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It should now be evident that America’s foreign policy is to an extent being driven by our banking mess. Again and again, we see Washington, including Wall Street’s handmaiden, the Fed, exporting monetary chaos implicitely in order to weaken the status of potentially competing reserve currencies:
- Wall Street sent a tsunami of bad AAA-rated mortgage debt to Europe, much to Germany, the locus of power for the Euro (and again, implicit admission of guilt is seen in the apparent fronting of billions of bailout dollars to the European banks by the Fed after the crisis);
- Washington has apparently fomented or supported a coup in the Ukraine that increases the likelihood of war in Europe dramatically therefore sending the gigantic pools of liquid financial assets in the world scurrying into the greenback and US Treasuries, which the Chinese have stopped gobbling up;
- the other factor is that the military-industrial complex needs war to get its funding, and when drone-bombing rag-heads can’t provoke a serious attack, destabilizing a former Eastern bloc nation and provoking a somewhat justifiably paranoid Russian leader into military action guarantees at least a shot in the arm of crisis funding.
Russia has repeatedly stated over the past decades that an EU move on the Ukraine crosses a red line. The EU ignored the warning, and with the US’s help and the ire of Ukrainians sick of a corrupt government crossed Putin’s red line. What the Ukrainians want is democracy and relief from their corrupt plutocrats (see previous post’s article by Paul Craig Roberts).
The US has no compelling strategic interest in the Ukraine, or in the Crimea remaining part of the Ukraine. Yes, the Ukraine has been looted by its oligarchs, just as Russia was, and just as the US is being looted by its oligarchs right now; incomes of a majority of American households are falling so the banks can collect on bad debts. It would be nice for people everywhere if they could break the grip of the plutocrats over their livelihoods. In the Ukraine, to substitute debt servitude to Western banks for the domination of the oligarchs would only accelerate the collapse of the EU. And it’s not clear the EU, if it offers help, won’t be ripped off by the oligarchs as well. The new government in the Ukraine has already increased the power of the oligarchs by giving them provinces to rule, so it’s not clear the Western “rescuers” are even able to help solve the fundamental problem at all, and might end up losing their shirts again, as they have in Greece, Portugal, et al.
Until democratic governments around the world become strong enough to counteract the power of the plutocratsby taxing them, both their income and their wealth (as Sweden does) the revolving looting of sovereign governments and demolition of middle classes by the plutocrats and their corporations will continue.
A couple of posts ago I said the scariest thing I’ve heard recently was Catherine Anne Fitts saying what the world needs now is a global debt for equity swap. I should say I generally like Ms. Fitts’ analysis and suspect she may even have misspoken when she made this comment. Such a move would concentrate ownership of the world’s assets sufficiently to create even more of a Plantation Earth than we have currently.
She identified the problem, but not the solution. What the world needs now is a global jubilee, debt forgiveness. The debt that the Fed is shoving under the carpet via QE is what is known in banking circles as “bad debt.” It is loans that never should have been made because they will never be repaid. In honest not crony capitalism such debts come out of the profits (as losses) of the banks that made them. In crony capitalism, with a central bank controlled by the banks, such debts are “paid back” by being monetized and put on the backs of the taxpayers either directly or through inflation.
The austerity programs Europe has put in place so that Wall Street and European banks can be paid back bad debts have destroyed more than one economy and more are probably yet to fall. (The idea promoted ten plus years ago of “convergence” of interest rates in the EU between periphery and core caused me to gag at the time.) Debt slavery to Western banks is not the answer. (China is apparently making similar mistakes; it will be interesting to see what they do with the bad debt. I suspect their strong central government will tell the bankers to go stuff it.) Ms. Fitts suggests that sooner or later the plutocrats will destroy the banks in order to buy them cheap and collect the rents themselves, canny suggestion indeed.
Chaos in the world = a strong dollar. Until it doesn’t. Chaos has a way of being unpredictable.
Capitalism has killed democracy. “Free” markets dominated by monopolies and oligopolies are not what Adam Smith had in mind. It’s time for democracy to be reborn. There are degrees of economic inequality that are simply immoral and destructive and humankind has the right to reject them. When the top 85 families own as much as the bottom 3.5 billion people, as recently reported, we have reached such a point.
Economists at Citigroup Inc. and Nomura International Plc say the strongest growth since 2007 will prompt the U.K. to lift its benchmark from 0.5 percent as soon as this year. Money-market futures show an increase in early 2015. That’s at least three months before the contracts indicate Federal Reserve Chairman Janet Yellenwill raise the target for the federal funds rate. European Central Bank PresidentMario Draghi and Bank of JapanGovernor Haruhiko Kuroda are forecast to maintain or even ease monetary policy.
“Carney and BOE officials will be looking at the domestic recovery, and if that is strong enough, then they will feel comfortable increasing rates before the Fed,” said Jonathan Ashworth, an economist at Morgan Stanley in London and former U.K. Treasury official. “Tightening by the major developed central banks will be gradual, and they will be aware of what everyone else is doing.”
The BOE will lift rates in the second quarter of 2015 and the Fed will increase in 2016, Morgan Stanley predicts.
This wouldn’t be the first time Carney, 48, has broken from the pack. As governor of the Bank of Canada, he abandoned a “conditional commitment” to keep rates unchanged until July 2010, citing faster-than-expected growth and inflation. He delivered a rate increase in June of that year, putting him ahead of other Group of Seven central bankers.
The risk of being first this time is that the divergence pushes up the U.K.’s currency and bond yields, threatening to choke off its economic upswing.
Acting before the Fed — now led by Yellen, who was sworn in today as chairman — “would require a very big stomach for having sterling rise,” former BOE policy maker Adam Posen said in a Jan. 8 interview.
While all economists surveyed by Bloomberg News predict BOE policy makers will leave their official bank rate unchanged when they meet Feb. 6, Carney may seek to quell expectations for increases when he releases new economic predictions Feb. 12.
Investors pushed up Britain’s borrowing costs as consumer spending powered the economy back from recession. The pound has already climbed to the highest level in more than 2 1/2 years against the dollar, and the extra yield investors demand to hold 10-year U.K. government bonds over similar maturity German bunds widened to 1.13 percentage points last month, the most since 2005 based on closing prices. Both may undermine growth.
“There’s no immediate need” to raise rates, Carney said on Jan. 25 at the annual meeting of theWorld Economic Forum in Davos, Switzerland. He added that any eventual increases will be gradual.
With Britain expanding 1.9 percent in 2013, matching U.S. growth, money managers are switching their focus to when key central banks will start tightening policy.
The Fed, which has a dual mandate of price stability and full employment, said last week it probably will keep its target rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent.
Joblessness dropped to 6.7 percent in December from 7 percent the previous month; part of the reason for the decline is Americans who are giving up on finding work. Prices rose at a 1.1 percent annual pace in December, according to the Fed’s preferred inflation gauge.
The BOE focuses on achieving price stability in the medium term by meeting its 2 percent inflation goal. Last month was the first time since November 2009 (UKRPCJYR) that price growth cooled to that level after hitting 5.2 percent in September 2011.
Weak inflation prompted the ECB to cut its benchmark to 0.25 percent in November, and Draghi said in Davos the central bank would be willing to act against deflation or unwarranted tightening in short-term money-market rates. The ECB’s Governing Council meets the same day this week as the BOE.
In Japan, nineteen of 36 economists surveyed by Bloomberg last month see the central bank expanding already unprecedented stimulus in the first half of this year as officials aim to drive Asia’s second-biggest economy out a 15-year deflationary malaise.
The yield difference between U.K. and German 10-year bonds widened one basis point to 1.06 percentage points as of 11 a.m. London time, after reaching 1.13 percentage points on Jan. 28.
The pound slid for a fifth day against the dollar after a purchasing-management survey showed manufacturing growth slowed last month. ING Bank NV economist James Knightley said the report, by Markit Economics, remains “consistent with very strong growth,” with domestic demand and export orders both improving. The U.K. currency fell 0.6 percent to $1.6341 as of 12:48 p.m. London time. It reached $1.6668 on Jan. 24, the highest level since April 2011.
“The market is pricing in that the BOE will raise rates first, and the Fed will follow three to six months after,” said Jamie Searle, a strategist at Citigroup in London. “The ECB, if anything, is going in the other direction. This will build on the policy-rate divergence that we’ve already seen, which will lead to an unprecedented decoupling in bond rates.”
Such a split has drawn criticism from emerging markets, some of which have been roiled in the past month after the Fed’s announcement of a reduction in its monthly bond purchases combined with signs of a slowdown in China to unnerve investors.
“International monetary cooperation has broken down,” India central bank Governor Raghuram Rajan told Bloomberg TV India on Jan. 30. Industrial countries “can’t at this point wash their hands off and say we’ll do what we need to and you do the adjustment.”
There’s precedent for the BOE to take action ahead of the Fed. The Monetary Policy Committee raised its benchmark in November 2003 and again three more times before the U.S. central bank boosted the rate on overnight loans among banks in June 2004 for the first time in four years. That action helped push sterling up about 9 percent against the dollar.
Between 2007 and 2011, policy makers in London lagged behind their American counterparts in cutting rates and adopting emergency policy measures in response to the financial crisis.
“Traditionally, Fed and BOE policy are quite closely synchronized, but if current trends are maintained, then there will be more than enough data and evidence to justify a BOE increase,” said Stuart Green, an economist at Banco Santander SA in London.
U.K. mortgage approvals rose in December to the highest level in almost six years as a revival in the housing market bolstered the economic rebound. Consumer confidence has improved, and Chancellor of the Exchequer George Osborne hailed signs of a manufacturing pickup in a speech last month.
“The BOE should welcome the opportunity to have a small normalization from an emergency policy setting which isn’t really justified anymore,” Green said.
Carney’s credibility is under pressure after official data show the U.K. jobless rate fell to 7.1 percent in the three months through November from 8.4 percent in the quarter through November 2011. That’s on the verge of the 7 percent he and colleagues identified last August as a threshold that would trigger a discussion about higher interest rates — something they initially didn’t anticipate would happen until 2016.
The BOE governor has signaled he will revise forward guidance next week, when economists say the central bank also will increase its growth forecasts. Among Carney’s options: setting a timeframe for low rates, changing the unemployment threshold, following the Fed in releasing policy makers’ rate forecasts or introducing a broader range of variables to inform decisions.
Simon Wells, a former Bank of England economist, isn’t convinced the BOE will act before the Fed. Unlike the U.S., the U.K.’s output still is below its pre-crisis peak, while workers face cuts in inflation-adjusted pay and are professing sensitivity to the cost of living. An election in May 2015 and the stronger pound also pose obstacles
“There is more willingness to give growth a chance,” said Wells, currently chief U.K. economist at HSBC Holdings Plc., who doesn’t expect the central bank to raise rates before the third quarter of next year.
Carney does have more flexibility now that inflation is back to the 2 percent target. The risk is if unemployment keeps declining, price pressures may re-emerge, especially if joblessness is dropping because of sluggish productivity. Output per hour slid in the third quarter and may leave the economy less inflation-proof.
“We do not believe the MPC can ignore the data and delay,” said Philip Rush, an economist at Nomura in London, who forecasts a rate increase in August. “Surging job creation is lowering unemployment without a commensurate supply-side improvement, so spare capacity is being rapidly used up. This is what matters to the BOE.”
To contact the editor responsible for this story: Craig Stirling at firstname.lastname@example.org
The report from RealtyTrac last week proves beyond the shadow of a doubt the supposed housing market recovery is a complete and utter fraud. The corporate mainstream media did their usual spin job on the report by focusing on the fact foreclosure starts in 2013 were the lowest since 2007. Focusing on this meaningless fact (because the Too Big To Trust Wall Street Criminal Banks have delayed foreclosure starts as part of their conspiracy to keep prices rising) is supposed to convince the willfully ignorant masses the housing market is back to normal. It’s always the best time to buy!!!
The talking heads reading their teleprompter propaganda machines failed to mention that distressed sales (short sales & foreclosure sales) rose to a three year high of 16.2% of all U.S. residential sales, up from 14.5% in 2012. The economy has been supposedly advancing for over four years and sales of distressed homes are at 16.2% and rising. The bubble headed bimbos on CNBC don’t find it worthwhile to mention that prior to 2007 the normal percentage of distressed home sales was less than 3%. Yeah, we’re back to normal alright. We are five years into a supposed economic recovery and distressed home sales account for 1 out of 6 all home sales and is still 500% higher than normal.
The distressed sales aren’t even close to the biggest distortion of this housing market. The RealtyTrac report reveals that all-cash purchases accounted for 42% of all U.S. residential sales in December, up from 38% in November, and up from 18% in December 2012. Does that sound like a trend of normalization? There were five states where all-cash transactions accounted for more than 50% of sales in December – Florida (62.5%), Wisconsin (59.8%), Alabama (55.7%), South Carolina (51.3%), and Georgia (51.3%). In the pre-crisis days before 2008, all-cash sales NEVER accounted for more than 10% of all home sales. NEVER. This is all being driven by hot Wall Street money, aided and abetted by Bernanke, Yellen and the rest of the Fed fiat heroine dealers.
The fact that Wall Street is running this housing show is borne out by mortgage applications languishing at 1997 levels, down 65% from the 2005 highs. Real people in the real world need a mortgage to buy a house. If mortgage applications are near 16 year lows, how could home prices be ascending as if there is a frenzy of demand? Besides enriching the financial class, the contrived elevation of home prices and the QE induced mortgage rate increase has driven housing affordability into the ground. First time home buyers account for a record low percentage of 27%. In a normal non-manipulated market, first time home buyers account for 40% of home purchases.
Price increases that rival the peak insanity of 2005 have been manufactured by Wall Street shysters and the Federal Reserve commissars. Doctor Housing Bubble sums up the absurdity of this housing market quite well.
The all-cash segment of buyers has typically been a tiny portion of the overall sales pool. The fact that so many sales are occurring off the typical radar suggests that the Fed’s easy money eco-system has created a ravenous hunger with investors to buy up real estate. Why? The rentier class is chasing yields in every nook and cranny of the economy. This helps to explain why we have such a twisted system where home ownership is declining yet prices are soaring. What do we expect when nearly half of sales are going to investors? The all-cash locusts flood is still ravaging the housing market.
The Case-Shiller Index has shown price surges over the last two years that exceed the Fed induced bubble years of 2001 through 2006. Does that make sense, when new homes sales are at levels seen during recessions over the last 50 years, and down 70% from the 2005 highs? Even with this Fed/Wall Street induced levitation, existing home sales are at 1999 levels and down 30% from the 2005 highs. So how and why have national home prices skyrocketed by 14% in 2013 after a 9% rise in 2012? Why are the former bubble markets of Las Vegas, Los Angeles, San Diego, San Francisco and Phoenix seeing 17% to 27% one year price increases? How could the bankrupt paradise of Detroit see a 17.3% increase in prices in one year? In a normal free market where individuals buy houses from other individuals, this does not happen. Over the long term, home prices rise at the rate of inflation. According to the government drones at the BLS, inflation has risen by 3.6% over the last two years. Looks like we have a slight disconnect.
This entire contrived episode has been designed to lure dupes back into the market, artificially inflate the insolvent balance sheets of the Too Big To Trust banks, enrich the feudal overlords who have easy preferred access to the Federal Reserve easy money, and provide the propaganda peddling legacy media with a recovery storyline to flog to the willingly ignorant public. The masses desperately want a feel good story they can believe. The ruling class has a thorough understanding of Edward Bernays’ propaganda techniques.
“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. …We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of.”
Ben Bernanke increased his balance sheet by $3.2 trillion (450%) since 2008, and it had to go somewhere. We know it didn’t trickle down to the 99%. It was placed in the firm clutches of the .1% billionaire club. Bernanke sold his QE schemes as methods to benefit Main Street Americans, when his true purpose was to benefit Wall Street crooks. 30 year mortgage rates were 4.25% before QE2. 30 year mortgage rates were 3.5% before QE3. Today they stand at 4.5%. QE has not benefited average Americans. They are getting 0% on their savings, mortgage rates are higher, and their real household income has fallen and continues to fall.
But you’ll be happy to know banking profits are at all-time highs, Blackrock and the rest of the Wall Street Fed front running crowd have made a killing in the buy and rent ruse, and record bonuses are being doled out to the men who have wrecked our financial system in their gluttonous plundering of the once prosperous nation. Their felonious machinations have added zero value to society, while impoverishing a wide swath of America. Bernanke, Yellen and their owners have used their control of the currency, interest rates, and regulatory agencies to create the widest wealth disparity between the haves and have-nots in world history. Their depraved actions on behalf of the .1% will mean blood.
Just as Greenspan’s easy money policies of the early 2000’s created a housing bubble, inspiring low IQ wannabes to play flip that house, Bernanke’s mal-investment inducing QEternity has lured the get rich quick crowd back into the flipping business. The re-propagation of Flip that House shows on cable is like a rerun of the pre-bubble bursting frenzy in 2005. RealtyTrac’s recent report details the disturbing lemming like trend among greedy institutions and dullard brother-in-laws across the land.
- 156,862 single family home flips — where a home is purchased and subsequently sold again within six months — in 2013, up 16% from 2012 and up 114% from 2011.
- Homes flipped in 2013 accounted for 4.6% of all U.S. single family home sales during the year, up from 4.2% in 2012 and up from 2.6% in 2011
The easy profits just keep flowing when the Fed provides the easy money. What could possibly go wrong? Home prices never fall. A brilliant Ivy League economist said so in 2005. The easy profits have been reaped by the early players. Wall Street hedge funds don’t really want to be landlords. Flippers need to make a quick buck or their creditors pull the plug. Home prices peaked in mid-2013. They have begun to fall. The 35% increase in mortgage rates has removed the punchbowl from the party. Anyone who claims housing will improve in 2014 is either talking their book, owns a boatload of vacant rental properties, teaches at Princeton, or gets paid to peddle the Wall Street propaganda on CNBC.
Reality will reassert itself in 2014, with lemmings, flippers, and hedgies getting slaughtered as the housing market comes back to earth with a thud. The continued tapering by the Fed will remove the marginal dollars used by Wall Street to fund this housing Ponzi. The Wall Street lemmings all follow the same MBA created financial models. They will all attempt to exit the market simultaneously when their models all say sell. If the economy improves, interest rates will rise and kill the housing market. If the economy tanks, the stock market will plunge, creating fear and killing the housing market. Once it becomes clear that prices have begun to fall, the flippers will panic and start dumping, exacerbating the price declines. This scenario never grows old.
Real household income continues to fall and nearly 25% of all households with a mortgage are still underwater. Young people are saddled with $1 trillion of government peddled student loan debt and will not be buying homes in the foreseeable future. Dodd-Frank rules will result in fewer people qualifying for mortgages. Mortgage insurance is increasing. Obamacare premium increases are sucking the life out of potential middle class home buyers. Retailers have begun firing thousands. The financial class had a good run. They were able to re-inflate the bubble for two years, but the third year won’t be a charm. In a normal housing market 85% of home sales would be between individuals using a mortgage, 10% would be all cash transactions, less than 5% of sales would be distressed, and 40% would be first time buyers. In this warped market only 40% of home sales are between individuals using a mortgage, 42% are all cash transactions, 16% are distressed sales, 5% are flipped, and only 27% are first time buyers. The return to normalcy will be painful for shysters, gamblers, believers, paid off economists, Larry Yun, and CNBC bimbos.
The Business Unit
Don Pittis has been a Fuller Brush man, a forest fire fighter and an Arctic ranger before discovering journalism. He was principal business reporter for Radio Television Hong Kong before the handover to China and has produced and reported for CBC and BBC News. He is currently senior producer at CBC’s business unit.
Janet Yellen, soon to be the new head of the world’s most powerful central bank, sure seems like a nice person. In some circles, being nice is an insult. Some Americans say Canadians are too nice – we even thank our bank machines, goes the joke. But despite all that, JanetYellen does seem nice.
Not that the outgoing chair of the U.S. Federal Reserve, Ben Bernanke, is a bad man. And surely the one before that, Alan Greenspan, meant well when he kept cutting interest rates to keep the stock and property boom alive – long past the moment when, most now agree, they should have been allowed to take a rest.
But Janet Yellen – soft-spoken, seemingly concerned about America’s disenfranchised as much as she is about stock market growth – exudes character. With Yellen assuming the role of Fed chair on Feb. 1, the question is, what does the character of a central banker mean for the economic future of the U.S., the world… and Canada?
- 5 key facts about incoming U.S. fed chair Janet Yellen
- Janet Yellen cleared to become next chair of U.S. Federal Reserve
For all the supposed clout of the U.S. central bank, the chair of the Fed does not have the power of a dictator. In a rare foray into central bank humour, comedian Rick Mercer reminds us that the levers of that power are subtle.
There is no question that Yellen is smart. That will count in her job of swinging the 19 members of the committee that makes interest rate decisions toward consensus. But it will also be helped by the feeling that she is motivated by the best intentions for the entire U.S.
Central bankers a product of their time
It may be that each of the recent central bankers was perfectly suited to their times. Greenspan, who trained at the knee of Ayn Rand, presided during the era of Greed Is Good, when everyone in the world was supposed to be fighting to get to the top of the heap.
When the house of cards suddenly collapsed, it was the turn of Ben Bernanke, a man who has made a career studying the economic mistakes that turned a 1929 market collapse into the Great Depression. He wanted to prevent the same thing from happening again, at all costs.
Now, we are in a different era. It appears that Bernanke’s strategy managed to avert a disruptive economic collapse. But one of the results of the Fed’s emergency measures was to give a giant handout to the people who Greenspan had allowed to climb to the top of the heap, creating a class divide not seen since before the Great Depression.
Like almost everyone else in the upper echelons of U.S. government, Yellen is elite, with elite friends. As she said in a revealing interview in the early 2000s with fellow University of California, Berkeley economist Kenneth Train, when she voted in favour of interest rate hikes in the 1990s, she says she felt pressure in social circles.
“Higher interest rates are things that people really don’t like,” she told Train. “I would go to parties and meet people [and people would say,] ‘I’m losing money because you’re raising interest rates and what you’re doing is harming me.'”
She goes on to say that while it drove home her personal responsibility for making rate decisions, she had to put the interests of the wider economy before those of her friends.
An easing of quantitative easing?
Yellen’s job now could have even more of an impact on her well-off friends. As I have said before, the distorting effect of Bernanke’s quantitative easing (or QE) – buying bonds to stimulate the economy when interest rates could go no lower – has been great for the stock market. But there are growing doubts that the extra injection of cash is making it into the hands of the poorer Americans who need it most.
Yellen knows she will have to cut QE eventually. But it is a scary process. You may argue whether or not QE really worked. But if buying bonds stimulated the economy, then ending the buying of bonds will definitely de-stimulate it. As with plans to halt fiscal spending in 2010,stopping a strong stimulant is effectively indistinguishable from taking a strong depressant.
As the Fed said in recently released minutes, even if reducing QE does not have a huge, direct impact on Main Street, it might cause an “unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated.”
That’s Fed-speak for bond and mortgage markets taking fright, sending interest rates shooting up. It’s not just hypothetical. It happened once last year, just because people thought policy would change. And that wouldn’t just be bad for Americans. World bond and mortgage rates are set in the U.S., and the Canadian housing market might be severely hurt by such a shock.
If you believe, as I do, that QE is hurting a majority of Americans and Canadians, and maybe doing long-term damage to the entire society by increasing the disparity of rich and poor, Yellen has a balancing act ahead of her. Her feat must be to reduce QE as quickly as possible without scaring the markets into thinking she is doing it too quickly.
Thankfully, Yellen is appropriately humble.
“Macroeconomics, I think it’s a very useful set of tools for thinking about the economy,” she said in her interview with Train. “But in terms of our ability to know the future and forecast where things are going, that’s a very difficult thing to do. There are a lot of imponderables.”
If Yellen succeeds, it will not be a feat of strength. It will be a feat of wisdom. It will be a feat of experience. And it will depend on being nice. Nice as a Canadian. With luck, Yellen, like Greenspan and Bernanke, will be the right person for her time. The world needs a little nice.
Paul Craig Roberts and Dave Kranzler
The deregulation of the financial system during the Clinton and George W. Bush regimes had the predictable result: financial concentration and reckless behavior. A handful of banks grew so large that financial authorities declared them “too big to fail.” Removed from market discipline, the banks became wards of the government requiring massive creation of new money by the Federal Reserve in order to support through the policy of Quantitative Easing the prices of financial instruments on the banks’ balance sheets and in order to finance at low interest rates trillion dollar federal budget deficits associated with the long recession caused by the financial crisis.
The Fed’s policy of monetizing one trillion dollars of bonds annually put pressure on the US dollar, the value of which declined in terms of gold. When gold hit $1,900 per ounce in 2011, the Federal Reserve realized that $2,000 per ounce could have a psychological impact that would spread into the dollar’s exchange rate with other currencies, resulting in a run on the dollar as both foreign and domestic holders sold dollars to avoid the fall in value. Once this realization hit, the manipulation of the gold price moved beyond central bank leasing of gold to bullion dealers in order to create an artificial market supply to absorb demand that otherwise would have pushed gold prices higher.
The evidence of gold price manipulation is clear. In this article we present evidence and describe the process. We conclude that ability to manipulate the gold price is disappearing as physical gold moves from New York and London to Asia, leaving the West with paper claims to gold that greatly exceed the available supply.
The primary venue of the Fed’s manipulation activity is the New York Comex exchange, where the world trades gold futures. Each gold futures contract represents one gold 100 ounce bar. The Comex is referred to as a paper gold exchange because of the use of these futures contracts. Although several large global banks are trading members of the Comex, JP Morgan, HSBC and Bank Nova Scotia conduct the majority of the trading volume. Trading of gold (and silver) futures occurs in an auction-style market on the floor of the Comex daily from 8:20 a.m. to 1:30 p.m. New York time. Comex futures trading also occurs on what is known as Globex. Globex is a computerized trading system used for derivatives, currency and futures contracts. It operates continuously except on weekends. Anyone anywhere in the world with access to a computer-based futures trading platform has access to the Globex system.
In addition to the Comex, the Fed also engages in manipulating the price of gold on the far bigger–in terms of total dollar value of trading–London gold market. This market is called the LBMA (London Bullion Marketing Association) market. It is comprised of several large banks who are LMBA market makers known as “bullion banks” (Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorganChase, Merrill Lynch/Bank of America, Mitsui, Societe Generale, Bank of Nova Scotia and UBS). Whereas the Comex is a “paper gold” exchange, the LBMA is the nexus of global physical gold trading and has been for centuries. When large buyers like Central Banks, big investment funds or wealthy private investors want to buy or sell a large amount of physical gold, they do this on the LBMA market.
The Fed’s gold manipulation operation involves exerting forceful downward pressure on the price of gold by selling a massive amount of Comex gold futures, which are dropped like bombs either on the Comex floor during NY trading hours or via the Globex system. A recent example of this occurred on Monday, January 6, 2014. After rallying over $15 in the Asian and European markets, the price of gold suddenly plunged $35 at 10:14 a.m. In a space of less than 60 seconds, more than 12,000 contracts traded – equal to more than 10% of the day’s entire volume during the 23 hour trading period in which which gold futures trade. There was no apparent news or market event that would have triggered the sudden massive increase in Comex futures selling which caused the sudden steep drop in the price of gold. At the same time, no other securities market (other than silver) experienced any unusual price or volume movement. 12,000 contracts represents 1.2 million ounces of gold, an amount that exceeds by a factor of three the total amount of gold in Comex vaults that could be delivered to the buyers of these contracts.
This manipulation by the Fed involves the short-selling of uncovered Comex gold futures. “Uncovered” means that these are contracts that are sold without any underlying physical gold to deliver if the buyer on the other side decides to ask for delivery. This is also known as “naked short selling.” The execution of the manipulative trading is conducted through one of the major gold futures trading banks, such as JPMorganChase, HSBC, and Bank of Nova Scotia. These banks do the actual selling on behalf of the Fed. The manner in which the Fed dumps a large quantity of futures contracts into the market differs from the way in which a bona fide trader looking to sell a big position would operate. The latter would try to work off his position carefully over an extended period of time with the goal of trying to disguise his selling and to disturb the price as little as possible in order to maximize profits or minimize losses. In contrast, the Fed‘s sales telegraph the intent to drive the price lower with no regard for preserving profits or fear or incurring losses, because the goal is to inflict as much damage as possible on the price and intimidate potential buyers.
The Fed also actively manipulates gold via the Globex system. The Globex market is punctuated with periods of “quiet” time in which the trade volume is very low. It is during these periods that the Fed has its agent banks bombard the market with massive quantities of gold futures over a very brief period of time for the purpose of driving the price lower. The banks know that there are very few buyers around during these time periods to absorb the selling. This drives the price lower than if the selling operation occurred when the market is more active.
A primary example of this type of intervention occurred on December 18, 2013, immediately after the FOMC announced its decision to reduce bond purchases by $10 billion monthly beginning in January 2014. With the rest of the trading world closed, including the actual Comex floor trading, a massive amount of Comex gold futures were sold on the Globex computer trading system during one of its least active periods. This selling pushed the price of gold down $23 dollars in the space of two hours. The next wave of futures selling occurred in the overnight period starting at 2:30 a.m. NY time on December 19th. This time of day is one of the least active trading periods during any 23 hour trading day (there’s one hour when gold futures stop trading altogether). Over 4900 gold contracts representing 14.5 tonnes of gold were dumped into the Globex system in a 2-minute period from 2:40-2:41 a.m, resulting in a $24 decline in the price of gold. This wasn’t the end of the selling. Shortly after the Comex floor opened later that morning, another 1,654 contracts were sold followed shortly after by another 2,295 contracts. This represented another 12.2 tonnes of gold. Then at 10:00 a.m. EST, another 2,530 contracts were unloaded on the market followed by an additional 3,482 contracts just six minutes later. These sales represented another 18.7 tonnes of gold.
All together, in 6 minutes during an eight hour period, a total amount of 37.6 tonnes (a “tonne” is a metric ton–about 10% more weight than a US ”ton”) of gold future contracts were sold. The contracts sold during these 6 minutes accounted for 10% of the total volume during that 23 hours period of time. Four-tenths of one percent of the trading day accounted for 10% of the total volume. The gold represented by the futures contracts that were sold during these 6 minutes was a multiple of the amount of physical gold available to Comex for delivery.
The purpose of driving the price of gold down was to prevent the announced reduction in bond purchases (the so-called tapering) from sending the dollar, stock and bond markets down. The markets understand that the liquidity that Quantitative Easing provides is the reason for the high bond and stock prices and understand also that the gains from the rising stock market discourage gold purchases. Previously when the Fed had mentioned that it might reduce bond purchases, the stock market fell and bonds sold off. To neutralize the market scare, the Fed manipulated both gold and stock markets. (See Pam Martens for explanation of the manipulation of the stock market:http://wallstreetonparade.com/2013/12/why-didn’t-the-stock-market-sell-off-on-the-fed’s-taper-announcement/ )
While the manipulation of the gold market has been occurring since the start of the bull market in gold in late 2000, this pattern of rampant manipulative short-selling of futures contracts has been occurring on a more intense basis over the last 2 years, during gold’s price decline from a high of $1900 in September 2011. The attack on gold’s price typically will occur during one of several key points in time during the 23 hour Globex trading period. The most common is right at the open of Comex gold futures trading, which is 8:20 a.m. New York time. To set the tone of trading, the price of gold is usually knocked down when the Comex opens. Here are the other most common times when gold futures are sold during illiquid Globex system time periods:
– 6:00 p.m NY time weekdays, when the Globex system re-opens after closing for an hour;
– 6:00 p.m. Sunday evening NY time when Globex opens for the week;
– 2:30 a.m. NY time, when Shanghai Gold Exchange closes
– 4:00 a.m. NY time, just after the morning gold “fix” on the London gold market (LBMA);
– 2:00 p.m. NY time any day but especially on Friday, after the Comex floor trading has closed – it’s an illiquid Globex-only session and the rest of the world is still closed.
In addition to selling futures contracts on the Comex exchange in order to drive the price of gold lower, the Fed and its agent bullion banks also intermittently sell large quantities of physical gold in London’s LBMA gold market. The process of buying and selling actual physical gold is more cumbersome and complicated than trading futures contracts. When a large supply of physical gold hits the London market all at once, it forces the market a lot lower than an equivalent amount of futures contracts would. As the availability of large amounts of physical gold is limited, these “physical gold drops” are used carefully and selectively and at times when the intended effect on the market will be most effective.
The primary purpose for short-selling futures contracts on Comex is to protect the dollar’s value from the growing supply of dollars created by the Fed’s policy of Quantitative Easing. The Fed’s use of gold leasing to supply gold to the market in order to reduce the rate of rise in the gold price has drained the Fed’s gold holdings and is creating a shortage in physical gold. Historically most big buyers would leave their gold for safe-keeping in the vaults of the Fed, Bank of England or private bullion banks rather than incur the cost of moving gold to local depositories. However, large purchasers of gold, such as China, now require actual delivery of the gold they buy.
Demands for gold delivery have forced the use of extraordinary and apparently illegal tactics in order to obtain physical gold to settle futures contracts that demand delivery and to be able to deliver bullion purchased on the London market (LBMA). Gold for delivery is obtained from opaque Central Bank gold leasing transactions, from “borrowing” client gold held by the bullion banks like JP Morgan in their LBMA custodial vaults, and by looting the gold trusts, such as GLD, of their gold holdings by purchasing large blocks of shares and redeeming the shares for gold.
Central Bank gold leasing occurs when Central Banks take physical gold they hold in custody and lease it to bullion banks. The banks sell the gold on the London physical gold market. The gold leasing transaction makes available physical gold that can be delivered to buyers in quantities that would not be available at existing prices. The use of gold leasing to manipulate the price of gold became a prevalent practice in the 1990s. While Central Banks admit to engaging in gold lease transactions, they do not admit to its purpose, which is to moderate rises in the price of gold, although Fed Chairman Alan Greenspan did admit during Congressional testimony on derivatives in 1998 that “Central banks stand ready to lease gold in increasing quantities should the price rise.”
Another method of obtaining bullion for sale or delivery is known as “rehypothecation.” Rehypothecation occurs when a bank or brokerage firm “borrows” client assets being held in custody by banks. Technically, bank/brokerage firm clients sign an agreement when they open an account in which the assets in the account might be pledged for loans, like margin loans. But the banks then take pledged assets and use them for their own purpose rather than the client’s. This is rehypothecation. Although Central Banks fully disclose the practice of leasing gold, banks/brokers do not publicly disclose the details of their rehypothecation activities.
Over the course of the 13-year gold bull market, gold leasing and rehypothecation operations have largely depleted most of the gold in the vaults of the Federal Reserve, Bank of England, European Central Bank and private bullion banks such as JPMorganChase. The depletion of vault gold became a problem when Venezuela was the first country to repatriate all of its gold being held by foreign Central Banks, primarily the Fed and the BOE. Venezuela’s request was provoked by rumors circulating the market that gold was being leased and hypothecated in increasing quantities. About a year later, Germany made a similar request. The Fed refused to honor Germany’s request and, instead, negotiated a seven year timeline in which it would ship back 300 of Germany’s 1500 tonnes. This made it apparent that the Fed did not have the gold it was supposed to be holding for Germany.
Why does the Fed need seven years in which to return 20 percent of Germany’s gold? The answer is that the Fed does not have the gold in its vault to deliver. In 2011 it took four months to return Venezuela’s 160 tonnes of gold. Obviously, the gold was not readily at hand and had to be borrowed, perhaps from unsuspecting private owners who mistakenly believe that their gold is held in trust.
Western central banks have pushed fractional gold reserve banking to the point that they haven’t enough reserves to cover withdrawals. Fractional reserve banking originated when medieval goldsmiths learned that owners of gold stored in their vault seldom withdrew the gold. Instead, those who had gold on deposit circulated paper claims to gold. This allowed goldsmiths to lend gold that they did not have by issuing paper receipts. This is what the Fed has done. The Fed has created paper claims to gold that does not exist in physical form and sold these claims in mass quantities in order to drive down the gold price. The paper claims to gold are a large multiple of the amount of actual gold available for delivery. The Royal Bank of India reports that the ratio of paper claims to gold exceed the amount of gold available for delivery by 93:1.
Fractional reserve systems break down when too many depositors or holders of paper claims present them for delivery. Breakdown is occurring in the Fed’s fractional bullion operation. In the last few years the Asian markets–specifically and especially the Chinese–are demanding actual physical delivery of the bullion they buy. This has created a sense of urgency among the Fed, Treasury and the bullion banks to utilize any means possible to flush out as many weak holders of gold as possible with orchestrated price declines in order to acquire physical gold that can be delivered to Asian buyers.
The $650 decline in the price of gold since it hit $1900 in September 2011 is the result of a manipulative effort designed both to protect the dollar from Quantitative Easing and to free up enough gold to satisfy Asian demands for delivery of gold purchases.
Around the time of the substantial drop in gold’s price in April, 2013, the Bank of England’s public records showed a 1300 tonne decline in the amount of gold being held in the BOE bullion vaults. This is a fact that has not been denied or reasonably explained by BOE officials despite several published inquiries. This is gold that was being held in custody but not owned by the Bank of England. The truth is that the 1300 tonnes is gold that was required to satisfy delivery demands from the large Asian buyers. It is one thing for the Fed or BOE to sell, lease or rehypothecate gold out of their vault that is being safe-kept knowing the entitled owner likely won’t ask for it anytime soon, but it is another thing altogether to default on a gold delivery to Asians demanding delivery.
Default on delivery of purchased gold would terminate the Federal Reserve’s ability to manipulate the gold price. The entire world would realize that the demand for gold greatly exceeds the supply, and the price of gold would explode upwards. The Federal Reserve would lose control and would have to abandon Quantitative Easing. Otherwise, the exchange value of the US dollar would collapse, bringing to an end US financial hegemony over the world.
Last April, the major takedown in the gold price began with Goldman Sachs issuing a “technical analysis” report with an $850 price target (gold was around $1650 at that time). Goldman Sachs also broadcast to every major brokerage firm and hedge fund in New York that gold was going to drop hard in price and urged brokers to get their clients out of all physical gold holdings and/or shares in physical gold trusts like GLD or CEF. GLD and CEF are trusts that purchase physical gold/silver bullion and issue shares that represent claims on the bullion holdings. The shares are marketed as investments in gold, but represent claims that can only be redeemed in very large blocks of shares, such as 100,000, and perhaps only by bullion banks. GLD is the largest gold ETF (exchange traded firm), but not the only one. The purpose of Goldman Sachs’ announcement was to spur gold sales that would magnify the price effect of the short-selling of futures contracts. Heavy selling of futures contracts drove down the gold price and forced sales of GLD and other ETF shares, which were bought up by the bullion banks and redeemed for gold.
At the beginning of 2013, GLD held 1350 tonnes of gold. By April 12th, when the heavy intervention operation began, GLD held 1,154 tonnes. After the series of successive raids in April, the removal of gold from GLD accelerated and currently there are 793 tonnes left in the trust. In a little more than one year, more than 41% of the gold bars held by GLD were removed – most of that after the mid-April intervention operation.
In addition, the Bank of England made its gold available for purchase by the bullion banks in order to add to the ability to deliver gold to Asian purchasers.
The financial media, which is used to discredit gold as a safe haven from the printing of fiat currencies, claims that the decline in GLD’s physical gold is an indication that the public is rejecting gold as an investment. In fact, the manipulation of the gold price downward is being done systematically in order to coerce holders of GLD to unload their shares. This enables the bullion banks to accumulate the amount of shares required to redeem gold from the GLD Trust and ship that gold to Asia in order to meet the enormous delivery demands. For example, in the event described above on January 6th, 14% of GLD’s total volume for the day traded in a 1-minute period starting at 10:14 a.m. The total volume on the day for GLD was almost 35% higher than the average trading volume in GLD over the previous ten trading days.
Before 2013, the amount of gold in the GLD vault was one of the largest stockpiles of gold in the world. The swift decline in GLD’s gold inventory is the most glaring indicator of the growing shortage of physical gold supply that can be delivered to the Asian market and other large physical gold buyers. The more the price of gold is driven down in the Western paper gold market, the higher the demand for physical bullion in Asian markets. In addition, several smaller physical gold ETFs have experienced substantial gold withdrawals. Including the more than 100 tonnes of gold that has disappeared from the Comex vaults in the last year, well over 1,000 tonnes of gold has been removed from the various ETFs and bank custodial vaults in the last year. Furthermore, there is no telling how much gold that is kept in bullion bank private vaults on behalf of wealthy investors has been rehypothecated. All of this gold was removed in order to avoid defaulting on delivery demands being imposed by Asian commercial, investment and sovereign gold buyers.
The Federal Reserve seems to be trapped. The Fed is creating approximately 1,000 billion new US dollars annually in order to support the prices of debt related derivatives on the books of the few banks that have been declared to be “to big to fail” and in order to finance the large federal budget deficit that is now too large to be financed by the recycling of Chinese and OPEC trade surpluses into US Treasury debt. The problem with Quantitative Easing is that the annual creation of an enormous supply of new dollars is raising questions among American and foreign holders of vast amounts of US dollar-denominated financial instruments. They see their dollar holdings being diluted by the creation of new dollars that are not the result of an increase in wealth or GDP and for which there is no demand.
Quantitative Easing is a threat to the dollar’s exchange value. The Federal Reserve, fearful that the falling value of the dollar in terms of gold would spread into the currency markets and depreciate the dollar, decided to employ more extreme methods of gold price manipulation.
When gold hit $1,900, the Federal Reserve panicked. The manipulation of the gold price became more intense. It became more imperative to drive down the price, but the lower price resulted in higher Asian demand for which scant supplies of gold were available to meet.
Having created more paper gold claims than there is gold to satisfy, the Fed has used its dependent bullion banks to loot the gold exchange traded funds (ETFs) of gold in order to avoid default on Asian deliveries. Default would collapse the fractional bullion system that allows the Fed to drive down the gold price and protect the dollar from QE.
What we are witnessing is our central bank pulling out all stops on integrity and lawfulness in order to serve a small handful of banks that financial deregulation allowed to become “too big to fail” at the expense of our economy and our currency. When the Fed runs out of gold to borrow, to rehypothecate, and to loot from ETFs, the Fed will have to abandon QE or the US dollar will collapse and with it Washington’s power to exercise hegemony over the world.
Dave Kranzler traded high yield bonds for Bankers Trust for a decade. As a co-founder and principal of Golden Returns Capital LLC, he manages the Precious Metals Opportunity Fund.
This article first appeared at Paul Craig Roberts’ new website Institute For Political Economy. Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His Internet columns have attracted a worldwide following.
In his final public appearance as chairman of the Federal Reserve, Ben Bernanke took a moment to reflect on the 2008 financial crisis and compared it to surviving a bad car crash.
During an interview Thursday at the Brookings Institution, Bernanke recalled some “very intense periods” during the crisis, similar to trying to keep a car from going over a bridge after a collision.
The government had just taken over mortgage giants Fannie Mae and Freddie Mac. Lehman Brothers had collapsed. He recalled some sleepless nights working with others to try and contain the damage.
“If you’re in a car wreck or something, you’re mostly involved in trying to avoid going off the bridge. And then, later on, you say, ‘Oh my God!”‘ Bernanke said.
Term ends January 31
Bernanke will leave the Fed on Jan. 31 after eight years as chairman. His successor, Janet Yellen, will take over on Feb. 1.
In his appearance, Bernanke defended the Fed’s efforts during the crisis, which included massive purchases of Treasury bonds to push long-term interest rates lower and forward guidance to investors about how long the Fed plans to keep short-term interest rates near zero.
Critics have warned that those efforts pose great risks for higher inflation or future financial market turmoil.
But Bernanke says there has not been a problem with inflation, which is still running well below the Fed’s 2 per cent target.
Should inflation start to be a problem as the economy starts growing at faster rates, the Fed “has all the tools we need to manage interest rates” to keep inflation from getting out of hand, he said.
“Inflation is just not really a significant risk” from the bond purchases, Bernanke said.
Bernanke said the central bank was aware of potential threats to financial market stability from its massive bond holdings and is monitoring markets very closely to spot any signs of trouble. He said this threat was the one “we have spent the most time thinking about and trying to make sure that we can address” should the need arise.
But he said any concerns about financial stability did not outweigh the need to keep providing support to the economy.
The Fed announced last month that it would slightly reduce the size of its bond purchases in January from $85 billion per month down to $75 billion. And it said it would likely make further reductions at upcoming meetings, if the economy keeps improving.
Authored by Guy Haselmann of Scotiabank,
FED – Encouraging the Melt-Up Trade, While Regulating Bubbles Away
The Fed moved ‘all-in’ in 2008/09 when it pushed rates to zero and embarked on QE. Since the Fed basically used its final chips via this action, it became trapped playing ‘this hand’ until the bitter end. The stakes are enormous and grow over time. The only way the Fed can ‘win’ is – as Yellen said today – “to do everything possible to promote a very strong recovery”. Tapering too soon could be calamitous toward this objective. Yet, the longer it continues, the more the risks aggregate. However, Yellen seemed to calmly indicate today that any unintended consequences or dangers to financial stability are worth the risk.
There is an inability, and lack of good options, for providing any additional monetary or fiscal accommodation, should the economy weaken or should a global crisis arise. This is what makes the Fed’s current policy experiment such a high-stakes experiment. Here is why policy-makers are in such a predicament:
Every economic or business cycle decline over the past three decades has been met with the same response: monetary or fiscal stimulus. Policy makers have been quick to offer accommodation, but they have been slow to withdraw the stimulus which is always politically more difficult.
Fiscal accommodation over the years has resulted in large deficits and debt which are now leading to contentious discussion about how to reel them in.
Monetary authorities have stair-stepped the Fed Funds Rate down, but eventually hit zero and ran out of room.
Effectively, both stimulatory mechanisms are broken.
Yellen had to field several questions about potential market bubbles, but she deflected them aggressively saying that she did not believe that “bubble-like conditions” existed. Whether she believes that or not, it would have been counter-productive for her to admit it. She mentioned that should bubbles begin to form, the Fed has the regulatory tools to control them. She can’t possibly believe this (or can she); but regardless, she must try to convince the market that the Fed is monitoring them and can contain them.
Basically, she has given the market the green light to “melt-up”. The only question is how much higher will the Fed’s ‘gift’ drive prices? She indicated the Fed has no choice but to continue with this policy until it succeeds (or will it ultimately fail?).
As perverse as this seems, Yellen likely ensured that an equity market crash (someday) is inevitable. Yellen’s failure to acknowledge any signs of bubble-like conditions encourages more risk-taking and speculation. Therefore, this fact, combined with her hints of a continuation of policy, should lead to a bubble; if one hasn’t been created already. And, all bubbles eventually pop.
Alternatively, it is possible that Fed policy fails and economic growth begins to slip. In this scenario, a significant re-pricing (lower) of financial assets would occur.
Since banks are in a much stronger position today than in 2008, the Fed probably has limited concern about a market crash – as long as the banking system remains healthy. The Fed probably doubts a crash could be as bad as 2008, and it know it know possesses a slew of liquidity facilities (established in 2008) which could be implemented quickly if necessary.
“The question isn’t who is going to let me; it’s who is going to stop me.” – Ayn Rand