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Archive for November 2nd, 2010

US Federal Reserve’s Latest Bubble Scam (QE2) Threatens Mayhem

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November 2, 2010: Jeremy Warner / London Telegraph – November 2, 2010

The prospect of more quantitative easing (QE) is driving government bond yields to levels that price in a depression.

What happens, as seems more likely, if there isn’t one?

The answer is that an awful lot of people are going to lose an awful lot of money. We heard the first rumbles of trouble from these freshly gathering storm clouds last week when unexpectedly strong UK third-quarter growth caused a minor correction to gilt prices. Yet this was fast forgotten. The latest purchasing managers’ index figures, indicating rising confidence in the UK manufacturing sector, were completely ignored.

Bond investors continue to look forward with growing certainty to a slow or nil-growth future, where interest rates and inflation remain subdued for years to come. It’s happened before – very low inflation and bond yields have persisted for decades in the past – so why not again?

Yet it’s not just prospects for a Japanese-style lost decade that are driving bond yields towards record lows. Anticipation of further QE – whereby central banks flood the economy with cash by buying up government debt – is creating a self-feeding spiral of ever-falling rates. This is an accident waiting to happen.

Yet policymakers seem determined to push ahead with QE2. On Wednesday, the US Federal Reserve is expected to sanction a further $500bn (£312bn) of bond purchases. And despite vocal objections from at least four members of the Open Markets Committee, Ben Bernanke, the chairman, has indicated a willingness to keep pumping money into the economy on a more or less indefinite basis until core inflation is unambiguously rising again and unemployment is falling.

It seems rather less probable that the Bank of England will do the same, but you never know. One member of the MPC, Adam Posen, is on record as demanding another £50bn of asset purchases, while Mervyn King, the Bank’s Governor, has expressed concern about subdued money growth, and a majority of the MPC seems slowly to be coming round to the idea. If not this month, then maybe next.

There are essentially three reasons for worrying about this latest outbreak of voodoo monetarism; it seems neither to be necessary, nor is it likely to be effective, and it carries significant risks. If QE fails all these tests, then policymakers shouldn’t be doing it.

That it is already a done deal in the US tells you as much about the country’s growing state of political paralysis – likely to become worse still after today’s expected drubbing for the Democrats in mid-term elections – than it does about the policy’s underlying economic merits.

Denied the political leadership necessary to pull the economy out of the mire, the Fed is resorting to the only thing left in the tool box to kick-start private-sector job creation – even lower interest rates. It’s hard to see why – with real interest rates already in negative territory – an additional slight reduction would make any difference.

If it were possible for householders and smaller businesses to access these very low rates, and relieve themselves of their debt burdens by doing so, then there might be some economic benefit. But of course they can’t. In the real economy, usury remains the order of the day. It is only governments and larger companies that can take advantage.

But what QE very definitely does do is create a powerful incentive for everyone to pile aboard the bond-buying bandwagon. If the Fed is about to acquire half next year’s expected issuance of Treasury paper, it represents something of a one way bet, regardless of the long-term outlook for inflation and rates.

The purpose of QE is – by driving interest rates ever lower – to create a disincentive to save in the hope that companies and households might consume more or invest in higher risk assets. Paradoxically, the very reverse may be happening.

Funds are still flowing into government bonds in record quantities, for if you know central bankers are going to continue supporting the price, then there is every incentive to buy. Consumption and private sector investment is correspondingly harmed. The phenomenon has also spawned a renewed “search for yield”, which creates yet further anomalies. For instance, corporate bond prices have been a major beneficiary of the dash for government debt.

One positive effect has been to enable larger companies to refinance themselves at very low interest rates, which in turn helps banks in deleveraging. This is how QE is meant to work. Yet if these very low rates point to a depression, then you would expect corporate defaults to rise anew once the present growth spurt had run its course. Many corporate bonds are therefore being mispriced.

Similarly, if the Fed succeeds in generating inflation through QE, then logically these very low rates shouldn’t exist at all. The Fed seems to want it both ways – lower bond yields and higher inflation. Only in Alice in Wonderland would this be possible.

There is always the possibility that contrariwise, bond markets have got it right – that there is going to be further contraction in the economy and that the price of goods, services and other assets will soon be deflating. But that only adds to the suggestion that far from helping the situation, more QE will only make it worse.

In any case there is little evidence of the deflationary bogey here in the UK, and even in the US, the problem may be one of mis-diagnosis. High structural unemployment, which the US is most unused to, is not the same thing as deflation.

As for the UK, it is becoming ever harder to justify more QE. Nominal GDP growth is back to where it should be, manufacturing has picked up again after the summer soft patch, velocity of money is recovering fast, and inflationary expectations are rising.

It takes quite a leap to think this relatively encouraging position will be completely reversed over the next year or two by the coming fiscal squeeze. Certainly the Bank of England will struggle to convince if that’s what next week’s Inflation Report says. To engage in more QE would be to overreact to a still unquantifiable risk to growth.

The dangers, on the other hand, of further inflating a bond market already disengaged from underlying fundamentals are all too apparent.

Assuming no default, government bonds will never entirely destroy capital, in the same way as sometimes occurs with equity. But inflation can seriously impair it, and once markets suspect the inflation genie is out of the bottle, the damage is always swift and devastating.

QE2: Return Of The Printing Presses

The Tonka Report Editor’s Note: Then in the aftermath of implementing QE2 and to celebrate their 100th anniversary of treason and looting, the Federal Reserve criminals will return to the place of their inception on Jeckyll Island, off the coast of Georgia back in November 1910, for a grand reunion this week… Unlike Yemen, does UPS actually fly there? How about Fed Ex? Earl’s Bi-Plane Air Mail Service? Anybody?! - SJH

The Fed At Jeckyll Island: 100 Years Later… They’re Baaack!

http://www.economicpolicyjournal.com/2010/11/fed-at-jekyll-island-theyre-baaack.html

Link to original article below…

http://www.telegraph.co.uk/finance/comment/jeremy-warner/8103079/US-Federal-Reserves-latest-bubble-threatens-mayhem.html

Desperate In Land Of Opportunity: Is “The American Dream” Over?

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November 2, 2010: Der Spiegel Staff Editors / Spiegel Online – November 1, 2010

America has long been a country of limitless possibility. But the dream has now become a nightmare for many.

The US is now realizing just how fragile its success has become — and how bitter its reality.

Should the superpower not find a way out of crisis, it could spell trouble ahead for the global economy…

It was to be the kind of place where dozens of American dreams would be fulfilled — here on Apple Blossom Drive, a cul-de-sac under the azure-blue skies of southwest Florida, where the climate is mild and therapeutic for people with arthritis and rheumatism. Everything is ready. The driveways lined with cast-iron lanterns are finished, the artificial streams and ponds are filled with water, and all the underground cables have been installed. This street in Florida was to be just one small part of America’s greater identity — a place where individual dreams were to become part of the great American story.

But a few things are missing. People, for one. And houses, too. The drawings are all ready, but the foundations for the houses haven’t even been poured yet.

Apple Blossom Drive, on the outskirts of Fort Myers, Florida, is a road to nowhere. The retirees, all the dreamers who wanted to claim their slice of the American dream in return for all the years they had worked in a Michigan factory or a New York City office, won’t be coming. Not to Apple Blossom Drive and not to any of the other deserted streets which, with their pretty names and neat landscaping, were supposed to herald freedom and prosperity as the ultimate destination of the American journey, and now exude the same feeling of sadness as the industrial ruins of Detroit.

Florida was the finale of the American dream, a promise, a symbol, an American heaven on earth, because Florida held out the prospect of spending 10, perhaps 20 and hopefully 30 years living in one’s own house. For decades, anywhere from 200,000 to 400,000 people moved to the state each year. The population grew and grew — and so too did real estate prices and the assets of those who were already there and wanted bigger houses and even bigger dreams. Florida was a seemingly never-ending boom machine.

Could The Dream Be Over?

Until it all ended. Now people are leaving the state. Florida’s population decreased by 58,000 in 2009. Some members of the same American middle class who had once planned to spend their golden years lying under palm trees are now lined up in front of soup kitchens. In Lee County on Florida’s southwest coast, 80,000 people need government food stamps to make ends meet — four times as many as in 2006. Unemployment figures are sharply on the rise in the state, which has now come to symbolize the decline of the American Dream, or perhaps even its total failure, its naïveté. Could the dream, in fact, be over?

Americans have lived beyond their means for decades. It was a culture long defined by a mantra of entitlement, one that promised opportunities for all while ignoring the risks. Relentless and seemingly unstoppable upward mobility was the secular religion of the United States. Alan Greenspan, the former chairman of the Federal Reserve, established the so-called ownership society, while Congress and the White House helped free it of the constraints of laws and regulations.

The dream was the country’s driving force. It made Florida, Hollywood and the riches of Goldman Sachs possible, and it attracted millions of immigrants. Now, however, Americans are discovering that there are many directions that life can take, and at least one of them points downward. The conviction that stocks have always made everyone richer has become as much of a chimera in the United States as the belief that everyone has the right to own his own home, and then a bigger home, a second car and maybe even a yacht. But at some point, everything comes to an end.

The United States is a confused and fearful country in 2010. American companies are still world-class, but today Apple and Coca-Cola, Google and Microsoft are investing in Asia, where labor is cheap and markets are growing, and hardly at all in the United States. Some 47 percent of Americans don’t believe that the American Dream is still realistic… Read the 6-part Full Report

George Carlin: The American Dream

The Tonka Report Editor’s Note: Living the American Dream was doomed to this inevitable fate back in 1913 by the nefarious passing of The Federal Reserve Act… End the Fed! - SJH

Link to original article below…

http://www.spiegel.de/international/world/0,1518,726447,00.html

Commercial About The “National Debt” Banned By Major Networks

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November 2, 2010: The American Dream Editor’s / The American Dream - November 2, 2010

A new television ad about the U.S. national debt produced by Citizens Against Government Waste has been deemed “too controversial” by major networks including ABC, A&E and The History Channel and will not be shown on those channels. The commercial is a homage to a 1986 ad that was entitled “The Deficit Trials” that was also banned by the major networks. Apparently telling the truth about the national debt is a little too “hot” for the major networks to handle. 

But perhaps it is time to tell the American people the truth.  In 1986, the U.S. national debt was around 2 trillion dollars.  Today, it is rapidly approaching 14 trillion dollars. The American Dream is being ripped apart right in front of our eyes, but apparently some of the major networks don’t want the American people to really understand what is going on.

The truth is that the ad does not even have anything in it that should be offensive. The commercial is set in the year 2030, and the main character is a Chinese professor that is seen lecturing his students on the fall of great empires. As images of the United States are shown on a screen behind him, the Chinese professor tells his students the following about the behavior of great empires:

“They all make the same mistakes. Turning their backs on the principles that made them great. America tried to spend and tax itself out of a great recession. Enormous so-called “stimulus” spending, massive changes to health care, government takeover of private industries, and crushing debt.”

Perhaps it is what the Chinese Professor says next that is alarming the big television networks: “Of course, we owned most of their debt, so now they work for us.”

So is this television commercial offensive? Watch it below and decide for yourself…

Citizens Against Government Waste: National Debt Commercial

The Tonka Report Editor’s Note: Not only is this extremely well done, it’s right on the money! - SJH

Link to original article below…

http://endoftheamericandream.com/

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