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US $2 Trillion Bailout- Monetary Inflation to Send Gold Soaring

Commodities / Credit Crisis 2008 Feb 20, 2008 - 02:47 PM GMT

By: Jim_Willie_CB

Commodities Best Financial Markets Analysis ArticleLike a whirlwind, the crisis triggered by the housing crisis and mortgage debacle has extended to almost every phase of the landscape in US economic and financial life. And the rookies running the US Federal Reserve initially said the problem would be contained. My claim made in late June 2007 (see article, click here ) was that it involved absolute contagion to the system, which is what we see vividly now. Let's review some high level stresses in several arenas, examine the response potentials, and check on the gold and US Dollar impact. One should note, the gold & silver prices will soon demonstrate strong independence from the US Dollar Just like in 2005, gold can rise even with some bounce in the buck. Unlike 2005 though, the buck is likely not to make much in the way of advances.

The profound change this early part of 2008 will be the weakness in foreign currencies, thought to be impervious and invincible. The problems with banking, bonds, and now economies have gone global. In reaction to policy changes, primarily monetary and now fiscal, gold will react to an acceleration in monetary inflation after a long period of heavy money growth over 10% annually in many leading industrial nations.


The US Fed has been playing a dangerous secretive game. They denied the depth and power of the bond debacle in order to wait for Europe to feel the same problems. The US Fed wanted to wait until Europe saw banking problems, economic slowdown, and bond losses. Some degree of arrogance might have crept into their thinking, that the US system was more resilient, more robust, and had stronger markets with greater safeguards installed. All were untrue. The US Fed figured they could cut interest rates faster later, only after Europe started to show signs of similar problems, joining them in the easing cycle. Well, Europe took a few months more time to detect damaging signals, and their problems on the continent are much less imposing in their degree of destruction than what is seen in the Untied States.

The European Central Bank (ECB) only lifted their official interest rate to 4.0% besides. So at a US peak of 5.25%, the US Fed had to cut first alone. Now the US Fed has come down to 3.0%, providing the euro currency with a full 1.0% vig to keep their currency rising versus the US $ from any carry trade. They do not want a higher euro! The US Fed wants the ECB to begin to cut rates, which would and will take much of the pressure off the US Dollar Since much of the rise above 135 and 140 and 145 for the euro was predicated upon the ECB continuing to hike interest rates, a reversal of monetary policy by the ECB will bring the euro down and give decent temporary support for the US Dollar

The bigger reasons for the US Fed to fiddle and diddle, delaying and postponing, are more profound to the problems faced. They are two-fold.

1) The US Fed is a private firm, not owned by Americans, with no desire to eat a trillion$ or more in losses. They do not wish to do the right thing for America when their primary loyalty is not to America . They are a private firm whose owners reside in London and Old Europe. So their initial repurchase loans to member banks and other banks have been for high quality US Treasury's, not mortgage bonds, and certainly not Collateralized Debt Obligations (those nightmares that leverage mortgage bond losses). Up to the time when the Term Auction Facility opened shop last month, the US Fed only took US T-Bonds of various maturities. Since the TAF began to lend against broader assets, they began to accept Fannie Mae & Freddie Mac bonds. Think their corporate bonds and mortgage backed (in)securities. Why would the US Fed take F&F bonds? Because they eventually will be bailed out by the USGovt. They might not really be fully guaranteed, but they will be at crunch time.

2) The other reason the US Fed delayed in prescribing and delivering the needed monetary medicine again points to their private firm status. They wanted to have the USGovt take the $1 trillion tab for bailouts, to put the kibosh on the US Dollar, not the private US Fed owners. They are no more a public benefactor than Wall Street. Both the US Fed and Wall Street firms are the quintessential parasites in the modern financial era. Finally, the USGovt has proposed a measly $150 billion bailout proposal, the first of several. My forecast has been firm, that the rescue packages will be numerous, greater in scope in succession, and each inadequate until a master Resolution Trust Platform is instituted. The price tag on the full blown rescue will be at least $2 trillion and possibly as much as $4 trillion. The USGovt fiscal packages will include tax cuts for households, permanent installation of lower taxes for the wealthy and corporations, greater tax incentives for business investments and job hiring, items directed to the poor, and more.

When the monetary stimulus takes root from lower interest rates and easier repurchases to assist the mortgage process, while at the same time the government fiscal stimulus packages spread out more broadly, we will see money overflowing everywhere. We will see more money directed towards speculation again. We will see more price inflation. The only big question in my mind is whether higher wages will be tolerated. They call them ‘Secondary Inflation Effects' which are halted, thus enforcing the destruction of the Middle Class. Lower wages permit the long-term interest rate to stay suppressed. Lower wages ensure the recession necessary to keep USGovt bonds more attractive than stocks, the ugliest of ugly conflicts of interest by the US Fed The US Dollar takes heavy blows when the USGovt stimulus package takes form as less an unknown. The gold price has risen since January, in part because of the foreseen combination of heavy US Fed monetary medicine and heavy USGovt fiscal medicine working. It smells more inflation in all forms.

When prescription moves to application, gold will vault past $1000 per ounce easily. Also, silver will vault past $20 easily.

THE MAJOR RUB WILL BE THE EFFECT ON LONG-TERM USTREASURY BOND YIELDS. The solution requires more price inflation, asset inflation, wage inflation, and spillover, all of which contribute to rising long-term interest rates. Already, we see the rub in higher mortgage fixed rates, higher jumbo mortgage rates, higher corporate bond yield spreads, higher junk bond yield spreads, higher fixed rate swaps. My gut feeling is that Rookie Chairman Bernanke harbors quietly his biggest fear, that enacting a full blown rescue of the banking & bond & economic system will trigger a bear market in US Treasury Bonds. That would ensure a credit derivative meltdown an order of magnitude worse than just from Credit Default Swaps off mortgage bonds, and an order of magnitude more swift.

The biggest losers in this game among leaders are Bernanke as US Fed Chairman and Paulson at Secy Treasury. They fiddled and diddled for months, issued denials, made lousy forecasts, and sounded like utter idiots. Their emergency 125 basis points in January rate cuts, from interim cuts followed by FOMC ordinary cuts, emphasized their failure, and badly eroded confidence in the US bankers globally. Being the curve, and inept! The impact will be seen in the US Dollar, since these are primary stewards of the US banking and currency system. The US Dollar takes the brunt, with gold enjoying the lift.

My position is firm, that the US banking system has been irrevocably destroyed, unfixable. That will stop these hacks from trying a remedy, and in doing so, gold will rise tremendously. When it is clear that the fixes, the solutions, and vast platforms of rescues are not accomplishing much, the inflation spigot will be turned on with much more volume. That is how the gold price approaches $2000 per ounce, like within 3 years. Inflation will become an urgent national priority, not to stop it, to promote it. INFLATE OR DIE will be the motto in reality.


The biggest obstacle to the initiation of the full bailout and rescue application has been and will continue to be the felons who command first positions in the rescue line. Since they are basically running the USGovt (thanks to Fascist Business Model), they dictate being first in line. Not only are they the initial beneficiaries, but Wall Street firms are actively involved in designing the actual rescue stimulus packages themselves. Only in America can the thieves and criminals knee deep in colossal fraud be active in administration of remedy when they should be in defense against felony charges, face heavy billion$ fines, restitution orders, and prison sentences. Start with Goldman Sachs and JP Morgan, then move on to Citigroup, Bear Stearns, Morgan Stanley, and maybe UBS. At least most of these firms are big losers.

Then again, nowhere but the Untied States has the state merged with large business so thoroughly. The Teaser Freezer stands as the most blatant interference by the state as an effort to block, prevent, forestall, and eliminate the potential for bond investor lawsuits against Wall Street. Watch the class action suits though, since they are conducted and litigated in federal court, not in any rigged compulsory arbitration charade run by the same Wall Street conmen. The crisis had to grow too big, run unaddressed for too long, so that the USGovt felt as though the public wanted a bailout rescue stimulus, EVEN THOUGH the primary beneficiary might be the Wall Street felons occupying their executive suites and running board rooms. As the US Fed delayed though, the big US banks suffered massive losses. That could be another motive to wait.


The Hat Trick Letter February Gold & Energy report is out. It focuses attention on both the euro and pound sterling currencies. The euro has begun to stall. This is not a popular concept for gold advocates. A US Dollar bounce, especially one of intermediate variety (not short-term), is not embraced with warm & fuzzy feelings. Usually such an event is accompanied by a decline in the gold price. NOT HERE!!! The euro sell off will trigger another phase of the gold bull market, one already well along in Europe . The gold bull market requires all three major continents ( North America , Europe , Asia ) to participate. With its US $ woes firm, diverse crises, and declining interest rates, the North Americans are feeding the gold bull. With its industrial renaissance, strong regional growth, and near 0% Japanese fountain for funds, and Chinese treasure trove of savings, Asia is feeding the gold bull. The missing piece is the Europeans, who have been stubborn in maintaining the same 4.0% official interest rates, enforced by the Euro Central Bank since summer 2007.

THE GOLD BULL REQUIRES A DOWNTREND IN INTEREST RATES WORLDWIDE, AND FULL MONETARY ACCOMMODATION. That is coming, once the Europeans begin to cut rates. The topping pattern in the euro currency foretells of the ECB cutting rates soon, despite the German wishes. They are the ultimate inflation hawks. Not only will Europe be fighting financial problems across the Atlantic with cheap money and ample money, but the English will be also. London has already changed policies toward accommodation. Europe will soon feed the gold bull.

The British are also feeding the gold bull. The Bank of England has ordered two official rate cuts, not back to back though. My forecast is for the complete decline of the UK housing market, the complete decline of the UK economy built atop it, and the complete drubbing of the British pound sterling currency. When the pound sterling 20-week moving average crosses below the 50-wk MA (circled in green), technical traders will take the sterling currency down toward 187. My eventual forecast target is in the 175 neighborhood. A disaster comes to the UK , just like the Untied States. Think Anglo Sphere. The tough call is whether money exiting England will pursue the euro or US Dollar As problems crop up further in Europe , my bet is the money will chase the US Treasury's, crude oil, and gold.


The hedge funds are actually being blamed for the crude oil price breaching the $100 mark. They are regarded as shunning the mortgage paper and bond arenas, in favor of hard assets like copper, gold, silver, crude oil, natural gas, grains, and more. Isn't it interesting how the hedge funds have not been in the news much in the last year or so? Their legion used to be mentioned as being 9000 in number, commanding $1.6 trillion in funds. No more! They are probably 7000 in number now (pure guess) and command only $1.2 trillion now (pure guess). These falsely labeled geniuses in propeller hats lost a huge sum of money in mortgage spreads, CDO bonds, credit default swaps, and other devices floating within the overall bond market. After licking their wounds, they have wised up to find commodities. Actually, they always were involved in commodities, from the start. They are reviving their interest, focus, curiosity, and attention for them. Commodities are the big winner asset group. They are untethered to debt generally, but vulnerable to a global slowdown in demand.


Given the frenetic Asian growth, and increase in intra-Asian trade, China and India along with Russia and Brazil will continue to grow, although slowly, even if the US and European Union and United Kingdom enter into a recession. Of course, the Untied States has been in a recession for at least two years, if you measure growth without nonsensical gimmicks in accounting, thus ignoring all USGovt official statistics. A great quote came this morning from one of the few consistently bright and accurate pundits on CNBC.

From the Chicago pits, Rick Santelli said, “Only a small amount of actual price inflation shows up in the government numbers.” That is a rare comment. He might be fined or relegated to Friday afternoon exposure if he is not more careful. By the way, word has it that the hedge funds place gold in a different elevated status among commodities. Even if Western nation economic recession takes root, and demand slows, hedge fund mentality is that the gold price will continue to rise. My belief is consistent with theirs, but also that the same is true of the crude oil price. China will stockpile it. Speculators will rely upon it against the weak US Dollar

The commodity boom continues. My favorite indicators are the Three Amigos: the copper price, and crude oil price, and the Baltic Dry Index shipping rates. These are monitored regularly in the Hat Trick Letter. They are each in decent shape. After 25 years of under-investment, commodities are showing inadequate supply chain structures. They are also displaying grotesque vulnerability to tyrants being in charge, whether in Caracas Venezuela or Moscow Russia or Kazakhstan or Washington DC. The ugly impact of the relentless commodity bull market, is that it results in nasty cost inflation. This leads to economic recession, as wages cannot keep pace, as corporate product prices cannot keep pace. Cost inflation without rising wages and product prices is a Western nation nightmare. All price inflations are not the same.


Two years ago, when the housing market was experiencing what was called a boom, my position was clear. The boom would turn to bust in a couple years, the damage to the banking system would be profound (probably total), the losses would be two-fold from home equity and mortgage bonds, and a deep ongoing relentless (possibly endless) recession would unfold. So far that over-arching forecast seems right on track. At the same time, my position was that the housing asset was a HARD ASSET IMPOSTOR . Many considered it incorrectly as another commodity, a hard asset, rising in price like copper, cement, lumber, gold, and energy. Not so! By now, my claim that it was an impostor seems evident. My claim was that the home asset was dominated by the mortgage financial security, whether a loan in the bank portfolio or an asset inside the mortgage bond. My claim was that the home price would be determined by the financial assets behind it. All booms have a financial credit feeding component.

As the housing asset base continues to drain home equity, it kills the banking & bond system entirely. Housing stands as the two-ton weight lodged in the car, the millstone around the household neck. The stimulus being ordered by the US Fed and USGovt must reverse the slow motion downward spiral for housing. So far, housing has lost around 10% of value nationally in the last year plus. That amounts to over $2 trillion in home equity loss, rendered unavailable for home loans and consumer spending, if not education and training. Forget the boats! The entire focus of attention on stimulus and rescue packages must be on stopping the housing price decline. No exceptions.

The prime adjustable mortgages are next in line within the killing field of grand destruction. This is the US Fed's focus. They see it coming. The commodity boom continues, but the housing market is in its second straight year of painful decline. Do not expect the housing bear market to hit bottom until late 2009 at the earliest. The US Fed, the Dept of Treasury, the USGovt, the US Congress, they have all fiddled like Nero as Rome burns. The current president resembles Nero, with brandished military weapons substituted for a violin. Rome is the US financial system, with the US Economy adjacent to the bonfire. Many references have been made recently by writers and analysts, citing that Rome is burning. When the officials at the US Fed and leaders in the USGovt decided to unleash the heavy artillery so as to stop the housing hemorrhage, the impact on the US Dollar and gold price will be profound. That is precisely my forecast, that when it comes, the gold price vaults past $1000 and does not look back. A rising gold price past $1200 and past $1500 will go hand in hand with a stabilizing housing market. Since they delayed so long, that bottom event will not come for at least another year. Goals finally have aligned.


The nexus of the current bank & bond debacle has been clearly concentrated lately in the Monoline Bond Insurers. Space does not permit full discussion, even a solid summary. The last couple Hat Trick Letter reports have dealt with this unfixable topic. An argument has been put forth that the cost of the cure to address inadequate bond insurer corporate capital needs is much less than the impact on the system from the insurer firm failures. What nonsense! Just like Wall Street firms wanted direct bailouts of their balance sheets, so do the Monoline insurers. The Wall Street impact from big debt downgrades is huge, since so many rafts of bonds would either be forced in sale or forced onto balance sheet for write downs. The current impact is seen with municipal bonds. The estimates for total bond losses are steadily rising. Big banks are raising their estimates.

Financial firms are raising their estimates. Soon the estimates will be more realistic, like above $1 trillion. Desperation has set in, as New York Insurance officials are attempting to hatch a rescue plan. It is doomed from the start. All they can hope for is to buy a few months. If the housing market continues down, their work is futile. If the adjustable mortgage resets continue, their work is futile. If the foreclosures continue, their work is futile. If the debt downgrades by the rating agencies continue, their work is futile. If the corporate balance sheet adjustments continue, their work is futile. If faith erosion in the central banks (most notably the US Fed) continues, their work is futile. If lenders hold ground and refuse to relax on lending flexibility, their work is futile. If foreigners continue to shun US$-based bond investments, their work is futile. If foreigners refuse to provide emergency cash infusions for capital positions, their work is futile. Gold smells a bond debacle worsening. When news progressively worsens, gold responds. Gold senses grandiose rescues.

However, the Monoline Bond Insurers must be prevented from declaring bankruptcy. The tragic sideshow has begun, of attempting to separate their healthy municipal bond business segment from their disastrous mortgage bond coverage business. A split cannot happen. Corporate obligations dictate that insurer success is balanced against their failure, so profits from their gainful segment must subsidize its losing segment. The developments will make great theater for many more months. Games are being played. Eventually the USGovt must bail out the bond insurers, or else the US banking system collapses. That is a strong statement. The US Fed will not take such a big step. The credit derivatives are a mountainous pyramid. The credit default swaps have counter-party risk entangled within. If the insurers are not prevented from bankruptcy, then a gigantic beehive will be opened and infected bees allowed to spread to all corners. My intuition tells me that the clowns at the US Fed and Dept Treasury misjudge the impact of the Monoline Bond Insurers and their collapse. So far, they have misjudged just about everything. When the bond insurer rescue comes, gold will respond, on the back of the renewed decline in the US Dollar


Let's walk down memory lane in conclusion. In 1980, a nasty recession lingered longer in time than most so-called experts contemplated. The causes were many, but in my analysis it extended from the OPEC quadruple of oil prices, the failed Nixon Wage Price Freeze, the Volcker (US Fed Chairman) harsh monetary medicine, the heavy hidden cost of the Cold War, and the Watergate Scandal. So the ‘Policy Bubble' was a defense buildup, complete with Star Wars technology, vast defense contracts, huge spending, and an economic recovery. The cost was about $2 trillion in added federal debt, the Reagan legacy few prefer to talk about publicly. The next bubble was well defined, but the costly impact was not. At the same time, the US manufacturing base was being dismantled and sent to the Pacific Rim of East Asia.

In 1992, a nasty recession lingered longer in time than most so-called experts contemplated. The causes were many, but in my analysis it extended from the end of the Reagan phony economic recovery, the dissipation end of the last coincident housing bubble, together with a painful shock of the Iraq-Kuwait Gulf War, when Saddam Hussein became more a household name. So the ‘Policy Bubble' was a military buildup, huge wasteful weapons R&D and system deployment, and a housing bubble. The actual war did receive some international funding. The icing on the policy bubble was the grand tech-telecom stock bubble. The next bubble was well defined, actually more broadly embodied in more diverse arenas, but the costly impact was not. At the same time, the US manufacturing base was still being dismantled and sent to the Pacific Rim of East Asia.

In 2001, a nasty recession happened suddenly but with swifter impact than most so-called experts contemplated. The causes were many, but in my analysis it extended from a busted stock market, together with a new factor. The new element was a newly engrained dependence upon financial bubbles serving as a foundation for the US Economy itself. The nation had lost most of its legitimate foundation. With the economy in decline, two avenues had to be pursued. First, a new enemy needed to be designed. A war was hatched on phony grounds by leaders of very duplicitous nature. Even the event triggering the war, the World Trade Center and Pentagon attacks, are heavily debated for suspicious origins. Second, a new financial bubble desperately needed to be spawned and puffed up. The ‘Policy Bubble' was the War on Terrorism and the housing boom on the back on the mortgage frenzy.

With war and security dominating USGovt spending, with the private sector pre-occupied not with valued added enterprise, the US Economy rebounded in a phony recovery. The next bubbles were well defined, in the two primary American icons of military and housing. However, the costly impact has only now been estimated. The cost is the destruction of the US bank and bond system, and an endless US Economic recession. At the same time, the US service base was being dismantled and sent to the China and India , while the remainder of the US manufacturing was sent to China , as a vast industrial buildup has taken place there. The cost is the grotesque increase in US debt coupled with the grandiose growth in Chinese savings. The new age of the Sovereign Wealth Funds has begun. They now stand either as US corporate aid agents or enemies of the US financial state, many no longer friendly.

The next ‘Policy Bubble' will be some form of grand US infrastructure buildup of a healthy nature, late to be sure. It should have its foundation extending into alternative energy research and development, as in actual deployment and installation of systems. With no new ‘Policy Bubble' to promote and feed, the US Economy and financial sector will implode. At the same time, the housing sector must be revitalized. The two objectives must work in concert. If a national program to rebuild bridges, internet lines, communications systems, electrical lines, water mains, natural gas pipelines, and recycle centers, jobs will be produced, enough perhaps to help the public in its ability to service a heavy debt burden. Be sure that the same level of inefficiency and corruption will be rampant in them. See the Hurricane Katrina Relief program for instance, and on a much greater scale see the Iraq & Afghan Wars. Contractors are part of the merger of mafias that has captured the essence of the Fascist Business Model since year 2000.


As the many rescues planned and put in place, monetary inflation will be mammoth. The US $ will inevitably be sacrificed in the housing crisis and mortgage debacle, in addition to reviving the banks. The US $ will be weighed down further, in order to lead the US Economy out of recession. Cheap money is coming again, and globally. The US Fed will not be able to escape the clutches of 1.0% interest rates again, coupled with the extreme shame. The US Dollar will not be able to escape the plumbing of lower exchange rates, like down to the DX=70 level. The gold price will feed off lower interest rates, as speculative gains will be back in vogue, even called a good thing. There is nothing like a bout with deflation to change the mind set of speculation and its vagaries, turning it positive.

The gold & silver prices will rise from the cheap money, low interest rates, stimulus packages to ward off recession, rescues to banking, and lower US Dollar But the US Economy desperately needs the next ‘Policy Bubble' in order to come back to life, to produce jobs, to change national psychology, to revive hope. Without a plan to puff a new bubble, which will buy some years of time, the nation will morph into chaos. A military dictatorship would be the only alternative. The urgent next step is leaders with some vision, rather than a plan for private profiteering, founded upon fear. Hope pays off more than fear, unless fascism is the end game.


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