Awesome interview of Mike "Mish" Shedlock by Spanish interviewer

Mish is the 3rd most read economic blogger on the planet.  Suffice it to say that he knows his stuff.  The recent interview is entitled "No confíen en gobiernos o bancos centrales: son los culpables de la crisis" which translates into "Don't trust governments or central banks: they are guilty/responsible for the [credit]crisis".

It is well worth your time to read the English translation at the above link because it contains so many truths that so few really understand.  Let me recap a few, but please do read the article if you want to know the full story:

• The US and every other government of the world is bankrupt.  They have avoided admitting it by papering over their losses.  The two main deceptions are failure to mark toxic assets to fair market value on the books (they account for worthless assets as if they were worth full face value), and printing money from thin air.  Mish assumes they will be able to slowly come clean over a period of perhaps 10 years.  I am not so sure that people will agree to suffer that long.
• The papering over has caused stocks and junk bonds to rise to unnatural valuations.  You really can't trust the numbers anymore because everyone is allowed to legally lie about their balance sheets.  The stock market is trading as if Bernanke is actually creating new value with his policies when in fact he is creating the illusion that real losses did not happen and do not still exist even though the losses are very real.
• Mish expects the European Union to shrink.  The weaker players cannot keep up the charade of solvency and thus are nothing but a drag on those who havent been exposed as frauds yet.  Mish fails to point out that when the weaker ones leave it means they will never repay their Euro denominated loans.  It also means that Germany and France will not be able to export as many goods to them because the credit of those kicked out or who leave the EU will be ruined.  In other words, Germany and France have fake, credit juiced economies just like everyone else which will be exposed if the EU begins to shed members.
• The Chinese economy is a massive debt based Ponzi scheme with stupidly excessive manufacturing capacity and stupidly excessive construction of cities to nowhere (cities for 1 million + people that stand empty because the locals cannot afford to move there, all built on credit..).  When China crashes it will take down Australia which is a commodity exporter.  Mish doesn't mention it but Canada, as a commodity exporting nation, is in the same boat as Australia.  All of them have huge real estate bubbles that are worse than what the US' was/is per capita.
• Don't trust governments or central banks.  The list of lies they have told is sky high and some of them were real whoppers.  They are in such dire straits that they are now making laws up as they go along (or acting in violation of existing laws) to handle whatever the problem de jour is.  None of it is well thought through because they are in crisis mode trying to save their crony capitalism system.  It is causing unintended consequences which is resulting in reduced trust of government and associated civil unrest.
• The root cause of ALL these problems is fiat currency and fractional reserve banking which are the dynamic duo of a dishonest money supply.  The money elite game this system in order to enrich themselves faaaaar beyond what they could have achieved by working for it like the rest of us.  This is why they will do anything that we are stupid enough to allow them to do in order to save it.  We would all be much better off going to an honest money supply which would include an audited gold standard and the elimination of fractional reserve banking.  Between fiat currency and fractional reserve lending, the latter is by far the bigger culprit.  It leads to credit booms and busts that cost people stability in their lives.  It leads people to give up hope and to engage in civil unrest.  It happens right under our noses because so few people understand the con game that is being played on us.  Everyone wants to treat the symptoms with more regulations while the root cause is never addressed.

The Egyptian experience is instructive

Lots of people know that something significant is happening in Egypt but few people understand the big picture.  Consider Mish's latest article on the situation there.  While you are absorbing that, consider also that Egypt is no small country in terms of population.  It has nearly 80 million people living there.  What's really happening is that Egypt is experiencing massive inflation and it is threatening the very survival of the lower economic classes.  We are exporting our QE1 / QE2 inflation and they are receiving it.  Mish reports short term interest rates may reach over 12% - high interest rates are generally an indication of high inflation.  That relationship exists because creditors fear that their wealth will get inflated away so they demand higher interest rates to compensate them for it.  The high inflation is making it more difficult for people to make ends meet but more importantly it is making it more difficult for government to borrow and then subsidize the economy.  As government subsidies wane people who got used to having them get restless and concerned for their own well being.

Egypt has several big problems.  First, it is a victim of Bretton Woods 2, the system whereby the US can print money from thin air and it directly impacts the value of the currency of other sovereign countries who have to print like crazy in order to keep the currency peg with the US dollar.  If they were on a gold standard right now they would be in 10x better shape but they bought into our scam and now they are paying for it.

The next issue is that they embraced fractional reserve lending.  This scam allows all manner of imbalances to occur in the economy.  It creates the super wealthy and the super poor even though the poor probably work harder than the rich do.  You know something is very wrong when a man cannot support himself and his family through the sweat of his brow while at the same time the elite are rolling in money for doing little to no work at all.  If they had rejected fractional reserve lending then they would just be laughing at all this right now and the level of inequality in their country would be far less.

Next, and this is mainly a symptom of fiat currency and fractional reserve lending, the poorer people have gotten used to government subsidies.  They have been taught to think it is normal for an adult able bodied man to require government assistance in order to survive.  Inflation steals from the poor and middle class and gives to the elite rich.  The middle class can normally handle it because the inflation is generally slow enough that they can still buy food.  However, the poor people have no wealth buffer or savings so they would starve without the subsidies which are put in place so that they don't revolt.  Subsidies like food stamps and section 8 housing are control mechanisms to keep the corrupt system from breaking down.

Once this system is in place the rich just borrow like mad until the state can not borrow anymore due to high interest rates.  At that point the elite have basically cleaned the country out and there is nothing left for subsidies.  The poor people get squeezed out and they riot.  The middle class also feels the pinch and they see the plight of the very poor and they (rightly) fear that their time is coming too so they riot as well.  The wise elite skip the country while the arrogant ones stick around hoping they can weather the storm of the angry herd.

The next problem is that middle class invested in the stock market which is basically a Ponzi scheme.  When things went down hill, few knew to cash out and get out.  Now their life savings are locked up in a system which is shut down until further notice.  When it opens back up they can expect an immediate haircut of at least 20% while everyone who is panicked rushes to get their funds out.  Taking your funds out means selling, and mass selling makes prices plummet.  A bird in the hand is sometimes worth a heck of a lot more than 2 in someone else's hands.

The next problem is that everyone trusted the banks with all their cash.  When the crap hit, the banks shut down without a care that people were left without access to their cash for more than a week running.  When the banks did open back up everyone had to stand in lines 100 deep hoping there would be money left by the time they got to the window.  This is a run on the bank and this kind of lack of confidence is what causes the buying power of the currency to drop.  So, while people are in line at the bank, the buying power of their savings, which they can only get out bit by bit, is evaporating before their eyes.  Years worth of work down the tubes just like that.

Of course the biggest mistake of the Egyptians was to blindly trust in government.  This trust drove complacency to the point where few understood the real risks associated with fiat currency, fractional reserve lending and with all paper assets when a credit crisis comes home to roost.  They are all paying for that complacency right now.

Have you ever seen the Youtube videos of people standing on the beach as the water gets suddenly sucked out of the bay?  Even the locals who should know better can be seen poking around the newly exposed flats when they should be gathering their stuff, sounding the tsunami alarm and running for high ground.  It's just human nature not to internalize the danger until the waves are nearly breaking over your head.  How bad will the economic tsunami become here in the states?  Nobody can really say for sure.  We are at the very top of the Pyramid Ponzi and it would take a pretty damned high tsunami to get our pant legs wet.  But anyone who says that the coming tsunami absolutely cannot be bad enough to cover the entire pyramid is completely out of touch with reality.  We are looking at a global credit bust the likes of which has not occurred, according to very smart guys like Bob Prechter, since the collapse of the South Sea bubble in the early 1700s.  Yes, it really can be that bad. 

There's no reason to risk everything on the debt tsunami.  Either get prepared now or at the very least figure out what the signs are and look for them on a daily basis.  If you see them, run first and ask questions later just as you would do with an ocean tsunami.  The main signs that could mean big trouble:

• a rapid and dramatic rise in short term interest rates and in CDS on US debt.
• significant levels of civil unrest where violence breaks out.
• rapid declines in the stock market
• rapid rise in gold and silver prices
• government making overt statements that everything is under control (this is when you know things are really bad).

All of these things signal that the herd is restless and that the smart money is selling paper assets and buying hard assets for safety.  Above all else, dispel the notion that we are somehow special or better than other people.  The only reason we haven't gotten creamed already is that we control the world's reserve currency and when things got bad in late 2008, 2009 and 2010 we just told banks to ignore their losses while Bernanke printed up well over a trillion new dollars from thin air to paper over the problems.  That game will likely soften our hit to some degree but there is no telling how long we can get away with that obvious con job.  Nothing says we cannot have another electronic run on the dollar as happened in 2008.  If you don't know what I'm talking about, listen to a US Congressman explain it.  Did you know that we were so close to a global economic meltdown as described by Kanjorski?  Very few people who I talk to have any clue.  Had that tsunami hit home people would have just been blown away in the carnage.  We would have been walking like Egyptians.

Silver metal shaping up to be a good bet

Silver metal has been on a tear for the past several months and now it has just had a big pullback.  This is not something to fear but rather normal ebb and flow in a new bull market.  It is a buying opportunity IMO because people here in the US and abroad are reawakening to the need for their money to have some backing other than the words of mealy mouthed government bureaucrats.  Silver is both a commodity metal and a money metal.  Silver's big consumer from a commodity perspective used to be in photographic applications but digital cameras have changed that industry completely and photography is no longer the big consumer of silver that it once was.  The big consumers of commodity silver going forward will be electronic and electrical applications, hand held computers, electric cars and in all manner of green energy technology such as windmills.  Silver has physical properties that will be leveraged by many industries going forward.  The more techology driven our society becomes -and that covers far more than electronics- the more demand there will be for silver's qualities of malleability, ductility, and reflectivity.  Silver is the best thermal conductor of all the metals and it also has highest electrical conductance.

From a monetary perspective, Bernanke has proven beyond any doubt that he has no respect for the dollar.  By the time he finishes printing up the $600 billion associated with QE2 in mid 2011, Bernanke will have tripled the monetary base since the start of the financial crisis.  It has to be seen in chart form to be really understood.  Bernanke doesn't have any more levers to pull.  Helicopter Ben has promised everyone that he will just print and print and print as long as the world lets him get away with it.

For its part, Congress has proven beyond any doubt that it has no regard for the national debt (which will eventually have an impact on the value of the dollar).  We were at $7 trillion at the start of GW Bush's reign of terror and now the national debt is up to $14 trillion just 10 years later.  The progression is not linear, it's exponential.  Until foreigners stop lending us money the debt will continue to grow exponentially because nobody in congress has the stones to risk their political career on doing the right thing.

And so silver (AKA poor man's gold) is acknowledging all of this lack of restraint by breaking out.  Metals watchers all over the web are reporting that fact including noted commodities analyst Adrian Douglas.  What was also very interesting to watch was that while silver spot price was falling back to $26, the price of silver on Ebay did not come down at all!!  There's no good way for me to capture this fact in the blog but just go to Ebay if you are reading this within a short time of its publish date and search for 1 oz silver coin.  Search completed auctions only using the advanced search function.  The price of winning bids without free shipping seems to average around $32-$33/ oz and with "free" shipping its more like $34-$36/oz.  That's a far cry from today's spot price of $27.12.  In other words, physical, delivered silver is demanding higher prices than the official "spot" price which is what traders of paper claims on silver look at.

One more thing, and I know this is entirely subjective, but when I hold a 1 Troy oz silver coin in my hand it has a size and a weight and a look and that just gives a gut feeling that it is undervalued.  If someone put $30 US dollars on the table next to a 1 Troy oz silver coin and told me to choose one over the other there would be no doubt that I would take the coin over the paper money.  That might make a worthy experiment for me to try on average folks some afternoon in front of some local big box store.

Generational Kleptoparasitism

It's pretty rare that you can put any two words together and then Google for the string without getting a hit but Generational Kleptoparasitism is one that I just coined.  I like the ring of it but mostly I like that it is succinctly descriptive of the social activity which is fueled by a dishonest money supply which includes the twin evils of fiat currency and fractional reserve banking.  Generational kleptoparasitism refers to the stealing of the next generation's wealth by the existing generation.  This is done by setting up a system which is very hard to change, and then gaming the crap out of it until it is just a hollow shell before passing it along to the next generation to deal with. 

The elitist scammers running the show steal all they can today and then on top of that they have the gall to set up long term payments to themselves which they hope the next generation is not enlightened enough to identify as an unfair scam.  Most of it is actually done legally but with a complete lack of morals.  How can this be?  Simple: they set up the laws which contain loopholes which they have figured out how to game in advance.  They know that people generally try to look at the good and to discount the bad.  They know that anyone who points out the potential for bad will be labeled a conspiracy theorist.  In other words, they play on the lack of sophistication of the masses that generally have to wait until something goes wrong before they even concede a problem is possible.

In this fairly recent video, Meredith Whitney talks about how one generation rips off the next, about how states' finances look a lot like banks did before the crash with off balance sheet games, etc.   Here is a written article reiterating the main points: http://www.bloomberg.com/news/2010-09-29/meredith-whitney-plans-report-on-weak-health-of-u-s-states-fortune-says.html

In that video, Meredith claims that Texas is in the best shape "by a mile".  She goes on to say that Texas has been more conservative since its own banking crisis in the 1980s.  People need to ask themselves how a state that does not have a personal income tax can be in such better shape than a state like California which has a 9.55% personal income tax for most people.  California should have plenty of money to run the state with that kind of revenue stream, right?  Well, this is what people need to think about.  Giving more money to the state does not equate to a better way of life, better services, better roads better anything.  It just gives the con men more and easier ways to scamper off with the cash, to buy votes, and to make unkeepable promises to its citizens.

At some point in the not too distant future we are going to see the big liberal spendy states begin to default on their promises.  They will be asking for federal bail outs just as the big banks did.  That is when we should begin to really understand the depth of the crash of our debt Ponzi.  The Federal Reserve and the treasury have gone "all in" to save the banks.  There is nothing in reserve to save the states like CA, IL, NV, NY, FL, etc.  The only thing that will be left is the massive printing of money and that is simply a tax on everyone.  If this begins to happen then it is not difficult to predict the reactions of citizens of states like TX and WA which have been more conservative in their government spending.  They will have no desire to see their cost of living rise in order to bail out the citizens of liberal states who did not control their governments.

This could easily turn into a massive social wedge for our country.  If the federal government decides to tax us all via inflation to pay for the sins of individual states then the only recourse for those who do not accept this type of taxation without representation is to reject the dollar as their currency.  The only way to do that is to secede from the union.  Once established as a sovereign nation, a country like Texas could then establish its own currency based on its own conservative beliefs.  If some major state like Texas did this and if its leaders would listen to the teachings of wise people like Ron Paul, the new currency would be directly tied to gold holdings. 

The reestablishment of a gold standard currency within the continental United States would completely transform the face of the North American continent.  The promise of an honest money system and freedom from generational kleptoparasitism would attract the best and the brightest of the next generation.  It would also attract businesses.  Texas would become a labor magnet.  Since all future value derives from labor, the bottom line is that Texas would, within a few short years, become by far the richest and most powerful entity on the continent.  It would laugh at Ben Bernanke and Tim Geithner’s antics. 

We look at how states play the beggar thy neighbor game.  California cuts Arizona off from this, Arizona cuts California off from that.  WA, TX, FL and others have no state income tax while so many others do.  The ultimate beggar thy neighbor move would be for one entity on this continent to return to a gold standard.  What brought so many people over to America from England?  The chance for a better life and the chance to have more freedom and to keep what you earn.  These ideals are what the gold standard would represent.  You cannot have an honest economy or an honest society without first having an honest money supply.

This might just sound like fantasy today but we could easily find ourselves going down this path in the coming years as states have to admit they are bankrupt and cannot pay what they have promised.  It could be the next chapter in the evolution of American culture.

Who will lose when the states can't pay?

A recent article published on the California Independent Voter Network web site discusses the coming default by states on their financial obligations.  Like most other articles of its ilk, the information is presented in news report like fashion.  Some details are given, the discussion options are listed but the reader has to come to his own conclusions.  While this is nice for some people who already have lots of background, it amounts to noise for most people because it simply says "something will happen".  Gee thanks for the insight...

My view is that we start off with math and work from there.  Without going into all the details, the math says that state obligations far exceed their ability to collect revenue to pay for them.  Why avoid the details?  Several reasons.  First, all you have to do is look at the magnitude of the budget shortfalls, the fact that they keep growing each time they are reported and the silly solutions being offered to handle them such as Governor Schwarzenegger's suggestion a year ago that bonds be sold to cover the shortage which will be repaid by future lottery earnings.  Of course that quickly fell through but the fact that it was offered in the first place demonstrates the level of clueless desperation involved. 

The other reason not to provide details is that we really don't know what they are.  States have been acting like shadow banks in many ways, including keeping double sets of books.  In other words, states carry huge liabilities off balance sheet so that even after balancing the budget they will still not actually be balanced.  In other words, states have been operating fraudulently and the only way it is all going to finally get cleared out is through some form of bankruptcy.  Then and only then will the true magnitude of the corruption become fully known because that is when their lawyers will throw in the kitchen sink.  Anything that can be written off and dismissed will be written off and dismissed.

Of course the article suggests that maybe the states can just raise taxes to cover the short fall but that strategy is already falling apart.  People are moving out of states with higher taxes because several states still have reasonable taxation levels for individuals and businesses.  In my home state of Texas there is no state tax on personal income.  Yes, you will pay more in property tax than in other states but not nearly enough to make up for payroll taxes of, say, California's 9.55% for those making over 47k (i.e. everyone above the poverty level...).  As an unretired person I would much rather pay property tax than income tax because it means I can control my tax bill by where I live as opposed to by how much I make.  Also, if I feel the tax is too high I can contest the property value.  This is not possible with income tax.

Someone is going to have to pay for the fact that states are essentially bankrupt.  You can try to place that burden on the workers and businesses but at some point they will just leave.  If your workers leave then with them go their value creation abilities and the remaining people have to be taxed at an even higher rate in order to make up for lost taxation.  It can become a downward spiral.  At some point all you have left is the nonproducers who are looking for their entitlement payments even though no money exists to make them.  This is why the states will eventually go bankrupt and the bondholders will eventually have to take the haircuts.  They stupidly loaned money to spendy governments and so they should be forced to eat the losses associated with this unwise move. 

Note that the ability to vote with your feet is a huge value associated with having multiple governments in the world.  Governments, especially at the state level but at the sovereign level as well, have to compete for your presence.  If you don't like how they are acting you can just leave.  However, if we ever we allow one world government to form there will be no place for dissenters to go in order to escape and so their only option will be to fight back.  It is thus easy to see why statists want one world government.  Once there is no place else to go they will have complete control (except for the terror factions that will obviously oppose them...).

Madoff clawbacks are a fearful reaction to the angry herd

Generally whenever a scam goes down there are winners and losers.  The winners know that something is wrong (or are in on it) and they bail out before the scam falls apart.  Everyone else is a loser holding an empty bag.

Or so it goes when the social mood is still being juiced by ever increasing credit.  During those times it seems that no matter how unfair something is, nobody really cares.  Everyone is expected to be a "big boy" about it.  Those who got scammed were just fools - walking examples of economic Darwinism in action.  The crooks are rarely even caught and if they are then they end up with light sentences or with simple fines to be paid, often by the company they are the CEO of.

But the mood of the herd has definitely turned south in a way that has not occurred in all of my 50 years and the Madoff proceedings are a great example of that.  Those who managed to skate out of Madoff's scam before it collapsed with all of their principal in addition to some fat Ponzi Profits are finding it all being clawed back for redistribution to the other patsies in the scheme.  So instead of winners and losers there will be losers and losers (and then of course lawyers who are always winners no matter what).

So why is this happening now?  Where was the long arm of government when Enron ripped so many people off?  How about all of the lower level Enron employees themselves who lost their retirement accounts which were funneled, by Enron rules, into Enron stock?  And how about all the people who got screwed by LTCM (Long Term Capital Management) when its scam went bust?  The general feeling back then was "too bad, so sad, start over dude".

The difference is that the social mood has changed and government knows it.  Banks are offering less credit and people are less inclined to accept it, even at record low rates.  This is reducing the money supply which lowers asset values and threatens jobs, marriages, families.  It puts stress on the herd.  These are scary times if you are a bureaucrat or government representative.  I think the following sequence from The Godfather sums it up pretty well:

[about the unrest in Cuba]
Michael Corleone: I saw a strange thing today. Some rebels were being arrested. One of them pulled the pin on a grenade. He took himself and the captain of the command with him. Now, soldiers are paid to fight; the rebels aren't.
Hyman Roth: What does that tell you?
Michael Corleone: It means they could win.
[-----]

Gerald Celente puts it another way.  He says, "When people have lost everything and they feel they have nothing to lose, they 'lose it' ".

The government closely monitors the social mood while trying to control it in exactly the same way that a cowpoke monitors the herd of steers as they are being driven to market.  If you ever watch an old cattle herder western you will see the inevitable stampede scene where someone misreads the herd and does the wrong thing at the wrong time.  The resulting stampede invariably results in personal injury and property damage for the cowboys.

The Madoff claw backs boil down to stampede control and they are being undertaken now because the government recognizes how quickly a seemingly calm country can erupt into a Tunisia or an Egypt.  Government can feel the rage boiling just below the calm façade and they are mighty scared.  You can read it in blogs, in news headlines and in comments to both of these.  All of these things and many more are monitored and aggregated in real time.  The government knows the score.  There is a reason that Obama did not press his gun control agenda and that's because he felt the herd would have felt even more threatened had he tried to do so. 

This fear is not cowardice but rather a display of wisdom.  Call it respect if you prefer.  Anyone who does not respect the threat of a stampede of a million angry cattle is not brave but rather a fool.  In order to calm things down, the government is taking from those few who have a lot and giving it to the many that are on the verge of a stampede.  The GM cash distribution from wealthy bondholders to disillusioned union members was more of the same.  "Spread the wealth around", as Obama put it, really means "rich people have to take one for the gipper".

The fake stock market rally is another attempt to give an appeasing gift to people.  Long term stock market watchers know something is wrong; something is fake.  Take Sam Collins, long time market watcher and technical analyst.  His view is that, "There is just no way to justify the strength of the U.S. markets aside from Fed policy."  In other words, none of the pros are at all confused as to why the market is showing strength at the same time that major sections of the global economy seem to be in such turmoil.  The Fed is in gift giving mode and everyone is living by the old saying "don't fight the Fed".  There is no conviction buying.  It is all low volume action.  But it keeps the herd calm.  For now.  Bob Prechter testified before Congress years ago that the Dow Jones Industrial Average is one of the best indicators of social mood out there.  Thus, the government has taken to manipulating the indicators, messing with the pressure gauge on the boiler as if that actually changes the boiler pressure.

Government will continue playing its game but unless the jobs situation actually gets better soon I think the Fed is going to have to deal with the new threat of inflation as an unintended consequence of holding interest rates down for too long.  Propping up the stock market does not do any good for young people who don't have enough wealth to own stocks.  Sooner or later the stock market game will no longer serve the goal of holding the social mood in check.  Once it loses efficacy, the Fed will stop pulling on that lever.  Either that or the lever will break off in the Fed's hand.  All I know is that none of it is a fix of any kind and all of it is just making the eventual problems worse. 

I suspect that in a few years people will quit saying "don't fight the Fed".  Instead they will be saying "don't factor in the Fed because it has become irrelevant".  Few people reading this today will think that prediction could ever come true but that is because people have been herded into thinking that a con man with a government title and a printing press can actually con the entire economy forever even though it has never been done yet in the history of man.  I am more inclined to side with those who believe that all scams eventually collapse because you can't fool all the people all the time.  I look around and I see a large and growing number of people who are in no way fooled.  As soon as the fed looks like it is losing control they are going to cut and run on the fake stock market and many other propped up aspects of the American economy.  It will be "every man for himself" and "only the paranoid survive".

The Bernanke Tax

Ben Bernanke went on record today calling rising oil prices "A kind of a tax".
http://www.chron.com/disp/story.mpl/business/energy/7412058.html

But before I go into that, I must digress for a minute.

Alan Greenspan commented on the art of "Fed Speak" (AKA Greenspeak) after he stepped down as Chairman of the Federal Reserve.  Mr. Greenspan called it "a language of purposeful obfuscation".  Its purpose was to avoid answering questions that he either did not want to or "could not" provide answers to.  All of this just drips with disgusting elitism.  What questions can possibly exist that a supposed public servant like the Chairman of the Federal Reserve "can not" answer?  Are the answers to these questions somehow magical in that they would cause Mr. Greenspan to choke should he attempt to utter them? 

Here's how the language actually breaks down: "will not" means he does not will to do it.  He stands on the 5th amendment.  Things have been done which would implicate him personally and he simply will not discuss it.   "Can not" is different.  “Can not” implies that someone else or something else is hindering him from answering.  Can not implies structural problems would result.  "Can not" might even suggest that the driving reason for silence is the fear of having a Jimmy Hoffa moment.  Either way, the Fed has skeletons it doesn't want exposed and they are not good for America.  I declared Alan Greenspan to be a traitor to the American people at least 4 years ago and he still holds that distinction to me.

So here we have Bernanke practicing his version of Fed speak in which half truths are said.  Hmmm.  Greenspan's words were designed to obfuscate the truth.  Bernanke speaks half the truth.  What kind of people speak in half truths and purposeful obfuscations?  Oh, that's right, CON MEN, grifters and scam artists.  That's who is running the show.

One has to wonder why Bernanke needed to say anything at all today but we should never assume it is because the Fed is bored or just babbling.  It looks to me like Bernanke is signaling those with eyes to see and ears to hear (i.e. fellow elite) that he expects higher energy prices to come.  Notice how he calls it "a tax".  Bernanke is not trying to blame higher energy prices on "Greedy Arabs" or problems in the Middle East.  Those people do not have the authority or ability to tax us.  Only the government can do that.  Higher oil prices are due to inflation and inflation is a form of sneaky taxation.

To recap on inflation, Bernanke is trying to increase the money supply so that it will offset the falling credit.  Banks don't want to loan and consumers don't want to borrow.  The herd has had a change of heart about all that debt.  But if the debt falls then the money supply contracts which leads to lower housing prices and bankrupt banks.

By increasing the money supply Bernanke hopes to achieve best case employment and best case stable prices. But these things are at opposite ends of the scales.  Increasing the money supply might increase employment but it is more likely to increase prices of things.  Bernanke is trying to sell us down the river in order to save his bankrupt banks from having lower priced housing stuck on their books.

At the same time, Bernanke really has no control over what actually happens.  The game is to increase the reserves at banks by printing money from thin air and buying treasuries from the banks.  The whole subject of Primary Dealers at the treasury bond auctions is big enough to be several posts on its own but the shell game goes something like this:

• Government spends more than it takes in via taxes and thus needs to borrow to cover the difference.
• The treasury creates out of thin air, treasury notes, bills and bonds, collectively referred to as "treasuries".  These are debt notes; IOUs.
• So called Primary Dealer banks are market makers for US government debt.  As such they are required to bid on treasuries at the treasury auctions and so they are stuck with any of them which are not bought by foreign suckers.
• When Bernanke wants to inject more cash into the economy he buys these treasuries from the Primary Dealers.  Right now the Fed is out of cash on its books so it prints the money from thin air to make the purchase.  This is known as monetizing the debt.
• The banks, having just sold treasuries to the Fed, now have more cash in their reserves and thus have the ability to loan more money into the economy.  This is very key to note: The Fed does not print money directly into the economy.  It prints money which it gives (either via loans or via Treasury purchases) to banks to hold in their reserves.  The banks are then supposed to create credit at a ratio of at least 10: but in current practice more like 20:1 and can often be as high as 60:1.  Bear Stearns was forensically determined to be leveraged 32:1.  That credit is actually what causes the inflation.  The money printed up by the Fed is the great enabler but not the direct source of inflation.

The fed really wants banks to take this enhanced ability to lend and use it to make loans that will create jobs which take gun wielding 22 year olds off the streets of Arizona and give them  some hope for the future so that politicians and bureaucrats are not shot in the head in the streets.  That's right, the fed's maximum employment mandate is more about saving the lives of corrupt bureaucrats than it is about the welfare of the people.  If the people get some benefit by accident then so be it but the whole thing is a sneaky tax so it is disingenuous to say that it is being done for the people.  It is being done for the elite and it is being done to the people.

The problem with this system (besides the inherent leverage it creates) is that banks don't want to finance the building of more factories when the existing ones can't even pay for themselves.  So instead of making loans that create jobs, the banks go gambling with the money for themselves.  The invest in stocks and commodities and all manner of things which not only create no jobs, they also drive the prices for these things up.  That's great if you have lots of money and a big stock account but if you are living on fixed income with no savings then you do not see rising food, clothing and energy prices as a positive event.  In fact, for many people it will be the reason to pull out their 9 mm parabellums and loading their high capacity clips.

And that brings us back to the tax Bernanke was talking about.  Government needs to hand out a bunch of food stamps and section 8 subsidized housing.  It needs to buy votes and to appease the masses.  So it creates the inflation and gets a few bucks into the hands of the treasury but in so doing it puts 10x as much credit into the hands of the banks which they use to drive up the price of bread and oil.  There is no way the fed can win this battle over the long run because inflation has a 10x or better leveraged advantage over welfare payments.

Of course, not everyone loses in inflation.  Notice how Goldman Sachs is making record profits and its CEO, Lloyd Blankfein, is getting record compensation.  These guys can't lose as long as the Federal Reserve is running the show because they get the full inside scoop that allows them to "front run" the Fed's movements.  At some point the Fed will run out of gas to juice the economy.  It won't be a matter of wanting to stop, the market will simply stop playing along and Bernanke will be standing there trying to push the herd in one direction but the herd will finally have had enough and it will rebel.   Food and gas prices will be the main drivers of civil unrest just as they are right now all over the world.  Of course Goldman will get the phone call from Ben telling him to duck and run for cover.   These elite do not want to be in the way when the stampede begins.