Thursday, May 26, 2011
The Flight into Gold. Rampant Inflation and the Collapsing Dollar System
When QE3, or something akin to it, is implemented during the summer, it will give the stock and bond markets one last boost. Most of the gains from a future QE3 have already been reflected in the market place. On the other hand such recognition by investors, not as yet discounted, will give a very large boost upward to gold and silver. As this takes place downward pressure will begin to appear in the stocks, bonds and the dollar. Those events will make it even more difficult to sell US Treasury and Agency bonds. Efforts will have to be added by the Fed to cover up the again ongoing losses of banks and brokerage houses – the financial sector – under the concept of too big to fail. The greater the effort needed to save these bankrupt institutions and the government the greater heights gold and silver will rise too. Adding fuel to the fire most other nations will have their own versions of QE3 compounding world inflationary problems. Even if a nation is not causing inflation they are forced to absorb foreign nation inflation whether they like it or not.
You have to look at the terrible fundamentals America is facing. The Fed has a balance sheet close to $3 trillion that could be $5 trillion in a year and one-half. If they purchase 80% of Treasuries and Agencies and bolster the declining economy. There is no end in sight for zero interest rates. Both the increases in money and credit and low interest rates will continue to send inflation into orbit. Monetization is the name of the game and the Fed and other central banks are playing it to the hilt. The ECB raises interest rates ½% and expects miracles. That could happen after they raise them 5% to 6%. Talk about misdirection as they continue to increase money and credit. They must think fellow Europeans and others are dumb and that is not the case. They knew as well as we do that what the Fed and ECB does causes monetization and inflation. Americans are used to inflation and heretofore they have been able to adjust for it. Other nations have not had that luxury in the past. Foreigners are far more sophisticated when it comes to propaganda and do not as easily fall for it as Americans do.
You would have to be stone dumb not to recognize the rampant inflation in the US, England and Europe. Gasoline and petroleum derivative products and food costs have gone up substantially. Not only in the regions but also worldwide. As a result inflation will be 14% in the UK and US by yearend and 8% on the Continent.
It is not only the federal government that is broke, but so are the states and municipalities in the US. Europe and England have the same problems. More than 40 states are struggling to balance their budgets. Most will, some will not and they’ll default on the interest payment on their bonds and probably have to pay vendors with IOU’s. There could be another federal bailout but we doubt it due to the battle over budget cuts in Washington. As these problems stand in the forefront the government’s debt dilemma is not going to go away anytime soon and over the next two years the US could experience a downgrade in its credit rating. Unfunded liabilities are $105 trillion and they are unfunded. Although stretched over years they still have to be paid unless benefits are adjusted.
We address the problems in Europe every week. Greece and its financial problems are still being negotiated. The discussion at hand only carries the shortfall in funding over the next year or two. The demand by banks for collateralization of debt by just about everything Greece owns has been rejected not only by the people, but by most of the politicians as well. Greece cannot pay its debt even over time and should default in part or in total. Again, the loans should have never been made and the bankers knew better. Similar conditions exist in Ireland and Portugal and Belgium, Spain and Italy could and probably will follow. One interest rate could never fit all. The euro zone is in deep trouble and the EU is starting to crumble at the edges. The sovereign lenders, German, France, the Netherlands, Austria and Finland, are very disturbed with the position they find themselves in. The Germans and the Finns have been quite vocal about the situation and recent elections in Germany made it quite clear that they do not want to fund any further loans. As we said a year ago $4 trillion will be needed to solve the problems and producing that kind of funding would certainly break the funding nations. As we said a year ago, the second half of 2011 will be full of dangerous problems. In the midst of all this we have the head of the IMF arrested and charged in what we see as an elitist power struggle with the US faction in the US entrapping a member of the European contingent to remove him from his position. It worked, but the fallout will be felt for many years to come. This intercene warfare is happening at a most unfortunate juncture in the midst of discussion involving Europe and the IMF and Greece and other debtor nations. These events have heightened the pressure on an already unstable situation.