Bob Chapman: Federal Reserve Overpowers Deflation with Massive Inflation

The dramatic and costly undertow of deflation continues unabated, as government via fiscal policy and the Federal Reserve, by creating money and credit out of thin air, proceed to overpower this deflation with massive inflation.

Unbeknownst to most the Fed and the Treasury have been maintaining this program for the past several years, accompanied by most major countries, all of which have taken the path of least resistance rather than address the underlying problems.

The current stage of problems had to be addressed 2-1/2 years ago in what has become known as a credit crisis. This continuing crisis has been accompanied by 22-1/8% current unemployment that has resulted in a perpetual fall in tax revenues and a resultant enlargement of government deficits. We might add that this condition is being experienced by many countries worldwide, which followed America’s leadership into this terrible financial and economic morass. These policies have led to massive sovereign debt policies, a hangover of the policies of 1933 and 1971. 

The financial system in America is on the edge of default. A recent poll found that 92% of those surveyed wanted to unseat their current representative or Senator in Washington and only 21% believed that government enjoyed the consent of the governed. It’s very obvious people are not happy with the political, economic and financial situation presently. Eighty percent believe that government is enmeshed in partisan infighting. Not only between parties, but within parties as well. Politicians are very aware of these numbers and are frantic to get reelected. The public has recoiled in disgust. People are demanding that the power of government be curbed. People are sick and tired of paid off corrupt politicians, more than half of whom have been in office for more than ten years.

It is not healthy for a nation to have $3.3 trillion in Treasury bonds held by foreigners. China holds about $900 billion and Japan about $800 billion. We also understand that hedge funds and others also are fronting both countries, so the figures are not really reflective in their total positions. These nations for the most part are rolling their positions, but have not injected new capital into US Treasuries. That is why the Fed had to fund 80% of new Treasury debt last year.

Presently the Fed is fighting and pulling out all stops to halt legislation to audit the Federal Reserve, a private corporation, which has managed our monetary policy since 1913, under the Federal Reserve Act. On Monday the Treasury held a media conference for financial reporters and bloggers in which the Fed was discussed. The meeting had some very strange conditions. Mr. Geithner, Mr. Krueger and Mr. Sperling could be paraphrased but not quoted and what was paraphrased could not be connected to a specific official. Again, the element of secrecy to protect the guilty. One blogger said, “Did they get the ground rules from Al Qaeda?” The meeting was a travesty. How can government officials demand secrecy in public briefings? It is no wonder that 90% of the public and 317 members of Congress want more Treasury transparency and an audit and investigation of the Fed. This is the same gang run by Geithner and Bernanke that are currently running the gold suppression scheme. When you have a criminal cabal involved you have no transparency. That is why the audit of the Fed is so important. Such an exercise would expose exactly what both have been doing in the markets. The Fed and Treasury have lied for years about what they have been up too in behalf of their Illuminist friends. It is not only about the actions of the President’s Working Group on Financial Markets, but the funding of Watergate, Saddam Hussein, who they supposedly conveniently hung, the countries that secretly received loans, how much, who got them and what was the collateral? Were currency swaps with foreign control banks used to strengthen the dollar by the Fed and for those foreign control banks to purchase Treasury and Agency paper? How about all the inside information funneled to Wall Street and banking for almost a century from both the Fed and Treasury? Their lies are legion. They both are manipulating every market in the world 24/7 and the American people want it stopped. We also want an audit of America’s gold and the testing of the gold bars held. There is much we want to know, so we can save our country and our freedom.

Investors continue to chase yields, which is a dumb practice. Interest rates are at 80-year lows and can only stay the same or rise. People are grabbing junk bond yields that will come back to haunt them.

At least for now Greece and euro problems are being shuffled into the background. You can imagine this is not the last of the eurozone problems. The PIIGS will be back one by one to cause never-ending problems until they are forced to leave the eurozone. That will cause a eurozone breakup, probably by the end of next year. 

This is the first real threat to the eurozone since its beginning ten years ago, and we think they will find that their rules are so restrictive that weak members will be forced to leave. The monetary policy and interest rates may be singular, but fiscal policy is not. Exchange rates for the euro must fit all members, but rates and methods of growth vary widely. With one currency sovereignty has effectively been lost. Public debt to GDP has to be under 3%, while most are over 3%: Greece is at 10.7%. There is also a public debt limit of 60% of GDP, which all nations in the zone have broken. All precepts have not and cannot be met. There is no effective policy because there is no way to enforce the rules. In addition most have current account deficits and the zone effectively has been carried by Germany from this aspect. The bottom line is a few have growth, the rest do not. As a result there is pressure, due to poor growth in some of the nations, for austerity measures to reduce fiscal deficits at the worst possible time. Greece comes first along with Ireland and the rest will follow.

Just as an example, Spain has a fiscal deficit of 10% of GDP that has to fall to 3% within three years, which is virtually impossible just as it is in Greece. Their current account deficit is 4.5% of GDP. In a recessionary/depressionary world getting into the plus column is a tall order. This dilemma is the result in part of the housing collapse caused by Spanish banks and inattention by the Bank for International Settlements. We see consumption continuing to fall in the face of 20% unemployment, which worsens by the day. The PIIGS and a present total of 19 nations are effectively bankrupt. We do not believe they can survive without devaluation and debt default. That is why we expect that to happen next year. 

Historically banks have kept loan loss allowance ratios at $1.33 for every dollar of debt. Today it is 0.58%.

The commercial paper market rose $11.2 billion last week to $1.145 trillion.

The Treasury sold $21 billion in 10-year T-notes. The bid-to-cover was 3.45 to 1, which is average vs. 2.85 to 1. This was the highest since 1995. Indirect bidders, which include foreign central banks, bought 35.1%, compared to an average of 41.7% at the last four re-openings.

Almost 39 million Americans received food stamps in December, the most ever, as the jobless rate hovered near a 26- year high, the government said.

Recipients of the subsidies for food purchases climbed 23 percent from a year earlier and rose 2.1 percent from November, the U. S. Department of Agriculture said Thursday in a statement on its Web site. The number receiving the benefit has set records for 13 straight months.

Food aid climbed as the national unemployment rate reached 10.1 percent in October, the highest since June 1983, and remained at 10 percent through December before easing to 9.7 percent in January.

An average of 40.5 million people will get food stamps each month in the federal fiscal year that began Oct. 1, Agriculture Secretary Tom Vilsack said last week. The figure is projected to rise to 43.3 million in 2011.

Nevada had the biggest increase in the percentage of the population receiving the coupons, up 49 percent from December, USDA figures show. Texas had the most recipients, at 3.31 million, topping California’s 3.11 million.

The U.S. government recorded a budget deficit of $221 billion in February, the Treasury Department reported Wednesday, even as its income posted a big increase for the month.

Income totaled $107.5 billion in February, a 23% increase over last February’s total, and marking the first monthly year-over-year increase since April 2008.

Spending was $328 billion in February, up 17% year over year. That was the largest February total on record, a Treasury official said.

February was the 17th consecutive month that the government recorded a deficit. It was a little less than expected: last week the Congressional Budget Office predicted that the deficit would be $223 billion in February.

Year to date, the deficit is $652 billion, according to the Treasury data.

The Senate approved a $140 billion package of tax breaks and aid to the unemployed Wednesday, the most substantial effort by the chamber to boost the nation’s economy since passing the stimulus bill last year.

Six Republicans joined 56 Democrats to pass the “tax extenders” measure, 62 to 36. The package faces an uncertain future in the House, where Democrats have taken a markedly different approach to the “jobs agenda” than have their Senate colleagues.

Small defense companies, energy firms, and other technology start-ups throughout New England could lose tens of millions of dollars a year because of a decision by House Democrats yesterday to abruptly halt budget earmarks for companies.

The decision follows a House ethics probe into an alleged pay-to-play system in which investigators followed a trail of campaign contributions and linked them to earmarks — a provision added to a bill that directs money to a specific project, in this case, a private company. Although the House Ethics Committee cleared members of specific wrongdoing, House leaders remained sensitive to the appearance of a rampant quid-pro-quo system that has stoked outrage around the country.

The decision, which exempts earmarks for nonprofit groups, could significantly affect Massachusetts because the House delegation has proved adept at the political horse-trading required to obtain funding for private companies.

Can Nancy Pelosi Get the Votes?

The Senate bill’s abortion language is not the House Speaker’s only problem.

online.wsj.com/article/SB10001424052748703701004575113292688090292.html#printMode

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SEVEN HOUSE members, including Northern Virginia Rep. James P. Moran Jr. (D), collected more than $840,000 in political contributions from employees and clients of a lobbying firm, Paul Magliocchetti and Associates Group (PMA), during a two-year span. In that same period, the lawmakers, strategically situated on the Appropriations defense subcommittee, directed more than $245 million in earmarks to clients of PMA.

If you think those two facts are unrelated, you are qualified to be on the House ethics committee. The panel recently found that “simply because a member sponsors an earmark for an entity that also happens to be a campaign contributor does not, on these two facts alone, support a claim that a member’s actions are being influenced by campaign contributions.”

The ethics committee acknowledged that “there is a widespread perception among corporations and lobbyists that campaign contributions provide enhanced access to members or a greater chance of obtaining earmarks.” Gee, how could anyone have gotten that impression? Maybe because the lawmakers targeted those seeking earmarks for campaign contributions? Sent their key appropriations staffers to fundraisers?

For instance, in 2008, the appropriations director for Rep. Pete Visclosky (D-Ind.) told corporations interested in obtaining earmarks that they needed to submit requests by Feb. 15. On Feb. 27, Mr. Visclosky’s campaign manager sent a letter to companies that had sought his help on defense matters inviting them to a fundraiser on March 12. Mr. Visclosky’s political committees received $35,300 from clients of PMA that month, plus another $12,000 from the lobbying firm and its employees. A week after the fundraiser, which was focused on defense contractors and attended by his chief of staff and appropriations director, Mr. Visclosky requested earmarks for six PMA clients, totaling more than $14 million.

House leaders understand that voters may not be quite as obtuse as the ethics committee seems to assume, and their extreme embarrassment — over this and other scandals — may lead to useful action. The House is right to ban lawmakers from earmarking government funds for for-profit companies. It should go further, and extend the prohibition to nonprofit and educational institutions as well. Some nonprofit institutions spend enormous sums on lobbyists, who dispense campaign donations in hope of obtaining earmarks. More important, the Senate must follow suit, as much as it appears disinclined to do so. A system that aligns campaign cash and earmarks is inherently unseemly, if not outright corrupt, and the Senate is tainted by this setup as well.

We say this fully aware that the Constitution grants Congress the power of the purse and that earmarks are not close to the biggest reason for out-of-control spending. And that lawmakers have taken steps in recent years to reduce the number of earmarks and make the process more open. And that eliminating earmarks would not end every instance in which private interests lobby for — and make campaign contributions in hope of obtaining — particular favors.

It would, however, eliminate the worst such abuse. The House Ethics Manual cautions members “to avoid even the appearance that solicitations of campaign contributions are connected in any way with an action taken or to be taken in an official capacity.” The ethics committee, dismissing that caution and a recommendation by the newly created independent Office of Congressional Ethics to investigate two of the seven representatives, decided there was nothing to worry about in the PMA case. With standards this lax, the only reasonable choice is to end the earmarks that fuel this sleazy process.  [This dramatically shows you why campaign contributions have to end.]