Gentlemen, Start Your Printing Presses!

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The Daily Reckoning | Wednesday, January 25, 2011 A conspicuous euro bump: A closer look at the Fed’s QE3 program, There ain’t no recovery and there never will be a recovery! Plus, Bill Bonner on sinking a ship, driving a tank and plenty more... ------------------------------------------------------ The Single Best Reason to Feel Good About America’s “Collapse” What could possibly be the good news about America’s next financial meltdown? I urge you to watch this eye-popping video. You’ll see why the years ahead could actually be the richest, happiest, and healthiest years of your life... not just in spite of the impending new financial crisis, but because of it. If that seems strange to you, click here to see why for yourself.   In Terminal Condition Confusing Gradual Bankruptcy with Economic Recovery   Bill Bonner Reckoning today from Baltimore, Maryland... We have a wintry landscape here in Baltimore...or what is left of one. But forget the weather, happy days are here again. At least, that is what you might think from reading the newspapers. Unemployment is going down. Consumer debt is going up. Even the housing market is showing signs of improvement. Gold is rising — investors seem to think inflationary pressures are building. The 10-year T-note yield is back over 2%. And stocks are having their best January in 15 years... And now, once again, the commentariat is talking about a ‘recovery’ from the Great Recession. But we’ll give it to you straight, dear reader. There wasn’t any Great Recession and there won’t be a recovery. You don’t recover from what ails the US economy. You die. Then, a new economy can be born. Still, there are many recovery sightings. But so far, the recovery itself remains as elusive as Bigfoot. Here’s Bloomberg, with more details: A decline in unemployment and pickup in manufacturing point to accelerating US growth. Some economists say the numbers may not be as good as they look. One reason: the severity of the economy’s plunge in late 2008 and early 2009 after Lehman Brothers Holdings Inc. collapsed threw a wrench into models used to smooth the data for seasonal changes, according to analysts at Goldman Sachs Group Inc. and Nomura Securities International Inc. “The impact of the financial crisis does seem to have affected seasonal factors for several indicators,” Andrew Tilton, a senior economist at Goldman Sachs, said in a telephone interview from New York. It “might tend to make things look a little better in the early winter and look a little worse in the spring time.” Most economic data are adjusted for seasonal changes to facilitate month-to-month comparisons. Without those changes, for example, construction would always pick up in the summer, when the weather is milder, and decline in the winter. The adjustment process is unable to distinguish between a one-time shock, like Lehman’s demise, and a recurring issue that would need to be smoothed away. For that reason, the mechanism gives some data a leg up from about September through about March before turning negative the rest of the year. The economy contracted at an average 7.8 percent annual pace from October 2008 through March 2009, the worst back-to-back quarters in the post World War II era. The 18-month recession ended in June 2009. The adjustment process “has been knocked out of whack by the financial crisis,” Ellen Zentner, a senior US economist at Nomura in New York, said in a telephone interview. “The model ends up adjusting for a growth pattern that isn’t there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesn’t happen late every year. It was a one-off event.” In effect, the models are over-compensating...trying to make sense of the big collapse of ’08-’09 by treating it as though it were a seasonal adjustment issue. If the winter weather were so severe as to cause such a big drop-off, the machines reason, we must move the bar lower next year. Then, even a modest improvement will look spectacular. But Goldman’s economists estimate that unemployment will average 8.5% this year — almost unchanged from last year. That is not a recovery. And we have to wonder...what will power the ‘recovery’ analysts believe they seem coming? Not household spending. Households don’t have any money to spend. What then? Nothing. There will be no recovery. Instead, the US economy is in the process of zombification and ossification...which is what happens when the feds refuse to allow dead-men industries to die. Ottmar Issing, of the European Central Bank, is on the case: “The problem of ‘too big to fail’ is that it has made society — more precisely, the taxpayer — hostage to the survival of individual financial institutions...the taxpayers’ billions committed to rescue supposedly systemic institutions has dealt a big blow to confidence in the free market system...and has in turn become a threat to free societies.” Well, yes. Now, the game is rigged. The fix is in. The zombies are dealt the aces. The rest of us get a bum hand. But wait...didn’t the US government make a profit from its loans to the banks? Didn’t the banks pay back the money? Didn’t taxpayers come out ahead? Oh dear reader, please stop...we can’t stop laughing. We’re afraid we might pull a muscle. Imagine a bartender. He realizes that his customers have been handing out IOUs all over town — including to him. And he also knows his customers can’t pay. People are beginning to wonder...they’re beginning to discount the IOUs. A crisis is coming... What does he do? He lends the customers more money and buys the IOUs from the other merchants! Naturally, the value of the IOUs goes back up. Because now, holders know they’ll get their money. Even the value of the IOUs owned by the bartender go up. Wonder of wonders, he has even made a profit on the deal! Happy days are here again. Which reminds us of Hemingway’s conversation between Bill Gorton and Mike Campbell. Bill asks; “How did you go bankrupt?” Mike answers: “Two ways. Gradually. Then, suddenly.” We’re still in the ‘gradually’ phase. Stay tuned...   A New Dawn of Medicine Begins One tiny California Company, priced under 80 cents per share, is at the forefront of a revolutionary new medical treatment... A breakthrough treatment that could eventually extend the life of every person on earth... It’s a startling discovery and one that could make you richer than you ever imagined. Click here for all the details... The Daily Reckoning Presents Gentlemen, Start Your Printing Presses!   Eric Fry Whoops!...Oh dear!...It looks like Ben fell off the wagon again! Such a shame. He had been doing so well ever since he put that bottle of “Old Q.E.” back on the shelf last June... and got sober. But a few weeks back, he tripped up on his 12-step program and started nipping at the bottle again. Slowly at first... then to excess. Yes, it’s true, dear reader, Federal Reserve Chairman Ben Bernanke, is printing money again. That’s bad enough. But this time, after he prints it, he sends it over to Europe. Crazy, but true. The chart below tells the tale. It shows the quantity of currency swaps on the Fed’s balance sheet. What are these things? Technically, they are an exchange of one currency for another currency. Functionally, they are a loan. Typically, one side of the swap pays interest to the other side of the swap, depending on the prevailing interest rate differentials between the two currencies. [For more about swaps, click here.] During the crisis of 2008-9, the Fed supplied nearly $600 billion of this form of credit to various financial institutions. Eventually, as credit conditions improved, the borrowers unwound these swaps, causing them to disappear completely from the Fed’s balance sheet...until late last year. The Fed is ramping up its swap activity again. As we noted in the January 6th edition of The Daily Reckoning: Whenever a central bank cannot provide direct, overt assistance to a specific insolvent investment bank or government, not to worry, a central bank can still provide indirect, covert assistance. The recently announced “backdoor bailout” of European financial institutions illustrates the point. The European Central Bank (ECB) cannot directly bail out the insolvent governments of Greece, Italy, Spain, Portugal, et al. Meanwhile, the US Federal Reserve cannot directly rescue Europe’s insolvent banks. Enter the indirect bailouts... Here’s how they work: The Fed extends unlimited lines of credit to the ECB under so-called swap agreements. The ECB, in turn, provides dirt-cheap capital to Europe’s struggling banks. Then, the banks — understanding an unspoken quid pro quo — use the dirt-cheap financing to buy the high-yielding bonds of Greece, Italy, Spain, et cetera. So if you follow the money, the Fed is lending money to the Greek government... and all along the way, the insolvent European banks are making money they don’t deserve to make, while US taxpayers are losing money they don’t deserve to lose... As recently as a few weeks ago, the amount of dollar swaps — i.e., loans — with the ECB was only $2.4 billion. “For the week ending December 14, however, the amount jumped to $54 billion,” the Journal reports... Thus far, the Fed’s indirect bailout of Europe is relatively small, at a mere $62 billion. But we should expect that number to grow...a lot. And as that number grows, the Federal Reserve will be providing yet one more reason to buy gold, silver and other hard assets... Since we aired those remarks, the Fed has added another $41 billion (and counting) in currency swaps to its balance sheet — bringing the grand total to $103 billion, as of January 18th. That little green doodad at the upper right of the chart below represents $103 billion of currency swaps. (The fact a $103 billion increase on a chart of Fed assets is barely visible says something about how out-of-control the Fed’s activities have become). Importantly, these currency swaps are not replacing some other asset on the Fed’s balance sheet. In other words, the Fed did not sell $103 billion worth of Treasury securities in order to provide $103 billion worth of currency swaps to the ECB. Instead, the Fed conjured this fresh cash into existence out of thin air. Since announcing the “emergency” swap lines on November 30, 2010, the Fed’s balance sheet has increased by $100.7 billion — a mere rounding error away from the $100.8 billion in currency swaps the Fed added to its balance sheet over the same timeframe. The mainstream financial press has not seemed to notice — or care — that the Fed is printing dollars and sending them to Europe...even though this new Fed operation is a kind of “QE3” without any headlines or fanfare...and without any direct US-based beneficiaries. What does interest the press, however, are the “improving credit conditions in Europe.” LIBOR rates have retreated a bit from their recent highs, for example, which means that European banks are finding it easier to obtain short-term credit. Of course they are! The Fed is flooding the European financial markets with cheap credit, thereby lowering the demand for credit from traditional sources in the private sector. But unless the Fed intends to single-handedly bail out every insolvent bank and government in Europe, the short-term balm it is providing will achieve absolutely zero long-term benefit...except for the owners of precious metals. This “Backdoor QE Operation” will merely kick the can down the stradas, rues and calles of Europe, while adding hundreds of billions of dollars to the Fed’s balance sheet. This new Fed operation is inflationary... and it will become more inflationary if/as/when the volume of currency swaps on the Fed’s balance sheet continues to grow. If you’d like to keep tabs on the growth of this Fed asset, the Cleveland Fed’s website makes it very easy. Just click on this link. While watching, remember to add a few precious metals to your portfolio. Regards, Eric J. Fry for The Daily Reckoning   Is this the miracle America has been waiting for? An unbelievable phenomenon is quietly sweeping the nation. The railroad age... the steel age... the electronics age... the technology age — this phenomenon triggered them all. Now it’s happening again! Watch this special, time-sensitive presentation now to find out how it could affect your job... your lifestyle... and your wallet.   And now back to Bill Bonner with the rest of today's reckoning from Baltimore, Maryland... Of Bankers and Ship Captains   Bill Bonner Will no one rise to the defense of Captain Francesco Schettino? No? Then we will! The poor man is calumnied as a pusillanimous incompetent. Just because he hit a rock. Heck, anyone with a ship that big could hit a rock. And the rock wasn’t s’posed to be there! This incompetence charge is completely baseless. He had even tested almost the exact same route under almost the exact same conditions back in August. He sailed through the straits without a scratch. It was perfectly reasonable for him to conclude that the passage was safe. Perhaps someone put the rock there, just to catch him out. And then comes the charge that he ignored the fact that his ship was taking on water...and abandoned ship before all the passengers were off. Well, yes, but who wouldn’t? As to the first part of that complaint, how could he know the ship was sinking until it actually began to sink? And then, once it was determined that she was going down, what was the point of hanging around? There were perfectly able seamen to assist; and those passengers who had survived the collision and the sinking proved that they were perfectly capable of getting out on their own. Besides, the idea that the captain goes down with the ship is out of date. Now, we are in a new age. Now, failed captains get a bonus...and a retirement package. In the old days, ship owners — like bank owners — were real capitalists. If the ship went down, the owners could lose everything. So, they required managers — captains — who were fully committed to bringing the vessel home safely. And if the ship sank, they were supposed to sink with it. The same was true of engineers during the Roman era. If they built a bridge that fell down, the people who paid for it were out a considerable amount of money. So the engineers were required to stand under the bridge when the scaffold was taken away. If the bridge failed, the engineer was toast. Bankers, too, were expected — until well into the 20th century — to suffer their own mistakes. If a bank failed. A banker was ruined. But those days are clearly gone. Now, the losses are felt by insurance companies and mutual fund investors...and who gives a damn about them? So, why should the captain go down? He should be treated like a bank manager...or the CEO of a large public company. He shouldn’t go down a hero. He should go up, a zombie. *** Wintry weather finally arrived in Baltimore on Saturday. The ground is coated with snow, now giving way to slush and water. “Be sure to drive slowly...you know, the roads are slippery when it is icy...” warned our 90-year-old mother. “Mom, I got my driver’s license in 1965. I’m familiar with ice and snow...” “Well, my brother got his license in 1945 or maybe in 1946. I’m so old I remember so many things that happened. And so many things that probably never happened. He had just come back from the war. I don’t think they made him take a driving test, because he had been driving tanks for three years. “He just went to renew his driving license yesterday.” “Isn’t he 95? I didn’t think they’d let you renew a license at that age.” “Well, they do in the state of Virginia. He passed the eye test. So they gave him a license that expires when he will be 105. He asked the clerk if they could give him a longer one, because he didn’t want to have to come back so soon. I think they just laughed at him. “But I talked to him on the phone and I told him the same thing I’m telling you. The roads are slippery. Be careful. You’re not driving a tank.” “Okay, Mom.” Regards, Bill Bonner, for The Daily Reckoning ---------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Tales from the Southern Hemisphere A Strange Appetite for US Debt A Real Stress Test: Could Any Major Bank or Developed Nation Survive? Currency Rally Fades in Overnight Trading It May Take a Dragon to Breathe Fire Into Markets Home Prices Keep Falling The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. 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