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GATA’s Adrian Douglas has done a tremendous job of combing through dozens of hundred-plus page FOMC transcripts, and has compiled numerous quotes by assorted FOMC-related personnel, including former Chairman Greenspan, which provides yet another piece of evidence, demonstrating the persistence of the Fed’s gold price suppression scheme. As Douglas puts it: “My thinking was that if an organization is so inept at covering up that
detailed transcripts were retained, then perhaps it is also inept at
completely redacting sensitive and incriminating information. What I
found is quite astounding and serves as documented evidence by the
Federal Reserve itself that it manipulates the gold market.” We present the relevant quotes dug up by Douglas, whom we applaud for his effort, together with his very relevant commentary, which once again exposes the Fed’s covert gold price suppression intentions.

In the March 21, 1978, FOMC meeting —

http://www.federalreserve.gov/monetarypolicy/files/FOMC19780321meeting.p…

– the following exchange took place.

* * *

CHAIRMAN MILLER. The Treasury has severe reservations about it.
Originally, two weeks ago, they were taking the position that they
would not be in favor of it — that it raised too many problems for
them. Since then I think they have become a little more open-minded
about it. However, I think the first avenue is apt to be the sale of
gold. Sales of gold were under consideration and were deferred partly
because of the French elections, which are now over. So I think it’s
likely that the Treasury will start a program of selling gold, which I
personally would favor. There are a lot of advantages in using gold
because at least then we don’t end up with debt and the currency risks
that go with it. So I think that’s an avenue that should be pursued.
There has been a discussion about the level of gold sales that are
possible — what the market can absorb and that sort of thing. Henry
can correct me, but I believe the Treasury feels that they could sell
about 300,000 ounces a month.

MR. WALLICH. That would be a very moderate amount — something like
less than 60 million. And bear in mind that unless they can develop a
means of selling the gold for foreign currency in a way that doesn’t
cause holders of dollars to buy that foreign currency in order to buy
the gold, it could be completely counterproductive. Then there isn’t
going to be much of a net effect. There is some because, after all, we
are importers of gold, which may reduce the imports of gold and may
make the trade balance look a little better. There is some portfolio
shift when there is gold in portfolios instead of dollars, so I
wouldn’t say it’s without effect, but there are lots of qualifications
on the possible success.

CHAIRMAN MILLER. The nice thing about this problem is that it’s
surrounded by dilemmas! Everything you do has an adverse effect on
something else. Nothing is ideal. I might add that we live in a
situation where the market is very realistic, very factual. That’s why
the possibility that gold would be sold caused the gold price to drop
by $5. You don’t have to sell gold; you just have to breathe [that you
may] one day.

* * *

The last sentence by Chairman William Miller (Fed chairman in 1978
and 1979) telling the FOMC that the gold market can be manipulated by
propaganda is very significant. This would certainly make Joseph
Goebbels proud. This manipulative deception has been played out time
and time again since then. This is why official gold sales are always
announced in advance and the announcements are repeated many times, as
happened with the International Monetary Fund’s gold sales.

At the FOMC meeting of July 9, 1980 –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19800709meeting.p…

– the following discussion took place.

* * *

MR. BAUGHMAN. Is it considered a political no-no to sell gold in the current environment?

CHAIRMAN VOLCKER. Oh, I don’t think so, necessarily. I don’t think
it’s a political problem in the sense that you may be suggesting. It’s
a question of whether it’s very useful or desirable at this stage. [If
we sold gold] we’d have to do it alone; I think that’s pretty clear. It
isn’t anything that’s ruled out a-priori, but it’s a practical matter
of whether it’s a good idea.

MR. BAUGHMAN. Well, it’s between selling assets and borrowing money. That seems to me the significant difference.

VICE CHAIRMAN SOLOMON. The psychology, Ernie, is that [selling gold]
seems to be much more effective if it’s a component of an overall
package of forceful measures than if it is done by itself. In the
present climate it would look like a major act of weakness. And that
might spur some additional dollar selling unless we did it on an
enormously massive scale, not just the levels that we have before. On
the other hand, if the situation gets to a point where once again we
have to begin thinking carefully of a package, then along with some
monetary policy measures it would be appropriate and add to the
effectiveness — this is my own personal feeling — to do some
substantial gold selling. And in that situation I think the Congress
would understand that. We’d have less of a political problem also. So I
think both factors operate.

CHAIRMAN VOLCKER. I should say, in connection with the political
problem, that I don’t think there are any great political constraints
so far as the thinking in the Administration is concerned. There are
politicians who would make a noise that would reflect upon the
credibility of the action. If we sell some gold and then immediately
get some congressional opposition, the market would say: “Well, they’re
not going to sell very much because there’s too much opposition.” And,
therefore, it might not be very productive in terms of the impact we’d
want to achieve.

MR. BAUGHMAN. There would be some grassroots opposition to it. I can report that, but I don’t have any impression. …

CHAIRMAN VOLCKER. Perhaps I spoke a little misleadingly because that
kind of opposition, I think, does reflect on the credibility of the
action. It raises questions about whether it could be sustained and
what the [total] amount would be and whether it’s really an accepted
technique or not, even though in some sense I think it’s not a
political deal for the Administration except in terms of appraising
that reaction. I can’t quite see the Congress opposing it in a formal
sense but there would be a lot of noise by these limited groups. We
have to ratify these transactions.

MR. SCHULTZ. So moved.

* * *

What is noteworthy is the comment by Vice Chairman Solomon when he
says selling gold “seems to be much more effective if it’s a component
of an overall package of forceful measures than if it is done by
itself. In the present climate it would look like a major act of
weakness. And that might spur some additional dollar selling unless we
did it on an enormously massive scale, not just the levels that we have
before.”

This is without a doubt a proposal to undertake gold market
manipulation, and what’s more it is proposed to be on an “an enormously
massive scale.” This is not a discussion about selling gold based on a
motivation to maximize the profit from such sales. Furthermore, the
vice chairman admits to previous gold market intervention when he
recommends increased selling of gold that is “not just the levels that
we have before.”

What is shocking is the apparent cavalier approach to breaking the
law. Volcker says, “I should say, in connection with the political
problem, that I don’t think there are any great political constraints
so far as the thinking in the Administration is concerned. There are
politicians who would make a noise that would reflect upon the
credibility of the action. If we sell some gold and then immediately
get some congressional opposition. …”

Note that the proposal implies that gold sales would occur without the congressional approval required by law.

The “strong dollar policy” was concocted by Treasury Secretary
Robert Rubin in 1995. However, the mechanism by which such a policy
could be implemented in a supposedly free market was never explained.
GATA has long maintained that the policy involved the suppression of
the gold price. In December 1994 the following exchange took place at
the FOMC meeting –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19941220meeting.p…

* * *

CHAIRMAN GREENSPAN. President Jordan.

MR. JORDAN. I think the main part of our problem right now is
inflation psychology. It certainly reflects the lack of a nominal
anchor. It suggests that it would be helpful to have a politically
supported mandate to attain and maintain a stable value of the dollar.
If somehow we could achieve the conditions of a true gold standard –
without gold but the steady purchasing power of money in the minds of
people — over time it would make some of these short-term things that
we go through a lot easier to deal with.”

* * *

Well, how about that? Achieving the conditions of a true gold
standard without gold? Does that sound like a confidence trick? The
last sentence of the FOMC minutes above here has been redacted. It
would be extremely interesting to know the full extent of the
discussion.

In response to a question posed by U.S. Rep. Ron Paul in testimony
before Congress in 2005, Fed Chairman Greenspan confirmed that this
financial wizardry has actually been implemented:

http://www.lewrockwell.com/paul/paul267.html

* * *

MR. GREENSPAN: So that the question is: Would there be any
advantage, at this particular stage, in going back to the gold
standard? And the answer is: I don’t think so, because we’re acting as
though we were there. Would it have been a question at least open in
1981, as you put it? And the answer is yes. Remember, the gold price
was $800 an ounce. We were dealing with extraordinary imbalances,
interest rates were up sharply, the system looked to be highly unstable
– and we needed to do something.

Now, we did something. The United States. … Paul Volcker, as you
may recall, in 1979 came into office and put a very severe clamp on the
expansion of credit, and that led to a long sequence of events here,
which we are benefiting from up to this date. So I think central
banking, I believe, has learned the dangers of fiat money, and I think,
as a consequence of that, we’ve behaved as though there are, indeed,
real reserves underneath the system.

* * *

The last sentence is exactly what Mr. Jordan was pondering in the
FOMC meeting of December 1994: How to have a gold standard without
using gold. Greenspan says the Fed “behaved as though there are,
indeed, real reserves underneath the system.”

I think it is safe to say there is some financial wizardry that is
apparent by implication. One either has real reserves or one doesn’t.
To behave as if there are when there are not is a confidence trick
doomed to fail at some stage.

In the FOMC meeting of Dec 22, 1992, the Fed governors reveled in
the fact that accounting errors in gold shipments could improve the
U.S. balance of trade numbers –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19921222meeting.p…

* * *

CHAIRMAN GREENSPAN. Did I hear you correctly when you said that the
gold exports in October appear to have come from the coffers of the
Federal Reserve Bank of New York? Has anyone looked lately?

MR. TRUMAN. Well, I didn’t want to tell too many secrets in this temple!

VICE CHAIRMAN CORRIGAN. Obviously, we knew what happened to the gold, but I don’t think we knew what it did to exports.

MR. TRUMAN. What happens in the Census data is that the Federal
Reserve Bank of New York is treated as a foreign country. [Laughter]
And when a real foreign country takes some of the gold out of New York
and ships it abroad, it counts first as imports and then as exports.
However, the import side is not picked up in the Census data. So there
you get the export side of it.

MR. LAWARE. Great accounting!

MR. BOEHNE. Great confidence building!

MR. TRUMAN. That’s because you haven’t been filling out your import documents!

MR. ANGELL. Let me run this by again. You mean a country owns gold
and has it stored in the Federal Reserve Bank of New York and if they
ship it out, that’s an export?

MR. TRUMAN. And in the balance of payments accounts it also counts as an import, so it washes out.

CHAIRMAN GREENSPAN. The Federal Reserve Bank’s basement is a foreign
country. When they move it out of the basement into the United States,
it’s an import. Then, when they ship it out again, it’s an export.

MR. ANGELL. That makes sense!

MR. TRUMAN. And sometimes when they sell the gold, it might be sold
into the United States, so it should count as an import. It doesn’t
necessarily always show up as an export.

MR. BOEHNE. That really clarifies it!

MR. KELLEY. Does it have to get out of your vault at all in order to be considered an import and an export?

VICE CHAIRMAN CORRIGAN. Well, I’m not even going to try to answer
that. In this particular case I know what happened, so I think. …

* * *

The most intriguing part of this discussion is the question by
Kelley: “Does it have to get out of your vault at all in order to be
considered an import and an export?”

While there is no explanation of the thinking behind Kelley’s
question (it was probably redacted), it is reasonable to extrapolate
the inference that “ledger entries” for gold movements could be made to
the import or export accounts without any gold having been physically
moved.

At the May 18, 1993, FOMC meeting there was much discussion how gold
influences public attitudes toward inflation. There were discussions
about interfering in the gold market to change the public’s expectation
of inflation, and such postulated interference was even regarded as
amusing by the FOMC –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19930518meeting.p…

* * *

MR. ANGELL. Here’s what I think would happen. I don’t think we
should increase interest rates by 300 basis points, but, if we did, I’m
quite certain the price of gold would immediately begin a [sharp],
quick [drop]. It would happen so fast you’d just have to go and watch
it on the screen. If we made a 100-basis-point increase in the Fed
funds rate, the price of gold surely would turn back down unless the
situation is worse than I anticipate. If we made a 50-basis-point
increase in the Fed funds rate, I don’t know what would happen to the
price of gold, but I’d sure like to find out! [Laughter]… People can
talk about gold’s price being due to what the Chinese are buying;
that’s the silliest nonsense that ever was. The price of gold is
largely determined by what people who do not have trust in fiat money
system want to use for an escape out of any currency, and they want to
gain security through owning gold. Now if annual gold production and
consumption amount to 2 percent of the world’s stock, a change of 10
percent in the amount produced or consumed is not going to change the
price very much. But attitudes about inflation will change it.”

* * *

Later in the same meeting Greenspan pursued this line of thinking:

* * *

ALAN GREENSPAN: I have one other issue I’d like to throw on the
table. I hesitate to do it, but let me tell you some of the issues that
are involved here. If we are dealing with psychology, then the
thermometers one uses to measure it have an effect. I was raising the
question on the side with Governor Mullins of what would happen if the
Treasury sold a little gold in this market. There’s an interesting
question here because if the gold price broke in that context, the
thermometer would not be just a measuring tool. It would basically
affect the underlying psychology. Now we don’t have the legal right to
sell gold but I’m just frankly curious about what people’s views are on
situations of this nature because something unusual is involved in
policy here. We’re not just going through the standard policy where the
money supply is expanding, the economy is expanding, and the Fed
tightens. This is a wholly different thing. Anyway, I’m most curious to
get your views in these various respects, so please don’t be afraid to
throw things out on the table.

* * *

Greenspan proposed that if the gold price could be significantly
depressed, then the public’s inflation expectations could be radically
altered.

In an FOMC meeting in January 1995 Virgil Mattingly, the Fed’s general counsel, said the following –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19950201meeting.p…

* * *

MR. MATTINGLY. It’s pretty clear that these ESF [Exchange
Stabilization Fund] operations are authorized. I don’t think there is a
legal problem in terms of the authority. The statute is very broadly
worded in terms of words like “credit” — it has covered things like
the gold swaps — and it confers broad authority. Counsel at the White
House called the Treasury’s general counsel today and asked, “Are you
sure?” And the Treasury’s general counsel said, “I am sure.” Everyone
is satisfied that a legal issue is not involved, if that helps.

* * *

This comment suggests that the U.S. gold stock has been mobilized in
the market. When GATA urged U.S. Sen. Jim Bunning to pursue this matter
with Greenspan, Mattingly responded (http://www.gata.org/node/1181):

“These inquiries focus primarily on a statement attributed to me
that appears on Page 69 of the published transcript of the January
31-February 1, 1995, FOMC meeting to the effect that the Exchange
Stabilization Fund (ESF) has engaged in ‘gold swaps.’ Given the passage
of time, some six years, I have no clear recollection of exactly what I
said that day but I can confirm that I have no knowledge of any ‘gold
swaps’ by either the Federal Reserve or the ESF. I believe that my
remarks, which were intended as a general description of the authority
possessed by the secretary of the treasury to utilize the ESF, were
transcribed inaccurately or otherwise became garbled.”

That doesn’t pass the smell test. Mattingly’s comments “were
transcribed inaccurately or otherwise became garbled”? This is the same
organization that lied to Congress for 17 years about the existence of
any transcripts or recordings of the FOMC meetings. So do we believe
him?

Notice the very clever inference — “I can confirm that I have no
knowledge of any ‘gold swaps’ by either the Federal Reserve or the
ESF.” He doesn’t specify what type of “knowledge” he is talking about.
Is it knowledge that any swaps were ever made or is it knowledge of the
details of swap arrangements that were made? In any case Mattingly is
professing not to know; he is not denying that any swaps have occurred.

The following discussion took place at the July 1991 meeting of the FOMC –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19910703meeting.p…

* * *

ALAN GREENSPAN: Why have commodity prices failed to decline as much
as they ordinarily would during recession periods? Now, it also looks
as if commodity prices are not spiking upward in a recovery like they
ordinarily would. So we have a different picture in commodity prices
than I’ve seen in a recession and, frankly, I’m very puzzled by it. At
the same time that commodity prices do not show the extent of the
recovery, I think it’s somewhat strange that gold prices failed to move
down. Given central banks’ reduced willingness to own gold, or given
what I see as a reluctance in the foreign central banks and others to
hold as large gold stocks, given countries in southeast Asia who have
changed their attitudes [toward gold], and given the Soviet Union
[sales], I don’t understand why gold prices do not come down. It
suggests to me that there may be some what we call ‘crazies’ out there
who believe that gold is a good [inflation hedge]. And I guess I think
that [inflation concern] is in the long bond.

* * *

Greenspan thus labels as “crazies” those investors who want to
protect their wealth against the promiscuous money creation of his
Federal Reserve. In 1966 Greenspan wrote an essay titled “Gold and
Economic Freedom” in which he recognized the unique properties of gold
as an inflation hedge –

http://www.321gold.com/fed/greenspan/1966.html

“In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. There is no safe store of
value. If there were, the government would have to make its holding
illegal, as was done in the case of gold. If everyone decided, for
example, to convert all his bank deposits to silver or copper or any
other good, and thereafter declined to accept checks as payment for
goods, bank deposits would lose their purchasing power and
government-created bank credit would be worthless as a claim on goods.
The financial policy of the welfare state requires that there be no way
for the owners of wealth to protect themselves.

“This is the shabby secret of the welfare statists’ tirades against
gold. Deficit spending is simply a scheme for the confiscation of
wealth. Gold stands in the way of this insidious process. It stands as
a protector of property rights. If one grasps this, one has no
difficulty in understanding the statists’ antagonism toward the gold
standard.”

And clearly once Greenspan had sold his soul to the devil and become a “statist” himself, he joined the antagonists of gold.

The following is a very enlightening discussion at the July 1995 FOMC meeting –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19950706meeting.p…

* * *

CHAIRMAN GREENSPAN. I think I’ve got it! [Laughter] You are telling
me that the SDR [Special Drawing Rights] certificate comes out of the
Treasury and we cancel the Treasury obligation and it is wholly an
asset swap so that the debt to the public of the U.S. Treasury goes
down by that amount. Is that what happens? That solves President
Jordan’s problem too! [Laughter]

MR. JORDAN. Can I follow up on that? The same thing happened when we
changed the price of an ounce of gold from $35 to $38 and then to
$42.22. The Treasury got a windfall of about $1 billion to $1.2 billion
in both of those so-called devaluations. So an issue on this is: What
was the dollar price of SDRs that we monetized? You say I have an asset
on my balance sheet and I don’t know what the value of it is.

CHAIRMAN GREENSPAN. It’s about $42.

MR. TRUMAN. It’s $42.22; it’s equivalent to the official price of gold.

MR. JORDAN. We do this at the official U.S. Treasury price of gold?

CHAIRMAN GREENSPAN. Do you mean that we can lower the debt to the
public by moving the price of gold up to the market price? That could
cut the debt back by a not insignificant amount!

MR. JORDAN. I have been trying not to mention that publicly for fear that someone might want to do it.

CHAIRMAN GREENSPAN. It’s probably too late; we just mentioned it.

MR. JORDAN. It will become known five years from now!

MR. LINDSEY. Five years from now it will be read in the transcript for this meeting.

MR. BLINDER. By which time it already will have been done.

* * *

This exchange is extremely significant because it recognizes that
external debt of the United States eventually will have to be balanced
with the amount of gold claimed to be held by the Treasury.
Interestingly enough the Fed doesn’t want this information to be known,
as this would essentially devalue the dollar overnight and give instant
hyperinflation. But as Greenspan points out, it would inflate away the
debt.

The five-year delay in releasing information to the public is
clearly viewed by the Fed as a way to disadvantage the public. When the
Fed and Treasury are forced by market conditions to balance the U.S.
government’s debt with its gold holdings, the dollar will be massively
devalued and gold will be multiples of its current price. This would
certainly make it advantageous to be one of the “crazies,” as Greenspan
affectionately calls gold investors.

I think the true crazies will be shown to be those people who have
drunk the Kool-Aid to believe that a currency can maintain its
purchasing power when the central bank confesses to employing a
confidence trick — that it is “behaving” as if there were real
reserves underneath its currency system.

What can be concluded from these insights into the deliberations of the FOMC?

– On several occasions the Fed discussed targeting gold prices with its policies.

– The Fed admits that propaganda is effective against gold
investors, insofar as just mentioning the possibility of selling gold
can drive down the gold price.

– The Fed at least contemplated interfering in the gold market, and
on a massive scale. The Fed admits that the U.S. government has sold
gold with the intention of reducing gold’s price.

– The record shows that the Fed opined that the statutes of the
Exchange Stabilization Fund have legitimized “the gold swaps.” Despite
claims that this statement has been inaccurately transcribed or
garbled, recent information suggests otherwise. In response to GATA’s
request to the Fed last year under the Freedom of Information Act for
access to Fed documents about gold swaps, Fed Governor Kevin M. Warsh
confirmed that the Fed does indeed have gold swap agreements with
foreign banks:

http://www.gata.org/node/7819

– The Fed does not want it to be known that the external debt of
the United States could be substantially reduced by revaluing official
gold at the market price, lest someone wants to do that. This is an
admission that the official U.S. price of gold of $42.22 per ounce is a
matter of smoke and mirrors. The ability of the Fed and Treasury to
create money is linked to the only liquid collateral they have, gold.
The gold price that is required to make the value of U.S. gold equal to
the dollars issued is multiples of the current price, and is heavily
dependent on how much unencumbered gold the Treasury still holds.

– The Fed expressed the utility of having the virtues of a gold
standard without using gold itself. Greenspan later confirmed that the
Fed was behaving as if it was on a gold standard, as if there were
“real reserves” underneath the system. This supports GATA’s claims that
the gold price has been suppressed by an increase in the supply of
“paper gold” — gold that investors believe they have bought and own
but is really no more than a certificate saying they own the gold. This
is the case with the London Bullion Market Association’s unallocated
gold accounts, unbacked exchange-trade funds, pool accounts, and gold
derivatives.

The demand for real physical gold bullion is surging in the face of
an impending daisy-chain of sovereign debt defaults. This threatens to
expose the confidence trick — that much more gold has been sold than
exists. I have explained this in a previous essay, “The Tiny Market
that is the World’s Biggest”:

http://www.gata.org/node/8248

The Federal Reserve can “behave” as if there are real reserves under
the U.S. dollar, but there are none. A study of the heavily redacted
and edited minutes of the Federal Open Market Committee reveal a
penchant for targeting and manipulating gold prices, and deceiving
Congress and the public.

The words of Alan Greenspan from “Gold and Economic Freedom” could not be more relevant:

“This is the shabby secret of the welfare statists’ tirades against
gold. Deficit spending is simply a scheme for the confiscation of
wealth. Gold stands in the way of this insidious process. It stands as
a protector of property rights. If one grasps this, one has no
difficulty in understanding the statists’ antagonism toward the gold
standard.”

Like clowns at a rodeo, there are too many academics creating a
distraction discussing whether we will have deflation or inflation. We
are now in an era of unprecedented deficit spending — which means that
confiscation of wealth will also be unprecedented. One of the most
prolific money creators of all time has told us what to do to prevent
it: Buy gold. But buy real physical gold, not a gold receivable.

—–

Adrian Douglas is publisher of the Market Force Analysis letter (www.marketforceanalysis.com) and a member of GATA’s Board of Directors.

 

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Submitted by Nic Lenoir of ICAP

We have been bearish on the Shanghai composite ever since the index rejected the 50-dma around 3,100. Overnight we tested and so far held the 61.8% retracement of the rally since 02/03/2010 at 2,971, and we have the support of a possible triangle formation at 2,947. Long term I remain bearish on China for reasons I will detail a bit more lower. However this potential triangle support need to be invalidated by a break to the downside. Indeed, triangles are almost exclusively continuation patterns within a trend, and in the case of an horizontal triangle it is always the case. Triangles however need 3 touch on one side and 2 on the other to be validated technically, so it is not a forgone conclusion that it is what the market is doing. This is why it is key break to the downside here, if not expect 3 months of consolidation between 3,000 and 3,240 (yawn).

I included again the chart of Copper and Copper/China PMI to show the obvious strong correlation between commodities ad China’s PMI / Growth / Equity Markets. Copper gapped lower this morning. Ideally we would have preferred to gap below 332.20 to leave the price action from March 1st to 12th as an isolated island… wishful thinking. Still, we gapped down and as I have argued several times Copper has rejected a key resistance and fundamentals are not so good with Chinese PMI rolling over and inventories quite lofty. USDCLP has consolidated after the initial spike following the retest of the former downtrend channel at 505, further appreciation is definitely tied to a break lower of both copper and Chinese equities.

In terms of fundamentals it is very interesting that so many people focus on the Yuan appreciation. I am personally rather interested in the political bickering surrounding currency float for a totally different reason: China had last year 32% YoY growth in monetary supply. All the buildings going up in China are fueled by the PBOC printing its positive trade balance every month and a flurry of lending. When it comes to lending and despite some feeble attempts to curb it, January and February have in fact shown very strong lending by Chinese state banks. If you stop for a second and imagine the consequences of China letting the Yuan float, it is rater scary. There would most likely in the current environment be an influx of dumb money into China. This would hurt their competitiveness, as well as their rationale/ability to print their positive trade balance every month. So beyond the initial influx of money, it would hurt their exports and kill their monetary growth which historically is highly correlated to the performance of their stock markets and commodities. Also the next 20 years are a fast aging one for China’s population courtesy of the one child (boy?) policy so that will add a nice deflationary headwind to the local demand. With all that factored in, I actually think the end result beyond initial speculation of a fully floating Yuan would be a very very weak Yuan. The problem is even more compounded when one considers the amount of debt piling up in China. The following article details and sums up what is going on in the land of Chinese loans better than I could or have the time t do it: http://articles.moneycentral.msn.com/Investing/JubaksJournal/is-china-actually-bankrupt.aspx?page=1

This is why a slowly appreciating Yuan is the only possible path for the PBOC, but as always when you artificially build and foster imbalances there is a flip side… You will run into inflation problems and hiking rates on this huge pile of loans may not be a pleasant experience. The only real question is when the end game is, but I think overall this shows why China is pretty much bound to experience a very hard landing: 1929-style, or Zimbabwe- and then 1929-style is only a question of form but not end result.

Waiting for the big picture to kick in, it is probably worth taking partial profits on SHCOMP shorts, and add back on if we break 2,947/2,971. Long term preference is the downside, but we need a short-term technical validation for the momentum to build up now.

Good luck trading,

Nic  

More articles from Zero Hedge….

Zero Hedge

On FDIC Failure Friday, one of the odd names to make the list of bank failures was New York’s very own Park Avenue Bank, whose president Charles Antonucci in March of 2009 was trumpeting the bank’s “resilience” by saying “I don’t need TARP money” and as result declined to accept taxpayer bailouts. Certainly with Friday’s failure, Antonucci’s statement seems a little short-sighted. What is more relevant, is that it was just announced that Antonucci, who was the bank’s president from June 2004 to October 2009 has been arrested on bank bribery, embezzlement and fraud charges. Makes you wonder just how safe the “safe” banks are, if only the bailout recipients are doing so-so in the current environment (presumably, without any outright fraud disclosed just yet among the TBTFs).

From BNO Breaking News:

The former President of The Park Avenue Bank in Manhattan, which was
closed by regulators last Friday, has been arrested on fraud charges,
prosecutors said on Monday.

A spokeswoman for the U.S. Attorney’s Office for the Southern
District of New York said Charles Antonucci was arrested on allegations
of self-dealing, bank bribery, embezzlement, and fraud on the New York
State Banking Department, FDIC and TARP.

And some more from Reuters:

A former president of a privately-held New York bank, Park Avenue Bank, was arrested Monday on charges including bank bribery, embezzlement and fraud, a federal prosecutor said.

A source familiar with the case identified the banker as Charles Antonucci, who was president of the bank from June 2004 to October 2009.

On Friday, state regulators closed Park Avenue Bank, which had assets of $520.1 million and deposits of $494.5 million at the end of 2009, according to the Federal Deposit Insurance Corp.

The charges against the former bank president include self-dealing, bank bribery, embezzlement and fraud on the New York state banking department, FDIC and the Troubled Asset Relief Program (TARP), the statement by Manhattan U.S. Attorney Preet Bharara said.

His office said U.S. officials were to disclose more details at a press conference at 1 p.m. (1700 GMT) on Monday.

In November the bank applied for a bailout of less than $12 million under the TARP program but withdrew its application over concerns about restrictions on banks that receive taxpayer money, bank chairman Donald Glascoff said on March 10.

This is truly not surprising: in the corrupt world of Wall Street banking, it appears that rampant criminality has long since become the norm, with selective enforcement here and there to make it seem that perpetrators get punished. The next question: where’s Fuldo.

More articles from Zero Hedge….

Zero Hedge

Don’t look now, but the leading indicators continue to paint a double-dip picture. From David Rosenberg:

The smoothed ECRI leading economic index for the U.S. fell last week for the 12th week in a row, to stand at its lowest level since July 2009. Something tells us a slowdown is about to start. With a week to go before the debate with the legendary Jim Grant at the Plaza in New York, we seem to recall that this was the index he was using several months ago to predict that nominal GDP growth was set to accelerate to a double-digit annual rate. We seem to have stopped well short of that mark.

We too marvelled at the 5.9% annual rate real GDP growth performance in Q4, though it should not be lost on anyone that nearly all the growth came in two non-recurring items — inventories and capital spending (the former is a temporary alignment of stocks with sales and the latter is a late-year rush to take advantage of some tax goodies). The rest of the economy actually slowed to less than a 1% annual rate last quarter. This is actually encouraging to those who see a big slowdown coming, or even a double dip.

Here’s why: We looked the 60-year history of the quarterly GDP data and broke the numbers into two subsets. The first set included business expansions that lasted more than 12 quarters (these cycles were: 1961-1969, 1975-1979, 1983-1990, 1991-2000, 2001-2007). And the second included expansions that were 12 quarters or less (1950-1953, 1954-1957, 1958-1960, 1971-1973, 1980-1981). The results are quite different.

If we expect to undergo another long economic expansion (average of 30 quarters) then we are not likely to see the peak in growth until the 13th quarter, when on average real GDP was running at a 7% annual rate. But if this turns out to be a short economic expansion (12 quarters or less) then the peak in growth happens in the first and second quarter of expansion. And that is exactly what seems to have happened this time around.

In other words, when the quarterly peak in growth happens this early — the second quarter of expansion this time around — then it usually signals a high chance of this being a truncated expansion; and we are seeing signs of this in the ECRI leading index too. This all augurs quite well for defensive, not cyclical strategies and buying insurance right now to protect any long portfolios is dirt cheap with the VIX index sitting at 17.

More articles from Zero Hedge….

Zero Hedge

Via UBS Financial Services

The Bulls Are Forced To Keep The Champagne On Ice For Another Day – The bulls thought they had it all set up Friday morning. For two weeks they had been tip-toeing toward a retest of the January highs. Thursday’s action finished with the S&P right on the goal line. The S&P closed Thursday’s session a hair’s breadth below its January high of 1150.45.

As I told Becky Quick on Friday morning, the bulls were confident enough to have the champagne on ice in the locker-room. They hoped to punch conclusively through the prior high and maybe stampede tons of sideline money into the market. At the very least, a significant run above the prior high would relegate the recent pullback to “correction” status and clear the path for the March ’09 rally to resume.

The bulls had their opportunity enhanced when Retail Sales, released at 8:30 a.m., were surprisingly strong, “despite the February snowstorms”. So, as brokers prepared for the opening bell, the futures were solidly in plus territory. As the trading day opened, the S&P shot above 1153 in a matter of minutes.

But, before the bulls could kick into second gear, or even begin to celebrate, the rally stalled. The stall occurred just as the University of Michigan Confidence Index dipped to 72.5 from 73.6. Whether cause, or just excuse, that release marked the day’s high for the S&P. For the balance of the day, the S&P and most other indices snaked around the unchanged line, again and again over the course of the day. The inconclusive action allowed the bears an opportunity to challenge. The “one-day” failure to break out was being called an indication of a potential double top.

So, the game is on the table. We’ll watch to see if the bulls can break out from the January levels and excite sideline money. Or, will the bears have a goal-line stand and force a double top. Friday did not give us a clear answer. Stay tuned!

It Was The Other Thing He Said – Most of the headlines coming out of China this morning are about Premier Wen’s slap at what he saw as U.S. meddling on the Yuan. But there may be another story. Here’s a take from UBS’s sharp-eyed London observer, Andy Lees:

China – Premier Wen Jiabao warned on Sunday that the Chinese economy could suffer from a “double dip” this year despite its apparent smooth recovery. Despite the beginnings of a world economic recovery, he said the main problems have yet to be solved. “The situation is potentially more dangerous than it looks,” said Ma Ming, dean of the department of applied economics at the Beijing Institute of Technology. Whilst growth has been fairly impressive, it has been achieved mainly on the back of government stimulus measures, including the $586-billion stimulus plan and the 9.6 trillion yuan ($1.4 trillion) in new loans last year. “A double dip is possible if the government exits from the stimulus package while enterprises have failed to adapt to the new situation,” said Zhao Xijun, finance professor of the Renmin University of China. “The government must continue its proactive fiscal policy and moderately relaxed monetary policy,”. Wen reiterated the continuity of those two policy lines and promised to strike a balance between maintaining economic growth, adjusting its economic development model and managing inflation; “Only in this way can we avoid the ‘double dip’.

Since many observers were counting on China to lead the recovery, a double dip could produce a global shock. It’s a story to be watched carefully.

Cocktail Napkin Charting – The S&P battle of 1150 is still on. Expiration week begins and may bring some added volatility. Given Friday’s narrow action, the napkins suggest the same numbers we saw Friday. Resistance for the S&P looks like 1155/1158 with support around 1138/1142. The McClellan Oscillator hints a big move (100/200 points) is due.

Spot! Spot! Come Back – Our ham radio pal passed along the latest sunspot data. It contained a surprise or two. Maybe I should say a surprise or four.

The sunspot readings for March 4th through the 10th were: 40, 35, 0, 0, 0, 0, 12. So, we had two days of multiple spots, followed by four spotless days and ending with one weak spot. Satellites indicate a new series of spots may be coming over the solar horizon. Nevertheless, don’t put that sweater in mothballs quite yet.

Consensus – The vigil of the FOMC statement may drag on trading. Also, the rumors of a looming “fix” in the Greece crisis may limit bets. If the bulls make the break to the upside, follow-through will be critical. Stay very nimble.

Trivia Corner

Answer - If 6 chartists could construct 6 charts in 20 minutes, the same six chartists would have constructed 36 charts in 2 hours. (Always divide time into time to narrow confusion.)

Today’s Question - Sal walked along the beach highway from Great Kills to South Beach. The distance was 5 miles and he walked at a steady two miles per hour. During his walk, 40 buses passed him from behind and fifty passed him coming from South Beach. What was the average speed of the buses?

History Trivia

On this day (or potentially two days either side) in the year 44 B.C., one Caius Julius Caesar chose to ignore the warnings of his wife and a certain part-time augurer named Spurinna. Caesar seeking to reform Rome went to the Senate to assume the broader, near-dictatorial powers he sought. There he was met by a group of former supporters and friends who felt he was betraying the reform movement, and took a stab at telling him so.

To celebrate, have an Orange Julius while lending an ear to a friend at a place called “The Forum”, and try not to make some too brutally pointed remarks on why, with today’s political debate, we may need the “V Chip” for C-SPAN.

(Editor’s Historical Note – To avert further complaints from the twelve, or so, NYSE members who pointed out that in an earlier episode, I failed to note that Caligula’s horse’s name was Incitatus {6 to 5 on the morning line} – nitpickers please note that originally the Ides of March was not necessarily March 15th but rather the period March 13th to 17th. Later…..Roman calendar makers would save on tablets and papyrus by designating the Ides to occur on the 15th of March, May, July and October. In other months, it was the 13th. If you’re not confused yet, let me try to explain derivatives to you.)

As we have noted previously, traders anticipated the Ides of March with just a little trepidation. Now they will face them with a large dollop of confusion.

More articles from Zero Hedge….

By Charles Hugh Smith, OFTWOMINDS
The saying “never waste a crisis” was bandied about the body politic last year as if it actually had meaning; alas, the crises were all squandered to prop up a doomed status quo.

I am not being cavalier when I say that things falling apart is the first necessary step for renewal, growth and wisdom. The collapse of a business, career, marriage, government, project or dream offers a unique opportunity to free oneself of an impossible status quo or an impossible double-bind.

Up until the moment of acceptance of complete and utter bankruptcy (the insolvency of the enterprise, home purchase, project, marriage, etc.), the participants flay themselves to keep trying to save what cannot be saved and propping up what has become an impossible burden.

The acceptance of bankruptcy/insolvency is a moment of loss and liberation. We mourn the loss of all that work, all that hope and all those dreams, and then we look on the world with fresh eyes, sadder, wiser yet also more realistically hopeful.

If we have any stomach for self-reflection, then we can in hindsight see the critical errors of judgment, the flawed assumptions, the mission creep, the fatal over-reach, the unresolved conflicts, the inherent inadequacies of talent, experience and capital, the tight, desperate clinging of those with the most to lose to the status quo even as it collapses under its own weight.

Those who contributed little but gained the most complain most bitterly, chastizing those who carried the burdens for falling down; those who carried most of the burden find a freedom they had forgotten existed.

All that seemed essential has been lost–the marriage, the corner office, the fancy vehicle, the identity as a go-getter entrepreneur, the comaraderie of the office, the home of one’s own, the sense of mission and purpose, the small affections one feels for the familiar be it factory, desk, colleagues, tools and even the pathway to the front door.

And yet there is one gift left in the ruin and rubble–a new understanding of oneself and of one’s limitations, weaknesses and strengths. Yes, strengths. The flaws and weaknesses are always painfully visible, but in a fair appraisal of When Things Fall Apart, we come to see the strengths which were present but overwhelmed or misapplied to an impossible situation.

“Hope springs eternal” has two meanings When Things Fall Apart. Those struggling to save what cannot be saved keep trying, even as they know deep inside that the battle is lost and it is futile to continue; they are spurred on by guilt, obligation, duty, and a keenly desperate hope that miracles will arise and save the status quo from a collapse which was ontological (inherent) to its nature and structure.

The real miracle is the collapse. After the status quo has finally given way to the fiscal and political realities, then real hope begins. Not the false impossible hope for miracles, but the real miracles of self-knowledge, an integrated understanding of the inherent unsustainability of the status quo, and the learning which only springs from failure.

Failure is how we learn. What did you learn when every jump shot dropped (basketball analogy) and you won effortlessly? What did you learn when everyone seemed to want to gather round you while you basked in the limelight? What did you learn when your business took off from the very start? Very little.

Conversely, what did you learn When Things Fell Apart? Isn’t that when you really learned about over-reach, mission creep, internally unresolvable conflicts, dependence, self-delusion, convenient fantasies, the limits of experience, fighting the last war, lies, greed, avarice, and a hundred other insights and understandings?

We as a nation have completely and utterly squandered the inherently inevitable collapse of our failed, rotten-to-the-core financial system. At great expense to ourselves and future generations, the Powers That Be of both parties have propped up a morally corrupt, venal, destructive and impossible-to-sustain financial system.

Nothing has been learned, and those bearing the burden (we the taxpayers) have not been freed of our burdens–we have been enslaved with even greater burdens.

What should have been done–close the insolvent institutions of whatever size, repudiate their bad debts and liquidate their assets–was not done. Excuses were made, failure was hastily covered up and the public shouldered the fatal losses engineered by private greed, corruption and fraud.

As a result, nothing has been learned and all the heavily-hyped hope is false. We as a nation remain delusional and unenlightened. The status quo has been propped up at great cost in treasure and wisdom, and an honest hope for renewal and real progress has been lost.

The collapse of the status quo has just been pushed forward, and the speed and ferocity of that coming collapse have been dialed up to maximum. When Things Fall Apart it will not just be the financial status quo which implodes, but the status quo of housing, commercial real estate, healthcare and Defense.

We as a society have squandered a miraculous opportunity to learn, and our “leaders” have squandered the opportunity to lead in their craven surrender to the Power Elites and Protected Fiefdoms which have the most to lose from the inevitable Collapse.

The Powers That Be have tacked a few years onto the life of the status quo, at the cost of a greater collapse to come. The chickens of their lies, pervarications, propaganda, embezzlement, fraud and corruption will come home to roost in the 2011-2016 timeframe. The bag of accounting tricks, cover-ups and bail-outs is almost empty, but there may be enough “hope” and delusion left to sustain one more election cycle.

We as a nation will learn one thing: our “leadership” has failed, completely and utterly, and we will have to lead ourselves.

If you haven’t visited the forum, here’s a place to start. Click on the link below and then select “new posts.” You’ll get to see what other oftwominds.com readers and contributors are discussing/sharing.

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More articles from Charles Hugh Smith….

The Daily Reckoning

“Masked youths…attacked the head of Greece’s largest trade union, who was addressing the crowd, and hurled stones at the police. GSEE union boss Yiannis Panagopoulos traded blows with the rioters before being whisked away, bloodied and with torn clothes.”

The Daily Mail account put the blame for these disturbances on Germany’s finance minister, who warned the Greeks that “the German government does not intend to give a cent.” At least Bild, a popular German newspaper, was trying to be helpful. It suggested that Greece sell Corfu…and that Greeks get up earlier and work harder.

Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bailout plan. The Icelanders were slated to make good $5.3 billion in bank losses. But why shackle common voters to the banks’ losses? The plan was so outrageous and so unpopular that Iceland’s normally compliant Prime Minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong.

Insurrection is in the air. In England, government employees are preparing the biggest strike since the ’80s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say, “Nothing can be accomplished in Washington.”

Herewith, an attempt to deconstruct the rebel yell. By way of preview, it’s not the principle of the thing, we conclude; it’s the money.

There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years – particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work – not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said.

Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.

Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn’t belong to them. Consumers could enjoy a standard of living they couldn’t afford. And the financial industry could earn huge fees by selling debt to people who couldn’t pay it back.

Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the ’30s, the government took it upon itself to guarantee the essentials in life – retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save.

As time wore on, more and more people lived at someone else’s expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged.

If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt…and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector – it helped them to go broke.

As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks’ losses…and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday. So, the patsies are in revolt.

Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports.

The rioters can go home, in other words. The system will collapse on its own.

Bill Bonner
for The Daily Reckoning Australia

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• Price of Oil May Rise Due to Scale of Georgian Conflict
• Government Sachs
• A Long Time Before Investors Will Gamble on Housing Debt
• Bankers Take Money From the Government and Use it to Speculate

More articles from The Daily Reckoning….

The Daily Reckoning

The air is so hot and humid, here in Mumbai, you can boil an egg in it.

Last night, we ventured out of the hotel for an authentic Mumbai experience. We went out the front door, around the corner, and a half block down the street to a restaurant called Indigo.

We would have taken a taxi but the only thing worse than walking in Mumbai is taking a cab. Taxis are everywhere…small black and yellow cars. They are banged up veterans of many years on Mumbai’s chaotic roadways.

If the car doesn’t break down or get in an accident, you merely suffocate.

This morning, our driver sounded his horn, then started the engine. Cars are never taken in for repair in India unless the horn doesn’t work. You can drive without brakes, but not without a horn. Maybe that’s why 110,000 people die on India’s roads and railways every year.

We were on our way to CNBC, where we were being interviewed. For some reason, your editor has achieved minor celebrity on the subcontinent. The announcer told his audience that we were a “venerated western economist.” Other interviewers ask for autographs. Many have read our books. All want to know what we really think.

This is probably because our views flatter them. Unlike the US, India is not at the end of a 50-year credit expansion. It’s only at the beginning. Investors might look forward to many years of growth.

“In the West, the situation is very different,” we explained. “The Western economies – especially the Anglo-Saxon economies, and particularly Britain and America – have been on a spending binge for many years. That reached its zenith in 2005-2006; now, it will be very hard for these economies to grow. They can’t do it by expanding consumer spending and consumer credit. In the first place, consumers already have too much stuff. In the second place, the consumer has neither the income nor collateral to justify more debt. So, the economy needs to find a new model to move forward.

“In India, on the other hand, people don’t have so much stuff. There are people sleeping on the sidewalk outside my hotel room. They have nothing except the clothes they are wearing. And they certainly don’t have credit cards and home equity lines. So India can grow for many, many years simply by providing basic goods and services to its own people. And the nice thing about it is that India doesn’t seem to be capable of central planning…or any planning at all. The country can expect a long spell of prosperity, until the central planners get in position to lead. Then, you’re in trouble.”

CNBC didn’t like what we had to say. Even if we were generally optimistic about India, we were definitely not cheerleading for world economic growth. And CNBC…along with most of the other mainstream financial media…like to keep viewers smiling.

“Sorry that you are so gloomy,” said the interviewer, adding to the audience that “those are just his views.”

Of course, dear readers know we’re not gloomy at all. Around the office they call us Mr. Sunshine. Why? Because we welcome a depression in the economy like we welcome a hard freeze in the winter; it kills off the parasites.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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• In India With a Strategic Partner
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More articles from The Daily Reckoning….

The Daily Reckoning

There was a time…not so very long ago…when Americans held all the top spots. We had the most…the best…the biggest companies. And the richest people.

Those days are gone…

MEXICO CITY (AP) – Mexican telecom tycoon Carlos Slim is the first man from a developing nation to become the world’s richest person – a shift that underlines the loosening of America and Europe’s stranglehold on the top spots in the billionaires’ club.

Slim’s arrival at the top aroused both pride and anger in Mexico, where many see his fantastic wealth in a poverty-afflicted nation as a sign of what ails it.

With a recovery in the value of his cell phone holdings pushing his estimated fortune to $53.5 billion, Slim jumped past Microsoft founder Bill Gates and investor Warren Buffett when Forbes magazine released its 2010 list of the world’s wealthiest Wednesday.

The rise of Slim, the 70-year-old son of an immigrant shopkeeper, is just a part of the emergence of billionaires in developing countries, Forbes reporter Keren Blankfeld said. She noted this year’s top 10 richest also include two billionaires from India and one from Brazil.

Here’s another item in today’s news:

“China becomes world’s biggest internet market,” says a Reuters headline. There are more Internet users in China than in any other country, says the article. And more cars sold. And more concrete poured.

Travel broadens your horizons, they say. More importantly, it humbles you. You realize that there are a lot more people doing a lot more things than you thought.

All over the world, people bus, hump, schlep, toil and strain. Some work hard. Some work not so hard. Some work smart; others don’t.

But over time, fashions and circumstances change. What goes around, comes around. Those that did once ride so high now lie low…

Yes, dear reader, the world turns. And traveling around…you get to see different parts of it…with different stories to tell…

This morning’s news tells us that 60,000 people are rioting in Greece…torching German cars and generally behaving badly.

What’s their beef? They’re running out of money, running out of credit…and running out of time. Modern macro-economic policies have turned against them.

But they’re not alone. The news from the plains tells us that Kansas might have to close half of its public schools…if it doesn’t find a way to close its budget gap.

The news from other states is not very different. Many foreign governments are in the same fix. Ireland has already begun its “austerity” programs. Italy and Spain can’t be far behind.

But what about the US federal government? No austerity at all. Just the opposite. The feds announced the biggest budget deficit ever – $221 billion for the month of February. In other words, per family, the American government spent approximately $2,000 more than it received in tax revenues. Hmmm….if it continues at this rate, it will spend $24,000 more than it receives per family this year. In round numbers, the typical family will pay about $25,000 in taxes…and receive about $50,000 worth of ’services.’

Is that a great deal…or what?

It’s an absurdity…it’s preposterous…it’s weird and unnatural. And it can’t last.

It is only possible now because of the peculiar circumstances of today’s financial world. Lenders, investors…Chinese creditors…give their dollars to the US government, believing it to be the most credit- worthy borrower in the world. But as the supply of US debt goes up the quality of it declines.

Already, the US is – from a GAAP accounting point of view – bankrupt. (See below…) Lenders cannot reasonably expect to get their money back. But that doesn’t seem to bother them. US debt still looks like a better bet than, say, Greek debt.

But the world is full of surprises. What a shock it will be when the US finds itself in Greece’s shoes!

Bill Bonner
for The Daily Reckoning Australia

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By Karl Denninger, The Market Ticker

Wen “cats in the kettle” Jaibao spouted:

“I don’t think the renminbi is undervalued,” Wen said yesterday at a press conference in Beijing marking the end of China’s annual parliamentary meetings, using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”

Oh really?

It’s time that we stop the the BS here with regard to China.

The entire premise of so-called “Free Trade” with the Chinese was predicated on the belief that if we opened our borders to their products on a “no tariff” basis that we would, over time, change their political system.  That is, we would import cheap Chinese plastic junk and export democracy.  More or less.

Well, we got all the cheap DVD players but they didn’t get any democracy.  Quite to the contrary.  There have been no meaningful improvements in areas of environmental protection, workers rights and wages or political freedom.  Indeed, the recent dust-up with Google just underlines the reality in China: Their government is a band of murderous brigands and thugs.

Disagree with them inside their nation, refuse to censor The Internet, for example, so that people can’t read about Falun Gong and China will be happy to arrest the executives of your firm inside the nation and provide this as “corrective influence” to your head:

Oh, they send the 50 cent bill for it to your family too.  Isn’t that special?

At least in this country they don’t shoot people for talking about the evil-doing that both private parties and government engage in.  If they did, well, I’d be long-dead.

Second, China hasn’t changed its spots a bit.  It has pursued a mercantilist policy for over two decades while at the same time stealing anything that isn’t nailed down (and some things that are), including such wonders of our technological prowess in nuclear warhead design.  Argue the defensive merits of nukes in a silo all you want – when they’re flying, they’re anything but defensive.

In short our policies have been an abject failure.  We’ve destroyed consumer product manufacturing in The United States, we’ve shuffled a huge amount of wealth over to China due to their manipulated currency, we’ve trashed our real standard of living and replaced production with debt and the supposed benefits of an open and free market, along with a democratic political system in China have failed to materialize.

It’s time to stop the stupid.  It’s time to force those firms who want to offshore production to return the so-called “savings” to the United States as something more than executive bonuses.  And it’s time to treat those who are a communist dictatorship as exactly that.

The simplest solution is to hit China with a 25% tariff on everything – literally everything – and close the market entirely to anything coming over here that contains stolen intellectual property.

China has done us one better with their “liquidity program.”  Instead of allowing the economy to adjust and build internal demand, they have instead stoked a huge bubble in fixed assets over there.  This, coming on the back of exactly what we just experienced in our property market, is one of the most-pernicious and outrageous series of acts I’ve seen out of a sovereign in a long time.  Couple that with questionable (at best) “official” statistics on China’s economy and you’ve got the ingredients for real trouble.

There are often claims that we’re “hostage” to China’s holdings of Treasuries and other bonds.  Nonsense.  First, if China sells them they cut off their own nose.  Second, in an extreme circumstance we could easily institute capital controls that would effectively neuter their influence entirely – and they know it.  Third, it’s time for us to live within our means anyway, so if China was to provoke that, where’s the foul?  There’s a solid argument to made for such an event being positive for America, not negative.  And finally, China needs us more than we need them – should we throw up a complete barrier to their cheap junk, along with the Euro zone who is likewise tired of the manipulation their mercantilist game would collapse on their heads.

It’s time to call the curtain down on the cock-and-bull story coming from China.  We have not achieved our goals with “engagement” and “trade”, and won’t.  Our nation has been intentionally and severely damaged by these thugs who have adopted a mercantilist “raid ‘em and loot ‘em” approach to commerce, then hidden behind their communist ability to manipulate and even kill those who disagree with them.  If we don’t deal with this now, we will wind up having to deal with it militarily, and it will be even less-pleasant than telling them to stick it with the slave-labor-produced, water-fouling and air-blackening $30 DVD players.

In short, it’s time for us to grow a pair of balls and tell the Chinese to put it where the sun doesn’t shine, neutering their interference and intentional distortion of trade balance and currency valuation.

We didn’t get what we bargained for, so it’s time for us to change the bargain.

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