Quote of the Day: Dissenting Opinion on Open Ended QE at the FOMC

The Federal Open Market Committee (FOMC) decided on September 13, 2012, to purchase additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee released a statement after the meeting saying that it expects a highly accommodative stance of monetary policy to remain appropriate for a considerable period after the economic recovery strengthens, and that it currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

I dissented because I opposed additional asset purchases at this time. Further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, it’s also likely to cause an unwanted increase in inflation.

Economic activity has been growing, on average, at a modest pace, and inflation has been fluctuating around 2 percent, which the Committee has identified as its inflation goal. Unemployment does remain high by historical standards, but improvement in labor market conditions appears to have been held back by real impediments that are beyond the capacity of monetary policy to offset. In such circumstances, further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations.

I also dissented because I disagreed with the characterization of the time period over which the stance of monetary policy would be highly accommodative and the federal funds rate would be exceptionally low. I believe that such an implied commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases would be inconsistent with a balanced approach to the FOMC’s price stability and maximum employment mandates.

Finally, I strongly opposed purchasing additional agency mortgage-backed securities. These purchases are intended to reduce borrowing rates for conforming home mortgages. Such purchases, as compared to purchases of an equivalent amount of U.S. Treasury securities, distort investment allocations and raise interest rates for other borrowers. Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve. As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, “Government decisions to influence the allocation of credit are the province of the fiscal authorities.”

(bold highlights mine)

This is from Richmond Federal Reserve president Jeffrey Lacker [hat tip Zero Hedge]

The Impact of Open Ended QEs on Asia: Bubbles or Stagflation

At least some foreign experts have an idea of the risks posed from inflationist policies, adapted by political authorities of developed economies, on Asia.

From CNBC-Finance.yahoo

The Federal Reserve's measures to revitalize the U.S. economy pose risky side effects half way across the world in Asia, warn experts, particularly in the form of asset bubbles driven by an inflow of speculative funds into the region.

Pumping cash into the U.S. financial system tends to have a spillover effect on other parts of the world and Asia, in the past, has been a big beneficiary of the extra cash looking for a home.

"The problem is that the Fed is simply not paying attention to Asia because they are so concerned about the internal economic dynamics in the U.S. and they are trying to resuscitate the U.S. labor market," Boris Schlossberg, Managing Director, BK Asset Management told CNBC Asia's "Squawk Box" on Friday.

"It is creating a bifurcated result where you (get) higher asset prices, but not necessarily quality growth," he added.

Hot money flows into the region are likely to return.

Currency debasement policies in the developed nations would motivate investors to move funds elsewhere. This has been widely known as “the search for yields” which in reality signifies as a capital flight dynamic where investors seek refuge for savings.

More from the same article:

The Fed announced on Thursday its third round of monetary stimulus, in which it pledged to buy mortgage related debt and other securities until the country's labor market showed sustained improvement.

The last two rounds of quantitative easing in 2009 and 2010 resulted in massive capital inflows into the region of $66 billion and $96 billion, respectively, according to data from the Asian Development Bank (ADB), some of which was withdrawn in 2011, contributing to a subsequent slump in markets.

The ADB warned earlier this week that history could repeat itself should the region be hit by a surge in speculative fund inflows, adding that policymakers should brace for a scenario where money exits the region as quickly as they entered.

Vishnu Varathan, Market Economist at Mizuho Corporate Bank, says Asia could see an even higher level of capital inflows this time around, since the Federal Reserve is unlikely to be the only major central bank launching renewed quantitative easing - the European Central Bank, for instance, may also step in with asset purchases.

He says the region's property market is most vulnerable to sharp price increases, particularly in countries such as Singapore and Hong Kong - where the seeds were sown a few years ago from previous rounds of monetary stimulus - and nascent markets like Indonesia.

Earlier I postulated that intensifying inflationism in Japan and in western nations will drive savers (or the capital flight dynamic) into Asia. This should include the Philippines.

But since (inward) capital flows into ASEAN will reflect on global central bank activities, this dynamic would not be limited to Japan but would likely include western economies as well.

With the Fed and the ECB riding into the open ended-unlimited options, it’s not far fetched for central banks of Japan (BoJ), England (BoE) and others to join the club.

By putting a cap on the Euro-Swiss Franc, the central bank of Switzerland (SNB) have been the frontrunner of the open ended asset purchasing policy options where signs of internal bubbles have emerged.

Yet unlimited inflationism will likely to spur consumer price inflation that increases the risks of stagflation especially on emerging Asia.

Vasu Menon, Vice President, Wealth Management Singapore, adds that rising prices will pose a challenge for Asian central banks going forward.

"I think central bankers are worried about inflation - the Philippines for example held its rates steady because they are concerned about inflation," Menon said, referring to a decision by the Philippine central bank on Thursday to leave its benchmark interest rates steady at 3.75 percent.

As I recently wrote,

High commodity prices are likely to influence emerging markets consumer price inflation more. Food makes up a large segment of consumption basket for emerging Asia including the Philippines. This would prompt for their respective central banks to reluctantly tighten. Monetary tightening will put pressure on the stock market.

Stagflation, thus, also represents both a contagion and internal (political and market) risk for the Philippines and for emerging Asia.

Yes the risk ON environment has been re-triggered by massive inflationism by the Fed and the ECB.

And one of the above risks (a bubble or stagflation) will become a force to reckon with in Asia, possibly in 2014 or 2015. All these will essentially depend on the feedback mechanism between the dynamics at the marketplace and policy responses on them.

Quote of the Day: The Roots of Arab and Islamic Hatred

What are the roots of that Arab and Islamic hatred?

Osama bin Laden in his declaration of war against us gave three reasons as his casus belli.

His first reason for war was the presence of U.S. troops on the soil of Saudi Arabia, sacred home to Mecca and Medina. His second was the U.S. sanctions on Iraq then said to be causing the premature deaths of as many as 500,000 Iraqi children.

Third was U.S. support for Israel, seen in the Arab world as a colonial implant to humiliate them and deny to the Palestinian people their right to a nation of their own.

Lately, new causes of Arab and Muslim hatred of us have arisen.

The first is what devout Muslims regard as our immoral and decadent culture, which they see as a threat to their societies and their young.

The second are the Islam haters and baiters in America and the West who deliberately provoke them with insulting and blasphemous portrayals of the Prophet and their faith.

While the U.S. bases in Saudi Arabia have by now largely been closed, and the United States is largely withdrawn from Iraq and the sanctions there have all been lifted, America is not going to change herself to accommodate their world.

Support of Israel is the declared position of both parties. And, though Secretary of State Hillary Clinton rightly called the crude amateur film "Innocence of Muslims," which caused the latest anti-American rioting, both disgusting and reprehensible, we are not going to repeal the First Amendment, which protects provocateurs and pornographers.

Yet, worldwide, there are hundreds of millions of Muslims for whom their faith is their most priceless possession. They live it. They will die for it. And not a few will kill for it. Others will seize upon real or imagined insults to that faith to excite the crowds to expel us from their world.

And some Americans will accommodate them by using books, films and videos to manifest their contempt of Islam.

So we have here an irreconcilable conflict.

The Islamic word, especially across the Arab region, is undergoing a transformation, a Great Awakening. Muslims from Nigeria to Mali to Ethiopia to Sudan to the Maghreb and Middle and Near East are growing more militant and more hostile toward Christianity and other faiths.

This is from Patrick J. Buchanan, co-founder and editor of The American Conservative writing at the Lew Rockwell.com

Inflationism Promotes Inequality, Immorality and Economic Hardship

Contra to what has been advertised by politicians and the mainstream, the policy of inflationism has essentially been political than about economics (e.g. couched by technical vernacular as “unemployment” or economic recovery) or social welfare.

That’s because inflationism is a policy which redistributes resources from society to the government and to politically favored groups.

I previously pointed out how a study from the Bank of England subtly admitted that their QE policies favored the political elites which indirectly has promoted “inequality”.

Yet we see more evidences of how central bank’s inflationist policies deepens the economic divide, from the CNBC,

The latest round of QE announced by Bernanke yesterday has sparked growing controversy about how Fed policy has mainly helped the wealthiest Americans.

Economist Anthony Randazzo of the Reason Foundation wrote that QE “is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality.”

Donald Trump – not usually one for distributional analyses of monetary policy – said on CNBC yesterday that “People like me will benefit from this.”

The reason is simple. QE drives up the prices of assets, especially financial assets. And most of the financial assets in America are owed by the wealthiest 5 percent of Americans.

According to Fed data, the top 5 percent own 60 percent of the nation’s individually held financial assets. They own 82 percent of the individually held stocks and more than 90 percent of the individually held bonds.

By helping to reinflate the stock market in 2009 and 2010, the Fed created a two-speed recovery. The wealthy quickly recovered much of their wealth as stocks doubled in value. But the rest of the country, which depends on houses and jobs for their wealth, remained stuck in recession.

Put another way, most Americans have most of their wealth tied up in their houses (about 50 percent for most). For the top 5 percent, homes account for only 10 percent of wealth, while financial assets account for between one third and 40 percent.

By boosting the value of financial assets, Fed has helped the economy of Richistan but not the broader United States.

Bernanke is obviously aware of this criticism, which is why the latest round of easing is focused on mortgages. But here too, there is a divide between the rich and the rest. Despite lowered rates, banks remain strict on lending, restricting access to credit for most Americans. The wealthy and the asset-rich, however, will now enjoy even lower rates on their credit.

The policy of inflationism does not only promote societal inequality, they advance immoral actions such as “orgy of speculation”, recklessness and the sense of entitlement-dependency (moral hazard) which ultimately sows seeds to social instability.

At worst, inflationism fosters boom-bust cycles if not the destruction of the currency which leads to economic depression

As the late distinguished Professor Hans F. Sennholz warned,

Evil acts tend to breed more evil acts. Inflationary policies conducted for long periods of time not only foster the growth of government but also depress economic activity. Standards of living may stagnate or even decline as growing budget deficits thwart capital accumulation and investment that are sustaining the standards.

Inflation misleads businessmen in their investment decisions, which causes much waste and many bankruptcies. In fact, it is the root cause of the boom-and-bust cycle which wreaks havoc on economic activity. Indeed, inflation breeds many evils of which most Americans are unaware.

Open ended inflationism by the US Federal Reserve and the European Central Bank, will ultimately lead to economic impoverishment and social chaos.

Graphic of the Day: Quantitative Easing

From the Wall Street Journal Blog

Video: Former Fed Governor on Bernanke’s QE: Unproven Experiment , Risks of Exit have to be Higher

Former Federal Reserve governor Kevin Warsh in this CNBC interview elucidates of the potential risks from Bernanke’s Open Ended QE

Here are some key points:

Ben Bernanke is a “modest man” with “an immodest move”

Yesterdays move was an “aggressive move”…which means that “They are really worried with the state of the economy”….part of it could be that “They must be dealing with some of the Tail Risk Europe is in an early innings of a recession” while Asia has been “weakening too”

For Mr. Warsh “Exit is a four letter world” where “exiting from a monetary policy is technically difficult”. He sees the benefits from QE as “incontestably small and that the risks are unknown”…He further notes that “This is an unproven experiment so risks of exit have to be higher”

So the FED’s hands are essentially tied and risks are magnified rather than suppressed.

Mr. Warsh also talks about the moral hazard risks by open ended QE on Washington where

“The risk in Washington is real too. I don’t mean political risks. What I mean is if the Federal Reserve is now in a business of private pullout, “rabbit out of hat” everytime the economy loses control, then the rest of Washington can say there is not much we can do or need to do because Bernanke has got my back. I do not think that is his intent”.

The implied incentive provided by QE to Washington is to rely on more inflationism.

Mr. Warsh adds that in reality the US state of the economy has been struggling “We’re not in a panic we are in a lousy recovery”

Short term oriented “informercial” policies have also been amplifying risks, yet this has been the framework guiding Fed and Washington policies

“For 4-5 years…Washington has been in the business of solving the next quarter, solving for the next election $5 trillion trying to turbocharge the economy we’ve been running stimulus program after stimulus program and GDP can look a little better next quarter but we’ve been running this program like it’s an infomercial…this time of short term policy has not served as well. I don’t they served the politicians well. We need to fundamentally change what our time horizon is”

Real recovery must come through improving competitiveness

“The private sector has much better at asset allocation than the government”

And that central planning has been hobbled by the knowledge problem

“There is lots of talent there, but they do not know which direction capital should go”

Mr. Warsh delineates what central banks can and cannot do

“Central banks are in the business of buying time…until the economy gets into the groove. But what we heard yesterday was that we will be buying time for a very long time”

He also notes that

“Policy makers should be humble”

Most importantly Mr. Warsh sees the market as I see it

“If you continue to look at the markets right now, where asset prices continue to melt up where asset prices are driven less by fundamentals in particular companies and more by speeches and policies come out of Washington you are taking this risks. Risk are highest in the economy when measures of risk ARE lowest, when I look at the VIX at this level and you compare that to the headlines you guys read every morning they certainly do not seem in sync that’s when shocks happen”

Shocks happen because inflationism has obscured the market price signals.

More Signs that China’s $2.4 Trillion Shadow Banking System is in Big Trouble

China’s shadow banking system has been feeling the heat from the deepening economic woes

From Bloomberg

China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest.

Suicide, Bankruptcy

The shadow bankers are now disappearing, committing suicide or reneging on agreements, leaving thousands of victims in their wake. In the first half of the year, more than 58,000 lawsuits involving disputes over 28.4 billion yuan in private lending were filed in Zhejiang province, where Wenzhou is located, up 27 percent from the same period in 2011 and the most in five years, according to the provincial supreme court. One-fifth of the cases were in Wenzhou, where authorities have set up a special court to handle the surge.

Private-lending victims nationwide filed more than 600,000 lawsuits valued at 110 billion yuan in 2011, an increase of 38 percent from the previous year. In the first half of 2012, the number of filings rose 25 percent to 376,000, according to People’s Court, a newspaper run by China’s Supreme Court.

In Wenzhou, an export hub where almost 90 percent of families have taken part in underground lending, more than 100 people have fled, committed suicide or declared bankruptcy since August 2011, and at least 800 lending brokers have gone bankrupt, Xinhua News Agency reported in May. Home prices there declined 16 percent in July compared with a year earlier, the fifth consecutive monthly decline, according to the National Bureau of Statistics of China.

China’s shadow banking system hasn’t been just the private informal sector but likewise involves state owned enterprises (SoE) and financing vehicles established by local governments. From the same article

The lending is part of a shadow-banking system that also includes the off-balance-sheet business of banks and trust companies and totals as much as $2.4 trillion, about one-third of China’s official loan market, according to estimates by Societe Generale. Shadow banking is prevalent in China because more than 90 percent of the nation’s 42 million small businesses are unable to get bank loans, while such investments offer returns at least several times higher than deposits.

As I previously pointed out since mainstream banks have been dominated by the state, where access to credit has been biased towards non-finance state owned companies

State banks discriminate in terms of lending where “only four percent of their loans to private businesses”. Thus, the recourse of private businesses has been through the informal or shadow banking systems. Ironically, transacting with unofficial credit markets “can be a criminal offense punished by long jail terms or worse”

The natural consequence has been that private savings resorted to alternative channels to employ their funds for profit.

Evidence from the same article,

Still, households and families nationwide withdrew 500.6 billion yuan of saving from banks in July, or 0.6 percent of the total. Chinese savers seeking higher returns have triggered swings in deposits during the past year as they’ve shifted funds among savings accounts, higher-yielding wealth-management products and shadow-banking investments.

About 619 million yuan of capital has been registered at the Wenzhou Private Lending Registration Center, which was set up in April to help control shadow lending by matching individuals holding excess capital with small businesses in need of funds. As of July, less than 10 percent of that was loaned out, even with collateral, according to the city government.

While China’s savings rate of more than 50 percent of gross domestic product is the highest among major economies, exceeding India’s 34 percent and 12 percent in the U.S., according to a June 2010 Bank for International Settlements report, people have few legitimate investment options for their deposits.

Retirees such as He can’t take advantage of annuities, IRAs or other such products to derive income in their old age. China’s pension program, like Social Security in the U.S., typically provides payments that don’t meet monthly expenses.

The nation’s stock market also is lackluster, and the bond market is largely off-limits to individual investors. The Shanghai Composite Index (SHPROP) has declined 3.3 percent this year after losing 14 percent in 2010 and 22 percent in 2011.

One obvious outcome from the stringent regulations by China’s authorities on the financial industry has been the underdeveloped domestic capital markets.

(charts from Business Insider)

Again since the world does not operate on a vacuum, given the limited access to credit from mainstream banks, negative real rates monetary regime and largely limited capital markets, China’s private sector savers engaged the shadow banking system by jumping on property bubble spurred by China’s government’s credit driven (left window) capital-infrastructure spending ‘socialization of investment’ boom.

Anecdotal proof from the same article,

Only 30 percent of the funds in Wenzhou’s shadow-banking market have gone to finance small companies, while 60 percent went to property speculation and re-lending, pushing up the cost of funds by end-users, the Wenzhou branch of People’s Bank of China said last year. The city’s economy expanded 5 percent in the first half, the slowest in three years.

That boom seems to be collapsing (chart above right window).

As of last week China’s government has re-engaged in the same fiscal stimulus through infrastructure spending but at a much lesser amount ($157 billion) compared to 2008-2009.

Also China has reportedly stepped up bank lending, reports the Botswana Gazette,

China ramped up bank lending in August, according to central bank figures released Tuesday, as the government seeks to give a boost to the slowing economy.

Chinese banks granted 703.9 billion yuan ($112 billion) in new loans in August, up from 540.1 billion yuan in July, the People's Bank of China said in a statement.

The August figure is higher than market expectations of 600 billion yuan, according to a forecast of 13 economists surveyed by Dow Jones Newswires.

Analysts said the increase in bank lending reflects China's moves to ease monetary policy with economic growth at its slowest pace in three years.

Given that these loans are likely directed towards China’s state owned enterprises, it’s not clear if these money easing will filter into the seemingly insolvent shadow banking system

My guess is that given the Keynesian leaning policies by China’s incumbent political authorities, the above rescue measures could be just installments.

Besides, given that the ECB and the Fed has both declared the next moves to expand their balance sheets, China’s authorities may find comfort in crowd, and thus, more easing moves should be expected.

It’s just a reminder that all these inflationism by global central banks will only temporarily provide a boost to financial markets, does nothing to help the economy (except to redistribute resources to the political and the banking class) and at worst amplify the risks of global stagflation.

Quote of the Day: Manipulating Public Opinion to Foment War

Today, the most likely culprit are far right Christian fundamentalists, who hate Islam with religious passion, and a group of neconservative businessmen trying to promote war between the US and Muslim world – and namely, Iran. A network of Evangelical broadcasters, publishers and schools churns out a steady stream of anti-Islamic fulminations.

The latest anti-US riots across the Mideast further convinced many Americans that all Muslims are violent extremists. The hate film reinforced the mistaken notion held by many Muslims that the United States is bent on eradicating their faith.

All this fits nicely with efforts by right wing ideologues to push the US into war against Iran. President Obama has so far stoutly refused to give in to war-mongering, no mean feat in an election year in which he is neck-a-neck with Romney.

This week, Israel’s prime minister, Benjamin Netanyahu, demanded Obama openly define the conditions under which the US would attack Iran. Netanyahu’s American supporters accuse Obama of "throwing Israel under a bus." At times, it appears there are three candidates for office in Washington: Obama, Romney and Netanyahu.

Netanyahu scolded and rebuked Obama for not sending American troops and spending American treasure to attack Iran because it is a potential rival or threat to Israel. Netanyahu is now openly backing Romney for president.

In Yiddish, such behavior is called "chutzpah," a mixture of brazen nerve and outrageous presumption.

Add all this up and we have evil memories of the hysteria and military posturing of August, 1914, the lead-up to World War I, a totally unnecessary conflict that ran out of control and wrecked Europe.

Opinion in the Muslim world, America and Canada is being manipulated by those seeking war. A few more killings, a clash in the congested Gulf, a bombing in the west, and a wider Mideast war could erupt.

This is from historian Eric Margolis talking about the wave of attacks on US embassies in the Middle East (source Lew Rockwell.com)

160 Benefits from Coconut Oil

Amazing article on the myriad benefits of coconut oil.

Here is the overview, from Wakeup-World.com (hat tip: Lew Rockwell.com)

Coconut Oil – An Overview

Offering a myriad of health benefits, coconut oil is affordable, readily available and completely natural. I use it for EVERYTHING. Literally. I buy it in 5 gallon increments and keep it all over my house. I even have some in the car. So here is a little information to inspire you to check out this amazing oil!

Coconut Oil Is:

• Anti-bacterial (kills bacteria that cause ulcers, throat infections, urinary tract infections, gum diseases, and other bacterial infections)
• Anti-carcinogenic (coconut oil has antimicrobial properties so it effectively prevents the spread of cancer cells and enhances the immune system)
• Anti-fungal (kills fungi and yeast that lead to infection)

• Anti-inflammatory (appears to have a direct effect in suppressing inflammation and repairing tissue, and it may also contribute by inhibiting harmful intestinal microorganisms that cause chronic inflammation.)

• Anti-microbial/Infection Fighting (the medium-chain fatty acids and monoglycerides found in coconut oil are the same as those in human mother’s milk, and they have extraordinary antimicrobial properties. By disrupting the lipid structures of microbes, they inactivate them. About half of coconut oil consists of lauric acid. Lauric acid, its metabolite monolaurin and other fatty acids in coconut oil are known to protect against infection from bacteria, viruses, yeast, fungi and parasites. While not having any negative effect on beneficial gut bacteria, coconut oil inactivates undesirable microbes.)

• An Antioxidant (protects against free-radical formation and damage)
• Anti-parasitic (fights to rid the body of tapeworms, lice and other parasites)
• Anti-protozoa (kills giardia, a common protozoan infection of the gut)
• Anti-retroviral (kills HIV and HLTV-1)
• Anti-viral (kills viruses that cause influenza, herpes, measles, hepatitis C, SARS, AIDS, and other viruses)
• Infection fighting
• Has no harmful for discomforting side effects
• Known to improve nutrient absorption (easily digestible; makes vitamins and minerals more available to the body)
• Nontoxic to humans and animals

Category of the 160 Uses for coconut oil

-Coconut Oil for Personal Hygiene/Body

-Coconut Oil for General Health and Wellness

-Coconut Oil for Health Problems (when taken internally it is known for aiding, preventing, relieving or even curing these health issues)

-Coconut Oil and Health Problems (when applied topically it is known for aiding, relieving, or even curing these health issues)

-Coconut Oil and Cooking

-Coconut Oil and Pets/Animals

-Other Uses for Coconut Oil

Read the rest here

Ron Paul on the Ben Bernanke’s QE 3.0

No one is surprised by the Fed's action today to inject even more money into the economy through additional asset purchases. The Fed's only solution for every problem is to print more money and provide more liquidity. Mr. Bernanke and Fed governors appear not to understand that our current economic malaise resulted directly because of the excessive credit the Fed already pumped into the system.

For all of its vaunted policy tools, the Fed now finds itself repeating the same basic action over and over in an attempt to prime the economy with more debt and credit. But this latest decision to provide more quantitative easing will only prolong our economic stagnation, corrupt market signals, and encourage even more misallocation and malinvestment of resources. Rather than stimulating a real recovery by focusing on a strong dollar and market interest rates, the Fed's announcement today shows a disastrous detachment from reality on the part of our central bank. Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious.

(source Lew Rockwell.com)

Inflation is a policy that cannot and will not last.

Video: Ron Paul on Foolish US Foreign Policies

Neil Cavuto to Congressman Ron Paul "You were decades ahead of this" (hat tip Bob Wenzel)

I Told You So Moment: US Fed’s Bernanke Unveils Open Ended QE 3.0 Bazooka

I guess this serves as another “I told you so moment”.

From Bloomberg,

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in his press conference today in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”

Stocks jumped, sending benchmark indexes to the highest levels since 2007, and gold climbed as the Fed said it will continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially.”…

The FOMC also said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Two important things from this development: the FED will engage in “open-ended purchases” of mortgage debt each month and that “federal funds rate near zero “at least through mid-2015.””

This essentially adds to the $267 Operation Twist 2.0 launched last June.

Chart from Doug Short/Business Insider

Bernanke’s panoply of bazookas has been intensifying. Inflationism is being piggybacked by greater inflationism. While this may not be enough (it never will), this may be near the zenith of the Fed’s arsenal of policies. Perhaps the FED will be buying other forms of debt or even equities in the future but may not beat the “open-ended option”

In short I expect diminishing returns from the Fed’s seemingly maxed out actions.

Yet as I previously noted,

With unlimited or open ended options (US Federal Reserve has already been taking this in consideration), central bankers have been increasingly signaling urgency and desperation.

While QE 3.0 provides short term boosts for the financial markets due to its narcotic effects (see the wonderful chart above), the risks is that this RISK ON environment may be short-lived because of the growing risks of stagflation

Chart from Moneyandmarkets,com

The open ended QE 3.0 comes amidst higher inflation expectations which only magnifies price inflation risks.

Of course Bernanke had to deliver, that’s because market’s expectations have built-in heavily to the Fed’s promises, I wrote,

Mounting expectations and deepening dependence from central banking opiate, which has been clashing with the unfolding economic reality, will prompt for more price volatility on both directions. The Bank of America posits that QE 3.0 has been substantially priced in.

Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.

Not only that, the fiscal conditions of the US government would require more funding from the FED. This will likely be done indirectly through banks, i.e. FED buys banks mortgages and banks are likely to buy US Treasuries in return. We’ve called the poker bluff (of claims that the FED won’t do QE) here before.

Lastly, Bernanke’s tidal wave of inflationism subtly proves the point that officials work to promote their self-interest; surging stock markets now tilt the balance considerably towards Obama’s re-election.

Again as I wrote,

Also considering that President Obama’s opponent, Mitt Romney, has piggybacked on Ron Paul initiative to have the US Federal Reserve audited, which thereby diminishes the political power of Ben Bernanke, we cannot rule out that Mr. Bernanke will use the banking system and the Fed’s monetary tools to ensure Obama’s re-election.

I’d gradually get exposed on gold related issues. Gold’s bull market has resumed.

Just one more point, the death cross seen in Gold’s price action last April is likely another chart pattern failure as the imminence to the “golden cross” reveals of another “whipsaw”. This once again shows that actions from policymakers shapes chart patterns and not vice versa.

People who claim of the supposed efficacy of begging the question “history repeats itself” have been misled by the gambler’s fallacy.

Many Americans Opt Out of the Banking System

Perhaps mostly as a result of bad credit ratings from lingering economic woes, many Americans have turned into alternative means to access credit financing.

The following report from the Washington Post,

In the aftermath of one of the worst recessions in history, more Americans have limited or no interaction with banks, instead relying on check cashers and payday lenders to manage their finances, according to a new federal report.

Not only are these Americans more vulnerable to high fees and interest rates, but they are also cut off from credit to buy a car or a home or pay for college, the report from the Federal Deposit Insurance Corp. said.

Released Wednesday, the study found that 821,000 households opted out of the banking system from 2009 to 2011 and that the so-called unbanked population grew to 8.2 percent of U.S. households.

That means that roughly 17 million adults are without a checking or savings account. Another 51 million adults have a bank account, but use pawnshops, payday lenders or rent-to-own services, the FDIC said. This underbanked population has grown from 18.2 percent to 20.1 percent of households nationwide.

The study also found that one in four households, or 28.3 percent, either had one or no bank account. A third of these households said they do not have enough money to open and fund an account. Minorities, the unemployed, young people and lower-income households are least likely to have accounts.

This serves as proof that despite the lack of access through the conventional banking system, substitutes will arise to replace them. Demand for credit has always been there. Such dynamic resonates with the post bubble bust era known as the Japan’s lost decade.

I may add that people opting out of the banking system may not at all be about bad credit ratings, they could also represent manifestations of an expanding informal economy in the US. Chart below from Bloomberg-Businessweek includes undocumented immigrant labor, home businesses, and freelancing that escape the attention of tax authorities.

Over the past decade, the informal economy has been gradually ascendant even for developed nations. Advancement in technology may have partly contributed to this.

Although the recession of 2001 (dot.com bust) and the attendant growth in regulations, welfare and ballooning bureaucracies may have been the other principal factors.

My guess is that the post-Lehman era, which highlights governments desperate to shore up their unsustainable fiscal conditions, may only intensify the expansion of the informal economies even in the developed world.

Add to this the growing concerns over the economic viability of the banking system and continued innovation in technology (e.g. P2P Lending, Crowd Sourcing and etc…), the traditional banking system will be faced with competition from non-traditional sources.

Quote of the Day: Wikileaks’ Tweet on US Embassy Attack at Libya

By the US accepting the UK siege on the Ecuadorian embassy in London it gave tacit approval for attacks on embassies around the world.

Source: Business Insider

For a short background, in fear of extradition to the US (through Sweden) out of political harassment for exposing many of the secrets of the US government, Wikileaks founder Julian Assange sought refuge at the Ecuador Embassy in London which was recently besieged by UK officials.

Wikileaks thus attempts to associate the US embassy attack to the harassment being endured by its founder.

Video: Should the Government Track Your Political Activity?

Thanks to Learn Liberty's Tim Hedberg for the video

German Court Clears Way for ESM Fund

There is no stopping the coming inflationism as German’s top constitutional court threw out of the window the legal opposition to the ESM rescue mechanism

From Bloomberg.com

Germany’s top constitutional court cleared the way for the permanent euro-area rescue fund, rejecting bids to halt German ratification of the 500 billion- euro ($644 billion) backstop while imposing some conditions on its use.

The Federal Constitutional Court in Karlsruhe today dismissed motions filed by groups including a conservative lawmaker and an opposition political party that sought to block the fund, known as the European Stability Mechanism, and a deficit-control treaty championed by Chancellor Angela Merkel. The court stipulated that a cap of about 190 billion euros be set on German liabilities before ESM ratification, unless parliament decides to back extra funds.

“The review has concluded that the laws that were challenged, with high probability, do not violate the constitution,” chief justice Andreas Vosskuhle told the court. “Hence the motions for a temporary injunction were to be rejected.”

The legal challenge to the planned rescue fund highlights bailout fatigue in Europe’s largest economy and delayed efforts by Merkel and other euro-area policy makers to stem the region’s debt crisis. In the neighboring Netherlands, Prime Minister Mark Rutte, a Merkel ally, is seeking re-election today…

“Some uncertainties” about the limit on Germany’s contribution to the ESM and the scope of the German parliament’s say over the fund also flowed into the ruling, Vosskuhle said. The judges also said that Germany must state when ratifying that it won’t be felt bound by the treaty unless these reservations are efficiently met.

Today’s cases were filed after German lawmakers approved the ESM and the fiscal pact, a deficit-control treaty designed to impose budget discipline on European Union member states. About 37,000 people signed up to endorse a constitutional complaint filed by political group “Mehr Demokratie e.V.” Other plaintiffs include opposition party Die Linke as well as Peter Gauweiler, a lawmaker from Merkel’s CSU Bavarian sister party.

Perhaps the Fed's Ben Bernanke and the FOMC will make the next move.

Is Al-Qaeda now a US ally in Syria?

The world of politics is a world of smoke and mirrors.

The supposed arch enemy of the US, the Al Qaeda, has reportedly become a US ally in Syria’s civil war.

Writes Joseph Wakim, founder of Australian Arabic Council, at the Canberratimes.au

In Syria, there is mounting evidence that Al Qaeda and its allies are actively deploying terror tactics and suicide bombers to overthrow the Assad regime.

Syrian citizens who prefer the secular and stable state to the prospect of an Iraqi-style sectarian state may well be turning this same question around to the US government: are you with us, or with the terrorists?

This week, head of the Salafi jihad and close ally of al Qaeda, Abu Sayyaf, pledged ''deadly attacks'' against Syria as ''our fighters are coming to get you'' because ''crimes'' by the regime ''prompts us to jihad''.

Bush referred to al Qaeda as the enemies of freedom: ''the terrorists' directive commands them to kill Christians and Jews''. But Sheikh Muhammad al Zughbey proclaimed that ''your jihad against this infidel criminal and his people is a religious duty … Alawites are more infidel than the Jews and Christians''. Because the new jihad targets Alawites rather than Jews and Christians, does this render them better bed fellows?

By his own admission, Bush stated that al Qaeda was ''linked to many other organisations in different countries … They are recruited from their own nations … where they are trained in the tactics of terror … They are sent back to their homes or sent to hide in countries around the world to plot evil and destruction''.

Yet this is precisely how the foreign jihadists in Syria have been described by reporters. They are funded and armed by Saudi Arabia and Qatar. And they collaborate with the Free Syrian Army which is aided and abetted by the US.

Read the rest here.

Ron Paul: US is a Constitutional Republic and Not a Democracy

Congressman Ron Paul reminds Americans that they are supposedly a constitutional Republic and not a democracy (bold emphasis mine)

Democracy is majority rule at the expense of the minority. Our system has certain democratic elements, but the founders never mentioned democracy in the Constitution, the Bill of Rights, or the Declaration of Independence. In fact, our most important protections are decidedly undemocratic. For example, the First Amendment protects free speech. It doesn't – or shouldn't – matter if that speech is abhorrent to 51% or even 99% of the people. Speech is not subject to majority approval. Under our republican form of government, the individual, the smallest of minorities, is protected from the mob.

Sadly, the constitution and its protections are respected less and less as we have quietly allowed our constitutional republic to devolve into a militarist, corporatist social democracy. Laws are broken, quietly changed and ignored when inconvenient to those in power, while others in positions to check and balance do nothing. The protections the founders put in place are more and more just an illusion.

This is why increasing importance is placed on the beliefs and views of the president. The very narrow limitations on government power are clearly laid out in Article 1 Section 8 of the Constitution. Nowhere is there any reference to being able to force Americans to buy health insurance or face a tax/penalty, for example. Yet this power has been claimed by the executive and astonishingly affirmed by Congress and the Supreme Court. Because we are a constitutional republic, the mere popularity of a policy should not matter. If it is in clear violation of the limits of government and the people still want it, a Constitutional amendment is the only appropriate way to proceed. However, rather than going through this arduous process, the Constitution was in effect, ignored and the insurance mandate was allowed anyway.

This demonstrates how there is now a great deal of unhindered flexibility in the Oval Office to impose personal views and preferences on the country, so long as 51% of the people can be convinced to vote a certain way. The other 49% on the other hand have much to be angry about and protest under this system.

We should not tolerate the fact that we have become a nation ruled by men, their whims and the mood of the day, and not laws. It cannot be emphasized enough that we are a republic, not a democracy and, as such, we should insist that the framework of the Constitution be respected and boundaries set by law are not crossed by our leaders. These legal limitations on government assure that other men do not impose their will over the individual, rather, the individual is able to govern himself. When government is restrained, liberty thrives.

Unfortunately, the “increasing importance” that will be “placed on the beliefs and views of the president” or the coming US presidential elections will be determined mostly by the following dynamics:

The jarring charts signifying the “epidemic” of entitlements are from Nicolas Eberstadt of the American Enterprise Institute at the Wall Street Journal

The devolution to “militarist, corporatist, social democracy” is why US fiscal conditions will continue to deteriorate.

Democracy or the rule of men rather than the rule of law self-reinforces on its own destruction.

The Coming Global Default Binge: German Officials Raise US Debt Concerns

German officials say that they are worried over US debt levels

From Reuters.

German Finance Minister Wolfgang Schaeuble questioned on Tuesday how the United States could deal with its high levels of government debt after November's presidential election.

In a speech to the Bundestag lower house of parliament to open a debate on the 2013 German budget, Schaeuble said worries about U.S. debt were a burden for the global economy, hitting back at Washington which has criticized Europe for failing to get a grip on its own debt crisis.

In private, German officials often express concern about U.S. debt levels and the inability of politicians there to reach a consensus on how to reduce it, but Schaeuble's public remarks underscore the extent of the worries in Germany.

US debt levels have indeed been a major source of concern.

But so has been the debt levels of Germany, the Eurozone, UK and Japan. This has mainly been driven by the insatiable spending appetite of these governments.

The worries by German politicians seem no more than an attempt to deflect on their domestic (regional) problems through pot calling the kettle black.(chart from Zero Hedge)

All of them will default in the fullness of time.

Quote of the Day: The Folly of Trusting Competence and Character of Public Officials

It is dangerously naive to trust chiefly in the competence and character of government officials while paying little attention to the temptations and complexities that confront such officials – temptations and complexities that grow exponentially with growth in government’s powers.

This from Professor Donald J. Boudreaux at the Café Hayek

Video: David Stockman: Lunatics at the FED

Former US Representative and Director of the Office of Management and Budget David Alan Stockman bashes the US Federal Reserve in the video below (source LewRockwell.com)

"Ron Paul is the only one who is right about the Fed, and the Fed is the heart of the problem. They have destroyed the capital markets and the money markets; interest rates mean nothing; everything is trading off the Fed and Wall Street isn't even home – as it's now a bunch of computers trading word-clouds emitted by this central banker and that"

"The Fed (and the lunatics that run it) are telling the whole world untruths about the cost of money and the price of risk."

When markets become disconnected with economic reality as I pointed out the other day, these are signs that capital markets have become dysfunctional or capital markets have been "destroyed" from mainly from central banking policies.

The popularity of what Mr. Stockman calls as "sugar" or clamor for the FED to further intervene by monetary inflation in order to further ease credit conditions reminds me of this stirring quote from the great Professor Ludwig von Mises.(bold added)

It is vain to object that the public favors the policy of cheap money. The masses are misled by the assertions of the pseudo-experts that cheap money can make them prosperous at no expense whatever. They do not realize that investment can be expanded only to the extent that more capital is accumulated by savings. They are deceived by the fairy tales of monetary cranks from John Law down to Major C.H. Douglas. Yet, what counts in reality is not fairy tales, but people's conduct. If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes or by loans on the bank books.

In discussing the situation as it developed under the expansionist pressure on trade created by years of cheap interest rates policy, one must be fully aware of the fact that the termination of this policy will make visible the havoc it has spread. The incorrigible inflationists will cry out against alleged deflation and will advertise again their patent medicine, inflation, rebaptizing it re-deflation. What generates the evils is the expansionist policy. Its termination only makes the evils visible. This termination must at any rate come sooner or later, and the later it comes, the more severe are the damages which the artificial boom has caused. As things are now, after a long period of artificially low interest rates, the question is not how to avoid the hardships of the process of recovery altogether, but how to reduce them to a minimum. If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining from government borrowing from the commercial banks and by letting the market determine the height of interest rates, one chooses the German way of 1923.

Economic reality will inevitably and eventually prevail.

Quote of the Day: The Unintended Consequences from China’s Infrastructure Spending

Why aren’t China’s leaders spending much more as they did in late 2008 and 2009 to boost economic growth? It might be because much of what they built was defective as a result of widespread corruption. The 8/4 issue of the London Times reported there were 99 road cave-ins in Beijing between July 21 and August 21 of this year. Roads and bridges are collapsing in other cities as well. Most are relatively new including a bridge that was built just 10 months ago.

The country's former railway minister, Liu Zhijun, was expelled from the Communist Party of China for corruption in May following the high-speed train collision that left 40 people dead and 172 injured near the eastern city of Wenzhou last year. In March of this year, part of a high-speed railway line due to open in May between the Yangtze river cities of Wuhan and Yichang collapsed after heavy rain. Engineers working on some projects have complained of problems with contractors using inferior concrete or inadequate steel support bars. Consider this excerpt from the 2/17/11 issue of the NYT:

“The statement underscored concerns in some quarters that Mr. Liu cut corners in his all-out push to extend the rail system and to keep the project on schedule and within its budget. No accidents have been reported on the high-speed rail network, but reports suggest that construction quality may at times have been shoddy. A person with ties to the ministry said that the concrete bases for the system’s tracks were so cheaply made, with inadequate use of chemical hardening agents, that trains would be unable to maintain their current speeds of about 217 miles per hour for more than a few years. In as little as five years, lower speeds, possibly below about 186 miles per hour, could be required as the rails become less straight, the expert said. Strong concrete pillars require a large dose of high-quality fly ash, the byproduct of burning coal. But the speed of construction has far exceeded the available supply, according to a 2008 study by a Chinese railway design institute.”

This is from Dr. Ed Yardeni on China’s slowdown.

China announced last week a 1 trillion yuan $157 billion infrastructure spending program which is much less than the 2008-2009 version.

Nonetheless, the above serves as further proof that infrastructure spending projects by governments, not only waste taxpayers money, but importantly promotes unethical transactions which results to MORE economic and social problems.

Signs of China’s Political Turmoil? China’s VP Xi Jinping Vanishes

Rumors swirl over over China’s VP Xi Jinping’s disappearance from all official functions.

From Financial Times,

Where is Xi Jinping? The man anointed to run the world’s most populous nation and second-largest economy has disappeared from public view just weeks before his expected elevation to lead the Chinese Communist Party.

Over the past week Mr Xi has cancelled at least four scheduled meetings with visiting dignitaries including a Russian delegation, Singapore’s prime minister and US secretary of state Hillary Clinton last Wednesday and the prime minister of Denmark on Monday…

Mr Xi’s mysterious disappearance has sparked speculation about his whereabouts and renewed political infighting just months after the purge of senior Chinese leader Bo Xilai shook the ruling party. It also underscores the opacity and lack of a strong institutionalised mechanism for transferring power in China’s authoritarian one-party political system.

A Bloomberg article says this may be about “health” reasons

I have been saying that the apparent policy dithering to mount bailouts, given the Keynesian propensities of the incumbent, may have been a consequence of the ongoing power struggle within China’s government.