There’s no doubt that the big question for markets this week and next is whether Bernanke will crank up the printing-press and purchase more US debt, in a so-called QE3. And from my point of view the answer is very easy: yes, he will. Bernanke’s academic career is characterised by him publishing papers on novel ways for government to stimulate the economy. And while he didn’t directly announce a program of easing, he did extend the next Fed policy meeting to two days, possibly to build consensus on the tools and the exact methodology that will be deployed. And with “highly-influential” investment bank Goldman Sachs foreseeing a program of great easing going into 2012 who am I to disagree?
new world order
To QE, or Not to QE…
Just a couple of days ago, I made the case that QE3 is coming — even if it is unannounced tomorrow . Indeed, it seems increasingly unlikely — in spite of Goldman’s pleas for a $1 trillion injection — that QE3 will be announced by Bernanke tomorrow. There are a multitude of reasons: the unseasonable austerity climate in Washington, the protestations of Wen Jiabao, inflation fears, and a number of positive economic signs in a national survey from the Chicago Fed.
Bernanke’s academic record suggests more easing. Here he is in 1999 on Japan’s monetary woes:
Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and
to do what needed to be done.
Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary 26 authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.
By all means that would suggest that QE3 is very much on. So we have conflicted signals. It’s at times like these when I bring out Shakespeare:
To be, or not to be, that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles,
And by opposing end them? To die, to sleep,
No more; and by a sleep to say we end
The heart-ache, and the thousand natural shocks
That flesh is heir to: ’tis a consummation
Devoutly to be wished. To die, to sleep;
To sleep, perchance to dream – ay, there’s the rub:
For in that sleep of death what dreams may come,
When we have shuffled off this mortal coil,
Must give us pause – there’s the respect
That makes calamity of so long life.
We all know that Bernanke will not stand and watch as markets, asset prices and confidence tanks. Yet in my view that no amount of quantitative easing alone can get America out of the troubles she is in. Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, systemic fragility, and so forth. The real question is when will America tire of the slings and arrows of fortune? When will America take arms against her sea of troubles? And how long will she last on this mortal coil? To die? To sleep? For in that sleep of death what dreams may come…
Angela Merkel says that Europe won’t issue Eurobonds, presumably heeding the warning that handing over 133% of German GDP to bailing out PIGS may not go down so very well with the German taxpayer. From Bloomberg:
German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying that she won’t let financial markets dictate policy.
Joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of Germany’s constitution, Merkel said. While common borrowing might arrive at some point in the “distant future,” bringing in euro bonds at this time would further undermine economic stability and so they “are not the answer right now.”
“At this time — we’re in a dramatic crisis — euro bonds are precisely the wrong answer,” Merkel said in an interview with ZDF television in Berlin yesterday. “They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”
The Great Gold Squeeze
So what’s next for gold? The weekend is over, and the week is about to begin — and that means gold, equities and debt trading in Asia will shortly be under way. Gold has been in a meteoric move upwards, spurred to even greater heights by Hugo Chavez’s announcement that Venezuela would repatriate its gold holdings from foreign banks — specifically those in London and New York.
From Things That Make You Go Hmmm (an absolute must-read):
Chavez’s move this week could set in motion a chain of events whereby Central banks who store the bulk of their gold overseas in ‘safe’ locations scramble to repossess their country’s true ‘wealth’. If that happens,the most high-stakes game of musical chairs the world hasever seen will have begun.One would imagine that a country’s gold would be storedonshore in their own vaults rather than be entrusted to a foreign power – after all, if tensions were to rise between the two sovereigns, amongst the first casualties would be said gold.
In trading since Chavez’s announcement, gold has shot up further. Of course there are other reasons for gold to rise — fiat debasement, sovereign debt concerns, equity weakness, concerns with overall trading conditions. But — ever since Gordon Brown offloaded Britain’s gold reserves for less than $300 an ounce at the millennium — coinciding with the peak of the fiat bubble — gold has shot up in value over 500%, and finally central banks are shifting holdings back into gold — especially the central banks of developing nations like China, Brazil and Russia, whose gold holdings have shot up 900%:
But the real problem may be that the vast growth in paper gold trading has been built on the backs of a very, very small physical base. Will the paper house of cards come tumbling down if part of the physical base is removed and sent to Venezuela? From Zero Hedge:
What could well be a gamechanger is that according to an update from Bloomberg, Venezuela has gold with, you guessed it, JP Morgan, Barclays, and Bank Of Nova Scotia. As most know, JPM is one of the 5 vault banks. The fun begins if Chavez demands physical delivery of more than 10.6 tons of physical because as today’s CME update of metal depository statistics, JPM only has 338,303 ounces of registered gold in storage. Or roughly 10.6 tons. A modest deposit of this size would cause some serious white hair at JPM as the bank scrambles to find the replacement gold, which has already been pledged about 100 times across the various paper markets.Keep an eye on gold in the illiquid after hour market. The overdue scramble for delivery may be about to begin.
The real question is whether any such scramble would cause more panics, more scrambles — to get out of cash, treasuries and equities and into gold and silver bullion — causing a deeper and harsher crash. Current data suggests that this is unlikely — but the deep worries over sovereign liquidity, fiat debasement, and food and fuel scarcity suggest that a panicked scramble out of cash is not entirely out of the question. Here’s a fantasy re-enactment of one not-entirely-improbable scenario:
$2000 gold ain’t far away:
Is Gold High or Low?
Have you been buying gold and silver? Lots of people, businesses and countries have — yesterday gold shot to a record $1880, on concerns about just about everything. Buyers clearly think they must be getting a good deal — but so did that those who bought at the apex of the dot com bubble and who then watched their investments crash into a heap. So is gold high or low? Certainly it is higher than it has been — gold has shot up over 500% since 2001. But if it went up another 500% prices today would seem pretty cheap.
Sticking your neck above the parapet often means you get splattered by tomatoes, whether you’re right or whether you’re wrong. I greatly enjoy getting attacked by those who resort to name-calling, but being misquoted is very annoying. A recent dispute regarding Paul Krugman had an adversary accuse me of saying that “gold is high”. Really? Gold is high? Compared to what?
China’s Trillion Dollar Bluff
Is China outsmarting America? Since I began writing this blog, I have paid keen attention to the strange and tempestuous relationship between the world’s greatest industrial behemoth, and history’s greatest debtor. Of course, any student of international relations or history could tell you that diplomacy is a game of bluff and counter-bluff. From Reuters:
China is confident the U.S. economy will get back on the track of healthy growth, China’s Premier Wen Jiabao told visiting U.S. Vice President Joe Biden on Friday during his five-day trust building mission to the United States’ largest creditor.
Earlier in the day, China’s vice president and heir apparent Xi Jinping gave a ringing endorsement of the resilience of the debt-ridden American economy during a second day of talks with his U.S. counterpart.
Pentagon Plans for War with China
Has someone at the Pentagon been reading azizonomics.com? While I recognise that all great powers will devise contingency plans, it should come as no surprise that Pentagon resources are being directed toward devising a strategy to fight none other than the single largest Treasury creditor, China. After all, as I have pointed out time and again, they are not happy that so much of their productive output is going to stock Wall Mart, Target and J.C. Penney in exchange for the increasingly devalued dollar. From Salon:
This summer, despite America’s continuing financial crisis, the Pentagon is effectively considering trading two military quagmires for the possibility of a third. Reducing its commitments in Iraq and Afghanistan as it refocuses on Asia, Washington is not so much withdrawing forces from the Persian Gulf as it is redeploying them for a prospective war with its largest creditor, China.
According to the defense trade press, Pentagon officials are seeking ways to adapt a concept known as AirSea Battle specifically for China, debunking rote claims from Washington that it has no plans to thwart its emerging Asian rival. A recent article in Inside the Pentagon reported that a small group of U.S. Navy officers known as the China Integration Team “is hard at work applying the lessons of [AirSea Battle] to a potential conflict with China.” Continue reading
Europe Bans Shorts (Backside Now Exposed)
No, not those.
While England may have quietened down (for now), Belgium, France, Italy and Spain have over-ridden European regulation to impose 15-day short selling bans on their markets. While there are huge black holes of debt slowly sucking those nations’ good faith and credit into the mists of the universe, regulators seem to have forgotten that imposing short selling bans didn’t prevent a crash in September 2008. Abraham Lioui, a professor at the Edhec business school in France, said:
It is the worst thing to do right now. This would signal to the market there may be something fundamentally bad that is happening.
Xinhua: “China Has Right To Demand US Address Debt Problem”
From the Wall Street Journal:
In a biting commentary, [Xinhua] urged the international community to improve supervision over the U.S. dollar and said the world may need “a new, stable and secured global reserve currency to avert a catastrophe caused by any single country.”
“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,”
The remarks came after the Standard & Poor’s Friday removed the U.S. government from the list of risk-free borrowers, citing concern about the rising burden of long-term federal debt.
China, with over $1 trillion invested in U.S. Treasurys, is among those that would be most immediately affected by any U.S. default or downgrade.
Too Big Not to Fail
In my last post in this series, I concluded:
I believe that the best kind of stimulus is drastically cutting military spending and spending the money instead on infrastructure — energy infrastructure (including alternatives to oil), education, transport, science, construction, food security. This can be done both through government spending, and by returning some money to the poor and middle class taxpayer to invest or spend. Achieving that would give us all something to be optimistic about.
Eliot Spitzer, the former Governor of New York writing for Slate in 2008 concludes much the same thing about the blockbuster financial aid package received by banks in the heat of the last crisis:
Vast sums now being spent on rescue packages might have been available to increase the intellectual capabilities of the next generation, or to support basic research and development that could give us true competitive advantage, or to restructure our bloated health care sector, or to build the type of physical infrastructure we need to be competitive.