正文
Uncle Sam Crying "Uncle" -- Posted Sunday, 10 February 2008 - by A.E. Fekete
"...weare not looking at a ditch into which the Japanese economy hasstumbled. We are staring a black hole in the face, the black hole ofzero interest. It can suck in the Japanese economy. It can suck in theeconomy of the United States. It can even suck in the entire worldeconomy. It is powered by the regime of the irredeemable dollar, andthe Fed's policy of serial interest-rate cuts."
Bonds, "____flation" and Gold
Peopletend to think in terms of black-and-white. Many of my correspondentsthink that either hyperinflation or deflation is in store for thedollar; (and) no third possibility (is) given. I would say the thirdpossibility is a hybrid of hyperinflation and deflation.
It ispossible, even probable, that we shall witness collapsing world tradeand collapsing world employment together with competitive currencydevaluations, as the three superpowers compete in trying to cornergold. The lure of gold is very strong. “There is no fever like goldfever” and, contrary to conventional wisdom, governments are especiallysusceptible.
A large part of the problem is that the Central Bank is helpless in the face of bond speculation.
Bond bulls' built-in advantage
Bondspeculation is virtually risk-free. Under our irredeemable dollar bondbulls have a built-in advantage. The Fed has to make periodic trips tothe bond market in order to make its regular open-market purchases ofbonds to augment the money supply. In order to win, all the bondspeculator has to do is to stalk the Fed and forestall (delay orprevent by taking precautionary measures beforehand) its bondpurchases. This is the Achillean heel of Keynesianism: it makes bondspeculation inherently asymmetric favoring the bulls, and that willultimately derail the economy on the deflation-side of the track.
TheFed is no Sorcerer. It is the Sorcerer's Apprentice. It can pumpunlimited amounts of “liquidity” into the system, but cannot make itflow uphill. new dollars flow to the bond market causing a lot ofmischief there, instead of flowing to the commodity market as hoped bythe Fed.
Commodity bulls are running into headwind and face grave risks. By contrast, bond bulls enjoy a pleasant tailwind
Aselect few commodities might continue in the bull-mode for a time,although gold could easily beat them. Most other commodities might gointo a bear-mode similar to that of the commodity markets of the1930's. If that's what was in store, then most investors would betotally lost. They would be navigating without a compass. There wouldbe endless debates whether the country is experiencing deflation ofhyperinflation. Your motto in this hybrid scenario should be: “expectthe unexpected”.
China
The Chinese have thegreatest U.S. T-bond portfolio ever, anywhere. They can overwhelm anyopponent bidding against them. Just think about it. The financialdestiny of the U.S. is in China's hand. the Chinese have vestedinterest in keeping the bond bull charging. They also have a vestedinterest in keeping the dollar on the life-support system. The Chineseinsist that it is their finger that must be on the switch.
Hereis an incredible sight, the U.S. being under the thumb of China. Notbecause the Red Army is a match for the U.S. military, but becauseUncle Sam has voluntarily put his head into the noose. The Chinese ask:why fight shooting wars when you know that your antagonist is paintinghimself into a corner anyhow?
They know that Uncle Sam willsooner or later start crying: “Uncle!” in agony. They have all themarbles. The marbles of saving. The marbles of producing. The marblesof silver. Maybe, one day, they will also have the marbles of gold.
The Logarithmic Law of Deflation
Mosteconomists are ignorant of the mathematics of depressions. They havecertainly never heard of what I call the Logarithmic Law of Deflation,which states that halving interest rates brings about the sameproportional increases in bond prices, regardless at what level thehalving takes place.
It makes no difference whether you gofrom 16% to 8% or from 2% to 1%, the value of long-term bonds willincrease by about the same factor. It can be seen that a much smallerdrop in interest rates could bring about the same proportional increasein bond prices, provided that the rates are low enough.
Why is this important?
Becauseit gives away the secret of the deadly deflationary spiral. It is wrongto describe Fed action as cutting interest rates. We should think interms of the Fed halving them. The bull market in bonds can go onindefinitely under the regime of the fiat currency. People assume,wrongly, that the Fed will run out of ammunition when the rate ofinterest is approaching zero. The bond-bull will run out of breath. Notso. The Fed will never run out of ammunition. The lower the rate, thesmaller cut will do. The Fed can halve interest rates any number oftimes without ever reducing them to zero. The bond-bull will never runout of breath.
The bond-bull is the root cause of depressions
Fallinginterest rates create capital gains for bondholders, yes, but thesegains do not come out of nowhere. They come right out of the capitallosses of producers. They are the very stuff out of which depressionsare made.
The serial cutting of interest rates by the Fed isthe grave-digger of the economy: it causes wholesale bankruptcies inthe producing sector. The large-scale dismantling of the producingsector in America during the past twenty-five years is a directconsequence of the regime of falling interest rates. Production stoppedas a result of the financial sector siphoning off capital from theproducing sector.
Industrial jobs were exported as there wasno capital left to support them at home. This shocking truth was neverinvestigated by mainstream economists, sycophants of Keynes.
AynRand called the confiscation of gold in 1933 by F.D. Roosevelt “moralcannibalism”. As I have shown elsewhere, the epithet is apt
Theremoval of gold as the chief competitor of government bonds was one ofthe main causes of the Great Depression in triggering, as it did, aprotracted fall in interest rates. (The other cause was the deliberatemanipulation of interest rates lower by the Fed.)
Thelatter-day equivalent of moral cannibalism is risk-free bondspeculation by the banks, perpetuating the bull market in bonds. It ismade possible by the open-market operations of the Fed that have beenclandestinely and illegally introduced and, by now, have become themainstay of the management of fiat currencies. The result is anotherprotracted fall in interest rates.
"Could they herald another Great Depression?"
"...weare not looking at a ditch into which the Japanese economy hasstumbled. We are staring a black hole in the face, the black hole ofzero interest. It can suck in the Japanese economy. It can suck in theeconomy of the United States. It can even suck in the entire worldeconomy. It is powered by the regime of the irredeemable dollar, andthe Fed's policy of serial interest-rate cuts."
Bonds, "____flation" and Gold
Peopletend to think in terms of black-and-white. Many of my correspondentsthink that either hyperinflation or deflation is in store for thedollar; (and) no third possibility (is) given. I would say the thirdpossibility is a hybrid of hyperinflation and deflation.
It ispossible, even probable, that we shall witness collapsing world tradeand collapsing world employment together with competitive currencydevaluations, as the three superpowers compete in trying to cornergold. The lure of gold is very strong. “There is no fever like goldfever” and, contrary to conventional wisdom, governments are especiallysusceptible.
A large part of the problem is that the Central Bank is helpless in the face of bond speculation.
Bond bulls' built-in advantage
Bondspeculation is virtually risk-free. Under our irredeemable dollar bondbulls have a built-in advantage. The Fed has to make periodic trips tothe bond market in order to make its regular open-market purchases ofbonds to augment the money supply. In order to win, all the bondspeculator has to do is to stalk the Fed and forestall (delay orprevent by taking precautionary measures beforehand) its bondpurchases. This is the Achillean heel of Keynesianism: it makes bondspeculation inherently asymmetric favoring the bulls, and that willultimately derail the economy on the deflation-side of the track.
TheFed is no Sorcerer. It is the Sorcerer's Apprentice. It can pumpunlimited amounts of “liquidity” into the system, but cannot make itflow uphill. new dollars flow to the bond market causing a lot ofmischief there, instead of flowing to the commodity market as hoped bythe Fed.
Commodity bulls are running into headwind and face grave risks. By contrast, bond bulls enjoy a pleasant tailwind
Aselect few commodities might continue in the bull-mode for a time,although gold could easily beat them. Most other commodities might gointo a bear-mode similar to that of the commodity markets of the1930's. If that's what was in store, then most investors would betotally lost. They would be navigating without a compass. There wouldbe endless debates whether the country is experiencing deflation ofhyperinflation. Your motto in this hybrid scenario should be: “expectthe unexpected”.
China
The Chinese have thegreatest U.S. T-bond portfolio ever, anywhere. They can overwhelm anyopponent bidding against them. Just think about it. The financialdestiny of the U.S. is in China's hand. the Chinese have vestedinterest in keeping the bond bull charging. They also have a vestedinterest in keeping the dollar on the life-support system. The Chineseinsist that it is their finger that must be on the switch.
Hereis an incredible sight, the U.S. being under the thumb of China. Notbecause the Red Army is a match for the U.S. military, but becauseUncle Sam has voluntarily put his head into the noose. The Chinese ask:why fight shooting wars when you know that your antagonist is paintinghimself into a corner anyhow?
They know that Uncle Sam willsooner or later start crying: “Uncle!” in agony. They have all themarbles. The marbles of saving. The marbles of producing. The marblesof silver. Maybe, one day, they will also have the marbles of gold.
The Logarithmic Law of Deflation
Mosteconomists are ignorant of the mathematics of depressions. They havecertainly never heard of what I call the Logarithmic Law of Deflation,which states that halving interest rates brings about the sameproportional increases in bond prices, regardless at what level thehalving takes place.
It makes no difference whether you gofrom 16% to 8% or from 2% to 1%, the value of long-term bonds willincrease by about the same factor. It can be seen that a much smallerdrop in interest rates could bring about the same proportional increasein bond prices, provided that the rates are low enough.
Why is this important?
Becauseit gives away the secret of the deadly deflationary spiral. It is wrongto describe Fed action as cutting interest rates. We should think interms of the Fed halving them. The bull market in bonds can go onindefinitely under the regime of the fiat currency. People assume,wrongly, that the Fed will run out of ammunition when the rate ofinterest is approaching zero. The bond-bull will run out of breath. Notso. The Fed will never run out of ammunition. The lower the rate, thesmaller cut will do. The Fed can halve interest rates any number oftimes without ever reducing them to zero. The bond-bull will never runout of breath.
The bond-bull is the root cause of depressions
Fallinginterest rates create capital gains for bondholders, yes, but thesegains do not come out of nowhere. They come right out of the capitallosses of producers. They are the very stuff out of which depressionsare made.
The serial cutting of interest rates by the Fed isthe grave-digger of the economy: it causes wholesale bankruptcies inthe producing sector. The large-scale dismantling of the producingsector in America during the past twenty-five years is a directconsequence of the regime of falling interest rates. Production stoppedas a result of the financial sector siphoning off capital from theproducing sector.
Industrial jobs were exported as there wasno capital left to support them at home. This shocking truth was neverinvestigated by mainstream economists, sycophants of Keynes.
AynRand called the confiscation of gold in 1933 by F.D. Roosevelt “moralcannibalism”. As I have shown elsewhere, the epithet is apt
Theremoval of gold as the chief competitor of government bonds was one ofthe main causes of the Great Depression in triggering, as it did, aprotracted fall in interest rates. (The other cause was the deliberatemanipulation of interest rates lower by the Fed.)
Thelatter-day equivalent of moral cannibalism is risk-free bondspeculation by the banks, perpetuating the bull market in bonds. It ismade possible by the open-market operations of the Fed that have beenclandestinely and illegally introduced and, by now, have become themainstay of the management of fiat currencies. The result is anotherprotracted fall in interest rates.
"Could they herald another Great Depression?"
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