Wednesday, December 9, 2009

The Coffin Shaped Recovery?

The Coffin Shaped Recovery?

By Darryl Robert Schoon | 29 September 2009

While often wrong, Bernanke is right about the recession. It's almost over. But a depression is about to replace it.

There has been much discussion about this recovery, whether it will be a "U", "V" or a "W" shaped recovery. The answer is, 'none of the above'. It is going to be a "C-shaped" recovery; "C" as in coffin.

The Coffin-Shaped Recovery

It would be a miracle if trillions of dollars of debt could be wiped out with one stock market crash, to be succeeded by a new bull market driven by another 'large offering of credit' [[the "one panacea that fits all!" : normxxx]] by the Fed. But such a central bank-engineered miracle today is impossible. Capitalism's natural cycles derive from central banker's unnatural infusion of credit into previously free markets. [[ I very much doubt that! These 'financial' and 'production/business' cycles go back way too far and have survived largely unscathed through many, many generations of wildly different economic theories and prescriptions for prevention and cure. There is evidence for these cycles as far back as the Sumarians, around 8000 years ago! And they are particularly bad when, as now, they begin with a financial collapse. Perhaps that is the best that modern financial engineering can do; delay/postpone/avert these preceding financial collapses: this one appears to be the first since the '30s (though the '70s came close). Let's see if BB's medicine is any better than Hoover's and FDR's. It's certainly likely to produce different results! : normxxx]]. The subsequent distortion causes market demand to expand (which everybody loves) only to be followed by the inevitable contraction— which everybody hates.

Usually, central banks wait until previous levels of excess credit have been absorbed in an economic downturn before embarking on a fresh round of credit creation. This time, however, is different. This time, the cumulative buildup of debt over previous cycles where contractions were cut short to minimize economic pain and maximize political gain is now so large that any contraction is sufficient to bring down the extraordinary backlog of debt built up over previous cycles. The current contraction is more than sufficient to do so as it is more severe than any downturn since the 1930s; and despite the frantic attempts of central banks to contain the cumulative forces unleashed by previous cycles of credit and debt, the enormous but fragile paper-based economy built by these international central bankers' paper money is now collapsing.

Hopefully, to prevent the collapse from reaching an unacceptably catastrophic end, central bankers have now intervened far earlier and with far more credit, to prevent this day of reckoning, a reckoning soon to be evidenced by an historic deflationary depression that will wipe out all accumulated unpayble debts, albeit at the cost of a functioning world financial system and economy. [[Not inflation!?! Actually, I am predicting both; waves of deflation followed by inflation until just about all money is worthless and all debts wiped out and we are all destitute (though, remarkably, likely to be better off in the aggregate than during the '30s, when democratic governments were just learning that they had better assume responsibility for the general welfare, or be eliminated by the gun or the ballot box.: normxxx]]

Such is Ben Bernanke's considerable task. Despite his outwardly positive demeanor, Bernanke is undoubtedly well aware that his desperate gamble doesn't seem to have paid off. [[Really? With the stock market booming and the Hummongous Banks & Brokers (HB&B) once more up to their old tricks, I thought he really believes he has pulled it off! (Back from the brink!): normxxx]] In these times, the last thing you want to be is Ben Bernanke's sphincter.

Keynesian Kops, Friedman's Follies, And The Flawed Theory Behind The Recovery

The current chairman of the US central bank is a self-described 'student' of the Great Depression. But, learning is generally limited by what is available for the teaching. And, regarding the Great Depression, Bernanke's teacher was largely Milton Friedman, unfortunately.

The reason why central bankers (and Ben Bernanke in particular) are flooding the global economy with money, i.e. borrowed, printed, and/or monetized out of thin air with such abandon— who would have thought bankers could act with 'happy' abandon except, of course, when believing 'risk' is 'non-existent' and when they're betting with someone else's money)— is because of Milton Friedman's 'theory' [[which he had largely recanted by the end of his life: normxxx]], to wit, that economic contractions can be reversed by sufficient monetary expansion.

Laid bare, Freidman's theory is simply another iteration of the Keynesian belief in the power of government intervention, albeit an intervention cloaked in Friedman's more palatable— at least to those on the right— conservative garb. Friedman argued that if the Fed had aggressively expanded the money supply in the 1930s, it would have then counteracted deflationary forces [[indeed, FDR proved that in 1933: normxxx]] and prevented the Great Depression, an argument unfortunately as flawed as another of Friedman's pet theories, i.e. that floating exchange rates would 'naturally' over time bring global trade deficits into balance. [[Or, Alan Greenspan's theory (which he has since abandoned) that 'excesses' in 'free markets' are 'self-correcting'!?! (Oh Alan— they are— but who said it had to be without great pain!?!) : normxxx]]

Note: When exchange rates were allowed to 'float' in 1974 as encouraged by Friedman who also encouraged Nixon to abandon the gold standard in 1971, the US had a positive balance of trade. Thirty five years later, the US trade deficit is well over $800 billion and is growing over $20 billion each month (Hey, Milton, how much more time will it take to balance the trade deficit?). [[What he failed to anticipate was the intervention, on massive scale, by governments in the currency markets to better their conditions of trade.: normxxx]]

Professor Antal Fekete warned several years ago that Friedman would someday be proved wrong and that we would collectively suffer the consequences; and, that just as during the Great Depression when banks hoarded the government's cheap money instead of lending it, they would do so again when Friedman's theory of monetary expansion was tried during another contraction. [[Ah; but the Fed has even engaged in 'direct' lending; bypassing the banks!: normxxx]] Professor Fekete's warnings have now come true. Today, US bank lending growth has entered negative territory at the same time cash reserves at US banks increased by 1,460%.

Frank Shostak in "Does A Liquidity Trap Pose A Threat?", 9/23/09, on writes:

The latest data for lending in the eurozone, including the United Kingdom, and the United States display a visible weakening. In the eurozone, the yearly rate of growth of bank lending to the private sector fell to 0.6% this July from 9.3% in July last year. In the United Kingdom, the yearly rate of growth of lending to the private sector fell to 2.2% in July 2009 from 10.1% in July 2008. In the United States, the rate of growth of lending plunged to -3.8% in August 2009 from a figure of +8.6% in August 2008… At the end of July this year, [however], US banks were sitting on $729 billion of cash against $1.9 billion in July 2008.

Friedman's theory is flawed and as suspect as the paper money Friedman and Keynes both promoted. Central banks can print all the money they want but that will not necessarily increase the money supply as central bankers are discovering. Severe monetary contractions that cause deflationary depressions are so powerful they, like monetary black holes, can destroy money faster than central banks can create it [[and get it into circulation: normxxx]].

The on-going monetary contraction is now clearly evident. Ambrose Evans-Pritchard, columnist for The Telegraph UK, points out the glaring truth that Bernanke and most of his paper-weight brethren would like to avoid:

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months… the M3 "broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist. On a three-month basis, the M3 growth rate has fallen from almost 19% earlier this year to just 2.1% (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March…. shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

This is not your mother's contraction. Instead, this is the mother of all contractions, a contraction far greater than even that which sent the world into the Great Depression in the 1930s. This time, the amounts owed are exponentially greater than what was owed in the 1930s; and, the greater the debts, the farther the fall.

Debts do not just disappear without consequence, nor can they be 'outrun'… ie, 'outgrown', as economists are desperately hoping, especially today when economies are still contracting, not expanding. Economic contractions cannot be reversed by expanding the money supply any more than wishful thinking by itself will change the world. [[Like "pushing a wet noodle uphill"!?!: normxxx]] Despite the best efforts of central bankers like Ben Bernanke, Friedman's flawed theory cannot save the world from what is now about to happen— the mother of all depressions, and the one that may be capitalism's last.

Keynes and Friedman, both brilliant, were both believers in paper money. Paper money has many powers, not the least of which is the power to mislead and delude.

Milton Friedman thought a lot
Of paper money and more
Like Keynes and others who thought the same
Milton showed gold the door

And Now Our Gold Is Spent And Gone
And so is Milton too
And now we're left bereft and broke
Not knowing what to do

But Ben Bernanke's At The Helm
Of the sinking ship we're on
And soon like Milton and our gold
We, too, will soon be gone

So Let's Make A Toast While We're Still Here
To those who caused our ruin
To those convinced that they were right
But didn't know what they were doing
[[That's pretty awful doggerel; let's hope the "goldbugs" have some better poets!: normxxx]]

Who Benefits From The Fraud Of Paper Money?

The substitution of paper money for gold and silver has always been imposed by those who govern upon those governed; and, in the US it was done so illegally. [[This is a popular conceit of many, but nowheres in the Constitution is the dollar or money defined to be exclusively of precious metal.: normxxx]] And, as noted elsewheres, see "U.S. Constitution Online: Q154"

[ Normxxx Here:  
Q154. "I think that the citizens of the United States are under the assumption that the Federal government actually prints money, which is actually not a right that the federal government has."

A. The ability of the government to print paper money is certainly not an enumerated right. Yet we all use U.S. dollar bills everyday. How is this possible?

An original draft of the Constitution expressly permitted the government not only to borrow money, as Article 1, Section 8, Clause 2 notes, but also to "emit bills". In Madison's Notes from August 16, 1787, the subject of paper money was debated at some length. Gouverneur Morris warned that if paper money was allowed, "The Monied interest will oppose the plan of Government". John Mercer thought it unwise to "deny [the Government] discretion on this point". But others thought paper money was a deal-killer. George Read likened the words, if included, to the "mark of the Beast," and John Langdon said he'd rather reject the entire plan than include the words. On a 9-2 vote, the words were struck. So how is it possible for us to pay for anything with paper money today? Shouldn't all currency be coins with 'inherent' value, like silver and gold?

Gold and silver are not panaceas. Gold and silver coins have issues of their own, and the evils of paper money were outweighed by the evils of manipulation of purity and weights, not to mention convenience. By the Civil War, "greenbacks" were issued by the government and used in all manner of commerce. Not everyone liked this, and legal conflict ensued. The Supreme Court eventually had to rule on the question.

In Knox v Lee, 79 U.S. 457 (1871), the Court ruled that paper money was not unconstitutional: "The Constitution nowhere declares that nothing shall be money unless made of metal". The Court argued that the Congress can manipulate the value of precious metals to the point where it can be rendered as inherently worthless as paper (the Congress could enact a law that says that 10-dollar silver coins weigh 400 grains in one year and 500 grains the next, effectively devaluing the silver). The Court even noted the arguments of the Framers against "emitting bills," but wrote that the Framers, one, could not anticipate all governmental needs, and, two, they allowed the Congress to do what was necessary and proper to carry out its powers. In this case, that includes printing paper money.

So, said the Court, "even though paper money is not expressly permitted by the Constitution, it is also not expressly forbidden, and in spite of the extra-constitutional opinions of some of the Framers, the ability to print paper money is a necessary and proper power of the federal government".  ]

The current regime of fiat money in the US is not only a monetary abomination, it is de jure[!?!] unconstitutional. The imposition of fiat money in the US was done without the consent of the governed [[hardly: normxxx]]. However, those who governed approved it. This is because the advantages of paper money accrue to those who 'rule'; and it is in their interests, not society's, that paper fiat money becomes the coin of the realm.

The disadvantages of paper money are borne by society-at-large, i.e. entrepreneurs, workers, businesses, retirees, savers, etc. who pay retail for the credit dispensed wholesale to those better connected, e.g. are you able to leverage your investments 50:1 as can JP Morgan Chase, Goldman Sachs, etc.; and, can you to carry your underwater investments at full book value and borrow against them as it does Wall Street? And were you bailed out last year as were the banks? [[Which has what, exactly, to do with money being fiat, not PMs?— of which latter you can purchase all you like! Besides, W. J. Brian, the populist, was for "easy" (inflatable) money and thought exactly the opposite, that "ordinary" people were systematically ruined by "hard" money. : normxxx]]

We are now headed towards a rendering so extreme that perhaps 'the many' will finally cease identifying with a system that benefits the few closest to the fountainhead of credit while penalizing those farther downstream, which usually includes them. Modern economics is a sophisticated Ponzi-scheme cross-pollinated with a shell game[!?!] designed for the advantage of government, banks and those at the front of the line wherein money is created out of thin air to be loaned to others who will in the end be indebted beyond their means to repay and whose economic futures will be destroyed by the inevitable confluence of the bankers' compounding interest and their constant inflation of the money supply[!?!] [[He sure has that one backwards; it's deflation that increases the burden on the borrower as the value of that borrowed money goes up faster than the borrower's income. Conversely, inflation reduces the costs of those borrowings— usually at rates well below the rate at which the borrower's income is rising.: normxxx]]

If you doubt this is so, an article "The Event" by Eric Andrews, is a must read, especially the areas directly concerned with money and its creation. If you already believe this, Eric Andrew's article is even more important. Clear, concise, and conclusive, it points out the inherent problems with our debt-based system of paper money, a system that contains its own seeds of destruction, seeds which are now flowering.

Andrews also points out where we are in the process and perhaps where headed, without guessing when we will arrive. We face a minefield of possible scenarios as deflation, inflation, hyperinflation, or a combination thereof may soon be in our future as the bankers' paper money is now about to self-destruct. We are in the final stage of the paper-boys' efforts to preserve their crumbling fiefdoms against gold's advance.

The Barrickade To Gold Crumbles

In truth, the value of gold is not advancing at all. It is standing still. It is the constant decline in the value of paper money that makes it appear that gold is rising. Extant virtue needs no movement.

While I am in deep admiration of Professor Fekete's insights on gold and money, I do not envy the price he paid for his learning. Professor Fekete's understanding of monetary chaos derives from a childhood in Hungary beset by a hyperinflation more severe than even that of the Weimar Republic or Zimbabwe. Professor Fekete then escaped communist oppression in Hungary to make his way to Canada where he received a front-seat look at the central bank and corporate collusion underpinning capitalism's fraudulent paper-money scheme.

Upon retirement, Professor Fekete had invested his savings in Barrick Gold Corporation, a Canadian gold mining company. But instead of an expected positive return on his savings, the professor got an unexpected education in how Barrick assisted central banks in suppressing gold. Barrick's forward selling of unmined gold from 1988 to 2003 put thousands of ounces of paper gold on the market which forced down the price of physical gold. For years, the forwards sales of Barrick and Anglo-Gold Ashanti were responsible for the downward spiral of gold's price, a goal desired by investment banks doing the bidding of central bankers.

Professor Fekete, as a shareholder, clearly understood that Barrick's forward selling (or so-called hedging operations) came at the expense of shareholders. It did, however, directly benefit the central banks who wanted to cap the price of gold. Today, the "Barrick-cap", a major "Barrickade" against gold's rise is no more. This month, on September 8, 2009, Barrick Gold Corporation announced it was taking a $5.9 billion charge against 3rd quarter earnings in order to buy back all its forward contracts, a considerable sum to pay for succumbing to the wishes of those in power[!?!] [[But it kept Barrick Gold Corporation from going BK during the long night of gold's depression (1984 - 2001) when the price of gold fluctuated but trended to lows of $255 an ounce in July 1999 and $258 in April 2001, below all but the lowest average cost of production.: normxxx]]

Once again, Professor Antal Fekete was right[!?!] Sponsored by the Gold Standard Institute, Professor Fekete will be in Canberra, Australia, November 2-5 speaking on "The World Financial Crisis and the Vanishing Gold Basis". I consider the Professor to be a light in these dark times. I and others will also be speaking.

It is absurd to discuss the price of gold without discussing central bank or government efforts to force the price of gold down, an effort that may soon be ending due to the imminent advent of the 'end-game'. In my Youtube video, I discuss the possibility of whether or not the US will again confiscate gold. I wish the possibility were not so.

Today, governments cannot see an alternative to that offered by central bankers, the merchants of debt who have enslaved nations with their fraudulent debt-based paper money. As yet, there are no alternatives to the bankers' offerings. But after bankers and governments fall— and they will— alternatives will then become clear.

Buy gold, buy silver, have faith.


Jobless Conditions Have Ominous 1930s Overtones

By Barrie Mckenna | 18 September 2009

If you factor in differences in how the jobless rate is calculated, current unemployment would be about 16.3 per cent, or a bit worse than in 1930. Amid all the reminiscing about last September's financial mayhem, it's worth pointing out the obvious: A year isn't a very long time. The Great Depression didn't end in 1930. It had barely begun.

This summer's rebound in stocks, inspired by improving economic indicators, is nice, for sure. But it's too early to relegate the crisis to the history books. And it's way too early for anniversary celebrations. It's easy to confuse the end of a recession with a full recovery.

That is particularly true in Canada, which was spared the worst of the crisis. Not so the United States. Americans have suffered a devastating financial and economic blow that will take years, not months, to heal, while the housing collapse has wiped out trillions of dollars worth of wealth. And the jobs that came with the boom are gone for a long time.

Consider the U.S. employment landscape. The jobless rate hit 9.7 per cent in August, and most economists expect it to breach the 10-per-cent mark by the end of the year, or early next year. Employers aren't done cutting jobs yet, wiping out hundreds of thousands more every month. Those may not seem like Depression numbers.

In 1930, the unemployment rate nearly doubled to 15.9 per cent from 8.7 per cent. But Daniel Albert, managing partner at New York-based Westwood Capital, has highlighted a few ominous parallels between the post-crash economies of 1930 and 2009. If you factor in differences in how the jobless rate is calculated, current unemployment would be about 16.3 per cent, or a bit worse than in 1930. The government now excludes vast numbers of workers who have given up looking for work, are on leave, on strike, working part-time or enrolled in job training programs. That wasn't the case in 1930.

"Suffice it to say that … we are in the same relative range right now," he argues. And then, like now, there was a hopeful rebound in stocks. Mr. Albert insisted he isn't predicting a repeat of the Dirty Thirties. "The world today is, of course, vastly different than that of the 1930s," he said. That doesn't mean anyone should ignore history.

You don't have to go all the way back to the Depression to get some perspective. Economist Ed Yardeni points out that in the two most recent recessions— 2001 and 1991— unemployment went up after the slumps officially ended. It both cases, the jobless rate still had a full percentage-point of upside.

Mr. Yardeni figures that the recession probably ended in June. Based on the two earlier recessions, unemployment won't peak for another 15 to 19 months. He offered the sobering prediction that it could take as late as March, 2011, for employment to recover.

"This recovery will be much more jobless than the previous two," Mr. Yardeni argued in a recent research note. "The industries that have cut back the most— durable goods manufacturing, construction and retail— are inherently labour-intensive, and they are likely to remain in intensive care for quite a while". And it's hard to see where the momentum will come from to drive the U.S. economy once the impact of all the fiscal and monetary stimulus now being pumped into the system runs out.

"When the punch of these measures wears off, economic growth will fizzle," Mr. Yardeni said. "In other words, unlike every other recovery since the Great Depression, this one won't be self-sustaining". Does that mean the United States is headed for a double-dip, or W-shaped recession?

Not necessarily. But it could take a lot more fiscal stimulus to keep the recovery on track. The wildly successful cash-for-clunkers program has ended. An $8,000 (U.S.) tax credit for first-time home buyers is due to expire in November. And much of the federal stimulus money is already out the door. Many of these programs will need to be renewed to ensure that by next year's crash anniversary, no one is talking about the ominous parallels to the dark days of 1931 and beyond.

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