One of the many scary things about writing an investment book is the six months that elapse between the typing of the last word and the book’s appearance in stores. That’s enough time for your predictions to be proven wrong or – nearly as bad – for your predictions to come true and make the book’s advice obsolete.

The temporal jury is still out on Nick Barisheff’s $10,000 Gold. Either it will be this generation’s Dow 36,000, a signpost marking a secular top, or a prescient and gutsy call for faith in gold’s fundamentals at a time when many are giving up.

The latter is more probable, for reasons that Barisheff, CEO of Canadian gold dealer Bullion Management Group, spells out early on. To hit just a few of the high points: the developed world is grossly over-indebted and is holding a 1930s-style depression at bay with insanely-low interest rates unprecedented amounts of newly-created currency. In response, the developing world, led by China, India and Russia, is buying up every bit of gold they can get their hands on, with an eye to the inevitable changing of the currency guard when the dollar, euro and yen are depreciated to nothing and the yuan and ruble rise to take their place. This dynamic, says Barisheff, will send gold soaring – though of course it will actually be gold sitting still and the dollar plunging.

As a gold dealer, Barisheff is at his best when clarifying the differences between paper gold like ETFs and unallocated storage and the real thing like coins and allocated accounts. This paper-versus-physical distinction has become front-page news recently, and is a crucial piece of information for new gold investors. The time will come when millions of people who think they own gold find out that they really don’t. This book’s readers will avoid that fate.

In Barisheff’s analysis, the US is in the final stage before hyperinflation, with debt beginning to overwhelm the system while crucial needs like infrastructure are starved to pay for entitlements, overseas military adventures and interest. Here’s how he describes what comes next:

Stage 5 is hyperinflation, the worst economic phase of the fiat cycle, when currency becomes essentially worthless. Hyperinflation has occurred fifty-six times since 1795. During the Weimar hyperinflation, which we will discuss in more detail below, only gold was accepted as reparation payment. Of course, it is probable that a significant structural change will occur, likely involving the formal recognition of gold as money, in order to avoid hyperinflation on a global scale.

Where would gold have to be set to account for all the paper currency now circulating? That’s right, $10,000.

This is a sharply-focused book, which is both a positive and a negative. It covers gold comprehensively and convincingly, but doesn’t discuss silver or mining stocks. So a reader who wants to understand the subject of precious metals investing rather than just gold will have to look elsewhere (try here and here). But as a primer on gold, it’s the most-timely book now available.

A final note about this book’s excellent production values: The publisher, John Wiley & Sons Canada, has done a great job with the cover art, the graphs and the indexes. The presentation is clear and the flow is logical. This is a polished production from beginning to end, which makes it an easy read. Everyone associated with it should be proud of what they’ve produced.

Bloomberg is reporting on the rising number of hedge funds shorting gold:

Gold Bear Bets Reach Record as Soros Cuts Holdings
Hedge-fund managers are making the biggest ever bet against gold as billionaire George Soros sold holdings last quarter and Goldman Sachs Group Inc. predicted more declines after the longest slump in four years.

The funds and other large speculators held 74,432 so-called short contracts on May 14, U.S. Commodity Futures Trading Commission data show. That’s the highest since the data begins in June 2006 and compares with 67,374 a week earlier. The net-long position dropped 20 percent to 39,216 futures and options, the lowest since July 2007.

Gold prices that surged sixfold in the past 12 years fell 19 percent in 2013, including a seven-session slump through May 17 that was the longest since March 2009. Soros joined funds managed by Northern Trust Corp. and BlackRock Inc. in cutting holdings of exchange-traded products in the first quarter. ETP assets are now at the lowest since July 2011 after some investors lost faith in gold as a store of value amid improving economic growth, low inflation and a rally in equities.

“Gold has faced disappointment after disappointment,” said John Stephenson, a senior vice president and fund manager who helps oversee about C$2.7 billion ($2.65 billion) at First Asset Investment Management Inc. in Toronto. “It’s had a 12-year run, but the whole fear-mongering that the world is going to end is just not working. So, I think that any last vestige of an investment thesis for gold has been stripped.”

Soros Fund Management LLC lowered its investment in the SPDR Gold Trust, the biggest bullion ETP, by 12 percent to 530,900 shares as of March 31, compared with three months earlier, a Securities and Exchange Commission filing showed May 15. The reduction followed a 55 percent cut in the fourth quarter last year. Paulson & Co., the top investor in the SPDR fund, maintained a stake of 21.8 million shares, now valued at $2.86 billion. Global ETP holdings slid 16 percent to 2,207.1 metric tons this year, valued at $96.5 billion.

Goldman Outlook
Gold’s slump “has been faster than we expected,” Goldman analysts led by Jeffrey Currie wrote in a May 14 report. A further drop in ETP holdings would “continue to precipitate this decline,” said the analysts, who forecast prices at $1,390 in 12 months. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.

Physical buying will help to support prices, said Paul Dietrich, the chief executive officer of Middleburg, Virginia-based Fairfax Global Markets, which oversees about $120 million.

India Premiums
Gold premiums in India, the world’s biggest buyer, more than doubled to $40 an ounce May 15 from $17 to $18 a day earlier, according to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. China’s bullion demand jumped to a record 294.3 tons in the first quarter, the World Gold Council said in a report May 16.

Prices surged 54 percent since the end of 2008 as central banks printed money on an unprecedented scale to boost growth. The Federal Reserve is buying $85 billion of assets a month to stimulate the world’s biggest economy, while Japan is making monthly bond purchases of more than 7 trillion yen ($67.8 billion).

“The case for gold is still there,” Dietrich said. “All the central banks are joining in a massive printing of money. Physical demand may be helping provide a floor on prices, and while there’s not a lot of downside risk right now to gold, there is a lot of upside potential.”

Some thoughts
This article is a great illustration of how a news organization can shape the tone of a story by deciding what to put where – and what to exclude. Bloomberg chooses to make the dominant theme the bear market in precious metals, framing the record level of bearish hedge fund bets as, well, bearish. So after mentioning the hedge fund shorts, the reporter inserts negative quotes from analysts. Only at the end of the article does he mention the record level of physical demand and soaring premiums in Asia.

But the data here could just as easily – in fact more easily – be the basis of a bullish story. Hedge funds are massively short? What happened last time they were really short? Gold and silver soared. Is this a pattern? Yes, in fact every time hedge funds get really short, gold and silver soar. Why? Because commercial traders (the fabricators who buy gold and silver for their business and the banks they trade through) like to prey on hedge funds. They push down prices, which induces trend-following hedge funds to go short. Then the commercials switch sides and start buying, pushing the market up and cleaning out the hedge funds. It’s amazing that the funds being suckered this way have any capital left.

Bloomberg could have done a little digging, found the pattern and structured the story as follows: A paragraph or two on the hedge funds’ record shorts, followed by an explanation of what this has meant in the past. Then segue to the massive Asian physical demand and some quotes from analysts who understand this dynamic.

Click on the next chart for a video from gold dealer Bullion Vault showing just how short the hedge funds are now (“managed money short futures” refers to hedge funds). Note that the last time they were really short (though nowhere near as short as today) was in the depths of the 2008 gold price correction – which was followed by an epic bull market in precious metals.

Based on both recent history and mainstream economic theory the past few years should not have been possible. When you cut interest rates to near-zero, run deficits of 10% of GDP and buy up every government bond in sight with newly created currency, you get a boom, end of story. That’s just the way capitalism works.

But this time was different. After four years of QE and ZIRP and all the other easy-money acronyms, we entered the month of May with Europe in a deepening recession and the US recovery petering out.

The culprit? The one piece of the puzzle that governments can’t control: the velocity of money. This is simply a measure of how quickly holders of currency, i.e., banks, consumers, businesses, hand their currency off to someone else. The faster and more frequent the hand-offs, the more stuff gets bought and the more robustly an economy grows. But after their 2009 near-death experience, the world’s banks have been in no mood to lend. Instead, they’ve been sticking all the new currency their governments have been giving them under the proverbial mattress. This reluctance to lend means record low money velocity and little or no economic growth.

But in just the past month something fundamental has changed. US home sales and prices have accelerated, with prices returning to 2006 levels in some markets and bidding wars, flippers and interest-only mortgages once again becoming common. Stock prices pierced old records and then spiked rather than corrected. Suddenly we’re back in an asset-driven boom.

But it’s a boom with a twist because it coincides with unprecedented amounts of “excess reserves” in the banking system. This is the raw material for new loans, and banks across the country are worrying that they’re missing the boat by remaining in cash. Marginal mortgage applicants now look a lot more attractive because their collateral is appreciating. Private businesses, judged by the share prices of their publicly-traded peers, are becoming more valuable and hence more creditworthy. Families with rising stock portfolios and appreciating houses suddenly look like better bets for car loans.

So what happens if a tidal wave of bank reserves are suddenly converted to business and consumer loans at a time when asset markets are already overheated? Maybe the fabled crack-up boom of Austrian economics. A couple of weeks ago Daily Reckoning addressed this issue in an article that quoted Ludwig von Mises’ famous definition of a crack-up boom:

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.

So how close are we to the point where “finally, the masses wake up?” Hard to say. Stocks and houses are back at previous-bubble levels and there’s even talk of a shortage of government bonds. And based on the excited emails pouring in from people who, after a decade of bad returns have seen their aggressive growth funds rise by 25% in a quarter and are feeling like geniuses, animal spirits are back and happy. All while bank lending has barely started to ramp up.  It’s safe to assume that banks getting into the game would heat the markets up even more.

How would today’s financial system handle the resulting volatility? Prudent Bear’s Doug Noland addresses this in his most recent Credit Bubble Bulletin:

I don’t mean to imply that today’s environment is comparable to 1999. The U.S. economy was sounder in 1999 – and the global economy was a whole lot more stable. Global imbalances in 1999 were insignificant compared to the present. The U.S. economic and Credit systems had yet to be degraded by a doubling of mortgage debt and a massive misallocation of resources. The federal government hadn’t doubled its debt load in four years. Europe had not yet terribly impaired itself with a decade of runaway non-productive debt growth. China and the “developing” economies had not yet succumbed to historic Credit booms, overinvestment and economic maladjustment. Central banks hadn’t yet resorted to really dangerous measures.

The implication: This world, levered to the hilt in response to the policy mistakes and financial crises of the past few decades, is more complex and fragile than the systems that (barely) survived the bursting of the tech stock and housing bubbles. So this bubble and its aftermath might be a whole different animal.

One of the lessons that gold bugs are learning, in the most painful way possible, is that you can’t trade a manipulated market. When big players with regulatory immunity can move an asset’s price — and can see resistance/support levels and moving averages just as clearly as anyone else — smaller traders don’t stand a chance.

In the gold-is-manipulated script, governments and their bullion bank proxies push the price to levels where they know hedge funds and other traders have stop-loss orders, which kick in and send the price careening lower. Then the manipulators buy back their short positions, thus gaining a two-fer: fleecing the flock for a nice profit, and crushing the spirits of stackers and preppers and regular folks who value honest money.

Which brings us to the following article, published by a major bullion dealer:

The Golden Bull & Price Pullback Gift

Rarely in bull markets do we see opportunities like the one being presented to silver and gold investors right now.

Silver & Gold spot prices are now retesting their recent low price points.

Current and favorable bull market fundamentals have not changed.

Below is a longterm view of gold’s bull market valuation channel over the past 15 years:

We view this current price pullback as a buying gift for gold and silver investors.

Now, for chartist in a normal market this picture would indeed imply a nice trade setup. But bullion bank traders can see this channel too, and for them it’s a bullseye. Just push gold through the bottom of the channel and a whole world of technicians who for some reason think their charts still have meaning will see that the up-channel has been broken, and, like good, dispassionate traders who cut their losses when they’re wrong, will sell their futures contracts, their GLD shares, and maybe their mining stocks, tacking yet another vertical drop onto this correction.

This might not happen, but if it doesn’t it will be because the bullion banks have had their fun and are now on the other side of the trade. But make no mistake, it’s their decision; in the short run this is their game.

Longer term, of course, is a very different story. Fundamentals always win eventually, and with the whole world on a borrow/print/lie-about-it binge, gold’s fundamentals just keep getting better. Excessive debt leads to currency war leads to soaring gold. And when the paper players are finally overrun by physical demand, the people who have been quietly accumulating bullion and high-quality mining stocks will barely remember this month’s drama.

Signs of a slowdown are spreading. Here in the US, despite all the happy talk about rising stock prices and falling deficits and the imminent unwinding of the Fed’s debt-monetization program, today’s numbers were ominous:

Producer prices post big drop, factory activity weak

(Reuters) – U.S. producer prices recorded their largest drop in three years in April as gasoline and food costs tumbled, pointing to weak inflation pressures that should give the Federal Reserve latitude to keep monetary policy very accommodative.

Separate reports on Wednesday showed an unexpected drop in U.S. factory output last month and troubling signs of weakness in manufacturing activity in New York state this month.

The Labor Department said its seasonally adjusted producer price index fell 0.7 percent last month, the biggest decline since February 2010. Wholesale prices had dropped 0.6 percent in March.

A Reuters survey of economists had forecast prices received by the nation’s farms, factories and refineries dropping 0.6 percent last month.

In the 12 months through April, wholesale prices were up only 0.6 percent, the smallest increase since July last year. Prices had increased 1.1 percent in March.

Underscoring the tame inflation environment, wholesale prices excluding volatile food and energy costs nudged up 0.1 percent, the smallest increase since November.

Producer prices rose modestly in 2011 but have since been trending down. Other stats like disposable income are also flattening out, which implies that the slowdown is about more than just temporarily lower oil prices.

Now the question is whether slowing inflation turns into actual deflation. Europe is closer to this point that than the US, so not surprisingly is a little further along in softening up its citizens for even more central bank “innovation”:

ECB’s Visco: negative deposit rates would be effective

(Reuters) – Cutting the European Central Bank’s deposit rate below zero would be an effective way to help the euro zone economy, ECB policymaker Ignazio Visco was quoted as saying on Monday, sending the euro lower.

Taking the deposit rate into negative territory would mean the ECB charging commercial banks for holding their money overnight, something ECB President Mario Draghi has said the central bank was “technically ready” to do.

Such a move could encourage banks to lend out money to the real economy rather than hold it at the ECB, though it could also have a big impact on banks’ own operations and major implications for funding and bond markets.

While non-euro zone member Denmark has dabbled with negative deposit rates, the ECB would be the first major central bank to use the measure – a policy step it is considering to try to boost lending to businesses in the recession-mired euro area.

Visco said the ECB was ready to deal with possible unintended consequences of negative deposit rates.

“We all agreed in the council that we have to look with care and in that case we may reduce the deposit rate,” Visco, a member of the ECB’s policymaking Governing Council, told CNBC in an interview.

“We think that – and I personally think that, this is effective – the economy now is capable of taking it on board. Technically, we are equipped and ready to intervene. There may be unintended consequences – we know we may have to work on that – and we know how to work on that,” he was quoted as saying.

Some Thoughts
In a deflationary environment wages can’t rise, which means tax revenues stagnate or fall, which means personal and government debts get harder to cover. For the people trying to maintain power, deflation is a black hole, the ultimate nightmare.

If these guys weren’t such predators you could almost feel sorry for them. On one hand, nascent housing bubbles and roaring stock markets are signaling an inflationary boom. On the other hand, stats like the above point towards a deflationary tipping point. Whatever the oligarchy does from here on out, the risk of being catastrophically wrong is both very real and growing. Like I said, you can almost feel sorry for them.

Japan’s currency devaluation has worked beautifully. The yen is plunging, Japanese stocks are soaring, and the current account surplus — the main measure of a country’s ability to trade effectively — is way up:

Japan Current-Account Surplus Climbs as Abenomics Sinks Yen
Japan’s current-account surplus rose in March to the highest level in a year as a depreciating yen boosted repatriated earnings and brightened the outlook for the nation’s exports. The excess in the widest measure of trade was 1.25 trillion yen ($12.4 billion), the Ministry of Finance said in Tokyo today. That exceeded the 1.22 trillion yen median estimate of 23 economists surveyed by Bloomberg News.

Prime Minister Shinzo Abe’s revamp of Japan’s central bank to focus on ending deflation paid off when the yen today slid past 101 for the first time since 2009, helping exporters such as Toyota Motor Corp. (7203), which now sees its highest annual profit in six years. Sustaining a current-account surplus may help to maintain confidence in the nation’s finances as Abe wrestles with a debt burden more than twice the size of the economy.

“The currency’s depreciation is buoying Japan’s income from overseas investment at a pretty solid pace,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo. “A weaker yen provides support for Japanese exports.”

The dollar versus the yen over the past year:

Here’s where it gets interesting: Measures like exchange rates and trade balances are relative, so Japan’s gains must by definition come at the expense of its trading partners. That is, the flip side of a weaker yen and rising Japanese trade surplus is a stronger dollar and deteriorating US trade balance. This hurts corporate profits, so to the extent that a cheaper currency and rising current account balance makes Japanese stocks go up, you’d expect US stocks to be doing the opposite. But that’s not the case; both stock markets are way up (S&P 500 blue, Japan’s Nikkei 225 green).

What does this mean? Either currency exchange rates and trade flows no longer affect national economies, or they still do and US companies are looking at a sudden, sharp deterioration in their ability to sell abroad and compete at home.

This is consistent with the general currency war script: One country devalues, reaps some short-term rewards at the expense of its trading partners, who then retaliate by devaluing their currencies. Which means, probably, that the US and Europe are about to follow in Japan’s footsteps.

In this week’s Q & A, National Numismatics’ Tom Cloud updates his near-term precious metals price targets and explains why silver will rise faster than gold once the bottom is in.

DollarCollapse: Hi Tom. Last time we talked you said that your charts put the worst case scenario for a gold correction at $1,380. Within two weeks it got there. Nice, if painful, call.

Tom Cloud: It actually got down to $1,328 mid-day, and silver fell to $22.68, which was right at the low point of our chart. It was pretty stunning. Both metals have recovered part of their losses lately.

DC: Now that your short-term predictive skills are established, what happens next?

TC: I’d say we right now we have a 50-50 chance of silver going back below $23 one last time, in the next week or two. But at that point the shorts will be taken out and we’ll see silver head back up above $25 fairly quickly. I’d be really excited if we weren’t heading into the weakest demand season. Normally the precious metals market kind of flattens out at the end of May when the kids get out of school and then picks back up at the end of August. So barring some big financial crisis or a Middle East war the next few months may not be too eventful.

DC: We can wait. Looking at longer-term fundamentals, the “austerity versus growth” argument seems to have been resolved in favor of growth. From now on the world will follow Japan’s lead and just create whatever new currency is needed to generate jobs and inflation. If they succeed and we finally get the Austrians’ crack-up boom, would that favor silver or gold.?

TC: In that scenario industrial demand for silver would rise. On the investment side, more people can afford silver. They can dollar cost average with $500 or $1000 a month. And with the gold/silver ratio now at 62, there’s a lot of room for silver to outperform gold – though both should go up given all the money printing that’s coming. Once Treasuries break [i.e. once the US government bond bubble bursts] you’ll see money moving out of paper, and gold and silver and other hard assets will explode.

DC: What’s happening on the supply side with availability and wait times?

TC: Right now, even with the seasonality, the long waits aren’t coming down. Two months ago we could deliver metal as soon as a client’s check cleared. Now there are multi-week delays on some of the popular coins like silver maples, silver eagles and silver philharmonics. I’ve actually been getting calls from smaller dealers who have been completely cut off. They can’t even order from their suppliers and they’re trying to get me to order for them, which I’m not doing.

DC: Last month you noted that your orders were coming mostly from big buyers and that smaller customers were notably absent. Has that changed?

TC: The small buyers came back after the correction. In addition to lower prices they’re starting to understand that after the Cyprus “bail-in”, money in the bank anywhere in the world is at risk. Most governments have made it clear that they will not bail out banks, so banks will go after depositors’ money.

DC: If I call you and say I want $10,000 of precious metals asap, what would you tell me?

TC: I’d tell you to get silver rounds and get them paid for. We’ll put you in line once your check clears and though your wait might be three or four weeks, the price is fixed and the product will come. It’ll be a much bigger thing down the road when supplies are even tighter and premiums are even higher.

For more information or to place an order, call 800-247-2812 or email Tom Cloud at tgcloud@bellsouth.net. Mention DollarCollapse.com for free shipping and insurance.

It’s easy to understand the attraction of things like adjustable-rate mortgages and teaser-rate credit cards. They give you cheap money up front and a few years of breathing room in which to raise your cash flow to cover the eventual higher payments.

Sometimes this works out for the best. But frequently not. If your cash flow doesn’t rise, a big jump in interest expense can ruin your life, as millions of American homeowners discovered when the mortgage bubble burst in 2007.

But the appeal of variable-rate debt endures. Now, amazingly, it’s the US government’s turn:

U.S. Sees Floating-Rate Note by 1Q 2014, Lower Coupon Sizes

The U.S. Treasury Department said it plans to sell a floating-rate security as early as the fourth quarter this year and signaled it may decide to “gradually” reduce the supply of notes and bonds at auction.

In its quarterly refunding statement today, the Treasury said a final rule on the floating-rate note auction is planned for coming months, with a first sale estimated to occur either in the fourth quarter this year or the first quarter of 2014. The department said it will use the weekly high rate of 13-week Treasury bill auctions as the index for the notes.

With a budget deficit of more than $1 trillion last year, the Treasury needs to expand its base of investors. So-called floaters may appeal to those who are seeking to protect themselves from a possible increase in interest rates or faster inflation stemming from the Federal Reserve’s unprecedented monetary stimulus.

“The floaters are being tailored to its audience and also to make it easier to transition into the product,” George Goncalves, head of interest-rate strategy in New York at primary dealer Nomura Holdings Inc., said in a telephone interview.

New Offering

The floating-rate notes would be the first added U.S. government debt security since the Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997.

“Indexing to the bill rate is likely a function of a preference at the Treasury and because global investors, like central banks, are more familiar buying Treasury bills and are likely more comfortable with this approach to the floaters,” Goncalves said.

The minutes said that James Clark, deputy assistant secretary for federal finance, told the panel that the Treasury was tentatively considering $10 billion to $15 billion in floaters a month and would solicit more market opinions as the first auction approached.

Some thoughts
Just when you think we can’t get any dumber, along comes the next beginner’s mistake, committed by supposedly the smartest people the world’s most powerful government can attract.

As the article notes, variable-rate bonds offer buyers some protection against rising interest rates. But of course the other side of that coin is that it increases the risk from rising interest rates for the rest of us. Already, the federal debt is mostly short-term paper that has to be rolled over every year or two. So rising interest rates would send the Treasury’s debt service costs through the roof as each new rollover is at a higher rate. Issuing longer-term floating-rate bonds would simply streamline the translation of higher rates into higher interest costs. In that sense, the new strategy is like maxing out teaser-rate credit cards to pay off a mortgage; good for cash flow in year one, very bad thereafter.

This is not an issue while the Fed is buying up $85 billion of Treasuries each month and rebating the resulting interest to the Treasury. It’s when the Fed tries to stop that things get dicey. Because a robustly-growing economy – which is the goal of all this borrowing and spending – naturally leads to higher interest rates. During the good old days of 1960 – 1980, the average rate on government borrowing was about 6%, or more than twice as high as today.

But rising rates would send the interest the government owes to non-Fed bondholders through the roof, increasing the deficit and either crowding out productive spending – which would tend to slow economic growth – or creating an even bigger mountain of debt that will require low interest rates to pay off. A 6% average borrowing cost applied to the $20 trillion that Washington will owe in another few years yields an interest expense of $1.2 trillion – every year forever, much of it going to China, Japan, and Saudi Arabia.

To sum up, floating-rate government bonds are just one more reason that interest rates can never be allowed to rise (and QE can never stop), even if it means sacrificing the value of the dollar, yen and euro. Devaluation is the only way out – for everyone.

Rolling Stone’s Matt Taibbi has once again put the world’s major hard news organizations to shame by describing, in comprehensible terms, the pervasive corruption at the heart of the financial system. Below are his concluding paragraphs from a much larger article that everyone with money at risk in a bank, brokerage account or business should read in its entirety.

Everything Is Rigged: The Biggest Price-Fixing Scandal Ever
After scandals involving libor and, perhaps, ISDAfix, the question that should have everyone freaked out is this: What other markets out there carry the same potential for manipulation? The answer to that question is far from reassuring, because the potential is almost everywhere. From gold to gas to swaps to interest rates, prices all over the world are dependent upon little private cabals of cigar-chomping insiders we’re forced to trust.

“In all the over-the-counter markets, you don’t really have pricing except by a bunch of guys getting together,” Masters notes glumly.

That includes the markets for gold (where prices are set by five banks in a Libor-ish teleconferencing process that, ironically, was created in part by N M Rothschild & Sons) and silver (whose price is set by just three banks), as well as benchmark rates in numerous other commodities – jet fuel, diesel, electric power, coal, you name it. The problem in each of these markets is the same: We all have to rely upon the honesty of companies like Barclays (already caught and fined $453 million for rigging Libor) or JPMorgan Chase (paid a $228 million settlement for rigging municipal-bond auctions) or UBS (fined a collective $1.66 billion for both muni-bond rigging and Libor manipulation) to faithfully report the real prices of things like interest rates, swaps, currencies and commodities.

All of these benchmarks based on voluntary reporting are now being looked at by regulators around the world, and God knows what they’ll find. The European Federation of Financial Services Users wrote in an official EU survey last summer that all of these systems are ripe targets for manipulation. “In general,” it wrote, “those markets which are based on non-attested, voluntary submission of data from agents whose benefits depend on such benchmarks are especially vulnerable of market abuse and distortion.”

Translation: When prices are set by companies that can profit by manipulating them, we’re fucked.

“You name it,” says Frenk. “Any of these benchmarks is a possibility for corruption.”

The only reason this problem has not received the attention it deserves is because the scale of it is so enormous that ordinary people simply cannot see it. It’s not just stealing by reaching a hand into your pocket and taking out money, but stealing in which banks can hit a few keystrokes and magically make whatever’s in your pocket worth less. This is corruption at the molecular level of the economy, Space Age stealing – and it’s only just coming into view.

Some thoughts
Knowing what we now know about the big banks, the idea that precious metals are not manipulated is absurd — which explains, if an explanation is needed — why the paper and physical markets are diverging. Paper gold is at the mercy of the manipulators, while physical gold is immune to them – and is in fact a threat to them. An ETF like GLD is emphatically not the same thing as a gold eagle in hand.

With the political and judicial systems now wholly-owned subsidiaries of the big banks, buying physical gold and silver might be an individual’s last effective weapon against an emerging meta-government run by and for the people profiled in Taibbi’s article.

In a broader sense this tracks with the concept, popularized by Automatic Earth’s Nicole Foss among others, of a shrinking trust horizon. As we discover that the people running the big systems from distant financial and political centers are “harvesting” us in ever-more-creative and hard-to-detect ways, the number of people and organizations we’re willing to trust shrinks and recedes towards our homes. We can’t trust dollars or euros or yen so we convert them to precious metals held outside the financial system. We can’t trust the big banks so we open accounts with local credit unions. We can’t trust Big Food to tell the truth about what they’re feeding us so we turn to local farmers markets and backyard gardens. In some ways this is good and right and as it should always have been. But as it progresses it becomes a threat to the systems we’re abandoning, raising the question of how they’ll respond, with what new lies and what kinds of coercion.

First-quarter GDP came in at an annualized rate of 2.5% this morning, which is not terrible as growth goes these days (Japan and most of the eurozone countries would love to be doing that well). But dig a little deeper and the picture gets darker. Here’s a summary from the Consumer Metrics Institute, which has been predicting a return to recession in the coming year:

In their first estimate of the US GDP for the first quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a 2.50% annualized rate, some 2.12% better than the 0.38% growth rate for the prior quarter.

Although the headline number itself indicates moderate mid-cycle growth, the details within the BEA’s report cast at best a mixed message for the overall health of the economy. For example: although the overall contribution from consumer spending was up, it came mainly from spending on services (boosting the headline number by 1.46%, and principally spent on non-discretionary rents and utilities), with consumer spending for goods contributing to the headline number at a more modest 0.78% (down about -0.24% from the prior quarter). And although fixed investments were still contributing a positive 0.53% to the headline number, that was down over a full percent from the prior quarter. In fact, inventories swinging back to growth (after contracting during the prior quarter) arguably provided all of the quarter-to-quarter improvement in the headline growth rate.

For this set of revisions the BEA assumed annualized net aggregate inflation of 1.20%. In contrast, during the first quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a 2.10% annualized inflation rate. As a reminder: an understatement of assumed inflation increases the reported headline number — and in this case the BEA’s relatively low “deflater” (nearly a full percent below the CPI-U) boosted the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a much more modest 1.63%.

Finally, one of the bright spots in the prior quarter’s data (the previously reported substantial improvements in real per capita disposable income) completely reversed in this report — confirming that the fourth quarter’s upward surge in real per capita disposable income was merely an artifact of payroll “gaming” in anticipation of increasing tax rates. In fact, real per capita disposable income contracted during the quarter at an astonishing -5.88% annualized rate — crashing back to levels that are below where they were two years ago. And, as expected, consumers offset the “new” FICA rate increase of 2% by reducing their savings rate by -2.1%. Although this arguably propped up consumer spending during the quarter, it is important to note that that spending support came in spite of a sharp contraction in sustainable household incomes.

To summarize, disposable income was pumped up going into the November elections and then collapsed once the votes were counted (which should surprise exactly no-one, since that’s how the party in power always plays it). So today’s positive GDP number came from fudged inflation assumptions and consumers spending pretty much all they made. This is consistent with reports that private sector debt is rising again after a couple of years of shrinkage. It’s also consistent with the projection of slower and maybe negative growth for the rest of the year. Which, in turn, is consistent with the idea that quantitative easing can never end, because the minute it does the economy – already struggling despite $85 billion a month in new money creation – will implode.