Dave Gonigam – August 17, 2011
- “Treasonous” conduct, or an “inappropriate” remark? A pointless distraction, and what really matters
- Watch the birdie: Bernanke’s next bombshell, due a week from Friday
- The Big Announcement from Europe that turned out to be nothing… and the real bailout price tag
- Surreal sign of imperial decline: Presidential motorcade overwhelms small town
- Another IRS tale of woe, an inquiry about “flash mobs” and Bill Bonner’s presidential speech!
“Even the Federal Reserve is something that a lot of people are talking about,” mused Ron Paul one day last month.
He was reflecting on his impact in two consecutive presidential campaigns: Thanks to him, Fed policy is now actually water-cooler talk… for folks who still have jobs, anyway.
But events of the last 24 hours raise the question: Is that such a good thing?
Paul’s fellow Texan, Gov. Rick Perry, jumped into the race last weekend. While he campaigned in Iowa yesterday, someone asked him about Fed chief Ben Bernanke.
“If this guy prints more money between now and the election, I don’t know what y’all would do to him,” Perry said. “We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous — in my opinion.”
This brought out the usual tut-tutting from the keepers of respectable public opinion: “That’s just not appropriate,” a law professor and former Fed lawyer told Bloomberg. “Completely inappropriate,” added a senior lecturer from the University of Texas. “Inappropriate and unpresidential,” added former Bush spokesman Tony Fratto.
“You have to think about your words,” intoned current White House press secretary Jay Carney, who evidently missed the memo about calling them “inappropriate.” Maybe he’s still twisted up in his mind pretzel from last week about how unemployment benefits help create new jobs.
Here’s what’s most striking about all this, aside from the attempt to co-opt Ron Paul: The rhetoric — on all sides — is very convenient for the Fed.
As long as the subject stays focused on “ugly” treatment of a “treasonous” Bernanke and whether such words are “inappropriate,” the subject of what the Fed is actually doing stays in the background.
Thus, NBC Nightly News can devote its lead story last night in part to the “ugly” kerfuffle — reported by Mrs. Alan Greenspan, Andrea Mitchell, no less — then move on to a story about skyrocketing grocery prices over the last year, attributing the phenomenon to bad weather, high fuel prices for farmers, etc. — never connecting the dots to Fed policy.
Thus, people whose eyes might be opened to how the Fed undermines their standard of living remain in blissful ignorance.
But this is par for the course: Last Saturday at the highly touted Ames Straw Poll in Iowa, 16,892 votes were cast. Ron Paul came within 153 votes of winning. The third-place finisher had half of Paul’s total and promptly dropped out of the race for the Republican nomination.
Afterward, the media declared the three front-runners: Michelle Bachmann, who secured the tissue paper-thin victory; Mitt Romney, who didn’t even try to compete in the Ames contest; and Rick Perry, who announced his candidacy that day.
Like Fed policy itself, the man who can explain its destructive impact without resorting to “treason” rants is studiously ignored… a phenomenon The Daily Show’s Jon Stewart noticed on Monday night.
“It was as if Paul had been sentenced to the Phantom Zone,” added Roger Simon, an old hand of the Washington press corps who plies his trade these days at Politico.
Rest assured, The 5 won’t ignore either Paul or the cause he’s best known for. How can we, when evidence of the Fed’s perfidy sits front and center on our computer screen this morning?
Behold, wholesale prices rose 0.2% last month, in the estimation of the Bureau of Labor Statistics. The year-over-year increase, fueled by $600 billion in Federal Reserve quantitative easing, is 7.2%.
Economists surveyed by Bloomberg before the numbers were issued expected no month-to-month change. But these are mostly the same economists who told us the current “slowdown” would “squeeze inflation out of the economy.”
Yeah, that’s working out really well: Moving up the production chain, the year-over-year increases are even steeper: 11.6% for intermediate goods, and a staggering 22.6% for crude goods.
Tomorrow we’ll have an idea of how easily producers are passing along their costs to you and me: We’ll get the monthly report on consumer prices. Jiggered as it may be, it should prove revealing. The “expert consensus” is counting on a 0.2% increase.
So that’s the view from the rearview mirror: Now let’s look ahead. Nine days from now, Ben Bernanke delivers his speech at the Fed’s annual retreat in Jackson Hole, Wyo.
At last year’s shindig, Bernanke winked and nodded and all but said a second round of quantitative easing was on the way. That was enough to tack on 2,800 Dow points over the following eight months.
So what now? Nearly half of those 2,800 points have been wiped out, even after the market bottomed a week ago today. What rabbit might he pull out of his hat now, especially after promising near-zero interest rates for “at least” another two years?
Your editors can’t peer into the mind of Mr. Bernanke, and even if we could, we might be frightened of what we’d see. But here’s a guess…
Two months after the Jackson Hole speech, Bernanke delivered another speech that got a lot less attention. It dealt with the arcane subject of “inflation targeting.”
As you may be aware, the Fed has an inflationary “sweet spot.” It wants consumer prices to rise about 2% per year. That’s right, in the mind of a Federal Reserve governor, it’s a good thing if the purchasing power of your dollars erodes by 18% in a 10-year span.
For a long time, this was unofficial policy, an unspoken assumption. But last October during a speech in Boston, Bernanke proposed making it official policy. “An inflation rate modestly above zero is shared by virtually all central banks around the world,” he said — glossing over the performance record of central banks, natch.
By June of this year, the talk got serious. “Federal Reserve officials are discussing whether to adopt an explicit target for inflation,” Bloomberg reported on June 15.
“An inflation target,” as Bloomberg explained the conventional wisdom, “could help quiet critics of record monetary stimulus and anchor public expectations for consumer prices should the Fed in coming months try to spur the recovery by keeping interest rates close to zero for longer.”
Well, we have our “close to zero for longer” promise now: mid-2013, as the Fed statement last week said.
Bernanke could well take the wraps off an inflation target a week from Friday.
How might the market react? No doubt Bernanke hopes it will goose the stock market; that was his intention with QE2. “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action,” he wrote in The Washington Post last November.
But a host of crises loom: European banks are in trouble because they loaded up on government bonds of the PIIGS countries. American banks don’t have enough capital to make good the European banks’ credit default swaps.
In addition, you can expect another showdown in Washington over the next six weeks: The debt-ceiling deal left a lot of specifics in the federal budget to be hashed out later. “Later” falls between Labor Day and the start of the new fiscal year, Oct. 1. With no resolution, we’ll get another “government shutdown” threat to spook markets next month.
In other words, it remains a very dicey time, even if the market has stabilized in the last week: Bernanke’s speech a week from Friday will only add a complicating factor.
So what should you be doing with your money now?
That’s the explicit focus of our 3-Part “Market Volatility” Strategy.
- Part One is the “Reserve Members-only” teleconference Addison recorded this week with six of our leading editors. It answers the most immediate “where are we going from here” concerns
- Part Two is a special report pulling together the top precious metals recommendations among all our editors
- Part Three is an Emergency Summit, convening our editors and select Reserve members here in Baltimore for a frank face-to-face discussion.
If you signed up to receive an invitation to this summit, you’ll receive it in your email inbox tonight. Look for it around 7:00 p.m. EDT.
If you’re already a member of the Agora Financial Reserve, you already have access to the teleconference and the precious metals report. You’ll receive links in your inbox within a couple hours of today’s 5.
If you’re not a Reserve member, and you didn’t sign up to receive an invitation, don’t despair… Tomorrow you’ll be given an opportunity to listen in on the teleconference and download the gold recommendations instantly.
And depending on how many people accept our invitation to the summit here in Baltimore, you might still have a chance to join us in person. But for the moment, we want to give priority to the folks who’ve already signed up.
Watch this space for further details…
Stocks are treading water as we write.
The Dow and the S&P each up a quarter percent, not enough to make up for yesterday’s losses: Traders threw a tantrum after the Big Announcement from Germany’s Angela Merkel and France’s Nicolas Sarkozy turned out to be a whole lot of nothing.
Well, almost nothing. They talked about a permanent president for the European Union, and a tax on all financial transactions. But that’s complicated pie-in-the-sky stuff; lots of different interest groups have to sign off on that in a distant future.
The real news — and the real disappointment for traders — was that Merkel and Sarkozy still believe that at 440 billion euros, the eurozone bailout fund is big enough to handle whatever crises might come.
Heh… Felix Zulauf, a member of the Barron’s Roundtable, figures it will require at least 1 trillion before all’s said and done. “Fixing” Italy, should it come to that, will cost three times as much as fixing Greece, Portugal and Ireland combined.
Gold has been steady for most of the last 24 hours, biding its time before the next push to $1,800. At last check, the spot price is $1,785.
Silver is a few pennies above $40 again.
As long as we have politics on the brain today, we’re wondering if anyone else is struck by the, well, imperial nature of the president’s bus tour around the Midwest.
This is video of the motorcade passing through Zumbrota, Minn. — population 3,252. “As a reporter,” writes Keith Koffler at the White House Dossier blog, “I’ve seen and been in a lot of presidential motorcades, and I’ve never seen anything this long. Looks expensive.”
But it’s nothing new. When George W. Bush went to Argentina for a trade summit in 2005, his retinue numbered close to 2,000 people (excluding reporters), plus two dozen vehicles for the motorcade… and bottled water to supply him and his inner circle. Quipped an Argentine at the time, “Even Caligula drank the local water in Gaul!”
As Addison points out in his forecast, this is a microcosm of how far we’ve traveled down the imperial road, and how much it costs. Two centuries ago, the British ambassador knocked on the door of the White House, and Thomas Jefferson answered it himself… in house slippers.
Obama’s armored bus? It cost $1.1 million.
“We have now seen flash mobs in Peoria, Milwaukee, Philly, Chicago,” writes a reader on a subject we’ve been following. “Why is there no real comment in the general media? Is the White House behind the downplay? Just wondering.”
The 5: We don’t see anything that sinister. The events get plenty of coverage close to home, in local media. But national media? They’re still in denial. That too is a phenomenon Addison explores in his forecast… as you can see here.
“Anyone dealing with the IRS has a problem,” writes a reader adding to our audit chronicle. “We are being audited for 2009. We are retired and for the past 15 years have used Turbo Tax without any problems.
“Now the IRS wants us to document our Form 1099-Rs and have recalculated many of the calculations for deductions, which makes no sense. The 13,000 new agents are still in the learning curve. Welcome to the new America.”
The 5: Welcome, indeed.
The 5 Min. Forecast
P.S.“My fellow citizens,” wrote Bill Bonner in yesterday’s Daily Reckoning, in a speech he wished the president would deliver to the nation, “We are faced with a choice. Either we continue with our program of trying to police the entire world. Or we give it up. If we continue, we will go broke. And our armies will be destroyed… along with our economy and our currency. If we stop now, we can save our currency… our economy… and our way of life.
“Which will it be? Guns or butter? A respectable nation… or an empire with a death wish? I know which I will choose.
“Effective immediately, as commander-in-chief, I am ordering all U.S. troops stationed overseas to come home. We will defend our nation to the death, but we will no longer meddle in other countries’ affairs. We will be a decent nation, a good nation; we will no longer be a great empire. Most Americans never wanted it anyway.
“I am also submitting a balanced budget for next year. You will see in it that I am closing all foreign bases and eliminating all military spending that is not directly related to our real national defense.
“But wait. There’s more.
“My fellow Americans, I don’t know about you, but I’m tired of supporting all these zombies. Why are there so many zombies? Because there’s so much meat for them…
“You wanted change…I’ll give you change…
“Here’s how to get rid of zombies. I’m proposing to scrap the entire tax code. From now on, Americans will pay 10% of their income… no deductions… no nonsense. You’ll fill out your tax return on a postcard.
“Serfs in the Dark Ages were only required to work one day in 10 for their lords and masters. You shouldn’t have to do more.
“The federal government will have to get by on that. That’s all. I’m proposing a balanced budget amendment… with a permanent 10% tax rate. No ifs. No buts. No zombies.
“You all know what a 10% flat tax will do? It will make the U.S. the most dynamic economy in the world.
“And what about all the debt? Simple. We’re raising interest rates. Yep. To 5%. It will drive all these deadbeats into bankruptcy. The debt will disappear… almost overnight. So will a lot of these big zombie banks.
“And by the way, by executive order, I’m hanging George W. Bush, Dick Cheney, Joe Biden, Alan Greenspan, Paul Krugman and Thomas L. Friedman.
“Some of them for war crimes. The others… well… just because the world will be a better place without them.
“Thanks for listening.”
Heh, now there’s some incendiary rhetoric the naysayers would find “inappropriate.”
But seriously, the “de-zombification” Bill describes here gets to the heart of Addison’s new documentary, Risk! If we’re going to have a real “recovery,” it’s the risk-takers and entrepreneurs who are going to make it happen… provided government gets out of the way.
Folks who attended this year’s Symposium in Vancouver got a chance to view a rough cut of the documentary. Tonight we’re inviting a select group of readers to the national premiere in October.
It’s part of the elite “Emergency Summit” we’re convening here in Baltimore… assembling our editors to meet face to face with Reserve members and lay out a plan to answer the question, “What now?”
If you signed up to receive an invitation, you’ll receive it tonight around 7:00 p.m. EDT. If you missed out, you’ll have a chance tomorrow… We’ll provide the link right here in The 5. Either way, you’ll want to move quickly: We have only a limited number of seats available.