first majestic silver

The Bernanke Conundrum

August 8, 2013

WHY IS THERE NO INFLATION?  -- Most economists, analysts, mavens of every sort and investors wonder why the Fed’s QE 1, 2,3 and 4  programs have NOT created any inflation to speak of and haven’t boosted the economy any more than it has, if at all.  After all, $85 billion monthly injections of money into the economy should in normal times be highly inflationary.  Had Helicopter Ben thrown $85 billion a month out of helicopters as he said he would, our economy would have been booming before the end of the that 1st year and our Income Tax coffers would have been overflowing by the end of the 2nd  year. But today’s economists, as I have argued many times over the last 5 years, can’t seem to learn from their past mistakes nor anyone else’s. Government money could not create jobs in the 1930’s and that was with a World War going on. The Government and all their economists, including all of our renowned academics with more than 100 years of history to learn from, can’t seem to realize that governments can’t create jobs. They give money to the banks and their crony Capitalists just to make a few people and of course themselves wealthy. In the process, they destroy the main advantage that Capitalism has over Socialism: The allocation of capital that is determined by profits competition and Free Market entrepreneurship.

We are focused on punishing profit and usurping the allocation function by government as we destroy capitalism from within. The Government is so busy trying to run everyone’s lives that they have forgotten the allocation principles of Capitalism.

PROFIT and COMPETITION are exactly the same as traffic lights. They tell everyone simultaneously what to do and when. And we all know what happens to a city when the traffic lights go out.  Do you want to fix our education system? It’s simple; just get rid of the Department of Education, eliminate tenure and Teacher’s Unions, issue vouchers to all students and see how quickly we become the Number One Education System in the World. Freedom, which is just another word for Capitalism, WORKS. How could it not since it is the way of the Old Testament.  

Ben Bernanke gave a very disappointing press conference where he laid out the Fed’s plans for exiting their stimulus program and the market displayed its resounding displeasure with his speech. Bond yields soared and all other asset classes sold off sharply. The Fed got worried about the reaction and immediately sent out numerous Fed Governors to the media trying to talk the market back up again.  Just goes to show you the complete lack of understanding that Bernanke, the Fed and the Media have as to how the economics of an economy works.

History has proven time and time again that manufactured, low interest rates are only good for BLOWING UP BUBBLES, but in no way do they create jobs and/or foster a growing vibrant economy.  

The Definition of a Bubble

The fact that the market would react so dynamically without the Fed actually doing anything (only talked about slowly transitioning from QE purchases in a tapering fashion with a rather drawn out process through the summer of 2014) means the Federal Reserve has created massive bubbles in numerous asset classes.  Not only has the Fed kept the Fed funds rate too low for far too long, but they injected billions and billions of dollars into asset classes with their various outright purchases, which had the effect of pushing many asset classes several standard deviations beyond any normal sustainable levels.  1.5% interest rates on 30 year Treasuries have completely destroyed the FREE MARKET mechanisms for allocating investment capital. This has resulted in 5 years of stagnation at best, leaving the Fed and the Government with no good and workable way of getting out of the mess that they have created for themselves, but more importantly for us (the economy).

The only way to recover is to foster a fast Recession which would last a maximum of 2 years and let the FREE MARKET get us out of our predicament; just as what happened in 1946-48 and 1981-82 under Reagan and Volker. Unfortunately Bernanke, the self-proclaimed expert on the 30’s Depression, learned absolutely nothing about the real problems of the 30’s having served his tutelage under Socialist professors throughout his entire academic life and beyond.


The Socialist Catch-22 is that it cannot exist without other people’s money. The ballooned markets cannot exist without the $85 billion/month; they will freefall back to natural, sustainable levels. So what does that portend for markets that are trading at hundred year highs? The real problem is that if they cannot exit now, then they will push markets and asset classes artificially to even higher more unsustainable levels! The inevitable crash would then become even more pronounced just like the Tech Bubble, where stocks that were trading in the 100′s dropped to zero. Silicon Valley also had their fire sale for property, as all the businesses that were built up around the unsustainable market valuations came crashing back to reality. Exactly the same as the real estate and stock markets around the world did after 2007.


Bernanke’s Original Plan (Unfortunately he was joKing)

The thought or rather the theory or hope by the FED was that they would push or support asset prices up until the economy picked up and then the next business cycle would kick in, take over and be able to support the overextended asset prices as they withdrew their artificial stimulus. But it has not worked out that way. We are now into over five years of artificial stimulus and the economy has not recovered one bit.  In fact, most likely, it has actually contracted in real terms by 1%-2% per year compounded. There will be no economic growth at all, let alone be strong enough to replace the Fed`s stimulus measures without the bubble asset classes falling precipitously.

What they can’t fathom is that the more the Government shrinks its bloated self and the greater the move back towards Free Market principles by cutting Taxes and Regulations, the less damaging the correction will be and the faster the economy will recover and expand under a new found Free Market.


the Withdrawal Effect

The talk of just letting the portfolio on the Fed’s books expire without them selling these assets into the markets completely misses the point. Markets react to future expectations and not to yesterday’s news, correct or otherwise. Yes, unloading the Bonds will make things a lot worse. These are massive positions (totaling in the trillions of dollars) and it is a foregone conclusion that they cannot sell these junk bonds into the market. However, it is the elimination of the QE stimulus which leaves no way to mitigate or hedge the effects of the withdrawal. Besides, even if the Fed’s Portfolio of Bonds is not sold, the FED’s Balance sheet would then act like a sword of Damocles hanging over the markets. The fear of all that selling would be worse than any actual selling. (Will they never learn?)

When you have Amazon going from a $50 stock to a $300 stock on several years of poor or lackluster earnings results, or an electric car company, like Tesla, that has a stock price at $130 a share in a boutique market and where low growth companies like Microsoft, Yahoo and Intel are all having tremendous multiple expansions for dying business models illustrates how much valuations have gotten completely out of whack.


Fed Options FOR Damage Control

No one seems to realize that markets react to future expectations and not to present or past market folly or to fabricated, false statistics. The best and only way is to take our medicine is by taking the short-term pain and cancel the programs that have NOT worked. The worst way is to continue the QE’S because of the fear of what will happen to the bubbles if they would suddenly stop.. So they continue to blow up the bubbles, until they will get so BIG that they crash from their own weight, as every bubble must eventually do with or without the Fed’s participation. Given the fact that the Fed is now out of bullets, the entire system will collapse if the Fed keeps pushing it to its eventual end. There will be no disaster cleanup mode possible where, after the carnage, somebody picks up the pieces and starts all over again trying to construct healthy markets from scratch. Who could that somebody possibly be? Even if someone  like that existed, would Congress and the President ever agree as to who that person would be and would this president give him carte blanche, like they gave Bill Seidman to clean up the savings and loan mess? It doesn’t seem possible since no one in power or influence understands FREE MARKET ECONOMICS (CALITALISM). Mr. Seidman (an old time Free Market Capitalist) tried to explain it to the President, before he died, but neither the President nor anyone else in power would listen; even though he had the track record to prove that his way worked wonders.

Somewhere between these two options, the intent to stop the stimulus in the near-term in a tempering plan can’t possibly work; as the markets always front-run the Fed; just as we have just witnessed the market price-in the potential collapse/money flow disruptions on their own - in essence breaking the Fed’s and the Market’s credibility.

The Bond Vigilantes

This is what the bond market is already starting to do in fits and spurts. But we haven’t seen anything serious yet by the bond vigilantes. The only thing we have seen so far is an $80 billion withdrawal from bond funds as investors try to protect their own principal. Make no mistake; we haven’t even begun to experience any real serious vigilantism in the bond markets. When this happens, the worst thing the Fed can do is try to fight them as the perception is that they are out of touch with reality, which further erodes credibility and the market becomes panic stricken when normal valuations and previous models go out the window.

The Fed IS behind the Curve due to Market Appeasement

We are in a series of bubbles, and the first thing that must be done is to face the facts. Then and only then can they possibly figure a way out. Hopefully the Fed realizes it.  The best and only way is to take what will be short-term pain and cancel their programs. But with elections coming up every 2 years, the politicians can’t and won’t even consider doing that.

Only the American People can accomplish the impossible just as they defeated what was then the most powerful army in the world with a rag-tag bunch of untrained, undisciplined volunteer soldiers, many without shoes and accomplished the impossible. The same thing happened during the Civil War. The North was losing until Lincoln took it upon himself to replace his incompetent Generals and appointed Grant to lead. Well all we, the American people, have to do is get rid of our incompetent leaders, elect a new staff that will get out of the way and we, the people, will once again demonstrate to the world who we are and what we can accomplish!

WHAT’S NEEDED IS COURAGE.  Stop worrying about the next election, stop dreaming about the impossible, stand up and start doing what has to be done. (The right thing is never easy at first nor is it ever popular.) You will be criticized, especially by the ones who have been raping the people (banks) for over 100 years.  But in the end, it will be the people who will win and the few who will lead us will take their rightful place next to Washington and Jefferson.  It is about time we learned another fundamental economic principle, perhaps the most important one of all:




Times are tough for the average person and they will soon become a lot tougher. Clearly the destruction to the Precious Metals markets wrecked by one group of banks in the Gold sector with their savage price-manipulation is now not only directly impacting prices but more importantly supply, with similar developments in the Silver market.  When you combine all that strong demand and waning supply (along with the sudden “run” on physical Gold), the result is that Comex Gold inventories have collapsed by more than two-thirds. It looks like vthe exchanges days may be numbered.

The bullish case for both Gold and Silver is now complete – with most of the ammunition supplied by the Corporate Media itself. The world’s best “safe havens” for the last 5,000 years are currently decidedly undervalued with strong demand, plummeting supply and inventories on the verge of complete collapse. Now is the best Gold buying opportunity ever.

Meanwhile, in the largest suckers market in the world (US Bond & Equities Markets); there is now another Super Sized asset-bubble – which yet again is totally ‘invisible’ to all the media talking heads and their experts. With all these experts assuring us that these US bubble markets are going to keep going higher and higher, we know that this bubble does not have a long life left to love.

Thus, while there are no more bullish drivers to come, there will soon be a panicked stampede out of US Equity and Bond markets (after that bubble bursts) looking for a new “home” with what’s left of investor dollars. The logical destination for those panicked investors will be either the world’s best safe-havens or the world’s most-undervalued assets.  Fortunately for investors, both of those avenues lead directly to precious metals. One thing for sure, it will not be the most loved, safe havens for the last 50 years.



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This article, like all my others, is for education purposes only and is designed to help you make up your own mind; not for me to make it up for you. Only you know your own personal circumstances, so only you can decide the best places to invest your money and the degree of risk that you are prepared to take.

The periodic symbol for gold is AU which come from the Latin for gold aurum.
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