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Permanent 0% on Road to Ruin

September 23, 2010

Japan has proved without confusion that 0% is a permanent stuck position. The United States will repeat the path, but with a vast mudslide. Japan has had the advantage of a strong industrial base, a sizeable trade surplus, and no war budget. Thus it has been capable of funding much of its own deficits. It does possess a big debt burden. But the US has $1 of new debt for every $1 in government revenue. The US war budget is almost as large as its total revenue. The US depends upon foreign creditors, many of whom have been thoroughly alienated. The emerging economy nations have embarked on initiatives to avoid the US$ in commerce. Apart from the structural and foreign angles, the US is stuck with a 0% policy. The USFed has no Exit Strategy at their avail, precisely what the Jackass has stated for over a year. It cannot manage any change, as sharp knives, machetes, and guillotines await on the other side of the monetary doorway. The present 0% road to ruin is fixed, as the USFed cannot change course from it. This is simple to see, when eyes are open and mind functioning rationally. The gaggle of US economists is locked in the Keynesian straitjacket, complete with commitment to its aberrations, mired in debt. They believe zero cost money can lead the way out of an indebted bind. They hold out hope of recovery, more than create feasible conditions for one. Together with the bankers, they show signs recently of awakening to their helpless helm devoid of tools, perhaps even an awakening to the systemic failure.


A rise in official interest rate would bring about five things, and cause total wreckage quickly. Therefore the present course will be kept, with full political support, ample justification, expressed banker urgency, reckless enthusiasm, and growing desperation. The immediate fallout from moving off the present pathway of 0% money would be a fast falling USTreasury Bond or USDollar. Immediate effects from lifting the 0% rate:

  • Pinprick the USTreasury Bond bubble, loaded with too much short-term issuance
  • Deliver a louder death sentence to the housing market, crippled and falling again
  • Kill off several major banks, all of which are deeply insolvent
  • Send the US stock market into a powerful bear market, even with a PPTeam
  • Light the fuse for a credit derivative explosion, centered upon Interest Rate Swaps.

This is not complicated. The entire concept of an Exit Strategy should invite derision even more than from Green Shoots. Nothing even remotely could happen to permit an exit, since the system would implode. The experts call it a Liquidity Trap. The better description is a Tight Box with liquidity running so hard and fast that the entire foundation structure of the castle is dissolved. The box (USEconomy) has lost so much of its capital, such as industrial base, that it operates dysfunctionally. When a nation loses the bulk of its industry, in particular its ability to manufacture its own transportation vehicles, it is doomed. Then there is the decrepit infrastructure. The march to the Third World is clear.

Tightly coupled with the constriction to maintain 0% is the requirement to maintain a semi-infinite increase to the monetary aggregate, the money supply. They have a euphemistically name for it, called Quantitative Easing. That makes it sound more erudite, more sophisticated, more acceptable, more impressive. But QE is cancer, especially when fresh money is printed to cover teetering USTreasury auctions, especially when fresh money is printed to cover interest on the USTreasury debt, especially when fresh money is printed to cover perhaps half of the entire gargantuan budget deficit. The QE is cancer since zero cost money has killed capital and eliminated the process of capital formation. US economists have a gigantic blind spot in this regard, leading to the current moribund condition. If truth be told, fresh money is financing most of the USGovt debt converted to USTreasury Bonds. If truth be told, fresh money is financing vast tranches of various types of bonds. If truth be told, fresh money is financing most of the abandoned foreign held USAgency Mortgage Bonds. They dumped $57 billion worth in a single week recently.

Next comes the long death march to the USTreasury default first forecasted in September 2008. It earned some laughter and mockery, but no more. My timetable back then was two to three years before the inevitability was clear. That is now. It is becoming clear, as the pathogenesis of debt suffocation and credit system constipation requires time to cause severe internal blockage. The slowness in admitting the QE2 initiative marked by bond monetization is testament to the growing consensus among bankers that not only will it accomplish nothing, but it risks a pinprick of the USTreasury bubble. Calls of a gold bubble are shallow vapid pontifications, since the sanctioned asset bubble is in the mammoth pile of celebrated USTreasurys. It is the last bubble before systemic failure. A few big banks will begin collapsing within a few weeks or months, from resumed property based credit portfolio losses, or basic derivative losses tied to gold & silver, even Interest Rate Swaps. It takes a lot of leverage and power to keep the required 0% rate in place. The cost of money is never zero.

Doug Noland (Prudent Bear) is an alert adept analyst, with a constant eye trained on bubbles. He perceives the presence of a USTreasury Bond bubble. He notes the symptoms, all too clear in a series of asset bubbles sponsored by the USFed. He sees the extreme danger of urgent need to finance the bubble. It must attract huge amounts of working capital and therefore starves the USEconomy. The ultra-low US interest rate climate is proof positive of a systemic failure in the making. Noland wrote, "Of course, skyrocketing bond prices have given rise to fundamental justification. Interminable deflation risk is at the top of the list of why bond returns will indefinitely outperform cash. I am reminded of how technology stocks and home prices were only to go higher. My analytical framework downplays deflation and focuses instead on a debt Bubble fueled by the Federal Reserve, the Peoples Bank of China, the EuroCB, the Bank of Japan, and the approaching $1 trillion year-to-date increase in global central bank reserves. Throw in hedge fund speculator leveraging and the billions flowing weekly (in search of any yield) into global fixed income, and one sees all the necessary financing for a historic bubble."

An important side effect of the 0% environment is the promoted powerful predominant Gold bull market. The price inflation is not near nil, as the official doctored data promotes. The Shadow Govt Statistics folks deal in realistic statistics. The SGS true CPI is closer to the 5% to 7% range for a few years running. Only a compromised mind or motivated promoter would challenge the integrity of John Williams and the veracity of his standard statistics. The SGS jobless rate, when people without work are counted in the formula, stands at 22%. The powerful Gold bull market is fed and built since the cost of money is negative 5% to 7%, enough to fuel speculation as well as investment exodus into precious metals. The Gold bull will continue as long as the cost of money is negative. Investors flee the conventional paper vehicles like stocks, bonds, and housing since they are struggling on the other side of the busted bubble dynamics. Besides, paper money has been called into question. Denominated valuations are fast losing their meaning. The food prices are the big alarm bell in addition to the Gold price. Both are canaries in the coal mine. The canaries are dead or dying.


Permit an uncharacteristic scattered flow of notes and thoughts, considered important in the theme of monetary system. Much danger lurks. The tipping point to higher price inflation is uncertain and unclear. Without a doubt, the process can flip on a dime. A USEconomic recovery in my view, or a sincere effort to promote one, would risk pushing past the tipping point easily, and risk hyper-inflation hitting quickly. The Deflationist Knuckleheads have undergone a learning experience, finally and thankfully. All things needed will cost more, while all things desired will be valued less. The former are necessities to survive, while the latter are derived extensions from busted asset bubbles. GOLD IS NOT A COMMODITY; IT IS MONEY. Furthermore, WHEN ASSETS ARE BURNED, VALID MONEY IS PURSUED AND MADE KING. Most chaotic inroads are caused by food price explosions. The US is seeing precisely that. The killer to the USEconomy remains to be the property sector, residential housing and commercial property. They lifted the USEconomy from 2002 to 2005, with all the fanfare inherent to asset bubbles and public glee, helped along by cheerleading from the myopic Greenspan USFed. My ears still ring from his high praise to off-loaded risk in sophisticated leveraged financial instruments. These proved to be weapons of mass destruction. The greatest innovation of bankers since 1980 still is the ATM cash dispenser.

Beware of extreme events in hidden form. Like a bank failure. Like the friction between the Chinese Govt and Japanese Govt. Like the lost control of the gold & silver prices, which could reveal depleted inventory vaults at the COMEX & LBMA. Like the incorrect perception sometime by the USFed of rampant sales (a run) of USTreasurys. Incidents in a systemic failure climate can grow out of control, cause ripple events, and lead to a string of breakdowns much like the assassination of Archduke Ferdinand of the Austro-Hungarian Empire almost 100 years ago. The failure of Bank of America would qualify. Bear in mind that the short position for gold at the COMEX & LBMA is roughly equal to the entire earth potential of future gold mining. Bear in mind that the short position for silver at the COMEX & LBMA is roughly equal to twice the global annual production. A short squeeze is just around the corner for the precious metals, better described as money in metal form. It will cause fireworks and bank failures, maybe even misguided attempts to confiscate gold & silver by the USGovt.

Lost control is obvious with Bear Stearns, Lehman Brothers, AIG, Fannie Mae, and Countrywide. The nationalization of AIG covered up the credit derivative explosion certain to occur, averted by virtue of the extreme hidden monetization still underway. Hardly a virtue! The nationalization of Fannie Mae covered up the mortgage bond market explosion and colossal fraud, averted by virtue of the extreme hidden monetization still underway. Hardly a virtue! Liquidity is proving to include a high degree of acidity. Fires burn bright and hot under the USGovt wings as bond capital is quickly destroyed. Beware of beacon events on the horizon, such as the QE2 Launch into oblivion, such as the Midterm 2010 election (switch party control, keep the gridlock amidst recession), such as the escalating trade wars. The road to the Third World involves breakdown of the mental process, where instead of admitting errors, they are compounded. Stimulus, bank rescues, and bond monetization are precisely these repeated errors.

An interesting label has come from Muhammed El-Erian of PIMCO, who describes the New Normal of increased fear of deflation. Nice name, wrong concepts. To me the New Normal pertains to a broken monetary system, a Printing Pre$$ gone amok, credit engines sputtering, chronic moribund economy, depressed labor market, burdened businesses, phony cost of money, constant market interventions, heavy pork projects continuing, banker losses subsidized, hype about energy independence, Syndicate control of the USDept Treasury, and endless war, where all the broken pieces are declared normal, all the broken markets are declared normal, all the broken political parties are declared normal, all the broken checks & balances are declared normal, and all the fraud is excused as errors of judgment (see the Hank Paulson apologies).

The Keynesian approach has been equivalent to debasement of currency on a continual basis until the system approaches failure. We are witnessing exactly that, with some growing recognition. Accurate perceptions of the failure gradually are labeled as contrary to the system. See preservation of capital like using gold investments. Soon the USGovt great grab will attract by force the private pension funds in order to feed the USTreasury bubble. Soon the USGovt great grab will attract by force the bank certificates of deposit in order to feed the USTreasury bubble. Resistance will be taxed heavily, punitively, and declared contrary to the system. The people are awakening, confused still, but growing wiser. There are new harvestings of civil liberties taking place every day, mostly in the name of national security, but also in the name of restoring order, and in the prevention of collapse. Within the confusing collage are letters that read CENTRAL BANKS FAILED. Central bankers in the Western nations are scared witless of systemic failure and monetary system collapse. Their Stress Tests, both in the United States and Europe, have been thoroughly discredited. The manage over a gradually ruined landscape. Further details on the widely occurring systemic failure are covered in the September Hat Trick Letter.


The USDollar should devalue sharply, but other major currencies are equally weakened and diluted. The date of September 21st of 2010 will be remembered as a day of infamy, just like March 15th of 2009, when the first QE Launch was announced. At the FOMC meeting on Tuesday this week, a critical juncture was passed. The USFed confirmed what it strongly hinted last month. They are officially willing to ease monetary policy further to spur growth and support prices. Later they will expand their balance sheet, like with another $2 trillion in wrecked securities. The USFed is the ultimate Bad Bank, soon to become a Worse Bank, then later possibly a Dead Bank. The statement read, "The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." That is a green light for QE2, when the need grows urgent, like the day after tomorrow. Nonsense about price inflation was stated as justification, which they strive to manage, but consistently mismanage. It cannot be managed. Background conditions of high jobless rate are painfully true, although it is more than twice the official rate.

Gold rose quickly on the news to a record high, then extended the high on Wednesday. Speculation is ripe, and very correctly on the mark, that the USFed will purchase additional USGovt securities in coming months in a bid to grease the system with a torrent of liquidity. They risk eventual hyper-inflation without the realization. They will push it until they get it. They risk global rejection of the USDollar. They risk global sales of USTreasurys that might outpace the USGovt ability to monetize and purchase what foreigners sell. They risk lost integrity of the central banks. Behold the quick response in the Gold price to the anticipated QE2 imminent launch admission, in the subsequent two hours. It is a launch into icy waters strewn with icebergs and a certain fate of systemic plunge to the depths, a potential watery grave. USFed Chairman Bernanke must be deeply disillusioned knowing that $2 to $3 trillion in zero cost money thrown at bond redemptions, banker welfare, corporate rescues, and stimulus fixed nothing. Notice the sudden afternoon jump in the gold price. The $1300 price is just around the corner.


The end of September will form a launching pad for the gold & silver prices. Several large major world banks have monstrous short positions in need of covering. A short squeeze might have begun in earnest. A big bank failure is just a matter of time. The September Hat Trick Letter identifies the primary candidates among the big banks for failure and bankruptcy dissolution. Egon Von Greyerz of Matterhorn Asset Mgmt provides solid arguments for three firm gold price targets at $6000, $7000 and $10,000. These are reasonable future targets, each justified, good rational arguments made. He cites the 24-fold rise from $35 per ounce to $850 witnessed from 1971 to 1980 in the last cycle, where it was released from a controlled setting. It could happen again, as control is lost, sending gold to $6000. He applies a correct price inflation adjustment to the past $850 peak price, using the Shadow Govt statistics, to arrive at a $7000 past peak target. He recalls an historical 25% of total market capitalization attributed to gold and mining shares. If that ratio were reached in financial assets once again, gold would need to rise to $31,000 per ounce. Factor in a powerful 65% bear market in stocks from current levels, and one would arrive at a $10,000 gold price. Thus the three historical comparisons offer potential targets for the gold price anywhere between $6000 and $10,000. Futhermore, the Von Greyerz targets assume no additional deep erosion in money standards from price inflation, or even the highly likely hyper-inflation. We will see bigtime price inflation, hence his conservative approach. See the Gold Switzerland article (CLICK HERE). If your memories of Jackie Gleason are revived, we are in synch.

As long as the current central bankers are in charge, the potential Gold price on this long-term bull market has almost no limit. The power center in charge is tied to the power center, which will not order bank asset liquidation, since a death sentence. That is the first requirement for remedy. It will never happen. The monetary system required a tangible core for stability, realism, and counter-balance. Only gold would serve the role. It will never happen. Instead of investment in a new and better global mousetrap, the broken one will receive unlimited funds for reinforcement, not new design. Thus the exercise in futility that feeds the great gold bull. The investment in failure described in a recent public article has prevailed and flourished. Thus, the upward pressure on the Gold price is unlimited. As money is wasted, the major currencies are rapidly undermined. As the government deficits continue in hemorrhage, the sovereign bonds are rapidly undermined. Gold is an investment in survival. It is a registered investment vote of no confidence. It is the ultimate safe haven in an increasingly dangerous world. The Gold price is going to the moon, at least $3000 per ounce. The silver price is going to the moon, at least $80 per ounce. Just give it time. Like a beautiful Costa Rican orchid, they just need water and sunlight. The water is the vast liquidity spread haphazardly by architects of ruin. The sunlight is the awareness of a broken system, the awareness of the legitimacy of Gold & Silver, and the awareness that they are missing in the system.


New York University Professor Nouriel Roubini was once a truly fine economist and analyst. From 2003 to 2006 he was brilliant in his dire warnings of USEconomic breakdown and housing market collapse. In the last year, Roubini has really slipped in his skills or has been unduly altered by Wall Street influence. Roubini has morphed into an economist cut from substandard cloth who simply does not understand gold. Roubini expects a short-term selloff in gold. He was correct last december 2009, in his similar call. Methinks this time, he is way off the mark. He has never favored gold. He makes some curious, if not fallacious points in criticism. He wrote, "September may be a good month to take partial or full profits for an investor with a long gold position. Alternatively an interested investor could buy December put options. Investors should thus be wary of getting the gold bug and being stuck with this barbarous relic. The recent swings in gold price, up 10% one month, down 10% the next, prove the point that gold has little intrinsic value and that most of its price movements are based on beliefs and bubbles. As an insurance policy against the tail risk of eventual inflation, it may be useful to hold a small amount of gold in one's portfolio, but stocking up portfolios with a fiat currency that has marginal practical use, a zero nominal interest rate, high storage costs, and the price of which is subject to volatile whims and bubbles is totally irrational... Unlike other commodities, it has little intrinsic value. Much like a fiat currency, gold's value is based largely on the irrational beliefs of investors. In a depression or near depression, one would be better off stockpiling canned food and other commodities like oil that are useful for riding out Armageddon. You cannot eat gold or burn gold." What a mouthful of substandard analysis!!

One must wonder if Roubini has noticed that the banking system lacks capital, since the primary reserves have been bond based, as in debt. Gold serves as excellent bank ballast in stormy times. He failed to observe that if the big banks were in possession of gold in reserves, they would not have turned insolvent during the gold price advance. Gold capital gains are enormous. Bond principal losses greatly overshadow their yields. Besides, Warren Buffet proved that gold & silver offer a yield, as in writing call options. The irrational beliefs expressed by Nouriel pertain more to stock and bond prices, one might easily conclude in the current environment with the grand USTreasury Bond bubble. The European sovereign debt crisis drove that point home rather vividly and thoroughly. Surely Nouriel must have noticed how the bond confidence erosion serves as a major motive to own gold in the past several months.

Conditions are very different now versus December 2009, when Roubini was correct in his anticipation of a gold price correction. What followed was a 14% to 15% price correction, then a long consolidation. He does not detect the benefit from the consolidation phase and return to crisis, thus the fertile ground for the next major gold price advance. Roubini must not observe that nothing has been remedied, no reform enacted, no restructure accomplished, but much more money wasted. His style of rear view mirror forecasting is a shabby statistician practice, a lazy endeavor. This time around, the gold seasons work against his new wayward gold forecast. Last December, the strong season was coming to an end. This September, the strong season is beginning. The big runup in the gold price will crush the shorts and shatter the reputations of many formerly respected analysts. His negative bearish call goes against the typical strong months of September through January, when last year the gold price rose from $950 to $1225. In the autumn of 2008, the gold price rose from $720 to $1000. What a limited awareness he has of the strong gold season, even pattern recognition. He does not comprehend gold!

Enter the second errant Roubini call concerning gold. Nouriel Roubini is on record with a position that the USDollar, the Japanese Yen, and the Swiss Franc may be a better investment than gold, if the global economy suffers recession. What an incredibly block-headed analytic viewpoint. A recession comes, then all major currencies will be undermined by excessive deficits and the response in monetary stimulus. Gold will thrive versus the major currencies, suddenly in much greater supply. This is simple Supply & Demand, whose dynamic escapes many economists, like a mental stain. He said, "If there was a double dip recession, increasing risk aversion, some assets are going to be preferred, and gold will be one of them. But in that situation, things like the dollar, the yen, the Swiss franc have more upside in a situation of rising risk aversion because they are much more liquid than the gold market. I believe that gold is going to trade around current levels. There are two extreme events that lead to a spike in gold. One is inflation, but we have no inflation in advanced economies. If anything, there is a risk of deflation. The other event in which gold prices go up is the risk of a global financial meltdown, and that tail risk has been reduced because we backstopped the financial system."

Roubini fails to recognize that the so-called backstop is nothing but impaired bond redemption, investment in failed gigantic financial firms, and countless liquidity facilities. The backstop is fashioned from the same sovereign bonds being attacked for their integrity and lofty values. The central bankers have rendered great damage with their own swords of debt. When the backstop proves inadequate, the gold price will respond with great power, enough to capture global attention. He fails to comprehend that the device enabling the requisite monetary flow is from dubious sources, namely the Printing Pre$$. Erosion of the USDollar is in high gear, but also for other major currencies, thus the entire monetary system. Gold responds with price rises versus such debased currencies, maybe uniformly. Nouriel seems ignorant of the monetary system. Moreover, the US stock market has seen 20 consecutive weeks of profound money exit flows. Maybe Nouriel does not monitor capital flows. It is called the Competing Currency War, something Nouriel must be aware of. Gold is the main winner in such wars. Next, in response to the USFed sponsored QE2 Launch, watch for Europe to announce a similar initiative. After all, they do NOT want the rising Euro currency to torpedo the strong German export trade. Some call this retaliatory gesture beggar thy neighbor. Money is being debauched, debased, and destroyed at a pace not seen in decades, maybe half a century. And Roubini believes the major currencies will outperform Gold in the spirited climate of a monetary paper flood sequence. His forecast might qualify more as propaganda than analysis! The heavy reliance upon the monetary engines toward empty output reduce the value of money itself, thus lift the gold price.


The majority of economic and bank analysts, like Roubini, simply does not comprehend gold! He does not comprehend its role as a reserve asset, nor the extreme attack to the integrity of sovereign debt, which supports the major currencies. He does not notice the debasement of money from profound abuse in its incremental wasted creation. Investors are rushing in pursuit of securities considered the most secure in a slowdown, as evidence mounts that the USEconomy has run out of momentum in its contrived rebound without remedy, reform, or restructure. Roubini does not comprehend the monetary system versus an anchor, either implied or direct, as in the gold anchor. The monetary high truth demands a value of the global reserve currency versus true money, whether sanctioned and blessed by the Ideological High Priests or simply implied. Gold and crude oil, even housing, have filled the implied gap for decades. They are called inflation hedges. These priests are heretics to sound money principles, thus the great financial crisis. Roubini cites US recession statistics and concepts with the best in his class, but he fails to link the official policy actions to a detrimental effect on the monetary and currency systems. The winner from the approach pattern to systemic failure is gold & silver.



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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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