Thursday, March 22, 2012

Fed's Near Zero Interest Rate Policy-Recipe For Disaster?

I wrote previously that the Fed's low interest rate policy marked one of the biggest thefts in history. It is, by giving savers,the thrifty,the conservative, the honest, a return on savings below the rate of inflation with bank deposits etc, the biggest shift of money ever in an attempt to reflate the economy. 


The result has been patchy at best after four years but the loss of income for savers is a certainty. This has forced many into the speculative stock market which has,with ups and downs, given a return. However it comes with anxiety and uncertainty and could end in tears-the savers after a lifetime of toil, don't deserve to be treated so callously.


Economic commentator Jim Willie discusses (full article AT THIS LINK) another aspect of the Fed's interest rate policy-the distortion in the marketplace it causes and the possible long term results. That negative results are a near certainty is in line of course with what happens when the government interferes in the free market. Willie is colorful in his language but that does not mean that his premises are wrong and many of the truths he espouses are time proven and obvious. Food for thought and a reinforcement of conservatism.
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$TRILLION USGOVT DEFICIT LOCKS 0% RATE
Few analyst seem to report a basic factor. The USGovt cannot afford a higher rate on borrowing costs than 0%, not now and not ever. So it will become permanent. This is the New Normal with ugly warts. There can be no Exit Strategy, since the government finances dictate no change. A normal borrowing cost would mean the debt finance cost would rival the defense budget in cost, and overshadow the Medicare cost. The USGovt deficit thus locks the 0% rate and puts the USFed in a monetary straitjacket. They refuse to discuss it, but instead wiggle around with feeble explanations of its continued policy. Notice the extension into 2014 of the accomodative 0% rate. What a farce! What a tragedy! What a pathetic excuse of a central bank! A vicious cycle is underway where the gargantuan federal deficits require continued 0% costs to finance them, but the 0% cost of money has its own heavy effect and damaging toll. The biggest insurance policy to the gold bull market is the USGovt and its runaway deficits.

DESTRUCTIVE DAMAGE OF 0% MONEY
The Jackass message has been steady and relentless. The 0% cost of money makes for a grotesque distortion in asset prices, all of them. Nothing is properly priced. The free money results in rising cost of everything rising. All categories rise inexorably within the cost structure. Wages do not, thanks to the forfeit of industry to Asia, in particular to China. So the squeeze on capital continues unabated and with ferocity. Capital is killed. By that is meant that marginal businesses and segments of business units within larger corporations will gradually respond to higher costs (equipment, materials, fuel, shipping) by closing the businesses. Workers are cut, but more importantly capital is retired, equipment is turned off, and capital is liquidated. A truck or machine or computer or telephone system might be sold off. The rising costs and more rigid final product prices dictate business shutdowns, since the profit margin is squeezed, then goes negative, forcing business decisions. The destructive effect on working capital from 0% money remains the singlemost blind spot of American and Western economists. They call it stimulative, when it is the exact opposite. They are badly educated. They are compromised by their paychecks. They are dead wrong, blind to the death of capital beneath their arrogant noses. Gold will benefit from the free money provisions, and head north of the $2000 price with ease. Gold will serve as capital sanctuary under attack.

HEAVY RELIANCE ON MONETARY INFLATION
As foreign creditors continue to shed USTreasury Bonds, the USGovt is left with a growing and near total dependence upon the US Federal Reserve to purchase its debt. It has no choice but to rely upon the inflation machinery apparatus to buy the USTBonds. Few bond dealers wish to continue, but their hope is not to be stuck with inventory, should the USFed stop buying. The dealers are acting as middlemen and nothing more. China continues to unload USTBonds, the latest month showing more of the same recent pattern. As Valery Giscard d'Estaing called it, the US benefits from the "Exhorbitant Privilege" of abusing the global reserve currency to finance its own debt in an unaccountable manner. Worse, the United States though the powerful forces of the Competing Currency War, has forced all major central banks to participate in the heretical 0% money policy. Nations that opt not to play the game will suffer from a rising currency exchange rate and damaged export industry. The major central banks are collusive in their policy, the effect being a Western world capital destruction slow burn. See the Global QE as it involves the US, Britain, Europe, and Japan not only in setting interest rates absurdly low, but in vast bond purchases wrapped in monetization schemes. Once upon a time 20 to 30 years ago, such schemes were called highly destructive and extremely unwise. Today they are normal tools. Gold will benefit from such powerful monetary inflation and debasement of money itself.  

COLLAPSE OF SOVEREIGN DEBT FOUNDATION
Holding like pillars the debt-based monetary system are the major banks. Their profound insolvency serves as proof positive of the broken structures of the monetary system itself. This is so plain to see. A mere FASB paper mache glued onto a rotten pillar does not permit it to bear weight. The legitimate matter behind the pillars is surely being siphoned as mass to other locations, while the farce of patch solutions continues with each passing month. The inescapable fact is that the world requires a new monetary system. To put it into place requires the liquidation of the old banks and sovereign bonds, which would mean making paupers and vassals out of the elite masters. So the game goes on.

USECONOMY MORIBUND WITHOUT INCOME
The concept of a jobless recovery is a bad joke. Such a concept does not appear in economics textbooks or its legitimate lexicon. The expectation of recovery without vast income machinery is a fantasy. The decision to ship US industry to Asia in the 1980 decade saw a climax in the 2000 decade with the advent of China. In doing so, the USEconomy lost its legitimate income sources and turned to inflating assets to power the national economy. It was the singlemost destructive trend in modern United States history on a financial basis.Income was replaced by debt, and the rest is history, where economists should be forced to inscribe the epitaphs. Stimulus programs at the USGovt level are mere plugs for state deficits. Infrastructure projects turn out to be funnels for Chinese contracts. As Kurt Richebacher told me in August 2003, as best recalled, "A nation that lacks industry is doomed, as it must at least dominate in transportation and steel, but the United States does not anymore." The financial press and banking leaders curiously serve up endless nonsense in viewpoints, that the US consumer is the engine. It is not. The engine is industry, and the USEconomy sorely lacks it. Unless and until the USEconomy brings back industry, factories, and all the supply chain encoutrements, the nation will remain moribund and without adequate income. The latest data, the December trade gap, shows a record setting $52.5 billion monthly deficit. This is not an economy in recovery. The rising energy prices are yet another crippling factor. A loud echo can be heard in Japan, where the nation is shocked by the reality of steady trade deficits, never seen in recent history. The power structure is to be turned on its head.




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