Back to Reality

By Greg Hunter’s USAWatchdog.com  

Now that the mid-term elections are over, it is time to get back to reality.  Just because House Minority Leader John Boehner is taking over for Nancy Pelosi as Speaker of the House doesn’t mean the economy will get better.  Yes, the Republicans can now, pretty much, put the kibosh on the Obama agenda with big victories in the House and Senate, but is that enough to turn things around?  In a word–no. 

The economy is functioning so poorly the Federal Reserve has widely telegraphed it will start another round of Quantitative Easing. It has been jokingly called “QE2” by the financial press.  What is QE2?  It is more Fed money printing to finance the country and revive the economy.  This kind of QE has never been done before in human history on this scale.  How much money will the Fed print?  The consensus among many economists is $500 billion, but that is just a start. Yesterday, Reuters warned, “Fed Chairman Ben Bernanke has said long-term asset purchases are an effective way to lower borrowing costs when rates are near zero, but a program of this size and scope is untested and many worry further expansion of the Fed’s balance sheet sets the stage for inflation or another asset bubble.”  (Click here for the complete Reuters story.)   

The Fed will start small but leave its plan of action open-ended.  In other words, it will commit to print as much as needed to buy treasuries and mortgage-backed securities to get the economy going again. One senior currency trader at HSBC, Daniel Hui, said on Bloomberg last week, “We think the eventual expansion of QE could be as large as $2 trillion if the Fed is serious about preventing deflation.”  (Click here for the entire Bloomberg interview.) 

Citywire, a British publication, is one of many media outlets reporting that Goldman Sachs wants twice that amount of QE.  It reports, The bank said that based on its own analysis the Fed ought to pump in a further $4 trillion in order to achieve the monetary easing the economy needs. . . “  (Click here for the complete Citywire story.)   

Former Bush economic advisor Marc Sumerlin talked about the upcoming Fed QE about a month ago on CNBC, “To me, it starts to get interesting at six to seven trillion dollars,” Sumerlin said.  (Click here for the CNBC interview and my post called “Could a Dollar Crash Be Coming Soon?”)   

Renowned gold expert Jim Sinclair (JSMineset.com) has predicted many times over the last few years that the Fed will “QE to infinity.”Don’t laugh, Sinclair is not kidding.  The banks are in deep financial trouble again because of “Foreclosuregate,” and the Fed will do whatever is necessary to bail out members of its banking syndicate.

The rest of the Fed QE plan is not so easy to forecast.  Even economist John Williams of shadowstats.com cannot predict the QE2 game plan.  In his latest report, published last Friday, he says, “The games-playing and market manipulation here has gotten so clever that it just might backfire, with too little monetization possibly crashing stocks, or too much monetization boosting gold and crashing the U.S. dollar and stocks.”   

What Williams is most worried about is a sudden collapse of the U.S. dollar.  You see, tax receipts are plunging right along with the bad economy.  Meanwhile, wild spending for bailouts, stimulus and war has put America in record debt.  Officially, it is north of $13.7 trillion.  The Truth 2010, a U.S. debt website, shows a debt clock with $75 trillion increasing by thousands of dollars by the second.  Check out the clock for yourself.

So, either the U.S. dramatically cuts spending or the Fed will be forced to print money and buy our own treasury debt to fund the country.  When a country buys its own debt with money printed out of thin air it’s called monetization.  Here’s Williams’ analysis, “What is not yet widely recognized is that the Fed will have to monetize Treasury debt soon enough, regardless of any action taken or not taken next week by the U.S.central bank to rearrange the proverbial deck chairs on the Titanic.  Monetization will be forced in an effort to prevent a systemic collapse . . . as the unexpectedly weak U.S. economy spikes the federal deficit, impairs Treasury fundings and the combination of factors pushes the U.S. dollar into a likely selling panic.”   

The Fed has stated many times, over the past several months, it wants inflation (rising prices) and not deflation (falling prices).  I think the Fed will get what it wants, but if a “dollar selling panic” hits the world markets, inflation could go haywire.  Williams predicts a “ Great Collapse” and a “ hyperinflationary great depression.”  Williams is an economist with a stellar track record.   

Comments
  1. Jonas

    Now we’ll have to wait and see whether the Republicans will put up with the Federal Reserve’s inflationary policies and bring about debt-deflation. Either way, it’s going to be a wild ride…

    http://www.daily-ops.com

    Thank you for the plug Greg!

    Jonas

    • Greg

      Thank you Joans for the link.
      Greg

  2. Art Barnes

    Greg, as discussed in your present and past articles, clearly the Fed
    is on a track of no return, it simply doesn’t know what to do so it is doing something, that is, on the inflation QE side of it. Inflation will make a whole lot of money quickly for the Wall Street speculators, all at the American peoples expense. Frankly, deflation is wholly better than hyperinflation. Deflation must occur so that the eoncomy can hit bottom and begin to dig itself out. Its kind of like a drunk that must hit bottom in order to get the help he needs. Its down to the wire now, inflation or deflation, nothing else, depends upon the Fed and they have made the call for hyperinflation. The Republicans can’t fix it because if they quit spending and pay some debt off, further down the economy goes, and more “Easing” will be needed by the Fed, a hanster treadmill so to speak. Its all a mess, can’t be fixed by the fat cats, Congress, or the Fed. The only real solution is deflation which the Fed fears more than the anything else, a long deep recession to the bottom of the barrel so that we can commence to start over but this time pay for our goods as we go. Frankly, fear of deflation is just that, fear, clearly it is will cause no greater harm than hyperinflation. More panic will be seen with hyperinflation that some deflation. Our Government and the fed have spent us into this dilema and like a roller coaster you either can go up or down but not sideways, the Government and the Fed have agreed to go up the inflation side of this mess, make some quick money for the big guys and then at the top, well, you know, it straight down anyway. Thanks for your blog!

    • Greg

      Thank you Art, John and Stanley for adding your views to this post.
      Greg

    • Glenn

      I couldn’t agree more that deflation is the answer here. The Fed’s long tradition of preventing falling prices was and is unbelievably ludicrous. Only government comes up with the idea that rising prices are good for Americans when all Americans in the private sector rush towards goods and services on lower price points. The politicizing of the Fed’s role in this country is now at the end. I’ve got a seat belt on but the Fed is putting on the brakes way too late heading into the point of no return.

      • Greg

        Glenn,
        The banks need to be taken to receivership. It would be much cheaper.
        Greg

  3. John Bernard

    This was only a partial, very limited victory for a return to sanity. It is probably too little, too late. The voters proved that they have no idea what’s coming; and apparently don’t care to find out. Will there be a sudden crash? No, probably not, which in a sense is good as it gives those who are interested a little more time to prepare. Stockpiling essentials in a dry place is a must; if the disaster does not come the materials can still be used.

    Silver and gold should be acquired if possible, stop turning your coins into paper they will be needed later.

    Today’s political shift is nothing more than a speed bump.
    By 2012 it will be more than obvious worldwide.

  4. Stanley Hartstein

    No doubt, those who are at the helm of the monetary policies of America will have to do something about the wide trade deficit that has been going on for at least two decades. If that is ignored then the future scenario will be more as Jim Sinclair is predicting – QE to Infinity. Tariffs will not work. What will work is import quotas. This leaves little room for other countries to retaliate in kind because they are restricting our products in any event.

  5. Doug Philbrick

    Greg,

    I wonder if you could speak to the apparent disconnect with reality and stocks. On the surface it seems obvious that stocks are rising simply because of all the Fed money printing having to go somewhere, but IF the so-called Republicans embrace fiscal discipline and austerity (not for themselves of course, but for the masses) then our paper mache economy should, theoretically contract hard and fast and IF they don’t then the dollar should, theoretically, quickly turn into toilet paper and stocks which are denominated in said worthless dollars should quickly follow suit. Granted, the market and the economy is totally manipulated and full of thieves, but doesn’t anyone understand that the only way out of this mess is to allow deflation to reset values to sustainable levels and otherwise destroy the bankrupt (both morally and financially) institutions that created this mess in the first place. And why, as a final thought, aren’t the various bankers, politicians, lobbyists, etc. who have stolen this country from its citizens being tried and hung for treason?

    • Greg

      Doug,
      i think we are already past the point of no return. What will be done will much too little and much too late. To do any good at all we need drastic cuts in spending for everythinng and I mean everything.. That is just not going to happen. The Fed is going to print $75 billion a month for the foreseable future. What does that tell you? Thank you for your comment.
      Greg

  6. slingshot

    I could not agree more that even as we have a change in Congress, we have not hardly addressed the problems. We have lost time in this electorial process and I hope the new members can hit the ground running,cause they have to. Even as some of the OLD Guard, have been re-elected it would behove them to fully understand that the game has changed. The time of political chess is over and they will finish the business of the people before going home on vacation. If they don’t, Call them. Write them and get in their face and tell them.
    As far as the QE2 is concerned you have to see that they have us at both ends. If the public decided to stop paying ALL TAXES, they would just pass a bill to print money to pay themselves. Imagine that?
    The taxes we pay is nothing to what they can print and print they will. Question here, who is calling the shots. Goldman Sachs? The FED?
    Congress? Forget about a dollar collaspe at this moment. Who gains on our pain? What actions precluded this debacle. Who in there right mind would mortgage a house when the buyer had no job? Because of this gross miscalulation and “To Da Moon” mortgage industry, we find ourselves powerless as these captains of the banking firms made wild games out of our lives and now laugh at us as it is so bad that it may never be untangled. To those who think it does not affect them then ask yourselves why you are paying more for things and your taxes/fees/ asessments are going up. This is the collateral damage of the financial world. No one left untouched! Quantitative Easing is just another way of saying, Infinite Money. Yours! I might add.

    Be Prepared.

    • Greg

      Slingshot,
      Good comment and good advice.
      Greg

  7. Bob

    The rich will get the QE2 an double up on there wealth. the poor workers will get the inflated dollar. Simple math tells you were people will see jobs being made. 30 cent’s a hr. China no unions, USA wage 7 bucks, unions, clean air laws you name it. I think the next election cycle will be the year of the women why. Because they are going to be the one’s cut off states programs. I just hope may pension fund gets some of that QE2 bailout money. The word bailout is fitting, take your wealth and get the hel- out of the USA. PEACE

    • Greg

      Bob and Robert,
      Thank you both for adding to this post.
      Greg

  8. Robert Hamburger

    An Open Letter to the newly elected Senators and Representatives:

    http://www.hamburgersstand.com/406/an-open-letter-to-the-newly-elected-senators-and-representatives/

  9. Wes Colby

    Excellent article Greg. I think a good portion of the US voting population has no clear understanding of what real storm is fast approaching our shores. It’s amazing to me that the media doesn’t focus more closely on QE2 and it’s impact on the economy. We’re all in a “pay me now or pay me later” boat and the latter is going to be much, much nastier for the country than if we were to just STOP the spending, hit a ‘bottom’ and work our way out of it. We’re a quick fix nation…and the Fed’s fix is going to hurt us terribly. Keep up the great insight and keep spreading the word!

    • Greg

      Wes Colby,
      You are correct the U.S. voting population is totally in the dark and I blame the mainstream media. The MSM is a sham. What I am reporting on the economy is just too big to miss, unless it is on purpose. As renowned gold expert Jim Sinclair says, “It is too stupid to be stupid.” Thank you for your comment and support.

  10. Lee Sluder

    It cannot be denied that Ben Bernanke is a partially honorable man. He has said that some planned amount of inflation will be good for the economy.

    What Bernanke has not stated in all honesty is what Malcolm Bryan, President of the Federal Reserve Bank of Atlanta, courageously made clear in 1957: “If a policy of active or permissive inflation is to be a fact, then we can secure the shreds of our self-respect only by announcing the policy. This is the least of the canons of decency that should prevail. We should have the decency to say to the money saver, ‘Hold still, Little Fish! All we intend is to gut you!'”

    That’s the ultimate reality!

    • Greg

      Lee,
      I am sad to say you are totally correct. The little guy will be killed and he has no idea what is really coming.
      Greg

  11. mcalevy

    Living abroad as a permanent expatriate, it is interesting to see how people in America keep fishing for hope. The US is bankrupt, and in the history of the world, no nation has ever paid off its debts, per Martin Armstrong. They simply change to a new currency and keep going.

    Interesting thing for the US will be when oil producers will no longer take dollars for oil. That will probably come after the Chinese and the Saudi’s have purchased controlling interests in all the stock of viable US companies. The question is, if you had a $trillion and you were required to spend it in the US, what is there in the US that is worth buying that would conserve your wealth?

    Because the bottom line is, world, as long as you will take our dollars, and we do not have the ethics to not print as dollars as we decide we need, we absolutely own you.

    • Bob

      Who controls the oil. Mr.Cheney said debt don’t matter did people think a few guys in caves were the reason to go to war. OIL is the dollar of the world. Give me the power of a nations money, I control the nation. Give me control of the worlds oil I control the world. Might makes right the dollar is the world dollar and the world knows we killed 3000 people of are own on 911. Who is going to out kill people like us. What we did is not all that bad, China is getting the oil they need and the pipe line going throw Afghanistan will be completed, this will be good for Russia. The world is getting rebuild all the big corporations are pushing the next move to bring Africa in to the new one world order. He-l boys the dollar is what it is, base on the control of oil. PEACE

  12. carmen

    Please, do whatever you can to help Martin A. Armstrong.
    He deserves a lot more than he gets. America should be proud having such a great man!
    http://www.martinarmstrong.org/economic_projections.htm
    Please, feel free to follow the link to as many people you can!
    God bless you and America!

    • Greg

      Carmen,
      Mr. Armstrong is one of the most brilliant economic minds of our time. Thank you for bringing this to our attention.
      Greg

  13. nm

    Just learnt that the Fed will buy $600 billion dollars worth of debt. Please tell me with what? How can you buy your own debt? it doesn’t make sense to me. Maybe I’m stupid.

    • Greg

      NM,
      You are most certainly not stupid because you are asking all the right questions.
      Greg

  14. ManAboutDallas

    I’m going to take a break from my usual “Stand-Back-And-Let-It-Collapse-As-Fast-As-Possible” mantra ( don’t faint, Greg ! ) and offer a bit of advice to the otherwise prudent who are wisely buying not only physical gold and silver, but precious metal mining stocks, as well, and that is:

    Don’t buy stock in ANY mining company having ANY mine(s) anywhere in the United States. ANYWHERE!

    The higher gold and silver go in price, the more such mines will be viewed with an eye to NATIONALISATION. By the United States. Don’t think it will happen ? Don’t kid yourself, it WILL ! And it will happen IN THE BLINK OF AN EYE, and the STROKE OF A PEN, just as FDR did in the 1930’s. It won’t matter who’s running the show, all that will matter is expediency, and U.S.-based gold and silver mines will, overnight, be “Property of U.S. Government”.

    • Greg

      ManAbout Dallas,
      Good advise. Thank you for the analysis.
      Greg

    • John Bernard

      To whom will I sell my paper gold and gold miner stock to in a world without value? Sometime in the not too distant future paper gold shares will be used for wallpaper.

  15. Robert

    Greg, it seems the Fed is making a whole lot of effort to get people to trust the stock market, especially with QE2 and its goal of coaxing people into equitys and out of bonds…

    I keep hearing theres going to be a big push to privatize social security. Im wondering if the ruse might be to get the uninformed masses to believe they will be better off with social security being invested in the stock market and this whole effort of propping up the market may just be to goad the public into thinking its a good idea and then point to this phony pumped up market as guaranty’ng a much better return.. and then when they get enough of the people to go along with it and after the conversion has happened, they do away with QE9 or 24 or whatever its up to by then, the market crashes and the banks effectively stole the remaining portion of the treasury theyve been eyeing for decades.. just thinking out loud… but these banksters dont care about us boomers (not sure if youre a boomer but Im sure many of us who post on here are)… Like Ive said in a previous post, corporations see people as expendable…

    Argentina privatized their social security program in the 80s and 90s and I heard it didnt work out and the senior citizens had very dismal lives as a result..

    • Greg

      Robert,
      What is hapening now is historic. There are few ways to protect ones wealth. Thank you for the comment.
      Greg

  16. dave

    They are calling this QE2… I think TITANIC would be a more appropriate name.

    • Greg

      Dave,
      I’d be laughing at your comment if is were not so true and sad. Thank you for injecting some levity.
      Greg

  17. Vess

    Actually, a dollar collapse would be the less bad outcome. At least it would be over soon, the mountains of debt would be written off and the used toilet paper we call “fiat money” will be replaced with something better.

    Sadly, it ain’t gonna happen. There will be neither a dollar collapse, nor hyperinflation. If the dollar holders (and most of the dollars are OUTSIDE the USA) decide to dump the dollar – what are they going to buy? Gold? Don’t be ridiculous. Compared to the treasury and dollar markets, the gold market is so tiny, that trying to buy gold would be not much different from simply throwing your dollar and treasury holdings away. Even if you add all other hard assets, it would make no noticeable difference. And you won’t be able to buy another currency, either, because all the major ones will be devalued in sync, as they race to the bottom.

    So, all the suckers holding dollars and treasurys will have to suck it up, grind their teeth, and see how their holdings slowly depreciate – because the only alternative would be to have them wiped out overnight.

    What awaits us (the whole world) is much worse: many years of double-digit inflation – no dollar collapse and no hyperinflation. At the end, the middle class will be wiped out and the banksters will win – again.

    Sorry folks, but there is no escape. Buying gold won’t protect you either. Even if it is not confiscated outright (which it probably won’t be, unless the gold holders hold a substantial amount of wealth to matter), it will be practically confiscated when you pay the capital gains tax on your gold once you start selling it (because you’ll have to live on something, right?).

    • Greg

      Vess,
      You are obviously a very smart man but I cannot figure out how you come up with your future scenarios. You are correct, we are going to have inflation but equating physical gold with treasuries is ludicrous. There is nearly a 5,000 year history with gold that says you are wrong. The analysis of people such as Jim Sinclair, John Williams and James Rickards (all world renowned in their field of expertise) say you are nearly 100% wrong. I also agree with you that there will be some taxes on gold, but you must pay taxes on any investment. Paying taxes on a profitable an investment is a good problem to have. Gold (or silver) is no different. I do not think you are correct in most of your analysis, but I will certainly give you a forum to express yourself here. As always, I say “Good men can disagree.” Thank you for weighing in.

      Greg

  18. Mitch Bupp

    HI Greg, I should have called Brad and Britt Show today and asked you this, “The FED is buying more mortgage toxic assets, aka mortgage backed securties, from the banks at full price (not discounted)? Is the FED buying up defaulted assets (foreclosed homes) for the banks so they do not have a call on the FRACTIONIZED mortgage backed securities OR is the FED buying up all of the fractionalized mortgage backed security straight out? I see that AIG went back to TARP and got billions more to pay off some mortgage backed securties.

    • Greg

      Mitch Bupp,
      The mosr recent Fed announcement on “QE2” only mentions Treasuries, but I don’t see how they will not be forced into buying mortgage-backed securities. We really will not know the full extent what the Fed is doing because the Fed is not subject to an independent audit. Much of what the Fed does is secret and that is a fact. You can take some guidance from the Gold market though because “Comex Gold Hits All-Time Record High in After-Hours Trade Thursday.”(Headline from Kitco.com) That is a repudiation of the Fed’s latest QE2 policy. I am sorry you did call today. I would have loved the questions. Thank you for your support.
      Greg

      • Mitch Bupp

        HI Greg, I was laying in bed when I realized the beauty of the FED and the banksters scam. They are using public money (owed by the taxpayers) to launder the fractionized funny money into hard currency!

        • Greg

          Mitch,
          You have a mind for the truth!
          Greg

  19. Jan

    The FED, and our new fannies in the seats of Congress are not going to save the country. I believe it is up to the American people to reinvent the economy and the country. We have choices and do not have to be victims of the banks, the clueless politicians or the Fed.

    We start by paying cash and preventing the banks from fleecing merchants for accepting thier credit cards. People have become used to usng the plastic, not realizing what it cost a merchant to accept them. Cash leaves no paper trail to audit how you spend your money so they can make even more money selling your personal information to advertisers.

    We can start picking up the products we buy to see where they are made. There are lots of products still being made in the USA, support American jobs and start buying more of them.

    The average American will be hit with a ton of bricks due to QE2 +++, I feel sorry for them. Then there are the people who will soon run out of their 99 weeks of unemployment. There have been lots of sad stories about their plight. Excuse me, 99 weeks, they have spent their savings and cashed their 401K’s sitting on thier fannies waiting for the phone to ring with a new high paying job offer? I am having a tough time feeling sorry for these folks. The jobs are gone, they are not comming back. It is time to move, create your own job, or accept reality and take a lesser paying job.

    I am living on the West Coast, my husband works and lives in the Mid-West. It’s not fun and it is not easy, but you do what you have to do.

    • Greg

      Thank you Jan.
      Greg

  20. Bob

    The simple truth gold, inflation, deflation matters not because the law makers, make the rules and laws and enforce the ones they want at any given moment and not other laws. In a lawless land no man is safe. There’s smart people talking to each other everyday trying to make sense of what is going on, we live in a lawless land it won’t make sense. The idea the sheep law makers are pushing now is education will make jobs. The idea is some smart dude will invent the new IPOD. It’s good to have new inventions but were is the new invention going to be made what country. Folks we are in the sh-t called the new world order Bush 3 is sticking his head up to be your new leader. It’s like having a ruling family and rulers always change the law to fit the moment. Stock up on gold but your life belongs to the ruling class, who will tell you what your gold is worth at any given moment.

    • Greg

      Thank you Bob for the analysis.
      Greg

  21. Greg Strebel

    Vess articulated a concern that precious metals may not be an adequate refuge from inflation. If PMs go up in exact reflection to the loss of purchasing power of the dollar, then indeed, the holder will be hosed by taxes. Eg, you buy $10,000 of silver at $25/oz and one year later it is $50/oz, but the new $20,000 nominal value only has the purchasing power that $10,000 had a year ago, yet you are going to pay taxes on the capital gain. Say, for the sake of argument, your capital gains tax rate is 35%, then after selling your silver you have $16,500. Sounds good until you realize that this has only 16,500/20,000 = 82.5% of the purchasing power of the original $10,000. Of course, the investor who bought a 1-year treasury at 1.0% has only $10,100 at the end of the year, the purchasing power of which will have dropped to $5,050, or $5,041.25 after tax. The saver in PMs is being skinned, but the saver in paper is being crucified.
    The only solution seems to be to use the PMs to barter. “Junk” silver may be the most useful for this.
    Do a search for Daniel Amerman to see a thorough discussion on the impact of inflation and taxation on your investments.

  22. Carl

    Thanks for your hard work and a perspective that isn’t difficult to relate to. I heard you on KFSO in San Francisco. I am waiting to be paroled from this bastian of, uh, well I try not curse anymore.
    I am sadden by the way our government has acted for years. My first opportunity to vote was during Ford and Carter, I wrote in Mickey Mouse. I thought about Keith Richards and a freind said that can’t understand him. I replied, so, what’s the difference? I don’t vote very much because it’s always the LESSER of TWO EVILS. It’s still EVIL! I love this country and all the people who have come here to claim their dream. The framework that makes that dream possible appears to be weathering. I truly hope the ground swell that is rising will renew the vision of what was, what is, and what will be. I thank everyone who have contributed in building this great country of ours. Some say it’s just a patch of the Earth, it’s more than that, it’s everything coneivable under the sun! “Banner in triumph shall wave O’er the land of the free and the home of the brave!”

    • Greg

      Thank you Carl,
      I still hold uout hope that America can be great again! Thank you.
      Greg

Leave a Reply to slingshot Cancel reply

Your email address will not be published. Required fields are marked *