So on Wednesday, not only did the Republicans win control of the House of Representatives, but the Federal Reserve finally took the plunge with Quantitative Easing 2—
—in other words, on the very same day, the U.S. dollar got the ol’ one-two punch—right to the groin:
—in other words, on the very same day, the U.S. dollar got the ol’ one-two punch—right to the groin:
First the spend-and-cut-taxes Republicans won the Congress—and then, the Fed opened the money spigot with QE2.
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| Light at the end of the tunnel? |
Talk about a bad hair day! The issue is no longer if the dollar will be killed—it’s now a matter of when.
Full disclosure: Though I am a fiscal and social conservative, I have always sneered at the Republican Party’s fiscal policies.
The Republicans have always espoused “smaller government” and “fiscal prudence”—but in the last 40 years, it was the Democrat’s president, Bill Clinton, who actually made government smaller. Shrub, Bush, Ford, Nixon, even the dubiously sainted Ronald Reagan all made government bigger: Bigger in absolute terms, bigger as a percentage of GDP—bigger government has been the real mantra of the Republican Party.
As for “fiscal prudence”—nominally, the Republican Party is in favor of balanced budgets. But ever since Richard Nixon said, “I am a Keynesian”, there hasn’t been a single Republican president who has managed to balance the budget. Cutting taxes without cutting spending is not a viable definition of “fiscal prudence”—but that’s what Republicans have been selling as viable macro-economic policy for close to 40 years.
The reason is simple. Long ago, the Republicans and the Democrats came to a tacit understanding: The Republicans let the Democrats spend all they want on various Big Government programs, while the Democrats let the Republicans cut all the taxes they want and spend all the money they want on defense. That way, both parties look good with their voters.
Dick Cheney summed up the Republicans’ attitude: Deficits don’t matter. Those three simple words are the Republican Party’s real mantra—their real motto. Deficits don’t matter—which is why Republican administrations have never delivered a balanced budget since Dwight Eisenhower, over fifty years ago. The United States now has a debt of roughly 100% of GDP—the deficit is now running at about 10% of GDP annually. This is worse than Greece.
In other words, America needs a political party to stand up and speak to the people like the grown-ups that they are—like David Cameron in the UK is doing: The Conservative Prime Minister is slashing government spending and raising taxes, in a hell-bent-for-leather drive to cut the Labour Party deficit his government inherited.
Are the British people happy about these measures? No. Are they going along with them? Yes. Why? Because they realize it has to be done.
Now, this alone would be bad enough—
—but the Fed’s actions are making it all even worse.
With Wednesday’s announcement of QE2, the Federal Reserve has implemented the absolutely worst choice it could possibly make, in terms of monetary policy.
Before Wednesday’s announcement, there were three paths the Fed could have taken:
That the Deficit doesn’t matter to Democrats is understandable: They are a party that by definition is fiscally irresponsible. Keynesian Klowns run that particular circus.
But the Republicans were supposed to be the party of fiscal restraint and discipline. After the profligacy of the George W. Bush administration, does anyone really believe that anymore?
Yet aside from raising shrill bleetings when it suits them—id est, whenever there’s a Democrat in the White House—never a peep is heard from the Republicans about the Deficit when they are in power, either in the White House or up on Capitol Hill.
So now that the Republican Party has won Congress, this is what they will want—and get:
• Tax cuts for the wealthy will become permanent.
• A great big chunk of regulations governing corporate behavior—and corporate excess—will be rescinded, most especially in the banking and financial sectors. That whole “financial reform” bill? Neutered like Spot, its teeth pulled for good measure.
• There will be no cuts in the bloated defense budget, much less any cuts in the budgets for the pointless, needless wars in Iraq and Afghanistan.
Meanwhile, the Democrats will want more Keynesian stimulus—and ironically, they will likely get it.
Precisely because the Republican Party won’t want to be perceived as hindering the economic recovery—and because the current Republican Party is at heart Keynesian to its very marrow—the Republicans will support the Democrats with:
• More money for another round of stimulus. Yes, you heard right.
• More money for jobs programs and extended unemployment benefits. Ditto.
• More money for Social Security. Talk of reforming Social Security is just that—talk. A cheap way to buy the illusion of fiscal responsibility and prudence.
• More money for Medicare. Need those seniors’ votes—especially with 60 million Boomers about to become seniors.
• More money for the individual states, many of which are bankrupt in all but name.
In exchange for their votes on these spending programs, the Democrats will let the G.O.P. kill environmental bills and regulations, and probably gut the so-called “health-care reform” bill that was passed in the last session.
Why will the Republican-controlled Congress allow the passage of even more Democrat spending bills? Because the measures are popular and populist, no matter how fiscally irresponsible.
See, the Republicans aren’t stupid—they know that they won the mid-term by default. It wasn’t a Republican “victory”—it was a throw-the-bums-out election. If it had really been an election signalling a true ideological shift—like the ‘94 midterm—then the Tea Party candidates would have swept all their elections. They didn’t—but the Dems got trounced anyway. So in other words, it’s not that the Republicans won—the Democrats lost.
So the Republicans aren’t going to do anything that will antagonize the voters.
On the contrary: If the American people want more deficit spending, in the mistaken Keynesian belief that deficit spending can pull the economy out of this black hole? Then by golly, that’s what the new Republican-controlled Congress is going to give them!
More spending!
That is of course not what the American economy—and the American people—need.
What the American people need is for the political leadership to say, “We need to cut spending here, here, and here—we need to wind down these pointless wars that are sucking us dry—and we need to raise taxes on these wealthy folks and big corporations here, here and here.”
In other words, America needs a political party to stand up and speak to the people like the grown-ups that they are—like David Cameron in the UK is doing: The Conservative Prime Minister is slashing government spending and raising taxes, in a hell-bent-for-leather drive to cut the Labour Party deficit his government inherited.
Are the British people happy about these measures? No. Are they going along with them? Yes. Why? Because they realize it has to be done.
The American people aren’t getting this grown-up treatment from their political leadership. They might have thrown out the Democratic bums out—but they got new bums in their place: The Republicans.
Just you watch: The Deficit is going to get a whole lot worse, because of the Republican Congress.
Just you watch: The Deficit is going to get a whole lot worse, because of the Republican Congress.
Now, this alone would be bad enough—
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| Once through the Money Hole, the travellers ventured into another dimension of the Fed-Dollar continuum. |
With Wednesday’s announcement of QE2, the Federal Reserve has implemented the absolutely worst choice it could possibly make, in terms of monetary policy.
Before Wednesday’s announcement, there were three paths the Fed could have taken:
One, more stealth monetization: Printing money—sorry, “expanding its balance sheet”—and buying more toxic assets from the Too Big To Fail banks. The TBTF banks would then turn around and use this cash to buy up Treasury bonds, and thereby complete the stealth monetization process I described here. (I was actually betting on this outcome.)
The rationale for buying more MBS was that, because of the Mortgage Mess that I discussed here, the Mortgage Backed Securities market is tumbling even as we speak. The MBS’s Credit Default Swaps—the same bit of financial kryptonite that damn near wasted the entire financial sector in 2008—are climbing like Edmund Hillary on speed. A big swath of money to prop up MBS’s would soothe the financial markets, which are beginning to stress something awful because of Foreclosuregate.
Two, a massive, shock-therapy, direct Treasury bond buy: No screwing around, no half-measures—just one big dollop of money in the shape of a one-off $500 billion to $1 trillion buy of Treasury bonds. The most adventurous possible outcome, and before today’s decision the least likely, considering the personalities and outlooks of the men charged with the decision.
It’s ironic, but this policy option was the helicoptering Ben Bernanke was referring to in his famous speech: A shock to the system that would literally bully the markets into doing the Fed’s bidding, which is reigniting the economy.
But Benny’s all hat, no cattle—he didn’t have the balls to do what he claimed he would do, if the time came.
Three, the Federal Reserve could refuse to print any more money, and instead say, “We’re going to stand pat, and keep our powder dry, in case something bad happens.” This was actually the easiest of the three choices I’ve outlined—and likely the best of all the possible choices.
But instead of making one of these three choices—one of these three rational, sensible choices—what did Backstop Benny and his Lollipop Gang at the Federal Reserve do?
They will direct-buy $75 billion a month in Treasuries over the next eight months, for a total injection of $600 billion.
This was the worst possible decision they could have made. They couldn’t have screwed the pooch any better, not even if they’d taken a fistful of Viagra and left the condoms at home. I mean, really, they fucked it up!
Let me explain why:
The Federal government is running a yearly deficit of around $1.4 trillion. That means that the U.S. Treasury has to borrow, on average, $100 billion a month. So during the next eight months—as announced by the Federal Reserve—the U.S. Treasury will only have to borrow $25 billion per month from the private sector. The other $75 billion will be coming from the Fed, who will simply conjure the money out of thin air, as is its power.
Now, what will the private sector do with the $75 billion a month it will no longer be lending to the Federal government?
Why, it will buy some other asset class.
But if the Fed is printing $600 billion over the next eight months—that is, expanding its balance sheet by 25% over the next eight months—what should the smart money do?
Easy: Get out of the dollar. Now.
What asset class would be the safest safe haven, and is instantly convertible to any needed currency?
Commodities.
New readers might fail to see this, but my kind fans will recognize the point we have now reached: We have reached the endgame of the dollar, as I discussed a mere two months ago in my How Hyperinflation Will Happen piece—commodities.
New readers might fail to see this, but my kind fans will recognize the point we have now reached: We have reached the endgame of the dollar, as I discussed a mere two months ago in my How Hyperinflation Will Happen piece—commodities.
Quantitative Easing 2 is the starting gun for a run up on commodities. A couple of trader friends pointed out how oil crossed the $85 a barrel mark today. Oil will continue to rise. Gold, silver, other precious and industrial metals—all will rise. Grains too—on top of the 33% year-over-year that they’ve risen so far.
And the winter is coming . . .
The winter oil demands will put price pressure on petroleum products and foodstuffs—which will naturally be passed on to the consumer. Thus inflation will rise—I am predicting to a 5%–6.5% annualized rate by March of 2011. Courtesy of the Federal Reserve, which thinks inflation—whatever its cause—is a sign that the American economy is back on track . . .
Incompetent mother fuckers. I’m sorry for the foul language, but there’s really no other way to characterize what they have done. What they are doing. And doing it with such placid calm!
Backstop Benny and the Fed don’t recognize that inflation is like fever: It is a symptom of any of a whole host of maladies and conditions. Inflation by itself does not necessarily mean that the economy is expanding, and therefore putting pressure on prices. That’s like saying, “Whenever you get in shape, you lose weight—therefore, if you lose weight, you are getting in shape”—the most blatant post hoc ergo propter hoc error imaginable, a logical fallacy that not even a mediocre junior-high school student would make.
But the Fed is making it! Incompetent mother fuckers!
Backstop Benny and the Fed don’t recognize that inflation is like fever: It is a symptom of any of a whole host of maladies and conditions. Inflation by itself does not necessarily mean that the economy is expanding, and therefore putting pressure on prices. That’s like saying, “Whenever you get in shape, you lose weight—therefore, if you lose weight, you are getting in shape”—the most blatant post hoc ergo propter hoc error imaginable, a logical fallacy that not even a mediocre junior-high school student would make.
But the Fed is making it! Incompetent mother fuckers!
Coupled to the Fed’s incompetence, the newly installed Republican Congress is going to cry havoc and let slip the Dogs of Deficit: More tax cuts, more defense spending, and a fiscal 2011 deficit that will be greater than the $1.1 trillion for fiscal 2011 the Congressional Budget Office is currently projecting. My guess is, the 2011 deficit will be on the order of $1.4 trillion—just like 2010 and 2009.
What does this all mean?
The SACT party (the “spending-and-cutting-taxes” party, the “sacked” party, it ceased being the GOP long ago) is going to expand the Deficit by $200 to $300 billion per year, between their tax cuts, their refusal to back out of Iraq and Afghanistan, and the spending sops they will likely throw at the Democrats like scraps to the neighborhood dogs. Fiscal 2012 will likely be similar to 2011—or worse.
These budgets deficits will put added strain on the U.S. Treasury’s funding efforts—exacerbating the underlying problem, which is really quite simple: The United States government spends far more money than it brings in. It’s as simple as that.
But because both parties are unwilling to cut spending and raise taxes, and because the Federal Reserve is so willing to encourage this political irresponsibility by its insane efforts at Quantitative Easing, there will be more and more pressure on the dollar—
—until the dollar finally collapses as a fiat currency.
—until the dollar finally collapses as a fiat currency.
Bottom line, I am more confident than ever in my predictions of a hyperinflationary collapse. I am more confident today than on Tuesday that the dollar will go up in flames in a hyperinflationary event, which will begin no later than Q4 of 2011 when annualized inflation crosses 10%. I am more confident than ever that the dollar will collapse no latter than 2012—unfortunately.
What, you think it gives me any sort of satisfaction to be right? No it does not—I’d far prefer to be completely wrong about my call, and instead see the economy staggering along at close to zero-percent growth but with a stable currency, rather than watch the American economy take a hyperinflationary fall.
What, you think it gives me any sort of satisfaction to be right? No it does not—I’d far prefer to be completely wrong about my call, and instead see the economy staggering along at close to zero-percent growth but with a stable currency, rather than watch the American economy take a hyperinflationary fall.
See, hyperinflation won’t bring a slight drop in GDP—instead, GDP will take a massive 20%–30% hit, when all is said and done. Hyperinflation is destructive. Destructive in a way the United States has not experienced in close to 70 years.
This is on the way—with Wedensday’s Fed announcement, coupled with what the Republican-controlled Congress will most likely do, there is no longer any turning back.
A few people have criticized me, for going on and on and on about hyperinflation. But see, if a truck is heading straight at your child—about to run him over—would you prefer it if I said, “Oh dear,” quietly under my breath, and just to myself?
Or would you prefer it if I shouted from the rooftops for all to hear—especially you?
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