As The Dollar Falls Inflation Rises

Bob Chapman
The International Forecaster
May 28, 2009Americans may just be beginning to understand the US strategy regarding the credit crisis, but foreigners understand what they are up too. The US is creating a stealth default on its debt by continuing to issue massive amounts of money and credit and in the process devaluing the dollar. This, of course, is fraud, but other nations have defrauded the US for years by cheapening their currencies and subsidizing goods and services. China may be upset as others are, but they have totally subsidized their economy and they have been the worst offenders in cheapening their currency. What do they call their current $1.25 trillion effort to keep their growth above 8%? They have 30 million unemployed and frankly fear a revolution. Chinese policy was to sell goods to America, which was unable to pay for those goods. Their $2 trillion in US denominated assets will probably end up being worth $1 trillion and they knew that going in. They wanted the market and they’ll have to pay the price. US Treasury and Fed issuance is going to get worse not better – it’s going to be that way for sometime to come. No aggregates are going to be pulled from the system. If the US does that the financial system will collapse. There is going to be massive inflation and what China should be doing is dumping dollars by buying gold. They have not anticipated the fall in US stock and bond markets and the derivative bomb. American assets, including bonds, will get badly trashed. We wrote of all this in June of 2002, but no one was listening. We could not even envision the affects of mark-to-model and the worthless balance sheets of corporate America, particularly in the financial sector. Within four years and more likely in two to three years the US will default on treasury and Agency debt. That should take the dollar in USDX terms to 40. It is now just below 80. China obviously feels the yields offered on US paper on the long end are not worth the play. They have been buying bills instead in the short-term market that the Fed has to support.

Today investors cannot conceive how bad this depression is going to get. Even the Bilderbergs see they cannot handle what is coming and want to reverse the process.

Unfortunately it is too late for that. There has been no return since June of 2002. The Chinese knew 5 years ago they were screwed, but they kept on playing the game. They had to supply jobs or they might have had a revolution. The illuminist plan to bring China into WTO was a very bad choice. All the money the transnational conglomerates made will eventually be lost.

When we see Dr. Kenneth Rogoff, IMF economist, advocating 6% inflation we have to laugh.

America is burdened in expensive wars in Afghanistan and Pakistan and is still occupying Iraq. This has cost Americans almost $1 trillion and it won’t end for years, an expensive distraction. We know war was created to enrich the elitists among other things, but the result has been disastrous not only for America but for the elitists as well. The Chinese have played a very dangerous game and if they try to get nasty as a creditor holding debt the US will just default. The Chinese will have to take their losses and perhaps start a war. America is in receivership and they should simply go into bankruptcy.

We can bring our troops home, get rid of the Fed, pass trade tariffs, clear Wall Street out of Washington and let the treason and criminal trials begin.

Our guess is that all kinds of deals have been made illegally that we know nothing about with China. We must find out what these deals were. The only way we can do that is by removing those from power, who made those deals.

Keynesian inflationism is so engrained in economic orthodoxy that it is very hard to get a dissenting view. 90% of economists and analysts work for large corporations, which more often than not are run by Illuminists. IF you speak out of line you are out of a job. That is why few disagree. We just did about 30 interviews on Fox News and we were told we would no longer be allowed on the network to speak on the Federal Reserve. This is today’s version of freedom of the press-or media. If you do not like it ban it. Economists and analysts face the same problem. Policymakers have charted a course that risks bankrupting the economy and the Fed are at the core of the problem. They are doing everything possible to destroy the US economy.

When we see Dr. Kenneth Rogoff, IMF economist, advocating 6% inflation we have to laugh. It is still running at 9-1/2%. Food prices continue to rise and gasoline is moving higher as are oil prices. To insinuate that inflation would ameliorate the debt bomb and help in the de-leveraging process is pure folly. Then we have professor Mankiw who advocates negative interest rates. You borrow $100 and pay back $97. That is idiotic and this man is teaching our children, someone has to tell me how incurring more debt will allow us to escape debt? We are nearing 50 years in finance and economics and we cannot believe the unmitigated crap we are hearing from so-called experts. If these are experts please dear Lord send us the uneducated. They at least have common sense. These are the same people, along with government, banking and Wall Street who are creating another debt bomb. Federal debt is expanding at an unheard of 13%. As a result yields are rising as are gold and silver and the dollar is falling. It is only a matter of time until a crisis of confidence occurs in the Treasury market. This year the yield has moved from 2.35% to 3.45% on the 10-year notes and they and the 30’ have broken their 200-day moving averages. At the same time the Fed has induced these low rates for mortgages, as risk is transferred to the taxpayer via loans being guaranteed by the GSE’s, Fannie Mae and Freddie Mac. In just two years we will again face this debt bomb to go along with ALT-A loans, Option-ARM-pick and pay loans and prime loan failures due to rising, encompassing unemployment. That will occur in 2011 and 2012. The failure of the housing market is only 40% to 50% over. All this is happening as policymakers, Goldman Sachs, JP Morgan Chase, Citicorp, etc., and the rest of the elitists are shifting all the debt from the financial sector to the American people. Virtually no one talks about what is really going on. The same people at the Fed, in banking, on Wall Street and in government are supposedly solving the problems they created. We have news for you; they are not solving anything. They are just pushing judgment day a little further out. That is costing us $2 trillion in additional debt a year, which we can ill afford. The bomb gets bigger every day and you won’t want to be around when it explodes.

We hope you are all aware that as the dollar falls inflation rises. That is because we don’t produce much anymore and as the dollar declines the cost of imported goods rises, including oil. By the end of the year oil could be $80 a barrel and gasoline over $3.00 a gallon. It started to feed on itself two months ago.

As long as the privately owned Fed and the rest of the Illuminists are calling the shots speculative market dynamics and casino chaos will reign. These arrogant criminals are taking gambling to even greater heights. They profit because the Fed briefs them of what is going on so they can reap riches. Manipulation is the order of the day. All Keynesian thieves love massive stimulus as the bubbles burst. This time there is no way back. This repeat will rival the collapse of the Lombard System in Venice in 1348. The more important question is will we have another plague to accompany the Illuminist plague?

The real reason banks want to return TARP funds is that banks do not want examiners uncovering any of their illegal activities.

When the Allen Stanford case broke we told you that his operation was a front for CIA money laundering. BBC recently ran a story connecting him with the DEA. As that story broke he was told there would be no criminal action against him, a fact the mainline press forgot to carry. It could be narcos were depositing money in his operation and he and the CIA decided to relieve them of their ill begotten gains. That is robbing the competition. Stanford has had narco connections since 1990.

The GDP price deflator rose at 2.9% in the first quarter, this while meatheads tell us there is no inflation and deflation is the problem. Monetization will soon send inflation flying.

Last week the stock market failed again to advance, forming an ever-bigger top. The Dow added 0.1%; S&P gained 0.5%; the Russell 2000 gained 0.4% and Nasdaq rose 0.6%. - a week of desperation. Consumers rose 1.6%; utilities fell 0.3%; cyclicals rose 2.5%; transports fell 1.5%; banks declined 2.6% and broker/dealers gained 4.2%. High tech rose 1.7%; semis jumped 3.4%; Internets gained 1.5% and biotechs rallied 0.7%. Gold billion rose $26.00 and the HUI Index surged 10.9%.

Two-year Treasury bills rose 4 bps to 0.85% and the 10’s surged 31 bps to 3.45% - a total breakdown. German 10-year bund yields rose 18 bps to 3.54%.

Freddie Mac 30-year fixed rate mortgage rates fell 2 bps to 4.82%. They’ll soon be 5%, although major banks are offering 4-1/2% to 4-3/4%. The 15’s fell 2 bps to 4.50%; one-year ARMs rose 11 bps to 4.82% and 30-year fixed rate jumbos fell a notable 15 bps to 6.22%.

Fed credit rose $48.6 billion and it is off $81.4 billion ytd. It is up $1.294 trillion yoy or 149%. Fed foreign holdings of Treasuries, Agency debt surged $25.9 billion to a record $2.710 trillion. Custody holdings for foreign central banks have been expanding at 20% ytd, and were up $433 billion yoy, or 19%.

Bank credit fell $34.4 billion and it is up 3.6% yoy. Securities credit was up $6.1 billion; loans and leases fell $40.6 billion; C&I loans fell $9 billion and real estate loans fell $24 billion. Consumer loans fell $8.4 billion and securities loans were little changed. Other loans rose $0.6 billion.

M2 narrow money supply rose $8.9 billion. It is up 3.9% ytd. Total money market funds dropped $16 billion to $3.774 trillion. The dollar index fell 3.6% to 80.05.

The bond market is not falling because there is deflation in our future, but because the dollar is again tanking. That is why gold and silver is rising. There is also the matter of US debt going into the stratosphere and the increase in interest rates in the demand for higher yields to combat coming inflation.

Based on nominal growth over the next ten years the CBO, the Congressional Budget Office, believes that GDP will grow 50%. There is not a chance that will happen. In fact, we could have no growth over that period. Yet, the proposed administration plan is to increase spending 50%. This shows you the desperation and stupidity of what is going on in Washington. Their only plan is to inflate until the system collapses. The robust recovery will only bring our negative GDP down to even as the stimulus package spreads its benefits. That will be some feat with real U6 unemployment at 19.2% to 19.8%. These facts and government projections will sink not only the dollar, but also sink the entire economy. America is looking at deficits of more than $1 trillion a year as far as the eye can see. Doesn’t anyone understand the impact of such borrowing? What foreigners can be stupid enough to lend to us unless yields are perhaps 15% on treasuries. That means the alternative is massive monetization and wild inflation. Making matters worse the whole world is experiencing the same problems. GDP growth has fallen 8% in Britain; 21% in Mexico; 14% in Germany and 15% in Japan. Chinese exports are down 41%, Japanese 38% and Germany’s 32%. The value of outstanding loans in Spain has fallen from $445 billion to $47 billion. They had risen between 2000 and 2008 by 850%. That was almost 50% of Spanish GDP. This is a direct product of the ECB, European Central Bank policy, of one interest rate for all 16 members, which is idiotic. Real unemployment in Spain is far above 20%. Ireland, due to the same misguided monetary policy, is almost as badly off. Both Spain and Ireland are insolvent.

Europeans, deceived by bogus securities ratings by Moody’s, S&P and Fitch, are even worse off than US banks. Thus far the Fed has bailed out European banks, but that cannot go on indefinitely. Oddly we see no civil and criminal actions against American banks and securities industry or the rating companies, which tells us they knew exactly what they were buying – toxic waste.

The money raising dynamic for the Treasury is overwhelming. 30-year fixed rate mortgages should be around 5% this shortened week. The Treasury needs to raise $2 trillion this year of which the Fed has already monetized about $300 billion, plus the Fed is buying $900 billion in toxic waste. This is $1.2 trillion in monetization by the Fed.

On Tuesday the Fed is selling $40 billion of 2-year bills, $35 billion of 5-year notes and $25 billion of 7-year bonds. We wonder if the Fed will suffer the indignity of its first failed auction. $100 billion is a lot of money. US Treasuries may face a crowding out process, as governments collectively will have to place $6 trillion in debt this year. That means international business will find it even harder raising money in the future. The US has already lost control of long rates, just look at how easily and cleanly the 10-year notes and the 30-year bonds broke their 200-day moving averages. Markets are choking on debt. The end result will be US stagflation and a falling dollar, along with higher yields. The Fed claims it has only bought $116 billion of monetized Treasuries, but we believe that number is higher. The Fed won’t raise interest rates, but the market is going too.