In
September 2008 the US came to a fork in the road. The Public Policy
decision to not seize the banks, to not place them in bankruptcy court
with the government acting as the Debtor-in-Possession (DIP), to not split
them up by selling off the assets to successful and solvent entities, set
the world on the path to global currency wars.
By lowering interest rates and effectively guaranteeing a weak dollar, the
US ignited an almost riskless global US$ Carry Trade and triggered an
uncontrolled Currency War with the mercantilist, export driven Asian
economies. We are now debasing the US dollar with reckless spending and
money printing with the policies of Quantitative Easing (QE) I and the
expectations of QE II. Both are nothing more than effectively defaulting
on our obligations to sound money policy and a “strong US$”. Meanwhile
with a straight face we deny that this is our intention.
Though prior to the 2008 financial crisis our largest banks had become
casino like speculators with public money lacking in fiduciary
responsibility, our elected officials bailed them out. Our leadership
placed America and the world unknowingly (knowingly?) on a preordained
destructive path because it was politically expedient and the easiest way
out of a difficult predicament. By kicking the can down the road our
political leadership, like the banks, avoided their fiduciary
responsibility. Similar to a parent wanting to be liked and a friend to
their children they avoided the difficult discipline that is required at
certain critical moments in life. The discipline to make America swallow a
needed pill. The discipline to ask Americans to accept a period of intense
adjustment. A period that by now would be starting to show signs of
success versus the abyss we now find ourselves staring into. A future
that is now massively worse and with potentially fatal pain still to come.
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The
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure
of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
a
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundres
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Ireland is being urged by European policy makers to
take emergency aid to contain a debt crisis rattling their
markets, according to a person briefed on the discussions.
The International Monetary Fund stands ready to help
Ireland if needed, its managing director said, as market
concern about the country’s debt crisis continues
European leaders' pledge that current bondholders will
be spared bailout costs briefly eased fears that Ireland's
financial malaise will soon spread to the continent's
other weak economies.
Couple the increased likelihood of an extension of the Bush tax
cuts with a new Congress that has at the least put on a front of
opposing further bailouts, and you get the kind of municipal bond
performance we've seen in recent days. After drifting lower
from late August to early November, the National Municipal Bond
ETF (MUB) has tanked this week. The California Municipal
Bond ETF (CMF) has tanked as well. So far the investment
world hasn't paid much attention to this big move lower in the
muni-bond market, but it's likely to get coverage soon if the
declines continue.
About the coming large rise in food prices Fabius Maximus Rising
food prices might be one of the most important geopolitical trends of the
decade.
What result do you expect from this combination of factors?
1- Rising demand for the product.
2- Inability to increase the key inputs. All that can
be done is investment more into equipment and technology.
3- Low stockpiles
4- Low prices (near record low real prices)
5- Adverse production environment (bad external factors)
6- Now square the circle: What will balance supply and
demand?
The subject is food, growing crops. The answer to the
question in bullet #6: rising prices.
Managing this almost inevitable trend might be one of the major
challenges during the next decade.
As the Fed began its "QE2" stimulus buying, investors
sold off everything from stocks to Treasury bonds and
gold. The Dow Jones Industrial Average was off 2.2% for
the week. The Treasury note's yield was pushed up more
than 0.20 percentage point for the week.
QE II Bet Starts to Unravel Mish
A representative of Curve Watchers Anonymous said "I
have never seen action like this before. The middle part
of the curve is blowing up even as the long bond rallies.
The action indicates that everyone who front-ran the Fed
purchases is now unloading to the Fed. "
The 5-year
is off 14 basis points while the 30-year is up 8. This is
quite unusual to say the least.
Fed Efforts to Revive Economy Find Critics NYT (Norris)
Crossing the Rubicon into the World of QE-2 Dorsch
Bernanke's worst nightmare: Ron Paul CNN
Littman: Police the Fed DetNews
easuring the Success of Bernanke's QE II "Virtuous Circle"
Mish
That China was emboldened to lecture the US on its currency
underscores how it and other countries have emerged from the
global economic crisis faster and more strongly than the US.
"It could unfold very, very quickly. Because deflation is a
swing of poverty feedback, it can take awhile to build up. If you
try to explain to people what's coming, because it doesn't happen
instantly, they tend to go back to sleep. The thing they need to
understand, however, is that when it does hit a tipping point, a
kind of critical mass, then it can unfold exceptionally quickly.
Then it's very much like having the rug pulled out from under your
feet. So I tell people all the time, prepare now because it's
better to be two years too early than five minutes too late. You
can't play with this sort of thing. In September, 2008, we came
within a few hours of the banking system seizing up, and that
could easily happen again. People wouldn't get a lot of notice.
For anyone who's not in the meeting room-it will be too late by
the time they find out. My worry is that if there are an enormous
number of people who just had the rug pulled out from under their
feet, they're going to run around like headless chickens, and the
human over-reaction to events will be really responsible for a
large percentage of the impact. “
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important
investment commitments.
