With the possibility of Central Banks becoming net gold buyers and the speculation that the IMF gold may be sold “off market” gold analyst Jeff Nichols remains bullish on the precious metal’s prospects.

Read more….

US liabilities to foreign governments at end-May totalled a whopping $2.3 trillion dollars or 17% of GDP – but the maturity curve is shifting to the short end, partly but not wholly as a result of quantitative easing. In principle this should be good for gold.

Read more….

Illusions pile up… They’re sure to come down sooner or later

Like snow at high altitudes, the central banks’ new money is piling up. As reported last week, all the world’s major central banks have turned on their snow machines. The US Federal Reserve has been authorized to “print” $1.75 trillion worth of new money in order to buy Treasury bonds. The Bank of England has its own program – worth 75 billion pounds, so far. Even Switzerland has been printing money – so much that its money supply, as measured by M2, is growing at 30% per year. And two weeks ago, the European Central Bank announced that it too would begin creating money in order to buy corporate bonds.

“Quantitative Easing” it is called. As a refresher for readers with real lives and better things to do, QE is how central banks describe what is essentially an act of counterfeiting. They buy bonds with money created – electronically – specifically for that purpose. Abracadabra – “money” comes into being.

The feds aim to provide liquidity for the cities and farms. But so far, only a trickle is coming down. Instead, chilly weather in the upper reaches of the financial sector holds it frozen in place. Hundreds of billions comes down from central banks, but there it stays…waiting for spring.

Today, here on the back page, we ask ourselves a simple question: what will happen to it?

The feds’ counterfeit money does such a good imitation of the real thing, you can’t tell them apart. But the problem with all money is that it is as fickle and unreliable as a bad girlfriend. One minute she goes along with the flow. The next minute she turns silly and bubbly. And then, she gives you the cold shoulder.

According to theory, an increase in the supply of something leads directly to a decrease in the price of it… That is, if other things remain constant. Despite the credit crunch, the banking freeze-up, and the economic recession, the money supply in the US as measured by M1 is actually rising at 14% per year. Yet consumer prices are not keeping pace. The latest report shows them actually going down slightly over the last 60 days.

Turns out, causing inflation is not as easy as it looked; controlling it probably will be even harder. It’s not enough to manage the quantity of money; you also need to be able to control its behavior. Money can be a solid, a liquid, or a gas depending upon the temperature of the economy. At normal temperatures, money runs freely, watering the economy. And when things really get hot, it vaporizes, creating gaseous bubbles such as those of the late Bubble Period. But when the temperature falls, money shivers in wallets and bank accounts – reluctant to go out into the cold. Economists refer to the ‘velocity of money” to describe the magnifying effects of motion. When the same dollar bill appears in three different places in the same day, it is as if the money supply had been multiplied three-fold. In a freeze, on the other hand, it comes to a dead stop.

When the thaw will come, we don’t know. But the authorities are ready for it. When consumer prices begin to rise, they’ll stop adding to the money supply. Then, they’ll withdraw liquidity, as need be, to keep it under control.

They know that runaway inflation would cause problems – the collapse of the dollar…and the US Treasury bond market, for example. So, at the first signs of inflation, they will move quickly to remove excess liquidity from the system. How? Their emergency plan is simple enough. Now, they are buying bonds. When their inflation targets are met, they will begin selling them.

We thought the Bubble Epoch was the peak in claptrap and illusions. But we were only in the foothills. The feds now pretend to bail out the economy by giving money to companies that pretend to be concerned, run by people who pretend to know what they are doing. And when they run short of money, they create more of it, pretend it is real…and pretend they can tell it what to do.

What is likely is that money will have a mind of its own. First, the markets will react…and the authorities will not. They will remember their own critiques of Japanese and Roosevelt-era monetary policy. In both cases, they believe central banks removed the punch bowl too early – before the party really got rolling. In both cases, the recovery was cut off.

Then, while they are hesitating, money will turn on them. Inflation rates will rise further. The velocity of money will pick up. And investors – including foreign governments – will become eager sellers of government debt. Suddenly, it will be too late. In order to remove the monetary inflation they previously added, central banks will have to sell bonds instead of buying them, trying to re-absorb money from the economy. The extra cash would then disappear back into the central banks. But in order to bring inflation under control, the biggest bond buyers in the world must turn into the world’s biggest sellers. Bond prices, already falling as investors feared the worst, will collapse immediately. An avalanche of dollars will fall upon the world markets – as dollar holders all over the world become desperate to get rid of them.

We don’t know what day it will happen. But we have a good idea as to what time of day central bankers will realize that they are doomed. About 4 AM is our guess. That is the moment when Ben Bernanke and other central bankers begin to feel like members of the Donner Party. That is, like imbeciles.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• Obama’s New Stimulus Program
• What Inflation Means to Central Bankers, Investors and the Consumer
• The French are Feeling Pretty Smug
• Government Sponsored Enterprise Debt and Australian Banks, a Ticking Time Bomb?
• Happy Birthday Subprime Crisis, Oil Price up 96%

Read more….

The euro loses against the dollar due too the expecting interest rates cut in the euro zone. European Central Bank meeting this week will cause interest rates cut to follow the other central banks worldwide.

Read more….

The current consensus for a regulatory blueprint after today’s financial crisis is calling for increased macro-prudential supervision of financial markets. The proposals of Europe’s de Larosière working group are no exception. What is another characteristic of the discussion is that both the Fed and the ECB are quick to proclaim that they should play a “leading” role in the macro-prudential supervision. I.e. they want to have that responsibility rather than just a mere say in the process (central role) as they are conceded in the de Larosière proposals. What makes this an interesting topic is the fact that central banks over the last decade had to part from a lot of supervisory responsibilities, so they are now lobbying to get these back.

Read more….

By Chuck Butler, Daily Pfennig

Good day… And a Tub Thumpin’ Thursday to you! Well… How about those wily veteran Central Bankers? They all got together and decided to cut rates… The Reserve Bank of Australia (RBA) went first with their 100 BPS cut, and opened the rate cut sea for the rest of the Central Banks around the world. The European Central Bank, The Riksbank (Sweden), Swiss National Bank, Bank of Canada, Bank of England, and the Bank of China all lined up at the rate cut table… The Bank of Japan, The Norges Bank (Norway), and Reserve Bank of New Zealand did not participate.

The Bank of Japan doesn’t have any rate to cut, The Norges Bank will wait until their regularly scheduled meeting on 10/15, and the RBNZ believes that they have taken their toxic waste bond flu shot…

RBNZ Gov. Bollard said last night… “New Zealand banks have high-quality assets. Fortunately they do not have the poor quality assets that have proved so damaging overseas.” Boy… Given what happened after the European Union’s Finance Minister put his foot in his mouth, pointing a blaming finger at the U.S. and putting the EU’s fortunes above the U.S. only to see the walls crumble down all around him, RBNZ Gov. Bollard, might want to talk low, talk slow, and don’t talk much at all!

That’s a famous John Wayne line… Just had to use that when I saw it on the Bloomie this morning!

So… The currency traders around the world, stopped when the rate announcements were made, to check the pulse of the markets… At first, we saw calm… But then, traders and investors began to say, “Uh-oh!, maybe things are worse than we imagined if Central Banks around the world are cutting rates”… So, getting back to the theme I talked about yesterday, where if it looks bad for the U.S., buy the dollar, and if it looks good, sell the dollar, we saw the currencies go back and forth… But overnight, calm seems to have settled in, and keeping with the “theme”, that means a weaker dollar.

The stock markets of Asia and Europe have generally been stronger, which could lead to a tourniquet being applied to the U.S. stocks… And again… Keeping with the “theme” that would spell a further weakening of the dollar.

This isn’t rocket science, it’s just what I see happening in the currencies right now… It’s like looking into the mirror, as everything is opposite, but that’s what’s happening right here, right now! Read more….