The Fear That Fed Money Brings

An excerpt from Bob Chapman’s weekly publication.

January 11 2012: US influence on decisions made in Europe, battle over a bailout, more quantitative easing, Fed as the instrument of liquididty, Ron Paul wants to abolish the US Federal Reserve, countries rushing to sell bonds, France fears downgrading, magnification of debt, Greece default still a worry.

The hand of the US elitists shows more each day in the decisions being made in Europe. Mario Draghi, ex-Goldman Sachs, Trilateralist and Bilderberg, is putting everything in place just the way the US elitists want. We are about to see full scale quantitative easing. One trillion in loans times fractional lending of 3 to 9 to whatever will give Europe the funds it needs indefinitely. Europe is going to be a rerun of what we have seen in the UK and US.In behalf of German voters who are 65% against such funding, Chancellor Merkel has refused to allow issuance of Eurobonds or an expansion of the EFSF. Draghi at the head of the ECB is now putting pressure on Mrs. Merkel to drop back to a more defensive position. The intrigue is at its height. If Frau Merkel gives into Draghi she and her party will not score well in the next election and may even lose political control. That could cause Germany to consider leaving the euro, which would destroy the euro zone. There are major dangers here and all the players are well aware of it. Agreement will take time and if it is not reached everything could short circuit, other than the fact that the Fed has put the funds in place. The other objective of getting Germany to whole-heartedly accept the bailout and stimulation is another matter. Confusion reigns even among the participants. The US, UK, France and their front men, Draghi, Monti and Papademos are all moving forward. The price will be very high from an inflationary standpoint, but to the elitists that isn’t even a consideration. They could care less. That is why you want to have your assets invested in gold and silver related assets. We could be headed toward another Weimer episode.

What we are seeing worldwide is another expansive use of money and credit creating better known by the euphemism, quantitative easing. In June, the Fed will announce its latest version that has been secretly underway for the past few months. The Fed is the instrument of liquidity, because it is appointed. By using the Fed everyone’s covered politically. That lets the political types slide into the election not having to be worrying about finances and the economy. It will all be designated the Fed’s fault. This will do the Fed lots of damage. If Ron Paul is elected president these actions could lead to the Fed’s demise. Long-term unemployment is still about the same and the housing situation is worsening, not improving. U-3 unemployment figures at 8.5% are almost meaningless. It is U-6 that counts less of course the birth/death ratio and that is 15.2%, or real unemployment of 21.5%.

This past week the euro hit its lowest level versus the dollar in 15 months. Investors certainly see the short-term positives of more than a trillion dollar injection to the banks and sovereigns of Europe, but they are looking beyond that. They see major long-term damage to the euro caused by this massive injection of new liquidity. Unless there is a breakdown in Greece, or another European sovereign, the euro should make it in 2013. That may be so, but banks that just borrowed $850 billion from the ECB have re-deposited $587 billion of those funds back with the ECB. That means only $263 billion was used in other ways, or about 15%. Normally banks would lend overnight to other banks, lending banks do not trust other banks, hence, the massive deposits at the ECB. The lending is for three years or less at 1%, but this program may go on indefinitely as perhaps the programs in the UK and US will as well.

In addition to this really open ended financing many countries are rushing to sell bonds, as $90 to $100 billion has to be refinanced in Europe. That is $203 billion in just the first quarter.

The European bond market is looking at Greece, which wants Greek bondholders to take a 60% to 75% haircut. Sixty percent of those bonds are held by banks and about 40% by hedge funds that will take large losses. In the case of new bond sales they should not sell to private investors. If they sell to sovereigns the debt burden will be smaller and hence the total bill.

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