The Devilish Mixture of Stagflation

By Bill Bonner

"One part slump…one part inflation…and one part who-knows-what. Of course, the feds are eager to put more inflation into the brew. If they had their druthers, the concoction would have more of a kick - with more exciting price increases and less depressing slump."

Read the rest

Upping the Inflation Dosage

By Peter Schiff

In perhaps one of biggest ironies to ever to come out of Washington, this week Congress simultaneously pilloried major league baseball players for using artificial stimulants to pump up their performance while passing legislation to do just that to the national economy. Am I the only one laughing?

In reality, the current slump in the U.S. economy is simply the come down from years of financial doping in the form of skyrocketing home values and easy credit. Rather than reaching for yet another syringe, Congress should ask Americans to do what it demands of ballplayers: play within their natural means. Unfortunately in the case of the economy, the patient is already so juiced up that further doses may not only fail to stimulate but may result in a trip to the emergency room.

As the widely praised “economic stimulus” bill was signed into law, the only dissent heard was from those saying the plan did not go far enough. Speaking for those unheard voices who disagree with the strategy entirely, I believe the most significant aspect of the plan is that it creates a new and improved method for delivering inflation.

Previously, the government has largely relied on interest rate stimulus to keep the economy humming. In this method, money supply growth, also known as inflation, is channeled through the banking system. The Fed makes cheap credit available to banks, which then lend out the new funds or use them to acquire higher yielding assets. As a result, asset prices, such as stocks, bonds and real estate, have been bid up to bubble levels. However, the inflationary impact on consumer prices occurs with a considerable lag.

Now that rate cuts alone are proving insufficient, mainly because banks are now so over-loaded with questionable collateral and shaky loans that few can consider acquiring more assets or extending additional credit (no matter how cheap such activities can be funded), the Government is opting for a more direct approach. By printing money and mailing it directly to the citizenry, the “stimulus plan” cuts out all of the financial middle men and administers the inflation drug directly to consumers.

If simply printing money could solve financial problems, the Fed could send $10 million to every citizen and we could all retire en masse to Barbados. However, more money chasing a given supply of goods simply pushes up prices and does nothing to improve underlying economics. Since this new money will go directly into consumer spending, without first being filtered thought asset markets, the effects on consumer prices will be far more immediate.

This politically inspired placebo will do nothing to cure what ails our economy. The additional consumer spending will merely exacerbate our imbalances, allow the underlying problems to worsen, and put additional upward pressure on both consumer prices and eventually long-term interest rates as well. The failure of the stimulus plan to cure the economy will cause the Government, and the Wall Street brain trust, to conclude that it was simply too small. Their next solution will be to administer an even stronger dose.

My prediction is that over the course of the next few years, successive doses of even larger stimulus packages will fail to revive the economy. As the recession worsens and the dollar drops through the floor and consumer prices and long–term interest rates shoot thought the roof, politicians and economists will look for scapegoats. Few, if any, will properly attribute the problems to the toxic effects of the stimulus itself.

However, like all drugs, the biggest danger is an overdose. In monetary terms an overdose is hyperinflation, which will surely kill our economy. It is my sincere hope that before we reach that “point of no return,” a correct diagnosis is finally made. When that occurs, the stimulants will be cut off, and the free market will finally be allowed to administer the only cure that works: recession. If that means we lose some speed on our fastball, so be it. Maybe we could use a few months in the minor leagues to get back to basics. While we may not like the economic side effects of stopping cold turkey, it sure beats carrying our money around in wheelbarrows!

For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

******

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for over twenty years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, Peter is a highly recommended broker by many leading financial newsletters and investment advisory services. He is also a contributing commentator for Newsweek International and served as an economic advisor to the 2008 Ron Paul presidential campaign.

******

FMM Comment:

The scapegoat referred to WILL be capitalism. Ron Paul addressed the question, "Has Capitalism Failed?" long ago in the U.S. House of Representatives, July 9, 2002.

"Corruption and fraud in the accounting practices of many companies are comingto light. There are those who would have us believe this is an integral part of free-market capitalism. If we did have free-market capitalism, there would be no guarantees that some fraud wouldn't occur. When it did, it would then be dealt with by local law-enforcement authority and not by the politicians in Congress, who had their chance to "prevent" such problems but chose instead to politicize the issue, while using the opportunity to promote more Keynesian useless regulations.

Capitalism should not be condemned, since we haven't had capitalism. A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank. It's not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price controls, protectionism, corporate subsidies, international management of trade, complex and punishing corporate taxes, privileged government contracts to the military–industrial complex, and a foreign policy controlled by corporate interests and overseas investments. Add to this centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare. This is not capitalism!

To condemn free-market capitalism because of anything going on today makes no sense. There is no evidence that capitalism exists today. We are deeply involved in an interventionist-planned economy that allows major benefits to accrue to the politically connected of both political spectrums. One may condemn the fraud and the current system, but it must be called by its proper names – Keynesian inflationism, interventionism, and corporatism.

What is not discussed is that the current crop of bankruptcies reveals that the blatant distortions and lies emanating from years of speculative orgy were predictable. "

Capitalism rests its case.

The Conspiracy Theory of History Revisited

Mises.org Updates

Murray Rothbard writes: Anytime that a hard-nosed analysis is put forth of who our rulers are, of how their political and economic interests interlock, it is invariably denounced by Establishment liberals and conservatives (and even by many libertarians) as a "conspiracy theory of history," "paranoid," "economic determinist," and even "Marxist." These smear labels are applied across the board, even though such realistic analyses can be, and have been, made from any and all parts of the economic spectrum, from the John Birch Society to the Communist Party. The most common label is "conspiracy theorist," almost always leveled as a hostile epithet rather than adopted by the "conspiracy theorist" himself.

It is no wonder that usually these realistic analyses are spelled out by various "extremists" who are outside the Establishment consensus. For it is vital to the continued rule of the State apparatus that it have legitimacy and even sanctity in the eyes of the public, and it is vital to that sanctity that our politicians and bureaucrats be deemed to be disembodied spirits solely devoted to the "public good."

FULL ARTICLE

Let's Legalize Competing Currencies

By Ron Paul

Before the US House of Representatives, February 13, 2008

I rise to speak on the concept of competing currencies. Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Money makes the transaction process far easier. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes.

This medium of exchange should satisfy certain properties: it should be durable, that is to say, it does not wear out easily; it should be portable, that is, easily carried; it should be divisible into units usable for everyday transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange.

Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people. Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce. It is precisely for this reason that gold and silver are anathema to governments. A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government. Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses.

Read the rest

The Frightful Face of Stimulus

Among businesspeople, bankers, and investors, there is a growing fear that the economy is headed towards recession or already in one. But that alone is not the source of worry. After all, an economy if left alone to function in freedom can recover. The real problem has to do with the political response. There is every indication that no matter who comes to be in charge in November, we face a future of massive spending, inflating, and regulating.

And here is the real danger. One only needs to look at such preposterous measures as the "stimulus package" that congress passed to much fanfare. Dumping money into consumers' hands, drawn from wherever they can get it, is the only means these guys can dream up to shore up prosperity. That only proves that they don't know what brings about prosperity in the first place, which is not congress but free enterprise.

Economist Robert Higgs compares a "stimulus package" to getting water out of the deep end of the swimming pool and dumping in the shallow end – all with the expectation that the water level will rise. As he emphasizes, economists should never tire of asking where the money for stimulus is going to come from. Mankind has yet to invent a machine to create it out of nothing: it's either taxing, inflating, or going into debt that has to be paid later (and crowds out capital creation now). There is no other way.

Read the rest

FX Insights Trade Team Update 14/02/2008

By FX Insights Moderator

A few days ago in our update (2/12) we covered some of the signs the market was showing us and how the signs were beginning to show the market wanted to take the euro back up after making a 400 pip correction...

Based on some things I observed in the market today, I believe we've been given very good confirmation that the euro found solid support in the 4500-4480 level and could possibly attempt to move back towards the 4750 level to test further upside...

The main driving force behind today's momentum to move up and test the 4650 level was Bernanke and Trichet... but, we'll talk more about those two in a moment, first, let's talk about some of the key fundamentals today...

Early this morning we got German, French, and Eurozone GDP which came in as expected and forecasted, and this certainly took away some market fears about slowing European growth -- but remember, that data is somewhat lagging, so we could see a different story...

U.S. Trade Balance came in way hotter than expected, and as we forecasted this USD+ number was the result of the dollar's continued weakness... Initial Claims, on the otherhand, came in below expectations showing further signs of a real recession happening... in addition, continuing claims were ugly again, and this certainly has put renewed pressure on the dollar...

Here's where the fundamentals come into play on a day like today -- Trade Balance was great economically and USD+, but the market couldn't react too strongly dollar positive because the sole reason we saw a hot number was due to the dollar weakness and not because demand for U.S. goods are increasing...

Then the Initial Claims data was just a great "reminder" to the market of how bad things are, taking away and desires to buy dollars and sell euros...

But the real story of the day is what Bernanke and Trichet had to say...

Bernanke -- I can sum up his speech in a few lines... Bernanke basically told the markets that the economy sucks, it's getting suckier, there's no hope it will get un-sucky in the near term, and I'm probably going to cut interest rates by at least 25bps in March to keep Wall St., banks, and Jim Cramer from crying like babies...

Trichet -- I can sum up his speech in a few lines as well... Trichet told the markets I'm hellbent on maintaining price stability, I'm worried about wage-induced inflation, I'm worried about consumer inflation, I'm not budging on interest rates, and I'm not worried about growth, so shut up and stop asking me...

Bernanke: over-the-top dovish
Trichet: over-the-top hawkish
Equals: EUR/USD going to 4650 today

For now, the central bankers have set the table... and now it's the market's turn to respond... Bernanke gave the market zero reasons to buy the dollar while Trichet gave the market every reason to keep buying the euro -- at least for now... he's going to give the market some reasons to sell euros, but that is still yet to come...

The other confirmation we need to consider is the fact we're now firmly entrenched above the key 4550 level... if you remember from the last half dozen or so updates we said in order to re-open the door to move back up, the euro would have to sustain a break above the 4550 level and I think this has finally been confirmed today, based on price action...

As you well know, the market has been trading in a rather confusing and odd range after we shorted the euro down to the 4400 level... we've since moved up 200 pips, but it's been a bit of a struggle to do so and quite "strang" how we've gotten back to the 4650 level...

We'll talk more about trading in a moment, but lets look at tomorrow's fundamentals:

There's quite a bit, but the biggest will be the Empire Index, Import Price Index, Net TIC Flows, and Michigan Sentiment... I really don't see too many USD positives coming from tomorrow's data... I don't expect any real upside surprises...

If my suspicions about what I saw in the market today, I suspect we should see the EUR/USD push for higher gains tomorrow... and as this relates to trading, I will likely have to buy the dips and not risk a short and not risk getting caught on the wrong side of the market...

The price action is still rather "methodic" and we're still trading in fairly tight ranges, so the longer we do this, the higher the probability grows we need to see a bigger move soon...

The euro's just been plodding along after forming support at 4480... the market will not trade within this slow, tight range for too much longer... pattern's are showing that it's getting close to move again...

And it's for those reasons that I will remain very tight and cautious with my trades, taking 20 to 30 pips per trade, then getting out and not keeping my accounts exposed to risk...

I do not like the way the market has been behaving, I don't like knowing the market is confused and unsure about what it wants to do... I don't like trading in a market that is hesitating to drive the euro long or is hesitating to push the euro short...

When the market is trading with this type of mentality and clearly displays these kinds of psychological traits, it greatly enhances how exposed to risk we as traders are, and for this reason, I'm playing it tight, depending on price patterns, not overleveraging my accounts, and I'm certainly not going to try and catch a big move, even though I'm certain one is coming...

Anyway...

We did have another successful live trade that was opened and closed this morning for some quick and easy pips:

Click on Image

Again, please practice very strict risk and money management as we head into tomorrow's trade day...

Also, for yen traders, don't forget the BOJ issues their interest rate policy and statement... you'll want to pay attention for this... with the yen's rapid appreciation the past few weeks, the BOJ could certainly say some things to manipulate prices... just an FYI...

See ya in the chat!

-FX Insights