Why are the feds desperate to avoid a correction?

Apr 11, 2011

Buenos Aires, Argentina

Whoa! This is getting interesting.

Two major central banks are tightening - China and the ECB.

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But nobody seems to care. These central banks are warning investors to sell their high risk investments. Instead, gold hits new records! The dollar is at a 15-month low. And oil moves up to $125 a barrel.

Either investors don't believe China and the ECB are serious...or they're counting on the USA to come through again - with more money and more credit.

Speculators may be forgetting that we're in a Great Correction. On the other hand, maybe it doesn't matter. If the feds keep pushing enough money into the system long enough the correction will take a grotesque, unusual and terrible new form -- it will end in a hyperinflationary depression!

Gold at $1,470? You ain't seen nuthin' yet!

Only we, here at the Daily Reckoning, will appreciate it. It will give us something to watch...something to write about. Something to laugh at. More important, we'll have yet another opportunity to wag our finger and say: 'we told you so...'

And who sees it coming? Just us...and a few other cranks, eccentrics, outcasts and marginalized diehards...

But word is getting out. You can't just add to the world's money supply indefinitely...not without consequences.

Many mainstream analysts are now looking for gold at $1,500. But watch out, they say. Just wait until QE 2 ends!

They may have a point there. The major, natural tendency of this market is towards contraction. The market wants to correct. No kidding. After a half-century of credit expansion, it's time to pay up...to settle debts...to recognize bad investments and to write off mistakes. That's what's happening in the housing sector. That's why about 12 million Americans don't have jobs.

But that's the way economies work. They 'breathe out and breathe in,' says old-timer Richard Russell. Unless we're wrong about it, the markets are holding their breath. They're waiting to see what effect all this pure oxygen - coming from the Fed - will have.

Why are the feds so desperate to avoid a correction? Well, that's where the story gets interesting.

It's a tale of one part vanity, one part necessity and one part cupidity.

In their vanity, the feds think they can command the economy to do as they want. They've invested whole careers...and gotten Nobel prizes for their crackpot theories. They're not going to give up now; they think their central planning can succeed, even though central planning by others has been universally disastrous.

But there's more...they are running what is little better than a ponzi scheme. That's where the cupidity comes in. We were delighted to see that Christopher Caldwell, writing in the Financial Times no less, sees it as we do:

"The story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity, but luxury."
We would put it a little differently. What they have been enjoying is not prosperity, but larceny. They've stolen from those who can't vote. Many of them haven't even been born.

A study by the Urban Institute, for example, shows that the Medicare system pays out in 'benefits' three times as much as it collects in revenues. This kind of thing adds debt fast. Mary Meeker calculates total unfunded liabilities of the US government at $75 trillion already.

(Estimates are all over the place...depending on what assumptions you make... But Meeker's estimate is likely to be low...)

Congressman Ryan has begun to address the inherent problems in this scheme. It will be interesting to see what happens. He seems to think that voters and politicians will 'come to their senses' and do the right thing. We doubt it. And there was no sign of it in the deal just struck to keep the government's lights on.

Paul Krugman put his finger on the problem with democracy. He agrees, for once, with us. Writing in the New York Times, he tells us that Ryan will fail. As soon as the greedy old bast**ds figure out that they are going to lose benefits, the jig will be up:
"Mr. Ryan and his colleagues can write down whatever numbers they like, but seniors vote."
Yeah, the zombies vote. Most likely they will vote themselves into an economic catastrophe.

That's the necessity of it. If they want to keep this scheme going...they have to borrow. And if they have to borrow...they have to keep credit easy and cash plentiful.

Stay tuned...

***Sleep baby, sleep
         Angels watch over you

The hedges were in bloom. The trees were in bloom. The bushes...the flowers...even the fields, green with grass, bloomed with yellow or blue flowers. This is the season when the rapeseed blooms, spectacularly, in this part of France - bright yellow...square miles of it.

France in the spring can be astonishingly beautiful. It takes your breath away. Everything is so alive. Pullulating...mating...reproducing....growing... flowering...

We strolled out into the park admiring the bushes, listening to a cuckoo...we walked down to the pond...and then around to the orchard.

We have been working on our house and gardens in Poitou for 15 years. When we're not there our part-time gardener, Damien, continues mowing and pruning...and waging war against the moles. Every once in a while, we heard an explosion, as one of his anti-mole land mines blew up.

But all the work is paying off. The place looked magnificent.

There is an allee of linden trees that begins at the edge of the pond and heads off into the woods at an angle. It had been neglected for years. Trees and bushes had grown up so much that it was invisible in the summertime. We didn't discover it until we had been living here for a few months, after the leaves had fallen. Then, we cut back the unwanted underbrush and pruned the trees. Now the trees have regained their proper form. This weekend, there was a carpet of flowers underneath them - blue and yellow; it looked like a scene from a children's cartoon.

We followed the allee...it leads through the forest...and then, after about 70 yards, it ends abruptly, nowhere in particular. We've always wondered why a former owner had gone to so much trouble. Maybe there had been something there which remains to be discovered? Or maybe that was the point: it is a memento mori; you walk along in heart-stopping beauty...and then it comes to an end and your heart breaks.

The sun shone bright. Birds sang in the trees. It would have been such a happy time to be there... had it not been such a sad time. We had not come to praise the living...but to honor the dead.

The property belonged to our neighbor's family for 200 years before we bought it. Now, the young man who would have been the chateau's heir was dead at 20 years old. We invited the cousins, uncles, grandmothers and aunts to spend the night and to use the place for the gathering after the funeral.

"You know, when an old person dies, it's not such a big deal. They're often forgotten before they die, anyway," said a distant relative.

"But when a young man dies...he hadn't even finished school...it's a tragedy. We all feel so bad for the parents.

"And we thought he was recovering. This leukemia...what a nasty disease. He was young. He seemed so healthy. We thought medical science could save him. But I guess there's only so much it can do.

"What can we do? What can we say? Nothing really...we can just be here for them."

No, there was nothing to say. So, we said the nothings that people say.

Our son Henry, who accompanied us to the funeral, was one of the young man's oldest friends.

"It was the nicest funeral ceremony I have ever seen," he said later.

The funeral was held in the large church in a neighboring town. It was not the church that the family went to regularly. But you cannot go to the local church regularly. Not and receive Holy Communion from the hands of a real priest. There aren't enough priests to go around. So, they rotate...

Besides, the little church at Lathus would not have been big enough. Even the biggest church in Montmorillon, St. Martiale, was overflowing with mourners. Some came to say goodbye to the deceased. Some came to say hello to the aggrieved parents who were left behind. All formed into a line to sprinkle holy water on the casket - so many of them that the line seemed interminable. We recalled a line from T.S. Eliot; we were surprised that death had left so many undone.

There were three priests at the altar. And one deacon - the man who had been the boys' headmaster when they were at school together 13 years ago. They reminded us of the holy mysteries. Of course, among the holy mysteries is that the mysteries themselves sometimes give way to understanding. A hundred years go, children were regularly carried off by diseases that doctors now know how to cure. Perhaps they will know how to cure leukemia some day.

But the great mysteries will still be there: We walk along. Then, we walk no more...and pray we dance with angels.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Why are the feds desperate to avoid a correction?"

Maulik Suthar

Apr 11, 2011

The mother of all evil is speculation.

--- Gordon Gekko (Wall Street: Money Never Sleeps)

But it is greed that makes my bartender buy three houses, he cannot afford with no money down. And it is greed that makes your parents refinance their 200,000 dollar mortgage for 250,000 dollars. Now they take that extra 50,000 dollars and go to the shopping mall so they can buy a new plasma TV, cell phones, computers and an SUV. And hey, why not a second home while we are at it. Gee Wiz, we all know the prices of houses in America always go up. Right?

--- Gordon Gekko (Wall Street: Money Never Sleeps)

In my opinion, it is absolutely wrong to condemn Ben Bernake only. He is prescribing the chemotherapy that was invented by Alan Greenspan. Condemning doctors is the simplest job, anyone can do that. Doctor Ben Bernake’s medicine named ‘Easy monetary policy’ (= reckless money printing) do have some serious side effects (= Inflation) besides the desired action (= getting economy on track).

Patient could have been well informed before giving heavy dose of cancer chemotherapy. But isn’t it the job of patient to ask doctor that what are the possible side effects of chemotherapy? Because that could have helped to determine the risk/reward balancing for selection of therapy.

People (= majority of losers) rather focused only on speculation (with easy money, of course).

If Alan Greenspan was wrong than Speculators (=like Bartenders of Gordon Gekko) were damn wrong.

If Bernake is wrong than Speculators (= Parents with new plasma TV, cell phones, computers and an SUV) will be damn wrong too.

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