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Thoughts from the Frontline

Thinking the Unthinkable

January 15, 2011

Choose your language

Last week, in the first part of my annual forecast, I suggested that 2011 would be better than Muddle Through, with GDP growth in the US north of 2.5%. World GDP growth should be even better. This week we look at what I see as the real downside risks to that prediction. Oddly enough, the risks are not in the US but on the other side of both our oceans, in Europe and China. Plus, we will visit a few other items, assuming we have space (Bernanke’s recent speech just screams for some comments).

Two housekeeping items. First, I will once again be hosting, along with my partners Altegris Investments, our 8th annual Strategic Investment Conference, in La Jolla April 28-30. Save the date. Each year the conference gets better. We have as strong a lineup of speakers as any conference in the country. I will announce when we will take reservations. It always sells out, so I suggest you do not procrastinate.

Secondly, between finishing my book and the holidays, I have been rather quiet the past few months in regards to my Conversations with John Mauldin, but that is getting ready to change. Over the next few weeks I will be doing conversations with David Rosenberg, Lacy Hunt (his quarterly will be next week’s Outside the Box), George Friedman of Stratfor, and John Burns and Rick Sharga to get the latest on the housing markets; and I am lining up some more very interesting Conversations, so that subscribers will get more than their money’s worth. Now, let’s jump into the letter.

The Fed Adds a Third Mandate

The Fed has two mandates: keeping prices stable and creating an economic climate for low unemployment. I am sure I was not the only one to listen to Steve Liesman’s interview of Ben Bernanke this week and shake my head at the spin he was giving us. First, let’s set the stage.

In a paper with Alan Blinder early last decade, Bernanke made the case for…

Discuss This

10 comments

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Comments

Jon Dostert

Jan. 18, 2011, 9:36 a.m.

Does anyone know where John quoted Barry Eichengreen’s comments from?

andre therien

Jan. 18, 2011, 12:18 a.m.

We are fast approaching the end of the road, who will bail out the USA ?  It will be the crisis that will end in the great depression # 2. Bernanke is following in the footsteps of Greenspan, feeding all speculations. Let all the degenerates fail whether they be European countries or US states. All governments should be obligated by law to balance the books, we can never rely on their sound judgment. As far as the inept cronies at all our major financial institutions, they got away with it at our expense and risk.

Don Currier

Jan. 17, 2011, 1:32 p.m.

Hello John,

I just read the following two articles:  http://gonzalolira.blogspot.com/2011/01/why-democracies-will-always-go-bankrupt.html and http://www.lewrockwell.com/rep2/if-fed-had-never-been-created.html.

The first article presents a “proof” why democracies always stop creating a yearly balanced budget and start issuing debt. I think it provides insight on how our elected representatives got us into this situation. Since unsecured debt can be easily issued through a central bank there is no reason to compromise and balance the budget.

The second article describes “10 Things That Would Be Different If The Federal Reserve Had Never Been Created”. I think the main purpose of this central bank is to make a consortium of private bankers wealthy at the expense of the rest of us.

The section in your letter “A Rational Voice in Dallas” caused my providing the above information. Is Mr. Fisher referring to QE when he uses the term “bridge financing”? He also said “The Fed could not monetize the debt if the debt were not being created by Congress in the first place.” This might be a chicken and egg situation - Congress can create unsecured debt only because there is a central bank. (I realize there are alternatives to a central bank such as the Treasury performing the function or maybe not performing the function at all). I think the Fed is only too willing to monetize the debt in order to make a consortium of private bankers wealthy.

Thanks for the wealth of information you provide in your newsletter.

Don Currier

Akhil Khanna

Jan. 17, 2011, 3:51 a.m.

Hi John,

One thing I fail to understand is that why most analysts are recommending the purchase of Gold as a safe investment? The problem today is that the price of Gold is not derived by it’s physical demand or supply but more by the speculative positions standing long or short on the commodity exchange like any other traded commodity, stock or currency.

The basic mechanism of price discovery (based on demand and supply for actual use) of anything traded on an exchange has been terminally infected by speculators having access to unlimited funds and super fast computers for trading leading to volatile price swings. This has been made worse by the launch of ETFs for anything and everything under the sun by the financial community.
The price of everything including Gold is likely to suffer when the speculators unwind their positions due to some event that they have not anticipated or foreseen.

http://www.marketoracle.co.uk/Article24581.html

Doug Hawkins

Jan. 16, 2011, 1:04 p.m.

After reading the Richard Fisher’s excerpts from his recent Speech in NY (Manhattan Institute) as laid out in John Mauldin’s weekly letter of yesterday pm, I commend it to everyone—especially all our politicians at all levels.  It could (and should) become the “thought focus” for Washington Politico’s and many State and County ones as well. This is no longer ideology…... this is for all to pause and consider a plan of real action.  That includes SS, Medicare, Imperial war funding, and all the other peripheral programs this 30 year wave of wastefulness in Washington and elsewhere has perpetrated in the name of we the people. I appreciate he is pointed in his remarks at the Ron Paul type advocates (toss the Fed)... but for the near to middle term, he has his priorities very right, darn it.. Let’s save the ship and its passengers before we consider changing out the engines. In the interim… perhaps Ben might relinquish his perch and let a new King (Fisher) lead the Fed. Sorry about that blatant attempt at an analogy. :-)

Henry Schedewie

Jan. 16, 2011, 1:03 p.m.

Why should (european) countries that manage to live within their means be forced to bail out those who don’t or accept those countries to just laugh their debts off? 
This certainly is not the way it works for each of us individually in real life.  You live a life beyond your means, your creditors will catch up with you quickly and out you go.  Your life style will definitely be adjusted down to your means by forces from without.  Sure, not everybody can work as hard as the other, or wants to for that matter.  And it should be perfectly fine for anybody or any country to choose their life style, as long as it is being adjusted to the means within, not counting on bail-out’s from without. 
Helping your neighbor out when a disaster strikes is one thing, bankrolling a neighbor’s excessive life style or bailing out their resulting debt is quite another.  Other than being a thankless, while expensive job, this also encourages bad habits and behaviours to flourish by implicitely rewarding them. 
Those issues are part of what Merkel, Trichet et al are grappling with as the bashing and arm twisting keeps escalating.  Not surprisingly, Commissioner Barosso, past PM of Portugal, advocates a bailout; but vested interests can get in the way of good judgement, as we all know only too well.

jeff mcconnell

Jan. 16, 2011, 9:31 a.m.

â??Those lawmakers who advocate â??Ending the Fedâ?? might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house. The Fed does not create government debt; fiscal authorities do. Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of those who control the purse strings â?? the Congress, working with the president. The Fed does not earmark taxpayer money for pet projects in local communities that taxpayers themselves would never countenance; only the Congress does that. The Congress and administration play the dominant role in creating the regulatory environment that incentivizes or discourages job creation
â??â?¦

true, but the Fed is the great enabler as long as they keep buying treasuries…  they can’t wash their hands of this one, either.

Torsten Staedler 19035

Jan. 16, 2011, 2:34 a.m.

Hi John,
I enjoy your thoughtfull comments since years now (and read them all). Maybe I am mistaken but the picture you paint for the european debt situationis in my regard incomplete concerning the “bagholders”.
Do you really know/believe its mostly just german, english etc. banks?? holding the bags now? Is that really their business modell? What about pension funds? life insurance companies etc.
Who was the real profiteers and who really holds the bags for me still isnt clear enough.
If you replace the easy to hate “bank” sticker with real effects on ordinary peoples (loss of pension) it should be more easier to find “solutions” or choices.

Peter J Taylor

Jan. 15, 2011, 2:46 p.m.

Hi John,
I spotted your deliberate error, and would like to be the first of your million best friends to point it out.
In section 2, paragraph 2 you write, about Ben Bernanke: ‘In his famous helicopter speech in late 2002, he assured us that inflation could not happen â??here,â?’
John, you mean “deflation” not “inflation”. The actual quote is:
“I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small”
See http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
Yours truly,
Peter J Taylor

andre therien

Jan. 15, 2011, 2:22 p.m.

Oops ! Second paragraph, attributed to Bernanke, should read DEFLATION, not inflation.