"[T]he paper market for silver is losing its significance in the process of price discovery. Everyone who owns physical silver should make their decisions based on what is happening in the physical market, not the paper market." - James Turk, 2/10/11
Dear All,
It was only a few months ago that all the talk and concern was about deflation. As has been repeatedly emphasized here it has always been inflation that was in the stars. From The Demise of Paper Currencies 9/28/10 -- "The inflation/deflation debate is a non-starter. Once QE2 goes full throttle the resulting price inflation will be unstoppable." To wit:
Got that? Putting aside entirely the baloney that there is anything temporary about these liquidity dumps -- that the Fed is bluffing and cannot withdraw currency without creating a financial holocaust --- we have a Fed chief speaking hooey. Bernanke is claiming that the money creation and Fed Treasury debt purchases which have occurred did not actually occur because the Fed plans to eventually reverse it. This is akin to an individual entering a Not Guilty plea at an arraignment for bank robbery on the theory that since he intended to eventually return the stolen money, the bank was never actually robbed in the first place.
Inflation, as James Grant has pointed out, is not "too much money chasing too few goods," the classic definition made famous by Milton Friedman. Rather, it is simply too much money. Central banks generate inflation by creating excessive amounts of new currency, thereby diluting the value of the existing currency stock. Rising prices are the result. In actuality the goods and services aren't rising in value. Owners and providers simply demand more of the debased paper currency in trade. Central bankers do not admit this. Rather they deflect and cite extraneous events, wage, goods and service supply/demand pressures. It is never, according to them -- the quantity of currency.
I return then to Bank of England Governor Mervyn king's remarkably candid speech, excerpted in my last post, Mr. Bernanke Goes to Cairo. While highlighting King's admission that his central bank was now in the business of manufacturing inflation and his near apology to its victims, I neglected to comment on his having also quite directly revealed the rationale for the Bank's having undertaken its own version of Quantitative Easing in the first place (emphasis mine):
"[O]ne way or the other, the squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent re-balancing of the world and UK economies... I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis...The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to re-balance our economy."
I cannot recall a sitting central banker speaking in such a truthful way, which I suppose is why it has received such scant attention in the financial press. On a daily basis economists and talking heads parse meaningless sentences uttered by this Fed governor and that central bank head, yet an exceptionally revealing speech goes barely noticed.
You will note what King did not say. He did not reassure UK families that the lowered living standards that the Bank will deliver will have been worth it because it will create jobs for their unemployed neighbors or even benefit the economy generally. Rather, he refers to "the legacy of the banking crisis" and "the inevitable price to pay for the financial crisis." Governor King comes as close as possible to admitting that the true purpose of the Bank of England's currency printing is to ease the burdens of the banks. As discussed here in Perpetual Adolescence, this is as well the real purpose of the Fed's Quantitative Easing. It is not as advertised, about jobs.
Shoot the messenger: FoxBusiness: Congress Wants to Hear from Meredith Whitney
CapitalResearch: Manipulation of Government Data
Oh, I see -- It's a game?
"President Barack Obama joined patriotism with economics as he urged U.S. business leaders to "get in the game" in support of their country by spending more cash."
The President is asking business to allocate capital in an implicitly irrational manner by considering not its own self-interest but rather, that of the United States. Companies do not make investments as an act of patriotism. Grown-ups understand this. It is particularly depressing to hear such blather from an adult, let alone a head-of-state. Such cajolery is antithetical to liberty and free markets and its only effect is to make business more nervous about committing capital.
Our favorite '60's acid-head economist is back at it: NYTimes: Paul Krugman - 'Abraham Lincoln, Inflationist'
"Start with that bit about debasing our currency. Where did that come from? The dollar’s value in terms of other major currencies is about the same now as it was three years ago. ... But the facts don’t matter, because conservative hard-money mania, the demand that the Fed stop trying to rescue the economy, isn’t really about inflation fears."
Surely it is not possible that Paul Krugman so misses the point, or does it seem fathomable that he is so thoroughly disingenuous. It should not be necessary to explain to the Nobel laureate that the dollar's (or that of any fiat currency) debasement cannot be calculated using as a metric "[t]he dollar's value in terms of other major currencies." That is the equivalent of measuring the speed of one object in motion against another also in motion (i.e. relative speed), an entirely different calculation than the measurement of an object's absolute speed -- the speed of its movement against a stationary object on the ground. I would have surely thought this was something laureates were taught in their Nobel laureate prep courses.
All of the major currencies have been in rapid motion for a decade as the central banks that manage them have continuously expanded their supply. The major currencies have collectively been debased, most pointedly against that fixed monetary object on the ground -- gold -- the only currency without a country and which cannot be created at the whim of a central bank. Without exception every one of the major currencies has lost dramatic value against gold for a decade. With few exceptions too, the losses for each have occurred year-in and year-out..
It must have been the mushrooms talking.
Not reported by The New York Times: Now that the Egyptian military has given Mubarak the shove and inadvertently provided President Obama what he seemed to want, this particular tale of the Administration's ineptitude will likely die a natural death. It turns out that a firm that employs Frank Wisner (the man President Obama sent to Cairo as his special envoy -- ostensibly seeking Hosni Mubarak's agreement to depart from power) was on the dictator's payroll. Wisner, who in a New York Times puff profile on the Obama appointment was described as an 'old friend' of the former Egyptian dictator, promptly U-turned after a brief meeting with Mubarak, returning to the U.S. empty-handed. Only three days after his return Wisner, a retired diplomat now working for Washington lobbying heavyweight, Patton Boggs said this: "President Mubarak's continued leadership is critical: it's his opportunity to write his own legacy."
This had more than a few people understandably scratching their heads about Obama and his State Department. How could the President have chosen as his special envoy an individual so grossly conflicted that he would willingly utter those words in defense of a dictator whom he had presumably, only days earlier tried to convince to opt for an early check-out? DemocracyNow remarked that Obama had sent Mubarak's own 'bagman' to negotiate.
"Patton Boggs states that its attorneys represent some of the leading Egyptian commercial families and their companies' and have been involved in oil and gas and telecommunications infrastructure projects on their behalf. But it is inconceivable Hillary Clinton did not know of his employment by a company that works for the very dictator which Mr Wisner now defends in the face of a massive democratic opposition in Egypt. Nicholas Noe, an American political researcher now based in Beirut, has spent weeks investigating Mr Wisner's links to Patton Boggs. Mr Noe is also a former researcher for Hillary Clinton and questions the implications of his discoveries...Do the US lack diplomats? Even in past examples where presidents have sent someone 'respected' or 'close' to a foreign leader in order to lubricate an exit the envoys in question were not actually paid by the leader they were supposed to squeeze out!" The Independent: US envoy's employer was on Mubarak's payroll
If you're at all curious about the character of the deposed dictator (whose representation by Patton Boggs was arguably paid for by American taxpayers) this jaw-dropping report on Mubarak and his family's pillage, made available by The huffingtonpost will be of interest. Don't read it though as a tale of unusual political greed. Given the same opportunities, the majority of American politicians would behave no differently. The only thing distinguishing the departed Egyptian dictator's swinishness from the average rapacious American political scoundrel was the former's lack of prosecutorial fear. While the scope of corruption may be grand, Mubarak's propensity to plunder is not particularly noteworthy: Big Assets
In his new book, The Bed of Procrustes, Nassim Taleb footnotes this aphorism:
My biggest problem with modernity may lie in the growing separation of the ethical and the legal*
*Former U.S. Treasury secretary "bankster" Robert Rubin, perhaps the biggest thief in history, broke no law. the difference between legal and ethical increases in a complex system...then blows it up.
This brings us to Matt Taibbi's latest piece. I wish it were solely a matter of the severing of the ethical and legal. There is also the distressing reality of selective prosecution of the highest white-collar crime. America is increasingly a nation of men, not laws: RollingStone:Why Isn't Wall Street in Jail?
The Trend...
CNN: IMF calls for dollar alternative
MiningWeekly: China may increase gold reserves beyond 'Fort Knox' level
On to gold...
Geopolitical stresses are building, the derivatives debacle has not changed and quantitative easing is now the permanent lifestyle in central banking. Frankly, even absent these factors, the majority of Wall Street does not understand the manipulation that has for years artificially suppressed silver and gold prices. For this reason alone ascending precious metals prices are assured. You are now observing -- particularly in silver -- the beginning of the breakdown of a bifurcated paper and physical price discovery system.
Expect even more volatility and sharp corrections. Sit through it all with your emotions in a box. Gold and silver are still very, very undervalued. You will not believe the prices that the mania stage -- still quite a way off -- will bring.
All the best,
Jeff