Thursday, June 24, 2010

Wonder What The Fed's Next Move Is?

“U.S. Dollars have value only to the extent that they are strictly limited in supply. But the U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. Dollars as it wishes at essentially no cost.”

-Ben Bernanke, Remarks to the National Economists Club, 11/21/2002.

Bernanke's raision d'etre - his whole reason to exist - is to fight deflation. He also is a self-proclaimed "expert" on the Great Depression. The reasons for which he high-fives himself for this I have yet to see revealed. In fact, I would argue that Bernanke's greatest strength as a human being is as operating as a purely political animal and performing sycophantic oral sex on those who control him politically and financially.

Now, if you dissect the infamous passage from his infamous speech back in 2002, when he had clearly thrust his own hat aggressively into the Greenspan-replacement ring, you can understand why all through the ages that paper/fiat money ALWAYS, WITHOUT EXCEPTION, "returns to its intrinsic value - zero."

Deflation can be considered as bad, or worse, than its inflation foil for many reasons, not the least of which that it penalizes debtors to the benefit of creditors. The United States - the Government and private sector combined - is by FAR the largest debtor entity in the world. The ONLY way the U.S. has any hope of an attempted fix of this is to inflate its way out of this predicament by printing money or a direct overnight massive devaluation of its currency - or both. Deflation, therefore, is the mortal enemy of the U.S. Government.

Up to this point in time, the Fed/Treasury have engaged in a little of both (money printing/dollar devaluation). Let's take a look at a couple of data points since Beranke assumed the Chairmanship of the Fed in 2006.  Since that time, the Fed has eliminated its reporting of M3, which is the most encompassing measure of the money supply. We are the ONLY major country in the world that does not report M3. Wonder why?

That being the case, we can use a couple other statistics which are still being reported.  Currency in circulation has increased 26% since 2006. The money stock, or MZM - considered by by many to be the most relevant surrogate for M3 - has increased by 46%.  These two facts would not be problematic if they were accompanied by a concomitant and commensurate increase in the country's economic output - the GDP. I can assure you that just off of the top of my head the GDP since 2006 has been flat at best. This money supply increase thereby serves as a subtle means of devaluing the dollar.  Most significantly, the outright monetary base - also known as "high powered" money and consists of currency in circulation plus commercial bank reserves held at the Fed - has skyrocketed an astonishing 262% since Bernanke's reign at the Fed. All this data can be found at St. Louis Fed.

This was largely achieved by the Fed's QE program, in which Bernanke went out and bought about $1.5 trillion in toxic assets off of big bank balance sheets, with that money being kept in these banks' "excess reserve" account at the Fed. This is exactly how the Fed prevented the banking system from collapsing in 2008. However, and this is crucial, not only have the underlying factors for bank insolvency not been fixed, they have grown worse as the global credit crisis has spread from the private sector to the Governmental level. And wrapped around this massive debt problem, and looming ever-present like nuclear financial weapons, are the OTC derivatives - which have actually grown in the amount outstanding since September of 2008. These derivatives function in a way that "turbo-charges" by several multples the degree of risk embedded in the global debt/insolvency problem. The outcome ultimately could be the financial equivalent of a nuclear holocaust.

In what will ultimately be a hopelessly futile attempt to prevent a global nuclear financial meltdown, the Fed, in conjunction with other western Central Banks (European Government austerity lip-service notwithstanding) plus Japan, will begin the coup de grace of hyperinflating the money supply - aka Weimar German currency printing/devaluation. If you want to see how this process developed and unfolded in Germany, take a look at this link: Crank Up That Printing Press, Ben.

Bernanke, in his speech referenced above, went on to explain that in order to combat deflation and stimulate consumption, the Fed could inject money into the system with policy tools that would achieve Milton Friedman's "helicopter drop" of money into the hands of the citizens. This would serve to disincentivize savings, stimulate consumption and be effective monetary policy to jump-start the economy.  Of course, a massive increase in the supply of dollars would only be, nominally and for all practical purposes, only effective in reducing the value of the dollar. And that brings us full circle to the methodology that I would argue is going to be used in an attempt to address the U.S. Government's seemingly hopeless debt problem.

The first round of Quantitative Easing ended in March. I would bet that we will see a more significant second round of QE that will be announced sometime in the next six months. Since the first attempt of taking printed money from the Fed and exchanging it for worthless bank assets has not worked, I am betting that we will see policy tools implemented which will encompass the outright printing and distribution of money.  For a description of these tools you can read Bernanke's speech here: Fire Up The Helicopters!

In that I believe - as do many others - that this outcome is fait accompli, we can expect to see inflation which transitions into hyperinflation, a stock market which levitates beyond belief, a substantial devaluation of the standard of living in this country and upward movement in the price of gold and silver that will take 90% of the U.S. population by complete surprise. The Germans and French will not be taken by surprise. They have lived through this and are currently - as several people have reported in the comment section of this blog - literally buying up all of the gold and silver they can find. For 5,000 years of human history, gold has been, is and always will be the ultimate and truest form of honest currency.

The only way you have as a means of defending your financial well-being against what is going to be delivered by Bernanke is to move as much of your fungible assets as possible into gold, silver and mining stocks. Institutions and large sovereign wealth funds are just now moving into precious metals and related assets. This means that the second stage of the precious metals bull market is just beginning and the best returns are yet to come from this investment sector.


  1. Top Posting Dave.

    I continue to buy ( physical ), but I am not currently holding any stock position ATM.

    Any suggestion?

    Thank you


  2. Dave--Do you have a source to recommend good mining stocks? I have neither the time nor the knowledge to research this on my own. There are a lot of newsletters out there, but I have no means of assessing their reliability.

    Old Hickory, Tennessee

  3. Hey Clark, how's it going?

    Here's the stocks I like for both you and Hopium:

    Goldcorp GG, Agnico Eagle AEM, Silver Wheaton SLW, Silvercorp SLV, New Gold NGD, Hecla HL, Golden Star GSS. Those are the large caps/intermediate producers I like.

    In terms of juniors, I have done a lot work on Eurasian Minerals EMX.V/ESMNF. I have met with management several times and they are as impressive as any I've ever met with. I believe it has potential to be a 10-bagger. If I ever get off my ass, I'm going to do a blog post on it.

    I also like Silver Dragon SDRG, Victoria Gold VITFF, ECU Silver ECU.TO/ECUXF and Great Basin GBG.

    I have yet to find a newsletter that offers much value-added analysis and this is not self-promoting and engages in promoting the stocks they own. With the large caps, you'll do well with the ones I mentioned. With juniors, it's always best to do your own due dili.

  4. The same monied elite that gave the world John Law have also given us Banana Ben. Expect the same result.

    Joe M.

  5. Yup. France lived thru this in the early 1700's. The U.S. wasn't even a country yet. Germany obviously in the 1920's. Europeans understand what is happening and that is why they are loading up on personal holdings of gold/silver.

    American's are "fat, drunk and stupid" (Animal House) - that's no way to go through life...LOL

  6. American's are "fat, drunk and stupid" (Animal House) - that's no way to go through life...LOL


    Just say it Dave " Dopes " anyone who would stand in line for an I-phone is a Born and Bred Dope at it's finest.

  7. Silvercorp is SVM, typo there

  8. Dave,
    I worked exploration for 3 years on a property that Agnico just bought in the Canadian Arctic. I certainly agree with you about them. They have mines coming online and I can't prove it but I bet they get way more ounces out of the property that I worked on than are in the resource. Good call there.
    Justin in Canada