classical economics
for analysis,  forecasting
and policy design

Next Crisis Kickoff Set

Round Up the Usual Suspects
By Wayne Jett © January 19, 2011

    Economic forecasting is no longer, if ever it was, a matter of assessing effects of macro policies and conditions. The relevant questions are what crisis will the dominant elite drop on us next, and when? A couple of straws-in-the-wind hint at possible answers and – surprise! – it is not a return to those golden days of yesteryear.
The Silver Bears
    In case you missed it, a financial sector source is creating a series of cartoon videos consisting of two teddy bears who discuss financial topics, including “quantitative easing” by the Federal Reserve (called “the Ben Bernank”) and manipulation of the silver market (by “J. P. Morgue”). The comic dialogues, though framed in earthy tones, are more soundly based in credible monetary theory than is any official pronouncement of the Fed or the U. S. Treasury in recent years.
    In Silver Market Manipulation – Part 2, the two little bears discuss “insider info” from a “J. P. Morgue trader” of backwardation pricing (higher price for immediate than future delivery) in silver at the London Bullion Market Association due to shortage of bullion for delivery. The U. S. COMEX, they say, is paying 20% premiums to roll over silver futures contracts coming due currently to avoid physical delivery.
    In addition, the bears discuss how the Bank of International Settlements (the Switzerland-based coordinating body of private central banks, also chaired by Ben Bernanke) sells gold based on “fractional reserves” to nations such as India, and hold the bullion in undivided common accounts. Such a practice is, of course, vulnerable to a run by nations demanding their gold when fiat currencies fail.
    In SMM - Part 3, “a J. P. Morgue insider” is said to have revealed that China in 2000 made a swap contract with the Fed covering 300 million ounces of silver, taking dollars in exchange. After recent sharp dollar devaluations by the Fed, China opted to unwind the swap and demanded its silver back. The Fed has dragged its feet in settlement, if not reneged outright, so China is using ingenious trading tactics to recover possession of its silver.
    China is said to be buying silver for physical delivery on the COMEX and LDMA, while at the same time selling silver short. Short sales keep the price low as silver bought is physically delivered to China. When physical deliveries reach 300 million ounces, the short silver position will approximate the same. China will notify the Fed to deliver its swap silver to COMEX and LDMA to cover the short sales. These events, so the bears say, are to be completed by February 28, 2011.
    Some observers allege the Federal Reserve and J. P. Morgan Chase already have very large short positions in silver, incurred by Morgan Chase with Fed backing to keep the dollar’s appearance falsely strong. If the Fed is unwilling or unable to comply with China’s demand to cover its short position, the COMEX and its traders would be in dire straits. Since the amount of silver involved in China’s swap is puny in Fed terms – less than $10 billion – the Fed would likely try to break the short squeeze on silver prices with more short sales backed by currency.
The Other Straw
    The cartoon bears' view into alleged activities in bullion markets may be, in fact, a hall of mirrors instead of a window. Look to extrinsic evidence or an independent source to confirm or refute their “intel.” As time passes, markers inevitably  surface which are consistent, or not, with the scenario presented by the video bears. At least one such marker already seems to “bear out” the video story.
    One asset manager responsible for investing significant Chinese funds in U. S. corporate securities is instructed by its client to be entirely out of the market by the end of February. This report may or may not be related to potential confrontation between China and the Fed in the silver markets.
    More likely than not, it is related. But while two straws together improve the probability that this China-Fed scenario is bending the silver markets, other events equally or more significant may be in play. With such tenacious teddy bears digging so deeply, though, an astute investor cannot fail to stay tuned to all sources for updates. When sharp dealing in precious metals cuts across intergovernmental relations, consequences show up in financial markets and military affairs.
Transformer Fed
    The dollar’s breathing, under care of Fed medicine men, is already noticeably labored. “Kicking the can down the road” does not begin to describe how badly the Fed has managed the dollar. Rather than tending to the dollar's stability, the Fed regularly and consistently serves pecuniary interests which own and dominate it, and which act at every level to exploit others with less advantage in world markets.
    Even polite economic society now remarks occasionally that six giant banks wield influence which captures the entire federal government and their regulators – primarily the Fed, the Securities & Exchange Commission and the Commodities Futures Trading Commission. Indeed, those banks and the Federal Reserve often act in ways completely at odds with U. S. national interests. The Fed is, on the one hand, openly devaluing the dollar with immense liquidity injections. Simultaneously, the Fed manipulates price indices, if not precious metals trading, to create false appearances that monetary devaluation and inflation is not occurring.
    Apart from their transparently contradictory objectives, both practices are outrageously bad for national interests. So, why is the Fed acting this way? Not simply to address crises as they occur - that much is clear. Addressing a crisis requires mitigating damage and correcting policy flaws which permitted the crisis. Before, during and since the financial sector events of 2008, the Fed has fanned the conflagration, weakened the dollar at every turn, and walked arm-in-arm with the worst attacks by big banks on the Treasury in U. S. history.
    The president of the Federal Reserve Bank of Dallas recently spoke of “the limits of monetary policy as a salve for the nation’s fiscal pathology.” He cited the Fed’s contribution as “bridge financing” until Congress can restructure tax and regulatory policies in ways sufficient to enable economic recovery, so the nation can climb out of the “fiscal sinkhole” dug by Democrats and Republicans. This is far too generous an assessment of the Fed’s role in ushering to fruition the apocalyptic debt expended since August, 2008, by both the Fed and Treasury.
    Fiscal irresponsibility has been a concern of the American economic landscape for generations. But fiscal spending pales in comparison to the truly disastrous trillions in new debt piled on since August, 2008, almost all as direct consequences of malevolent machinations by giant financial institutions – many of them under the Fed’s supervision and all of them influential at the Fed.

    Trillions more dollars were created by the Fed in this same brief interval and spent in unaccounted amounts for undisclosed purposes. All of this new debt comes out of the value of savings built from productive labor exchanged in past and future years for the Fed’s crippled currency.     
    This is a shameful, heinous legacy of institutional theft aided by a central bank which is no more egalitarian, democratic or public spirited than any other central bank in world history. Its powers should be terminated before the middle class and constitutional government in the U. S. are completely destroyed. ~