order to offset the future inflationary surge and the current lack of yield.

But this is exactly what the U.S. economy needs, isn’t it? A dollar devaluation.

Well, yes, on purchasing power parity grounds, the dollar ought to be depreciating to improve the relative position of U.S. exporters. After all, the U.S. trade balance has been worsening lately, even as the economy’s rebound runs out of steam.

The problem is the speed of adjustment and the fact that a sudden dollar devaluation would likely overshoot its equilibrium level. In other words, the dollar could become too cheap too fast. Such a sudden and dramatic move could cause all sorts of disruptions and trigger a sudden and rampant bout of inflation.

And were the rest of the global economy in a healthy state and were exchange rates fully flexible, this is indeed what might happen.

But China’s dollar peg is likely to prove a drag on a massive dollar devaluation. At the same time, countries like the U.K. are likely to respond to any sudden appreciation of their own currencies with their own programs of quantitative easing. As might the European Central Bank. Or there could be more direct currency intervention–the sort the Japanese and the Swiss have tended to resort to.

The upshot is likely to be not just a U.S.-driven inflationary push, but a global one, where all countries aim to devalue their way to economic health at the same time.

The result will benefit borrowers at the expense of savers worldwide. But, then again, maybe given the state of global imbalances–too much debt in the U.S. and other Anglo-Saxon economies; too many assets held by Chinese, Japanese and oil-producing countries–maybe a massive bout of global inflation is the only way forward.

Week in Review with Jerry Robinson

By Jerry Robinson | FTMDaily.com

What a dismal week for economic and geopolitical news!

GEOPOLITICAL TENSIONS

Of course, the big news last week came out of the Middle East. The U.S. announced new peace talks set to take place next month between Israel and the Palestinians. And after years of delays, Iran finally began loading tons of uranium fuel into their first nuclear reactor (Russian-built) on Saturday. Iran claims that they have a right to produce nuclear energy, and in an unusual gesture offered to allow oversight of their nuclear activities. Iran maintains that its intentions are peaceful.  Israel immediately denounced Iran’s new nuclear power plant calling it ‘totally unacceptable.’ In response to the news of an atomic Iran, Israeli Foreign Ministry spokesman Yossi Levy said:

“It is totally unacceptable that a country that so blatantly violates resolutions of the (United Nations) Security Council, decisions of the International Atomic Energy Agency and its commitments under the NPT (non-proliferation treaty) should enjoy the fruits of using nuclear energy.”

The U.S. appeared to disregard the political urgency of the news. Darby Holladay of the U.S. State Department told news agencies:

“We recognize that the Bushehr reactor is designed to provide civilian nuclear power and do not view it as a proliferation risk.”

However, the U.S. did admit that while Iran posed no immediate threat, they could potentially have a bomb through the conversion of fuel into weapons-grade uranium within 12 months. According to sources within Washington, U.S. and Israeli intelligence would detect such conversion “within weeks” and would have ample time to engage Iran in military strikes.

In classic form, Iran’s leader warned that an attack on the reactor would be met with a global and “painful” response.

I would expect that we will witness rising tensions followed by a full-scale war between the West and Iran within the next 18-36 months.

ECONOMIC MALAISE

On the economic front, the weekly jobless claims reached 500,000, a 9 month high. Consumer bankruptcies hit a 5 year high this week.

And it appears that the U.S. government’s “chicken in every pot” policy regarding home ownership may be coming to an end as Washington attempts to “untangle the wires” of America’s housing and mortgage crisis.

Besides, “renting” instead of “owning” is fast becoming a new normal in today’s tumultuous economy. At least so says Fortune magazine in it’s new article entitled: Five ‘new normals’ that really will stick

Flight to Safety

Flight to Safety… In other news, small investors appear to be losing their appetite for risk by fleeing the stock market for the perceived “safety” of the bond market. According to the Investment Company Institute, small investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year. Click the chart to the right for more.

No Liquidity… And in a sign that American’s lack liquidity, Fidelity Investments reported this week that hardship withdrawals from 401(k) retirement saving plans rose to the highest level in 10 years during the second quarter.

When this news is coupled with the fact that most working Americans have very little liquid savings, it offers further proof that the Mutual Fund industry has successfully trained the American public to max out their 401(k) before building adequate liquid savings reserves.

The Mutual Fund industry sponsors many popular financial commentators today who fervently preach the “max out your 401(k)” gospel. Suze Orman and Dave Ramsey are just two examples of the droves of financial personalities who have been paid handsomely to pay little attention to the importance of adequate and diversified liquidity prior to “maxing out a 401(k).”

However, as of late, “abundant liquidity” has become a hallmark of many financial gurus like Orman and Ramsey. Unfortunately, this sudden emphasis upon liquidity comes late for the millions of Americans facing foreclosures and bankruptcies.

Consider for a moment that most people’s two largest assets are their primary residences and their 401(k)’s. Both of these assets are explicitly government-controlled. Diversification is the only weapon against a cash-strapped government hungry for revenue. When the government comes looking for cash where do you think it is going to look? With nearly $20 trillion in personal retirement assets, why not slap a higher distribution tax on your 401(k) and traditional IRA? Could they? Of course. What could you do about it? Nothing. Except maybe curse the Suze Ormans and Dave Ramseys of the world who told you to stuff money into a 100% government-controlled asset. Why not just put your money into a box and hand the government the key and ask them to give it back to you at retirement? That, by the way, is the definition of a 401(k)… minus Mutual Fund fees.

Across the Pond… Since making the news a couple of months ago, the country of Greece has imposed strict austerity measures. The result? Greece is in the grip of a depression. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies are on the rise. In addition, stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Has Greece entered the death spiral? You can read more here.

Big Brother Alert… There’s more troubling news on the growing threat of government intrusion.

Biometrics R&D firm Global Rainmakers Inc. (GRI) announced today that it is rolling out its iris scanning technology to create what it calls “the most secure city in the world.” In a partnership with Leon — one of the largest cities in Mexico, with a population of more than a million — GRI will fill the city with eye-scanners. That will help law enforcement revolutionize the way we live — not to mention marketers.

The intrusion of constant government monitoring is slowly becoming a reality. We are already tracked like animals. But they won’t stop until they have total and complete control.

Is the real price of gold over $2,000 right now? My weekend radio interview with GATA Chairman, Bill Murphy, offered some unusual information. According to Murphy, the artificial suppression of the price of gold has caused the precious metal to be severely undervalued. Murphy states in the interview that if the price manipulation were to end, gold would be trading at around $2300/oz! If you are interested in the precious metals sector, do yourself a favor and take time to listen to this weekend’s radio program. You can listen to the entire show here. Or, if you prefer to listen to the show on iTunes, click here.

That’s all for this update. Look for a few blog updates this week and an excellent radio program next weekend. My guest will be geopolitical and economic analyst, Puru Saxena. Mr. Saxena will be joining me from Hong Kong.

Have a prosperous week!

About Jerry Robinson

Jerry Robinson is an economist, published author, columnist, international conference speaker, and the editor of the financial website, FTMDaily.com. In addition, Robinson hosts a weekly radio program entitled Follow the Money Weekly, an hour long radio show dedicated to deciphering the week’s economic news.

Economic Recovery or Financial Armageddon? – LISTEN NOW!

Follow the Money Weekly radio host Jerry Robinson talks with popular author and financial commentator, Michael J. Panzner regarding the most pressing economic issues. The interview includes Panzner’s outlook on inflation in the U.S., as well as his opinion about precious metals and agriculture.

Part 1

Part 2

Listen to the entire radio show, and hear more interviews like this one at our website: http://www.ftmdaily.com/ftmweekly.php

Six Important Questions for Gerald Celente – LISTEN NOW!

Follow the Money Weekly radio host Jerry Robinson asks Gerald Celente six vital questions about the times and trends of the U.S. economy. In this shocking and timely interview, you will hear Celente’s opinion of where the U.S. economy is headed, as well as what the future holds for citizen preparedness during times of war.

Part 1

Part 2

Listen to the entire radio show, and hear more interviews like this one at our website: http://www.ftmdaily.com/ftmweekly.php

Jerry Robinson Interviews Economist and Author, F. William Engdahl

Listen as Jerry Robinson talks with F. William Engdahl about his ground-breaking new book, Gods of Money: Wall Street and the Death of the American Century. You may be surprised by Mr. Engdahl’s take on the recent Euro crisis. Click here to hear this week’s entire radio show.

Enjoy the clips and have a great weekend!

PART 1

PART 2

PART 3

Inflating War: Central banking and militarism are intimately linked

By Thomas DiLorenzo

August 01, 2010 Issue
Copyright © 2010 The American Conservative

“One can say without exaggeration that inflation is an indispensable means of militarism,” Ludwig von Mises wrote. “Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.”

This explains why American politicians have always resorted to the legalized counterfeiting of central banking to finance wars, the most expensive of all government programs. If citizens had a clearer picture of the true costs, they would be more inclined to oppose non-defensive intervention and to force all wars to hastier conclusions.

Government can finance war (and everything else) by only three methods: taxes, debt, and the printing of money. Taxes are the most visible and painful, followed by debt finance, which crowds out private borrowing, drives up interest rates, and imposes the double burden of principal and interest. Money creation, on the other hand, makes war seem costless to the average citizen. But of course there is no such thing as a free lunch.

As a general rule, the longer a war lasts, the more centrally planned and government-controlled the entire economy becomes. And it remains so to some degree after the war has ended. War is the health of the state, as Randolph Bourne famously declared, and the growth of the state means a decline in liberty and prosperity.

As Robert Higgs wrote in Crisis and Leviathan, among the effects of World War I were “massive government collusion with organized special-interest groups; the de facto nationalization of the ocean shipping and railroad industries; the increased federal intrusion in labor markets, capital markets, communications, and agriculture; and enduring changes in constitutional doctrines regarding conscription and governmental suppression of free speech.”

Inflationary war finance inevitably leads to calls for price controls, which inflict even greater damage on the private enterprise system by generating shortages of goods and services, which are falsely blamed on capitalism. The state uses this excuse to grant itself even greater central-planning powers. Inflating the currency as a method of war finance is often a first step in the adoption of what is essentially economic fascism.

Paper and printing were invented in China, but American politicians were the first to use government paper money. It was adopted by the colonial government of Massachusetts in 1690. As Murray N. Rothbard wrote, the Massachusetts government was “accustomed to launching plunder expeditions against the prosperous French colony in Quebec.” The loot was typically used to pay mercenary soldiers, but when one of the expeditions failed and the soldiers threatened mutiny, the Massachusetts government printed 7,000 British pounds in paper notes to pay them. The government promised to redeem the paper money in gold or silver, but took 40 years to do so. Meanwhile, the public was so suspicious of the notes that they depreciated by 40 percent in the first year.

By 1740, every colony except for Virginia had followed Massachusetts’ lead in issuing fiat paper money. The results were dramatic inflation, boom-and-bust cycles, and depreciated currency.

During the Revolution, a form of centralized banking was adopted when the Continental Congress issued “the Continental” in 1775. Because it was not backed by anything of value, the Continental depreciated so severely that it was virtually worthless by 1781. “Not worth a Continental” became a popular slang.

Some of the states attempted to deal with the inflation caused by the massive printing of Continentals with price-control laws. The predictable effect: shortages so severe that George Washington’s army almost starved in a field in Pennsylvania. The situation became so desperate that the Continental Congress issued a resolution on June 4, 1778 urging all the states to abolish their price-control laws: “Whereas it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likewise productive of very evil consequences—resolved, that it be recommended to the several states to repeal or suspend all laws limiting, regulating or restraining the Price of any Article.” Within three months, “the army was fairly well provided for as a direct result of this change in policy,” write Robert Schuettinger and Eamonn Butler in Forty Centuries of Wage and Price Controls: How Not to Fight Inflation.

Despite the economic calamities caused by America’s first foray into centralized control of the money supply, at the end of the Revolutionary War the nation’s first central bank—the Bank of North America—was created, with defense contractor/congressman Robert Morris implanted as its president. Centralized banking might have been ruinous for the general public, but political insiders like Morris profited handsomely. The bank was given a monopoly license to issue paper currency, and it used most of its newly created money for loans to the central government. In so doing, it inflated its currency so rapidly that within one year the market lost all confidence in the bank and it was privatized.

Alexander Hamilton was the real founding father of central banking, as the Federal Reserve Board declares in one of its publications. His Bank of the United States (BUS), established in 1791 after a momentous debate between Hamilton and Jefferson over its constitutionality, was partly intended to finance “sudden emergencies” like war, in Hamilton’s own words. He rejected Washington and Jefferson’s foreign policy of commercial relations with all nations, entangling alliances with none. Instead, he advocated a permanent military establishment complete with a large navy and standing army that would pursue “imperial glory.” As historian Clinton Rossiter explains, “Hamilton’s overriding purpose was to build the foundations of a new empire.”

Hamilton praised public debt as a “blessing” and complained to George Washington, “We need a government of more energy!” Jefferson, on the other hand, opposed both a large public debt and a national bank, arguing, “the perpetuation of debt, has drenched the earth with blood”—a reference to European monarchs’ endless wars of conquest funded by public debt.

Hamilton’s Bank of the United States ran up 72 percent inflation in its first five years and created such economic instability that its 20-year charter was not renewed by Congress in 1811.

Then came the senseless War of 1812. There was no central bank, but the federal government still devised a way to monetize the war debt. It encouraged the creation of dozens of private banks, then in 1814 declared a “suspension of specie payment.” That is, banks were not required to redeem their paper currency in gold or silver. Thus, under the direction of the U.S. Congress, banks were allowed to inflate their currencies at will for two-and-a-half years as a means of monetizing the war debt, thereby disguising the costs of the conflict to the public. Inflation during the war years averaged about 35 percent.

This was exacerbated when the BUS was resurrected in January 1817 and empowered to create a national paper currency, purchase public debt, and receive deposits of U.S. Treasury funds. Rothbard explained the politics in his History of Money and Banking in the United States:

The Second Bank of the United States was pushed through Congress … particularly by Secretary of the Treasury Alexander J. Dallas … a wealthy Philadelphia lawyer [and] close friend, counsel, and financial associate of Philadelphia merchant and banker Stephen Girard, reputedly one of the two wealthiest men in the country. … Girard was the largest stockholder of the First Bank of the United States, and during the War of 1812 Girard became a very heavy investor in the war debt of the federal government. … [A]s a way to unload his public debt, Girard began to agitate for a new Bank of the United States.

The Second Bank of the United States “launched a spectacular inflation of money and credit,” writes Rothbard, coupled with a great deal of fraud. It promptly created the “Panic of 1819,” the first real depression in American history. For the first time there was large-scale unemployment in cities such as Philadelphia, where employment in the manufacturing of handicrafts fell from 9,700 persons in 1815 to only 2,100 in 1819.

After nearly 20 years of inflation, fraud, political corruption, and boom-and-bust cycles caused by the Second Bank of the United States, President Andrew Jackson heroically vetoed the bill to recharter the Bank in 1834, and it went out of business. But the Hamiltonian nationalists did not. They would wage a political crusade for the next two decades as members of the Whig and Republican parties to inflict central banking on the nation once again.

They finally succeeded during the Lincoln administration with the Legal Tender Act of 1862, which empowered the secretary of the Treasury to issue paper “greenbacks” that were not redeemable in gold or silver. The National Currency Acts of 1863 and 1864 created a system of nationally chartered banks that could issue bank notes supplied to them by the new comptroller of the currency. The Acts also placed a 10 percent tax on competing state bank notes to drive them out of business and establish a federal monetary monopoly.

The predictable effect was massive inflation, with the greenback dollars so devalued that within one year they were worth only 35 cents in gold. All of the negative economic effects of inflation—devaluation of private wealth, unfair redistribution of income from creditors to debtors, and hindrance to rational economic calculation—damaged the Northern war effort, but not as much as that of the South. The North funded most of the war with public borrowing; the South funded most of its wartime expenditures by printing Confederate dollars. Consequently, inflation in the Confederacy averaged more than 2,200 percent per year.

The nationalization of the money supply created an engine of inflation—and a powerful lobbying force to advocate that it keep running. Northern manufacturers realized that during periods of inflation, domestic currency tends to depreciate faster than prices are rising. A falling dollar makes domestic goods cheaper and the price of imports higher. Henceforth, they became a powerful political force in favor of an even further centralization of banking. Meanwhile, the heavily indebted railroads realized that inflation cheapened their debts, so they allied with manufacturers as a permanent lobby for inflation.

These special interests joined the political coalition that created the Federal Reserve Board in 1913, which became an important source of finance for America’s disastrous participation in World War I four years later. The Fed did not just print greenbacks, as was the case during the Civil War. It printed enough money to purchase more than $4 billion in government bonds that were used to finance the war. The amount of money in circulation doubled between 1914 and 1920—as did prices. This was an enormous hidden war tax on the American people: wealth was cut in half, along with real wages, and just about everything consumers purchased became more expensive.

The boom created by the Fed’s war financing inevitably caused a bust—the Depression of 1920, the first year of which was even worse than the first year of the Great Depression of the 1930s. Gross domestic product declined by 24 percent from 1920-21, while the number of unemployed Americans more than doubled, from 2.1 million to 4.9 million. The Great Depression of 1920 only lasted one year, however, thanks to President Warren Harding’s inspired policy of cutting both government spending and taxes dramatically.

In the wars that have followed, central-bank financing has inflicted essentially the same kind of damage on American society: inflation, economic chaos, reduced real wages, price controls and other government interventions, and ideological attacks on capitalism rather than the real culprit, the Fed.

Adam Smith recognized the advantage of financing wars with taxes rather than public debt when he wrote, “Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and the government, in order to humor them, would not be under the necessity of carrying it on longer than it was necessary to do so.” Central-bank inflation renders the costs of war even more invisible than debt financing does and is therefore even more disastrous for the American public. 
__________________________________________

Thomas DiLorenzo is professor of economics at Loyola University Maryland and the author of How Capitalism Saved America, The Real Lincoln, Lincoln Unmasked, and Hamilton’s Curse.

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