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Keiser Report: Feedom & Plutocracy (E108)

Housing, raw jobs data, and NIA 2010 recap

Why Can’t Europe Avoid Another Crisis? Why Can’t the U.S.?

Most experienced watchers of the eurozone are expecting another serious crisis to break out in early 2011.  This projected crisis is tied to the rollover funding needs of weaker eurozone governments, i.e., debts falling due in March through May, and therefore seems much more predictable than what happened to Greece or Ireland in 2010.  The investment bankers who fell over themselves to lend to these countries on the way up, now lead the way in talking up the prospects for a serious crisis.

This crisis is not more preventable for being predictable because its resolution will involve politically costly steps – which, given how Europe works, can only be taken under duress.  And don’t smile as you read this, because this same logic points directly to a deep and morally disturbing crisis heading directly at the United States.

The eurozone needs to – and will eventually – take three steps:

1. Agree on greater fiscal integration for a core set of countries.  This will not be full fiscal union, but it will comprise some greater sharing of responsibilities for each other’s debts.  There is much room for ambiguity in government accounting and great guile at the top of the European political elite, so do not expect something completely clear to emerge.  But Germany will end up underwriting more of the liabilities for the European core – the opposition Social Democratic Party and the Greens are very much pushing Chancellor Angela Merkel in this direction by calling her “unEuropean”. 

2. For the core countries, the European central bank (ECB) will receive greater authority to buy up government bonds as needed.  Speculators in these securities will be badly burned as necessary.  The wild card here is whether Bundesbank president Axel Weber will get to take over the ECB in fall 2011 – as expected and as apparently required by Ms. Merkel.  Mr. Weber has been vociferously opposed to exactly this bond-buying course of action.  The immovable Weber will meet the unstoppable logic of economic events.  Good luck, Mr. Weber.

3. One or more weaker countries will drop out of the eurozone, probably becoming rather like Montenegro – which uses the euro as its currency but does not have access to the ECB-run credit system.  Greece is probably the flashpoint; when it misses a payment on government debt, why should the ECB continue to accept Greek banks’ bonds, backed at that point effectively by a sovereign entity in default?  The maelstrom will probably sweep aside Portugal and perhaps even Ireland; the chaos will threaten Spain and Italy.

It would be so easy to set up preemptive programs with the IMF for Portugal and Spain, but this will not happen.  The political stigma attached to borrowing from the IMF is just too great.

The unfortunate truth is that despite its much vaunted supposed return to preeminence and the renewed swagger of senior officials, the IMF remains weak and of limited value.  It is an effective lender to small European countries under intense pressure – Latvia, Iceland, Greece, etc.  But the Fund does not have the resources or the legitimacy to save the bigger countries.

At the end of the day, the Europeans will save themselves, with the measures outlined above – only because there will be no other way to avoid wasting 60 years of political unification.  But this action won’t “save” everyone; one or more countries will be forced out of full eurozone membership (although they will likely keep the euro as the means of exchange).  And the costs to everyone involved will be large and largely unnecessary.

And remember, when the financial markets are done with Europe, they will come to test our fiscal resolve.  All the indications so far are that our politicians will also struggle to get ahead of financial market pressure.

There are plenty of places in Europe where you can find an easy political consensus is to cut taxes and increase budget deficits.  Sadly, this no longer pacifies markets.  The American political elite – right and left – believes that we are different from the Europeans because we issue the dollar and therefore have some special privileges for ever.

But this is not the 1950s.  Asia has risen.  Europe will sort itself out and become more fiscally Germanic.  The Age of American Predominance is over.

Our leading bankers looted the state, plunged the world into deep recession, and cost us 8 million jobs.  And now many of them stand by with sharpened knives and enhanced bonuses – also most willing to suggest how the salaries and jobs of others can be further cut.  Think about the morality of that one.

Will no one think hard about what this means for our budget and our political system until it is too late?


Richard Russell

December 27, 2010 – I have posted below the year-end price of gold starting with the year 2000, the first up-year of one of the greatest and least appreciated bull markets in history. Take in this series, you may never see its like again.

2000 – $273.60
2001 – $279.00
2002 – $348.20
2003 – $416.10
2004 – $438.40
2005 – $518.90
2006 – $638.00
2007 – $838.00
2008 – $889.00
2009 – $1118.40
2010 – ?

I’ve been around a long time, and I’ve studied many primary bull markets. And now I want to venture a few of my observations.

In markets, I have never seen a series like the above end with a whimper or a fizzle. The end or the wind-up of such a series usually arrives with an upside “explosion,” as those who have failed to participate in the series finally rush in to join in the apparent endless advance. This is the wild and wooly speculative phase of a great bull market. Big bull markets don’t end with a sigh, they end in exhaustion.

(1) Most great primary bull markets last longer and carry farther than the majority of investors (even the bulls) expect.

(2) A great primary bull market is an expression of something changing in a very fundamental and meaningful way. Following a great bull market, the world is never quite the same.

His father, Congressman Howard Buffett, understood gold, but his son, Warren Buffett, does not understand gold.

Maybe this will help Warren. Why is gold the ultimate and timeless money? Good money must have a number of unique characteristics.

(1) It must be durable, which is why we don’t use wheat or corn.

(2) It must be divisible, which is why we don’t use a Picasso painting or jade statues.

(3) It must be convenient, which is why we don’t use lead or copper or real estate.

(4) It must have value in itself, which is why we don’t use paper.

(5) It must be transportable, which means that large values must be contained in a small area (a gold coin weighing only one ounce can be worth far more than fifteen hundred dollars).

(6) It must have a long history of being accepted as a store of value. Gold was considered valuable as long as 5,000 years ago in the age of the Egyptians.

(7) It cannot “disappear” or be used up in manufacturing as is copper and even silver. Thus, the gold coin that you have in your hand may have been part of Cleopatra’s earrings centuries ago. Almost all the gold that has ever been discovered is still available in one form or another.

(8) It must not be the liability of any sovereign nation, nor should it require governmental law to make it money. For instance Gold requires capital, talent, risk, sweat and courage to recover or to accumulate.

Russell note:

It’s possible that gem-quality diamonds can fit all the above characteristics but two. Diamonds are not divisible, nor do they have a long history of being stores of value.

Second note:

The Washington-based IMF recently completed its promised sale of gold. It was rumored that the IMF would have to sell its gold on the open market. Not so. The fact is that central banks eagerly gobbled up the IMF’s gold. According to The Financial Times, the IMF sold its gold directly to the central banks of India – 300 tonnes, Sri Lanka – 10 tonnes, Bangladesh – another 10 tonnes, and Mauritius – two tonnes.

And why are these central banks trading paper for gold? After all, it’s the central banks that are creating the fiat paper. Why are they swapping their own beloved products for gold?

The latest anti-gold propaganda centers around the gold exchange traded funds. A full page article in Sunday’s New York Times implied that only with the advent of all the gold ETFs has gold boomed. The article implies that the ETFs (mainly GLD) allowed an ignorant public to buy gold, and that this is the reason for gold’s recent advances. The article did not explain why gold has risen yearly for almost a decade, even before gold ETFs were created. The Times article hinted that gold was in a bubble, and that it was a dangerous bubble. The article emphasized the 20-year gold bear market of 1980 to 1999.

Fed Can’t Prop Up Stock Market Forever

Greg Hunter

From the very beginning of QE2, it was no secret the Federal Reserve wanted the stock market to rise. The Fed got its wish. Many people see the stock market increase of nearly 20% in a few short months as a sign things are turning around. The turnaround is really a mirage of the printing press. Even so, some pundits think the economy is on the mend. Maritime News reported last week, “It has been successful,” Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, said of Bernanke’s policy of pumping money into the financial system, dubbed QE2. “It’s contributed to the rally in the stock market” and has “been important in reducing substantially the downside risk of deflation.” (Click here for the complete story.) Pumping money into the stock market to get stocks to go up is not the same as hiring people and making products so share prices grow. With the stubbornly high unemployment rate of 9.8% (or more than 22% according to Shadowstats.com), this is just one of the dismal facts of this economy. Other gloomy indicators are the million plus foreclosures this year and next. The auto industry just had its fourth month of decline in new orders. The FDIC has shut down 157 banks so far this year, and all the banks look solvent only because of rule changes that amount to government sanctioned accounting fraud. You cannot have the banks, housing and auto sales all tanking at the same time and expect the party to last.

For the life of me, I cannot see how share prices going up are going to get businesses hiring again. This stock market rally is good for one group of people – insiders. They are selling at a rate of more than 80 to 1 over buyers. It is obvious this market is not growing organically but is simply being pumped. Now, people should look out for the dump. Will the market continue to rise? Will there be QE 3, 4, 5, 6, 7 or to infinity? Is printing money the true road to wealth and prosperity? I think you know where I’m going.

A funny and clever way to illustrate what is going on has been put together by a group called Xtranormal. They have produced a series of financial cartoons that explain the economy. Below is one of their latest called “Suckers rally: Pimp Bernanke and the Psychopathic Super-Whores of CNBC.” (Yes, this the actual title.) Enjoy the cartoon below:

Ultimate Cost of 0% Money

Jim Willie CB

Since the early 1990 decade, the nation’s maestros have promulgated the notion that cheap money is a beneficial factor for the sustenance of wealth, for economic development, for the standard of living, for the robust industries, in general for the American society. Nothing could be further from the truth, but even today the reckless US economists from the Keynesian Camp and their controllers from Wall Street have convinced the multitudes that cheap money is a good thing. Cheap money comes with a deadly ultimate cost. The inept professor occupying the US Federal Reserve Chairman post has gone on record claiming the US banking sector has a secret weapon in the Printing Pre$$ that it can use with zero cost, in its electronic form. Nothing could be further from the truth. The Clinton & Rubin team began the distortion of the Consumer Price Index, ostensibly to reduce Social Security and USGovt pension benefits in cost of living raises. They wanted to cause a massive USTreasury Bond bull market, and succeeded in doing so. They wished also to bring down the USTreasury Bond yields. The infamous Fed Valuation Model dictated that as rates rose, stocks fell. So the scheme to manipulate the bond market began with the venerable craftsmen of rigged markets, ruined engines, and mega-fraud schemes. They taught from their high priest pulpits that cheap money was good for the financial markets. Nothing could be further from the truth.

Many analysts have sought the underlying root cause for the systemic failure of the USEconomy, the US Banks, and the USFed itself. One can start in pursuit of answers by looking at the cause being a sequence of costly wars and the ensuing monetary inflation, followed by lost industry to globalization and price inflation. The Vietnam War had a powerful consequence of inducing Nixon to exit the Gold Standard, a linkage few if any economists or even gold analysts make. But the true singlemost cause of wreckage is the artificial low forced cost of money, the near zero cost of usury. The subtitle to that billboard is that CAPITAL IS TRASH. Imagine in a nation that developed, promoted, and exploited the fullest riches of capitalism, embarked upon a path to destroy capital without even the recognition by its best brain trusts. Their mental chambers have been totally corrupted by the justification that inflation is a positive force that must be managed. Nothing could be further from the truth. The consequences of artificially cheap money, the wrecked pricing of usury, ultimately is capital destruction and economic failure.


My friend and colleague Rob Kirby calls the artificially low cost of money, the cost of usury, to be the pox on humanity. It is actually a pox on the entire economy, in which humanity resides. The Jackass calls it acidic paper mixed in the cauldron to dissolve capital. The points of this article expose the most glaring blind spots of USEconomic and USBanking, a mindboggling failure that has delivered the United States of America to the doorstep of the Third World. The sins committed are almost precisely what Banana Republics have done, and faced ruin. The annual $1.5 trillion USGovt deficits are proof positive of the failure. Those deficits are grossly under-stated when hidden costs of war are factored, and when hidden costs of nationalized acid pits like Fannie Mae and AIG are factored. Leave alone the costs of endless war and its seamy motives. Consider the many sides to free money, the forcibly low cost of usury.

The 0% usury cost has destroyed capital, with the recent destruction seen as in an accelerated phase. The 0% money encouraged asset speculation, not business investment. The steady stream of nonsensical labels to the USEconomy are comical. The Macro Economy ten years ago fizzled. The Asset Economy six years ago fizzled. The bylines of a Jobless Recovery offer insult to one’s intelligence. Nothing could be further from the truth, since no such contraption exists. The 0% money even encouraged drainage of real assets, like gold. The Clinton-Rubin gang altered the gold lease rate toward 0% in an experiment. Almost the entire gold inventory was drained from the USTreasury and its secure storage facility at Fort Knox. It was essentially stolen from the front door using official trucks. In defiance, the USFed and USDept Treasury continue to refuse an independent audit. With artificially low rates come complete destruction of capital formation, as economic laws have all been commandeered. The outcome features a shortage of everything valuable and a climax of central planning to manage the destruction. Witness the stream of nationalized failures, whether financial firms or critical industrial firms. Now General Motors (Govt Motors) produces an electric car twice the price of Toyota, rotten fruit. Witness the Home Buyer Tax Credit which has ended. The USFed as central bank has a bloated ruined balance sheet. The last remaining question for the august USFed is whether they will declare bankruptcy and liquidate, since their net value is between minus $700 billion and $1.2 trillion, OR whether they will attempt to purchase the remaining few $trillion of home loans from Fannie Mae and take property title to 30% to 35% of American homes. That would serve as a Fascist Manifesto of collectivism in a sense.

The tragedy is that the USEconomy has chronically suffered from an absence of capital investment. Some analysts point to a prohibitive US corporate tax structure. With a recent Japanese decision going into effect, the USGovt takes the top spot with a 39.5% corporate tax rate. The European nations range between 24.0% and 30.2% by comparison. Rather, the Jackass submits, the more pressing and acute problem is the 0% usury rate. It is common between the US and European Union, which faces a fracture. The United States shipped most of its factories to China, in an abandonment of capital structures and their legitimate wealth engines. The US economists applauded the move, calling it a Low Cost Solution. It was in fact a ruinous movement, one that replaced wealth engines with debt burdens. The climax is coming, with a higher cost structure across the USEconomy, and shortages where prices are kept down artificially. US businesses see little prospect in capital investment, at least not within the United States. They sit on cash, and see little usage for it. So they speculate with it, a contradiction that capitalism exists in the US at all. In the next chapter, future price inflation will be called economic growth, the next travesty!!

Look for an increase in empty sections of supermarket shelves for food, and gasoline stations shut down. It will be an end symptom. Look for a collapse of Municipal Bonds, as the states and cities are in a late stage of implosion. The impact of the semi-permanent housing bear market has local impact. Even banks have far less money in ATMs, a signal of the supply chain being interrupted. That is as much a sign of a supply chain problem as a solvency problem for the big banks. The ultimate problems are the cost of money, control of governments, the coordination of central bank policy, and the control system that enables the entire fiat system to perpetuate and continue. The desperate response has been to throw 0% money into the system, primarily the big US banks, $trillions of worthless money, and expecting to produce a remedy. It is folly on the stage in global view. Rob Kirby summed it up, as he said “It is like taking 100 gallons of water into the desert and pouring it into the sand to promote growth. Nothing happens, nothing grows, and people die of thirst.” It is the climax folly of the Keynesian attempts, something in fact that Keynes himself never advocated.


For the 0% cost of usury to be enforced, all connected financial structures must be attuned, distorted, and brought in line with the artificially priced markets. The enforced long-term rates are managed by means of Interest Rate Swap contracts. Their volume went in overdrive. The Interest Rate Swaps have inherent embedded USTBonds built inside them. The IRSwaps produce therefore huge USTBond demand, enough artificial demand to enable the finance of unlimited USGovt deficits. The maestros are not stupid, just corrupt. In fact, 84% of all credit derivatives have no end user, an exercise of pure bond market control. The portion of the credit derivatives with bonafide end users is negligible. Another $150 trillion in total credit derivatives from bank holding companies does not show up in the graph, which is from commercial banks. Recall Goldman Sachs changed their status to holding company, partly to conceal their credit derivative holdings, but also to qualify for USGovt slush funds in the TARP Fund program.

The group of big banks have total derivatives greater than the global GDP, which should offer a warning signal to economists, but instead they refer to it as providing stability in an unstable world. The USFed claims that the bond market determines long-term rates, but it does NOT. The Interest Rate Swap contract serves as a powerful mechanism to control long-term rates, using leverage from the more easily enforced short-term side of the USTreasury Bill market where the USFed exerts daily control with Fed Funds. Note the skyrocketing interest rate derivative tally, which is 84% of all credit derivative contracts. Note the miniscule volume of credit derivatives with actual end users, in the lower flatline. This is the smoking gun of ruined financial markets, in particular the bond market whose job it is to set the cost of usury!! Thanks to Rob Kirby for a fine graph.

In a recent interview, a fool on a financial network recommended JPMorgan as a stock investment, claiming the firm would benefit from rising interest rates. The level of ignorant recklessness is without bounds. As the 10-year USTreasury and the 30-year USTreasury yields have risen markedly in the last six weeks, the stress to JPMorgan has been so acute that some astute financial analysts like Jim Rickards have suggested that JPMorgan is burning money at an unprecedented clip, and at great risk. The enforcement of 0% money by IRSwaps has become extremely costly, as the leverage has backfired in JPMorgan’s face. It is a reflection of the burned capital.

Take a walk down history. Clinton made a deal with the Wall Street devils. In the Clinton Admin, from January 1993 to January 1995, Robert Rubin set the stage, did the spade work, and made the necessary preparations. During that time, he served in the White House as Assistant to the President for Economic Policy. In that capacity, he directed the National Economic Council, a creation by Clinton after his coronation in the presidency. With his squire Lawrence Summers, they developed the Gibson Paradox at the USDept Treasury. That provided the high priest ideological dogma required to alter the cost of usury. Many recall Rubin as the Goldman Sachs superstar of currency trading desks. He was also head of their gold trading desk in London through the 1980 decade. He became Treasury Secretary in the Clinton Admin in January 1995, succeeding caretaker Lloyd Bentsen. From this important privileged post, he prepared to raid the national gold inventory for private Wall Street benefit. The volume of credit derivative growth accelerated in the Clinton-Rubin years, only to skyrocket since. The chart is proof. That unbridled growth occurred at the same time as the Tech-Telecom Boom & Bust, the Housing-Mortgage Boom & Bust, and the climax of ruin when the US banking sector died in September 2008. It will no more be revived than a dead man in a morgue will be revived from massive blood transfusions. The US banking sector has no pulse. Blood from large scale transfusions continues to collect in the form of Excess Bank Reserves held at the USFed, obscene bank executive bonuses, each a major eyesore never seen before in US history.


Speculation became the norm, not capital investment. The ugly response has been heavy asset speculation, not investment in capital intensive industry. A clear consequence of 0% usury cost is the massive distortion of all financial markets. The trend has been for US industry to leave the nation, and seek lower labor costs, less federal regulatory obstacles, to lands where capital is valued and industrial output is held in the highest regard. The steady stream of wrecked markets will be written about in US journals for a generation. Witness the mortgage bond market and its ruin. Its pathogenesis includes a particular Wall Street specialty with leveraged Collateralized Debt Obligations useful to hasten to vanishing act of capital. This was financial engineering at its finest. A typical CDO bond that lost 15% rendered the bond holder with a total wipeout, a complete loss. The housing market led the decline in mortgage bonds, as collateral was eliminated, as revenue stream was eliminated, as bank portfolios suddenly saw a climb in the REO bank owned properties taken in foreclosure. The homes clutter the bank balance sheets more with each passing month in a heap of fetid rot. The control mechanisms to maintain desired price ranges for bonds, stocks, energy, and currencies were available. However, the property market failed on the maestros since Fannie Mae & Freddie Mac were forced to show financials on their balance sheet. The Chinese were actually a key player in the housing & mortgage blowup, as they abandoned the GSE Bonds. In doing so, they forced the issue and urgently pressured the USGovt to indeed prove they backed the Fannie Mae Mortgage Bonds, the so-called USAgency Bonds.

The big US banks continue to speculate, and not lend much to businesses. The 0% usury cost is like a flesh eating disease. It causes gross negligence on asset management. It causes financial counselors to suggest speculative investment portfolios. All things become a grand carry trade game. The big US banks prefer to play the USTreasury carry trade, than to engage in business lending. Capital controls keep the money in the bank casinos. Even the stock market has been exposed as a fraudulent private game. The shock in May to the stock market exposed the role of Flash Trading. The culprits were not prosecuted for either market rigging or insider trading. They continue to ply their trade. The flash trading mechanisms control the stock market similarly, like Interest Rate Swaps do with bonds. In the aftermath, it was revealed that ten stocks can dominate half the daily trading volume. It was revealed that the average time held for stocks is minutes, not months, in a grand Round Robin of Wall Street firms buying and selling stocks to themselves, thus propping stock prices. It was revealed that over 80% of stock trading volume was from the empty chamber of Flash Trading. Another ruined market, verified by almost 30 consecutive weeks of outflows from US stock funds. The American public has wised up.


In the United States, the destruction of capital is so widespread, so universal, so perverse, that the maestros encouraged the development of vehicles extremely useful to accelerate the destruction. An addictive American mentality helped the process, fresh off the Me Generation. Recall in 2001 when USFed Chairman Greenspan showed open frustration with the bond market. Greenspan openly urged the long-term interest rates to come down, so that housing prices would rise and support the consumer society. He attempted (and succeeded for five years) to prevent the natural course of a major stock market plunge to be followed by a major housing market decline, as history would have dictated. He knew it would have been the end of the US financial structures, with big US banks going bust. That is whey he resigned in late 2005. He did not wish to preside over his handiwork disaster. He did not want to reap the harvest of the seeds of destruction he sewed. Greenspan essentially assured the USTreasury Bond market that the vigilantes would be killed off, and enlisted the aid of JPMorgan with Interest Rate Swap contracts. Notice the acceleration in the above graph after 2003.

The housing market boom ensued. It was unique. This time around, second mortgages were easy. Home equity lines of credit were easy. Origination fees (points as closing costs) were held down. Some people refinanced every 12 to 18 months. People without income had home loans approved. A street bum in St Petersburg Florida owned four properties bought with nothing down before he died. Income and asset verification became an annoying irrelevance. The end result was that the entire US housing market morphed into a gigantic ATM machine. Cheap money overbuilt the homes (MacMansions) and brought the 2nd and 3rd homes into play. From the year 2000 to 2007, the amount of mortgage equity removed from assets was astonishing. People ate capital in a veritable frenzy. The graph shown here is of equity withdrawal as a percentage of disposal income. From 2% to 8%, the trend was revealed as a quadruple. The trend was cheered by USFed Chairman Greenspan. With the home price declines came a new American phenomenon, negative home equity. The current figure is 23% of Americans owe more in their home loans than their homes are worth on the market. They are prisoners of capitalism gone awry. The ruin of the US homeowners is the symbol of the US systemic failure. So are food stamps and tent cities.

The trend turned to tragedy. Instead of investment in capital equipment, factories, and providing the fertile ground for robust job growth with legitimate income, the nation did the opposite. Investment instead was made in the $trillions on devices to drain capital, namely homes, shopping malls, and big box retail stores. The nation turned into a consumption engine whereby 70% of the US Gross Domestic Product was devoted to consumption. In a sense, the nation ate their homes and shopped until they croaked. Following the binge, came the current trend with mortgage defaults, home foreclosures, and bankruptcies. Lest one forget, the tent cities of homeless. To think that a collection of homes could supplant a collection of factories to drive economic progress and sustain a standard of living is the greatest folly in the history of the USEconomy. It is the last chapter of failed Keynesian policy. Remember well, it was blessed by Greenspan as good and wholesome and legitimate. He also blessed as sophisticated, legitimate, and robust the entire offload of debt risk with credit derivatives. THE GREENSPAN LEGACY IS OF RUIN, but in particular ruin from 0% usury cost as its root disease.

The perversity is so deep that home builders have often morphed into arbitrage outfits, who purchase wrecked development project homes and sell them to Fannie Mae. Even PIMCO has become a major buyer of wrecked housing portfolios with hopes to unload them onto Fannie Mae. Even big US banks have made the rules for home loan modification so twisted, that huge 25% profits can be snagged by merely forcing foreclosure, then sending the wreckage through the FDIC. The rules have been changed to favor the banks. Other arbitrage funds have sprung up to deal with mortgage backed bonds, as the vibrant funds have turned into processors of ruined capital. Regard these all as recyclers, no different than scrap metal, scrap paper, and scrap plastic processors that we are familiar with. The nation has not only created vehicles to drain and deplete capital, it has created recyling process plants to handle the wrecked capital. For the unrecoverable toxic waste paper, go to Fannie Mae. So the investment trend enabled accelerated depletion of capital, the shortage of factories, and the removal of legitimate wealth engines. It is like making bread without wheat.


Few if any analysts make the connection that 0% usury costs and heavy speculation instead of capital investment go hand in hand with the fraud strewn about from the Fascist Business Model. Put aside the war machine, its missing $2.2 trillion in defense appropriations, its missing $50 billion from the Iraq Reconstruction Fund, its annual sacred defense budgets that surpass the entire world combined. Focus instead on the bank fraud, centered upon mortgage bond fraud, Municipal Bond fraud, Treasury Bond fraud, and the diverse counterfeit of same. See the packaging of quickly ruined mortgage bonds as unqualified buyers rendered the bonds worthless in double quick time. Then the ruined mortgage bonds as housing market declines rendered the bonds worthless (or badly impaired) despite the buyers having good credit. See the auction bond fraud for Muni Bonds across the land. See the naked shorting of USTreasury Bonds in order to supply operational funds that kept financial firms humming, made evident by Failures to Deliver. Not one prosecution has taken place against a Wall Street bank. The civil cases all result in a settlement that later proved to be bland. The license to fraud has become a mere cost of doing business for the large corporations, led by the big US banks.

The 0% usury cost is the business card to the national fascism umbilical cord to the USGovt from the banking sector. It enabled the development of the Syndicate, and its flourish. The economists have been reduced to carrying clipboards to track the fraud as they utter mindless drivel about the justification of Too Big To Fail. The slogans should be TOO BIG TO SAVE and SO BIG, SO CORRUPT. The extraordinary efforts and attempts to save the big US banks will be the precise policy that leads to systemic failure and the USTreasury Bond default, all in time. The corrupted financial markets are the province of the Syndicate in charge, which rules over the SEC, the CFTC, the FDIC, and the debt rating agencies. They also control the USCongress, painfully evident in the outcome of the Financial Regulatory Bill that enhanced their power. They rule from their exalted perch at the USDept Treasury, where Goldman Sachs has presided since 1995. They and the USFed have strangled the nation with a 0% usury noose.


The US economists and the US bank brain trust provide many lousy analysts. They are good propaganda artisans, a craft developed in the 1930 decade in a land not so far away. Their repeated lies are echoed by the obedient US press and financial networks. The current drivel they spew is that Gold is in a bubble. Nothing could be further from the truth, since the USTreasury Bond market is the global gigantic bubble. Gold cannot be in a bubble since gold is money. Money is never in a bubble, since, well, it is money. Gold might someday be subject to downdraft pressures, if and when the paper asset world is so incredibly depressed that the value of bonds goes below the cost of producing the embossed raised print colorful bond certificates. A precedent can be drawn from in the housing market, where in some areas the price of houses has gone 15% below construction costs. When USTBonds are valued less than their printing costs, let me know then and only then about a gold bubble. The US economists and the US bank brain trust are lousy analysts because they miss, overlook, and ignore the four primary driving forces behind the gold & silver bull markets:

1) When the price of money is well below the inflation rate, gold rises and silver soars

2) When government deficits go far beyond the ability of bond markets to finance, gold rises

3) The global monetary system has been exposed as faulty, supported by debt, so gold rises

4) No restructure or remedy is permitted, only gigantic bank welfare, so gold rises.

These are four principal foundations to the valuation of Gold within the fiat money system. The truth is that Gold is constant, and the USDollar and other paper instruments like assorted types of bonds vary in value relative to gold. The mindset of the US public and European also is so twisted that they believe Gold varies in price. It is fixed. The USDollar and various US$-based bonds are losing value so fast that Gold appears to be rising in a breakout in all major currencies (US$, Euro, Pound, Yen). The USDollar and USTreasurys are in a powerful bubble, at risk of puncture. That puncture is the USTreasury default, with the associated declaration that the USDollar is no longer valid legal tender to purchase imported products in the world market. Think of the USEconomy bidding up a currency in order to purchase crude oil. With each successive month, the USDollar would go lower in order to supply the crucial supply of oil to the USEconomy. The USDollar will someday not be legitimate to satisfy commercial trade contracts. That day will see the United States slide into the Third World. It is moving quickly in transition through the Second World with its tagline of Jobless Recovery.

The real price of money is somewhere around minus 7%. Calculate the price inflation as 8% by the Shadow Govt Statistics folks, up from a steady level a smidgeon lower for several months. The true CPI is rising. Subtract 8% from the cost of money at 1%, given generously, tied to the prevailing short-term USTBill yield. So the real price of money is big negative, like in the minus 7% range. Translated, it means generally that paper based financial assets (include housing) are losing 7% per year in value. Long ago, when mortgages dominated in the home valuation process, the home lost its status as a hard asset and became a financial asset adjunct perversion, a proxy. Translated, that means to borrow money and invest in hard assets, one should expect a positive 7% annual return, conservatively speaking. It pays to invest in Gold during such conditions. It always have been profitable to invest in Gold during such conditions. The US economists and the US bank brain trust consistently ignore this important point.

The spiraling USGovt deficits have become a regular fixture, with gaping shortfalls of $1.4 trillion each year. Remember in mid-2008 the nation was told that the $1.4 trillion deficit would be reduced to below $1 trillion easily in 2009. It was not, and repeated the $1.4 trillion. Remember in mid-2009 the nation was told that the previous two $1.4 trillion deficits would be reduced to below $1 trillion easily in 2010. It was not, and repeated the $1.4 trillion. Finally, the USGovt deficits in current projections are estimated to be well above $1 trillion, as reality has struck. The $1T deficits are a permanent fixture. Thus the Quantitative Easing #2 is in place, since the USTreasury does not want the shame from failed auctions to reflect badly on the USDollar or the other galaxy of US$-based paper assets. They masquerade as containing value, when they are largely trash items. They can no longer compete against Gold. If truth be known, Wall Street executives are trashing their corporations and buying gold in private accounts as counter-parties. They will someday dump their corporate losses on the USGovt and ride into the sunset zillionaires. Then comes the USTreasury default.

The global monetary system is crumbling, as all major currencies are mired in deep trouble, stuck in quicksand, pulled down with perennial deficits and extremely sluggish economies. The secret is out, the jig is up, that the major currencies are nothing more than denominated debt coupons. These arguments of a broken monetary system, the search for legitimate safe haven, the colossal aid packages for the banks that broke the system, the corruption within the big US banks (see mortgage bonds and home foreclosures), these factors have been thoroughly discussed in Jackass articles to date. But the topic of 0% usury cost is something that needs to be discussed more widely and fully. The 0% usury cost encourages a war of investment in tangibles led by gold & energy, of investment into tangibles and out of the bank-run financial centers. The fast rising price of gold & energy (silver too) are a vivid screaming report card of failure. Money in the form of gold represents money taken out of the corrupted banking system. Its value rises, or more accurately, the value of all else besides gold falls. Witness the climax of failure.

The fact that the big US banks are in no way even attempting to remedy, reform, and restructure the system is the additional jet assist to Gold & Silver. Any true restructure would begin with their liquidation as corporations, with fire sales of their nearly worthless assets rotting on their balance sheets. They would be forced to cede power and control of the USGovt and its Holy Grail, the USDollar Printing Pre$$. That event will come tragically only during a USTreasury default and assumption by the Receivership Tribunal, already formed. As more phony money is devoted to false fixes, more bank welfare, and wasted goony projects like Clunker Cars, Home Buyer Tax Credits, General Motors buyouts, Fannie Mae nationalization, FDIC home foreclosure processors, TARP Funds, and the many charades that make the USFed a virtual banking system, the Gold & Silver prices will seek their rightful value. Gold will move well past $2000 per ounce, and Silver will move well past $50 per ounce, before June 2012 as my forecast. Then they will double again when the USTreasury default goes face to face with a new global monetary system. The Boyz are soiling their pants with the runup in USTreasury Bond yields, a well-kept secret. So they are trying to paint the tape on the Gold price, trying to keep it down. It will not work. They cannot paint the Silver price tape at all, since it has great industrial demand. It is making new highs, trampling JPMorgan in the process, in a Silver Shetland Pony stampede. The Golden Stallion stampede comes soon enough.

The Lull Before The Storm: What’s Coming in 2011

Gonzalo Lira

This week – what with Christmas on one end and the new year’s celebration on the other, and everthing in between covered in snow – nothing much is gonna happen: It’s a week that’s about as dead as Dillinger. So I figured I should take stock of where we are – and more importantly, where we’re going.

To me, the biggest macro-economic story of 2010 was Europe: It’s falling apart, and there doesn’t seem to be anything that’s going to stop this collapse.

The second biggest macro-economic story of the year – though not by much – was the successful monetization of 75% of the U.S. Federal government deficit by Ben Bernanke and the Federal Reserve. I use the word “successful” in a morality-free, completely pragmatic sense: Bernanke achieved monetization with minimal market disruption. In fact, a lot of people would argue that QE-lite and QE-2 were not policies of debt monetization – that is how successful Bernanke has been. (Talk about “reality distortion field”! Steve Jobs ain’t got nuthin’ on Benny!)

This “success” has allowed the U.S. Federal government to continue to avoid making necessary, critical budgetary decisions – paradoxically accelerating the U.S.’s deteriorating fiscal situation.

The third biggest macro-economic story of 2010 has been the inexorable rise in commodity prices. Everyone’s been paying attention to silver and gold, but the real story has been industrial metals – especially copper – and agricultural commodities – especially grains – especially wheat – and corn, corn, corn!

To be sure, there were other important stories in 2010 – the Mortgage Mess, Wikileaks, Wayne Rooney. But these three issues – auguries of EMU collapse, successful Fed monetization, and commodity price rises – are the ones that mattered on a macro-economic level this past year.

In 2011, every other financial story will be either a cause or consequence of one of these three issues: Guaranteed.

Now then – to specifics:


Europe is in deep shit – there’s really no polite way to say it.

Back in the spring of 2010, Greece went down the tubes, as its sovereign debt collapsed in price, and its ability to borrow money from the open markets – and thereby continue to operate – for all intents and purposes ceased.

Then in November/December of 2010, the Irish sovereign debt also began to tumble, as it became increasingly clear that Ireland simply does not have the wherewithal to backstop its disproportionately large – and insolvent – banking sector. Angela Merkel’s less than clever words in an interview (to the effect that Irish debt holders might have to take a haircut) sparked a rise in Irish debt yields, squeezing Ireland’s ability to borrow fresh cash to keep its insolvent banks afloat – thereby creating the need for a rescue package from the IMF, the UK, the European Union, and the European Central Bank.

What was painfully apparent in 2010 was that the Eurozone and the European Union had no mechanism to handle a crisis in one of its member states. Nor is it moving forward to correct the single biggest weakness of the euro scheme – namely, the ability of each member state to issue its own debt.

In May of 2010 – over a decade since the introduction of the euro – the EU finally came up with a mechanism to salvage the broken economy of one of its member states, the European Financial Stability Facility (EFSF). Stability Facility: Even its very name sounds cartoonish and silly – which fits with the general cartoonishness of the European crisis response, first to Greece, then to Ireland.

The concept of the EFSF – at least in theory – is for the member states to contribute to a €440 billion fund. In reality, the EFSF has no money, but rather, it will issue debt. Therefore, what’s really happened in the case of Greece and Ireland is that their bad debts were taken over by the EFSF – so in a sense, no one has been bailed out: Rather, the bad debts have been transferred to the European Monetary Union as a whole.

This is the European model of bailouts: In exchange for handing over their fiscal sovereignty and having tough austerity measures put in place – but without harming a single hair on the head of a single sovereign bond holder – Greece and Ireland had their debts taken over by the EU. In other words, collectivising the bad debts, in exchange for tighter central control from Brussels.

Which is fine – for the smaller countries with their smaller economies, and their weaker political pull.

But what about a big country? What about a country like – oh, I dunno – Spain?

Possible EMU Collapse: What To Pay Attention To In 2011

After the Greek and Irish bailouts, it looks like Portugal and possibly Belgium are up next in this perverse game of musical chairs played to the tune of sovereign debt –

– but these smaller countries are dwarfed by Spain: Spain, as I argued here, is where the European game is really at.

As I pointed out, Spain is twice the size of Greece, Ireland and Portugal combined – Spain is roughly half the size of Germany – Spain has a fiscal deficit of over 11% of GDP for 2010, and a total debt of over 80% of GDP, data here (I am counting the accumulated debt of comunidades autónomas, which is so far 10.2% of GDP and steadily rising; data here) – Spain has an unemployment of over 20% –

– in short, Spain is trouble.

Not “Spain is in trouble” – that’s obvious, but that’s not my point: Spain is trouble. Trouble for the German banks that own so much of the Spanish debt. Trouble for Germany, which is propping up its insolvent banks (What, you think German politicians are any less craven than American politicians?). Spain is trouble for the European Union, for what a German banking crisis might mean for the EU as a whole and as an institution.

More than anything, Spain is trouble for the European Financial Stability Facility, because Spain is too big to be saved – and there’s really no way to finesse that hard fact.

You know what a lynchpin is? Actually, I didn’t – I had to look it up. According to the dictionary, a lynchpin is “a pin passed through the end of an axle to keep the wheel in position”. Hence the figure of speech: Without a lynchpin, the wheel comes off, and the whole vehicle crashes.

In the case of Europe, the lynchpin can come off awfully fast – think of Ireland. A few impolitic words from Angela Merkel, and suddenly the Irish bond market panics. Suddenly, Ireland is teetering on the brink of insolvency, unable to meet its funding needs. And that was Ireland – all due respect to those wonderful people, but we’re talking a GDP of a paltry $227 billion. Ben Bernanke takes a morning dump bigger than that. What’s Ireland’s $227 billion when compared to Spain’s economy of $1.5 trillion?


During 2011, Spain will be the flash-point – so you want to keep one eye on Spanish sovereign bond spreads, and one eye on Brussels:

When Spanish debt spreads over German bunds creep into the 3.5% to 4% range, you know trouble is coming. And when the Spanish spread decisively crosses 4.25% over the German 10-year, then you know trouble’s arrived – and it won’t be leaving town ’til it’s had its chance to run riot in the streets.

How the EU and the ECB handle an eventual Spanish sovereign debt crisis will determine the very future of the European Union.

Because there will be a Spanish sovereign debt crisis – it’s inevitable. The Spanish balance sheet is not improving fast enough, even with so-called “austerity” measures, because even though the Spanish government might be cutting spending, the comunidades autónomas – roughly analogous to states or regions – are expanding their budgets in order to take up the slack, and thereby increasing the Spanish deficit. Don’t believe me? Check the figures I just cited.

So when Spain goes into crisis – which should take place no later than August 2011, and perhaps as early as this coming March – the European Union’s collective and institutional reaction to this crisis event will determine whether a smaller, healthier European Monetary Union continues to exist, or whether the whole concept of EMU is ripped to shreds by events.

If the EU and the ECB are clever, and brave, and humble in the face of failure, then they’ll expel Greece, Ireland, Portugal, Spain and Italy from the European Monetary Union. The euro will remain the currency of the stronger economies – France, Holland, Germany – while the weaker economies will go back to their original currencies, and immediately devalue so as to kickstart their economies.

If, however, the European Union and European Central Bank leadership proves to be stupid, cowardly, and arrogant – as is very likely, considering their confused, self-defeating actions and reactions to the Greek and Irish crises – then there will be some sort of European-wide convulsion, when the bond markets panic, and leave Spain locked out of any funding.

This is the key event of 2011: Whether the European Monetary Union survives. Unless Brussels gets its collective shit together and realizes it has to cut the weaker economies loose from the euro, odds are high the euro goes the way of the dodo.

The U.S. Fiscal Situation – Local, State and Federal

There is a limit to sympathy: You can feel sorry for someone – but only up to a point. Insofar as the United States’ fiscal situation is concerned, that point has been reached, at least for me: I can no longer feel sorry for the American people.

Americans want more services and entitlements, but with less taxes – and then they’re all surprised when their local, state and Federal governments cross the edge of insolvency, and into the nightmare land of feverishly staving off bankruptcy.

During 2010, the Federal government debt finally crossed the 100% of GDP mark – and continued rising non-stop. Actually, the debt’s growth accelerated. Why? Because the Bush tax cuts of 2001 – implemented when there was an expectation of surplus, with clear sunset provisions, and no massive war expenditures – were extended by the mindless Republican Congress and the spineless President, Barack Obama.

So the U.S. Federal government will continue to add to the debt, at the rate of 10% per year for 2011, 2012, 2013 and 2014, according to the CBO.

Some might argue with the 2013 and 2014 extrapolations – okay, fine, I’ll concede them: But that still leaves the U.S. Federal government with a debt burden of 120% of GDP by 2012 – those are Greek levels of debt. And even if by some miracle tax receipts increase after 2012, so that the deficits in 2013 and 2014 are not 10% of GDP, what will they be? 7% of GDP? Maybe even 5% of GDP? Whoop-dee-fucking-doo – so total debt by 2014 will be only 130% of GDP, instead of 140%.

And that’s not counting the State and Local governments.

In late 2010, we finally started to notice something which has been festering for years, like one of those yucky worms that winds up eating your brains and driving you mad: The financial condition of the U.S. States and municipalities – they’re bankrupt.

For fiscal year 2010, the states’ combined budget shortfall is $191 billion. Of that figure, $68 billion is offset by the Recovery Act – Obama’s stimulus. Currently, the 2011 combined deficit of the States will be in the neighborhood of $160 billion – but that doesn’t seem credible, considering the ongoing unemployment. Regardless, $59 billion of those will be offset by the Recovery Act – which still leaves at least $100 billion up in the air. (Source for figures is here.)

However you look at it, the States have a huge collective hole in their budgets. And this hole is going to get worse, before it gets any better – just like the Federal government’s massive yearly deficit.

Which brings me to Federal Reserve policy in 2010 – specifically the announcement and implementation of further rounds of “Quantitative Easing”.

Call it QE, call it “liquidity injections”, call it “interest rate stabilization”, call it “Fed balance sheet expansion”, call it “monetary accomodation” – whatever clever name you give it, it’s basically money printing, plain and simple: The Federal Reserve “implements” QE by simply creating money out of thin air, then going out and buying bonds with that new money. Actually, it’s even better than printing money – no bothers with printing presses and such.

There were two rounds of QE in 2010: QE-lite in the early summer, whereby the Fed reinvested the excedent of it Mortgage Backed Security holdings into Treasury bonds, which will total between $200 and $300 billion between August 2010 and August 2011; and QE-2, whereby the Fed began purchasing Treasuries directly, in $75 billion monthly increments over the eight months between November 2010 and June 2011, Benny and the Fed reserving for themselves the right to continue – or expand – their Treasury bond purchases as the drones as the Eccles Building see fit.

Now, why did Ben Bernanke and His Federal Reserve Fools implement QE-lite and Quantitative Easing 2? The (mainstream) answer is, As a way to prop up the U.S. economy by keeping interest rates low via liquidity. The (mainstream) reasoning is, By keeping interest rates low, Benny and the Fed want to encourage borrowing, and thereby reactivate the economy. Which is fine, as analyses go.

But let’s ask a different question – an It’s a Wonderful Life counterfactual history question:

If Benny and the Fed had not been there to buy up Treasury bonds via QE-lite and QE-2, what would the U.S. Treasury Department have had to do, in order to fund the Federal government?

In other words, Would the Federal government have been able to finance itself without Federal Reserve purchases? Without QE-lite and QE-2?

It all depends on the numbers: What’s the Treasury shortfall, and what’s the size of QE-lite and QE-2.

Well – and this is just back-of-the-envelope numbers – the Federal government deficit is about $1.3 trillion. Meanwhile, between August 2010 to August 2011, QE-lite ($200 to $300 billion) and QE-2 ($800 billion) will add up to at least $1 trillion in Treasury bond purchases by the Federal Reserve.

So . . . a $1.3 trillion shortfall . . . and $1 trillion in money printing . . .

Now you get the picture – in 2010, the Federal Reserve successfully began monetizing over 75% of the U.S. Federal government’s yearly deficit.

Not only that, they did it with minimal market disruption – and in the case of the equities markets, Fed monetization actually improved those markets: Just like really expensive make-up applied to a dead guy, Bernanke’s monetization gave a false sense of corporate health and vigor to the stock market.

Bernanke’s successful monetization of the bulk of the U.S. Federal government deficit in 2010 was not a one-off: It will continue unabated for the foreseeable future – horrible public policy tends to follow Newton’s laws of motion.
That was the story of America’s finances in 2010: The United States officially became a Banana Republic – with nukes.

American Insolvency, and The Morphine of QE: What To Pay Attention To In 2011

The upshot of the Fed’s successful monetization has meant that politicians on Capitol Hill and Pennsylvania Avenue have not had to make any real budget decisions: Because of Bernanke’s “success” with deficit monetization, he has created the conditions whereby the American political leadership can irresponsibly postpone the fiscal Day of Reckoning.

This will have the pernicious effect of unleashing positively huge Federal government spending during 2011.

Look at the evidence: The budgetary questions in Washington are not either/or – they are both/and: Stimulus spending and Bush tax cut extensions and never-ending wars and health care reform and the creation of a police-state. The clowns in Washington have been able to eat their cake and have it too, with nary a thought as to cutting spending.

Ben Bernanke’s successful monetization of 75% of the new Treasury debt issuance is the direct cause of this policy mentality.

It’ll only be a matter of time before the bankrupt States take advantage of this both/and mentality – and in no time at all, the political pressure from the States to have the Federal government bail them out will become an overwhelming clamor: Especially as pensions – and therefore pensioners, who always vote – become increasingly affected.

Therefore – as a direct byproduct of Bernanke’s “successful” monetization of the U.S. Federal deficit, and the resultant lack of need on the part of the political class to make true budgetary decisions – I am confident in predicting that in 2011, there will be another round of “stimulus”.

Don’t act so surprised: The State budget bailout package will be a “little” stimulus in the $400 to $500 billion range – but it will be explained away as being both “necessary” and “targeted”, with the explicit aim of propping up the bankrupt States and municipalities. This “targetting” will make it politically popular, and therefore insure its passage.

Now, the Fed’s monetization of the deficit should have some incidence on the Treasury bond market – shouldn’t it?

Here – I confess – I’m at a bit of a loss:

On the one hand, Treasury bond yields ought to rise, as the Federal government continues to spend like there’s no tomorrow, and slowly but inexorably positions itself to take over State and municipal liabilities, especially pension liabilities (which is what’s really killing the State balance sheets).

On the other hand, since the Federal Reserve is the buyer of 75% of the debt the Treasury Department issues, the Fed ought to be able to squeeze yields whichever way it wants to – which is exactly what it seems to have done: During 2010, the 10-year Treasury bond yield fluctuated between 2.41% (in October) and 4.01% (in April); today as I write it’s at 3.50% even. (Source is here.)

This would seem to prove that the Fed has the yield curve well in hand – therefore, if this really is the case, then the Treasury bond market is useless as a sign of anything. Just like the equities market, Treasuries are a rigged game that signify nothing.

What asset class is reacting more or less rationally to what has been going on in Europe and the United States? Commodities.


Commodities rose drastically all throughout 2010: Every single commodity class, every single one of them rising by double digit percentage points – at least.

You can talk to me about wheat rising because of wildfires in Russia, oil rising because of the BP spill in the Gulf of Mexico, copper rising because of the trapped miners in Chile, silver rising because JP Morgan tried to do like the Hunt brothers, gold rising because a lot of Chinese want gold for their teeth fillings instead of porcelain, corn rising because Martha Stewart and Nigella Lawson simultaneously declared it their favorite ingredient –

– or I could argue that commodities of all classes are rising because the markets are afraid of Treasury bond weakness and continued irresponsible monetary policy, so they’re looking for a safe haven to replace Treasuries.

Occam’s Razor teaches us to always pick the simpler explanation. Commodities of all classes have been steadily rising – is it because a whole host of various causes have led these myriad commodities all to rise?

Or is it because a single common cause is driving them all up?

Now, I think that commodities are rising because of market fear of the U.S. fiscal. I can argue that position from the commodities’ side of the equation – no sweat. But I just can’t prove my case when I cross over to the Treasuries’ side.

I can’t prove it because there has not been the movement in Treasury bonds which would signal that that is the case. I could point to Treasury yields rising 100 basis points since the October – but that’s a weak-ass evidence, even if you deign to call it “evidence”. A decisive break-out in yields above 4% on the 10-year over the next two-to-three months – that would be sort of compelling. But a drift up from 2.5% to 3.5% at the end of the year? That’s nothing.

My own thinking is, the reason there hasn’t been a drastic, unequivocal fall in Treasury bond prices is because of the aforementioned Fed grip on yields: It is neither the Fed’s intent nor in its interest to have Treasury bond yields widen. What with a 75% market position in new debt issuance, it ought to be a snap for Benny and the Fed to keep yields low.

Therefore, I think that market participants are going into commodities for safe haven, even as they are exiting Treasuries. I do not think there is a correlation between commodities’ rise and equities’ rise: I think equities are the speculative play, with the market riding the bubble Bernanke is blowing, whereas commodities are where the market is going as the safe haven play. Strange but true – all because of Bernanke’s manipulation of the Treasury yield, and cornering of the Treasury market.

I think this is happening – but I hate to rest my argument on such an inference, a teleological inference: I sound like a fucking conspiracy theory windbag – “The Fed is doing it! The Fed is manipulating T-bond prices! The Fed is behind The Conspiracy!” Fuck that bullshit – but then again, that’s what it looks like to me: The Fed manipulating the Treasury bond yields to the point where they sit on their hind legs and beg for a crunchy cookie.

Ultimately, for this discussion, it doesn’t really matter why commodities have been implacably rising over the last 12 to 18 months – the fact is, they have been rising. So let’s pay attention to that.

Commodity Price Rise: What To Pay Attention To In 2011

I know I have the reputation for being the crazed hyperinflationista – but you don’t have to buy any of my dollar-hyperinflation arguments to acknowledge the fact that, a., commodity prices have experienced a sustained and enormous rise in their prices, and b., this sustained rise in the prices of commodities will inevitably hit consumers at all levels of the economy.

Therefore, I would expect food, heating oil and gas prices to rise considerably over the winter of 2011 – that is, now. This will be a knee to the ‘nads of the American economy – indeed, to the world economies.

There’s really not much more to say, about the issue: A sharp rise in consumer spending on essentials would shove the American and world economies firmly back into recession, this time potentially with negative growth.

What happens after that? It depends on the fools at the helm of the good ship S.S. Depression II.

Bottom Line in 2011

My thinking is, the EMU situation will come to a head this year, likely before the summer, and it will be because of Spain.

As to commodities, their strong, steady rise in price will reach the wider economy starting this winter, and shove it down into a recession, likely deeper than the last one. (Possibly – even likely – this slow-down will trigger the Spanish crisis.)

The wild card in this trio is Bernanke and the Fed: Extend QE-2 indefinitely, as they’ve hinted, or grow some balls and force the Congress, the White House and the political establishment to get serious and cut spending? No surprise, my money is the Eunuchs of the Eccles Building extend QE-2, and continue with their 75% monetization of new Treasury issuance.

So bottom line: It’s looking like 2011 is gonna suck. But hey! At least two of these three story-lines are gonna come to their respective climaxes this year – so 2011 might well suck, but at least it’ll be exciting!

(I take my cheer where I can find it.)