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Gold implications of Central Banks Monetizing the Financial Markets

Commodities / Gold & Silver 2009 Oct 22, 2009 - 04:21 PM GMT

By: Christopher_Laird


Best Financial Markets Analysis ArticleAround 2005, I wrote an article that predicted that when the US housing bubble broke, there would be a stock/financial crash – and this:

“When markets collapse, the US Fed and other central banks will end up having to buy up the markets, and basically monetize them…in the $trillions”

I don’t remember the exact quote but that is what I said. Well, here we are. The Fed has spent $3-4 trillion directly, and another roughly $19 trillion buying/guaranteeing bad assets and giving mortgage bonds and such support. The ECB also did roughly $4-6 trillion of market bailouts/backstopping. Japan and other central banks have done similar amounts.

Even Saudi Arabia and China have been putting a floor under their stock markets over the last year.

It happened - Monetization
What I predicted effectively has already happened. Central banks have monetized the markets to the tune of tens of $trillions worth. When I first wrote that, I thought to myself, ‘how will they actually do it? Surely, they cannot monetized $ten or twenty trillions?’ Well, they have, and they are.

(Monetizing markets means central banks buy up troubled assets, stocks, etc with public money, putting a floor under them- another term they use for this is ‘quantitative easing’. One major way they all do this is to buy stock futures.)

Then, what really got the Chinese upset this year was when the US started ‘quantitative easing’ which put simply is them buying up everything with printed money, and putting a floor under any markets deemed in trouble. The US had to back off from this- this Summer- after China had been complaining very loudly about this for the last year.

It’s estimated that half of all stimulus money and bailout money the banks got was not re lent by the collapsing financial institutions like banks, but was either held to repair their capital liquidity, and the other half plowed right back into the equity markets. They speculated and are speculating with all that money – with the full knowing of the Fed, the BOJ, the ECB, China’s central bank,  Bank Rossi –Russia – you name the central bank, they are all doing it, and massively.

Monetizing markets is exactly, exactly, what has been done.

It has been said that the US bought half of their own bonds in Q2 2009, and that sent the Chinese into a rage…and the US backed off…supposedly anyway.

The economy is not supporting the markets
Evidently, a decision was made in late 2008, and probably 2007 too, to monetize the markets worldwide on a massive scale. The results show too in the stock indexes.

Why is it that, when the US is LOSING 500,000 jobs a month markets rally 60%? And with US unemployment publicly about 10%, but actually roughly double that, since if they computed the unemployment figure the same way before Clinton was president, US unemployment would be over 17% now? (ShadowStats)

Why is it with these massive job losses, and corporate profits getting squeezed hard at this juncture, that the US and other world stock markets boomed 60% over the last 6 or 7 months?

It’s not the public doing it
It’s said that there are 3 to 6 $trillions in US money market/various funds mostly sitting on the sidelines, IE many average US investors stayed mostly out of the stock markets. Also it’s stated that many investors are not going back into the stock markets, this would be worldwide, nor will they return en masse either. So, why did markets rally 60%? They were monetized, that’s why. A floor was put under them.

Your remaining savings
Now, one sure way to get control of the world financial collapse was to put a floor under the one remaining big asset people have, their tax deferred savings – via supporting the stock markets. Thus, their IRAs, 401ks and such did not evaporate totally, and even grew in many cases – making people more willing to spend, even though they are reluctant spenders today – consumer confidence way down still. This is what the central banks accomplished.

Not only that, but since half of all the stimulus and bailout money went to the totally denuded banks worldwide, and the banks all invested in speculation with the money, and the markets are up 60%. The banks did not lend it out, they speculated with the money. Well, you now see why so many of them are having new profits – and it all was done intentionally with the full knowledge and cooperation of the world’s central banks.

What does this monetization mean for retirement savings?
Which brings me to the next point. Now, next year, I understand that taxes on withdrawals from the last big pool of money out there, tax deferred savings accounts are going up in some ways. Is this a surprise?

For example, with the US running a fiscal deficit of what looks like $2 trillion this year, they have to raise taxes – I mean, they WILL raise taxes. It’s academic. And we have not seen anything yet on that vein either. Wait till the bond markets start rebelling on the huge and ever increasing US Treasury issuances. We have been seeing one week periods this year with $100-200 billion of US Treasury issuances at certain times!

One of our comments to subscribers has been that if you think taxes on your ‘tax deferred’ savings is high now on withdrawals, you have seen nothing yet. They are going to raise taxes more on your supposedly tax deferred savings…

One subscriber considered that, then when he found out they are raising taxes next year on one category of his tax deferred savings, he decided to go ahead and pull the money out in a chunk (a part of it) and pay off his mortgage, so at least he would have a paid off house that he liked; the recent market rally helped that decision he said. Which I personally think is mandatory Financial Survival 101 anyway, having a paid off turtle shell in an area you like. That is the FIRST thing anyone should try to have.

Then of course, gold. In the last 2 years, what market if any is up consistently over 2 years, and up big? Gold is the only one that comes to mind other than T bonds. And of course, that’s logical since gold reacts primarily as a currency, being a key central bank reserve asset in all the world’s central banks, gold rises relentlessly as central banks monetize markets. Gold is at records, or near them, in all major currencies.

Then of course, if you have gold and gold stocks (silver too, but gold is less volatile) in your tax deferred accounts, at least you have a very liquid protective vehicle for your savings. But never do 100% of anything of course…

By Christopher Laird

Copyright © 2009 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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