"Whenever a high government official starts calling for more or increased power to regulate/interfere with a "system", one's first safe assumption is that the "system" in question is in trouble and that the official asking for increased powers knows it."
Gold This Week (GTW) - June 20, 2008
In well over thirty years of "real-time" study of economic and financial history and markets, your "Captain" has seldom if ever seen this truism confirmed as quickly as it was over the two days of the week just ended. The ludicrous press release which accompanied the Fed's decision to do nothing at their June 24-25 meeting has swept aside whatever shreds remained of the Fed's "credibility".
The most ludicrous aspect of all is the Fed's oft stated determination to keep "inflationary expectations" from breaking out. This is utterly hilarious, nearly as hilarious as are the Fed's preferred measures of price inflation, the CPI and, in particular the "core" CPI. On June 27, the US Commerce Department announced that their latest reading of "core" (minus food and energy costs) inflation had increased 0.1 percent, half the "expected" 0.2 percent. As we said in the current issue of The Privateer, "Is there any American who believes this number?"
Back in February of this year, Mr John Williams of Shadowstats fame was interviewed on CNN. His central point in this interview is that US M3, which the Fed stopped reporting in March 2006, was growing at a rate of more than 15 percent annually. This rate of growth in the "broad money supply" of the US was the fastest since 1971, the year when the US Dollar was divorced from Gold. That was in February, four months ago. It was before the Fed rescued the system by the arranged takeover of Bear Stearns and before they threw themselves wide open to ANY form of debt wastepaper being acceptable as official banking "reserves". Please remember that properly and usefully defined, inflation is an increase in the total stock of money. The closest measurement of such an increase used to be the M3 statistics in the US. Small wonder that the Fed stopped reporting them more than two years ago.
But the most hilarious part of the Fed's press release comes at the end: "The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability." This from an FOMC which, held paralysed in the headlights of an onrushing economic and financial meltdown, chose not to act at all. What can they do? If they raise rates, the crumbling US economy collapses. If they lower rates, prices surge as fast or faster than the Dollar collapses. And the crumbling US economy collapses.
The Fed has destroyed any semblance of sustainable economic growth by destroying its prerequisite, a SOUND money. And as for their mandate to maintain "price stability", what could be more absurd than the contrast with what is happening to prices inside the US, and everywhere else, right now? Price stability is a chimera anyway, it cannot be maintained and any attempt to maintain it inevitably ends up distorting the entire financial and economic system.
The entire question is preposterous. Did anybody complain to the Fed when the prices of financial assets of all descriptions were rocketing skyward in the late 1990s? Did anybody complain when the prices of computers and electronic goods of all descriptions were plummeting during the same period? Has anybody noticed that it takes about $US 950 today to buy what $100 could buy in the year of your Captain's birth, 1949? And this measure is done by using the US government's own official "price inflation" statistics. The real measure is MUCH worse than that.
Public credulity is a powerful thing. It can go on for a very long time, immune from all evidence to the contrary. It cannot, however, be maintained indefinitely. There is a point at which the official version of the situation and the REAL situation that people face every day becomes so contradictory that the credulity breaks down. That is now happening, everywhere. The Fed is desperate to rein in "inflationary expectations". But they can do nothing about the simple fact that people are no longer merely "expecting" inflation (rising prices). Today, people are LIVING with rising prices, ever more rapidly rising prices.
The fact that the Fed's credibility is gone is eloquently shown by the market action in the US in the 48 hours since the FOMC announced its decision not to decide. US stock markets have plummetted. For the first time in living memory, US brokerage houses are actually issuing SELL (rather than "buy" or "hold") recommendations. Commodity prices are ratcheting up again. The US Dollar is on the skids. And Gold (and Silver) have abruptly awakened from a month long slumber.
In the current (late June 2008 - published on June 22) issue of The Privateer, we end the Global Report section like this: "We will know when the US Dollar collides head-on with Gold. Watch for the day when Treasury Secretary Paulson or Fed Chief Bernanke has to answer a qeustion at a press conference about - GOLD."
The FOMC meeting and press release of June 25, and the market's reaction to it since, has brought that day MUCH closer.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in three large "spurts" since then, the most recent taking it all the way down below the $US 855 level - Gold closed at $US 850.90 on May 1. A month ago, with Gold at $US 925 on the chart, half the post March 17 fall had been regained. Gold spent most of the time since then bouncing between about $US 870-875 and $US 900. As you can see, the surge since June 25 has seen Gold now close to breaking out of that trading range.
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March.
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