Chicago Gold and Silver Investing Fan Blog

The Federal Reserve Is Paying Banks NOT To Lend 1.8 Trillion Dollars To The American People

From Michael Snyder of The Economic Collapse blog,

Did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us?  We were always told that the goal of quantitative easing was to "help the economy", but the truth is that the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system.  Instead, most of it is sitting at the Fed slowly earning interest for the bankers.  Back in October 2008, just as the last financial crisis was starting, Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve would start paying interest on the reserves that banks keep at the Fed.  This caused an absolute explosion in the size of these reserves.  Back in 2008, U.S. banks had less than 2 billion dollars of excess reserves parked at the Fed.  Today, they have more than 1.8 trillion.  In less than five years, the pile of excess reserves has gotten nearly 1,000 times larger.  This is utter insanity, and it will have very serious consequences down the road.

Posted below is a chart that shows the explosive growth of these excess reserves in recent years...more...

ZIRP Manipulation Failing

The Fed has manipulated interests rates so that it is artificially lower than the market should make it. This is called the Fed's Zero Interest Rate Policy or ZIRP. The thinking behind ZIRP is to make interest rates so low as to encourage people to go out of cash and into stocks, housing, car loans, credit cards, or anywhere else where they spend money. When they people put money into other assets, those assets go up in value. People's stock portfolio and houses go up in value. This gives people the perception that they are wealthier. When they feel that way, they tend to spend more money and this stimulates the economy. That is the theory anyways.

The problem is, is that real wealth is not created by manipulation. And this type of manipulation is highly flawed and eventually fails.  We are already seeing signs of the bubble deflating. Mortgage applications have tumbled and today the stock market has crashed. Stocks and housing are the assets that most of the middle class holds. If those two asset classes crash in price, people will suddenly feel poorer and thus hold more of their money in cash nad not spend it.

Believe me the Fed is deathly afraid of this from happening. They call it the deflationary death spiral. Look for them to take countermesures such as pumping more money into the system, more masssive governemnet spending programs, more capital controls. Anything to prevent the deflationary death cycle.

But I'm not worried. Their attempts will fail again. Those who are smart enough to see this will educate themselves and take the necessary action to go out of this much better.

Numbers Show Gold is Not in a Bubble

The recent drastic drop in the price of gold had some calling that the gold bubble popped. However, the numbers do not indicate that.

The chart above shows that only 1% of all financial assets are in gold. Whereas in the 1970's when a real gold bubble hit, 26% of financial assets was in gold. This tells me that gold is not in a bubble. If anything, the price of gold still has a ways to go UP.

Click for more charts and analysis.

Kyle Bass on Japan Debt Bomb

Kyle Bass made a lot of money in the economic meltdown of 2008. He feels the next economy to go will be Japan. For more on his take watch his CNBC video above.

Bass says that Japan's debt is 24 times central governement tax revenue. It would be like someone earning $50,000 a year with a debt of 1.2 million. Think about that if a person earned $50,000 a year in annual income, the interest on the debt alone assuming a very low interest rate of 2% would be $24,000 a year or almost half of his annual income. That is just interest payments alone on debt. How will he pay his other obligations?

Bass feel when you get into that type of insolvency, there is nothing you can do to help especially printing more money.

When you think of a crisis 99% of the people get it wrong.

When questioned why Japan's economy has not blown up yet despite him being able to predict it, he said that no one can predict with precision exaclty when the meltdown will occur. All the component are in place for all of sudden this will break. Interest rates will be lowest as soon as it breaks. The clock has started when the belief in this untenable situation.

Japan spends 25% of revenue on interest, 50% of revenue on debt service. Any 1% increase of rates cost them an additional 25% of revenue. He feels the Japanese government (and I feel the US government) has been dishonest with its constituents.

The situation is so bad in Japan in the Yen, that he recommends anyone that holds the Yen to spend it and buy a productive Western asset. As a side note, this is something to watch. When the Japanese flee their own Yen and start buying US dollars, US companies, Western real estate, or other non-Japanese assets then you know the meltdown has begun in Japan. This could also include precious metals like gold and silver. When the Japanese start buying in droves gold and silver, you will see the price rise up dramatically.

The likely scenario in Japan is that the elites, wealthy individuals, and others holding a lot of Yen will realize this is an untenable situation. When that happens, they will flee the Yen and the Yen will collapse.

The problem is that before the bomb detonates, things will seem alright. Interest rates will probably be the lowest, the Yen will be the strongest, and more. Then, one day it will just collapse and the run away from the Yen will appear.

Another issue is the relationship between China and Japan. There is a rise of nationalism in those countries and they really do not like each other. Yet, 20% of Japanese exports go to China. That's 340 Billion dollars. If Chinese and Japanese relationships worsen, that will be terrible economically for Japan.

As for the US, he still invests some of his money in the US. He says he is long on anythingwi th real estate. He feels that this is about the time for housing to turn flat and then turn.

In China, he has no positions and he does not know what to believe. He is concerned about non performing loans and other issues. He feels China has set iteself up for a problem down the road. We are spending 10-11% of central government revenue on interest.

Another Kyle Bass interview

Detlev Schlichter

Famed Austrian economist Detlev Schlichter. If you want an Austrian economic, British and German perpective on the current monetary meltdown, you gotta read Schlichter.

The more I research, the more I am certain that this world is going to go through a monetary meltdown. Few have an expert understanding of our situation. One man that seems to get it is Detlev Schlichter.

Here is Schlichters biography from his website:

Detlev S. Schlichter is an Austrian School economist and author. His book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown was published by John Wiley & Sons in September 2011. Paper Money Collapse was named winner of the getAbstract 2012 International Book Award.

Mr. Schlichter had a 19-year career in international financial markets, predominantly in investment management. He worked at J.P. Morgan & Co. (1990-1998), Merrill Lynch Investment Managers (1998-2001), and Western Asset Management Co. (2001-2009). During his career Mr. Schlichter has overseen billions in assets under management for institutional clients from around the world. He left the industry in 2009 to focus exclusively on his first book, Paper Money Collapse.

Mr. Schlichter has appeared as a commentator on television and radio (Sky News, Reuters TV, Russia Today, BBC Radio 4 Analysis and BBC Radio 4′s Start The Week) and his editorials have been published by The Wall Street Journal, City A.M., TheStreet.com and mises.org. He is a senior fellow at the Cobden Centre, London, a free-market think tank devoted to issues of money and banking.

Mr. Schlichter holds a degree in economics (Diplom-Ökonom) from Ruhr-Universität Bochum, Germany. He lives with his family in London.

Ageing Japan Won't Be Able to Face It's Obligations

Adult Diaper fashion show in Japan.

There were more adult diapers sold in Japan than baby diapers. This is a huge sign that the adult populations in Japan is greatly more than the children population.

Japan is obligated to pay for all of these old people. There are not enough young people to pay for them. What will happen?

The Japanese government is so desparate to extract more funs from its citizens that it is using the popular girl band akb48 as marketing to sell more Japanese bonds. akb48 is an all -girl band in Japan that likes to dress in school girl outfits. There is a strange obsession in Japanese males for this type of look.

The analysis is undisputed, Japan is in deep financial trouble and will have to go into some kind of sovereign default. We are going to enter a phase of sovereign restructuring of debts. What it means to all of us is how do we figure out how to not lose money when all of this sovereign defaults happen.

What will put Japan over the edge? I feel when Europe goes under, Japan will follow.

The Next Collapse

This Man Made Billions on the Sub-Mortgage Crisis...What Does He Think Will Collapse Next


Kyle Bass, founder of Hedge Fund Hayman Capital.(KB blog photo)

Kyle Bass knows a thing or two about profiting from a collapse. After all he made over $590 million after short selling the 2008 sub-prime mortgage bond market.

So what is Bass doing now and what does he feel will fall next?

According to his blog: " In 2011, Bass initiated a huge position in Greek sovereign debt through CDSs. Media reports were that he could profit up to 650 times his investment should Greece default on its debt obligations."

That's right, Bass could profit uptp 650 times his investment should Greece default on its debt obligations - which seems more likely every day.

Here is Bass himself on the state of this very difficult investing situation:

 

 

Low Interest Rates Raise Prices

The above chart shows US interest rates for a 3 month Treaury Bill. As you can see, the trend since 1982 has been towards lower interest rates. It has gotten to the point where today, interest rates are near zero.

The Federal Reserve has a large say in the interest rate percentage. Their thinking is that if interest rates are low it will be more attractive for a consumer to use credit to purchase things like houses, cars, electronics, etc. Thus, with more things being spent, it will stimulate the economy and cause even more spending.

It's not that simple. With more people having access to credit, it artifificially puts the demand higher on the things that the credit purchases. So with an artificially high demand (and supply remaining constant) it costs more to buy a house, car companies can charge more for a new car, and electronics are higher than they normally would be.

Manipulation of the free market shows time and again that it creates artificial bubbles, raises prices for consumers, and damages the economy. By they way, this type of manipulation raises commodity prices such as gold and silver.

The Derivatives Time Bomb

The above chart is a simpplistic view that shows the rise of derivatives over the years. As you can see since about 2005 the amount of derivatives (a contract) have risen dramatically.

"The reason we have all of these derivatives because you can control markets quite effectively, until you can’t.  At that point the price of gold is going to go crazy.  Thing about the fact that the shadow banking system is $67 trillion, and the leverage that creates in the system.  I just think that the ‘end’ of this is going to be horrific.” - John Embry

Embry points out that derivatives are uses as a way to effectively control market. But at some point, even derivatives won't be able to control the market. At that point the sand castle is going to tumble in one big horrific crash.

 

More Texas Secession Talks

More than 25,000 people have already signed the online petition at the White Hose website calling for Texas to peacefully secede.

I feel this does not mean much now. However, when the economy contiues to tank, when we hit higher unemployment, have higher taxes, and go into a period of high inflation, there will be more turmoil. This is just an initial sign.

Conversation are already happening. As the economy get's worse things will start to simmer. This time it won't be a Tea Party uprising, it will be some other type of uprising. I have not figured it out yet. But, something will surface.

The movement does not necessesarily have to be a secessionist one, nor does it have to come from the right. It could very well come from the left. Teachers recently held a Marxist conference at Northwestern University.