US Economic Situation “Intractable”
Over the last few years we’ve often mentioned the situation that the government has gotten itself into and wondered how it was ever going to be able to get iteslf out. The speculation has been that a period of hyperinflation might be the only option. In today’s article David Galland editor of the Casey report discusses the economic bind the government is in and just what options it has. ~Tim McMahon, editor
By David Galland, The Casey Report
In describing the current situation in these United States, and in many of the world’s other superpowers, we here at Casey Research have often used the word “intractable”… as in, “impossible to resolve.”
While that may not be technically accurate – because there is no problem related to economics that can’t be solved if one is willing to swallow sufficiently strong medicine – it is a correct assessment, given the overwhelming role that politics now play in the economy.
In a recent edition of The Casey Report, I observed that the largest and most persistent bubble of all over the last half-century has been the bubble in government – making the ones witnessed in dot-com stocks and housing mere blips by comparison.
The following chart is particularly illustrative of that contention.
As you can see…
What Most People Don’t Realize About The Fed’s Superpowers
Since its creation in 1913, the primary intended role of the U.S. Federal Reserve Bank has been that of protector. In theory, the central bank was bestowed with the power to shape monetary policy in a way that would keep both booms and busts in check. The two main tools at its disposal — interest rates and money creation — would provide a “ceiling of normalcy” above expansions AND a “net of safety” below contractions.
To this day, the financial mainstream holds great faith in the Fed’s ability to fulfill its save-the-day duties — as these recent news items make plain:
- “Why Raising Fed Funds Rate Is Positive For Equities.” (Seeking Alpha)
- “Fed’s Moves Lift All Asset Classes.” (Associated Press)
- “US Stocks Erasing Losses: The aggressive moves of the Fed have been an important driver for the stabilization of stock prices.” (Bloomberg)
Understanding the Federal Reserve Bank
What’s a greater threat to the U.S. economy — inflation or deflation?
To decide that… it helps to understand what role the U.S. Federal Reserve plays.
Despite so much focus on the policies of the Fed, its operations remain somewhat of a mystery to most investors — in no smaller measure, due to their complexity.
Here’s an excerpt of a 35-page report that explains the Fed, its goals and, very importantly, its limitations in layman’s terms. Continue reading
The Long Swim – How the Fed Could Become Insolvent
You’ve seen the proof in real time. Once-dominant industrial companies, e.g., General Motors, can run out of money. The biggest banks, e.g., Bank of America, can run out of money. Even sovereign governments, e.g., Greece, can run out of money. Yes, all those organizations are still limping along, but only after being rescued by other giant institutions, such as the U.S. government, the less unhealthy European governments, the European Central Bank, and the International Monetary Fund.
So far, it’s been easy to get rescued. The people who run giant institutions seem to shudder at the thought of other giant institutions being shown up as anything less than indestructible. Of course, the rescues weaken the rescuers and push them toward the day when they, too, may join the ranks of the desperate. Continue reading
U.S. Tax Burden Good News?
By Timothy McMahon, editor
December 2010-
The Organisation for Economic Co-operation and Development (OECD) released its revenue statistics today and it contained some good news for residents of the United States. Well, maybe not “Good News” but “Less Bad” news. It seems that the tax burden in the United States is not as bad as it is in the majority of the other developed countries in the world.
The OECD statistics show that as a percentage of GDP Denmark has the highest tax burden with the Danish government absorbing almost half of their GDP (48.2%). Sweden was a close second at 46.4%. Other European countries Continue reading
Bernanke Is Making the Crisis Worse
By Bud Conrad, Chief Economist, Casey Research
The Fed is a corrupt and powerful institution, and Chairman Bernanke is making the global crisis worse. His new speech given last week in Europe was terribly misguided and will upset markets as the Chinese and Germans won’t ignore his challenges. Bernanke’s interpretations of the markets have been wrong since before he was appointed to head the Fed, and his actions are doing nothing but aggravating the situation.
In this seminal speech, titled “Rebalancing the Global Recovery,” Bernanke not only defended QE II as the right policy, but also attacked the monetary policy of China, the biggest holder of U.S. debt, an action that must be understood for how misdirected it is.
Here are a few excerpts from the speech: Continue reading
What is the Federal Reserve – Part 3
Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter
How the Federal Reserve Has Encouraged the Growth of Credit
Congress authorized the Fed not only to create money for the government but also to “smooth out” the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our “fractional reserve” system, banks were authorized to employ that new money as “reserves” against which they could make new loans. Thus, new money meant new credit.
It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand (“in reserve”) to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the “multiplier effect.” This process expanded the supply of credit well beyond the supply of money. Continue reading
What is the Federal Reserve – Part 2
This is Part II of our three-part series “Robert Prechter Explains The Fed.” In part 1 we saw how Central Banks came into being and money went from something tangible and of value like Gold or Silver to paper backed by Gold to paper backed by nothing. You can read Part I in “What is the Federal Reserve – Part 1” — and come back later this week for Part III. “Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is ‘backed’ primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise…”
What is the Federal Reserve – Part 1
Do you really know What a Dollar is?
Or how the FED controls interest rates?
What is quantitative easing? Or (QE2)? Or monetary stimulus?
For answers, let’s turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter. Today we begin a 3-part series that we believe will help you understand the Fed as well as he does. (Excerpted from Prechter’s Conquer the Crash and the free Club EWI report, “Understanding the Federal Reserve System.”)
Here is Part I. Continue reading
How The FED Prints Money- Part 4
This is part 4 in the video series on the effects of Quantitative Easing by Chris Ciovacco the Chief Investment Officer for Ciovacco Capital Management. To see the other parts How the FED Prints Money, How the FED Prints Money – Part 2, How The FED Prints Money- Part 3
