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Ron Paul Debates Ben Bernanke About Inflation

Ron Paul, who is one of four remaining GOP candidates running for President, has returned to Washington D.C. to address Ben Bernanke of the Federal Reserve System. Inflation, budgets, deficits, and the US Dollar currency were topics discussed at the hearing of the House Financial Services Committee. Ron Paul consistently criticized the anti-free market US Financial and Monetary system throughout his 30 year political career in Congress. He is also the only Presidential Candidate who forecasted the housing bubble and the inflationary price actions as a result of the debasing of the currency by the quasi-private Federal Reserve.


 

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China Currency Policy Shift Will Expose Artificial US Economy

Official data from the People’s Bank of China shows the reduction of reserves to $3.18 trillion for the final quarter of 2011. This is a 0.6% negative growth rate for the last quarter of the year and the weakest quarterly data since Spring of 2009.

It should come as no surprise that manufacturing output is coming under pressure as the artificial consumer demand driven by market manipulation, excessive credit, and foreclosure moratoriums is coming to an end. WTF Finance explained the reasons for the artificial stock market rebound and the return to excessive consumerism in our article “Why Investing In US Stocks or Treasuries Is A Bad Idea”.

Reuters reports on the potential consequences to the Chinese Economy and anticipated monetary policy changes:

“The decline in foreign exchange reserves in Q4 is consistent with the sharp reversal in capital flows out of emerging markets in general and the region in particular,” said Andy Ji, an economist at Commonwealth Bank of Australia in Singapore.
“The People’s Bank of China is likely to engage in more cuts in the reserve requirement ratio (RRR) and aggressive liquidity injection through open market operations if the trend deteriorates further,” he said.

“Bank of America-Merrill Lynch Economist Ting Lu expects a trend of sinking surpluses to retard capital flow into China, necessitating a policy response to keep economic conditions as stable as possible ahead of a change in the country’s top political leadership anticipated in late 2012.
“The drop in foreign currency inflow will have significant implications for China’s monetary policy, but limited impact on liquidity conditions if policymakers are flexible in using monetary tools,” Lu said, adding that he expects more reserve requirement cuts.”

The reality is that the Chinese are operating with budget surpluses and over a trillion dollars of China’s currency reserves are invested in US Treasuries. Absent of those Chinese investments, the United States will have a difficult time deficit spending at its usual rate without experiencing significant consequences for its irresponsible behavior.


Chinese President Hu Jintao on several occasions expressed concern over the irresponsible financial policies of the United States and its addiction to deficit spending. The entire Obama Administration travelled to China over the years to blatantly lie that the US would get its financial house in order while at home big government policies continued as usual. Vice President Joe Biden, Treasury Secretary Geithner, Secretary of State Clinton, and President Obama all attempted to convince the Chinese that the United States has its financial affairs in order while supporting costly big government policies, continuous deficit spending, and increases in the debt ceiling.

With the Chinese manufacturing sector slowly losing momentum, China will start having to rely on its own consumers to replace foreign demand for its products. Reduction in reserve holdings and increased consumerism by the Chinese people will reduce the outflow of capital. As the Chinese Economy slowly becomes more self-reliable, the Chinese people will experience an increase in their standard of living while the United States will have to adjust and no longer rely on China’s savings and its productivity.

With China no longer buying US Treasuries, there will be a collapse in the real demand for US Debt. The Federal Reserve can create artificial demand and participate in the Treasury Auctions as it already has done with its $600 Billion Bond Purchase Program, but the World Economy is under no obligation to prop up the irresponsible United States and its artificial economy. China diversifying away from US Treasuries with monetary policies that increase lending and consumption within its own demographic will result in a strong, self-sustainable Chinese Economy and new economic world power while the consumer based US Economy that lacks production and is built on artificial credit will finally be exposed and collapse.

The ultimate collapse of the US Economy is by no means the fault of China. The coming economic demise of the United States can be directly attributed to its fiscal, economic, and monetary policies. By abusing its monetary system with inflationary policies, the US ignorantly enjoyed a lifestyle it cannot afford. As the era of the US Dollar as World Reserve Currency nears its end, the true US Economy will be exposed as artificial and unsustainable.

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How To Hedge Physical Silver And Gold Positions

There are many people who are worried about the status of the US Dollar and inflation. Since the inception of the Federal Reserve System in 1913 the US Dollar has experienced a continuous depreciation as the Central Bank debases the currency. Those who protected their savings through strategic purchases of gold and silver benefited from the bull market in precious metals which has been fueled by the loose monetary policy of the Fed and the unwillingness of our Government to live within its means.

The US Dollar has enjoyed the status of the World’s Reserve Currency. It’s not the first nor will it be the last fiat currency that came to receive such a status only to collapse under the weight of unsustainable expansion and unfunded liabilities.

Gold and silver are approaching overbought status as they have so many times over the past decade. During these times it would make sense to sell your physicial gold and silver and repurchase them after a pull back. The problem with that strategy is that few are willing to take the risk of losing their physical gold holdings in case the bull market continues full steam ahead. Another problem is the tax liabilities that arise from closing out a position. For those reasons most people simply buy and hold while having their positions ride through the ups and downs.

Gold and Silver Corrections


Having bought physical ounces of gold and silver incrementally over the past decade, your cost per ounce is significantly lower compared to today’s market value. Yet the many ups and downs provide excellent opportunities to profit from since corrections in the precious metals market can be extremely violent. From May 2006 to mid June 2006 silver corrected from a high of around $16 per oz. to the low $10s. During the same period, gold had a pull back from around $740 per oz. to the $560s. In 2008, despite the financial turmoil from the Bear Stearns collapse, silver experienced its most drastic correction of the decade. Having traded in the Spring of 2008 above $20 for the first time in decades, the precious metal acted very strong with solid support at $16. That didn’t keep silver from correcting from the $19s down to the low $10s within less than two months. Gold corrected nearly 25% during that time period from the mid $900s to below $750 per oz. As these price corrections in the precious metals market illustrate, seasonal fluctuations can be very significant and traders can benefit from such wild swings.

You can hedge your physical gold and silver to profit during market pull backs

Many investors, espeically gold and silver bulls, do not want to sell their physical holdings as long as the investment makes fundamental sense and they simply ride through the cyclical ups and downs. It makes sense that an investor would not want to pay a capital gains tax or possibly a higher price for the same precious metals position in case the pull back doesn’t materialize. The spread between the bid and the ask plus commission for such a transaction makes it difficult to make such a trade worthwhile. You can however, hedge your physical position and profit from market pull backs by buying Put Options on gold and silver ETFs such as IAU, GLD, and SLV. This hedge allows you to keep your physical gold or silver for the long term while holding a short term position that potentially yields a significant return. Since options decay with time it is crucial to time such a transaction well.

Hedging your physical gold and silver positions with Puts on GLD, IAU, or SLV can be an excellent strategy to take advantage of the volatility and significant corrections in the precious metals markets. Entering such a trade can make perfect sense after extended rallies when the metals reach overbought status. Any correction in gold at this time could become amplified since the changes in margin requirements took effect earlier this month.


List of Gold and Silver ETFs

  • SPDR Gold Trust (GLD)
  • iShares Gold Trust (IAU)
  • ProShares Ultra Gold (UGL)
  • ProShares UltraShort Gold (GLL)

  • iShares Silver Trust (SLV)
  • ProShares Ultra Silver (AGQ)
  • ProShares UltraShort Silver (ZSL)
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    Vice President Biden To Sweet Talk Chinese

    At first it was Treasury Secretary Timothy Geithner, then President Obama, then Geithner followed up with with a second trip to China, then the United States sent Hilary Clinton to reassure the Chinese that the United States is a safe economic investment. All this hypocritical talk about the US taking care of its spending problem hasn’t fooled China as it is more than clear that neither the Democrats with President Obama nor the Republicans have the will power or capacity to balance the budget.

    In the latest attempt to sweet talk the Chinese, President Obama sent his Vice President Joe Biden to China for the next round of economic talks. It’s political theater and those who seriously believe that China is fooled need a reality check. While China continues to be the greatest foreign holder of US Treasuries, it is diversifying from the US Dollar as it entered agreements with Russia to settle bilateral trade in local currencies. Chinese rating agencies downgraded the United States well before S&P did. Money News reported that Xia Bin, economist and advisor to the Chinese Cabinet and Central Bank stated that “The United States has entered a long period of decline”.


    On Friday Vice President Joe Biden will meet with Chinese President Hu Jintao. There’s little doubt that the US will continue making empty promises about how it will get its finances in order while the Chinese will no longer fall for such sweet talks.  The Chinese-US talks will continue only on a meaningless superficial level. On a positive note, the United States must have accumulated enough frequent flyer miles from flying its delegation to China in an attempt to fool the Chinese that it might qualify to exchange its frequent flyer points for a Chinese Golden Panda.

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    When Did the US Get Off The Gold Standard?

    40 years ago today, on August 15, 1971 President Nixon officially took the United States off the Gold Standard. In his speech, President Nixon claimed to have asked Treasury Secretary John Connally to defend the US Dollar by closing the convertibility of the dollar into gold. According to President Nixon this was done to protect the United States and the US Dollar against speculators and is remembered as “Nixon Shock”.

    “In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy – and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.”

    As always, speculators or those who understand economics and recognize economic bubbles are blamed. People didn’t short the US Dollar or convert their US Dollar holdings into gold on unfounded rumors. The United States ran significant deficits that couldn’t be financed through direct taxation. The cost of the Vietnam war amongst other unfunded expenses would not be paid through direct taxation but through inflation.


    Since Bretton Woods of 1944, the value of the US Dollar was tied at a fixed ratio of 35 dollars to one ounce of gold. Still claiming to be on the gold standard the United States had to redeem US Dollars for physical gold. In the months leading up to President Nixon’s famous speech, France correctly assumed that the United States devalued their paper currency . In an effort to continue fooling the world the United States made good on the promise to exchange physical gold at the 35:1 ratio. This temporarily restored some faith in the US Dollar but having inflated the paper dollars beyond the promised gold backing was a limited and unsustainable strategy. It was on August 15, 1971 that President Nixon officially took the US Dollar off the gold standard but nobody really knows the exact date that the US Dollar was no longer backed by gold at $35 per 1oz. according to the agreed Bretton Woods agreement. Fact remains that any currency speculator that shorted the dollar assuming that the US had more paper dollars in circulation than gold backing was correct. It wasn’t the currency speculators that devalued the dollar, it was runaway government spending.

     

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    Treasury Secretary Geithner, Warren Buffett, and Credit Rating Agencies All Wrong About US Debt

    The recent stock market sell off has been blamed on the credit rating downgrade of US Debt by S&P. WTF Finance warned its readers in March about the possibility of a stock market sell off. Treasury Secretary Geithner who previously claimed to be for a strong US Dollar policy while simultaneously suggesting costly market interference policies dismissed a potential credit rating downgrade in April.

    In a CNBC interview, Treasury Secretary Geithner called the credit rating downgrade by S&P irresponsible:

    “I think S&P has shown really terrible judgment and they’ve handled themselves very poorly. And they’ve shown a stunning lack of knowledge about basic U.S. fiscal budget math. And I think they drew exactly the wrong conclusion from this budget agreement.

    They, like many people, looked at this terrible debate we’ve had over the past few months, should the U.S. default or not, really a remarkable thing for a country like the United States. And that was very damaging. And I think it left people to wonder whether this political system was going to be up to the challenges facing the country. It caused a lot of damage and that’s going to take a long time to heal that damage.”

    Stock market cheeleader Warren Buffett also made a public statement calling the credit rating downgrade of US debt by the S&P irresponsible and to Fox news, Buffett stated that he would upgrade US debt instead.

    “I don’t get it. It doesn’t make sense. In Omaha, the U.S. is still Triple-A rated and if there were a Quadruple-A I’d give the U.S. that.”

    S&P wrong about downgrade


    Here’s why the S&P downgrade to AA+ is wrong and why both Geithner and Buffett are out of touch with reality. Without the continuous deficit spending the United States would have defaulted a long time ago on its debt obligations. Both parties are clearly unwilling to balance the budget as both parties rely on deficit spending and their best budget proposal still depends on increasing the National Debt by trillions of dollars. The fact that S&P still rates US Debt AA+ illustrates how this rating agency is incapable of assessing risk. Not surprisingly given that they failed to understand and forecast the implosion of the Real Estate market and the collapse of Mortgage Backed Securities (MBS). Fact remains that the United States is unwilling to live within its means, has trillions of future obligations, continuous to rely on credit expansion to finance its operations, and relies on the Federal Reserve System to actively participate in Treasury Auctions through its bond purchase program in order to create artificial demand for those securities. That’s hardly A rating worthy and Treasury Secretary Geithner, Warren Buffett, and S&P all are delusional in their risk assessment of US Debt.

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    Monetary Policy Subcommittee: Where Is The Gold?

    The topic of debate at the Monetary Policy Subcommittee was Gold. Who owns the Gold the United States supposedly holds? Does the United States owe Gold to the International Monetary Fund? Where is the U.S. Gold and who audits the gold holdings?

    Congressman Ron Paul’s opening statement at the Hearing on the Gold Reserve Transparency Act.

    “For far too long, the United States government has been less than transparent in releasing information relating to its gold holdings. Not surprisingly, this secrecy has given rise to a number of theories about the gold at Fort Knox and other depositories. Some people speculate that the gold has been involved in gold swaps with foreign governments or bullion banks, others believe that the gold has secretly been shipped out of Fort Knox and sold, and still others believe that the bars at Fort Knox are actually gold-plated tungsten. Historically, the Treasury and Mint have dismissed these theories, rather than addressing these concerns with substantive rebuttals. No one from Congress has been allowed to view the gold at Fort Knox in nearly 40 years, recent photographs of the gold holdings seem to be hard to come by, and the Mint’s and Inspector General’s audit statements contain only the bare minimum of information.

    Because the government has for so long refused to provide substantive information on its gold holdings, it is not surprising that so much confusion abounds, both within and without the government. The difference between custody and ownership, questions about responsibility for US gold held at the New York Fed, and the issue of which division at Treasury is ultimately responsible for the gold reserves are just some of the questions that have come up during the research for this hearing. In a way, it seems as though someone decided to lock up the gold, put the key in a desk somewhere, and walk off without telling anyone anything. Only during the preparation for this hearing was my office informed that the Mint has in fact conducted assays of statistically representative samples of gold bars, and we were provided with a sample assay report. This type of information should be reported or at least tabulated and published, so that the public knows how many bars of gold exist, what their fineness is, and whether they are encumbered in any way through loans, swaps, etc.

    While the various agencies concerned have been very accommodating to my staff in attempting to shed some light on this issue, it should not require the introduction of legislation or a Congressional hearing to gain access to this information. This information should be published and available to the American people. This gold belongs to the people, especially since much of it was forcibly taken from them in the 1930s, and the government owes it to the people to provide them with the details of these holdings. We would greatly benefit from a full, accurate inventory, audit, and assay, with detailed explanations of who owns the gold and who is responsible for ownership, custody, and auditing. While the Mint and the Inspector General trust the accuracy of the audits performed between 1975 and 1986, this still means that at least two-thirds of the gold reserves were last audited over a quarter century ago. Surely a full audit every 25 years is not too much to ask?

    I look forward to the testimony of the witnesses regarding the condition of the gold reserves, the accounting audits that are regularly performed, and the inventories and assays that have been conducted on some of this gold over the years. I am also very interested to hear their comments on the Gold Reserve Transparency Act so that we may put forward a measure that provides the public with accurate and complete information on their gold.”




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    Jim Rogers Interview: US Stock Market, US Dollar, Inflation

    In February of this year we wrote an article about the overbought status of the stock market. In “Why Investing In US Stocks Or Treasuries Is A Bad Idea” we highlighted how companies benefitted during this artificial recovery that was made possible with accounting regulation changes, bailouts, foreclosure moratoriums, and massive infusion of newly created debt into the markets. It wasn’t a fundamental recovery but merely a re-inflating of the bubble.

    Jim Rogers is talking with Maria Bartiromo about the state of the US Economy, the future of the US Dollar, the emergence of China and the recent US Stock market correction.

    “The U.S. is the largest debtor nation in the history of the world. The debts are going through the roof. Would you keep lending money to somebody who’s spending money and not doing anything about it? No you wouldn’t.”





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    Former Treasury Secretary O’Neill Interviewed About The Debt Ceiling

    Former Treasury Secretary Paul O’Neill who served during part of President Bush’s first term was interviewed on Bloomberg television about the debt ceiling.

    The former Treasury Secretary criticized Congress for not being responsible in passing the debt ceiling.

    “The Congress needs to be responsible and adult and take action on the debt ceiling and the people who are threatening not to pass the debt ceiling are our version of Al-Qaeda terrorists. They really are putting our whole society at risk by threatening to round up 50 percent of the members of the Congress, who are looney…who would put our credit at risk.”

    It sure doesn’t take much these days to be labeled a financial terrorist. Wanting the government to live within its means and not continue to grow the deficit qualifies you as a domestic terrorist according to this former Chief Financial Officer of the United States. It’s not those that do not want to increase the debt spending that are putting our credit rating at risk. The credit rating is already artificially manipulated by the Federal Reserve to reflect a stronger US Economy. Those that want the Government to live within its means are not financial terrorists and Paul O’Neill should look at the deficit spending Democrats and Republicans that got us here if he wants to blame anybody for the financial demise of this Nation.


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    Federal Reserve Press Conference: Ben Bernanke Lies About Strong Dollar Policy

    Federal Reserve Chairman Ben Bernanke appeared at the first Federal Reserve Press Conference to discuss and answer questions regarding the monetary policy and the current state of the U.S. Economy.

    Following in the footsteps of Treasury Secretary Geithner Ben Bernanke stated that it is US policy to have a strong US Dollar. This hypocritical statement is misleading as it follows Bernanke’s promise that the Fed will ease out its $600 billion bond purchase program while doing what it can to ensure continued growth in the US Economy. If the Federal Reserve would care about the fundamental value of the US Dollar it wouldn’t debase the currency at record rates, it wouldn’t have bailed out Wall Street by buying toxic debt, it wouldn’t have kept interest rates at artificial lows near zero percent, it wouldn’t have injected trillions of newly created dollars into the market place. The only policy that the Fed enacted to help the value of the US Dollar was the Fed Bond Purchase Program and that is only artificial demand to manipulate the currency and not a fundamental policy to preserve the value of the dollar. In essence, the only policy that helps the “value” of the US Dollar was inflationary as the Fed had to create over a trillion dollars in order to provide artificial demand and support for the currency.

    Here is Ben Bernanke’s answer to a question regarding inflation and oil prices.

    “Higher gas prices, higher oil prices also make economic developments less favorable. On the one hand obviously the higher gas prices add to inflation. On the other hand, by draining purchasing power from households, higher gas prices are also bad for the recovery. They cause growth to decline as well. It’s a double whammy coming from higher gasoline prices.”

    WTF Finance agrees with Bernanke that higher oil prices negatively affect economic growth that is dependent on oil as a means of energy. However, Bernanke wrongfully tries to blame higher oil prices for the root of inflation. Oil prices certainly have a negative effect on household budgets as he acknowledges but the cause for this economic phenomenon can be directly attributed to the Federal Reserve’s inflationary monetary policy. With trillions of new dollars created to bail out and manipulate the markets the Federal Reserve debases the currency and with that each monetary unit loses purchasing power. It is this inflationary monetary policy that is at the root of rising commodity prices. Oil prices are up but so is gold, silver, corn, wheat, coffee, cotton, etc.


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