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US Treasury Bond Interest Rates: Nowhere to Go But Up

I’m feeling under the weather today, so please enjoy this funny commentary from the Mogambo Guru.

I do want to say one quick thing.  SafeBulkers Inc. (SB) is getting pummeled today at a loss of 4.33%.  It opened at $8.70/share and is down to $8.40/share.  This is one of the best dividend stocks.  I would be an excellent buy below $7.50.  I’m not aware of any exposure to the Japanese earthquake/nuclear crisis.  I will keep monitoring.

Disclosure: I don’t own SafeBulkers (SB) right now.

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Mar 14, 2011

from The Daily Reckoning

Charts from contraryinvestor.com show that, as of right now, there is going to be almost $1.8 trillion in US Treasury debt maturing this year, and all of it will need to be “rolled over” by issuing new debt.

Perhaps it is also instructive that they also note that “Just shy of 50% of UST debt ‘rolls’ within three years.”

What this means, in practical terms, of course, is that We’re Freaking Doomed (WFD). “Why?” you ask. “Because,” I helpfully explain, “rising rates of inflation mean higher rates of interest that borrowers, especially deadbeat bankrupted governments, must pay when they try to rollover such massive amounts of debt!”

And what were interest rates three years ago when half of all Treasury debt, now rolling over, was first issued? I don’t know exactly, but the graph of “US Treasury Bond Interest Rate History” at observationsandnotes.blogspot.com shows that interest rates were higher in 2008, and lower now in the range economists call “squat,” meaning that rates have nowhere to go but up.

Well, perhaps you would be interested to know that the interest rate on these bonds is lower than at any time since the ’50s, and is just inches away from the all-time, record-low of 2% set in 1940.

Or perhaps you would be staggered, clutching your heart and screaming, “Nooooooo!” when you learn that the average interest rate over the years was somewhere just under 6% ever since the low of 2% set in 1940, which means that interest rates would have to double – double! – from here just to get back to the average interest rate paid on bonds since 1971!

And why was 1971 the big inflection point where interest rates went nuts? Because that was when volatility in interest rates really started Going Freaking Nuts (GFN) because, not by coincidence, Nixon severed the last threads of connection between the dollar and gold.

And there is a personal reason, too for picking that date. Before 1971, I was a fresh-faced kid, his whole bright future ahead of him, but who decided to make one idiotic, disastrous decision after another until I ended up here, decades later, a bitter little man wearing a bullet-proof vest and a tinfoil hat, hiding in the closet under the stairs and typing out hate-mail to the Federal Reserve (“Dear Federal Reserve morons, I hate you! Signed, Hateful in Florida”) and the Congress (“Dear Congress morons, I hate you! Signed, Hateful in Florida”).

And even before that, back to 1900, interest rates were low, and swings in interest rates were much more muted, too, because the dollar was mostly on the gold standard, which are two of the beauties of the gold standard, as we are seeing by just standing up and going over and looking out at a world on the verge of panic and ruination thanks to the Federal Reserve creating So Freaking Much Money (SFMM) for So Freaking Long (SFL).

And when the people of the world do panic, they will run to gold and silver, and their prices will soar, making this investing stuff so easy that you just gotta say, with every bit of earnestness you can muster, “Whee!”

The Mogambo Guru
for The Daily Reckoning

You Call It Inflation, I Call It Theft.

 This is an excellent article from Forbes by Bill Flax.  Tell your children the truth about inflation when they are ready to hear it.  Encourage them to save.  Saving is capital formation.  Teach them to be entreprenuers that serve customer's market needs and they will set for life.
 
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You Call It Inflation, I Call It Theft

Mar. 3 2011 - 5:05 pm | 5,977 views | 0 recommendations | 5 comments
IRS building on Constitution Avenue in Washing...

Image via Wikipedia

On my daughter’s birthday, she received a crisp new $5 bill, which she promptly deposited in her piggy-bank. Never foregoing an opportunity to expound on free market principles, I warned about her susceptibility to a subtle means of theft even more devious than a burglar breaking in at night against whom you might get a clear shot.

Usually, when she asks why it’s, “Because I told you so!” But for inflation, because Washington wills it, that explanation hardly suffices. And as often as economic prognosticators prescribe currency debasement as some miraculous panacea, her question is a good one. Why do we suffer inflation?

I searched online for “benefits of inflation.”

Inflation Spurs Growth – The theory goes something like this: Since savers realize the value of their money will erode, they spend more quickly thus stimulating the economy. If we believe tomorrow brings higher prices, we buy today. Basically, we spend before the monetary authorities steal our money’s value. Hmm.

The proponents of consumption-based stimuli overlook the essentiality of saving. While burying your money in the ground wastes its talents, most save via bank accounts or through the purchase of capital assets. Thus saving makes investment capital available for new businesses hiring new workers and creating new products that sustain and beautify life. The accumulation of capital drives growth.

Inflation discourages saving. Inflation buries capital into the ground as people flee toward real estate as a protective hedge. Inflation stymies growth.

Inflation Decreases Debt Burdens – If we borrow say, $14 trillion and then cheapen our debt through dollar devaluation, the repaid lenders can’t buy as much thanks to diluted dollars being returned to them.  Inflation essentially harms savers for the benefit of borrowers. Every dollar borrowed requires a dollar saved. The economy gains nothing by such mischief.

Generally, borrowers aren’t responsible for this debauchery so it’s not fair to label it theft. In government’s case, dilapidated debts at least rise to the level of fraud. Why does Washington willfully reward the profligate by cheating the prudent? Ah yes, because they exude profligacy.

Inflation Increases Asset Values – As the dollar falls, the price of our assets raises commensurately. Stocks, real estate, etc. surge. That sounds wonderful, but their value increases against what? Since the prices for everything else rise too all we’ve secured is a nominal gain for tax collectors to confiscate. We derive no real benefit.

A stock that cost $20 thirty years ago would need to fetch over $50 today just to match the CPI, understated as it remains.  If it now costs $40, you pay the IRS on the $20 nominal gain even as your stock actually lost value.  Washington thus rewards itself for its own reckless monetary policy. The more they inflate, the more they take.

A similar phenomenon nails your wages. As your salary increases, you pay more taxes even as you can afford less. A two percent raise increases your tax bill two percent, but if prices also rise only the IRS derives any benefit.

Inflation Offsets Unemployment – The Philips Curve, the illusion that increasing inflation decreases unemployment, remains a staple of macroeconomics even as few still publicly acknowledge its role. Bernanke, Geithner et al remain smitten by the Philips Curve.

To succeed, this essentially entails deceiving workers. Since the price of labor, your wage, is less elastic than many other costs, businesses can raise prices quicker than can employees increase their salary demands. As businesses raise prices to cope with inflation, the cost of labor proportionally lowers. Thus, in Keynesian theory, more workers can be hired as inflation dilutes your pay.

Remember this when you hear some self-proclaimed friend of the working man imploring that we accept inflation as a means to expand employment. They peddle pay cuts for workers in real terms versus free marketers who promote wealth generating growth. Growth affords higher living standards for all. Inflation silently erodes living standards.

Inflation Promotes Exports – While few non-economists still accept the Philips Curve, the crowd espousing inflation as a facilitator of exports proves more enduring. Exporters love dollar debasement.

In theory, if the dollar falls then anything priced in dollars becomes cheaper for someone holding say, euros. But the dollar and the euro are merely measuring sticks. The underlying transaction involves trading our goods. Currency is a tool; a ticket of exchange. Currency simplifies trading relative to bartering. You may not want my output, but you definitely want my dollar so that you can acquire what you do want.

For illustrative purposes only, ignoring taxes, regulatory burdens, and transportation costs or differing local tastes, if the dollar equals the euro and it takes a dollar to buy a dozen eggs then it too will take a euro to buy those eggs.  Purchasing price parity.

But as the dollar plummets, a euro is now worth more. Thus it takes more dollars to buy eggs, but it still takes but one euro. Domestic eggs didn’t become cheaper in euros. This isn’t some mysterious or complicated economic theory or even subject to debate. It’s elementary school mathematics: the transitive property. If A equals B and B equals C then A too must equal C. Making A not equal B doesn’t change the value of C.

Markets are not perfect and as well as the arbitragers perform, timing differences remain. Gutting the dollar never makes eggs cheaper in euros other than timing discrepancies, which can make or break producers. Firms whose inputs are denominated in one currency and their outputs in another frequently get jilted.

As the dust settles, things must balance, but if you bought a dozen eggs yesterday in dollars to sell them tomorrow in Euros, the dollar’s lack of certainty promotes intrigue. Inflation wobbles the scale hindering international commerce.

When parties trade of their own volition, by mutual consent and to mutual advantage, both expect to gain and both should, assuming an honest scale. When Washington deliberately engineers a false balance, the likelihood that someone gets harmed rises dramatically. Cheating your trading partners can win the day, but isn’t a successful long term strategy.

Like the Philips Curve, promoting exports by debasing the currency effectively pokes the pendulum. The inflation driven exhilaration proves fleeting as the pendulum swings back like a wrecking ball. Some latch onto the pendulum as it soars higher, but others get whacked as it returns.

Inflation is deceitful and ineffective. It swindles savers, fleeces lenders, pumps taxes higher and triggers malinvestment. It doesn’t reduce unemployment; it whittles away your wage. Nor does inflation promote exports, but it does make international trade more frightening.

If inflation succeeded, it would be merely dishonest. But as history proves, it never works. Neither Bush, nor Obama’s weak dollar policies did anything to alleviate the overblown “trade deficit” and much to undermine growth. There is no evidence that inflation fosters exports or employment.

As Washington plunders the value of our property and expropriates the product of our labor, inflation reduces us to servitude. Debasement is a despicable ploy the government uses to rob you blind. Period.

So what do I tell my children?

Link to original article: http://blogs.forbes.com/billflax/2011/03/03/you-call-it-inflation-i-call-it-theft/ 

How To End the Federal Reserve System

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How To End the Federal Reserve System

by Gary North

Things are not always as complicated as they seem. With respect to the Federal Reserve System, it is a deliberate mystery. It was deliberately designed in 1910 to deceive the public, who were opposed the idea of a central bank. The conspirators who met on Jekyll Island in November 1910 knew this. They did good work from their point of view. They concealed the beast.

The general public today knows little about the FED. Prior to Ron Paul's Presidential run in 2007-8, far fewer people understood it.

I have been asked: "How could we get rid of the Federal Reserve? What will replace it?" The answer: either the free market or Congress.

People who think of themselves as free market people often are not. The tax-funded public schools and the state-regulated and accredited university faculties have taught that the modern system of intrusive civil government is necessary for an orderly society. People cannot imagine a market-based society.

There is an old saying, "You can't beat something with nothing." But the free market social order is not nothing. It is expanding around the world, which is why the world is getting richer.

At the Federal level, a free market social order in banking existed prior to 1914. That was back when the dollar was worth over 20 times what it is worth today. On this point, see the inflation calculator of the Bureau of Labor Statistics.

We can go back to that system. We will go back to it. The question is: When? The other question is: At what price?

ENDING THE FED BY LAW

Ron Paul could introduce a bill to end the Federal Reserve System. He could call it: "The Monetary Liberty Act." It would get known as the "End the Fed Act." Here is what the text might say.

The Federal Reserve Act of 1913 is hereby repealed. So are all subsequent acts based on the Federal Reserve Act of 1913.

All authority of the Federal Reserve System to act in the name of the United States government is hereby revoked.

The assets of the Board of Governors of the Federal Reserve System, which are already the property of the United States Government, are hereby transferred to the Department of the Treasury. This includes all of the assets listed on the balance sheet of the Federal Reserve System.

The twelve (12) privately owned Federal Reserve Banks will return all assets held in trust for the United States government within thirty (30) calendar days of the signing of this bill into law.

The gold reserves of the United States government that are held in storage by the Federal Reserve Bank of New York will be transferred to the Government's depository at Ft. Knox, Kentucky, within one calendar year after this bill becomes law. The Government Accountability Office will conduct an inventory of the gold held in storage by the Federal Reserve Bank of New York before and after this transfer.

The Board of Governors will vacate the premises of the Federal Reserve building within thirty (30) calendar days of the signing of this bill into law.

Any pension fund assets of the employees of the various Federal Reserve Banks will remain under the control of those banks. All pension obligations under the authority of the Board of Governors of the Federal Reserve System are hereby transferred to the Department of the Treasury, to be administered under the retirement program of the Department of the Treasury.

This is simple. The Board of Governors of the Federal Reserve System is a government agency. Its authority would be transferred to the U.S. Treasury.

The dozen Federal Reserve Banks are privately owned. All authority of these 12 banks that derives from their connection to the Board of Governors will cease. If they can make a profit, fine. If not, equally fine. The free market will determine which will survive and which will not.

Is this radical? Not at all. There are two historical precedents: the refusal of Congress to renew the charter of the Bank of the United States in 1811, and the refusal of Congress to renew the charter of the Second Bank of the United States in 1836. Both of them went bust.

The standard response is that there must be independence between the Federal Reserve System and the U.S. government. Let us apply this to other agencies:

The Department of Defense
The Department of the Treasury
The Department of State
The Department of Education

I could go on, one by one, to list all of the thousands of agencies that are funded by Federal taxes and which operate by means of the authority of the U.S. government. Only one government agency is defended by publicists, both on and off the payroll of the Federal Reserve System, as deserving to be independent of the government that has transferred authority to it: the Board of Governors of the Federal Reserve System.

The phrase, "the independence of the Federal Reserve System," is a code phrase for "the independence of the four largest U.S. banks from the threat of losses." A growing number of voters has figured this out since the fall of 2008. This is why the Federal Reserve System is facing public criticism for the first time since 1914. This criticism will grow.

All of this may seem Utopian. Ron Paul could not get Congress to audit the FED, which by law possesses this authority. The Congress has been in the hip pocket of the FED for almost a century. The Congress lets the FED run the nation's economy.

But as criticism spreads, there will be more voters who figure out what the FED is and has always been: a government-created cartel of the banks. It operates for the benefit of the largest banks.

Will Ron Paul get such a law passed by Congress and signed into law? No. Does this mean that the FED is forever untouchable? No.

We need the following:

1. A wave of price inflation caused by the FED
2. A subsequent recession caused by the FED
3. A depression caused by the FED
4. A wave of outage in response to the FED
5. An endless series of criticisms of the FED

This will result, ultimately, in the abolition of the FED. Whatever replaces it will decide the economic fate of Americans: Congress (hyperinflation) or the free market (economic stability).

But could the free market replace the FED without a catastrophe following? Yes. We are already seeing this in another sector of the economy.

"YOU'VE GOT ALMOST NO MAIL!"

From the days of America's most famous postmaster, Benjamin Franklin, two decades before the American Revolution, residents of North America have thought that the country could not do without a government-funded postal system. In the past 15 years, this faith has quietly died. The United States Postal Service now delivers mostly subsidized opportunity mail. (I hate the work "junk mail," for I built my business on opportunity mail. But I have not used it for 15 years.) With email, UPS, FedEx, and text messaging, the first class letter is an anachronism. Historians will not be able to trace much after 1998 based on copies of letters.

With no fanfare, the postal system has become optional. The public does not go to the local Post Office often. If it were not for Netflix, a lot of people would not check their mailboxes daily.

All of this has happened without any new legislation. The once unbreakable monopoly of the Post Office is a rusted-out shell, staffed by union-protected workers who probably know their jobs are peripheral. Its volume declined by over 12% in 2010. This is expected to continue. That would cut volume by 50% by 2017. About 40,000 employees were fired in 2010. Saturday delivery will be dropped soon. There is another rate hike scheduled. Yet the outfit will lose $10 billion this year.

All this has happened without any enabling legislation. It has happened quietly. Market competition has reduced the USPS to an anachronism. It is a leftover shell of a bygone era.

In an essay about his youth, sociologist Robert Nisbet remarked that in the year he was born, 1913, the only contact that most Americans had with the Federal government was the Post Office. Later that year, the Federal Reserve Act was passed in a late session, just before Christmas break. Also in that year, the income tax came into effect. The expansion of the Federal government has been relentless ever since.

Nevertheless, the Post Office is slowly dying. No one planned this. The free market has replaced it, despite its official monopoly.

This offers hope. It means that free market solutions can come into existence before a government entity is shut down by law. The Post Office officially is a monopoly, yet its monopoly status has been eroded over the last four decades. It has been almost entirely replaced over the last two decades.

I think of a TV commercial that did not directly attack the Post Office. It was targeted at UPS. But UPS responded much faster than the Post Office could.

While critics of the postal monopoly had for decades tried to get Congress to revoke the Post Office's monopoly, all attempts failed. They were associated with the fringe. Yet, year by year, the Post Office fell behind. It is irrelevant in American life today.

This was not planned by any political group. It was the result of new technologies. People made decisions, day by day, to bypass the Post Office.

AN END RUN AROUND THE FED

I do not expect Congress to revoke the Federal Reserve Act of 1913 in this decade. The powers that be who run this country do so by means of the Federal Reserve System more than by any other semi-private institution. It is at the center of control, because the monetary system is at the center of the economy.

But the central bank faces a problem. To maintain the boom, the FED must inflate. To cease inflating would allow the credit bubble to implode on a scale far more devastating than what happened in 2008. The FED has placed us all on the back of the tiger.

Yet if it does not reverse its policy, it must produce hyperinflation at some point. That will destroy the FED's ability to guide the economy. Hyperinflation will lead to alternative currencies. Digital technology is now international. If buying and selling digital U.S. dollars is no longer profitable, because long-term contracts are not possible under hyperinflation, then the citizens of the United States will do what citizens of Zimbabwe did. They will use other currencies.

If the FED produces a Third World economy through hyperinflation, then people will do what Third World citizens do: find reliable currencies elsewhere. This can be done on-line nearly for free. The Internet has reduced the transaction costs of using rival currencies.

The FED economists know this. They know that transaction costs for using other currencies are low. If the FED's policies undermine long-term contracts, the citizens are not helpless. They can switch.

It will not take legislation to end the FED. All it will take is the FED. If the FED continues to inflate, it will destroy its base: the monetary system based on the FED. But if it ceases to inflate, by ceasing to buy Treasury debt, it will create Great Depression 2.

QE2

Bernanke can get away with QE2 today only because commercial banks are not lending. If they start lending, M1 will rise, the M1 money multiplier will rise, and price inflation will return.

He has bought time with QE2, but he has not bought a way out of the credit bubble that Greenspan created and he created.

He can play hide and go seek with Ron Paul, refusing to show up at the hearings of the Monetary Policy Subcommittee. Congress cooperates. But he cannot play hide and go seek with the business cycle. Greenspan did, but he got out in 2006. He passed on the Old Maid to Bernanke.

The Federal Reserve System bases its power on its ability to control the monetary base. It swapped T-bills for toxic assets to save the big banks, but to replenish its supply of swappable liquid assets, it has to inflate, as it is now doing. QE2 is replenishing the supply of Treasury debt to swap with large banks.

The FED did not bail out any small banks in 2008. It never has. Its unofficial mandate is to bail out the largest commercial banks. This it has done.

I think Bernanke sees another banking crisis coming. This is why he has pushed QE2. Only Hoenig has voted against it. Bernanke has his way with the other members of the Board of Governors and the Federal Open Market Committee. He has not said why this massive increase in the monetary base is mandatory for the economy. To talk about this would create doubts. He does not want to rock the boat. So, he gets away with another $600 billion in monetary base creation.

This is working for now. But the results are unavoidable: either price inflation or continued high unemployment and stagnation, because commercial banks thwart the stimulation. He is on the tiger's back. So are we.

CONCLUSION

The Post Office looked unbeatable for over 250 years. Technology has made it peripheral. The same will happen to the Federal Reserve System. It looks unbeatable. But the Internet can beat it. There are ways out of the FED's trap.

A lot of people will pay a heavy price for Bernanke's policies. That will be the price of persuading those people with the bulk of their assets in digital dollars to sell those assets and replace them with other digits.

This is why I do not think the FED will resort to hyperinflation. The economists know that the FED's victims can escape. The FED will risk mass inflation, but at some point it must say: "We will buy no more Treasury debt." That will be the moment of truth. That will be the day it climbs off the back of the tiger.

So will we all.

March 9, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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Don't be like these people. They will be wards of the State.

Fidelity Investments released results from a 401(k) study a few weeks ago.  Fidelity is one of the largest investment companies in the US.  The huge number of people in the survey are a representative sample of the US investing population.  The results of the survey are ominous.  The average Fidelity 401(k) account balance was $71,500.  The article touted this as a positive development, but I don’t see it that way.  These people will be wards of a failing State that can’t deliver its welfare/retirement promises.

Social security and Medicare are huge ponzi schemes.  Please read the free introductory chapter of Tom Wood’s new book Rollback to get a succinct overview of the coming government default.  Type your email and they will email you a PDF file of chapter 1.

http://bit.ly/RollbackChapter01

$71,500 invested in a high dividend stock portfolio averaging a 6% yield would generate $4,290 in income minus extortion (taxation).  They might get some social security money.  Let us assume a monthly benefit of $1,200 from social security and no pension money.

$1,200 social security (pre-tax) + $357 (monthly high dividend pre-tax) = $1,557 per month pre-tax income.

The average 401(k) account holder is screwed.  They will be forced to accept a much lower standard of living, reverse mortgage their home, and/or move in with some of their children.  There is no way someone retiring today at 65 years of age with $71,500 in their retirement account could not live off of their savings for 20 years.

Let’s assume for a moment that those closest to retirement have twice the average Fidelity account balance.  How much better off are they?  They would have an account balance of $143,000.

$143,000 in their 401(k) x 6% dividend yield = $8,580 per year dividend income or $715 per month

$1,200 social security + $715 dividends = $1,915 per month income.

Yikes!  Can you say Wal-Mart greeter?  These people will not be able to retire on an income of $1,915 per month.  Keep in mind that most people are not putting together high dividend stock portfolios earning over 6%.  The S&P 500 index is only providing a pathetic 1.71% dividend yield recently.  These people will be devastated by the Federal Reserve’s price inflation.  The money supply and later prices will skyrocket when the commercial banks lend out the over one trillion dollars in excess reserves.  Retirees are on fixed incomes.  They will be crushed by price inflation.

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Fidelity Study Finds 401(k) Account Averages in 2010 Reached 10-Year High

Posted in 401k, Financial News, Retirement

February 23, 2011

The average 401(k account balance showed a significant increase at the end of 2010, according to a new study released by Fidelity Investments. On average, accounts held $71,500 during the year, which was the highest average account balance revealed by Fidelity in 10 years.

Accounts Up 11 Percent from 2009

Fidelity Investments had a lot of positive numbers to share regarding the increases in 401(k) accounts. One great bit of data was that, for the 17,000 employer-sponsored defined contribution plans and their 11 million participants, the average balance of their retirement accounts rose 11 percent over the average balance in the fourth quarter of 2009.

Even better was the fact that after 401(k) accounts took a huge hit from the financial crisis, some even losing more than half of their balance in 2008 and 2009, they managed to increase 7.65 percent over the accounts in 2000 that averaged $54,700.

According to the study, about two-thirds of the increases seen were driven by market performance while one-third increased thanks to participant actions such as contributions. The Standard & Poor’s 500 Index increased by about 13 percent last year, and according to the study, workers deferred an average of 8.2 percent of their salaries.

Continuously-Active Accounts Tripled Over the Decade

The report also found that savers who were continuously-active, meaning they were employed by the plan sponsor and had a balance for the entire decade, saw their plans triple during that time. The average 401(k) balance increased from $59,100 in December 2000 to $183,100 in December 2010.

One reason account averages increased was because most participants continued to contribute to their plans through the financial crisis and fought against withdrawing funds or borrowing from their plans.

In fact, four out of five savers didn’t take a loan from their plans last year and only 33 percent cash out when leaving a job. Most people found that keeping money in their plans was the best way to ensure they would have money available once they retire.

Original link: http://www.gobankingrates.com/retirement/fidelity-study-401k-account-2010-10-year-high/

TIP OF THE WEEK - Watch What They Do; Not What They Say

Watch What They Do; Not What They Say

Jason Brizic

Mar. 4, 2011

Federal Reserve chairman, Ben Bernanke, says a lot of contradictory statements in his boring speeches.  Ignore what he says.  You should watch what Federal Reserve does instead.  The FED’s balance sheet visually shows you if they are inflating or deflating.

The stock market’s nominal index numbers will go up when the FED is printing money out-of-thin-air.  Commodities will go up when the FED is printing.  The purchasing power of the dollar goes down when the FED prints money.  However, the opposite happens when the FED deflates.

Cumber Associates does a great job of visualizing FED balance sheet data.  It is available for free and it is updated weekly.  Click on this link to see the Federal Reserve’s balance sheet:

www.cumber.com/content/misc/fed.pdf

It looks like this:

Image001

The large dark blue increase at the bottom of the chart since December 2010 is QE2 (the purchase of US Treasuries).

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Farrell Predicts Market Crash 2011: It Will Hit by Christmas

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Paul B. Farrell

Feb. 22, 2011, 12:01 a.m. EST

Market Crash 2011: It will hit by Christmas

Commentary: The S&P 500 is worth only 910. Get out or lose big

Mr. Farrell, behavioral economics columnist and former Morgan Stanley investment banker, recently wrote a damning commentary on the lies that Wall Street and the Federal Reserve continue to feed you.  Ignore it at your own peril.

There will be another opportunity to buy high dividend stocks at or near the bottom of the next phase down in this Federal Reserve induced bust (bear market).  Keep your invested savings on the sideline in a money market fund.  Make sure you are raising your trailing stops on your winning high dividend stocks.

http://bit.ly/BearMarket

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(Hat tip to Larry)

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Food Price Inflation Calculator.

Food Price Inflation Calculator

by Richard Daughty
The Daily Reckoning

Previously by Richard Daughty: Buying Silver While It’s Still Relatively Cheap

 

   

Mark Thornton of the Mises Institute writes, “The price of everything seems to have skyrocketed. Only housing, the dollar and inflation-adjusted income are negative.”

I immediately interrupt to wittily say, “Well, housing is going down because nobody wants to buy a still-over-priced-yet-even-lower-quality house that now needs painting, a new water heater, some leaky things fixed and a new roof, especially now that inflation-adjusted incomes are negative!”

The stunned silence at my rudeness was all I needed to continue, “And the ridiculous fiat dollar is going down in purchasing power because the foul Federal Reserve is creating So Freaking Much Money (SFMM) that, vis-à-vis other dirtbag fiat currencies of other dirtbag countries running budget deficits, the dollar is going down in value faster than they are because the Federal Reserve is creating more new money than all the rest of the world’s dumb-ass, dirtbag central banks put together!”

Seeing that everybody is completely stunned by the way I just barged into the conversation with one of my patented Stupid Mogambo Remarks (SMR), I, thus emboldened, powered forward by thoughtfully stroking my chin as if contemplating something profound, whereupon I go on, my voice rising in a crescendo of pain and outrage, “But if you calculate all prices in ounces of gold, you will find that prices will have actually gone down! I’m not sure exactly how to prove it, but this has to mean We’re Freaking Doomed (WFD)!”

Apparently, Mr. Thornton is not sure how to calculate it, either, but is perhaps suggesting that the horror may be found in the fact that “World food and commodity prices are up 28% over the last six months.”

I was surprised that I did not edit his remarks to end with at least one exclamation point, and also surprised at his use of a 6-month time-frame, instead of annualizing it, at least in some simplistic linear manner that a dolt like me can understand.

In doing so, he unwittingly provides an opening for Showoff Calculator Man (SCM), as I happen to be an absolute whiz at multiplying numbers by 2!

Putting my calculator where my mouth is, I quickly crank out 2 X 28% = 56% inflation! See? I CAN do it!

On the other hand, 1.28% X 1.28% = 1.64%, which would seem to be a massive 64% annual inflation when compounded, even more so than the simple 58%. Yikes!

Mr. Thornton ignores me, and goes on, “Higher food prices set off the revolutions in Tunisia and Egypt and the mass protests in countries like Algeria, Jordan, Yemen, Bahrain and Iran. People in these countries buy more unprocessed foods and spend a much higher percentage of their income on food, so they have been severely impoverished by Bernanke’s QE2.”

Of course, being an American, all I really care about is how it affects me, an American, and American prices, and how in the hell I am going to afford higher prices on my American income which has, as he said earlier, gone down when inflation-adjusted.

In that regard, Joel Bowman, Managing Editor here at The Daily Reckoning notes, “Wholesale prices jumped 0.8% in January. The producer price index (PPI) has now jumped 3% over the last four months. And no, that’s not an annualized figure.”

Again, Showoff Calculator Man (SCM) comes to the rescue, and multiplies 3 times 3% to get 9% inflation, which IS an annualized figure, and more than 9% inflation when compounded, and which is scary enough to send me running, running, running, like the paranoid little weasel that I am, to the safety of the Mogambo Secret Bunker (MSB).

I was hurriedly shutting the bunker’s door when I heard Mr. Bowman go on, “Note that the PPI headline number is for ‘finished goods’ – stuff that’s ready to be sold direct to consumers. In the category of ‘crude goods,’ the figures are far worse – up 3.3% in January, and up a staggering 15.8% over the last four months.”

The last four months! That’s almost 48% inflation a year! Man, if ever there was a time to buy gold, silver and oil, this is it! Whee! This investing stuff is easy!

February 26, 2011

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning, and other fine publications.

Booms, Busts, and Food Prices

  Booms, Busts, and Food Prices

by Gary North

Recently by Gary North: World's Longest-Using WordPerfect Author Abandons WordPerfect After 30 Years

 

   

Maybe you have heard about rising food prices. It is happening all over the world. We hear of Third World rural populations that are trapped by rising food prices.

Why are food prices rising? Simple: because urban people in formerly Third World nations are getting richer. India and China are the obvious examples. As these economies are freed from the regulations that once burdened them, the growing urban middle class bids up the price of food. People with money in their pockets like to eat more and better food. In the bidding war between rural people with little capital and therefore low incomes vs. urban residents with more capital and higher incomes, rural people lose.

The price of food is rising not just in U.S. dollar terms, but in terms of all currencies. This is not a U.S. phenomenon only. This is international.

When we compare the rise in the price of oil since 1999, the rise in the prices of commodities in general (including gold and silver), and the price of food, food remains a bargain. Two charts are here.

COLLAPSE IN 2008

The recession in 2008 drove down the oil price from $147 to $33 in the final five months. This was a collapse. The price of food fell, too, though not to this extent. Silver and gold fell – silver far more sharply than gold. This indicates the degree to which commodities are tied to the worldwide business cycle. Commodity prices fell because the international economy fell.

Commodities are not the initiating force in price inflation; monetary policy is. The prices of raw materials rose in the first decade of the 21st century because central bank policies around the world were expansionary. When the recession hit in 2008, the prices of commodities fell, but not until several months into the recession. (Gold and silver fell in March, before the others fell.)

There is an ancient error, stretching back to Adam Smith, which says that retail prices rise because of cost-plus inflation. Prices for raw materials rise, forcing up retail prices. This was refuted by Carl Menger, the original Austrian School economist, in 1871. He showed that production costs rise in response to bids by entrepreneurs, who in turn expect rising demand for the output of their enterprises. The prices of economic inputs rise in response to expectations.

When, in the second half of 2008, entrepreneurs and speculators finally recognized the extent of the recession, they stopped bidding for as many raw materials. So, the prices of these production goods fell.

It is true that monetary policy affects the business cycle. It is true that QE2 is inflationary. But let us not mistake cause and effect. The increase in commodity prices all over the world ever since early 2009 is the result of simultaneous central bank policies. The Federal Reserve System and other large central banks began inflating in late 2008 to reverse the banking panic by large depositors, not small depositors, who were covered by FDIC rules.

The policies of late 2008 have not produced mass inflation, because commercial bankers have increased their banks' excess reserves at the FED and other central banks. They are not lending all of the money that they are legally entitled to lend.

QE2 has nothing to do with much of anything. Yet.

QE2 AND PRICES

First, QE2 did not get rolling until early in 2011. For most of 2010, the Federal Reserve System was deflating. This is seen in the chart of the adjusted monetary base.

Second, commodity prices rose in 2009 and 2010.

Third, the cause of this increase was the prior monetary policies of central banks, late 2008 to early 2010.

Fourth, the increase in the adjusted monetary base in 2011 indicates that the "exit strategy" of 2010 has ended. Bernanke keeps talking about being ready to adopt an exit strategy when the time is ripe. This is a smoke screen. The FED actually began to adopt a policy that can best be described as an exit strategy in March 2010. It has made a fast exit from the exit strategy in 2011.

That commodity prices could continue to rise in expectation of a QE2-generated recovery later this year is quite possible. It depends on what entrepreneurs expect commercial bankers to do. Will bankers lend? If so, the M1 supply will rise, and so will the M1 multiplier. That will force up prices. But QE2 may fail to persuade commercial bankers to lend. Then the FED will be pushing on a string.

My point is this: you should pay no attention to anyone who tells you that the rise in food prices has been the result of recent Federal Reserve policies. Commodity prices rose in 2010 despite a policy of monetary deflation by the FED. This is rarely discussed by financial commentators.

I think the upward move of commodities will continue until China goes into recession. China's central bank is raising interest rates. As far as we are told, monetary policy remains expansionist. But rising rates for commercial banks will have the effect of making commercial loans unprofitable for some entrepreneurs. They will cease hiring workers. They will cease buying commodities. This is what the Austrian theory of the business cycle teaches. In order to avoid price inflation, the central bank changes course and lets interest rates rise. This ends the boom.

At the margin, Western consumers are not the source of the rise in food prices. The West is rich. It allocates relatively little of its monthly expenditures to food. When Western incomes increase, the bulk of the money does not go to increased consumption of rice, wheat, and corn. This is not the case in the Third World. When people move from the country to work in urban settings, they increase their purchases of food. Their mark of wealth is their ability to buy more food. They bid against each other. They bid against rural residents.

The rising price of oil and food indicates a growing economy worldwide, just as falling prices in the second half of 2008 indicated a contracting economy.

Oil is extremely volatile because of the inability of buyers to store large quantities in reserve. This is not true of foodstuffs. The food is kept in grain elevators. The price of food is less volatile than energy prices, because entrepreneurs who hold grain in reserve can sell into this increased demand. This increases the supply of food available to retail food producers.

DOLLARS AND FOREIGN CURRENCIES

One of the marks of an ill-informed analyst is the absence of any discussion of foreign central bank policies in relation to Federal Reserve policies. Let me explain.

Food in foreign countries is priced in the domestic currency units of those countries. What the Federal Reserve does is not directly relevant to the economies of those countries.

When the FED increases the monetary base by purchasing Treasury debt, this reduces the interest rate of short-term bills, but it can – and did – increase the mid-term rates. This was not what Federal Reserve economists would have imagined. You can see what happened in February.

Higher rates of limited magnitude have little effect on foreign central banks. They buy U.S. Treasury debt for other considerations than a few hundredths of a percentage point in interest. They buy for reasons of mercantilism: subsidizing their export sectors.

The average resident in a foreign nation bids for food, as for all other scarce resources. But he bids in terms of his nation's currency unit. This has nothing directly to do with the Federal Reserve and QE2. The bidding process raises the price of food. Americans must bid more dollars to buy food. But this demand is in terms of consumers' output, not dollars. Japanese residents bid with yen. Americans bid with U.S. dollars. Chinese residents bid with yuan. But to buy yen, dollars, or yuan, residents must sell their output. They are buying food with their output. This is the fundamental fact of all pricing.

The FED inflates the monetary base. This may or may not lead to increased M1 and a higher M1 money multiplier. At some point, Americans will get their hands on some of this new money. They will bid for goods and services. But they will not bid very much extra for increased food. If Richard Simmons had his way, Americans would bid more for a new Richard Simmons DVD on how to lose weight by this or that technique. They would bid more for fresh fruits and veggies and less for snack foods that most people enjoy eating. Snack foods are more about packaging and taste than about the cost of grains to produce them.

So, what matters most for the price of food in a foreign country is the domestic monetary policy and economic output in that country.

If the central bank of some Asian country tries to keep its currency from rising in relation to the U.S. dollar by inflating the domestic currency, this will affect the price of food there. The increased monetary expansion will fuel the boom phase of the boom-bust cycle. This will goose the economy by lowering nominal interest rates. But this effect would not take place if the central bank did not tamper with the money supply or the interest rate on short-term government bonds.

To blame Bernanke and the FED for the rising cost of food is based on a misunderstanding of the currency markets. It blames a cause which is not in fact the primary cause. The primary cause is rising output – increased bids – in Third World countries that are experiencing economic growth. To the extent that this rising output is based on long-term innovation and capital investment, this is positive. To the extent that it is based on fractional reserve banking and central bank purchases of debt, it is not positive. Rather, it is creating a boom that will turn into a bust, just as it did in the second half of 2008.

DESPERATE CENTRAL BANKERS

Central banks inflate to keep government debt markets solvent. That is their official task. It has been ever since the Bank of England was created in 1694.

Central banks inflate also to keep large commercial banks solvent in a financial panic. That has been their unofficial task for at least a century.

They began doing this as a depression hedge in the early 1930s. John Maynard Keynes announced his last career flip-flop in 1936, with the publication of The General Theory of Employment, Interest, and Money. Here, he set forth his recommended cure for the Great Depression: government spending. This could be done through taxes, borrowing, and monetary inflation. He preferred the second, but he was not limited to it, nor have his disciples been limited. Keynes baptized policies that Western governments had already adopted. He invented a new terminology to cover his tracks. He was merely promoting the crackpot monetary theories of Major Douglas and Silvio Gesell, as he admitted (pp. 353-58).

Bringing Keynesian policies up to date, the unprecedented increases in the monetary base of the Federal Reserve, the Bank of England, and the European Central Bank, beginning in late 2008, were the cause of the reversal of the collapse of the financial markets. This reversed the recession. This led to a recovery of commodity prices after 2008. These effects had impact on the eating habits of Chinese and Indian consumers. China and India are part of the international economy. But the effect on food prices was indirect. They rose because demand for Asian exports recovered. The people involved in the export trade were able to bid up the price of food.

There is talk about food being a bubble sector. Given what happened in the second half of 2008, this is a legitimate conclusion: the bubble popped. If the central banks continue to inflate, and the West's economy avoids another major recession, then food prices will continue to increase. Poor people are becoming less poor, and as they become richer, they will eat more. They will also move from bicycles to motor bikes. Motor bikes consume gasoline.

Commodities rise in price when there is increased demand for them as factors of production. There will be increases in technology in these sectors, but the rate of speed at which Indians and the Chinese are getting richer is greater than increases in production of raw materials. This is a bubble in the sense of central bank policies promoting a boom economy through inflated currencies. But the general upward move of commodity prices, as distinguished from consumer goods prices, will likely continue over the next two decades.

There will be a bust at some point, perhaps in the next few years, and maybe before. Central bankers in China and India will separately decide to put on the monetary brakes in order to avoid mass price inflation. There will be recessions in both nations. This will once again force down the price of food. But this will be a buying opportunity. The long-run trend is up, because the long-run trend of Asian productivity is up.

Bernanke is responsible for persuading all of the FOMC members except Hoenig to vote for the expansion of the monetary base. To the extent that this delays the day of reckoning, when capital is finally priced apart from monetary inflation, the FED is responsible for the bubble in food prices. But this increase has been going on for a decade. This is not recent. It has nothing to do with QE2. Yet.

CONCLUSION

The rise in food prices is a mark of deliverance out of poverty for hundreds of millions of Asians. The fact that they are saddled with imitations of the Bank of England, just as residents of the West are, is unfortunate. It will be even more unfortunate when the era of central banking and the welfare state reaches its apogee and collapses.

The universal bankruptcy of the national welfare states will provide a great opportunity for free market economists to say, "We told you so," and perhaps gain their followers a market for the reconstruction of the political order from the bottom up.

There will be a price to pay. The rising price of food in the boom phase of the great transformation is likely. When poor people get richer, they spend money more on food, but less time producing it. The bubble in food prices is indeed a bubble, because Asian central banks are inflating. But in the long run, food prices and oil prices will rise because newly middle-class people prefer to buy food and fuel with their increased output.

The supreme mark of a more productive economy is the increase in the price of land, meaning the raw materials that land produces. Capitalism is reducing poverty today on a scale never before seen. So, food and fuel prices will rise until new technologies are implemented that allow raw materials suppliers to keep pace with the move from the Asian countryside to the cities. Such innovations will not keep pace for the next 20 years.

Be thankful that you are not some middle-aged peasant trapped in the pre-capitalist economy of some Asian village. For him, this vast increase of urban wealth will be no picnic.

February 26, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

 
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Central banking and social unrest.

Rising food prices in the Arab world are much to blame for social unrest.  And who’s actions cause prices to rise?  Why, that would be the central bank of the world’s fiat reserve currency – the Federal Reserve, of course.  And you thought they just tried to control interest rates.

Charts: Food Prices, Commodity Prices

Gary North

Feb. 24, 2011

The United States Department of Agriculture has published this chart of commodity prices, including oil. Food prices have risen, especially after 2006, but not anywhere near as rapidly as general commodity prices and the price of oil.

Image001

  

Image003

http://www1.eere.energy.gov/biomass/pdfs/global_agricultural_supply_and_demand.pdf

The move in oil began in 1999, during the boom phase of the economy. The recession of 2001 did not reverse the rise of prices.

Oil's price tumbled sharply in the second half of 2008: from $147 per barrel in July to $33 in December. Since then, it has risen. Food prices also fell sharply. Food prices have risen steadily since late 2008.

Image004

  

Image003

http://www.fao.org/worldfoodsituation/foodpricesindex/en

The Role of US Debt in the Current Revolution

by Bill Bonner
Daily Reckoning

Recently by Bill Bonner: Revolution in Egypt and Where to Be When Black Swans Appear

 

 

 

Cereal Wars…and Zombie Wars…

Hey, how ’bout that Ben Bernanke… He’s a freedom fighter! Look what he’s done to North Africa!

Seems like every time we pick up the paper another dictator is toppling over. Where does it lead, we wonder? What would a world be like without dictators? Without them, who will the CIA and the State Department give our money to?

On the run this morning (but not quite given up) is Muammar Gaddafi of Libya.

Wait… Is this guy a friend or an enemy? We can’t remember. Wasn’t he a bad guy a few years ago? But recently we’ve heard that he is a good guy. He’s helped with the War on Terror. And he sells oil.

Friend or foe, we don’t know…but whatever he is, he’s beginning to look past tense. As of this morning, reports say he’s lost control of Libya’s second largest city. His troops are firing on protesters in the capital, where he and his loyal guards are holed up in a few government buildings.

His son vows to fight back. He says there will be “rivers of blood” before he gives up.

That “rivers of blood” image was used by Enoch Powell in Britain fifty years ago. It came from Virgil’s Aeneid, in which a character foresees “wars, terrible wars, and the Tiber foaming with much blood.”

Powell was referring to the effects of immigration into Britain from Africa and elsewhere. He thought he saw race wars and power struggles coming as a result.

But the younger Gaddafi uses the language as a threat, not a prophecy.

Still, it didn’t do Powell much good. Maybe Gaddafi will have better luck with it. Most likely, he’ll high-tail it out of the country before the blood is his own. That will bring to three the number of regime changes in the last few weeks. Which leads us to ask: what’s up?

The answer comes from our old friend, Jim Davidson. He pins the revolutions on Ben Bernanke. Behind the popular discontent is neither the desire for liberty nor the appeal of elections. It’s food. And behind soaring food prices is Ben Bernanke.

The Arab world is a model Malthusian disaster, says Davidson. Populations have ballooned. Food production has not. Which makes Arab countries the biggest importers of cereals in the world. And when the price of food goes up, the masses rise up too.

From Jim’s latest newsletter, Strategic Investment:

Food prices hit an all-time high in January. According to the UN’s Food and Agricultural Organization (FAO) “the FAO Food Price Index (FFPI) rose for the seventh consecutive month, averaging 231 points in January 2011, up 3.4 percent from December 2010 and the highest in both real and nominal terms” since records began. Note that prices have now exceeded the previously record levels of 2008 that sparked food riots in more than 30 countries. “Famine-style” prices for food and energy that prevailed early in 2008 may also have helped precipitate the credit crisis that Federal Reserve Chairman Ben Bernanke described in closed-door testimony “as the worst in financial history, even exceeding the Great Depression.”

This time around, the turmoil surrounding commodity inflation has taken center stage with more serious riots and even revolutions across the globe. Popular discontent is not just confined to “basket case” countries like Haiti and Bangladesh as in 2008. High food prices have roiled Arab kleptocracies with young populations and US backed dictators such as Tunisia, Egypt, Bahrain and Yemen. Even dynamic economies have been affected. Indeed, all of the BRIC countries, except Brazil, have witnessed food rioting.

Well, how do you like that, Dear Reader? All those billions of dollars spent propping up dictators – $70 billion was the cost of supporting Hosni Mubarak in Egypt alone – and then the Fed comes along and knocks them down.

The Fed lowers the cost of money so speculators can borrow below the rate of inflation. And then it prints up trillions more – just to top up the worlds’ money supply.

Is it any wonder food prices rise? Imagine you’re a farmer…or a speculator. You can sell food. Or you can hold it in storage. You know the food is valuable. You know the world has more and more mouths to feed every day. You know food production is limited. And you know Ben Bernanke can print up an unlimited number of dollars. What do you do?

Do you sell immediately? Or drag your feet…holding onto your valuable grain as the price hits new highs?

Davidson continues:

While Mr. Bernanke modestly declines the credit for de-stabilizing much of the world, close analysis confirms that he played an informing role. His QE2 program of counterfeiting trillions out of thin air has helped ignite a raging bull market in raw materials with food and commodities – up 28% in the past six months. The fact that the US dollar has heretofore been the world’s reserve currency means that almost all commodity prices are denominated in dollars. As a matter of simple math, when the dollar goes down, the prices of commodities tend to go up.

Today, Libya. Tomorrow…Yemen? Or Saudi Arabia.

In North Africa, Cereal Revolutions…

In North America, Zombie Wars…

Yes, the battle rages in the Dairy State. And yes, Nobel Prize winner Paul Krugman (Economics!) has no idea what is going on:

It’s “not about the budget. It’s about power.”

He thinks it is a battle between the rich and powerful, whom he calls the “oligarchy,” and the decent lumpenproletariat. Wisconsin’s governor is trying to bust the union, says Krugman, so that the elite can ride roughshod over poor government workers, cut their pay, and reduce their benefits (thereby downsizing the state’s budget deficit).

It’s not about money, says the New York Times columnist. He’s wrong, as usual. The Zombie Wars are always about money. There is less money available and more zombies who want it.

In the present case, rather than hire honest people to work at market rates…Krugman wants the state to be forced to deal with a privileged union. Union zombies should bargain with government zombies, he says. Together, in cooperation, not in conflict, they should figure out how to rip off the taxpayer.

Stay tuned…the Zombie Wars are just beginning.

Reprinted with permission from The Daily Reckoning.

February 24, 2011

Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.

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Why is price inflation raging in China, but not in the US?

Image002

Why is price inflation raging in China, but not in the US?  Both countries and their central banks showered banks with stimulus money.  The short answer to that question is because the Chinese state-owned banks kept lending to businesses and individuals while US commercial bankers have tightened lending.

The fractional-reserve lending process creates money.  Money creation adds to the money supply that comprises people’s checking accounts (M1).  People spend the money in their checking accounts to purchase goods.  More money chasing the same amount of goods leads to higher prices (all other things being equal).  To better understand how this process functions to create money click here: http://en.wikipedia.org/wiki/Fractional_reserve_banking .  Also, Murray Rothbard’s “The Mystery of Banking” is a bit longer, but it is so elegant an explanation of this process that affects us all.  http://mises.org/resources/614/Mystery-of-Banking-The

The US commercial bankers are not lending the over one trillion dollars in excess reserves that they received from the Federal Reserve.  Lending is the process in which the reserves are transformed into M1 money supply.  Individuals in the US are going to experience massive price inflation once the bankers expand lending.  These price increases will make the 1970’s seem like a sunny afternoon.

The Chinese government bankers do not face negative career sanctions if they drive their banks and country into the ground.  Only the biggest US banks are protected by the Federal Reserve.  All other bankers are tightening for their lives.  The biggest banks are not lending to shore up their pathetic balance sheets.

They Chinese government bankers are lending like crazy despite the obvious price increases in goods and real estate in China.  Their price increases are going to lead to strife in China.  There are millions of unmarried, unemployed Chinese males due to the government’s one child policy that are facing increased prices and poor employment prospects.  That spells revolution in most historical cases.

What is happening in China will happen to us.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.  I will also help you time your purchases of non-correlators to the stock market like commodities and precious metals.  Their prices will be impacted by the events in China, the US, and Europe.

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Chinese shoppers struggle with spiraling prices

Chinese shoppers struggle with spiraling prices as government tries to cool inflation

A woman selects vegetables on a store inside a market in Beijing, China Tuesday, Feb. 15, 2011. A jump in food prices pushed China's inflation higher in January, adding to pressure on Beijing to control surging living costs. (AP Photo/Andy Wong)

, On Tuesday February 15, 2011, 5:33 am EST

BEIJING (AP) -- Spiraling prices have made the grocery store a scary place for Chu Yun, a 27-year-old office clerk.

"Prices for everything are going up and it seems it will never stop," Chu said as she hunted bargains in a supermarket. "I have no confidence prices can be brought under control this year. I think they will keep going up."

China's public is struggling with a monthslong surge in food prices that has defied government efforts to combat inflation with interest rate hikes, price controls and a campaign to boost vegetable and grain output.

On Tuesday, the government reported inflation accelerated in January, rising to 4.9 percent from December's 4.6 percent. That was driven by a 10.3 percent jump in food costs amid tight supplies and strong demand.

Economists expect more sharp price rises in coming months because China faces a problem it cannot quickly fix: Demand is outstripping food supplies, while high global commodity prices mean it can't fill the gap cheaply with imports.

"Inflation is unlikely to come down substantially in the first half of the year," said Mark Williams of Capital Economics. Analysts expect more rate hikes, but Williams said that on their own, "they aren't going to bring more crops to the market."

Inflation is dangerous for China's leaders because it erodes economic gains that underpin the Communist Party's claim to power. And it hits the poor majority hardest in a society where millions of families spend up to half their incomes on food.

That is politically awkward as Beijing tries to enforce stability ahead of a once-a-generation handover of power next year to younger Communist Party leaders.

"The political backdrop of the transition is paramount in the policymakers' minds," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB. "They realize the poorer people who still are the majority of China's population are hurt by inflation to a larger degree than they benefit from growth."

Beijing has tried to mollify the public by paying food subsidies to poor families, holding down prices in university cafeterias and ordering local leaders to see that vegetable markets have adequate supplies. It has tried to diffuse public frustration by claiming hoarding and price-fixing by speculators is partly to blame.

But analysts say Beijing also failed to act quickly enough to head off inflation after it deflected the 2008 crisis by flooding the economy with stimulus money and bank lending. The economic rebound gave consumers more money to spend and banks are pumping out loans despite orders to curb credit.

Beijing has raised interest rates three times since October, but economists say more rate hikes are needed and it will be months before the effect is seen.

"It seems Chinese policymakers are behind the curve in fighting inflation," Kowalczyk said. "They have been too cautious."

The headline inflation numbers hide even sharper increases in key items.

In January, the price of fresh fruit soared by more than a third from year earlier, while eggs rose by a fifth, the National Bureau of Statistics reported.

At the Xinya Shopping Center, a supermarket on Beijing's east side, the price of sugar is up 80 percent over a year earlier, while high-quality rice costs 65 percent more, according to manager Wang Yongyi.

"Since the second half of last year, we have been busily changing the price tags to mark the prices up," Wang said. "It seems that the more control we had from the government, the higher prices rise."

Inflation could also spill over into higher Chinese export prices. That might raise costs for Western consumers but also could help countries such as Vietnam and India compete with China as suppliers of clothing, furniture and other low-cost goods.

Global Sources, a company that connects Chinese suppliers with foreign customers, said this week that a survey of 232 Chinese companies found 74 percent of them raised prices last year -- some by up to 20 percent -- due to higher costs for materials and components.

"China is steadily moving away from being the world's low-cost source of various products," the company said in a report released this week.

A separate Global Sources survey of 385 foreign buyers last month found 31 percent were increasing purchases from Vietnam due to higher Chinese prices.

Higher inflation also might prompt Beijing to slow the rise of its currency, the yuan, against the U.S. dollar to help its exporters compete. That might add to strains with Washington and other governments that complain the yuan is kept undervalued, giving China's exporters an unfair advantage and adding to its huge trade surplus.

Adding to pressure on food supplies, China's northeast faces a crippling drought that threatens its winter wheat crop. Global wheat prices are high, limiting Beijing's ability to fill the gap by boosting imports at a reasonable price.

The government has launched a $1 billion campaign to save the harvest with emergency irrigation and cloud-seeding to make rain.

"I hope the government can rein in the food price rises this year, or else people's lives will be greatly hurt," said Wang, the supermarket manager. "No matter how high prices go, people need to eat anyway, right?"

AP researcher Yu Bing contributed.

China National Bureau of Statistics (in Chinese): http://www.stats.gov.cn

China's Economic "Hard Landing" Will Cause a Commodity Crash, Says Gary Shilling

by Peter Gorenstein

China, now the second largest economy in the world, is headed for (relatively) hard times, says economist Gary Shilling, president of A. Gary Shilling & Co. He expects the economy will experience a "hard landing within this calendar year or perhaps the first half of the next calendar year," he tells Aaron Task in this accompanying clip.

China's Hard Landing Is Another Country's Boom

Shilling says a hard landing will result in 6% growth, not the double-digit growth they've been used to over the past decade. The irony, of course, is that kind of growth in the U.S. and other developed countries would be considered an economic renaissance. But not in China.

It's the Inflation, Stupid

China is currently trying to battle inflation that rose 5 percent in January and included a 10 percent gain in food prices, putting new stresses on domestic consumers. Shilling says rising prices are an ill effect of China's $585 billion stimulus package implemented in 2009, in the wake of the global financial crisis. 

The stimulus package, which amounted to 12% of the Chinese economy -- twice as large a percentage as the U.S.'s stimulus -- has manifested itself in a commodity and speculative real estate bubble that Shilling thinks is set to pop.

So far, Beijing has unsuccessfully tried to cool the economy by raising interest rates three times since October.  It won't have the desired effect, Shilling argues.  "I think that they are probably going to overdue it."

Commodity Crash Coming

That hard landing is bad news for commodity prices.  He's betting against the entire commodity complex, saying once the industrial metals such as copper fall, it will cause a domino effect in agricultural products such as cotton, wheat and soy beans.

That commodity crash will also manifest itself in weaker "commodity" currencies such as the Australian dollar, the New Zealand dollar and, to a lesser degree, the Canadian dollar.

Link to original article: http://finance.yahoo.com/tech-ticker/chinas-economic-hard-landing-will-cause-a-commodity-crash-says-gary-shilling-yftt_535929.html

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