QE4, the Fiscal Cliff & the Buiding Disaster

Phoenix Capital Research recaps some of what I have posted and tells you why we are already in trouble.

1. We're likely already in a recession again (though we really never left one since 2008)
2. The Fed will soon be buying 90% of all new fixed income.

CPI: How the Government Steals from You

One of the things I try to accomplish with this blog is to illustrate how the economy works to the non economist who wants to understand better how the economy works and effects their pocket book. Today. One of my most popular posts was one of my earlier ones explaining how real vs. nominal rates affect your wealth. Almost a year later its still one of the most viewed posts.

Today we will examine CPI, how its been calculated over the years and how it impacts you, especially with regard to social security. Its especially timely given that in the fiscal cliff negotiations, one of the proposals is to yet again change how CPI is calculated in order to save the government money by providing less social security while taxing others at higher rates.

Marc Faber Unleashed

Marc Faber of the GloomBoomDoom Report is one of my favorite economists not just because he is one of the rare economists who understand markets rather than just theory, but because his track record proves he sees what's happening and what's coming. Dr. Faber is one of the few that saw the 2008 crisis coming.

In the extended interview below he gives his opinion on many subjects and explains the source of the crisis, a subject either not understood or ignored by most of the media. Its a 50 minute interview that I believe is worth your time, but if you don't have the time, here are the quick notes:

• Credit from 2000 to 2007 expanded by 4.2 Trillion economy total credit by 21.3T (note: this means $21 Trillion of new credit was needed to create $4 Trillion in new growth. The same .2 negative multiplier I've noted previously in a Charle Biderman interview.)
• Credit expanded at 5 times GDP, i.e. $1 dollar of debt created .20 of economic output.
• QE is leading to higher wealth inequality.
• Cost of living in the US rising at 5-8%
• US Government bonds are a bubble that will burst one day.
• Student loan debt is now over $1 Trillion is also a bubble.
• Canadian real estate is in a bubble, especially in Vancouver.
• To believe China doesn’t have economic cycles is a fallacy. In my view it is hardly growing and could crash.

The interview is very interesting but the one thing I thought was most important was the above description of how it now takes $5 of new debt for every $1 of new economic activity in both the private and public sector. This is proof of the debt saturation of our economy and once again shows why Obama's $800 Billion stimulus was a failure. Its also very instructive of what we might expect if we go over the "fiscal cliff". If government spending is cut it is believed by all economist to have a negative effect on US GDP growth. But what the negative multiplier indicates is that each reduction of spending may have a far less impact on the economy than expected. The converse of the negative multiplier implies that a $5 reduction in new deficit spending may only cause a $1 reduction in economic activity. Perhaps in the long run that's not such a bad thing.

Fed confirms $1 Trillion new stimulus per year to infinity

As expected, The US Federal reserve has decided continue quantitative easing past this month when the $45 Billion operation twist was set to end. This had been "sterilized", meaning they were using maturing treasuries to buy new treasuries. After December 31st, it will be unsterilized (ie new printing). They will also continue to buy $40 Billion per month of toxic mortgage assets to remove them from bank balance sheets bringing the total to $85 Billion per month or a little over $1 Trillion per year.

From CNBC:

The Federal Reserve met market expectations Wednesday with another round of easing, this time with a pledge to keep interest rates low until unemployment falls below 6.5 percent and inflation tops 2.5 percent.

Teresa Ghilarducci Wants to Confiscate Your IRA, 401k & Pension

Back in August I wrote about Teresa Ghilarducci from the Schwartz Center for Economic Policy Analysis who wants to solve all of our problems by creating "Universal Retirement" benefits. This post has obviously received a lot of attention given that it has remained the most read post both since this blog was created as well as the most read on a daily basis.

 I had pointed out back then that there are currently about  $2.9 Trillion in 401k's and IRA's. This is a sizable sum our bankrupt government would like to get its hands. I explained that they would confiscate the money in exchange for IOU's that would essentially become the basis of a second social security program. Of course, much like social security you would not be able to name a beneficiary and there would be no guarantee that the money wouldn't be spent on whatever the government wanted. It would merely be a one time confiscation with a new entitlement on the US balance sheet.

The US Fed Monster to Buy 90% of New Treasury Issues

Back in September during the heat of the Presidential election, I posted that the US media was making a big deal about Romney's "47%" comment while ignoring something quite stunning that he said. Romney had mentioned:

"...the Fed's buying like three-quarters of the debt that America issues."

 "We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up."

Gresham's Law Applied to Gold & Silver

A better explanation is that when money is not valued correctly or its price is distorted it may be pulled out of circulation when its perceived value is greater than its distorted "market" value.

Let's say the price of some metal (say gold or silver) is manipulated by market participants...lets just say by some company like JP Morgan, who artificially keeps the price low by say...using paper derivatives, unbacked by any metal. Let's also say some currency, say the US Dollar is over valued by its users who are unaware the Federal Reserve is debasing the dollar by printing trillions. The result would be an overvaluation of the US Dollar and an undervalued distorted price of metal.

Some market participants, who were aware of the distortions would use their Dollars to buy the metals, attempting an arbitrage between the two forms of money. This could be done by individuals who want to preserve their wealth by changing currencies (from dollars to gold) or by countries like China who want to get rid of foreign reserves in the depreciating currency to buy sound money.

Now you know how Gresham's Law effects gold, and silver and why shortages will result. Gold and silver will be hoarded by those who understand its true value (as well as that of the dollar) until the prices reflect their true price.

More BS at BLS but Revisions to Reality

In previous months I wrote about some of the pre-election shenanigans in the jobs numbers and a manipulated unemployment rate that did not reflect reality including a blatant omission in new jobless claims in one of the nation's most populated states, California. Today we get more BS but with some revisions that reflect reality

Headline:

Job Creation Hits 146,000, Rate at 7.7%

So once again, the job number is well below the 200 to 250k needed to lower the unemploymnet rate through job growth. So why has unemployment dipped again? Its the same old story.

Well Isn't This Interesting?

If you haven't already, please vote in the new poll on the bar to the right:

Will we go over the fiscal cliff? Someone seems to think we will.

Beware Chasing Yield

Often times here at Macrowealthpreservation, I post updates on factors effecting gold because I believe that its one of the few places where, in this environment, wealth can be both preserved and even grown given the government controlled markets we have experienced since 2008. Today however, I just want to point out the dangers of chasing yield, especially in the area of high yield or "junk" bonds.

The Fed's ZIRP (zero interest rate policy) have lowered interest rates to levels few professionals ever thought possible. This has resulted in savers seeing little opportunity to earn interest in savings accounts, money markets, CD's, or relatively safe bond funds. Indeed, many of these pay essentially zero and substantially less than the real rate of inflation. Even when compared to the government's CPI, which massively under reports the real inflation level people experience, savers using conservative instruments that I mentioned above are actually losing purchasing power. The Bureau of Labor Statistics reported recently in October that the CPI for the previous 12 months was a well controlled 2.2%. If you are getting even 1% from a CD (you can check rates at bankrate.com) you are at a loss when you minus out the 2.2% of CPI. Its much worse if you follow Shadowstats and see that its more like 10% when calculated in the 1980 based method.