The thing I loathe most about election season is reflected in the central fallacy that drives progressive discussion the minute “Ron Paul” is mentioned. As soon as his candidacy is discussed, progressives will reflexively point to a slew of positions he holds that are anathema to liberalism and odious in their own right and then say: how can you support someone who holds this awful, destructive position? The premise here — the game that’s being played — is that if you can identify some heinous views that a certain candidate holds, then it means they are beyond the pale, that no Decent Person should even consider praising any part of their candidacy.

The fallacy in this reasoning is glaring. The candidate supported by progressives — President Obama — himself holds heinous views on a slew of critical issues and himself has done heinous things with the power he has been vested. He has slaughtered civilians — Muslim children by the dozens — not once or twice, but continuously in numerous nations withdrones, cluster bombs and other forms of attack. He has sought to overturn a global ban on cluster bombs. He has institutionalized the power of Presidents — in secret and with no checks — to target American citizens for assassination-by-CIA, far from any battlefield. He has wagedan unprecedented war against whistleblowers, the protection of which was once a liberal shibboleth. He rendered permanently irrelevant the War Powers Resolution, a crown jewel in the list of post-Vietnam liberal accomplishments, and thus enshrined the power of Presidents to wage war even in the face of a Congressional vote against it. His obsession with secrecy is so extreme that it has become darkly laughable in its manifestations, and he even worked to amend the Freedom of Information Act (another crown jewel of liberal legislative successes) when compliance became inconvenient.

He has entrenched for a generation the once-reviled, once-radical Bush/Cheney Terrorism powers of indefinite detention, military commissions, and the state secret privilege as a weapon to immunize political leaders from the rule of law. He has shielded Bush era criminals from every last form of accountability. He has vigorously prosecuted the cruel and supremely racist War on Drugs, including those parts he vowed during the campaign to relinquish — a war which devastates minority communities and encages and converts into felons huge numbers of minority youth for no good reason. He has empowered thieving bankers through the Wall Street bailout, Fed secrecy, efforts to shield mortgage defrauders from prosecution, and the appointment of an endless roster of former Goldman, Sachs executives and lobbyists. He’s brought the nation to a full-on Cold War and a covert hot war with Iran, on the brink of far greater hostilities. He has made the U.S. as subservient as ever to the destructive agenda of the right-wing Israeli government. His support for some of the Arab world’s most repressive regimes is as strong as ever.

Read it all at Salon.com.

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at

Earlier this week the Federal Reserve ignited a firestorm in the global markets by admitting that the U.S. economy is facing downside risks. Although it continues to sugar coat the unpleasant reality, never has such a stunningly obvious statement resulted is so much turmoil.

Once again we are seeing the knee-jerk market reaction to seek refuge in the perceived safety of the U.S. dollar and U.S. Treasuries. However I expect investors will soon discover that such assets are firmly in the eye of the storm.  As the tempest moves on, those enjoying the dollar’s current stability may soon find themselves battered by a category five monster.

Market disappointment was compounded when the Fed failed to follow up its dire outlook with a new round of quantitative easing (QE). Instead, through a policy entitled “Operation Twist” the Fed promised to sell $400 billion of short-term Treasuries and use the proceeds to buy an equivalent amount of long-term Treasuries. The markets evidently perceived this “balance sheet neutral” policy as too timid.

From my perspective, the Twist really amounts to another Fed “Hail Mary” pass that will fall short of the end zone. But, by putting the squeeze on banks and further restricting credit availability to small business the move will likely do more harm than good.

The policy rests on the false premise moving already historically low interest rates even lower will stimulate the economy into recovery. But low interest rates are part of the problem, not part of the solution.

Even by the government’s debased standards, trailing headline inflation is already hovering above 4%, and, at current rates, 30-year Treasuries are negative by 100 basis points. This distortion is inflicting untold damage on the economy. Pushing rates further into negative territory seems only to invite more problems in the future.

With the Twist, the Ben Bernanke wing of the increasingly divided Fed is offering debtors the short-term gain of low long rates in exchange for its own long-term pain of limited balance sheet flexibility and diminished power to deal with surging inflation. By selling on the short end (thereby pushing up short term yields) and buying on the long end (thereby pushing down long-term yields), the Fed will flatten the yield curve. But to attain these insignificant benefits, the plan exposes the Fed, and the economy, to great risks.

First the “benefits”: Mortgage rates are already at generational lows and have recently lagged the declines seen in long dated Treasuries. Is it reasonable to believe that mortgage rates will go much lower as a result of this policy?  Even if they do, what would be the net economic benefit of a new refinancing wave? Do we really want to encourage consumers once again to use their homes as ATM machines? Even if they do, any short-term boost in consumer spending would be transitory and counter-productive to a genuine recovery.  The last thing we want to encourage is more spending, particularly on the imported products that would likely be purchased by those who refinanced.

What’s more, the program will actually increase borrowing costs for small businesses. By increasing the cost of short-term borrowing and lowering returns on long-term loans, it will severely pressure the profitability of the beleaguered financial sector. In other words the borrower’s gain is the lender’s pain. In such conditions, should we expect banks to provide more credit to small business? In fact, the move will be a devastating blow to bank balance sheets and further enfeeble a financial sector on life support.  Business credit will instead be diverted to dead end consumer spending, resulting in less business activity to grow the economy and create jobs.

Now the costs: The Fed severely underestimates the danger of loading up its own balance sheet with long dated securities. Not only does the move expose the Fed to severe losses when interest rates inevitably rise, but it drastically reduces its ability to withdraw liquidity to fight inflation. Short-term securities provided flexibility as they could be sold into a falling market with little price risk, or if need be, held to maturity. Such options do not exist with bonds maturing in 6-30 years. So when inflation continues to rise, as I’m sure it will, the Fed will be powerless to slow it without crushing the bond market and causing yields to soar.

In any event, the markets did not want the Twist program, they wanted additional liquidity injections in the form of QE III. In this respect, the market is like a heroin junkie. It needs ever-greater doses of money to continue moving higher. When it gets its fix, it will rally.

But a growing popular mistrust of stimulus is currently pressuring the Fed to forestall the launch of QE III. But a few more whiffs of financial turbulence could cause the Fed to fold. When the market rally ensues the Fed will claim victory.  But the celebration will be hollow. The nominal gain in stock prices will likely be eclipsed by dollar declines and a more rapid gain in gold, oil, or other commodity prices. The result for investors will be higher nominal portfolio values but lower real purchasing power and a reduced standard of living.

But many of those who oppose QE3 do so because they believe the economy doesn’t need more stimulus not because the stimulus itself is causing the economic weakness. As a result when the economy deteriorates, support for QE III could grow. In the end QE3 will likely be far more popular than another bank bailout (possibly to be called TARP II), which may be on the table if the Fed fails to rescue the banks it may be pushing over the edge with the Twist.

But our zombie economy does not need to be perpetuated by more QE. It must be allowed to die so that a living, breathing, self-sustaining economy can replace it. By feeding our drug addiction now the Fed is impeding the recovery. QE may goose the markets and provide a short-term boost to spending, but it will also increase debt and grow the government. This process exacerbates the structural imbalances underlying the U.S. economy, making what may be the inevitable crash that much more spectacular.

by Peter Schiff

The markets are going through another sell-off phase, yet the traditional notions of a ‘safe haven’ are changing. No longer is the US dollar the default shelter; instead, gold, the Swiss franc, and the Japanese yen are the preferred assets.

All three of these havens – gold, francs, and yen – have been surging upward this month. Two of them, however, are being actively devalued by central banks desperately (and foolishly) trying to curtail appreciation. The Swiss and Japanese are enlisting both policy measures and all the banker-speak they can muster to stem the tide of investment flows into their currencies.

The game is Last Haven Standing, and Spielberg has already acquired the movie rights.

SWITZERLAND: FROM NEUTRALITY TO INTERVENTION

Looking to Europe, the Financial Times now has the awkward task of reporting that mighty European Union’s currency is coming apart at the seams, while neighboring Switzerland has barely enough hotels to house the world’s waterlogged financial refugees. The franc is up 5.41% against the euro this year and almost 14% against the dollar. One wonders if the only way to prevent a collapse of the these major debtor currencies is to back them with Swiss-made wristwatches. At least then they’d have a partial gold standard and there’d be no excuse to be late for an austerity protest!

Unfortunately, the Swiss National Bank is so afraid of the franc’s rise that it has flooded the market with liquidity and cut interest rates to zero. The SNB even recently threatened to peg the franc to the euro. It’s as if survivors on one of the Titanic’s lifeboats were so confused and bewildered that they began tying their boat to the sinking behemoth out of a desire for a ‘stable relationship.’

NOTE TO JAPAN: IT’S NOT THE SPECULATORS

Japan, ironically, has been blessed that while its debt problems are severe, they’ve been severe for so long that markets are willing to take that as a sign of stability. And, aside from the public debt problem, Japan does have fairly impressive fundamentals. They are still a productive economy with high personal savings and exposure to booming China. So, it’s no wonder the Yen has risen 6.63% against the dollar so far this year.

Former Finance Minister, and now Prime Minister, Yoshihiko Noda stated recently that he would “take bold actions if necessary and won’t rule out any possible options” to restrain the yen’s appreciation. Yet, while Noda has said the ministry will study whether “speculation” is behind the yen’s rise, he doesn’t seem to understand that this is a permanent move away from dollars and euros and into anything which might be a better alternative. This is not driven by Wall Street gamblers, but rather by everyday investors seeking shelter.

CLEARLY SHIFTING SENTIMENTS

My readers know that I see these past years in the US markets as one ongoing crisis. We’re not “facing a double-dip recession” as the media suggests; instead, we’re really in the midst of a prolonged economic depression. The periodic market panics since 2007, both in the US and Europe, all stem from the same disease and, as such, ought to be properly understood as related symptoms, not as separate events.

And as one long, ugly narrative, these subsequent panics resemble a series of steps; sharp drops leading down either to a dismal “new normal” or – more likely – a collapse in both the fiat dollar and euro currencies and a widespread return to gold as money.

My brother, Andrew Schiff, wrote an article for my brokerage firm this month reviewing the market turmoil and how it compares to previous crises since ’07. He found a steady shift in what investors perceive as a safe haven.
During the depths of the credit crunch, from October 2008 to March 2009, the S&P lost over a quarter of its value, as investors flocked to the US dollar, driving it up 8%. Foreign stock markets sold off and most foreign currencies fell substantially. The Swiss franc fell over 3%. Gold rose some 6.5% and the yen rose 5.75%, but neither kept pace with the US dollar, which rose 13.5%.

Then, during the dip between April 23, 2010 and July 2, 2010, the S&P dropped again by almost 15%. The dollar rallied barely more than 3%. The Swiss franc gained slightly instead of falling. And this time, both the yen and gold beat the dollar, gaining 4% and 5.5% respectively.

Now here we are in August, and what’s happening?

In extreme volatility, the S&P fell over 13% before rebounding to its starting place. The dollar has remained essentially flat even with intensified fears in the euro zone. The yen is also flat, despite heavy intervention to push it down. The Swiss franc rose 8% before Switzerland’s central bank threatened to peg the currency to the euro, and gold has surged almost 12%!

See the pattern? On each step of this multi-year downward spiral, global investors are slowly but coherently altering their preferred safe haven. Alternatives are being desperately sought, though actions first by the Japanese central bank and more recently by the Swiss have prevented their currencies from fully realizing potential gains as dollar-alternatives.

Fortunately, gold doesn’t have a central bank, so it can rise as fast as the dollar falls.

THE FIAT DOWNGRADE

Whether it is in their interests or not – and I argue it is not – central bankers look set on continued competitive devaluation of their currencies so that their economies don’t have to do the hard work of retooling for the new reality.

That is why gold is doing so phenomenally well, and why it should continue to do so. New gold comes into the market at a rate of about 2% per year. This number has been fairly steady over time, and reflects the ability of mining companies to locate, finance, purchase, and develop new gold mines. I invest in these companies, and trust me, it’s not an easy job.

Contrast this with a paper currency – more dollars can be created by Bernanke simply printing extra zeros on his banknotes. See that $10 bill? Shazam, it’s a $100!

The reason currencies like the yen and Swiss franc are considered safe is simply a longstanding habit of their central banks not to print too much. But a habit is much less reliable than a physical constraint.

Think of a dog that has been trained not to eat steak. If you put it in a room with a juicy ribeye, would you be more confident the steak would be there when you came back if the dog was in a kennel or just sitting there? Just like a dog always craves steak, and will grab a bite when no one’s looking, central bankers always crave the printing press.

That’s why we need to hold an asset for which scarcity is dictated by nature itself – gold.

As this realization becomes more commonplace, and as this depression accelerates, I expect gold to be the Last Haven Standing. This will not be a “new normal,” but rather a return to thousands of years of economic tradition.

A NOTE ABOUT THE FUNDAMENTALS

Those who do not really understand the fundamentals, such as commodity trader Dennis Gartman, continue to look at gold’s rise as a bubble. In fact, Gartman just called the top in gold, again, claiming that one of the “great bubbles of our time” had finally popped.

He cites as evidence the quick 200-point rise to over $1900/oz, which Gartman sees as a speculative blow-off top. He also cites the meaningless fact that one Gold ETF, GLD, has a larger market cap than one S&P 500 ETF. He absurdly compares this situation to the Japanese Emperor’s palace eclipsing the value of the entire state of California at the top of Japan’s real estate bubble. Those ETFs simply represent one way of owning assets, and do not, as Gartman contends, indicate that investors value gold higher than the entire US stock market. In fact, a true comparison of the two asset classes reveals gold’s value is historically low relative to the value of US stocks.

Rather than the bursting of a bubble, the recent technical action in gold is more indicative of a break-out. In fact, the positive divergence of gold stock from bullion in this recent correction is evidence that a more powerful leg in this bull market is about to begin. Up until now, the market for gold stocks has been characterized by fear. However, it now appears to me that gold stocks will make a new high before the metal itself. If the stocks finally begin to lead the metal, it means traders are finally starting to believe in this rally. Rather than evidencing the end of the trend, such a shift in sentiment likely indicates an acceleration in that trend. Maybe when the last skeptic finally throws in the towel, we may finally get the blow-off top Gartman thinks already occurred – but that day is likely many years into the future.

In fact, all the talk about a gold bubble seems to be based on the fact that so many investors are now talking about gold. However, the problem with this argument is that despite all the talking, very few investors are actually buying. Bubbles are not formed by talk, but by action. Before we get a gold bubble, all those investors talking about gold actually have to buy an ounce. In fact, before a bubble pops, its not just investors, but the average man in the street who will have to be buying. Thus far, he has not even joined the conversation.

by John Browne, Senior Market Strategist at Euro Pacific Capital

The basic unwillingness of politicians to face economic and financial realities has caused the United States and European Union to face currency collapse. The politicians are content literally to paper over the problem with massive amounts of newly printed currency. This means that savvy investors, facing major real losses, are turning increasingly to gold. In essence, even though currencies are no longer on a gold standard, they are increasingly being “redeemed” for gold in the marketplace.

For decades, fiscally irresponsible US Administrations have gradually reduced the world’s richest nation, with a currency perceived as ‘good as gold,’ to the position of the largest global debtor, with a debased currency. Furthermore, US stock markets have offered little real return. Indeed, the Dow stands just below 11K, down over 3K points from its all-time high on October 9, 2009. Discounting for inflation shows a loss close to 4K points, or a fall of over 25 percent from its all-time high. Meanwhile, equities in emerging markets have often shown handsome returns.

The recent political wrangling in Washington has damaged the financial credibility of the United States, prompting a long overdue debt downgrade by ratings house Standard & Poor’s. This removes a fundamental pillar supporting the dollar as the global reserve asset of choice.

In Europe, the unwillingness of politicians to face the fatal structural flaws within the euro is encouraging a fear-driven economic recession, sovereign debt defaults, a banking crisis, and, potentially, a currency collapse. This is hurting the euro’s formerly bright prospects of replacing the dollar as global reserve.

This week’s Merkel-Sarkozy summit meeting amounted to nothing constructive. The most popular topic was instituting a Tobin tax on forex transactions. This would, of course, drive financial markets out of the EU to more friendly environments. But more importantly, it leaves the major structural issues of a two-speed Europe unaddressed.

With nothing achieved by the EU’s ruling Franco-German axis, European banks are correctly seen as increasingly vulnerable to further EU sovereign debt defaults. Of course, former communist Merkel and her French ‘poodle,’ the socialist Sarkozy, will find no problem in transferring toxic bank assets to the public purse. But it will require more market anguish before they dare to do it. Once this happens, the euro will be locked on the same railway to devaluation as the dollar.

China’s yuan has strong fundamentals, but is not properly situated to vie for a place on the world stage. It is neither backed by hard assets nor freely floating. Though this policy is changing, it is not yet a true alternative to the dollar as it maintains a fixed exchange ‘band’ to restrain its true value.

Naturally, private investors and foreign central banks are turning to the very monetary instrument that they never should have abandoned: bullion gold. That is why the gold price is rising in $50 leaps per day, with only small corrections. Gold is being re-monetized. [Learn the difference between rare and bullion gold in Euro Pacific Precious Metals' new special report, free for download HERE. Please note: Euro Pacific Capital and John Browne are not affiliated with Euro Pacific Precious Metals.]

Still, despite our continued warnings, and perhaps motivated by yield or a misplaced sense of safety, some investors still are tempted into dollars and US Treasuries, driving them to negative real yields of up to three percent. This may prove to be one of the largest financial traps in history, potentially devastating the savings of many investors. It reflects a fundamental investment strategy flaw.

It has been held that most wise investors should look not at yield and capital appreciation, but at total return. The only need to differentiate between yield and capital growth is for tax purposes. Some investors avoid gold still, because of its lack of yield. This can be a costly mistake when gold’s meteoric capital gains are taken into account.

Some are skeptical because of the performance of silver during the spring. However, it must be remembered that silver is still up some 125% year-over-year. The drop from $50 to $35 was directly related to an unprecedented triple-margin hike by the Chicago Mercantile Exchange. The exchange made the same move against gold, but the yellow metal shrugged it off through buoyant demand.

Indeed, while silver is temporarily hobbled by worries of global depression and a corresponding drop in industrial demand, gold appears to have no such reservations. Silver may ultimately surge well past gold as the emerging markets prove themselves able to stand on their own despite an ailing West. But gold is a pure monetary trade, and its signal is indisputable.

As long as politicians continue to paper over their problems by issuing more fiat money, gold will regain its crown as the king of monetary instruments.

Paul Krugman sounded the war cry this Sunday on Fareed Zakaria’s program Global Public Square. After all, he asserted, only spending equivalent to another World War could lead us back to prosperity. That, and a healthy dose of inflation.

Krugman argued that inflation would address our debt problem by reducing our bill in current dollar terms and that the Second World War was a giant stimulus plan that actually worked. Thankfully, he added the refrain, “Hopefully we don’t need a world war to get there,” but I sensed a tinge of regret in his voice. After all, the Keynesian economist’s favorite pastime is seeing people waste their lives digging holes in the ground or sacrifice their lives in war. Both acts create economic growth according to the topsy-turvy logic of men like Krugman.

The truth is that wars are a miserable misallocation of capital and usually leave financial ruin in their wake. The US did not boom in the ’50s because we fought World War II, but because we resoundingly won. It was the byproduct of having an unscathed manufacturing base, solid infrastructure, an intact military, most of the world’s gold, and the only reserve currency.

The logical implication of Krugman’s arguments remains that working in productive employment is not at all necessary. If this is true, why not have people just save gas and stay home? The government could simply borrow and/or print money and send it to foreign countries that are dumb enough to produce goods and services for US consumption. Christina Romer, former Chair to Obama’s Council of Economic Advisors, also sided with Krugman in a commentary posted in Sunday’s New York Times finance section. In it, she pontificated on the lessons to be learned from the Great Depression, saying: “It would be a mistake to respond by reducing the deficit more sharply in the near-term. That would almost surely condemn us to a repeat of the 1937 downturn.” This misdirection demonstrates her lack of understanding of what causes economic depressions in the first place.

The cause of the Great Depression in the 1930s and the Great Recession beginning in December 2007 were one and the same – an over-leveraged economy. Easy money provided by the banking system eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, and is marked by the selling of assets and the paying down of debt. Unfortunately, our politicians today are focused on fighting the natural healing process of deleveraging by promoting the accumulation of even more debt.

During this latest economic contraction, the Federal Reserve has taken interest rates to near 0% for the past 2 ¾ years, and it has just promised to keep them there for an additional 2 years! Meanwhile, the Obama administration is leveraging up the public sector to record levels in an effort to re-leverage the private sector. The government’s philosophy is tantamount to sticking a frostbitten man in the freezer so he won’t have to suffer the pain associated with the thawing of his extremities.

During the Great Depression, real GDP plummeted 32%. The Great Recession, through which we are still struggling, began in December 2007, according to the National Bureau of Economic Research. But, in contrast to the 1930s, GDP during this recession shrank only 3.6% from the fourth quarter of 2007 through its low point in the second quarter of 2009.

The contraction in GDP during the Great Depression was the direct result of consumers paying down debt and selling off assets. Household debt as a percentage of GDP reached nearly 100% in 1929. To put that number in perspective, household debt did not go back above 50% of GDP until 1985. And it was not until the first quarter of 2009 that household debt once again approached the 1929 level.

Between the start of the Great Depression and the end of World War II, household debt fell from 100% to just above 20% of GDP. Getting there was a painful process, but such de-leveraging was the only real cure for an economy swimming in debt. Thanks to government efforts to carry on our debt-fueled consumption binge, during today’s Great Recession, household debt has barely contracted at all – it has only been reduced to 90% of GDP as of Q1 ’11.

To make matters even worse, during this current crisis our government’s response has been to dramatically increase its own borrowing. At the start of the Great Depression, gross national debt was 16% of GDP. It peaked just below 44% when the Depression ended. While the national debt did increase significantly during that period, it was still relatively benign compared to other Western governments. The US entered this current Great Recession with gross national debt equal to 65% of GDP. It has since exploded to 98% of GDP!

US federal debt did rise dramatically during World War II, topping out at 120% of GDP in 1946. But consumer debt plunged concurrently. So, while Washington was adding debt to fight and win a global war, households were taking the necessary steps to ensure their balance sheets were well prepared for the aftermath of the battle.

Today, for the first time in our history, gross national debt and household debt are both at least 90% of GDP.

Mr. Krugman and his allies believe that we can grow our way out of this recession like we have in the past few. Unfortunately, we’re dealing with a completely different animal. In every past recession, the government, under the guidance of Keynesians, decided to put off deleveraging in return for artificial growth. Well, that tab has come due.

Since these economists keep trying to spend like it’s World War III, we are moving inexorably closer to causing Great Depression II. If policymakers and mainstream economists fail to understand that the progenitor of a depression is debt, they will also be unable to provide a genuine solution. Instead, by pushing public debt past the point of our creditors’ willingness to lend, they may ensure that this next Great Depression will be accompanied by runaway inflation. If history is any guide, this is a truly lethal combination.

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at

This week’s wild actions on Wall Street should serve as a stark reminder that few investors have any clue as to what is really going on beneath the surface of America’s troubled economy. But this week did bring startling clarity on at least one front. In its August policy statement the Federal Reserve took the highly unusual step of putting a specific time frame for the continuation of its near zero interest rate policy.

Moving past the previously uncertain pronouncements that they would “keep interest rates low for an extended period,” the Fed now tells us that rates will not budge from rock bottom for at least two years. Although the markets rallied on the news (at least for a few minutes) in reality the policy will inflict untold harm on the U.S. economy. The move was so dangerous and misguided that three members of the Fed’s Open Market Committee actually voted against it. This level of dissent within the Fed hasn’t been seen for years.

Many economists have short-sightedly concluded that ultra low interest rates are a sure fire way to spur economic growth. The easier and cheaper it is to borrow, they argue, the more likely business and consumers are to spend. And because spending spurs growth, in their calculation, low rates are always good. But, as is typical, they have it backwards.

I believe that ultra-low interest rates are among the biggest impediments currently preventing genuine economic growth in the US economy. By committing to keep them near zero for the next two years, the Fed has actually lengthened the time Americans will now have to wait before a real recovery begins. Low rates are the root cause of the misallocation of resources that define the modern American economy. As a direct result, Americans borrow, consume, and speculate too much, while we save, produce, and invest too little.

It may come as a shock to some, but just like everything else in a free market, interest rate levels are best determined by the freely interacting forces of supply and demand. In the case of interest rates, the determinative factors should be the supply of savings available to lend and the demand for money by people and business who want to borrow. Many of the beneficial elements of market determined rates are explained in my book How an Economy Grows and Why it Crashes. But allowing the government to determine interest rates as a matter of policy creates a number of distortions.

It was bad enough that the Fed held rates far too low, but at least a fig leaf of uncertainty kept the most brazen speculators in partial paralysis. But by specifically telegraphing policy, the Fed has now given cover to the most parasitic elements of the financial sector to undertake transactions that offer no economic benefit to the nation. Specifically, it will simply encourage banks to borrow money at zero percent from the Fed, and then use significant leverage to buy low yielding treasuries at 2 to 4 percent. The result is a banker’s dream: guaranteed low risk profit. In other words it will encourage banks to lend to the government, which already borrows too much, and not lend to private borrowers, whose activity could actually benefit the economy.

This reckless policy, designed to facilitate government spending and appease Wall Street financiers, will continue to starve Main Street of the capital it needs to make real productivity-enhancing investments. American investment capital will continue to flow abroad, denying local business the means to expand and hire. It also destroys interest rates paid to holders of bank savings deposits which traditionally had been a financial pillar of retirees. In addition, such an inflationary policy drives real wages lower, robbing Americans of their purchasing power. The consequence is a dollar in free-fall, dragging down with it the standard of living of average Americans.

Until interest rates are allowed to rise to appropriate levels, more resources will be misallocated, additional jobs will be lost, government spending and deficits will continue to grow, the dollar will keep falling, consumer prices will keep rising, and the government will keep blaming our problems on external factors beyond its control. As the old adage goes, “insanity is doing the same thing over and over again and expecting different results.”

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by John Browne, Senior Market Strategist at Euro Pacific Capital

Last week Fed Chairman Bernanke raised eyebrows and denied history when he asserted in front of Congress that gold doesn’t qualify as money. Yesterday he took the unprecedented step of announcing that the Federal Reserve would keep interest rates near zero for at least the next two years. In very short order thereafter it required much more of the money that he believes in (U.S. dollars) to buy the money that he doesn’t believe in (gold).

In any event, it was beyond unusual for the Fed to make such an explicit time commitment on monetary policy. To underscore this fact, three voting members of the Federal Open Market Committee came out against the policy. Such dissent within the Fed’s ranks has not been seen in decades. But Bernanke’s shameless appeasement of market fears did interrupt, if only for a few hours, the free fall on Wall Street. Wiser investors, understanding how a more activist Federal Reserve will destroy the value of the dollar, moved to gold, pushing the metal up to north of $1,750 per ounce.

The economic forecast contained in the Fed statement was far gloomier than earlier pronouncements. Bernanke sees continued sluggish growth for the U.S. economy and subdued inflation. Normally under such conditions gold should be expected to fall. However, as we have said consistently, these times are far from normal.

Readers will know already that we believe that the U.S. Treasury market is a gigantic wealth trap. Even before the Fed’s statement, investors seeking safety from European debt fears and staggering losses and unnerving volatility in the equities markets had flooded into U.S. Treasury securities. Nevertheless, this week has thus far seen a stampede into Treasury securities, causing yields to plummet. One-month Treasuries now yield 0.02 percent, making them no better than cash; the 5-year yields 0.93 percent, 10-year 2.17 percent and the 30-year 3.56 percent. Assuming a Consumer Price Inflation rate of 3.2 percent, all new investors in U.S. Treasury securities with a maturity of less than 30 years are losing ‘real’ money. In addition, with little prospect of further interest rate reductions the possibility of capital gains through Treasury investments are essentially nil.

These negative returns will eventually act as a pressure for funds to drift away from the bloated bond market into the beaten down equity market. But the total size of the global bond market is more than twice the size of the global equities markets, so these fund flows, when they occur, may make an outsize impact on equity prices.

In addition, the Fed is debasing the U.S. dollar at an increasing rate. Despite the fact that other nations are following suit to protect their exports, the dollar is set to fall further. Indeed in criticizing the S&P downgrade last week, Former Fed Chairman Greenspan said that the Fed need not be concerned about debt service because it can just “print more money!”

Facing negative real yields, the prospect of further credit rating downgrades and a falling dollar, investors in U.S. Treasuries are setting themselves up to be plundered.

On the other hand, despite recession fears, the upward march of gold continues, with many mainstream investment firms now setting price targets north of $2,000 per ounce. But skepticism remains, with some analysts pointing out that the price of gold is in “record” territory and is therefore highly speculative. However today’s gold price of $1,760 is still about 30 percent below the inflation adjusted high set in 1980 when gold struck $850 per ounce. From my perspective, with a sovereign debt crisis threatening, a currency collapse looming, and a chronically persistent low interest rate regime, gold looks positively cheap.

by John Browne, Senior Market Strategist at Euro Pacific Capital

Although I believe gold still faces a very rosy future, an agreement in Washington that avoids default and growing concerns of a global economic slowdown could create significant near-term headwinds for gold investors.

While the dysfunction of the US government is on stark display over the debt ceiling negotiations, other areas of the world show similar policy confusion. In the European Union, great doubts exist as to how the leaders will be able to stem the tide of serious sovereign debt contagion without inviting recession and an uptick in inflation. In China, commentators seem to lack confidence that the economy can maintain its impressive growth rate if its major trading bloc partners fall back into recession. This uncertainty has created a level of financial fear that has contributed to gold’s run up to more than $1,600 per ounce. However, this also means that any weakening of these fears could lead to a pull back in gold. An agreement in Washington, however meaningless, may be such a trigger.

Evidence has grown that the United States government has no real intention of curbing its spendthrift ways. By next Tuesday, Congress will likely reach some sort of pallid agreement that will involve a short-term agreement to raise the debt ceiling just enough to postpone an imminent fiscal crisis until after the 2012 election. This will, of course, be another case of kicking the can down the road – and will only further compound the very problems that have helped send gold soaring. Still, any agreement that prevents an immediate default on Treasury debt will be greeted with great relief in the markets. The good feelings may spark a short-lived rally in stocks and sell-off in gold.

Another near-term hurdle for gold will be the dawning realization that recession may take hold once again in many regions around the globe, most notably in the US and eurozone. To the extent that these recessions are deflationary, they could drag on the gold price.

Despite the agitation of the freshman Tea Party members of the US House of Representatives, there appears little or no serious discussion about curbing the rise of runaway government spending that is acting as a crippling parasite on the US economy. Similarly, the punitive nature of the present so-called sovereign debt rescue packages in the eurozone likely will fan the flames of recession in Europe. To the extent that these downturns are not met with new money-printing, they could hypothetically hurt the gold price.

This is especially true if the implosions among Western economies impede the growth of China. For now, it appears China’s breakneck growth is indeed slowing, but it is neither clear what role their export markets play in this nor how quickly they will be able to shift to a domestic-consumption model.

In normal times, these deflationary forces could present long-term problems for the gold price; however, these are not normal times. Rather, we believe the stage is being set for the currency catastrophe we have long forecast. In our calculation, the sovereign debt problem likely will increase. Eventually, even suddenly perhaps, it will lead to a currency crisis. This may cause a temporary capital shift from the euro into the US dollar, temporarily correcting the current dollar slide. But very quickly, I expect investors would realize that the US dollar itself is most vulnerable. As it is the international reserve currency, this might very well threaten a currency collapse and a surge in the price of gold.

In summary, gold appears set on a very strong upward path. However, in the short term, if global recessionary forces re-emerge and/or investors become euphoric over the US dodging a debt default, gold could face a significant price correction. If governments inflate wildly in a futile attempt to avert a pending depression, leading to stagflation, as we expect, then gold should rebound in price.

This should not be construed as an appeal for investors to sell their gold and try to time their way back into the market. Rather, I would suggest that there may be some discounted opportunities in the coming months. Hold on tight for turbulence ahead, and keep your bearings fixed on your intended destination.

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at www.schiffradio.com

I have been forecasting with near certainty that QE2 would not be the end of the Fed’s money-printing program. My suspicions were confirmed in both the Fed minutes on Tuesday and Fed Chairman Ben Bernanke’s semi-annual testimony to Congress yesterday. The former laid out the conditions upon which a new round of inflation would be launched, and the latter re-emphasized – in case anyone still doubted – that Mr. Bernanke has no regard for the principles of a sound currency.

Tuesday’s release of the Fed minutes contained the first indication that a third round of quantitative easing (QE3) is being considered. The notes described unanimous agreement that QE2 should be completed, along with the following comment: “depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run.” Since the unemployment situation is deteriorating, and by all accounts will continue to do so, the Fed is essentially pledging to keep the spigot turned on. The committee also decided to look only at current “overall inflation” in making their judgments, as opposed to “inflation trends.” Since new dollars take awhile to circulate around the economy and raise prices, this means the Fed is sure to be too late in tightening once inflation starts to run away, causing more dislocations in the American economy.

If anyone had lingering faith that Mr. Bernanke actually has a plan to end the US government’s addiction to cheap money, the Chairman’s semi-annual testimony to Congress should have washed it away. In addition to claiming that his money-printing has helped the US economy, Bernanke told Congress that gold is not money, people buying gold are not concerned about inflation, and the external value of the dollar has no influence on its domestic purchasing power. He even took a moment to stump for President Obama’s plan to raise the debt ceiling.

By claiming that gold is not money, the Chairman demonstrates his ignorance of much of monetary history. He told Congressman Ron Paul that he had no idea why central banks hold gold, before speculating that it might have something to do with tradition. Yes, traditionally gold is money, which is precisely why central banks hold it. And gold is money because central bankers like Mr. Bernanke cannot be trusted with a paper substitute.

Bernanke further disputes the facts by claiming that the only reason people are buying gold is to hedge against uncertainty, or “tail risks” as he calls them. My advice to the Chairman is to ask the people who are actually buying it. As someone who has been buying gold myself for a decade, I can assure him that my gold buying has nothing to do with “uncertainty.” In fact, it’s just the opposite. I am buying gold because of what is certain, not what is uncertain. I am certain that Mr. Bernanke’s incompetence will destroy the value of the dollar and unleash runaway inflation.

If it were true that people bought gold to protect themselves from market uncertainty, as the Chairman claims, then the metal should have spiked in the midst of the ’08 credit crunch. Instead, it fell along with most other assets. People instinctively fled into US dollars and Treasuries because of their long record of stability. What Bernanke doesn’t understand is that his irresponsible monetary policy is undermining that faith in US assets, built up over generations. That is what’s driving gold: easy money, negative interest rates, and quantitative easing.

Finally, by claiming that the dollar’s exchange rate has no effect on domestic prices, Mr. Bernanke demonstrates that he probably lacks the competence to be a bank teller, let alone Chairman of the Federal Reserve. A weaker dollar means Americans have to pay more for imported goods. But it also means domestic producers have to pay more for raw materials and imported components, which raises domestic production costs as well. It also means that more domestically produced goods are exported, reducing the supply and raising the price of what is left for Americans to consume. This is Econ 101.

Given the Chairman’s confusion on the basics of economics, perhaps it’s no surprise that he’s put quantitative easing right back on the table, where, despite prior rhetoric, it has been all along. The Fed has always known that QE3 is coming; it’s just looking for an excuse to launch it.

The problem is that fighting a recession with QE is like fighting a fire with gasoline. As the flames of recession reignite, more QE, while dousing it momentarily, will only produce an even larger economic inferno.

At one point, Bernanke said, “The right analogy for not raising the debt ceiling is going out and having a spending spree on your credit card and then refusing to pay the bill.” He’s got the analogy right, but his conclusions are completely wrong. Yes, Congress has gone on a spending spree and it’s time to pay up. But raising the debt ceiling is like taking out a Mastercard to pay the Visa… it just makes the problem worse. If you or I go out one night, get drunk, and run up a huge credit card bill, we know that the way to fix it is to buckle down and pay it back. We might postpone vacation plans or put off buying a new car, we might cancel our cable TV subscription or gym membership. The point is that we would have to reduce current consumption to make up for the overspending in the past.

Obama claims that raising the debt ceiling is about getting a hold of the federal debt. Have you ever heard of anyone getting out of debt by taking on more debt? Has anyone ever reduced their debt without reducing current consumption? How can the Fed Chairman endorse such a preposterous idea?

Bernanke actually went a step further and warned against reducing current federal spending too sharply, claiming that such a move might impede the “recovery.” He apparently believes that it is the role of the Congress to go on spending sprees, and his role to pay the mounting bills with freshly printed dollars. The fact that this formula has produced larger and larger economic crises does not seem to bother him. I guess ignorance is bliss.

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Those who take issue with the outlook of Austrian economists in general, and Euro Pacific Capital in particular, have pointed to the persistence of low bond yields as proof that our philosophy does not hold water. We argue that as the United States takes on ever more debt and prints greater quantities of dollars, that buyers of our debt will demand higher rates of interest to compensate for greater risk.  In fact, our philosophy leads us to believe that rates would currently be spiking as Washington debates whether to raise the debt ceiling yet again or default on existing debt. Instead, rates are hitting close to multi-year lows. As a result, our critics have found a seemingly valid issue. However, we believe that there are strong market reasons that are holding rates low for now that do not invalidate our central thesis.

Looked at objectively, there are a litany of reasons why rates should be much higher than they are.  Official government data from the Labor Department has year over year consumer inflation rising at 3.4%. With the Ten year note offering a paltry 3.1%, negative real interest rates now extend out over a decade! At the same time, total non-financial debt as a percentage of GDP is at the highest level on record and in our view there are no credible projections that show the trend reversing anytime soon. In addition, with the end of quantitative easing, the Federal Reserve will apparently no longer be soaking up 75% of all new Treasury issuance. Given this, does it make sense that yields on Ten Year Treasuries are trading 60% lower than their 40-year average?  Forget the flowers, where have all the global bond vigilantes gone?

But, what makes these low yields on U.S. debt even more unfathomable is the current debate over raising the debt ceiling. If a deal to lower the trajectory of debt isn’t reached by August 2^nd, we are being told that America could enter into default. But you wouldn’t know it from looking at the bond market. It seems that everyone is convinced the U.S. will never renege on her obligations and that the Democrats and Republicans will come to an agreement with time to spare.

Peter Schiff subscribes to this logic. He believes the bond market is pricing in an increase in the debt ceiling that temporarily lays to rest any fears of default. As a result, he believes that traders are buying bonds now so they can sell into the “positive” news that will result from a debt deal in Washington. However, Peter believes, as I do, that an increase in the debt ceiling is actually very negative for bonds. That means that after the dust settles he expects interest rates to rise dramatically. But that won’t stop the traders from booking a quick profit.

However, I believe there is little to support the belief that a deal will be made. Republicans have very little incentive to agree on a deal that includes tax hikes, which are an essential prerequisite for Democrats to assent to dramatic spending cuts. The Republicans want spending cuts without any tax increases and that’s exactly what they will get if the August 2^nd deadline comes and goes. In fact, the Republicans will force a severe dose of austerity upon the American economy, which could be a double-win for the GOP. They may simultaneously balance the budget without increasing revenue and engender a recession that will force the current party out of the White House.

I believe that bond investors may be hedging their bets. If an agreement is not reached there will be a huge reduction in borrowed money that is printed by the Fed. The result will be a severe reduction in the money supply. This forced deleveraging will bring about a needed round of dramatic deflation like we experienced in the fall of 2008. From my perspective that is the best justification for the current low yields on U.S. debt. Maybe the bond market has it right after all; but reasons completely contrary to those offered by market bulls who see low yields as a sign that all is well on the economic front.

Peter and I may differ on the current psychology of bond investors, but we do believe that once the economy slows in earnest once again, the authorities will not hesitate to reignite the monetary madness thereby punishing bond investors with weaker dollars.

by John Browne, Senior Market Strategist at Euro Pacific Capital

This week, in the second in a series of less-than-impressive press conferences, Fed Chairman Ben Bernanke offered market observers little hope that any additional quantitative easing programs are on the horizon. The Chairman continues to cling to the position that the economy is improving (with the recent “soft patch” attributable to external forces) to the extent that additional Fed support will be unnecessary. Left unsaid was any guidance as to who the Chairman believes will buy the massive amounts of Treasury debt formerly swallowed up by the QE II program?

The logical conclusion is that Bernanke believes that there will be massive private sector demand for U.S. Treasury securities. If so, how long can it be expected to last? If the economy improves, as Bernanke expects, would it not be logical to assume that private investors would direct capital to more promising sectors than ultra low yielding U.S. sovereign debt? Clearly something does not add up. Judging by the Chairman’s halting delivery and sheepish demeanor, it appears as if he knows his position is untenable.

We have argued repeatedly that the inflation created by the unprecedented Fed monetary expansion remains hidden beneath the larger deflationary forces of a major recession. When banks inevitably start more aggressively pushing their Fed-supplied funds out to the broader economy through increased lending will the full inflationary impact of quantitative easing be felt.

If the Fed were true to its word, and could hold in abeyance any additional quantitative easing programs, inflationary concerns would justifiably drop and precious metal prices should be expected to dip. Given that many market participants are giving credence to these intentions, this very well may happen in the short term.

However, we do not believe that we have seen the last of QE. In fact we see the launching of the next monetary juggernaut as a nearly foregone conclusion. It is very likely that if the economy fails to improve as Bernanke anticipates he will reflexively reach again into his monetary bag of tricks. Nothing he has said has ruled out another round. If the door remains open, we should assume he will use it if the going once again gets rough.

For now however, the global winds may strengthen Bernanke’s hand. New and troubling developments in the long running Greek debt crisis have unleashed a knee jerk “flight to quality.” Investors have purchased U.S. dollars, giving it unexpected and to some extent unwarranted strength. More significant demand for U.S. Treasuries pushed yields down to fresh lows for the year.

Today, one-month bills earn only 0.01 percent. Five-year Treasuries yield only 1.48 percent, ten-year less than 2.9. These historically low yields are killing living standards of retired and middle-income investors who rely heavily on interest generated from bonds. Although the returns are minimal, these securities are nevertheless dangerous. They are backed by a government that has over $100 trillion of unfunded debt, whose published Treasury debt is forecast to reach 70 percent of GDP by year end, and which has embraced currency debasement as a national economic policy. When market perceptions focus more intently on these risks, and when the more meaningful returns offered by other asset classes become irresistible, private demand for Treasuries will evaporate.

But there is no logical scenario that will allow the status quo to persist. If the economy improves, inflation will flare and risk assets will become more attractive. This will reduce demand for Treasuries, and cause interest rates to rise, thereby impelling the Fed to launch more QE in a single handed effort to keep U.S. interest rates low. On the other hand, if the economy continues to deteriorate more, QE will be “needed” to keep the current recession from becoming a depression.

Either way, those betting that a Fed retreat from intervention will push up the dollar over the long term, or spell the end to surging inflation expectations, will likely be disappointed.