by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.
If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are high.
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
By its very definition, fiat money is something created out of thin air: the word ”fiat” is Latin for ”let it be done” (as in, by decree). But the convenience that such a currency system offers central bankers is paid at the expense of savers. With nothing of real or lasting value on which to anchor, the value of fiat currencies can always blow away like ashes on a windy day.
For the past 40 years or so, every country on the planet has relied on fiat money. To a very large extent, this means that the national economies are far more exposed to the whims of their central bankers than they have been in the past. So, if central bankers go off their meds, the danger to the currency becomes profound. Unfortunately, at America’s Federal Reserve, it seems the inmates are now running the asylum.
We are being led to believe that falling prices are evil, and that only an increase in inflation can save our economy. From the moment the financial crisis took hold in 2008, Fed Chairman Ben Bernanke has looked to lower the dollar’s value and cause asset prices to rise – especially in real estate. But his pitch is wildly off the mark. The Fed can’t control the exact rate of inflation, nor can it direct where inflation will be distributed across the economy. In other words, inflation is like a knuckleball: once you let it loose, you’re never really sure where it’s going to go. And Bernanke’s pitches are so wild it would make Tim Wakefield jealous.
by John Browne, Senior Market Strategist at Euro Pacific Capital
While the world’s attention has been focused on the physical destruction wrought by the Japanese earthquake and tsunami, the desperate attempts to contain the fallout from the shattered Fukushima Daiichi plant, and the daunting problems that Japan faces in rebuilding its infrastructure, few have truly illustrated how long-lasting and widespread the radiation’s effects may be. There has also been little mention of how large radiological events affect economies of countries outside the immediate fallout zone. In truth, the disaster could make as much of an impact on investors in New York, London, or Sao Paolo as it makes on an investor in Tokyo.
The world’s most significant nuclear accident occurred 25 years ago at Chernobyl, Ukraine. Although its effects are now well-documented, many forget how thoroughly the damage was covered up at the time. To avoid panic, the Soviet authorities grossly downplayed the risks to those living near the plant, as well as those who lived hundreds, and even thousands, of miles away. In the months that followed, high levels of radiation were detected as far away as Scotland!
While we can hope that the present-day Japanese are more prone to candor than the Cold War-era Soviets, a series of botched and contradictory communications from Tokyo Electric Power, the operator of the plant, and the Japanese government have given us reasons to worry.
Here is video of Ron Paul’s most recent hearing on Capitol Hill on the relationship of monetary policy and rising prices. Paul begins by explaining the difference between monetary inflation (expansion of the money supply) and price inflation (rising prices). Enjoy it below.
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
A few months ago, the chorus sung by the recovery cheerleaders reached a crescendo when expanding consumer credit statistics and surging US trade deficits provided them with “evidence” of an economic rebound. In declaring victory, they overlooked the very nucleus of this past crisis: namely, the enormous debt levels and bubbling inflation that created fragile asset bubbles. If they had recognized the original problem, they would have remained silent. In reality, only a reduction in US debt levels or increase in the value of the dollar would have signaled a budding recovery; but, thanks to the Federal Reserve and Obama Administration, there is virtually no way those results will ever be seen.
Last week’s Flow of Funds report issued by the Federal Reserve clearly underlines the fact that we, as a country, haven’t just avoided deleveraging, but rather continue to accumulate debt. At the end of the last fiscal year, total non-financial debt (household, business, state, local, and federal) reached an all-time record high of $36.2 trillion. Not only is the nominal level of debt at a record, but also debt-to-GDP – a far more worrying statistic. In Q4:07, total non-financial debt registered 222% of GDP. In 2008 and 2009, it was 238% and 243% respectively. As of Q4:10, that figure had risen to 244% of GDP, For some perspective, look back to the turn of the millennium, when total debt-to-GDP was ‘just’ 182%. Even that level points to a sick economy, but today’s make you wonder how the patient is still breathing.
It is clear to me that the overleveraged condition which brought the economy down in 2008 still exists today – only worse. For all the suffering and displacement that has gone on, all we have accomplished is an unprecedented transfer private debt onto the Treasury’s balance sheet. Now that the Fed is (hopefully) just months away from taking the printing presses off overtime, the paramount question is how fast interest rates will climb. The Fed has been able to keep yields this low through relentless devaluation and a propaganda campaign that convinced the majority of investors that deflation was a credible threat (kinda like those phantom Iraqi WMDs).
But Washington’s ability to continue that ruse is coming to an end. The unrelenting growth of the Fed’s balance sheet, increasing monetary aggregates, surging gold and commodity prices, $100/barrel oil, soaring food prices, and trillions of dollars of new debt projected for the near future have served to vanquish the deflationists. Any echoes of those once prominent voices can barely be heard amid the thunderous roar of oncoming inflation.
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
As the world confronts one of the most critical periods of economic upheaval that it has ever seen, it is clear that our most influential economic stewards have absolutely no idea what they are doing. But, like kids with a new chemistry set, they are nevertheless unwilling to let that stand in the way of their experimental fun. As they pour an ever-growing number of volatile ingredients into their test tubes, we can either hope that they magically stumble on the secret formula to cure the world’s ills, or more pragmatically, we can try to prepare for the explosion that is likely to result.
Recent comments from current and former Federal Reserve Chairmen, and from the leaders of the European Central Bank, have starkly illustrated this stunning lack of understanding. In an extended interview on CNBC today, former Fed Chairman Alan Greenspan, once considered the sagest of all economic gurus, admitted that he had no idea whether the Fed’s current quantitative easing program will help or hurt the economy. The Maestro simply said that we must wait and see, and if positive economic indicators come, then we may begin considering the policy to be a success. That’s some serious insight.
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
It now appears that the United States has finally succeeded in its efforts to destroy confidence in the U.S. dollar. Given the currency’s reserve status, its ubiquity in financial markets, and the economic power and political position of the United States, this was no easy task. However, to get the job done Washington chose the right man: Fed Chairman Ben Bernanke. Thanks to Bernanke’s herculean efforts, investors across the globe have now been fully weaned from their infantile belief that the U.S. dollar will remain the ultimate safe haven currency.
The proof of Ben’s success can be seen in comparing how the foreign exchange markets reacted to the recent crisis in the Middle East with how they reacted to the financial crisis of 2008. Back then, investors looking for safety abandoned their foreign currency positions and piled into the U.S. dollar (the market for U.S. Treasury Bonds in particular). As a result of these fund flows, the U.S. dollar surged 20% from August to November 2008.
However, during this latest round of global destabilization the dollar experienced no such rally. In fact, the greenback shed about 5% of its value since the Tunisia revolution began in December of 2010. The reason should be clear; the Fed has placed international investors on notice that it will unleash even greater doses of dollar debasement at the first whiff of additional economic weakness, deflation threat, or dollar appreciation. Just this week, Bernanke once again made clear that despite what he considers to be a better growth outlook at home and abroad, and spreading global inflation, the United States will not pull back from monetary accommodation, even as other nations conspicuously do so. The architect of U.S. monetary policy has stated explicitly that dollar debasement will continue for the indefinite future.
In the world of precious metals, silver spends a lot of time in the shadow of its big brother gold.
Gold, with its high price-to-weight and distinctive yellow tint, has always occupied a special place in the human psyche. To many people across many ages, gold is simply the ultimate form of money – and, as a long-term, stable store of value for one’s personal wealth, I agree it’s hard to beat.
However, rare circumstances are aligning today that I believe will make silver the true champion of this bull run.
WHAT’S DRIVING PRECIOUS METALS?
Gold and silver are both benefitting from a perfect storm in the sector.
Dollar devaluation means that much of the ‘gains’ we see are really just losses by people holding dollars. In other words, if your dollars lose 50% of their value, it’s going to take twice as many of them to buy the same ounce of gold.
But the rally is based on more than simple inflation. Precious metals are regaining their role as the ultimate reserve asset. That means many, many more people are buying and holding these metals than at any time in the last thirty years.
by John Browne, Senior Market Strategist at Euro Pacific Capital
Earlier this month, J.P. Morgan made an important announcement that received scant coverage in the media: the bank would now accept gold as collateral for loans. The move appears to have been well-timed, for in the ensuing weeks, the price of gold and silver climbed steeply, based largely on political turmoil in the Middle East. But why should Morgan’s decision be of interest to anyone outside the bank?
It can be argued that J.P. Morgan is the world’s premier major bank. As such, its decision to accept gold as collateral offers a rare glimpse into the very private financial decision-making of some of the largest and most sophisticated investors in the world, whether governments, corporations, or wealthy individuals.
By reopening its former gold vaults in New York, as well as new facilities in Far Eastern financial centers – which cater to investors who typically have larger gold reserves than Western counterparts – Morgan is telling the world that gold is gaining greater traction as a medium of exchange.
Given that a bank continually looks to provide services that its clients demand, the move suggests that a strategy has taken hold among the highest echelon of investors based on core holdings of precious metals.
There are cerebral strategists and balls-to-the-wall activists in the tent of Ron Paul. Both were evident at the Conservative Political Action Conference (CPAC) today. Prior to Rand Paul’s stellar speech the surprise speaker was Donald Trump. Many of us in the audience had come to get our seats to see The Rand instead of The Donald, and things got a bit ugly.
During Trump’s speech there were some vocal activists shouting out Ron Paul’s name, among other things. At one point when Trump mentioned there were no good GOP candidates the shouts of Ron Paul became too much for him. The video below shows what happened:
Yes, the out-of-touch celebrity with lots of money reacts by telling the crowd that Ron Paul has zero chance of winning. I immediately said something that was later echoed by Rand Paul, “Trump has an even less of a chance of winning than Ron Paul”. That was only the beginning.
Liberty Maven
by John Browne, Senior Market Strategist at Euro Pacific Capital
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 
Loading ...
