The Rag Reel


Wednesday, June 26, 2013

Policy Of Energy

Policy of Energy 

Energy Scale

Even though much of the world is still suffering from economic stagnation, most of us would agree that we still have a very high standard of living in the United States. Compared to previous generations, we are wealthier, healthier, have better technology  more mobility and many more opportunities for a better life. Several factors contribute to a higher standard of living, but one of the most important (and most often overlooked) is access to reliable and inexpensive energy. Affordable energy is essential for almost every aspect of our modern lives. Without it, we wouldn't have many of the things we often take for granted. Affordable energy is needed to run the hospitals and laboratories that improve our health. It’s required to deliver electricity to our homes and put fuel in our vehicles. It also supports the millions of jobs associated with all of these things.

Carbon concerns

In general, the most affordable forms of energy come from fossil fuels, such as coal, oil and natural gas. Compared to these energy sources, alternative fuels such as solar and wind power are considerably more expensive (and less reliable). Burning fossil fuels to generate electricity or provide power necessarily releases carbon dioxide, or CO2, into the atmosphere. Carbon dioxide, a gas, is what we exhale every time we breathe. Erupting volcanoes, decaying trees, wildfires and the animals on which we rely for food all emit CO2. This by-product, which is essential for plant life and an unavoidable aspect of human life, is at the center of today’s climate change controversies.

Degree of change

There is a vigorous debate about what effects carbon emissions may or may not have on our future climate. Many scientists have estimated that the earth’s atmosphere has warmed by about 1.3 degrees Fahrenheit since 1880. Those who believe that increased CO2 emissions inevitably lead to global warming believe this change is directly attributable to the widespread use of fossil fuels. Because they believe further warming will have catastrophic effects, they have waged a war on carbon for many years. They have persuaded regulators to restrict carbon-based fuels in favor of subsidized alternative energy and encouraged policymakers to make fossil fuels more expensive in hopes of discouraging their use.

A matter of policy

In 2009, some policymakers proposed new legislation called “cap-and-trade,” which would set a cap on carbon emissions and allow businesses to buy, sell or trade permits for emitting carbon.
Due to its severe economic effects and the lack of proven benefits for the environment, the legislation was widely unpopular and failed to become law. Instead of accepting this reality, the Administration decided to bypass Congress entirely and restrict emissions through regulations, which are rules that don’t require the approval of elected officials. The U.S. Environmental Protection Agency began restricting emissions from mobile sources such as cars, working with other agencies to require manufacturers to make more fuel-efficient autos.

Although this might sound like a good idea, such a policy is loaded with unintended consequences. Vehicles with higher fuel efficiency are typically more expensive. They also tend to be smaller. For cash-strapped families with several children, this is a serious problem. Manufacturers have also tended to make cars lighter as a way of improving fuel efficiency  which can reduce a car’s safety in the event of an accident.

Truth and consequences

Regulators have also changed the rules for stationary sources of emissions, including mills, manufacturing plants and refineries. The EPA now requires new and modified carbon-emitting sources to have permits from various agencies in addition to separate greenhouse gas requirements. These new requirements, coupled with lawsuits from non-governmental organizations, stop expansions that would create value for society and more good jobs. The new rules also force manufacturers to use the most advanced (which usually means the most expensive) technologies.

Tale of two climates

If the goal is really to reduce carbon emissions, it’s worth noting that the U.S. is doing a good job of achieving that goal without cap-and-trade programs. In Europe, where carbon cap-and-trade was imposed years ago, carbon emissions are actually up, not down. The same is true for European energy prices, which have become more expensive.

In April, the EU’s CO2 emissions-trading program was described as “on the brink of collapse,” as prices crashed by as much as 45 percent, dropping to record lows. In the U.S., which has no national cap-and-trade program, carbon emissions and energy prices are both down in recent years.  Thanks to increased U.S. production, natural gas, which cost about $12 per million BTUs two years ago, now costs less than $4. U.S. crude oil prices are also down by more than $20 per barrel since 2011. Meanwhile, the U.S. economy is less sluggish than the recessionary economies of much of Europe. An article in the U.K. acknowledged how the recent boom in U.S. shale oil and natural gas production has already had “profound” effects.

London’s Daily Telegraph noted that increased production of these fossil fuels in the U.S. is “creating hundreds of thousands of jobs, significantly adding to GDP and contributing tens of billions of dollars in federal, state and local taxes.” Instead of celebrating these developments state and federal regulators in the U.S. keep trying to impose new and more restrictive carbon regulations. Considering the numerous and extensive environmental laws already in place, it’s easy to wonder why any additional carbon legislation – such as cap-and-trade – would be necessary.

Inside your numbers

All too often state and federal proposals to tax carbon directly or launch new carbon cap-and-trade schemes have much more to do with raising revenue than helping our environment. Even with the so-called sequestration, total U.S. spending has not gone down, but taxes have certainly gone up. As of Jan. 1, a U.S. household making $50,000 a year pays about $1,000 more in taxes. That isn't nearly enough to erase the $1.3 trillion U.S. budget deficit, let alone the $16 trillion national debt. For those who prefer higher taxation to spending cuts, having an entirely new source of revenue is an appealing way to reduce the deficit. Unfortunately, taxing carbon, as with all taxes, only takes more resources from the private sector to support a swelling federal government.

Does this feel fair?

A recent study by NERA Economic Consulting analyzed the probable effects of a U.S. carbon tax that starts at $20 per ton and then rises 4 percent per year (which is in line with recent proposals). If such a tax were imposed, the study estimated that more than 1.3 million U.S. jobs would be lost this year alone and that workers’ incomes would eventually drop as much as 8.5 percent. Such a tax would also decrease household consumption, due to the increased cost of goods.

In Arkansas, for example, the average household would have to pay 40 percent more for natural gas, 13 percent more for electricity and more than 20 cents per gallon extra for gasoline. And that’s just in 2013. Costs would rise even more in subsequent years. For those living paycheck-to-paycheck, price hikes like these (coupled with higher payroll taxes) can only mean lower standards of living and less opportunity. Families that spend a bigger portion of their household income on transportation  utilities and household goods are hurt, not helped, by carbon taxes and cap-and-trade rules that make traditional forms of energy more expensive.

Almost everyone is hurt by these higher costs – the exception being those few who benefit from subsidies

Friday, February 24, 2012

A World Of Credit


Slim-Fast doesn't work anymore!

The Burden of Debt!

   The credit rating of the United States was recently downgraded by Standard and Poor's from AAA to AA+, moving from the best possible rating to the second highest out of 19 possible ratings. The creditworthiness of a government borrower is measured by it's likelihood of default (the inability or unwillingness to repay debts).

   For sovereign nations that issue debt in their own currency, the risk of default is less about the inability to repay as it is whether that currency will be worth the same in the future as it is today. Governments that do not take steps to preserve the value of their currency are - by definition - unwilling to preserve the value of national debt held by investors.

Credit Counts!

   A government can choose to repay its debts by simply turning on the printing press. Today, that can happy electronically in a matter of seconds. But when a government prints more money, that money will soon be worth less. After all, money is a commodity.

   If the supply of a commodity goes up and demand remains constant, the price (value) of the commodity will decline. If supply goes down, the price goes up. It really is just that simple. Unfortunately, the U.S. has been printing a lot of money lately. That devalues our currency, which leads to inflation, less prosperity and less purchasing power.

   To understand why, let's look at what might happen if we allow the U.S. dollar to devalue as a result of government policy. At an exchange rate of 80 yen to the dollar, buying a Toyota Camry for $25,000 gives Toyota the equivalent of 2 million yen. But what if future dollars are worth less and will purchase only 40 yen? At that exchange rate, Toyota would have to double the dollar price of the car just to maintain the same price in yen. This is why when currency devalues, the prices for goods and services eventually increase.

Why Does It Matter?

    Today nearly 30% of all trade is between nations. This trade has not only led to greater global prosperity, but more and better goods, and higher standards of living for billions of people. As a part of this process, capital is exchanged between countries in form of borrowing and direct investing. But when the borrowing goes too far, trouble arises.

   About $4.5 trillion of the $15 trillion in federal debt is held by foreign investors such as China and Japan. If the U.S. dollar is worth less in the future, the willingness of those investors to continue lending will decline. The same will be true for anyone - including employees and retirees -who are paid in U.S. dollars.

   As debt increases, interest rates (the cost of time and creditworthiness) will go up and overall standard of living will decline. After all, the amount of wealth in the U.S is finite. If we must pay more to service our debts, there will be less left over for anything else.

   S&P downgraded the U.S. for one primary reason: the potential inability of the U.S. to repay it's debts with dollars that will be worth the same in the future as they are today. If S&P is right (which I believe they are) and the U.S. government does not start living withing its means, our standard of living will most certainly decline.

Can This Problem Be Fixed?

   Canada lost it's AAA rating from S&P in 1992. At that time, Canada's national debt (measured as a percentage of GDP) exceeded 60%. It took a decade, but the Canadian government was successful in reducing its dependency on debt. Canada's external federal debt-to-GDP ratio fell to 29% in 2002, the year its AAA rating was restored. Canada improved its creditworthiness the old fashion way; by cutting government spending and balancing the budget. When government spending was cut, the economy then grew as amounts previously spent by the government, including interest expenses on debt, were instead invested to improve the capacity and productivity of the nation.

Time To Act!

   Today, the amount U.S. debt owned by third parties is estimated at 73% of GDP. If you include the $5 trillion Social Security trust fund surplus that has also been borrowed by the federal government, the current debt exceeds 100% of GDP. Of course, these calculations don't even begin to include the trillions of dollars in government promises for increased entitlement spending down the road.

   This is why our elected officials and policymakers must act quickly, before our debt grows even more out of control and we see further reductions in our standard of living. The best first step is to reduce borrowing by cutting actual spending - not just the rate of spending increases. All of us need to understand that our fiscal sovereignty is being compromised and that tough choices are required to reverse this trend.

   There are currently 17 nations and three territories (Hong Kong, Guernsey and Isle of Man) with a AAA debt rating from S&P. When the United States of America isn't on that list, it's time for change!

Monday, March 7, 2011

It's called Inflation!

We have a bull market alright!
The Weed Keeps Growing

In October of 2009 cotton was 0.80 cents/pound; on March 4th 2011 cotton was at $2.20/pound. That is a tripling in the price of cotton; and obviously this doesn't happen without a lot of money creation from the central banks. Cotton is up 190% since last fall; does anybody not think that's cause of inflation and thats going to feed through to the price of clothing? Everything uses cotton; socks, t-shirts, underwear, blue jeans. Of course it's not just cotton, it's all fabrics that are getting expensive; so you can't substitute some other material for it. This is just one example of the true cost of increase money supply.

Rising food prices is not the story, it's rising money supply that's the story; which is the reason food prices are rising. It isn't a coincidence, that prices of food is surging to record highs at the same time as money supply's are expanding to record highs. There is a cause in relationship between QE1 and QE2 and whats happening with prices. It's not like all these high prices are a surprise; it's exactly what you would expect based on the monetary policy of the United States. The reason why inflation is global is because the United States has the world reserve currency. What the U.S monetary policy direction is, affects the monetary policies of every other currency so long as the dollar remains the world reserve currency.

3 scapegoats

Scapegoat number one : the weather. The weather has nothing to do with it, there's weather every year. There's always problems in the weather; someones got a flood, drought, freeze.... It happens every year. In the old Soviet Union (Russia) was the bread basket of Europe. When the communist system came in, every year produced a bad harvest and every year they blamed the poor harvest on the weather. It wasn't the weather, it was the communist system that destroyed the incentive of farmers to farm. It is not weather related these surging prices across the board. It's not just this commodity (Wheat) that's rising, it's all commodities that are rising. So the weather is affecting every crop on the planet? Come on.

Scapegoat number two : demand in emerging markets: well we have had demand in emerging markets for centuries; they've been eating for centuries, they didn't just show up. What's changed? Answer : whats changed is all the money they have to spend on food because all the money that central banks are printing.

Scapegoat number three : Speculators. Where are the speculators getting all the money to speculate? Answer : from the FED; the critics are not pointing the finger at the real problem and the root cause of global inflation. It's Ben Bernanke, the money he's printing, it's President Obama and Congress that are spending money; the debt that they are issuing that Ben Bernanke is buying. This is a direct consequence of economic stimulus; that's why the world is suffering and that's why Americans are going to suffer in the future!

If we don't make the connection of printing money and rising prices; then it's never going to stop. It seems like it's so obvious, that it's such a obvious connection. If we have more money, then money is less valuable; so prices have to rise. If we keep blaming the inflation problems on the weather, speculators, emerging markets; we are going to keep blaming it on everything but the actual cause which is the Federal Reserve and the deficits that are being created by congress that forces the FED to monetize. They're not required to monetize but we have a FED chairman with no guts!

Global Economy / Global Problems / Naughty FED!

First off, the global economy has been growing; theres currently 5 billion people on the planet. More people are alive today than in the past but this growing trend has been in place for centuries; yet we've never had this "problem" with food. The thing is with more people on the planet means not only more people eating but also more people farming. Also, with advances in science and technology their are more advanced means in growing food with less input. It's not like you've had this huge explosion in people in the last 2 years, no; whats changed is this huge explosion in money supply. Whats changed is the FED's balance sheet being blown out of proportion. What's changed is all these foreign reserves of all these emerging markets central banks printing money to buy up all these FED printed dollars like it's going out of style. That's what's different from now and a couple of years ago; that's why prices are shooting through the roof.

Why doesn't the FED see this you ask? Answer : the FED is not missing it, the FED is just closing it's eyes. The FED doesn't want to acknowledge what they see, because they don't like the picture that's being painted. If the FED admitted it sees inflation, the reaction to that is having to raise interest rates. The minute the FED has to raise interest rates the economy tanks. The only reason why the economy is not tanking already is because it's on artificial life support already by the FED. The trade off consequence of that is to keep this phony economy going, to keep these banks afloat,  to keep the real estate prices high we have to create inflation, we have to make prices go up. The FED doesn't want to say that's the trade off; the FED doesn't want to admit they've made a deal with the devil and these are the consequences. So they ignore inflation, they lie; but the problem is they loose all credibility when they look at all this inflation and say it doesn't exist. Of course it exist, but they don't want to deal with it. They don't want to have raise rates, they don't want to force politicians to make real cuts.  The problem is we need to get this recession out of the way; the recession is part of the cure. In less we allow the economy to restructure in a way that will create a solid foundation, we will never build a lasting economic recovery; that is the point!

QE2 Failure!

The main goal of QE2 was to bring long term treasury rates down and instead they went up! So, the FED has already lost control of long term rates; noticed in the rising rate. At some point the long end yield curves will get out of control. When the FED loses control of short term rates; is when it will be forced to monetize not only treasuries but other short term commercial paper. Because at some point when inflation gets so high, nobody will want to buy any short term paper and then what is the FED going to do? If the FED doesn't raise rates then nobody will be able to borrow cause the current rate for borrowing is 0%; unless the FED lends to everybody and then of course the FED becomes the buyer of only resort and not the buyer of last resort and that's it for the dollar index! If the FED raised rates right now then the recession will start right now and that would be bad for any political representative trying to get re-elected like the President. Because when it comes to politics it's all about postponing, delaying, even if the delay exacerbates the problem; that doesn't bother a politician. A politicians biggest problem is getting through the next election. He doesn't care how much long term damage he does to the economy in reaching his own goals. Unfortunately the central bankers are working in partnership with the politicians, they're buddy buddy; they're helping them get re-elected instead of being the independent central bankers they were appointed to be. The central bankers are not playing the role of the adult in the room. Instead the bankers are the life of the party, they've got the lamp shade on their head and they're spiking the punch bowl! There is a party in DC and I haven't got a invite.... 

Uncle Ben is Numb to Global Inflation

Thursday, January 6, 2011

The Loss of Prosperity!

Taking Notes!  

“We could be facing the greatest loss of liberty and prosperity since the 1930s." – Some Degenerate. Sad to say, that prediction is coming true. We now know the U.S. economy has been in recession for more than 3 years. Most of the world's economies are still suffering from the effects of that crisis, with no end in sight of the spread of this govt. induced disease. When trying to overcome such dire economic circumstances, it is essential to learn from what has and has not worked in similar circumstances in the past. And we need to not only remember, but to understand the past.

History lesson

   The closest parallel to our situation today, both economically and politically, is the early 1930s. Although there are differences, there are striking similarities. In both instances, free markets were blamed for problems caused by misguided government policies, which led to additional interventions. This ratcheting up of interventions led to long-term economic decline. For example, the U.S. Federal Reserve began a “monetary expansion” in 1927. This led to a stock market bubble, which the Fed, in 1928, felt it needed to pop. The resulting deflation, combined with the anticipation of other interventions, caused the stock market to drop nearly 50 percent in just two months.

   If these interventions had been avoided, there is no reason to believe we wouldn't have escaped with a short-term, if severe, market adjustment rather than an historic depression. Instead, having caused a crash, the government quickly began looking for others to blame - especially bankers, brokers and businessmen. Sound familiar? Getting it wrong!

   Far from being a champion of minimal government intervention in markets, as is commonly believed, President Herbert Hoover launched the most interventionist economic program in U.S. history. Hoover supported record income tax hikes and devastating import tariffs. He also initiated an explosion in government power by creating massive new programs. Far from helping, these programs created a destructive “uncertainty” that discouraged investment and entrepreneurship and contributed to the decline.

   Unfortunately, most of us (and our children) have been told or taught just the opposite that Hoover was a laissez faire President who let unregulated markets get out of control. Nothing could be farther from the truth. Making matters worse, when Franklin D. Roosevelt came to power after Hoover, he compounded the uncertainty by pursuing a change policy of "bold, persistent experimentation" to end the Depression. This approach, instead, extended and amplified Hoover's mistakes. FDR's actions fundamentally changed the government's role in the economy, and prolonged and deepened the decline.

   Rather than following the philosophy that government "can only exercise the powers granted to it" by the U.S. Constitution (as expressed by Chief Justice John Marshall in 1819), Roosevelt changed it to one in which the government has all powers not expressly forbidden by the Constitution. Prior to 1936, U.S. federal regulations covered 2,600 pages. By adopting Roosevelt's philosophy, they have since mushroomed to 72,000 pages. Non-defense spending skyrocketed as dozens of new government agencies (many of them still with us today) were created and most of them are un-necessary wastes of tax payer funds.

   Personal income tax rates increased and new taxes, including corporate "excess profits" taxes as high as 90 percent, were imposed. The Great Depression saw the most far-reaching and abusive use of executive privilege in U.S. history. FDR issued 3,466 executive orders, nearly as many as the combined total for all his successors. Our current President, Barrack Obama is almost a reincarnation of FDR and his policies.

What did all that spending, regulation and intervention accomplish?

   None of it, including Roosevelt's massive public works programs - solved the problem. In fact, under FDR, unemployment was still more than 23 percent at the end of 1934, and remained at double digit levels until World War II. Businesses, faced with the uncertainty created by invasive and ever-changing government policies, curtailed investment. Thus, share prices remained low. (The stock market did not recover to pre-crash levels until 1954.) The only reason the U.S markets are performing strongly is due to the FED’s position of pumping liquidity into the system, which is artificially creating a Bull Market and false optimisms among the masses.

Tough lessons

   The responses we've seen to today's economic crisis make me wonder if we have learned anything at all from the sobering lessons of the past. Once again, our government has allowed a “yo-yo” monetary policy to distort economic reality and wreak havoc on the stock market. Once again, massive government interventions - including bailouts, takeovers and make-work programs - are being offered as the "solution" to our economic problems. Once again, leaders are suggesting we can solve the problem by creating even more government agencies while piling on even more regulations. Once again, the government - rather than the market - is picking who wins or loses.

   It is markets, not government, which can provide the strongest engine for growth, lifting us out of these troubling times. If we are foolish enough to ignore some of the most painful lessons of history, then we will almost certainly make the same mistakes on a devastating scale. In the new year of 2011 we have a crack in the door that if taken advantage of can open our country up to the realities of the past 4 years and allow the U.S.A express to get back on the tracks! With new leaders in office this could be the last opportunity we have to get the country back to its original promise to the American people, Freedom!

Monday, January 3, 2011

Bond Market Implosion!

We will have those Inflation Blues again!

Inside the Fortune Cookie

   Consumer Prices in China have risen to 5.1% annual rate. The Producer Prices are rising better than 6% per year and beneath the surface if you look at food prices, food prices are up almost 12% in a year in China. That is a huge rise in cost of the most basic of all commodities food, and obviously the Chinese government has it’s hands full dealing with all the inflation which is largely a consequence of it’s own foolish policies on pegging it’s currency to the dollar. Because by doing that, China gets our (United States) inflation. The United States biggest export to China is inflation; they send us products and we send them paper. So we get more stuff, that’s what keeps prices low for the U.S. and China gets more paper, that’s what makes prices rise (inflation). Why you ask? Answer: because China is sending their stuff away and paper is coming in; and the way it all works is the U.S. sends those dollars and then the Chinese Banks buy up those dollars and in turn prints RMB. The Chinese Money Supply then rises, that new money goes through the economy biding up prices, meanwhile the dollars that the Chinese buy get loan back to Americans because they buy our Treasury Bonds and our Mortgage Back Securities which keeps this whole phony economy here in the United States moving!

   The consequences for China are rising prices which result in a higher inflation which is at 5% currently in China. To counter this China thought that raising interest rates would curb inflation by encouraging people to put money away in savings at the bank. The only money China is attracting with the raise hike is speculative money; because by raising rates they attract a lot of hot money into RMB’s and people will do a carry trade, in which they short U.S. dollars and buy RMB because they know that the RMB is not going to go down against the dollar; it’s only going to go up and if they can borrow in dollars and buy RMB’s then it becomes a risk less trade from the perspective of a lot of people. So this rate hike may actually backfire on the Chinese because of a lot of the hot money coming into China, results in them having to print more RMB to keep their currency from rising. Normally when you raise interest rates your currency rises but China doesn’t want it’s currency to rise. It’s raising rates because it doesn’t want to let it’s currency to rise, but if it does keep on raising rates then it makes its own currency more attractive. So then to prevent the currency from rising what do they (China) have to do? Answer: they have to buy more dollars; they’ve got to grow their money supply faster. What does that mean? Answer: that means more inflation; but why do we care in America that inflation in China is a big deal? Because this is the key to all of the coming problems we will face in 2011.

   There are two options China really has in this situation. 1.) They can allow inflation to get worse and run out of control and if that happens you’re talking about a billion people, you’re talking about a lot of money that’s going to be chasing commodities and gold and everything if they realize there is massive inflation in their country. 2.) Or the Chinese can get serious about attacking inflation, not just speak about it but actually attack it.

   There’s only one way to do it and it’s not price controls, it’s not through higher rates, it’s through a stronger RMB. They’re not going to stop inflation until they stop inflating and inflating means growing their money supply and they are growing their money supply because they don’t want their currency to go up. Well If you let your currency go up then prices will come down and that will stop the Chinese Inflation but when they stop the Chinese Inflation they ignite the American Inflation. Instead of exporting our (U.S.) inflation to China, our inflation will stay right here in America. We will have our (U.S.) paper money, we won’t have the Chinese products or other products and so we will be biding up prices. Prices will then be going up and Bonds will be falling, interest rates will be rising!

Uncle Bens Animal Farm

   In 2011 the United States will see the 30 Year Bond yield be above 5% in Q1 and by Q2 and Q3 the yield will be above 6% and we will have interest rates at a 10 year high. Now what is that going to do to the economy; what’s it going to do to the Mortgage Market? Remember why this will happen, Ben Bernake “Quantitative Easing” was all about bringing rates down. Instead of rates going down they are doing the opposite; they are going up. They are even going up despite the fact that the FED is buying Bonds in a effort to artificially push them down.

   Look at the charts of some of these commodities; look at the chart of the CRB, extremely bullish! There is no resistance in the CRB, maybe we might get some at the 365 level. That spike in the CRB will happen. We had a similar move in the CRB in 2008 before the collapse in the markets was up at 473 levels. We will be there again in 2011 and may even eclipse the 473 number. This means the FED will be forced to make the decision it has tried to avoid.

   Uncle Ben said on “60 minutes” that “the FED could raise interest rates in 15 minutes if it had to.” well we will see if Ben meant it cause he will have to raise interest rates. That will be the most difficult 15 minutes of his life when he has to raise them, which will end his world and ends his fantasy where we will have a collision course with reality. Because remember the way the government was able too delay the crisis in 2008 which was “print money” expand, stimulate; the FED was able to buy up debt, buy up Mortgages, buy up treasuries. That’s what has kept this whole phony economy going, is the FED’s ability to constantly inject money; to keep buying Bonds and to keep bailing everybody out. When the FED has to deal with Inflation as a problem, when the FED sees prices rising, long term interest rates rising and now is force to raise rates. The FED can’t bail out anybody because it would be adding to the problem; the FED can’t buy Bonds when it’s the one selling Bonds, it can’t buy Mortgages when it’s one of the sellers of Mortgages. So it’s not going to be just the private sector trying to unload and the govt. coming to the rescue. It’s going to be the private sector and the govt. through the FED trying to unload and nobody coming to the rescue. So this is the decision the FED chairman doesn’t want to have to face; raise interest rates or just keep inflating and say “I lied” inflation is here to stay. I think the latter will happen but the FED will try to spin it in some double speak. It will probably go something like this “The increase is welcomed, it shows we have a victory over deflation, a little inflation is good for us.” They will try hard to rationalize why it’s okay so that they don’t have to put on the breaks; “Don’t worry inflation isn’t going to get too bad.” It will not work and it will rage out of control very… very… quickly.

   All of this is going to happen and we will hear it from the puppet master himself on Friday the 7th of January when Uncle Ben gives his speech before the budget committee. This disaster will occur in 2011 and will probably happen in the next couple of months.

  Is it possible that this move up in Bond yields is all a fa├žade? Then the scenario is going to be pushed back and we will get some longer rope to hang ourselves later on. But their may be some real money and real power behind these recent moves in the Bond Market. It’s not just Bonds; look at some of the charts in commodities, Silver, Gold, Crude Oil, Soy Beans, these markets look like they are going a lot higher. I think it’s more than just a coincidence this is all happening and happening at a time when the Chinese are finally having to face the music when it comes to the inflation that resulted from their foolish currency peg.

Thursday, November 4, 2010

We Won't Get Fooled Again!

    Consider the Following:

  •    The FED reduced the interest rate charged to the banks to near 0%. The push was on to improve their (Banks) performance in hopes they could overcome the large losses from the default mortgages that they hold.

  •     Problem is few businesses an individuals wanted to borrow the money from banks due to the political an economic conditions that they face daily in the market place. Banks could not loan out the cheap money and make profits on the spread!

  •    Now the FED will buy U.S. Bonds held primarily by the same banks to again infuse money into them and take the risky debt of their books. The hope is the banks will lend out this money to small business and consumers to spur growth in the economy.

  •    Not So Fast - Banks will take the new cash and put it to work in foreign currency's, and stocks plus Gold. They will make money and our economy will not grow. It's another bailout for banks holding ever decreasing mortgage's. We get fooled again!