An Addendum to the ‘Flations – Gold $5,000

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).

Federal Reserve Chairman Ben S. Bernanke delivered a much-anticipated speech on Friday, August 27, 2010. There was no reason to think this talk would be more or less important than his other talks except for the degree of hysteria whipped up by the media in advance. Bernanke was addressing an audience of fellow central bankers and their camp followers at an annual gathering in Jackson Hole, Wyoming. There have been memorable comments at these late summer getaways, such as, in 2005, when past-Federal Reserve Board Vice Chairman Alan Blinder claimed then-current-Federal Reserve Chairman Alan Greenspan might be the "greatest central banker who ever lived."

But Ben Bernanke said nothing new. The post-mortem analysis of the world’s most influential central banker can be reduced to four of his claims from Jackson Hole:

  1. “The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation.” [Because the economy is noodling along – #4, below.]
  2. “A… policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability.”
  3. “However, such a strategy is inappropriate for the United States in current circumstances.”
  4. “I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace. Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.”

In summary, Bernanke’s strategy of inflating is “inappropriate,” given Bernanke’s stated outlook.

Bernanke’s stated outlook is wrong. On August 17, 2010, the Federal Reserve Bank of New York reported $986 billion of “severely delinquent” consumer debt, defined as 90 days overdue. On August 18, the Wall Street Journal published a survey by CareerBuilder.com. Of 4,500 white-collar workers who were asked, 9% had taken a second job in the past year and an additional 19% intended to do so in 2010. This is probably due to constrained income and shrinking access to credit (see The ‘Flations).

At some point, Bernanke’s outlook will be untenable. The Fed chairman is habitually slow to understand changing circumstances, but Dow 5,000 could do the trick.

It looks as though the U.S. Postal Service is prepared. It has listed instructions on its website to convert Priority Mail International insurance from U.S. dollars to SDRs (Special Drawing Rights). SDRs were conceived in 1969 as a possible substitute when the U.S. dollar was chasing U.S. prestige down a rat hole. It originated under the auspices of the IMF (International Monetary Fund) which defines it as “a basket of currencies, today [August 30, 2010] consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.” (The value of the SDR translated into dollars is calculated by the IMF daily “except on IMF holidays and when the IMF is closed for business.” A currency that that takes a lunch break is doomed to fail.)

The U.S. dollar is still the currency that dominates international transactions, although the percentage of trade in other forms of payment has been rising for the past several years. China, Russia, and other countries have attempted to shift settlement into other currencies, including the SDR. This is understandable given how the overpopulation of U.S. dollars around the globe leaves foreign central banks with redundant dollar reserves and another housing bubble.

From the USPS website:

323 Priority Mail International Insurance

323.62 Accepting Clerk’s Responsibility

The accepting clerk must do the following:

a. Indicate on PS Form 2976-A the amount for which the parcel is insured. Write the amount in U.S. dollars in ink in the “Insured Amount (U.S.) block.”

b. Convert the U.S. dollar amount to the special drawing right (SDR) value and enter it in the SDR value block. For example:

INSURED VALUE

$100.00 (U.S.)

65.76 SDR

c. See Exhibit 323.62 for a table showing the conversion of U.S. dollar values up to $600 to SDR equivalents. To determine SDR equivalents above $600, multiply the insured amount, rounded up to the next full dollar, by the conversion factor of 0.6576.

Note: Use the following rates when converting between U.S. dollars and SDR values:

1 U.S. $ = 0.6576 SDR

1 SDR = $1.52 ($1.5206 U.S.)

The world has operated on the U.S. Dollar Standard since America defaulted on the Post-World War II Gold-Dollar Standard in 1971. Has the U.S. Dollar Standard ended? If it has not, Simple Ben’s intention to inflate the United States to prosperity will do the trick.

If “USPS Updated Postal Revision Through July 15, 2010, Section 323.62” has been discussed in the major media, it must have been in the Society pages. The website Zero Hedge carried the story last week. Whatever its chances of adoption, it certainly deserves more debate than the boring and trivial analysis of a boring and failed economist who has stated his intentions to hyperinflate for the past 30 years. Maybe a mole from the IMF infiltrated the USPS. Accentuating the trivial and ignoring imminent cataclysms is the story of our times.

6 Comments
  1. Tom Hickey says

    Gold is going to keep going up over the long run, not because of inflation or as a safe haven against impending disaster, but rather because Asians and Indians are getting richer. Gold is traditionally a preferred form of saving for them, and gold jewelry is a display of the families wealth and success. This is going to be very big as Asia increasingly comes online in the global economy, which it will eventually dominate — but not for a long time to come. (The US GDP is ~14T and the runner up is China at less than 2T. Consolidated Europe rivals the US, so Western dominance is not going to diminish anytime soon, in spite of all the noise.)

  2. Element says

    Hi Fred, I’ve been reading PDFs on your site recently; read ‘Dark Vision’ and Fed needs a Grinch’ last night. As a person who also monitors the deviation between public statements and timings, and reality and subsequent statements, I really appreciate the light your documents and resulting views cast on events.

    http://charts.abi.org/

    Recent ABI “Chart of the Day” graphs depict a very sick US economy. Not just weak, but very ill. Edward was perfectly right about a ‘fake’ or ‘statistical-recovery’ due to massive fiscal and monetary stimulus. But the US did not recover, it only bounced where spending stimulus was applied (house sales, cash for clunkers, GM bailout).

    The graphs of Commercial Retail Investment and CRE investment are shattered while existing house sales are again down by almost 50% from peak, and near the level of 1996. And the situation is now much worse than the initial subprime default environment.

    Car sales are endlessly bleeding-out. US credit in the form of mortgages and credit cards, are delevering, mostly via default and falling sales when stimulus disappears. Unemployment became entrenched during 2010 and generally very long-term, while the recent GDP fall locked this in for years.

    But the way these graphs cliff-dive without bottom indicates worse to come and makes it undeniable there has been no actual recovery. NONE in the real-economy. The real economy sinks or swims on the basis of competitive merits capacities, but most importantly, market demand condition.

    Ordinarily a small business can create demand and turnover and job growth via investment in advertising, to build up its clients and diversify, innovate and refine services. But when market demand conditions are this bad with no end in sight, the significant investment required for expansion usually does not yield any growth or better profits, just higher costs. At best can afford to do it a couple of times and fail, and then you are running-on-empty.

    So small businesses now have little option but to cut costs and contract enough to still meet bills and try and hold on. Job creation is not possible unless it’s being public subsidized (or massive tax incentives). Frankly, this is what it is going to take in practical term to get a rush of job creation in a recovery from a new negative growth phase. Business will be broke and a poor credit risk, so unable to initiate it on their own.

    You can call that business welfare, because it is. But if you want jobs and an economy that recovers, you HAVE to do it, on a gigantic scale, and sustain it for a long time to get profits growing.

    And you are also going to have to prime private bank accounts of consumers, so the new small business jobs become profitable and self sustaining as confidence returns.

    But for the time being, persons irrationally assuming the US will not go into negative growth soon are in denial or not paying objective attention. The US economy is going down hard in all sectors, over most of its geography. In what world does that not result in recession? The DOW is at 10,000 rather than 11,500, (or 14,000 for that matter). In what world does that not lead to a fall in future GDP? Capacity utilization is down, trade-balance is a smoking-heap, unemployment is high, demand is weak, credit is constantly falling, stimulus has begun to drop, the dollar is too strong. Washington and the Fed are still doing nothing effective while GDP is low and trending down.

    In what world does all that not result in a recession? They can talk it up and analysts can assert low or flat growth, but real-economy business people are not dumb, and will not be fooled at all by that delusional drivel. They will know via their monthly and weekly earnings, phone calls, and the traffic density outside their window how the economy is going, and that’s many months in advance of the analysts, or the stats in those ABI graphs.

    The EU has an economy of about the same size/scale as the US. The euro has fallen much lower, with respect to the USD, during QTR2 2010 and particularly during the beginning of QTR3 2010. This will translate into sharp relative lower US export competitiveness with respect to the Eurozone.

    This has still not even BEGUN its impact the US economy and trade balances.

    So the trends will exacerbate over the next 6-months. To turn this trade and export trend around, the USD must become even more relatively-‘ugly’ than the hideous euro.

    Or else a major productivity increase, via cutting costs, i.e. lower wages – that exacerbate default and lowers demand, or else, trade protection of US jobs, wages and markets to sustain demand.

    So I expect global trade conflict to erupt as soon as the end of November, and for the US to be the one that initiates it.

    Remember the recent G-20 meeting where on June 28, Obama said the US would not keep paying for other country’s recovery? ;
    “…As I reiterated to my colleagues, after years of taking on too much debt, Americans can not and will not borrow and buy the world’s way to lasting prosperity. No nation should assume its path to prosperity is simply paved with exports to the United States. Indeed I’ve made it clear that the United States will compete aggressively for the jobs and industries and markets of the future. And that’s why I’ve set the goal of doubling our exports over the next five years, an increase that would support millions of jobs in the United States. It’s why I’ve launched a national export initiative, to help meet this goal. … A strong and durable recovery also requires countries not having an undue advantage, so we also discuss the need for currencies that are market driven. As I told president Hu yesterday, the United States welcomes China’s decision to allow its currency to appreciate in response to market forces, and we will be watching closely in the months ahead. … ” – Barack Obama, Toronto G20 closing remarks, June 28 2010.

    But it’s not just denial that is occurring, it’s state propaganda, and it’s global, for instance, there has been a lot of discussion in recent days of a US double dip.

    So this morning we had the US Ambassador to Australia, Jeffrey Bleich on TV denying the US was about to double-dip and he cited a recent conversation with Joseph Stiglitz and reported he said (verbatim);

    “Well, I, I don’t see a double dip recession, I just spoke with er, Nobel Prize ah ah, laureate, um, um, Joe Stiglitz, who doesn’t see one either, so I’m, ah, I won’t want to put, er,..that makes you feel good when he says it, I think he knows a little bit more about economics than I do.”

    But did Stiglitz say this? I seriously doubt he did and strongly suspect Ambassador Bleich is not being remotely honest or circumspect.

    Stiglitz was here in July, and gave a series of speeches and detailed interviews and he was basically sounding a warning about what is coming. He gave an interesting speech called “Who Sank The Global Economy” and made it perfectly clear another financial and economic bubble pop would occur soon.

    ABC ‘Big Ideas’ Video:
    http://www.abc.net.au/tv/bigideas/browse/video_popup.htm?vidURL=/tv/bigideas/stories/2010/08/10/2977548-mediarss-full.xml&vidTitle=Joseph%20Stiglitz:%20Who%20Sank%20The%20Global%20Economy?&vidLength=Full

    Download the MP3 Audio:
    http://mpegmedia.abc.net.au/tv/bigideas/uq_josephstiglitz_full.mp3

    But in another national 730 report TV interview ABC’s Kerry O’brien prefaced his interview ad introduction of Stiglitz thus;
    “…His latest book, ‘Freefall’, is a worrying critique of the root causes of the Global Financial Crisis, and despite President Obama’s recent banking reforms, he says it could happen again. He’s also predicting another US economic slowdown. …”

    Transcript excerpts;
    KERRY O’BRIEN: Joseph Stiglitz, if we can start with an up-to-date appraisal of the US economy: what is the state of the economy right now? [June 29, 2010]

    JOSEPH STIGLITZ, GLOBAL ECONOMIST: In a single word, weak, ah, and probably going to get weaker.

    KERRY O’BRIEN: How serious is the risk of a double dip recession, if not this year, then next when the federal stimulus runs out?

    JOSEPH STIGLITZ: It’s almost sure that growth in the United States is going to slow markedly. Whether it slows from where it was to one half per cent or one per cent or to minus one half per cent isn’t yet clear. I think what’s been happening in Europe has been increasing the likelihood that we go into a double dip, for two reasons: one, it means that global financial markets are in a little bit more unsettled state. But secondly, the US had hoped to export its way out of the recession through a weak dollar. We had a weak dollar policy. We didn’t call it that, but that’s what was going on. But, exchange rates are like negative beauty contests in the current context: who is the ugliest? And, we were winning, the US was winning hands down until this year and Europe’s financial troubles have put it in – have meant that it is doing much better in this negative beauty contest, so the dollar is stronger, and that’s gonna make it more difficult for the US to export and that’s going to mean that our economy is going to be all the weaker.

    /… …/

    KERRY O’BRIEN: Can the whole thing [financial system seizure] happen again?

    JOSEPH STIGLITZ: It can and it almost surely will happen again, because we didn’t deal with the problem of too-big-to-fail banks. It is one of the reasons why it will happen again. And we didn’t really deal effectively with all the kinds of excessive risk-taking, all the problems of lack of transparency that were at the core of this crisis. And so, yes, we understand what the issues are, we understand the issues better than we did three years ago, but politics intruded the power of the banks, was too great. They’re making $20 billion off of derivatives. So rather than lending, they’re engaged in all of these kinds of gambling and excessive risk-taking and generating large profits, but it’s not helping the American economy and it’s putting at risk American taxpayers.

    That does not sound like a man who just told the Ambassador, “… I just spoke with Nobel Prize er laureate, um, Joe Stiglitz, who does not see one either …”.

    That’s not just denial, that’s state propaganda that could not be more diametrically at odds with what Joe Stiglitz has been loudly saying and not in any way reflective of Stiglitz new book, ‘Freefall’, which basically makes clear that the US economy is doing what the title says.

    US leaders need to stop the denials and stop their propaganda.

    I’ll leave you with this cracker comment by David Wyss of Standard & Poor’s on ABC Lateline-Business last night (Sept 1st 2010); “The big problem’s the [US] consumer, consumer is scared, he doesn’t want to spend, he’s being more cautious. As individuals I applaud that, because we should be saving more money. But from the economy’s stand-point, we really like to get people out there living beyond their means, like normal”.

    Yeah, you read that right. That’s what he said, verbatim. Go to the ABC Lateline Business website and watch the video, the interview with Wyss is ~11-minutes into the show.

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