Posts Tagged ‘Interest rates’
Massive Market Manipulation

We have posted on the possibility of USD 15 trillion money laundering, a rogue US agency or an attempt to extort at least 50 billion. It seems so farfetched, surely it can’t be true. But is it any more unbelievable than the manipulation of the gold and silver market or that of AAA rated securities?

Gold and silver markets are manipulated in what was termed the biggest fraud in the history of the world. Gold is the biggest commodity market in the world. USD 5.4 trillion a year is traded through the LBMA and no end of derivatives hang off it. The leverage level is 100 to 1. In other words there are 100 ounces of paper gold for every ounce of physical gold. Every ounce of gold that leaves the LBMA causes leverage rates to rise. At some point the market is going to blow.

Listen to King World News Interview with Andrew Maguire & Adrian Douglas. Andrew told the CFC exactly what was going to happen to the gold price when it followed the pattern caused by the manipulation. It then moved exactly as he said it would. He even gave the CFC live commentary explaining what was happening.

The email exchange between Andrew Maguire and the CFTC is linked to at the King World News site. It includes the following:

A final e-mail to confirm that the silver manipulation was a great success and played out EXACTLY to plan as predicted yesterday. How would this be possible if the silver market was not in the full control of the parties we discussed in our phone interview? I have honored my commitment not to publicize our discussions.

I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position.

It is common knowledge here in London among the metals traders that it is JPM’s intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.

The Wikipedia entry on Maguire states:

He went public in April 2010 with assertions of market manipulation by JPMorgan Chase and HSBC of the gold and silver markets. Maguire said “JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses (on their short positions) by the Fed and/or the U.S. taxpayer.” “No one at JPMorgan is familiar with Andrew Maguire,” said Brian Marchiony, a JPMorgan spokesman. HSBC declined to comment….

Maguire and his wife were injured in London in a hit-and-run accident on March 26, 2010, the day after Maguire’s name came to light during a CFTC hearing on limiting gold and silver positions held by large market participants in order to prevent manipulation. Maguire believes the accident was an attempt on his life. The driver of the other vehicle was apprehended after a police chase, both on the ground and from the air in helicopters, but his name has not been released.

Think about the implications of the biggest commodity market in the world being manipulated. Of banks being even more leveraged in this than other securities. At the moment much of the manipulation may be designed to stop gold from appearing as a viable alternative to fiat currencies. But it also flags the potential manipulation in the event of a move back to the gold standard. A debate that has raged before. The Secret of Oz is a great documentary. Well worth watching for its outline of the debate between a gold standard and one which uses silver coinage as well.

We have commentated repeatedly on fraud in assorted securities market. I expect this book will detail more. If central bank manipulation of interest rates, the very price of money was not bad enough, we have the banks at it as well. Money is so central to everything that if it is too badly distorted the economy can’t fail but to destroy value, rather than create it.

It’s time to face facts, there is something rotten in the State of Denmark. Not to mention the other States of the formerly developed world. Formerly developed world is an awkward term. The “regressing world” seems a better term for describing our reality.

What is happening has nothing to do with classical models of capitalism. We now have a new form in the US, UK and perhaps other “Anglo” style economies. It can be thought of as connected capitalism. Not because the net connects us all, but because wealth accrues on the basis of connections. Not merit, not luck, but that now rather quaint concept …. corruption. Corruption on this scale will undermine the legitimacy of our system. This would be an unmitigated disaster.

Innovation represents the only hope for a beneficial black swan that will enable western governments to meet their promises. That will enable developed country citizens to have anything like the life style they are expecting. It must not be sabotage in a march to neo-luddite or pseudo-socialist alternatives. Neither they nor gangsta capitalism or its related connected capitalism will enable sufficient innovation. It really is a case of go forward fast or experience a collapse of Western civilization and much of the existing world order.

There is an interesting video here on the failure of our societies to continue to get big things done. It makes an unstated but nevertheless devastating attack on the precautionary principle. It also touches on the loss of the BS detector that Westerners used to have. We need to turn our culture around, fast.

Graphic courtesy of The Market Oracle

 
Raise interest rates

The Reserve Bank of Australia (RBA) reduced its cash rate to 4.5 per cent from 4.75 per cent. While it is good that Australia still has positive interest rates, this is a bad move.

When an economy has total debts (household, corporate and government) of 235% of GDP it should be reducing debt, not increase it. Australia’s 235% Debt/GDP ratio in 2010 is in the same territory as Greece at 262%. While different compositions of the debt and cultural attitudes to tax affect the likelihood of it being paid back, private as well as public debt affects growth.  Money used to service debt, particularly if foreign sourced, is money not spent on other things. Australia now has some of the highest levels of household debt in the world.

The Bank of International Settlements (BIS) produced table copied below shows just how indebted Australia and the rest of the developed world are.

The RBA is acting as if we still operate in a relatively debt-unconstrained world. That by tweaking interest rates it can painlessly boost the economy or constrain inflation. If such a world ever really existed, it certainly does not now. Yes the RBA can kill the economy by cranking up interest rates, but it does not necessarily follow that it can make it grow by reducing them.

Things change. The developed world has an aging population. There are lots of retired people and people saving for their retirement. Reductions in interest rates hits their hip pocket. This will constrain their consumption. Despite the bleating of assorted officials that all is well, many people know it is not. They are trying to reduce their debt. A decrease in interest rates will supply welcome relief, but will not necessarily drive them to the shops in an orgy of GDP boosting wanton consumerism. Some will reduce their rate of debt accumulation or even reduce their total debt.

Then there is the currency effect. The Australian dollar has been very strong. This has made imports, including fuel cheap. If lower interest rates result in a lower dollar, this will increase the price of imports. Increased import process, particularly of fuel, suck the life out of an economy. It is worse than a tax. At least governments tend to spend much of their tax take domestically. Even if the government expenditure is largely wasted it will still provides some benefit, at least for a while. But putting more money into some oil Sheiks pocket does not. It particularly does not if that money is then used to propagate Wahhabist ideology around the world. Who says Saudi Arabia exports nothing but oil?

A falling currency is a mechanism for reducing domestic production costs compared to those elsewhere. But it is not a painless panacea. The flip side of a falling currency is a relatively poorer nation. Although if internal markets, such as that for labour, are relatively inflexible then it can help. But devaluation is a very blunt instrument.

Rising import prices cause pain, but the source of the pain is hidden. Politicians tend to like that, making it a feasible policy choice. Of course, not all countries can devalue at once. Devaluation is a relative game, if some currencies are falling then others must be rising relative to them. That all, or even many might try and devalue at once is what keeps the gold bugs warm at night. In nominal terms, under such a scenario the price of real things will rise. This is not a prediction for immediate inflation. There is a high chance of falling prices as money and valuations are destroyed in a cyclone of credit defaults and forced sales. Although what happens after that is another story.

The Australian economy is in a perilous state. Outside mining related areas and the public service things are dire. But for the good of the nation as whole people need to reduce their consumption and increase their savings. The savings then have to be used to fund productive investments, not just speculation. This move in interests rates will encourage the opposite. It increases the chance of Australia following the US and UK path. It may delay the inevitable housing market correction, but at the cost of making things worse when we do eventually experience our correction. Australia has approved covered bonds, so crony capitalism is alive and well down under.

The Keynesian influenced mindset driving policy does not adequately take into account the starting point. Accumulation debt may have beneficial effects, but too much of it is an economy killer. Much of the developed world is past that point.

Given the level of indebtedness of the developed world there almost certainly will be:

Sovereign defaults. Debt holders do not get repaid in full and on time.

Great stagnations. Prolonged periods of low growth.

Financial repression. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt.

There is a non trivial chance of a Great Depression, perhaps the Greatest Depression. The developed world is overdue for one. Our authorities also seems to be taking steps to guarantee that it will be big. Hopefully while the decline may be greater than that experienced in the 1930’s, it will still end at a much higher levels of absolute wealth. We live in hope.

We must also hope that aspects of the 1940’s are not repeated. National and international socialism have always and everywhere been bloody phenomena. But this will be the subject of another post.

 
US Deficit

The US deficit is more than twice its total expenditure on defence.

The US has no easy way out of its mess. Whatever they do, things will be nasty for a while. They can influence the timing of the correction by putting it off, but only at the cost of making it worse. Similarly slowing the decline will make the period of people getting poorer last longer. Japan has had twenty years of stagnation, in many ways the US is in a far worse position.

The US can not keep its options open forever. Eventually circumstances will take over. The correction will test their democracy, particularly if the mainstream media and much of the intelligentsia continue to expound the big lie while the country racks up ever more debt.

If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.” Goebbels

Reality always wins in the end, normally on the battlefield, but sometimes in the grocery store.

The falling dollar will result in imports costing more. Oil and commodities will rise and this will impoverish those on low incomes. It will make the situation of older Americans even worse:

“Fed President Fisher makes part of the rest of the argument I’ve been making now since The Fed started financially rap**g our Senior Citizens – all of whom are being intentionally thrown under the bus to bail out the speculators and banks on Wall Street:

But I take no comfort, and see considerable risk, in conducting monetary policy that has the consequence of transferring income from the poor and the worker and the saver to the rich. Senior citizens and others who saved and played by the rules are earning nothing on their savings, while big debtors and too-big-to-fail oligopoly banks benefit from their subsidy.” Market Ticker

Who just a couple of years ago would have thought that the supposedly risk free returns associated with US government treasuries would become return free risk?

If you want to watch a simple short video explaining what is happening, then look at this, again curtesy of the Market Tickler.