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Tuesday, September 20, 2011


George Offerman

There are two extremely powerful economic forces at play, and both are diametrically opposed to each other, and the Federal Reserve is caught in the middle.  These forces are ready to collide, and the outcome will be so dramatic, that the crisis in the late 1920’s known as the great depression will look like child’s play in comparison.  Now, no one needs to cry for the Fed, as they are solely responsible for one of the forces, and influential in the other.

The first force is what I will call the immovable. Over the past century, the Fed has been in charge of our fiat currency, and their primary (claimed) reason for existence was to stop all financial crisis (which it failed) and to guarantee a stable monetary system (which it failed).  Looking at nearly a century of existence, the financial status of the United States could not be worse.  Our country is the largest debtor nation in the history of the world, and it was just announced that this past month’s deficit was $112 billion, which annualized, would be over $1.3 trillion.

The American consumer is up to his eyeballs in debt, and barely able to service the debt he already has, as well as trying to eat and keep a roof over his head.  The ‘official’ unemployment rate is around 10 percent (See John Williams http://www.shadowstats.com/ for the real number).  Prices of items are up in the double digits for many items, yet our government tells us inflation is 1-2% or under control, closer to zero.  People are not getting raises, yet seeing all sorts of taxes going up due to the deficits of local, state and federal government, which in turn cuts into their personal budgets. 

As one can surmise, the ability for the American consumer to service not only his own debt, but the debt and interest payments of the government at all levels, are literally topped out.  There is no more room for increasing debt load, and the government in general and Obama in particular are sensing that if things get worse, there will be massive retribution, and the majority of the people will ‘quit playing the game”.

The above listed coupled with the fact the Fed cannot raise interest rates makes up the force that is immovable.  For if the Fed raised rates, the cost of all debts would escalate, business activity would be greatly reduce, resulting in more layoffs, credit would dry up most of government would shut down due to lack of money, many more would be homeless, due to mortgage rates changing, credit cards going up, etc. and the cost of business would become so much higher that more layoffs would soon follow, thus escalating an already downward progression. Raising the interest rate just one percent would require an additional 150 billion dollars going towards the debt.  Where is this money going to come from?

The other force that is diametrically opposed to low interest rates and out of control money printing are the creditors.  Those who have lent the United States government money, via Treasury Bills, want a high rate of return on their money.  In the current environment, interest rates on the T-Bills are near record lows.  This is particularly disturbing to our largest creditor, China, and was evidenced by an emergency meeting held last year with Fed. Chairman Ben ‘Helicopter’ Bernenke, and then Secretary of the Treasury Hank ‘printing press’ Paulson  China warned them at the time, to not ‘print’ their way out of this crisis, but resolve it through fiscal conservatism and an increase in production from the United States (Ironic, coming from a communist country).

The creditor nations want a decent return on their money (or at this point, a simple return OF their money).  These countries will not accept default: they expect a fair return on their investments, and grow more alarmed by the current Fed policy of ‘monetary easing’ which in layman’s terms means ‘printing at will’.  Creditor nations want a higher rate of return to offset the risk of inflationary policy of printing money, hence, want to see the Fed raise interest rates.  This incorporates the force of the unstoppable: they want more for their money, they will continue this push until they get what they want, or they will come ‘collecting’ the debt.

So, these two forces are ready to lock in a fierce battle for the ages, and one will prevail over the other.  Last year, the Fed chose the immovable, and began the process of ‘monetizing’ the debt.  China also began its defensive moves against this policy and has been buying up assets that will thrust it onto the world’s stage as the number one nation economically (barring disaster).  They represent the unstoppable, and have the backing of many different nations, who are also creditors to the United States.

Consider this: China has the largest manufacturing base in the world, and still growing in capacity.  China has become the number one country in the refining of precious metals, and number three in production and mining of precious metals.  China recently banned all export of precious metals, and has been a net buyer of gold for the past few years.  They have allowed their citizens for the first time in 60 years to buy gold and silver, and are they ever! China has lead several nations in calling for a new ‘reserve’ currency or basket of currencies: they recently signed a multi decade deal with Russia, the number three oil producer in the world, they are working with Venezuela in exchanging oil for goods (meaning protection) China also has control over the panama Canal for the next 99 years, and thus has control of an important shipping channel.

The creditor nations, lead by china, are not going to allow the United States to print their way out of this mess, and the citizens of the United States are not going to give up their property and heritage to the bankers that created this mess.  The unmovable will meet the unstoppable very soon, and it will be very interesting to see the results of this titanic battle.  In the middle is the Fed, and either way, there are likely to be marches by throngs of people with torches and pitch forks headed towards the Fed in the middle of the night.  The only question is: will the mob be speaking English or Chinese?

Part 4: Where’s the Gold?

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