Try to find the Deflation in these pictures, Ben !

The official wordsmiths term for what we are experiencing is a financial crisis. The better term though, is bankruptcy. An outright default was averted by the Fed printing money and providing it to the bankrupt financial institutions. Without that action, the dominoes surely would have kept falling.
In a normal bankruptcy proceeding creditors lose. In this case, the losses are born by all holders of the US currency. The printing of a few trillion Dollars, tends to make it worth less. The zero percent interest offered by the Fed to banks means that savers get no interest income on their cash holdings. In this fashion, money is transferred from pension funds, retirees, savers of all kinds, to banks.
Ben states that to combat deflation he needs to print a few trillions of Dollars. The following pictures make one wonder what he's looking at !

This is the Dollar Index. This is the only chart that shows a declining price. It would be even lower, if not for the Euro, which makes up about half of the index and has been weak lately because of its own debt troubles. I currently own the Euro, because I believe that even in the worst case, its troubles are a lot less than that of the Dollar.

Coffee: no comment, as I will not comment on the next 4 charts either. Let me just say that no matter what commodity you look at, they all look similar. In fact, this is a random collection !

Corn

Copper

Cotton

Soybeans

Though I usually only publish original work (with the exception of these charts that are courtesy of Futuresource.com, I just have to share this youtube clip with you. It's educational and hilarious.

http://www.youtube.com/watch?v=PTUY16CkS-k

Economy of Scale

Have you ever noticed how tax rates are lower in rural areas and higher as you get closer to population centers ?
On the other hand, government services are provided in a lot more pleasant manner and more efficiently in the less populated regions, at least in my observation.
I was again reminded of this as I tried to get some property information and building permit on a property in Mason county. The small county government consists of simple buildings, the people are friendly and helpful and there is no standing in line or taking of numbers.
If that is your experience with government, you would not object to having more of it. To turn you off that idea, all you have to do is observe the same functions being performed in Pierce or King county.
Strange, isn't it ? When an organization becomes bigger, shouldn't it enjoy economics of scale and be able to offer cheaper services at higher quality ?

Trial by Jury

One of the greatest protections against tyranny in the American system of justice is the right to a trial by jury. If you should ever be put on trial, you have the right to be tried by 12 of your peers who have to vote unanimously to convict you.
But today, when you are called to be a juror, you will be told that you'll have to follow the law as the judge tells you. You will be told that you'll have to find the defendant guilty if he has broken a law, even if you disagree with the law or it's application in the particular case.
Yet, this is a trial by jury : not a trial by the judge, nor by legislators. If you vote to convict someone, it is on your conscience alone. You are the one who sends someone to prison or even his death. You are the judge and no-one else.
It takes a lot of courage to be able to stand up to the judge and the pressure of the other jurors. That is why anyone who shows a hint of this quality is usually excused from jury duty. Indeed, if you want to get out from it, all you need to state, is that you have the right to judge not only the facts of the case, but also the law.

Commodity prices

All major commodities traded on US exchanges remain in strong uptrends and whenever anyone looks toppy and succumbs to selling pressure, it's only for a short period. Hard to tell if it's overdone, but I'm not selling.
As long as Ben is busy printing and giving money away for nothing, why would anyone hold on to a falling Dollar?

Truth ?

Often it's not difficult to discern the truth, it's just difficult to accept it.

Bond market is cratering....

On November 11th I made the lucky guess that rates will rise even though Ben committed 600 billion Dollars to make them fall.
Also, on September 28th, I appealed to your sense of civic duty to accommodate Ben by selling your Treasuries to him.
Turns out, this wasn't such a bad move after all:
The 10 year note traded at 125.84 on September 28, at 125.6 on November 11 and now can be had for 121.6.
Yields rose from 2.45% to now 3.14%.
These moves would not warrant the use of the term "cratering", but perhaps these do : The 30 year bond fell from a high of almost 136 to now 122 and the yield on the 5 year note rose from just above 1% to now 1.7% in the same time frame.
Again, just a lucky guess, but I'm betting this trend will continue.

Individual Responsibility

Freedom, Liberty, Capitalism are now loaded terms that are mis-interpreted all the time. Perhaps this is less confusing. What we shall strive for is : Individual responsibility and the rewards that come with it.

Gold at $1400 an ounce

AngloGold, the worlds 3rd largest gold producer,  reported today that it re-purchased the gold that it had sold as a hedge on the futures market. That repurchase was completed October 7 at a cost of  2.64 billion Dollars and an average price of $1300 an ounce.

No-one is bigger than the market...

not even the Fed. It just announced that they will purchase 105 billion Dollar worth of Treasury securities in the next 30 days and that they will continue buying for the next 6 months.
My prediction is that interest rates will rise anyway.

Just a few observations.....

on the results of your current policy, Ben. You once promised aerial vehicles spreading cash amongst the populace to combat a recurrence of a depression. We are now more than 2 years into this mess and it would appear you have lost your way.
Sure, you have printed a lot of money and you continue to give unlimited amounts away at no interest - but who are the beneficiaries ?

1. Of course, the government. You are buying as much debt as it can issue with your freshly printed dough.
2. Banks: They get money for nothing from you and lend it to "safe" creditors (like governments) at record low rates. (but still make money)
3. Big corporations with access to the capital markets. They can issue just about any amount of debt at rates only slightly higher than the government. Also, they can issue stock, which of course does not obligate them to any payment at all. Further, since the cost of their capital is next to nothing, they are not feeling any pressure to invest. They're just waiting for some great opportunity to fall into their lap.
4. People who are short the Dollar. Your money printing has not gone unnoticed and the price of the Dollar is hovering at all-time-lows.

So you have been wondering why your heroic measures have not yielded any good results for the masses ?

Let's look at who is hurt:

1. Savers and retirees: they now get ZERO return on their money and are forced to gamble, buying overpriced assets if they want to have a chance at making any money at all.
2. Most everyone: We are not getting any credit. If we still have good credit, just the act of taking out a little bit hurts our credit scores tremendously. Oh, and if we take any credit, the rates are amazing. As you are giving free money to banks, consumer loan rates are going UP.
In my brokerage margin account for example, I get ZERO on my cash balances, yet if I borrow to buy stocks, I'm charged 8%-10%.  Of course you know that these loans are callable daily and are the most secure loans any financial institution can make !
3. Workers continue to be hurt as they continue to have no jobs.
4. Anyone who holds Dollars, as every Dollar you print directly diminishes the value of every Dollar already in existence.
5. Pension funds and insurance companies are not earning any money on their reserves and have to take higher risks. Result: rate increases and likely defaults in the future.

Gold is not an investment

Ads are popping up everywhere promising large returns from "investing" in gold. That is very confusing, since gold is not an investment (or a collectible - like the IRS treats it).
Gold is cash. Cash is not an investment, but a refuge that one seeks when there are no viable investments available or the outlook is too murky to make any sense of it.

Money is Credit

That's a fine monetary system, where one has money as long as his credit is good. Not good for the people who don't have credit, cause they don't get much, but have the little money that they own devalued by inflation.
What happens when the system breaks, like now ?
The ones without credit get shafted again, cause now they lose everything - including their jobs.
Why and to who's benefit was the Fed created in 1913 ?

Gold standard ? Will it ever happen ?

This question has come up a number of times and the answer is surprisingly simple: Get rid of the income tax !
Once there is no income tax and its incomprehensible "rules" everybody would be free to keep his funds in whatever form he wishes.
Even today you can choose to use gold (perhaps in the form of shares of GLD) as your cash position. Instead of using Dollars as cash, you could just use shares of GLD as cash. You can do this in an IRA right now.
Only remaining (unfair) disadvantage: twice the transaction costs, as you always would sell investments - buy GLD. The other disadvantage being in the "daytrading" regulations that would not allow you to purchase another security before the settlement date of your sale.
In other words, the answer is: competition ! If you don't have to keep your books in Ben's paper, you are free to chose whatever commodity or currency you wish to use.
How many people would continue to use paper ? Is it any coincidence that the income tax and the Fed were created in the same year ? (1913)

TIPS : 5 year yield now negative !

The Treasury just auctioned 10 billion of 4 year 6months Treasury Inflation Protected Securities (TIPS) at 105.51% of principal. The coupon on these is 0.5%. It means that you'll get 2.25 total interest for the remaining term, or you are guaranteed to lose 3.26 on your purchase of 105.51 over the next four and a half years.
The "upside" is that the principal is increased annually by the inflation rate as it is reported by the government.

Does the Income Tax tax income ? Or just our patience ?

No matter how often it is falsely stated: the "income tax" does not tax the rich. It should be easy to tax the rich. All that is needed is to look at the ownership interests in major assets and send out tax bills that would correspond to the value of those assets.

The income tax on the other hand is the most destructive element to attack individual liberty ever devised. And - it does not tax income; not the income of the rich anyway. This most interesting case to make my argument was just published this weekend: 

http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

And yes, what this example shows is NOT the exception but the rule. If you are already wealthy, you can afford to plan your income and hire the accountants and lawyers to show you how to pay little or nothing. 
But remember, it's not about the money, it is about the method: it places the burden of figuring out what is owed on the individual and it is impossible to figure ! 

This system cannot be fixed and needs to be ended.

Sachzwang

After "Angst", "Schadenfreude", "Blitzkrieg" and other wonderful word imports from the German language I believe this one represents a real enrichment to our current conversation: Compulsion to do something because of the way things are, or "Sachzwang".
Henry Paulson blackmailing Congress to give him 700 billion Dollars, no strings attached, would be such a time where he successfully argued "Sachzwaenge". (That's the plural and sounds actually even better :) )
Indeed, it is most often used in a political context, since politicians have this great ability to maneuver us into hopeless situations where they can plausibly argue that there is just one solution left: give them more money and/or more power !

Making Decisions

I am struggling with the challenge of having inferior knowledge and still having to make decisions every day. It would be nice to think that someone like Fed chief Bernanke has perhaps almost perfect knowledge of the relevant economic data and the wisdom to implement the right monetary decisions.
Unfortunately, evidence shows that it is the Fed that has brought on this crisis. It does also appear that the situation is continually made worse by its present actions.
Ben thinks that inflation is too low. Lies, damn lies and statistics; perhaps it's just my advancing age, but never before in my life did I find the data that the government produces as suspect as it appears to me now.
So here are just my current observations:
Commodity prices are close to record highs and the price of the Dollar at record lows. True, credit is still hard to get for small businesses and consumers, but any company with access to the capital markets does not have that problem. At the same time that the commercial real estate sector is still deteriorating, share of many REITs are already trading at higher prices than before the crash !
Even the stock market as a whole has almost made it back up to its high. The federal government is borrowing to the tune of 1.3-1.6 trillion Dollars a year and investment banks are making record profits this year (according to the Wall Street Journal).
Could it be that the Fed that was unable to see the seeds of the crash is now unable to see the beginning of a very serious inflation ?

None of the above

wonder why in this so called democracy (some claim its not only the envy of the world, but something we have to forcibly install in other countries) almost no-one bothers to vote?
What if you really like to participate in the process, but the 2 clowns offering to run your life are simply too offensive a choice?
None of the above ! This simple and effective idea was actually tried in Russia after the collapse of the Soviet empire. It now isn't offered anymore. I'm assuming that it must have been a little too threatening to the new elite (which strangely resembles the old one ! ).
None of the above: a real necessity in a system that is allowing the voters only the choice between 2 candidates that they very likely wholeheartedly disagree with.

No inflation ! (and no COLA)

here is a list of the major traded commodity contracts that are close to their all- time highs:
corn, wheat, soybeans, cattle, crude oil, gold, silver, copper, sugar, coffee, cocoa, cotton.
Are there any contracts trading close to their lows ? No.
I found only three items that trade about in the middle of the range of the last 10 years: hogs, natural gas and orange juice.
Oh, I almost forgot: yes, there is one contract that is trading close to all-time-lows. It's the Dollar index.
In short, the Dollar is at its low and the overwhelming majority of commodities is trading close to all-time highs.
Hey, wake up Ben ! You seriously want to tell us that we need to fear deflation ? You are so fearful that you feel it necessary to print up another 2 trillion Dollars ? Can you imagine what will happen to prices if you do ?

The Ultimate Pain !

After harvest estimates were reduced Friday morning by the USDA, futures for corn, wheat and soybeans immediately went limit up bid. Anyone who had sold the contracts not only lost his margin, but is now also unable to close his position and will be forced to buy at the open on Monday. 
Most traders will protect their positions with stop orders that are triggered when the trade moves against them. In this case, the stop would have been triggered, but even market orders would not have been filled and traders would now be forced to carry their losses over the weekend, not knowing how much it will cost them in the end.

What's the difference between a financial bubble and a Ponzi scheme ?

None, really. They both rely on greater fools to inject ever greater amounts of money into the scheme for it to work and make EVERYBODY rich.
Here's the major difference and problem: Ponzi schemes are of course illegal. Financial bubbles on the other hand ?
They were tolerated by the Fed (remember chairman Greenspan stating that he is not in the business of pricking bubbles ?) and now that the biggest one of them all has burst, the Fed is frantically promoting bubbles so that the game can go on !
In a sane economy that uses money of real value, rising prices cause demand to decrease and production to increase. In our bubble economy, when prices rise, everybody tries to buy before prices go up even higher.

Japan has a new "printing" program too..

Japanese central bank just announced last night that they want to create another 60 billion Dollar worth of currency. Since the Japanese economy is roughly 1/3 the size of ours, it would translate to about 180 billion if done here.
It doesn't quite compare to 2 trillion, but the interesting part is that they are planning to buy just about ANY asset that's traded in Japan, including stocks (through ETF's) and Real Estate Investment Trusts. That's something that many people, including myself, have speculated that the Fed is already doing.

Some more unwieldy numbers...

Total mine output of gold this year in the world (as well as average for about last 10 years) is about 2500 tons. At the current price (which some say is too high) that amount is worth about 100 billion Dollars.
Now here I again have to repeat myself: the Fed is proposing to "print" another 2 trillion Dollars in the near future after having "created" 1.7 trillion last year.
It's not just the magnitude of the difference, but also the nature of the two assets that must be taken into account. Paper Dollars can and will be further multiplied by the wonder of the reserve banking system. In normal economic times this multiplier is about a factor of ten. Now the Fed claims that it has to create these huge amounts because credit is not being created in its usual fashion. That may be true, but will the Fed be able or even willing to withdraw this potent drug from circulation when things return to normal ?
Remember that this is the Fed that was utterly unable to foresee what the housing bubble would do. The same Fed that saw no problems when trillions of Dollars were lent to borrowers who would not get a loan of even twenty bucks from a responsible lender.
When the Fed announced its first printing job in December of 2008, copper prices were at about $1.25 per pound. Today copper trades at almost record highs again: $3.70 a pound. Even though crude oil trades at "only" $82 per barrel (after having dropped to a low of $35 from a high in 2008 of $150 ), major commodity price indexes are making new record highs. The Dollar index (a basket of the currencies of the major trading partners of the USA) would be trading at a record low, it not for the temporary weakness of the Euro.

Here are two worthwhile links:

http://online.wsj.com/article/SB10001424052748704847104575532442706099582.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html

US is not Japan

Many investors expect to see rates on US government debt fall to levels like they are common in Japan for the last 15 years: 1 to 1.5 % on 10 year obligations.
That is highly unlikely IMHO and indeed I see a much greater danger in inflation hitting double digits.
The key difference is that Japan was a net creditor to the world when its real estate bubble burst in 1989. I guess that because debtors in Japan were now pressured to repay debts in Japan itself and also were unable to incur new debt because of falling asset prices, they in turn called in loans and sold assets in foreign countries. The receipts of those transactions were converted to Yen, thereby pushing it from around $0.60 per hundred Yen in 1989 to about $1.20 per hundred Yen 6 years later. Japan, in other words, experienced vicious asset price deflation and at the same time had to deal with a doubling of the value of its currency, making its exports much less competitive.
The position of the USA is exactly opposite: It is a net debtor and the Dollar has been making new lows since the bubble burst here in 2008. Since the US trade balance is still negative and amounts to about 3-4% of GDP per year, it requires foreign entities to accept that quantity of new Dollar assets every year. It would seem a daunting proposition, considering that investment returns here do not cover the present inflation rate.
It appears ludicrous to me, to fear deflation as commodity price indexes are reaching new historic highs almost every day.

Cash gold has a higher yield than the 10 year Treasury Note....

Whoa - that doesn't make any sense, right ? Holding gold only causes you to pay for storage and insurance, right ?

Here's the comparison: If you currently buy a 10 year Treasury note, you'll receive about 2.5% annually in interest. When you buy gold you get no interest at all. Here my good friend Ben comes to the rescue: he aims for 2% inflation per year and he's not shy about printing Dollars if that goal should be in jeopardy.

But wait ! There's more : the way he calculates inflation, it understates it by about another 1% (quite conservatively).

Put another way, paper Dollars depreciate by at least 3% per year against gold.

If you think you've heard all the arguments to abolish the IRS .....

 bet you haven't heard of this one : tax patents ! Oh yeah, if you finally get around to untangling the tax code, you can get a patent on your work. However disgusting this may sound, you'd have to admit that whoever is able to accomplish this has most certainly done more work than, say, the "inventor" of the "one click purchase" (held by Amazon (http://en.wikipedia.org/wiki/1-Click), or "buy it now" patents (http://news.cnet.com/8301-10784_3-9882151-7.html).

Here are some links on the subject of tax patents:
http://en.wikipedia.org/wiki/Tax_patent
http://www.nytimes.com/2006/10/19/business/worldbusiness/19iht-norris20.3214232.html

A trillion here, a trillion there, pretty soon etc, etc

Some people still have trouble getting their hands around the meaning of a trillion. That is why I want to share this handy example :
If my friend Ben would distribute all that cash that he is creating amongst all of the 300 million residents of the USA evenly, everyone (men, women, child) would receive about $12,300 Dollars.
This number is arrived at by adding the amount he has made up last year (1.7 trillion) and adding the 2 trillion that he has hinted he wants to create next year. Total : 3.7 trillion Dollars.
Dividing that by 300 million actually yields 12,333 Dollars and 33 Cents. A family of 4 therefore would receive $49,333 Dollars.
May I ask you how much cash you have lying around ? Would you think that such an infusion of cash might change your balance sheet ? (or your investing and spending ?)

Time to sell all Treasury securities !

My friend Ben has strongly hinted that he's ready to purchase another 1 to 2 trillion worth of government obligations. This has brought yields on the 2 year to record lows of about 0.4% and the 10 year maturity to 2.5%.
Needless to say, he will pay for his purchases with nothing more than a bookkeeping entry. To put it another way: after creating 1.7 trillion Dollars last year, he wants to print another 2 trillion next year.
He thinks that inflation is too low and that printing money creates jobs.
I happen to not believe either. So be nice and sell him what he wants to buy !

Gold at $1300 an ounce...

There are no good investment alternatives at this time. The central banks of the world seem to be determined to make their respective currencies worth less and less. Investors are not paid for that risk.

Gold just keeps going up and there is no speculative fervor evident in that move.

Stocks of gold miners have a tendency to move up before the price of the metal itself does. That usual observation is likely caused by investors who go for the leverage in the miners, before pushing the price of gold itself.

This time though, gold has just been quietly pushing higher and higher while the miners have not gained since 2004, when gold was trading at $400 an ounce.

It appears that the cost of mining the metal kept well pace with the price of gold itself. As a result, gold production has dropped from 2620 tons in 2001 to only 2480 tons in 2009. This is worth repeating: As the price of gold rose from $300 in 2001 to $1300 now, the production has actually declined.

Gold remains in a very solid, long term uptrend. A trend like this is very difficult to reverse and it usually only happens after the price goes parabolic.

Ben's messsage

If you hold Dollars we will give you these choices:
1. Buy overpriced stocks
2. Buy Treasury securities that will yield you nothing
3. Buy real estate that's falling in value

If you should not agree to accept either one of those choices, I will print money. I will print whatever amount it takes so that you WILL accept the choices that I outlined for you above.

Best regards,
Ben Bernanke
Chairman of the Federal Reserve

Whats with the name ?

Helicopter Ben: the name stuck after the current chairman of the FED suggested that in times of economic depression, money should be thrown from the sky to alleviate it.
Now we have the depression, the man is in charge, and I'm waiting for the rain !
Can someone please explain why the rain of cash is only falling on the likes of Goldman Sachs ?
Well, I for one will not believe that Ben has forgotten the common man and so I continue to scan the skies.

Income Tax

No-one questions that the US income tax is destructive and inefficient. It does not tax the "rich" but instead it taxes those who want to improve their lot. Those who already have, can afford the accountants and lawyers it takes to navigate the system that the IRS itself does not understand.
On the other hand, people who have new ideas and the potential to shake up the status quo are easily entangled by the tax system and often smashed by it.
The wealthy certainly realize, that this system helps them to keep their power and perhaps that is why you see so few of them opposing it.