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Is This It? Or Can They Fool Us Again?

by John Rubino on August 9, 2011 · 48 comments

A stressful weekend for the world’s bankers and politicians, followed by a sleepless Monday, and all with a single question rattling around in their heads: How can we fool them again?

For decades now the financial/public sector complex has been able to clean up its recurring messes — from Long Term Capital Management to the Asian Contagion to the tech crash to the housing bust — with credit. Just lower interest rates, shovel capital into the banks, and watch the hedge funds and CNBC eat it up. This has worked so well for so long that most of the people now running things seem to believe that it’s right, that easy money actually improves lives and greases the wheels of capitalism.

History will show, of course, that an unfettered printing press is actually economic heroin, inducing happy dreams at first but requiring ever higher doses until it finally kills its victim. Over the past three decades, the doses of debt have grown to near-fatal levels, leaving only the question of timing: when do we realize that not only have we been conned but that the con is over, and abandon, perhaps violently, the existing system?

Today could easily be that day. Interest rates are as low as they can go, debt is surreally high, and life is still getting worse. Government and the big banks seem to have fallen back on platitudes and finger pointing. Just today the president proclaimed that “The United States of America is now and always will be a triple-A credit!”

On the other hand, they’ve fooled us so many times, and so brazenly, that the possibility of one more for the road can’t be discounted. Here’s how the strategy is evolving:

Fed Expected To Try To Sooth Markets But Not Undertake New Quantitative Easing Tuesday

Federal Reserve policy-makers are likely to try for language assuaging financial markets Tuesday, but probably are not ready to embark upon a third round of quantitative easing, economists and market analysts say.

This is because fears of possible deflation are smaller than when the Fed last embarked upon quantitative easing, plus 10-year Treasury yields are already low.

The Federal Reserve has already embarked upon two rounds of quantitative easing, which is buying of long-term Treasury securities in an effort to push down market-set interest rates. “I don’t think the Fed is going to do anything dramatic, i.e., QE3,” said Greg Michalowski, chief currency analyst with FXDD.

“We’ve already had QE1 and QE2, and here we are today,” he said in reference to continued economic problems. “Participants who are looking for an actual QE3 announcement could be disappointed because the Fed has stated on a number of occasions now that it’s a really high bar in terms of implementing a QE3 program.”

Still, economists and analysts look for the Fed to acknowledge economic headwinds and craft some kind of communiqué that lets markets know the Fed is ready to help as necessary.

“There might be some type of change in the language that drives home the point they are committed to keeping interest rates very low for a significant period of time,” O’Hare said.

“One thing they might do is be a little more explicit in what they mean by extended period,” said Mike Moran, chief economist with Daiwa Capital Markets America. “For example, instead of just saying we intend to remain accommodative for an extended period, they might say we will remain accommodative until well into 2012, or something along those lines.”

Likewise, it’s possible the Fed may provide a more definite timeline on how long it will keep its balance sheet at elevated levels, said Robert Lynch, currency strategist with HSBC. “They are reinvesting interest in maturing debt, but they haven’t said how long they are going to continue to do that.”

Still another possibility, Moran said, is the Fed might opt to increase the length of the securities in its portfolio.

“They would not enlarge it by doing additional quantitative easing, but to try to lengthen its maturities, so that as securities mature, they would roll them into something longer term than what they had originally held and gradually increase the average maturity,” Moran said.

This might put some upward pressure on short-term yields, Moran said. “But long-term rates probably have more of an effect on the economy, therefore it would be a mild form of support for economic activity.”

The above is mostly speculation, of course, but it does seem reasonable that among the things we’ll be offered at Tuesday’s Fed meeting will be a promise of low interest rates pretty much forever, increased buying of long-term bonds to lower interest rates even further, and a statement of willingness to flood the banks with cash again if the bonus pool shrinks, er, if the economy keeps slowing.

None of these, of course, will make the junkie stop shaking. So the next dose — a towering QE3 — will come soon. But will it “work” again, buying the banks another year to drain the last few drops of wealth from the system? Or will the markets finally see through the monetary illusion and pour every last bit of free capital into hard assets and out of the US?

  • John G.

    Fine analogy to heroin/junkie, John.

    This next fix will be mighty short-lived.

    Withdrawal is going to be utterly painful, especially here in the U.S., where few are prepared for the now beginning cascading crash.

  • dewey

    I agree the sponge is about dry… it all started with whom Obama surrounded himself with the likes of Ben Romer Summers Turbo Timmy (Obama) and the list goes on…Obama is a puppet for GS CB….This is far from being over but there will be much pain!!! we forgot the principals of capitalism what goes up must come down…with all the union and government entitlements that the chosen one and his blind cronies tried to protect…I believe this whole is just incompetent….Obama could have gave each man women and child 20000 each for what he spent bailing out auto’s bank’s and wall street…and to believe not one person is in JAIL for helping bring down this country…They always said Americans would be happy as long as there bowl of soup is full..they didnt mention that its now a full half cup of soup

  • Brad Thrasher

    On Thursday last, the run from Euro banks caused a spike in the USD as US debt instruments were seen as the safe haven. Today the dollar remained strong and gold benefited. Not a good week to be long equities.

  • kwark

    Or will they come to their senses and finally allow the fantastic pile of debt to unwind and clear the system? Nah.

  • http://thetruthno.wordpress.com truthseeker

    If the FED dont do a QE3, who will by the 1,5 trillion dollar deficit of Obama? There are simply not enought buyers out there for such big amount of debt that need to be bought.

  • Tom Rankin

    Withdrawal need not be utterly painful with a new bill out that will use the Principals of the Free Market to put an end to the Federal Reserve System and Fiat money forever:
    H.R. 1098, the Free Competition in Currency Act of 2011, which would repeal legal tender laws in order to prohibit taxation on gold, silver, platinum, palladium, and rhodium bullion.

    “…This bill eliminates three of the major obstacles to the circulation of sound money: federal legal tender laws that force acceptance of Federal Reserve Notes; “counterfeiting” laws that serve no purpose other than to ban the creation of private commodity currencies; and tax laws that penalize the use of gold and silver coins as money.” Ron Paul

    “…..in our country today, attempting to use gold and silver as money is severely punished, regardless of the fact that it is the only constitutionally-allowed legal tender! In one recent instance, entrepreneurs who attempted to create their own gold and silver currency were convicted by the federal government of “counterfeiting”. Also, consider another case of an individual who was convicted of tax evasion for paying his employees with silver and gold coins rather than fiat paper dollars. The federal government acknowledges that such coins are legal tender at their face value, as they were issued by the U.S. government. But when it comes to income taxes owed by the employees who received them, the IRS suddenly deems the coins to be worth their full market value as precious metals.” Ron Paul

  • W G Thompson

    With Gov. Perry now declared, the ever-
    haunting issue of secession is going to
    be in play. (He’s in favor of it, and
    has threatened to take TX out of the
    Union if the Feds don’t quit printing
    money and starting meaningless wars.)
    Truth is. we’d be safer and freer as
    4 semi-independent nations, (i.e. NE,
    SE, Mid-West & Far West) united by just
    3 ties: a gold backed currency, a common
    language (Eng.) and a mutual defense
    treaty. Washington, to be sure, would
    cease to exist, and its debts likewise.
    That’s right: default. The WSJ and the
    Economist have now flatly stated that neither the UK nor the US can ever repay
    its creditors. Why delay it any longer?
    That’s just more agony. Every Empire in
    history has collapsed in monetary tur-
    moil; why should we imagine that we’re
    Just one question: what will all the dedicated socialists do with their time? There won’t be a tax base big enuf to
    exploit in any of the 4, nor will
    there be any need for the Federal Reserve.
    What a nice clean slate that would
    vty, WGT

    (A recent E-book that broaches this
    subject is The Organ Lady, on Nook &

  • MarkyMark

    “Or will the markets finally see through the monetary illusion and pour every last bit of free capital into hard assets and out of the US?”

    I think that even when the markets conclude that the US is toast they won’t necessarily think to put money outside of the US. This is because in addition to the delusion that the US is still OK there are a couple of other delusions which might not be exposed at the same time namely:

    (1) the US will always bounce back strongly [the logic here being you stick with the horse you are certain will come good eventually even if it gets behind for a while]; and

    (2) if the US goes down the economic toilet there is no way anywhere else can possibly survive either [people talk a lot about Asia and China but I think most people are still at heart extremely dismissive of just how far China has come and still see them as upstart third-worlders who have stopped riding their bicycles in blue shirts just long enough to learn how to copy things and who will come crashing down to eart the moment that the West goes into an economic funk].

    • Brad Thrasher

      As soon as people realize (1) Chinese accounting standards don’t pass the smell test, (2) China uses 20% of the world’s commodities to produce 5% of the world’s goods; the wheels fall off the so-called China miracle.

      Frankly, China is competitive for lack of (a) social safety net, (b) lack of any EPA standards (c) cheap labor including child & prison labor. This model is less sustainable than our own.

  • Tony D

    They can and will fool us again, no doubt. Despite the increasing futility of their efforts central banks still have liquidity to squander before hyperinflating their respective currencies.
    There will be a recovery from this stock market blip and just when everyone thinks it’s safe to go back in the water …….

    Speaking of distortions isn’t it interesting that there is a 5.3% divergence in silver and gold prices today, in one day alone. Clearly silver isn’t being allowed to be seen as a monetary metal.

    • paper is poverty

      That’s interesting, I had the opposite reaction to the silver price– I thought it held up extremely well yesterday given the carnage in stocks and the massive “risk off” flight to safety. If you compare silver with copper it’s pretty clear it’s not being seen as a base metal either, because while silver has been bobbing around $40 for 2 or 3 weeks, copper took a 10% dive in recent days. My thought was that silver is transitioning from being seen as risky / speculative and industrial to being seen as monetary, and that would explain its unexpectedly solid performance yesterday. Of course it’s not quite there yet, and it may never be seen as the safe haven that gold is, but perhaps it’s gaining some respect. Gold may be the money of kings, but silver is the average man’s gold.

      • Jason Emery

        Yeah, I’m surprised silver is lagging today. Regardless, that is why you practice diversification. Own gold, silver, and precious metal mining stocks. One of those three will go ballistic, if all three don’t. Right now, it is gold’s turn.

        Notice how the media is barely mentioning gold? Not an oversight. They don’t want to emphasize the fact that America’s savings, such as they are, are being marked down a couple of percent, PER DAY!!!

        If everyone owned a little gold, this would be great for America, since, eventually, we all use our appreciated gold to pay off all of our debts, public and private.

        But, unfortunately, it is just you and me a me a few thousand of our closest friends that happen to own gold. So our families will eat, and others won’t be so lucky.

        When gold is valued at several thousand dollars per ounce, someone like The Bernank will say, “it just occurred to me, gold really is money. Everybody should get some.”

  • B

    “abandon, perhaps violently, the existing system?” The hegelian-dialectic or marxist ideology have nothing to do with capitalism, these are used for it’s destruction. I am beginning Rubino is a marxist!

  • RetiredPara

    Excellent point WG Thompson! The only wildcard I see is how our major creditors may react to an actual breakup of our Republic. MarkyMark lays the groundwork for this when he speaks of how far along China is. They now have an incredibly large army, larger reserve forces to draw on, and something they have never had: A bluewater navy with power projection capability. Don’t think for a moment the banksters and their purchased president wouldn’t “Invite” them in to keep order, along with NATO. Perhaps they would also receive some land, for their “help”.

  • Agent P

    You can judge ‘how long this will go on’ by simply contrasting the existing fiscal dynamic with the two-party voting dynamic of the electorate over the past 40 years. The majority of voters have been and continue to be ‘duped’ into voting the two-party plutocracy and so then, the results of that dynamic should not surprise anyone. And let’s not mince around – we are a Plutocracy, headlong into becoming an Authoritarian State as this train comes off the rails – with a large percentage of its occupants dependent upon Taxpayer largesse.

    Private property in rural or semi-rural areas with sufficient populations of like-minded individuals is likely to be the only refuge relatively unscathed by the social chaos and corresponding response of the ‘State’ in the future.

    Moscow Idaho is looking better & better all the time –

  • BJ

    Nice article and nice analogy. Eventually, of course, there will be a QE3, and I believe a fiscal (jobs) stimulus a well……. and sooner rather than later. After all, there are elections to consider, and neither party wants to be seen as hindering job growth.

    It’s all a matter of pain. The path of least resistance (pain) is QE and stimulus, even if the impact is drastically less, and ultimately destructive, because it is still less painful in the present than the alternative. Besides, nobody gives a hoot about the future, it’s all about now.

    The desperation and exasperation from our President and leaders around the world is palpable. In their minds they have to be thinking “we can either get together and launch one final assault on the problem, or let it all crash on our watch”. I think it’s obvious what they’ll do.

  • Agent P

    And one more thing…

    Look at that idiot, goofball, pencil-necked peckerwood in the Jim Rickards interview there on the right hand column of this page. These condescending Numb-Nuts continue to be discredited in their outlooks and assumptions about Gold. Thankfully, Mr. Rickards pointed out towards the end that Gold Is Money. It is becoming hilarious (unbeknownst to them), how utterly ridiculous these high-minded/low-wisdom FTV cranks look. They can’t help themselves but to ‘posture’ that gold has no place in a ‘modern’ economy. Well guess what fella’s, if you don’t own any, yer gonna be ditching those suits for some work clothes right soon, as your economy gets steamrolled for the old-is-new-again economy that is right at our doorstep.

    Thank you.

    • Jason Emery

      I’m hear ya, Agent P. Why does everybody worship Martin Armstrong? He gets out of prison, and immediately says, more or less, ‘I love gold, it won’t go below $1000/oz. What, did they graft a bankster slizzard tail onto his behind?

      And of course you have the Clive Maund’s of the world who are forever proclaiming that ‘gold will go up, unless it first goes down, or maybe sideways, …..’ lmfao

  • paper is poverty

    “a promise of low interest rates pretty much forever… and a statement of willingness to flood the banks with cash again… if the economy keeps slowing.”

    Nice, you nailed that one! Now we’ll see how long the sudden equities euphoria will last. I’m guessing it’ll be measured in days, but that’s just my guess.

  • Bruce C.

    Interesting rhetorical questions.

    So far I think it’s too early to tell. Today, the markets reacted in the traditional way to a Fed “press conference” during heightened financial concerns: Opened higher in anticipation of something positive/supportive/stimulative (especially given the S&P downgrade, low GDP numbers, and market turmoil), followed by an equity-cliff-dive/Treasury-surge as the markets “digested” Ben’s glum analysis, then followed by the countervailing Pavlovian equity surge as the market figured out that equities are a better deal than bonds whose interest rate is guaranteed to be “exceptionally low” until at least mid-2013. Thus, so far, the markets have seemed to learn nothing.

    Furthermore, considering last week, US government bonds continued to be popular in proportion to the bad news globally, hence remaining the “ultimate” safe haven. Again, nothing different, so far.

    We shall all see what tomorrow brings. The markets may come to their senses and keep selling off, or they may meander upwards again having “gotten back to fundamentals”: corporate earnings, lower commodity prices, the global growth story, etc., etc. It will be interesting to see if all the bonds in Europe and the US can be sold on the open market for the next 6-12 months. If the auctions fail then there may need to be QE3.

    It was heartening to see gold prices to react as they did (rationally), but I was surprised silver didn’t surge as well. Maybe it was manipulated but I think it really means that “This” isn’t it, yet.

    • Brad Thrasher

      -Bernanke just cast his vote for a second Obama term.
      -S&P lowers our credit rating and people the world over suddenly rediscover our debt instruments.
      -Silver is ignored. Now there’s a real bargain.

      The financial markets are among the few things that maintain a wow factor for me.

      • Bruce C.

        Bernanke’s bid for a second Obama term, if that’s what he intended, is dicey. Holding interest rates down for so long is bound to create unintended consequences.

        The renewed love fest with Treasuries may be due more to Europe’s/Italy’s problems than some perverse attraction for newly lower rated bonds. S&P’s downgrade seems to be more of a political censure than financial.

        Nevertheless, the financial world still seems to be significantly US dollar-centric. The fact that gold prices rose amidst the turmoil means at least some investors get it, but silver falling like all the other commodities indicates to me that it is not yet considered a monetary metal as much or more than an industrial commodity. Perhaps as one equity price “support level” after another goes down such thinking will change.

        • Brad Thrasher

          Yes, agree that the flight to USD denominated debt instruments is a direct result of a run on the Euro. European banks are experiencing a run similar to what our banks experienced in September ’08. We don’t see lines because the transfers are executed digitally.

          Don’t kid yourself Bruce, Obama is the bankers boy and people vote their wallet. Many of us left of center had hoped for something more in the tradition of a TR or FDR. While many are profoundly disappointed in the 1st term result, U3 did drop from 9.2 to 9.1 and the downward trend should continue given the Fed’s commitment to virtually free money for the fat cats through to 2013.

          The Republicans took the House in 2010 by promising jobs. They haven’t delivered. Paul Ryan’s budget proposal was merely a reduction in social spending to finance more tax cuts for the rich.

          We desperately need tax reform but more in a restructuring of how gubment gets its revenue. Like a reduction in income taxes in favor of a VAT.

          Medicare can be saved simply by letting us old farts keel over instead of spending hundreds of thousands and millions extending lives by 90 days. Virtually every advance health care directive I prepare instructs less heroic medical intervention anyway. Based on my experience the vast majority simply want to be clean, hydrated and pain free while nature runs its course.

          All the best @myrightofcenterfriend.

  • Jason Carter

    In the infamous words of GW Bush, “If you fool me once, shame on me… uhhhh, you can’t fool me again!” QE3 will come, perhaps not until 2012 but likely won’t avert/reverse the next major leg down in equities. It seems most in the U.S. are poor in mathematics and/or fail to consider the consequences of a mature debt-based, fiat currency. As constraining as lovers of Keynesianism/statism claim commodity backed currencies would be, it would seem to spread the wealth more fairly (justly) while limiting the growth of debt and government.

  • mcp

    Screw the Chinese and the retirees,
    Print, print, print, till there’s no more trees

  • kaldon parson

    hi friends
    back again with the same question and i’m completely confused and don’t know what to do,all my saving with usd what should i do ?please help.

    • paper is poverty

      Find a local coin shop, check their prices / premiums, and if it looks okay, start accumulating silver while you read more. Stick to junk silver and gov’t bullion coins, accumulate over time, and you should be fine… but keep reading.

      • Bruce C.

        I agree with “paper is poverty”. Silver has a greater upside potential than gold at this time. The historical gold/silver price ratio is about 16 and it is now 45 (approx. $1760/$39) so silver should eventually gain much more than gold in percentage terms going forward (For example, if gold increases by another 50%, or $2,640/oz, then silver should approach $2640/$16 = $165/oz, which is a 423% gain. Also, I suggest you compare the prices and premiums of any coin shop with a large volume dealer like MONEX (Monex.com).

        • Bruce C.

          Correction: Silver should approach a 323% gain in the example above, not 423% ((165-39)/39 = 3.23 = 323%). Still significant.

        • Johnny

          Is there any evidence for historical ratio’s being written in stone to happen again? Golds mining price is approaching 1000, silvers mining price is what 4.00? So gold could fall by 50%, but silver could fall by 1000% from current levels… That said, I do think silver is a speculative play, but its highly speculative, and I don’t believe in historical ratios, they are bunk.

    • Johnny

      @kaldon, I think your best bet would be something along the lines of 25% cash USD are fine, 25% farmable land – even if its just an acre, 25% oil-coal-uranium-agriculture stocks or etfs, 25% physical precious metals. If you have a small amount of money like under 40K you may just want to go like 80% precious metals and bank on the cheap ones Platinum and Silver mostly, then 20% cash physical.

    • Brad Thrasher

      pip & Bruce are spot on. Will only add that you want to take possession of your silver and/or gold. Start small but steadily and regularly convert those USD’s into American Eagles and pre-1964 US silver coins.

      Just my unqualified opinion but at a minimum you should hold at least 20% of your available cash in the form of gold and silver coin that you keep in your possession.

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  • gman

    “Or will the markets finally see through the monetary illusion and pour every last bit of free capital into hard assets and out of the US?”

    out of the u.s. … where? there’s really nowhere else to put it all.

    “people talk a lot about Asia and China but I think most people are still at heart extremely dismissive of just how far China has come ….”

    china has come a long way. and when the u.s. and european markets crash the chinese will go right back to their rice paddies and bicycles. getting rich was glorious, and becoming poor again is really gonna be depressing.

  • Chris

    The elites had failed America. They encourage consumers to spend even when they cannot afford to. The overpaid CEOs send jobs overseas to justify their obscene pay packet. US bonds are considered to be risk free which is zero risk. The less risky something is, the more risky they becomes. The banks can borrow any amount of money to buy bonds and they can borrow from Uncle Fed. This is a ridiculous situation. The world will be wipe out by inflation if this problem is not addressed. The next downturn will involve the banks again and it will be unmitigatable.

  • Brad Thrasher

    JR asks, “Can they fool us again?” According to CNBC’s Steve Liesman a majority believe the Fed is now more likely to do QE3.

    “57% say the bigger threat to the US is cutting government spending too quickly rather than not getting the deficit under control quickly enough.”

    There are no libertarians in a crisis. Pull themselves up by their own bootstraps? LMAO, our bankers are corporate welfare bums. I’d prefer my tax dollars went to education, single Moms and/or aid to the blind but that’s just me.

  • Eddiehun

    I wonder if the engineers of the present world economic situation are using those hefty supercomputers, and massive modelling programs American citizens bought for universities and governments to develop and learn about big issues. If so, are the data and results being applied FOR, or AGAINST, the People?

  • Jeff

    America is Charlie Brown. Lucy pulls the football away every time and he never learns. Ever. You can fool Americans a million times in a row and they’ll still fall for anything.

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  • Thomas the Tinker

    “Can they fool us again?” the chior members in here, perhaps not. Who believes those in authority care who… is being fooled. At times I feel as if we are stranded down a deep well. We beat on the slippery walls and shout our lungs out but by the time our voice reaches the surface it is only a faint wisper egnored by those with the rope….. They are far to busy taking care of business as they see it. I suppose I am out of that well now and have decided to stand aside and in a way enjoy living in the history being made. Don’t beat me and kick me for that comment…… I am simply done with ‘reacting’ to the situation. In a world were action always beats reaction….. My ‘action’ is to take my assets out of the equation and …. stand aside. Maybe we should all stand aside and see if what comes of all this has the legs…. to make a good long run…

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