The graphs shown in "Our prosperity is owed back plus interest" say it all, really. That plus Mike Maloney's comment that
"We're in this long term cycle, and there has to be what's called a credit revulsion, where people just WILL not take on any more credit."
and
"The total currency supply is total outstanding credit, which is up in the $50 trillions. So $825 billion is nothing. You're only talking about a few percent of the currency supply that Ben Bernanke has direct control over. The rest of it, all the Federal Reserve can do is try and influence it; but to influence it, he's got to make us feel good."
Robert Prechter was the first person to point out the importance of the deflationary fall in credit outstanding and he is the pre-eminent theorist on social mood driving the markets. The latter, he maintains cannot be driven or changed by endogenous means. There are no feedback loops. The mood is the mood - it is cyclic and its manifestation is best seen in financial markets, particularly the largest markets like the Dow30 and the S&P 500.
Yes, it is astonishing that Bernanke and Geithner and their supporters can still have the arrogance to believe that they can really affect the eventual outcome. But this has been seen throughout history by the "potent directors" as Prechter ironically calls them. Examined through the lens of Elliott Wave Theory and Prechter's other area of brilliant research, socionomics, the extraordinary behaviour of markets in recent years is pointing to a top of very major degree - grand super cycle in Elliott wave theory.
The behaviour of Fed and Treasury officials is evidence of an extraordinary complacency (we kow what we are doing/we are right) as are the extreme low cash levels held by mutual funds (they are fully invested in the markets). But Bernanke and co represent the elites - the tiny proportion of people who have done so magnificently well out of the Fed inspired Ponzi scheme - they are somewhat insulated from the the mass mood of people across the world who are steadily tightening their belts, paying off borrowings, reducing outstanding credit and saving again. The equity and commodity markets will reflect that in time. They are certainly lagging - most technical measures point to tired markets with volumes falling on upturns and increasing on downturns.
Their shenanigans with put selling is just another version of what AIG was doing selling more or less naked credit default swops. When the tide goes out and it will, they will be found wanting. In any case, the Fed is no longer unanimous in its outlook - the first stirring of disent have been appearing since January. The mood is descending on that institution too. As for their actions being illegal, they are hardly setting a precedent. At least as far as the US government is concerned, which is quite unconcerned about the legalities of invading other countries.
Some commentary likes to see evidence of conspiracy in the PIMCO pull out of Treasuries. I take it at face value - it is a large bet and the risk is that the Treasury market could be driven up again in the flight to safety. I suspect, though, that the market will gap down and large amounts of wealth will simply disappear, particularly because the markets have been driven by leverage. The large banks and hedge funds are up to their necks in leverage. There will not be the same value amount going into treasuries as disappears in value from equities and commodities as they are sold. The value never really existed in the first place - leverage is, by definition, money from thin air.
Gold and silver will be sold to pay off margin calls. I am sure Bill Goss will not be jumping out of the fat into the frying pan. The US credit market will not disappear but it will fall in value but not evenly. The corporate and municipal markets will be trashed but US governement debt will survive - although I would not want any but the shortest time frame to maturity. The dollar will survive. What would replace it? Beads or shells? Gold? There is not enough to go round.Buying gold is a symptom of the complacent mindset that so permeates the world. Nobody really believes that the world financial system can break down, that values of most things could be reduced by 90%. In such a situation, what the hell is the use of gold? You would be better off putting a solar hot water system on your roof, doing anything to cut your costs, stock-piling fuel, stock-piling dried foodstuffs, imagining how bad things could get and taking measures to protect yourself. Imagining how bad things can get is so totally against the gung ho American mindset. Think positive! Find the solution! I think those exclamations are still valid but within the constraint of recognising that there is no real solution that is not painful. There is almost certain to be civil unrest. Thank goodness I live in Australia. At least we are not armed to the teeth. Aussies have a way of behaving under duress and extreme adversity which gives me lots of hope.
The dollar's real value will return as the deflation lowers values to sensible and most likely less than sensible levels. The deflation is real - outstanding credit is falling for the first time in 80 years. I cannot see a useful alternative to paper money although, at some point, it needs to be backed by something to prevent the madness breaking out again. We may well be reduced to barter for a while. Whether gold will be much use in barter compared to a sack of potatoes or a tin of petrol. Well, we will find out.
Dr. Steve Keen, the ever-insightful Australian economist who runs the Debt Deflation website, wrote an excellent piece in March of 2009 entitled Bailing out the Titanic with a Thimble. It essentially argued that the U.S. government's fiscal stimulus and the Fed's liquidity injections would be wholly insufficient to restart growth in the private credit markets, and so far this analysis has been spot on.
Ilargi and Stoneleigh, who run The Automatic Earth, have also been preaching this same message for several years now, and have repeatedly stated that the U.S. dollar and Treasury market would be the beneficiaries of the debt deflationary trend. It was most recently repeated in Ilargi's latest post, Our Prosperity is Owed Back Plus Interest.
Yet, since late 2010, it would appear on the surface that long-term Treasury rates have been inching upwards and that commodity prices have been going through the roof. This superficial trend has led many commentators to "double down" on their predictions of a Treasury market collapse and imminent hyperinflation of the dollar. [/qoute]
Full piece - http://theautomaticearth.blogspot.com/2011/04/april-17-2011-bailing-out-...