Money, Banking and the Federal Reserve

Thomas Jefferson and Andrew Jackson understood "The Monster". But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates.

Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and featuring Ron Paul, Joseph Salerno, Hans Hoppe, and Lew Rockwell, this extraordinary new film is the clearest, most compelling explanation ever offered of the Fed, and why curbing it must be our first priority.

Alan Greenspan is not, we're told, happy about this 42-minute blockbuster. Watch it, and you'll understand why. This is economics and history as they are meant to be: fascinating, informative, and motivating. This movie could change America.

Video: FIAT EMPIRE - Why the Federal Reserve Violates the U.S. Constitution

This is a new video I discovered, although it has been around for some time. I have only one problem with these documentaries and books. A Central Bank is a Central Bank, no matter what name it goes by. The practices by The Federal Reserve is no more different than that of the European Central Bank, Bank of England, Bank of Japan or the South-African Reserve Bank. Keep that in mind if you are not an American watching this video.

The problem is not exclusive to the U.S.A. Fortunately for us plebs, there are still Americans with a backbone and they are the only people exposing and addressing this issue, as far as I know.

This Award-winning documentary, which features presidential candidate Ron Paul, was inspired by the book, "The Creature From Jekyll Island" by author and FREEDOM FORCE founder, G. Edward Griffin.

To get the full documentary on DVD(with up to 120-minutes of additional uncut interviews of Ron Paul and the other experts) go to www.FiatEmpire.com/screener. To instantly download a DVD-quality version of FIAT EMPIRE, go to www.mecfilms.com/mid/orders/fiat4.htm.

Find out why some feel the Federal Reserve's practices are a violation of the U.S. Constitution and others feel it's simply "a bunch of organized crooks." Discover why experts agree the Fed is a banking cartel that benefits mainly bankers and their corporate clients as well as a Congress that would rather increase the National Debt to over $9 trillion than raise taxes. Find out how the corporate media facilitates the partnership between the Fed and Congress and why it fails to disclose what's going on. Lastly, find out how the Federal Reserve-member banks are owned and controlled by an elite group of insiders.

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.

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

Whore of the World

No institution in modern times is as vile, insidious, corrupt, evil and disgusting as a Central Bank.

It is a whore that has stradled the globe, copulating and spreading its version of syphilis, namely inflation, in an orgy of debt and cheap credit.

The biggest whore of them all, is the Federal Reserve.

Reuter reports that a Depression risk might force U.S. to buy assets. Really? How will this work?

"Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts."

What is so bad about the Fed and U.S. govenment buying a broad range of assets, including stock? Effectively, if the Fed buys an asset, it means that the asset is monetized, or turned into cash for the seller. The money paid by the Fed doesn't exist.

During a normal transaction, a buyer and seller exchanges money for goods. The money used actually exists. It comes from the existing money supply (assuming the transaction doesn't involve credit).

The money offered by The Fed and/or government to conclude the transaction is money added to the current money supply, also known as inflation.

That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.

In the late 1980s and early 1990's Connolly worked for the European Commission analyzing the European monetary system in the run up to the introduction of the euro currency.

"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday.

"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said.

What is so bad about deflation. It corrects the wrong created by inflation. It washes out the excesses and brings the market back to equalibrium.

"While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today.

The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said."

Wrong. The perception that a more "pro-active Central Bank and Government" will avert a repeatof is flawed.

Continued interferance by The Fed and government only postpones and further inflates the inevitable correction.

The Reuters article is based on a worst case scenario and might not even materialise. However, if you catch a wiff of The Fed resorting to these type of tactics, be prepared for a monetary meltdown.

How to Socialise Risk

What does it mean when a government "socializes" something? The answer is quite simplistic.

When a government socialiszes something, it means that it is incurring a cost to do something, and that cost is transferred to the taxpayer. Northern Rock in the U.K. is an excellent example and illustrates The Economic Incompetence of Socialism.

The Wall Street Journal reports on the attempts by banks to get government to "socialize" some of the risk THEY took on:

"The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government."

Nice business to be in, this banking business. If going to school was anything like banking, nobody would fail, no matter how dumb you are.

The Fed's Open Checkbook Policy

By Bill Bonner

"Faced with what appeared to be a '70s style slump, Bernanke rushed off in the opposite direction - offering lower interest rates and more cash. He hopes to avoid a recession and - who knows - this morning's news suggests that he may have done the trick."

Read the rest

For Interest Sake !

Chuck Jaffer at Marketwatch reckons that Certificates of deposit don't have much horsepower for today's savers. He is right. Chuck goes on to say the following:

Investing with the expectation of losing money is stupid. Locking your money into an investment that can't keep pace with inflation is the same thing. With the cost of living on the rise and interest rates on the decline, that makes bank certificates of deposit that are more than a 1.5 percentage points behind inflation a dumb idea.

For certificates of deposit, savers who locked their money in before the Fed's recent cuts, are much more likely to be ahead of inflation, and clearly should ride out the length of their term deposit. For investors with new CDs, penalties for early withdrawal could make a pull-out even more costly than simply lagging the rate of inflation.

Before I go any further, I think it is appropriate to first establish what inflation is. The popular belief these days is that inflation is the "Rise in Prices". But, something has to cause prices to rise. In his book "What You Should Know About Inflation", Henry Hazlitt sums up Inflation as follows:

No subject is so much discussed today—or so little understood—as inflation. The politicians in Washington talk of it as if it were some horrible visitation from without, over which they had no control—like a flood, a foreign invasion,or a plague. It is something they are always promising to "fight"—if Congress or the people will only give them the "weapons" or "a strong law" to do the job.

Yet the plain truth is that our political leaders have brought on inflation by their own money and fiscal policies. They are promising to fight with their right hand the conditions brought on with their left.

Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit.

If you turn to the American College Dictionary, for example, you will find the first definition of inflation given as follows:

"Undue expansion or increase of the currency of a country, esp. by the issuing of paper money not redeemable in specie."

In recent years, however, the term has come to be used in a radically different sense. This is recognized in the second definition given by the American College Dictionary:

"A substantial rise of prices caused by an undue expansion in paper money or bank credit."

Now obviously a rise of prices caused by an expansion of the money supply is not the same thing as the expansion of the money supply itself. A cause or condition is clearly not identical with one of its consequences. The use of the word "inflation" with these two quite different meanings leads to endless confusion.

The word "inflation" originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean "a rise in prices" is to deflect attention away from the real cause of inflation and the real cure for it.

Let us see what happens under inflation, and why it happens.

When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase—or does not increase as much as the supply of money—then the prices of goods will go up. Each individual dollar becomes less valuable because there are more dollars.

Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before. A "price" is an exchange ratio between a dollar and a unit of goods. When people have more dollars, they value each dollar less. Goods then rise in price, not because goods are scarcer than before, but because dollars are more abundant.

In the old days, governments inflated by clipping and debasing the coinage. Then they found they could inflate cheaper and faster simply by grinding out paper money on a printing press. This is what happened with the French assignats in 1789, and with our own currency during the Revolutionary War. Today the method is a little more indirect.

Our government sells its bonds or other IOU's to the banks. In payment, the banks create "deposits" on their books against which the government can draw. A bank in turn may sell its government IOU's to the Federal Reserve Bank, which pays for them either by creating a deposit credit or having more Federal Reserve notes printed and paying them out. This is how money is manufactured.

The greater part of the "money supply" of this country is represented not by hand-to-hand currency but by bank deposits which are drawn against by checks. Hence when most economists measure our money supply they add demand deposits (and now frequently, also, time deposits) to currency outside of banks to get the total.

The total of money and credit so measured was $63.3 billion at the end of December 1939, and $308.8 billion at the end of December 1963. This increase of 388 per cent in the supply of money is overwhelmingly the reason why wholesale prices rose 138 per cent in the same period.

This is the issue Ron Paul refers to in his speaches. If you didn't understand what he was talking about, you should understand now. This phenomenon is not exclusive to the U.S.A. Any country with a Central Bank will be exposed to this type of monetary inflation.

Furthermore, credit created by banks is another underestimated contributor to inflation. People believe that the money they borrow from a bank is the money of another depositor. That is only 10% true. The fact is that banks are ALLOWED to create money out of thin air. For every $1 deposited with a bank, they can create another $9 to lend to other people. This "legally fraudulant" practice is better known as "fractional reserve banking". It is also the reason why banks are tinkering on the brink of collapse. If you want more information, read The Economic Incompetence of Socialism.


Getting back to ol' Chuck's article, he continues to say that:

Clearly, certificates of deposit are not money losers. No matter how low the payout, they are better than stuffing money in a mattress, and they provide a safe haven -- with coverage from the Federal Deposit Insurance Corp. -- for investors who are skittish about the market.

But anyone turning away from market risk could be giving a big wet kiss to purchasing-power risk -- the chance that their money grows more slowly than the rate of inflation -- and there is little doubt that the majority of people investing in CDs now fall into that category. For proof, look no further than the numbers.

I have a problem with this statement. If you deduct the 2007 CPI value of 4.1% from whatever yield you are receiving now on your CD, you have a problem. Your answer is hovering close to zero. Your problem becomes even bigger if you believe CPI to be 4.1% as the government claims it to be. Shadow Stats estimates annual M3 (broad money supply growth) at around the 15% level. That is why you can't figure how CPI can be at 4.1% when you see the price of goods around you rising at a higher rate. I say CDs are money losers.

I also believe The Fed is well aware of this. Dropping rates will eventually discourage people to save. The Fed wants you out there spending, stimulating the economy with those worthless Dollars. It is not interested in you parking your savings in some CD account.

Still don't understand the consequence of inflation? Henry Hazlitt further says:

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because:

• It depreciates the value of the monetary unit,
• Raises everybody's cost of living,
• Imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest,
• Wipes out the value of past savings,
• Discourages future savings,
• Redistributes wealth and income wantonly,
• Encourages and rewards speculation and gambling at the expense of thrift and work,
• Undermines confidence in the justice of a free enterprise system,
• Corrupts public and private morals and
• Encourages malinvestment by entrepreneurs.

I don't know. Chuck leaves me with the impression that he is marketing CDs on behalf of the banks in order to help them build up reserves. :-)

My personal investment/savings strategy: Meet or beat the annual growth of M3

IMF Gold Sales Don't Change Anything

Boris Sobolev writes the following:

"Many pundits have been calling for gold to correct since October. But the rally in gold has been strong, steady and without any sizable corrections. Much money is still sitting on the sidelines, waiting for a cheaper entry point. It is quite possible that this entry point is coming soon as the G7 has just agreed to allow the International Monetary Fund (IMF) to start selling a portion of its 3,200 tonne gold holdings to cover its running deficits. The details of the sale will not be known until April, but the most mentioned figure for the total tonnes up for sale is 400 or about one eighth of total IMF holdings.

It is difficult to guess gold’s reaction to the news, but it is clear that the metal’s fundamentals remain sound. Paper money is in oversupply, gold is in demand by investors and especially countries looking to diversify away from the US dollar. Undoubtedly, buyers for extra gold offered by the IMF will be easily found. IMF sales don’t change anything."

Read the full article

How to Stimulate Yourself - Part 2

The Stimulus' Short-Term Purpose
Christopher Westley

The Wall Street Journal's Mark Gongloff quotes Lehman economist Ethan Harris in this morning's "Ahead of the Tape" column:

In the rush to enact a timely package, politicians may have stopped a 2008 recession, but they have ignored a risky letdown -- after the election. [The U.S. faces ] another brush with recession in 2009" [for this reason].

Gongloff adds that once the "stimulus cocktail wears off,"

...home prices seem likely to keep falling, weighing on consumer balance sheets, confidence and spending. The expansion after the the 2001 recession ... was partly fueled by more than $1 trillion in borrowing against home equity. It is hard to see the economy getting that lift this time.

Even if the stimulus package serves to help the political class survive the November elections, it remains that (as Hazlitt pointed out) the longer and indirect consequences of policies or actions are those that the good economists will focus on. Unfortunately, democratic capitalism produces politicians and the economists who focus purely on short-term results.

Until the rank-and-file realize that it is the expanding nation-state itself, with its monetary inflation and government spending, that has created this mess, and that more of the same can only prolong the inevitable (and make it worse), then the next few years will look like the 1970s all over again. This time, could we at least be spared the disco?

FMM Comment: My recommendations still stands on How to Stimulate Yourself

Ron Paul: Presidential Campaign Update 11/02/2008

Going the Distance: Dr. Paul gives another update on the campaign



Here's the article Dr. Paul is referring to: The Mouse that roared: Why Ron Paul won the election

I like the way how Dr.Paul is using YouTube of late to distribute important information regarding "The People's Campaign". ;-)

SCREW YOU MSM !!!

If you are a Ron Paul supporter, spread this message A.S.A.P. !

Dow Jones Musical Chairs

NEW YORK (MarketWatch) -- With Altria Group Inc. and Honeywell International Inc. booted out, the Dow Jones Industrial Average is now getting a little less industrial and a little more oriented financial and oil, with Bank of America Corp. and Chevron Corp. joining the world-famous blue-chip index.

Read the rest

FMM Comment: Nadeem Walayat made the following point in his article:

"Don't Bet Against the Dow!".

"Investors should realise one important factor about the Dow 30 stock market index and other similar general multi-sector indices that are made up of a limited number of stocks. The Indices are designed to exhibit the long-term inflationary growth spirals. In that in the long-run the indices will always move to a new high! "

Beware the smoke and mirrors!

FX Insights EUR/USD Calendar 2/10 thru 2/15 (with commentary)

By FX Insights Moderator,

For this trade week we have a four-headed beast to do battle with:

1. U.S. & European Growth Fundamentals
2. Equities
3. Securities
4. Central Bankers

Lets start with number one and work our way down as we try to devise our battle plan for the week ahead...

Fundamental Data:

Last week we saw the market take the EUR/USD down 200 pips twice... this is not a common occurance and something to take note of as we prepare for this week...

On Friday some dude from OPEC talked about denominating oil out of dollars and into euros, which caused that spike in the late afternoon... where did we bounce? At 4550. And if you remember last week we told you several times that the 4550 level is a key level to either keep us pushing lower lows or to allow the euro to make a recovery... we'll talk more about key levels later, though...

As far as this week's fundamentals go, the reason why it's such a critical week is because the market is so intensely focused on Europe's growth situation... the market is looking for any and all signs that growth is destabilizing, that it's weakening, and whether or not this weakness will be enough for the ECB to cut rates soon...

Monday -- key Eurozone growth data by way of French and Italian industrial production data. Forecasts show some recovery there from the previous data release... I'm not quite of this opinion...

Tuesday -- ZEW... I think in the ZEW data we'll see further deterioration of Europe's investor sentiment because of weakening economic conditions... the signs of this weakening sentiment have been there for several months and I believe it's not playing out right before our eyes...

If European investors continue growing wary of economic and financial conditions in the Eurozone this could likely lead to safe-haven buying of bonds, which would negatively impact the value of the euro against the dollar... just something to keep in mind.

Wednesday -- things pick-up on Wednesday... the two biggest pieces of data is the Eurozone Industrial Production number and the U.S. Core Retail Sales... I expect both pieces of data to disappoint to the downside, which will only further confuse the markets... there's really been no sign of much recovery in the U.S. retail sector... my research shows consumers are continuing to tighten their purse strings.

U.S. consumer credit is way down! Consumers are not borrowing either because they can't get a loan, they are loaded with debt and have nothing else to borrow with, they are out of a job, they are about to get their home foreclosed on, they are scared to take on new debt, or a combination of any or all of the above... it's a very tough situation and these factors are certainly weighing heavy on U.S. retailers.

Thursday -- this is where we really get a look at the growth situation in Europe as we get German, French, and Eurozone GDP data... I believe we'll see growth contracting from the previous month in this GDP data, which will not be EUR supportive at all...

Later in the morning we get the U.S. Trade Balance which seriously needs some help... the USD's continued weakness and worthlesness should help the Trade Balance and I'm expecting the data to be USD supportive...

Initial Claims has been quite weak all year long and I see no reason why we're going to get an upside surprise on Thursday... layoffs are continuing and there's no signs of this slowing...

The other keys for Thursday are speeches by Bernanke and Trichet... Bernanke is testifying before the Senate Banking Committee and he's scheduled to speak on the economic outlook and monetary policy... the market will be listening intently to both Bernanke and Trichet for any clues and signs on interest rate policy and growth outlook...

Friday -- tons of data on Friday... most of Friday's data is USD-related... growth, inflation, foreign investments, industrial output, and consumer sentiment... is that enough for you for one day?

I'm going to reserve any commentary on Friday's data for later on this week in the Trade Team updates as I've got much more research to do on what Friday holds...

Lets move on to equities now...

Equities:

Equities is the second head of our four-headed beast we're going to do battle with this week...

I believe the correlation between the Dow, S&P/500 and the EUR/USD will stay in play this week... equities are in a precarious spot right now... have they hit a bottom? Is there more room down to go? Investors will be trying to figure this out...

The way I see it, it's pretty simple... should the equities markets make a recovery this week and see some upward momentum and upward gains, I think this will be highly supportive of the EUR against the USD...

If money flows out of equities again this week, this will likely keep the USD pressure on the EUR... I'm not an equities expert nor do I trade them, so I can't predict what those markets will do this week, but I do know how those moves can effect the EUR/USD, so I'll certainly be watching very closely...

Securities:

Have you been watching U.S. bond yields lately? If not, you might want to this week... the 10-year yield in particular has made a roaring comeback from its lows in the 3.30's... on Friday the 10-year yield closed at 3.65%... if the bond yields keep rising, this should keep the USD supported against the EUR...

Central Bankers:

For most of the week, the Fed's henchmen will be on the speaker's circuit... the market will be listening for any clues on further Fed cuts or to see if the Fed is going to start getting hawkish on inflation and scale back the talk of keeping more cuts on the table...

Same goes with the ECB and Trichet... is Trichet going to stay dovish the next few months? Is he going to signal rate cuts? The markets will be watching and listening all week...

Over the weekend the ECB's Almunia talked about concerns over the euro's strength...

Of course we had the G7 meeting with the central bankers... I've already posted the key points from this meeting, so please take a look at that info... I expect we'll see some fallout in the market from this G7 meeting...

EUR/USD Trading:

As far as trading goes, I'm not heavy short nor am I heavy long... we're close to that key 4550 level... I believe in order for the euro to make a recovery, it's going to need to sustain a break above 4550...

If the euro stays below the 4550 level, it keeps the doors open for more downside testing and correcting... other key downside levels are the 4440 are and the 4380-4360 area...

I remain overal biased to more downside testing, but as I said, I'm not loading the boat with shorts and I'm playing the shortside extremely tight and cautiously because I know this week's fundamentals and those other variables we talked about could easily send the EUR/USD back up toward the 4750 level...

Best advice is to look for those relatively safe intraday trade opportunities, using 1% or 2% entries, taking a few pips per trade, and mitigating your risk during these times of uncertainty and no clear directions...

As we did last week, we'll look for some high probability live trade calls to put in the chat, but only if the opportunity for a lower-risk trade presents itself to the Trade Team...

There's a few posts you'll want to take a moment to read:

The Yen -- the market's untamed beast

Our 1-year anniversary message

FXI's Fundamental Test Part II

That should take care of things for now... again, practice strict risk and money management as we have a potentially volatile and crazy week ahead... each and every day this week holds heightened potential for volatility and price swings...

-FX Insights

EURUSD Financials 2-10-08 thru 2-15-08.xls

The drumbeat of Weak Economic Numbers

Ugly retail sales on tap, and more from Bernanke

WASHINGTON (MarketWatch) -- The drumbeat of weak economic numbers will likely continue this coming week, topped by awful retail sales figures and depressed consumer sentiment readings.

As if that weren't enough, Federal Reserve Chairman Ben Bernanke will trudge to Capitol Hill again, along with the rest of the President's Working Group on Financial Markets (a.k.a. The PPT), to explain to senators just why the financial markets aren't working.

Risks abound in both the numbers and in the testimony.

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FMM Comment: I'm looking forward to Ron Paul boxing Ben's ears again. Is Ben dragging the PPT along as bodyguards?

The Fed and The Sorcerer's New Apprentice

Uncle Sam Crying "Uncle!"

by Antal E. Fekete

Tertium datur

People tend to think in terms of black-and-white. Many of my correspondents think that either hyperinflation or deflation is in store for the dollar; tertium non datur (no third possibility given). I would say tertium datur. The third possibility is a hybrid of hyperinflation and deflation. I described this scenario in my previous article "Opening the Mint to Gold and Silver". It is possible, even probable, that we shall witness collapsing world trade and collapsing world employment together with competitive currency devaluations, as the three superpowers compete in trying to corner gold. The lure of gold is very strong. "There is no fever like gold fever" and, contrary to conventional wisdom, governments are especially susceptible.

A large part of the problem is that the Central Bank is helpless in the face of bond speculation. The Fed is no Sorcerer. It is the Sorcerer's Apprentice. It can pump unlimited amounts of "liquidity" into the system, but cannot make it flow uphill. As we shall see, new dollars flow to the bond market causing a lot of mischief there, instead of flowing to the commodity market as hoped by the Fed.

Up to now leading commodities have outperformed gold. That could change. A select few commodities might continue in the bull-mode for a time, although gold could easily beat them. Most other commodities might go into a bear-mode similar to that of the commodity markets of the 1930's. If that's what was in store, then most investors would be totally lost. They would be navigating without a compass. There would be endless debates whether the country is experiencing deflation of hyperinflation. Your motto in this hybrid scenario should be: "expect the unexpected".

Of course, the Fed will keep printing dollars like crazy. Few of them, if any, will go into commodities. Indeed, most of the newly created dollars will go into bond speculation. Why? Because commodity bulls are running into headwind and face grave risks. By contrast, bond bulls enjoy a pleasant tailwind. Bond speculation is virtually risk-free. Under our irredeemable dollar bond bulls have a built-in advantage. The Fed has to make periodic trips to the bond market in order to make its regular open-market purchases of bonds to augment the money supply. In order to win, all the bond speculator has to do is to stalk the Fed and forestall its bond purchases. This is the Achillean heel of Keynesianism: it makes bond speculation inherently asymmetric favoring the bulls, and that will ultimately derail the economy on the deflation-side of the track.

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The Mother of All Bubbles

By Peter Schiff

In contrast to the dismal forecasting record of mainstream economists over the last few years, the forecasts that I have made regarding the dollar, oil, commodities, precious metals, global stock markets, inflation, and the U.S. economy have all come to pass. In addition, unlike the top economic oracles on Wall Street and in Washington, I can also point to similar accuracy in predicting the bursting of growing bubbles, first with technology in the late 1990’s, and more recently with real estate. However, my long-standing prediction about the fate of the bond market has fared much worse. I still do believe this prediction was not wrong, but simply premature.

For years I have predicted that the falling dollar, persistent trade deficit, and the lack of domestic savings would combine to send long-term interest rates sharply higher. The effects of these fundamental drivers would undermine the Fed’s efforts to lower short-term rates and compound the problems for the housing market and the U.S. economy. Yet as of today, the yield on the thirty-year Treasury bond still stands below 4.5%, within 40 basis points of a generational low. Either this is the one piece of the puzzle that I somehow got wrong, or other factors are working to temporarily confound fundamental economics and prop up the bond market. As you might imagine, I am confident that it is the latter and consider the U.S. Treasury market to be the mother of all bubbles.

I have often said that the only thing worse than holding U.S. dollars is holding promises to be paid U.S. dollars at some distant point in the future. However, this is precisely what U.S. Treasuries represent. Given all of the inflation that already exists, and all of the additional inflation likely to be created over that time period, why would anyone pay par value for the right to receive $1,000 in thirty years in exchange for a mere 4.5% coupon? Although it looks like the sucker bet of the century, the fools have been lining up to buy. Alan Greeenspan called this a "conundrum." I simply call it mass delusion of the same variety that brought us pets.com, and $800,000 tract homes in the middle of the California desert.

Just like dot coms or real estate, today’s bond prices reflect a fantasy world. In this "Bizarro" reality, the dollar will remain strong, inflation will stay low, economic strength will persist uninterrupted, and Fed policy will be predominantly hawkish for the foreseeable future. But when the fog finally lifts, and investors come to grips with a sagging dollar, recession, gaping budget and current account deficits, and the most accommodative Fed imaginable, bond prices will collapse, sending long-term interest rates skyrocketing higher. Unfortunately, for investors who hitched their wagons to benign government CPI statistics and ignored real world evidence of inflation [rapid money supply growth, surging gold, oil and other commodity prices (wheat and soy beans prices catapulted to record highs this week), the sinking dollar, and actual increases in consumer prices,] the losses will be excruciatingly real.

It is important to remember that for every borrower there has to be a lender. For example, if a homeowner wants to refinance his mortgage, there must be someone willing to loan him the money. Practically everyone on Wall Street is hailing the Fed’s recent rate cuts because they believe it will allow strapped ARM holders to refinance into more affordable mortgages. However, while low rates are great for borrowers, they are lousy for lenders. Why would anyone want to offer a thirty-year mortgage at an artificially depressed interest rate? As soon as the Fed raises rates again, as it clearly intends to do once the crisis ends, all that low yielding mortgage paper will collapse in value. Lenders can surely figure this out and will therefore refuse to volunteer to be the patsy in this plan.

Eventually, the world’s lenders will reach similar conclusions with respect to U.S. Treasuries. No matter how low the Fed funds or discount rates get, private savers around the world will simply refuse to lend given the inherent risks and paltry returns. At some point the sheer absurdity of holding long-term, low-yielding receipts for future payments of depreciating U.S. dollars will be apparent to all. After all, it was not too long ago that investors thought holding subprime mortgages from financially strapped borrowers who could not possibly repay them was also a great idea -- so great in fact that many leveraged themselves to the hilt to buy them. Judging from the extremely poor demand at this week’s $9 billion auction of thirty-year Treasury bonds, the day of reckoning may not be too far off.

For now there are a host of factors temporarily propping up the Treasury bond market, such as unrealistically sanguine inflation expectations, foreign central bank and hedge fund buying, short covering, credit spreads, problems in the mortgage market, recession fears, and flight to what is falsely perceived to represent the ultimately in safety and quality. When these props give way, look out below! As we have learned from previous bubbles they can inflate for a long time before they burst. As this one has been inflating longer then most it has amassed quite a bit of air. When it ultimately finds its pin the popping sound will be deafening.

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.

>> Click here for Mr. Schiff's video interviews.

Rejoining of the Unholy Matrimony

ECB may follow Fed and BoE in rate cut
By Ambrose Evans-Pritchard

The European Central Bank has ditched its bias towards interest rate rises, preparing to join the US Federal Reserve and the Bank of England in easing monetary policy to head off a sharp downturn.

Jean-Claude Trichet, the ECB's president, acknowledged that risks are now largely on the "downside" after January's precipitous fall in Italy and Spain's services index.

"It is a total capitulation," said Jacques Cailloux, eurozone economist at the Royal Bank of Scotland.

"The ECB was wrong in thinking that Europe could decouple from the US and has misjudged the loss of momentum. We think they will start cutting rates in April," he said.

Ken Wattret, an economist at BNP Paribas, said cuts could come as soon as March, warning of a "vicious spiral" as the credit squeeze and sliding confidence feed on each other.

The euro plummeted to $1.4450 against the dollar as Mr Trichet's comments flashed across traders' screens. Funds have taken massive 'short' positions, betting that the euro's six-year march to record highs is over.

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Credit Crisis: Precursor of Great Inflation

The so-called "credit crisis" is gaining momentum. Investors increasingly question the solidity of the banking system, as evidenced by banks' tumbling stock prices and rising funding costs. With bank credit supply expected to tighten, the profit outlook for the corporate sector, which has benefited greatly from "easy credit" conditions, deteriorates, pushing firms' market valuations lower. In fact, peoples' optimism has given way to fears of job losses and recession on a global scale.

The obsession with a policy of lowering the interest rate is rooted in a deep-seated ideological aversion against the interest rate. It is a destructive ideology, in particular if the government is in charge of the money supply. Because then the government central bank will lower the interest rate to whatever is deemed appropriate from the viewpoint of the government, pressure groups, and vested interest. FULL ARTICLE