Schmidt's Gold Thoughts 6 September 2012

DOES BERNANKE HATE OLD PEOPLE?

A question that follows from the above is also of interest. Why is Bernanke transferring so much income and wealth from savers and investors to mega-banks and other speculative funds? We are of the basic crowd that believes that actions are more important than words. Since Bernanke has assumed a dictatorial role at the Federal Reserve, savers and investors have been punished. We need only look at the poor plight of savers to see the imposition of the Bernanke Wealth Tax.

Reliable data on the savings of retired people and those over the age of 60 in the U.S. is not readily available. An important element in those savings is the standard savings account at a bank. We suspect that a substantial portion of those deposits are owned by the retired and older citizens worried about retirement. Given all the caveats on data, let us start by just looking at the Bernanke Wealth Tax on those with savings accounts.

In the latest weekly report from the Federal Reserve savings accounts held $1,600 billion. We all know our banks are paying us near nothing due solely to Bernanke’s monetary policy. Let us make the math easy. Assume these accounts earned a grand 0.5% per annum interest rate. That would result in $32 billion in interest income being paid to old people and other savers.

What interest rate would be a fair rate for them to earn? While admittedly a tough number to estimate, if we look at inflation, near $4 gasoline, and the financial uncertainty of the world, 3% per annum would certainly be fair. Should that be the case, savings account should be earning $192 billion of interest income.

In short, holders of savings accounts are losing out on ~$160 billion of interest income, and that is probably a low estimate. That lost income, instead of paying for gasoline, prescriptions, and trips to see the grandchildren, is being transferred to speculative funds and mega-banks. We are not about to say that Bernanke hates old people and other savers. But, if it walks like a duck . . .

The Bernanke Federal Reserve has also persistently voiced the opinion that it intends to keep interest rate low for an indefinite period. Somehow that is supposed to be good news. If one is a saver, that is as bad as news can come. That means the Bernanke Wealth Tax will be imposed on those with saving for an indefinite period. As far as can be seen into the future the Bernanke Federal Reserve intends to transfer massive amounts of potential income, $160 billion per year for holders of savings accounts alone, to speculative funds and mega-banks. Some hope does though exist as Romney has announced he intends to end Bernanke’s reign of monetary terror.

Investors now await the September 12-13 of the FOMC. At the meeting another round of QE of some form could be announced. Not satisfied with imposing the Bernanke Wealth Tax on simple savers, at this meeting they may impose another round of the wealth tax on every single owner of U.S. dollars. What else is QE? By injecting unneeded reserves into the financial system the intrinsic value of every dollar owned is reduced. Again, the beneficiaries of the tax will be speculative funds and mega-banks.

However, our worst expectations may not manifest themselves. Rather than a massive, all-in, injection of reserves a more stealth approach has been floated. Given all of the factors contributing to this decision, the stealth approach seems more likely. In this policy the Federal Reserve would set a monthly amount for monetizing U.S. government debt. Doing so would simply stretch out the period for imposing the wealth tax on dollar holders.

What might be the impact on financial markets and Gold of the stealth approach? The recent Gold rally, and the purely speculative run in Silver, have been built on the expectation that an all-in, massive monetization of U.S. government debt would occur. If that is not the case and the stealth approach is chosen, part of the rally, perhaps a significant part, will be given up.

We must also note that the other factors exist. The ECB has announced a policy of forcing down the interest rates on some EU bonds. It will then claim that it will then sterilize those injections to avoid the inflationary impact of such debt monetization. That, however, is a classic case of easier to say than do. In fact, it may be near impossible to do.

This action by the ECB will to some extent offset the QE nonsense coming from the Federal Reserve. More dollars and more Euros may simply mean the relative values of the currencies might be unchanged. As shown in the chart below, the value of the dollar has gone essentially no where since the beginning of the year. That is likely to be the central tendency for the dollar for the near term. The Obama Fiscal Cliff awaiting the U.S. economy in January might change that situation.

Without an immediate “collapse” of the dollar on 13 September, the current rally of Gold will be extremely vulnerable. As most of the Gold “bought” in the past few months has been really Gold derivatives, not physical metal, the vulnerability is high. Buyers of those futures are not going to take delivery. Now is not the time to be chasing the fantasies of the Street. Was not Facebook enough of a lesson on that?

Gold has been the “game of the month”, and Silver has been the speculators’ play toy. Do not confuse a short-term game of fantasy speculation in the derivatives markets with investment.

GOLD THOUGHTS comes from Ned W. Schmidt,CFA as part of a mission to save investors from the regular financial crises created by Keynesianism, and the high priests of that misguided ideology. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts. To receive these reports, go to: www.valueviewgoldreport.com