 | | The Daily Reckoning | Wednesday, November 30, 2011 |
- The Feds Are Coming! Crank up the printing presses!
- Bernanke becomes the world’s lender of last resort,
- Plus, Bill Bonner on debts and the dead...
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|  | | | | Cause for Celebration? | | Understanding the True Implications of Central Bank Money Printing | | |  | | Joel Bowman |
Checking in from Buenos Aires, Argentina...
Big news out of the gate today is that the central banks of the world are about to do more. More what, you ask? More of what central banks do best, of course...more money printing!
They don’t call it that, obviously. They call it “swapping” or “easing” or “recapitalizing” or “saving us from the abyss.” Or they call it “bolstering financial markets,” as The New York Times breathlessly explains...
“The Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank all moved to bolster financial markets by increasing the availability of dollars outside the United States.”
And some forgotten voice, somewhere up in the peanut gallery groans, “We’re all Keynesians now.”
But never mind all that. The markets are up. The Dow stacked on 400 points before lunch. There’s no time to think, Fellow Reckoner. No time to wonder on the whys and whatfors. The money is coming! There’s celebrating to do! Hooray!
If only we’d worked this out years ago. Can you imagine? Whenever there was a crisis, we’d just add more liquidity to the system and hey, presto...problem solved!
Unless, that is, the problem has to do with solvency and not liquidity. Broke individuals usually don’t benefit much from extended lines of credit. Not in the long run. They are broke because they have a tendency to overindulge, to consume more than they produce. They need to kick their nasty habit...not reinvigorate it. They need to pay their debts, not put them off, accruing interest in the process.
To switch metaphors for a second, the last thing a man in a hole needs is a shovel. But here are the feds...ready to beat him over the head with it and fill his grave in over the top.
In today’s “Double-Decker DR,” we take a look at both dollar and anti-dollar, paper and gold. The connection between the two will be clear to long-suffering readers. More printing = bad for paper money (and those who hold it) = good for gold (and those who hold it).
Jeffrey Tucker, the man driving Laissez-Faire Books to new and greater heights, tackles the first subject. Jeff Clark, editor of Casey Research’s BIG GOLD, addresses the second. Please enjoy...
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| | The Daily Reckoning Presents | | Leaping Toward the Keynesian Dream | | |  | | Jeffrey Tucker |
The Fed’s latest inflationary scheme sounds like a technocratic innovation. It lowered the costs of currency swaps between central banks of the world with the idea that the Fed would do for the globe what Europe, England, and China are too shy to do, which is run the printing presses 24/7 to bail out failing institutions and economies. In effect, the Fed has promised to be the lender of last resort for the entire global economy.
It sounds new, but it is not. Following the Second World War, John Maynard Keynes pushed hard for a global paper currency administered by a global central bank. This was his proposed solution to the problem of national currency disputes. Let’s just take the inflation power away from the national state and give it to a world authority. Then we’ll never have to deal with a lack of coordination again.
The idea didn’t fly but the institutions that were supposed to administer such a system were nonetheless created: the International Monetary Fund and the so-called World Bank. It didn’t work out that way. Instead, nation states retained their monetary authority and the new institutions became glorified welfare providers, conduits for transfer payments and loads to developing nations.
The dream lived on, however. The creation of the Euro and its central bank was a step in that direction. So was Nixon’s closing of the gold window. Each new currency crisis has created the excuse for further steps toward what Murray Rothbard calls the Keynesian dream.
Why hasn’t it happened yet? Many reasons. Nation states do not want to give up power. The World Bank and the IMF are institutionally unsuited to the task. Many people in the banking world are also downright squeamish about the idea, with full knowledge of the ravages that unchecked inflationary credit can bring to the world economy. Mostly, there hasn’t been a crisis big enough to warrant such extreme measures.
However, that crisis might have finally arrived. Since 2008, the Fed has demonstrated that among all the world’s central banks, it alone is brave enough to embrace gigantic inflationary measures without wincing. The European Central Bank is under some strictures to not act as a monetary central planner. China is unconverted to the inflationary faith. The same holds true for England.
Ben Bernanke, however, is different: he is revealing himself to be an unreconstructed Keynesian with an unlimited faith in the power of paper money to solve all the world’s problems.
What this means is that it is left to the Fed alone to bail out the world. There is a perverse logic to this. After all, if you are going to be a world empire, operating under the assumption that nothing on the planet is outside your political purview, you bear certain responsibilities as well. Foreign aid and troops in every country are just the beginning. You must eventually embrace your financial responsibilities too. A globalized economy addicted to debt needs an institution willing to step up and guarantee that debt and provide the liquidity necessary to get us through the hard times.
As soon as the announcement of the new Fed measures came, the smart set of the worldwide web lit up with the obvious observations that these measures come with massive risk of setting off a global inflationary crisis. It could lead to the final crack-up boom.
The Fed assures us otherwise. It “bears no exchange risk” in undertaking such actions. But as economist Robert Murphy explains “strictly speaking this isn’t true. If the Fed gives $50 billion in dollars to the ECB, which (at those market prices) gives $50 billion worth of euros to the Fed, then the ECB lends out the dollars to private banks and, before they repay the loans, the euro crashes against the dollar...then the ECB has no means of acquiring dollars to repay the Fed. Even though the ECB has a printing press, it is configured for euros, not dollars.”
He further states what everyone knows but no one is willing to say: “The current round of interventions will not solve the problem. Down the road — probably much sooner rather than later — the central banks of the world will engage in some further extraordinary measures, again lest the whole world fall apart. Even so, printing money doesn’t fix the underlying problems. No matter what they do, eventually the whole financial world will fall apart.”
The speed at which all of this is happening is startling to behold. It was only 36 hours ago that we heard the first public worries about the drying up of credit in Europe. Large corporations were seeing their credit lines tightened. Banks were starting to become more scrupulous in their operations, which is hardly a surprise given that zero interest rates have made it nearly impossible to make a profit in conventional lending operations.
Where in the fall of 2008, the Fed let the worries about tight credit grow to the point of international mania before it acted, this time it jumped in to anticipate the inevitable warnings about the imminent death of civilization. Only trillions in paper money can save us now! The Fed saw what was coming and decided to do the deed even before the demand came.
But rather than settle markets down, the real effect is the opposite. If you go to the doctor with a head cold, and he rushes you to the hospital for surgery, you don’t merely congratulate him for being thorough. You figure that he knows something that you don’t, namely that your condition is way more serious than you thought. Your family is likely to fly into a panic.
For this psychological reason alone, this action is likely to roil markets in crazy ways. The Fed is now paper-money printer for the entire world. It’s a new world, and a brave one. If you think that a new era of prosperity, peace, and stability awaits, you have been living under a rock for at least a century. There’s not a soul alive who will sleep soundly knowing that Ben Bernanke has elected himself the loan officer of the entire globe.
Regards,
Jeffrey Tucker
for The Daily Reckoning
| | | | | Don’t Sweat the Correction in Gold | | |  | | Jeff Clark |
I’ve told more than one concerned investor that when the gold price falls, they should “come back in three months” and see if they’re still worried. The idea is that the daily and monthly gyrations are nothing to fret over, that the price will recover and, in time, fetch new highs.
That advice has worked every time gold underwent any significant correction (except in late 2008, when one had to take a longer view than three months). Here’s proof.
I’ve traded emails regularly with Brent Johnson ever since meeting him at an investor event I spoke at a couple years ago. He’s the managing director of Baker Avenue Asset Management, a wealth management firm with over $700 million in assets. He forwarded some charts he’d prepared for his clients that put gold’s September decline into perspective; it’s a good visualization of my standing advice to worriers.
The following charts document corrections in the gold price of 8% or more — first measured with daily prices, then monthly, quarterly, and finally annually. See if this doesn’t put things into perspective.
While the gold price has had plenty of big corrections since late 2001, they’re not so concerning when viewed beyond a day-to-day basis. In fact, if one resists checking the gold price except once a quarter, one might wonder what all the fuss with price declines is about.
You’ll also notice that the September decline, when measured monthly, was our second biggest in the current bull market (and third when calculated daily). This suggests to me that unless we have another 2008-style meltdown in all markets, the low for this correction is in.
That’s not to say the price couldn’t fall from current levels, of course, nor that the market couldn’t get more volatile. It’s simply a reminder that when viewed on any long-term basis, corrections are nothing but one step down before the next two steps up. It tells us to keep the big picture in mind.
It also implies that pullbacks represent buying opportunities. It demonstrates that one could buy any 8% drop with a high degree of confidence. Keep that in mind the next time gold pulls back.
Until the fundamental factors driving gold shift dramatically — something that would require most of them to completely reverse direction — I suggest deleting any worries about price fluctuations from your psyche.
And if you’re still a tad uneasy about today’s gold price, well, let’s talk next February.
Regards,
Jeff Clark,
for The Daily Reckoning
P.S. The current issue of BIG GOLD lists the top stocks to buy in our portfolio, ones we’re convinced are destined for much higher stock prices before this bull market is over. Get their names, along with our new Bullion Buyers Kit, with a risk-free trial here.
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| | | | | And now over to Bill Bonner with the rest of today’s reckoning from Baltimore, Maryland... | | |  | | Bill Bonner |
Nothing much happened in the markets yesterday. Which is a good thing. We’re too exhausted to reckon with it.
We went to a funeral yesterday. Dead people wear us out. They are like debt. They don’t just go to their graves and disappear. There’s always more to the story. They leave debts...accounts with the living that must be settled.
“Did I tell you about my friend Nancy?” mother began as we were passing through Cumberland, Maryland, on the long drive to the funeral ceremony.
“She was married to Don...who was a Methodist minister. But the poor girl drove up to Cumberland every weekend. Her mother was awful and her father needed her. At least, that is what she told me.
“Don got tired of being left alone every weekend. So he found another woman named Nancy. He divorced the first Nancy and married the second one.
“Then the first Nancy was on her own. She kept trying to help her parents... Really, I think she was trying to protect her father from her mother. And finally, her mother died. And everybody thought how relieved the father must be. Finally, he was free of that terrible woman.
“But he went to her funeral, caught a cold, and he was dead two weeks later. It was as if the mother had reached up from the grave and pulled him in with her.
“I’m 90 years old now...and I’m close enough to the dead to know how they work. They may die. But they don’t go away... They’re still with us. Which is usually a very good thing.
“You know, my brother says Alice [his recently deceased wife] helps him find things. When he can’t find something in the house, he just takes a deep breath. He says that something...or someone...then tells him where to look. He goes. And he finds what he is looking for.
“He thinks it is Alice helping him. And I know I think your father helps me often... “
“So...what happened to Nancy?” we asked.
“Oh, she was very happy after Don left. And then, the second Nancy died. She went to the funeral. She said it was very satisfying.”
Regards,
Bill Bonner
for The Daily Reckoning
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