Author: Peter Schiff

Despite the fact that the Fed still believes that a recession is unlikely to occur, Bernanke & Co. followed up on last week’s emergency 75 basis point rate cut with a 50 basis point kicker on Wednesday. Not to be outdone by the Fed’s generosity, the House of Representatives and the Bush Administration slapped together a $150 billion “stimulus package”, which can only be delayed by the Senate’s desire to join in the bead throwing. On Wall Street these actions were cheered as heroic, with praise and accolades for all (what could be more politically courageous than handing out free money in an election year.) In a recent poll, fully 78% of economists thought these policies were appropriate…while 18% thought that they were not aggressive enough.

A common definition of insanity is the act of repeating the same activity while expecting a different result. Bernanke is now repeating the same mistakes made by Greenspan, yet he and almost everyone on Wall Street expect a different result. The stock market bubble of the 1990s resulted from interest rates being too low, which sent false signals to businesses, causing them to over-invest in information technology, telecom, and dot coms. When that bubble burst, rather than allowing the corrective recession to run its course, the Fed responded by slashing interest rates. The result was an even larger bubble in real estate; causing consumers too borrow far too much money to buy houses and other goodies.

Now that the housing bubble has burst, the Fed is once again slashing interest rates to postpone the pain. However, in order to correct for years of extravagant borrowing and spending, the country is in desperate need of a period of saving and economizing. But by rewarding debtors and punishing savers, lower interest rates actually encourage the opposite behavior. Given how much harm this strategy has already done in the past why should we assume it will work any better now?

Consider a real world example. Suppose your spendthrift neighbor, maxed out on credit card and home equity debt, no savings in the bank, struggling to make ends meet and one paycheck away from foreclosure and personal bankruptcy, comes to you for financial advice regarding what to do with the $1,200 he received in the Federal Stimulus Lottery? Would your advice be to “go out and buy yourself a brand new plasma T.V.”? My guess is that you would suggest he pay down his debts. If you were a good friend you might help him devise a budget to put his financial house back in order. Such a plan might include trading in his Mercedes SUV for a more fuel efficient Honda, brown bag lunches instead of expensive restaurants, tearing up department store charge cards, cancelling vacations, cutting back premium cable channels, etc. When you are neck deep in debt, the solution is to economize, ratchet down your lifestyle and repair your personal balance sheet. In other words, you go though your own personal recession.

Would your advice be any different if it was not just one neighbor asking but 300 million? If it’s wrong for an overly-indebted individual to blow a windfall, it’s just as wrong if millions of us do it collectively. If our economy is already suffering from too much debt, think of how much worse off we will be after we blow thought these rebate checks.

Or think about it this way — Imagine an obese individual showing up at a Weight Watchers meeting and his counselor handing him a box of Twinkies? How much weight do you think would be lost on the “Twinkie diet?” American consumers have basically stuffed themselves almost to the point of explosion. What is needed is salad; not more Twinkies.

Ironically of course, by blowing up both the stock market bubble in the 1990s and the real estate bubble that followed, Greenspan actually repeated the same mistakes that previous Fed chairmen Benjamin Strong and William McChensey Martin made in the 1920s and the 1960s respectively. It seems sanity is a major disqualification for central bankers.

Visit Peter Schiff’s website.

Author: Jim Sinclair

Thursday the Chairman of the Federal Reserve expressed his support for a significant fiscal and monetary stimulus as a preemptive strike against a U.S. recession. The market answered by dropping over 300 points. Today the President of the U.S. broadly outlined a non-specific plan for economic stimulation. After the Administration’s plan for $150 billion of economic stimulation was made public, the DOW closed almost 60 points lower. The result of the Bernanke/Adminstration fiscal and monetary stimulus is a total Dow decline of 479 points, according to my calculations.

Nothing said by either luminary addresses the problem, including those that developed this afternoon by the downgrade of the debt of Ambac, one of the four major bond insurers, MBIA, MGIC and similar companies dealing in OTC Default Derivatives. Should S&P and Moody take similar action, which is expected, two trillion in debt should also be downgraded. The downgrade of the debt of the guarantor must impact the debt they have guaranteed. So the two trillion is debt that may well and should be downgraded now is another domino of titanic size.

This afternoon’s problems are new and their size says both Kings Are Wearing No Clothes” with respect to their presentations of Thursday and today.

The general equities market must be calmed. Should the Dow crater, another major domino falls. Let’s see how the PPT (Price Protection Team) brings the Dow in Tuesday morning in pre U.S. trading and then how Tuesday closes. The DOW better be higher each day than the indices are before U.S. trading or as the last two days demonstrated, the PPT has lost its tight control of the equities markets. Watch the pre-open indices and closing Dow very closely.

If the equity markets cannot be calmed then:
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Paulson, Banks in Talks to Stem Surge in Foreclosures

By Alison Vekshin and Craig Torres

Nov. 30 (Bloomberg) — U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.

Paulson, who will address a housing conference on Dec. 3, presided over a one-hour gathering at the Treasury Department in Washington with federal regulators, bankers and lobbyists. Citigroup Inc., Wells Fargo & Co. and Washington Mutual Inc. executives attended, said a person present, who spoke on condition of anonymity.

The Bush administration cut its forecast for economic growth yesterday, reflecting a deepening housing recession that’s roiled financial markets since August. The Commerce Department reported the same day that the median price of a new house fell 13 percent in October from a year earlier, while fewer homes were sold than economists anticipated.

“One of the roles of Treasury is to say `come on, let’s get together and see what we can do,”’ said Wayne Abernathy, executive director of financial-institutions policy at the American Bankers Association in Washington and a former Treasury assistant secretary. “You’re likely to come up with something that will work both in the marketplace and honor the sanctity of the contracts involved.”

Stocks Advance

Stocks climbed today on speculation Paulson’s efforts may help slow credit losses. They also gained after Federal Reserve Chairman Ben S. Bernanke said “renewed turbulence” in financial markets may hurt growth, reinforcing investors’ expectations for an interest-rate cut next month. The Standard & Poor’s 500 stock index rose 0.8 percent to 1,481.14 at the close in New York.

Paulson was joined yesterday by Federal Deposit Insurance Corp. Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich.
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Representative and Republican Presidential candidate Ron Paul questioning Federal Reserve Board chairman Ben Bernanke about the debasement of the dollar at the JEC in Congress on November 8th, 2007

Learn the truth about our present monetary system:

It took Jon Stewart from Comedy Central to make the former Federal Reserve Board Chairman admit there is no free market in America because the Fed regulates the market for money! Notice how Mr. Greenspan also admits implicitly that only under a gold standard and without a central bank can there be a true free market.

Watch Mr. Greenspan admit it:

By Peter Schiff

Coming at a time when rate increases were needed to combat the sinking dollar and surging gold, oil and other commodity prices, Ben Bernanke’s 50 basis point cuts in the Fed funds and discount rates this week may go down as the most irresponsible move in Fed history.

To America’s creditors around the world, whose mountains of dollar reserves will be debased by lower rates in the U.S., this action amounts to the monetary equivalent of “let them eat cake.” My prediction is that rather than doing so, they will just throw it back in our faces, and refuse to continue funding our deficits.

Wall Street bulls have heaped praise on the Fed, at times calling the rate cuts courageous and brilliant. From their response, you would have thought that Bernanke’s solution was akin to Einstein’s breakthroughs on relativity. In the first place, what is so brilliant about cutting rates? My five year old could do it and would gladly accept payment for his service in popsicles.

Furthermore, a fifty basis point cut was not an act of bravery but one of cowardice. The brave thing to do would have been to raise rates and allow market forces to purge the economy of the imbalances built up during the Greenspan bubbles. It would have taken some real courage to level with the American public and let them know that our profligacy has consequences, rather than pretending it can ride to the rescue with a wave of its magic wand and a crank of the printing press.
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Yesterday (Friday, September 21st, 2007) the gold price for physical purchase was fixed at $737.00 per troy ounce in the London P.M. session. The gold price is fixed twice a day in London. The A.M. fixing is done from 10:30 onwards and the P.M. fixing is done from 15:00 onwards. The reason why we are looking at the P.M. fixing is that during this period the major financial markets of Europe and the United States are open so this fixing price is very representative of physical demand for gold bullion.

Prior to yesterday the second highest weekly P.M. fixing ever had been last year on May 12th when gold was fixed at $725.00. One needs to go back to January 18th, 1980 to find the highest weekly P.M. fixing ever at $835.00. It is not surprising that the second highest ever weekly fixing for gold came on the week that the Federal Reserve Board decided to slash the the Fed Funds and Discount rates by 1/2 of a percent. The Fed’s aggressive rate cut came despite the fact that the Dow Industrial average is near its all time peak of 14′000, the unemployment rate is at a relatively low 4.6% and when U.S. G.D.P. growth is growing at a 4% rate according to the preliminary second quarter data reported by the U.S. government.

We think the gold price is telling us the international money market does not trust Ben Bernanke, the Federal Reserve Board chairman, to maintain the integrity of the United States’ currency.

The Gold Weekly P.M. fixing chart courtesy of Bloomberg.

By Peter Schiff

During his testimony before Congress this week, Ben Bernanke didn’t hesitate to opine on a number of topics that had very little to do with his mandate as Fed Chairman. The wealth gap, racial factors in income inequality, and the impact of capital gains tax policy were all fair game.  But when queried about the one issue where his impact is unrivaled, the value of the U.S. dollar, the Chairman quickly passed the buck to the Secretary of the Treasury. Conveniently, the Secretary was nowhere in sight.
 
This should come as a surprise to no one, but the Fed sets monetary policy in the United States. The last time I checked, money in the United States is the dollar. Therefore monetary policy is in fact dollar policy. The supply of dollars is regulated by the Federal Reserve, with ostensibly no interference by the Federal government. The Fed also independently sets short-term interest rates, which are a huge factor in determining the dollar’s value. In other words, the Fed controls both the supply of and yield on dollars. Bernanke claims to be worried about inflation, yet will say nothing about the value of the dollar. Prices rise as a result of the dollar losing value. How then can he ignore the persistent weakness in the dollar and refuse to comment on its effects on domestic inflation?

Why defer to the Secretary of the Treasury? Other than signing the bills, what does he have to do with monetary policy? As a member of the Cabinet, the Secretary’s job is to advise the President on economic matters, manage the finances of the United States, help plan the budget and oversee appropriations. He has no control over either money supply or interest rates. That power was delegated to the Fed in 1913. Potentially, the Treasury Secretary could authorize using our meager foreign exchange reserves to buy dollars, but given our limited bank account of foreign currency, such intervention would be more embarrassing than effective. There is literally nothing the Secretary can do except repeat the useless mantra “A strong dollar is in our national interest.” 
 
Another interesting exchange occurred when a Congressman asked Bernanke what he would tell his Chinese counterpart in order to help convince the Chinese government that an appreciated yuan was in China’s interest. First, Bernanke noted that a free-floating yuan would enable China to pursue an independent monetary policy. Unburdened by the need to print yuan to buy U.S. dollars, China could end the domestic inflation which is now causing Chinese consumer prices to rise and which has caused the formation of asset bubbles. The Chairman neglected to mention that if this were to occur, China’s retreat from the U.S. Treasury bond market would send interest rates in this country significantly higher.

Second, Bernanke correctly stated that a higher yuan would create additional purchasing power in China, resulting in a higher percentage of China’s resources being devoted toward satisfying domestic rather than foreign demand. The Chairman neglected to mention however, that such a re-allocation would result in fewer exports to the United States and higher prices for American consumers.

So if China actually adopted Bernanke’s suggestions, the result in America would be that both consumer prices and interest rates would rise. For someone who claims to be worried that inflation will fail to moderate or that the subprime problems might spread to the overall housing market and the economy, it seems odd that Bernanke would encourage China to take steps that significantly raise the likelihood that both scenarios occur simultaneously.

Finally, Bernanke dismissed concerns about the wisdom of favoring core inflation over headline by asserting that oil prices will soon moderate. Considering that oil prices rose another 2% during his two-day testimony, and that he and his predecessor have consistently underestimated oil prices for years, what now makes his crystal ball any clearer? Also during his two-day testimony the dollar fell to new lows against most currencies and gold prices rose $15 dollar per ounce. Bernanke may claim that inflation is under control, but $76 dollar oil and $670 gold suggest otherwise.

For a more in depth analysis of the tenuous position of the American economy and U.S. dollar denominated investments, read my new book Crash Proof: How to Profit From the Coming Economic Collapse (Lynn Sonberg Books)”

Visit Peter Schiff’s Website