Mr. Bernanke is losing control

Jun 22, 2013

Paris, France

Yesterday, it felt like all Hell was breaking loose. It was the kind of day when each man looked to his own. He checked his bank balance and his margin account. He counted his gold coins and looked in his liquor cabinet. He wondered what would happen next...

The Dow dropped 353 points. Gold lost $87.

What does this tell us? It shouts a warning: Mr. Bernanke is losing control. He desperately wants inflation. He's getting deflation instead. He wants low interest rates; yet, rates are rising.

But he is getting the worst kind of deflation - sluggish price increases against a background of rising interest rates. Consumer prices are rising at their slowest pace in 53 years. And, as PIMCO chief Bill Gross says, it looks like the long bull market in bonds, which began 30 years ago, is finally over. Yields are rising. The feds' borrowing costs are going up.

This is the exact opposite of what the Fed wants...and needs. Its strategy is to hold interest rates down while encouraging consumer and asset prices up. This would make possible a gradual growth in the GDP while the real value of the debt was whittled away by inflation. Then, it could 'taper off' its QE and ZIRP.

Instead, the debt gets heavier as yields rise...backs ache, legs buckle, nerves crack.

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    Bernanke has finally realized that the Fed has lost its battle with the primary trend. The Fed and the economy are now at the mercy of the strengthening primary bear trend. Deflation, which the Fed has tried frantically to hold back, is now taking over. The Fed would like to exit the battle field but it can't. The mere thought of the Fed giving up the battle to hold back deflation terrifies the stock and bond markets. Years ago Ben Bernanke stated emphatically that he would never, ever allow the nation to deflate -- even if he had to drop cash from helicopters to prevent it. But now deflation is happening. And Bernanke, the academician who has never understood markets, is frozen with confusion, consternation, and fear.

    Everybody's escape, so far, has been to rush headlong into Treasury bonds. But that avenue is no longer working (the bonds are sinking). The next avenue of escape is the dash for cash. Cash today amounts to intangible Federal Reserve notes, which are fiat paper and actually intangiblefinancial garbage. The last and final avenue of escape will be to gold....

All over the world, the feds are trying to lock the exits and bar the doors.

David Franklin at Sprott Asset Management:

    With the Indian rupee plumbing new lows against the US dollar and the country's current account deficit at record levels, the Reserve Bank of India (RBI) is taking the easiest route to tackle both; it has declared a war on gold. ...The central bank has announced a series of measures over the past month, including restraining lending against gold-backed assets, and restricting gold imports. The hike in gold import duty to 8% this month is the most recent announcement in this drive and doubles the duty that was applied at the beginning of this year... Indian finance minister P. Chidambaram has even urged banks to advise their customers not to invest in gold.
Meanwhile, from 'Always Something Interesting' this news from France:
    On May 23rd the French government banned the delivery of all forms of precious metals, currency and jewelry by La Poste and all other branches of the French postal service.

    The announcement was made through Legifrance, the legal publishing house responsible for all legislative publications. The ban was not reported by the press and the French government has made no statement.

    ....all registered or insured precious metal shipments are forbidden by the French government.

    Although the decree is limited in language to France, FedEx had also stopped shipping precious metals in March, without explanation. More recently, FedEx suspended all shipping or taking delivery of precious metals in Germany and the UK.

The gold price is falling. This signals to us that the Great Correction which began in 2008 is entering a new phase. The can was kicked down the road by the feds. Now, the markets are stumbling over it. In the end, markets always triumph. And now, the markets are correcting, whether the Fed likes it or not.

What will happen next? Like Everyman we wonder too. But we have a hunch. If the Great Correction intensifies, the feds will be forced to react. They can permit neither a bear market... nor deflation...nor higher interest rates. They will have to resort to Overt Monetary Financing...otherwise known as dropping money from helicopters.

Markets will rock, roll, and lay down on the floor in spasms of laughter and revulsion. And at the end of the day...when the dust settles and the music will be the last man standing.

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

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5 Responses to "Mr. Bernanke is losing control"

bharat c dalal

Jun 22, 2013

USA is a very clever country. China is buying USA bonds which they cannot use.If they use them for consumption, it would cause a heavy inflation; similar to deficit financing. Only US can help by controlling consumption, if so, it could cause recession. Us is not growing as expected and whatever small growth it is having is due to China buying American debt. India suffers as a cause.Anyway Bernanke had done lot of damage to US and his going would be a good riddance.


Lakshminarayanan KP

Jun 22, 2013

IMHO, Bernanke has gone ahead because he has read the writing on the wall. Either allow the problem to come out in the open or allow it to morph into a gigantic problem later when he wants to wean away the addict.


Dr Jagadish

Jun 22, 2013

Good reading as always but a little bearish to my liking. Gold will give opportunity for entry and then will be out of reach soon.


Deepak Shamdasani

Jun 22, 2013

I hope the helicopter drops few packets on my roof.

Evertyhing not only looks confusing but has been made confusing by the so called Wise.

Economists beleive in trying out text book models, least realising that contents of the text books are real time events of the past, the present will also find a way into future books and that every situation is unique and there are manying moving parts also the relativity is also different from the past

Ultimately it is the large masses gor no fault of theirs would be the biggest loosers of the experiments and tampering carried out by people who get fat salaries and are callous to the reality

The best solution to all this is Moderation & Simplicity in our daily living, not getting tempted into the whirlpool of financial fancy products designed to ultimately confuse you and enable the wise fools to earn their living at our cost.

The biggest damagers are credit cards derivatives etc etc.


Praveen Bhargava

Jun 22, 2013

Federal Reserve of USA is Super bank over all the banks of USA and controls the banking activities in USA. One of the major responsibilities of Fed Reserve is to control the US Economy to move in positive zone always and take all the steps needed for growth all the time. One of the important tools with it for improvement in the US economy is control of interest rates. The Quantitative Easing schemes 1, 2 and 3 are part of the stimulus package thrown out by Fed Reserve Chairman Ben Bernanke in the last 5 years. By these schemes no doubt few of the good signs have been seen in these years such as improvement in manufacturing activity, lower rate of unemployment, increase in housing activity and consumer demand etc. These are the few positive signs of improvements in US economy.
But huge negative signs are there in the US economy, as well, which require an immediate attention to correct .During the last 5 years, The QE 1,2 and 3 stimulus package had increase the huge debt burden by 3 Trillion USD making a total of US debt to cross a RED ALARM figure of 17 Trillion USD. The QE 3 which is still continuing with a Bond purchase target of 85 Billion USD per month will further increase this debt burden in the period to come.
Now stop and think over the 85 Billion USD Per Month Bond purchase (stimulus package) scheme carried out by the FED Reserve Chairman Ben Bernanke for improving the US Economy. There is a very low improvement in the US economy and put US into a DEEP DEBT TRAP of ever increasing debt of 17 Billion USD.
Nevertheless if we argue that may be debt burden had increased by 3 Trillion USD in last 5 years we have seen the signs of improvements in the US economy and the QE 1,2 and 3 package will give much better results in the times to come.
But, ALAS! These hopes of improvements in US Economy are not going to take place in near future say 3-5 years and the DEBT position will deteriorate day by day and the day in not far away when the Debt Balloon will burst and GREAT RECESSION will spread over in USA for a long time.

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