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GDXJ Shows More Signs of Outperformance
Tim Geithner is a Gold Bug
Bernanke Soothes Market With Promises Of Near-Zero Rates, Gold Reacts
Doug Casey on the Collapse of the Euro and the EU
Baltic Dry Index Continues To Collapse Down Another 3.94%
JCP: Welcome to The New Retail Paradigm
Roubinis Bearish Forecast Is Bullish For Gold
Morning Outlook from the Trade Desk - 01/27/12
You could be missing out on free money for retirement... and not even realize it
These reports could show the real state of China's economy
Central banks’ determination to inflate
No Gold & Silver Daily Today
Ivory Coast aiming to fight illegal gold production
Gold Bonds: Averting Financial Armageddon
Overt or Covert, “QE to Infinity” is Here
Michael Hudson: Banks Weren’t Meant to Be Like This
“Mortgage Fraud is a Top Priority for This Administration”
Gold & Silver Market Morning, January 27, 2012
Links, 1/27/12
LISTEN: David Morgan talks with Ellis Martin
James Dines on 2012: “No Place to Hide”
Silver Update: “Bill of Rights”
Stored for Decades, Hitlers Silver Will Go on Display
Willie on Dollar Collapse
Volcker confirms central bank need to suppress gold to stabilize exchange rates at critical point
The Surprise Rally In Gold and Silver
"Fed Euphoria" Sees Gold Touch 7-Week High as 0% Rates Promised Til 2014
Broken Dollar
The Legend of Chief Namekagons Lost Silver Mine
Currency Wars

Posted: 27 Jan 2012 05:10 AM PST

HOUSTON – From the Chart Book. One hopeful sign for bargain loving Vultures who stepped in to build positions in their favorite junior miners and explorers late last year is the performance of the smaller, less liquid and more speculative miners and explorers relative to their larger cousins, like the companies represented in the AMEX Gold Bugs Index or HUI. We Vultures stuck our very long necks out in kind of a big way from October to the end of December – taking advantage of the shares being thrown overboard by tired, scared or disgusted penny stock gamers, or perhaps the Ridiculous Cheap offerings of late year tax loss sellers, who were more interested in maximizing losses than they were maximizing the amount of cash they might raise by selling.

At the end of 2011 The Little Guys, as we like to call them, were likely at the tail end of a very bad negative liquidity event period (NLE), which drove prices for many of them into Penny Stock Purgatory. From March to December of 2011 we went from a period where we were unable to find any junior mining stock bargains to the complete opposite – a bargain target rich environment for The Little Guys. The relentless negative liquidity event demoralized penny stock gamers to the point where sentiment became morose and defeatist. Then came the heavy tax loss selling period from October to December. The first part of the year was very good; traders had booked big gains; but the smaller companies sold off so hard after that the need to offset some of those gains with horribly beaten up juniors trumped all else. The Vulture Tax Loss Selling Season for 2011 was trophy class.

Now, however, it may be time for a little optimism for our Vultures who took advantage of the nasty sell downs of 2011. From about April to December the smaller miners and explorers were mistreated by the market and one way we can gauge that is by how they traded relative to the larger companies in the HUI. As the chart below comparing the Market Vectors Junior Gold Miners Index or GDXJ with the HUI shows clearly, The Little Guys strongly underperformed the Big Boys of the mining biz from at least May to December.

(GDXJ:HUI, daily, 2-years, performance. If any of the images are too small click on them for a larger version.)

Continued…

Today, in late January, notice that there has been quite a change in the signature of the graph. The fact is that since the last full week of December The Little Guys have been outperforming the Big Boys. Sure enough, that outperformance began just as the nasty panic selling and horrible tax loss selling came to an abrupt end.

Who knows if this over performance will continue long enough to engender a new wave of trader confidence, but if we are going to see a new Positive Liquidity Event (PLE) this is the kind of chart action we might expect to see to get it started.

Just to show that the chart above is not some kind of relative performance trick, below is a chart of The Little Guys relative to gold metal. Clearly we can say that at the very least a change in trend is attempting to get underway. When the smaller junior miners and explorers are outperforming gold most analysts would consider that bullish.

(GDXJ:Gold, daily, 18 months)

Of course the best of the best indicators are The Little Guys indexes themselves. Recall that on December 21, into the teeth of the malevolent tax loss selling – literally as it was peaking - we shared our thoughts about The Little Guys in a special Got Gold Report holiday offering in these pages entitled "Why We Remain Bullish on Small Mining Shares." In that special report (which by the way received by far the largest number of unique visitors in GGR history, at times more than 350 per minute or more than 20,000 per hour) … in that holiday offering, speaking then about the CDNX, GDXJ's Canadian cousin, we said:

"As confidently as we can say it, as Got Gold Report Vulture-in-Chief, we believe that this fantastic 2011 buyer's strike event is certainly a good one. It already ranks as number two of all time for the CDNX and therefore is an exceptional example of exactly the kind of market imbalance we hope to exploit. It has given us the exceedingly rare opportunity to target our Guru-chosen Faves in lower-than-low blue target boxes on our Vulture Bargain (VB) and Vulture Bargain Candidates of Interest (VBCI) charts – and to actually build significant, meaningfully large positions in them in some cases.

As Vultures we cannot ask for more opportunity than that. We might get better opportunities, but we dare not even dream they might arrive or count on them arriving. This really is about as good as we can hope for. When we can repurchase shares we sold in February or March at the rate of 5, 6, 7 or even 10 shares for the price of each share we booked back then, that is a sure-enough, no question, bona fide sale price in our view. Especially when the company in question is the same or even better off than they were then.

We really cannot expect such unusually large market imbalances to last for much longer, either. That kind of fear just isn't the norm in markets, no matter how it "feels" today, but we must also be prepared mentally for our timing to be "as long as it takes." We don't get to choose the timing in our chosen market, but we do get to choose to let the market tell us what that timing is. (One of the most important lessons a Vulture ever learns.)"

Just below is a small comparison chart of both the GDXJ and its Canadian counterpart, the S&P TSX Canadian Venture Exchange Index or CDNX. The signature is what we might expect to see if there was a little confidence beginning to return to The Little Guys.

(GDXJ and CDNX 2-years, daily, comparison.)

As least now, as we close out the first month of 2012, we can point to an optimistic looking, rather encouraging photograph – a snapshot of what has the potential to become the next positive liquidity event (PLE). But man alive, do these indexes ever have a long way to go to get to "Confidenceville." A long way indeed.

(CDNX, long term, monthly, showing that The Little Guys are still being priced as they were back in 2003, when gold traded under $400 and silver under $5.)

Vultures (Got Gold Report Subscribers) know we are not kidding when we say we stuck our long Vulture necks out to layer in overly large "size" in some of our promising, Guru-chosen "Faves" in the junior miners and explorers late last year. We did that into the teeth of virtual panic in some cases and at prices that actually captured those 5, 6, 7 and even 10-for-one Ridiculous Cheap "clearance rack sale prices." So, we welcome the more promising looking graphs above, ever mindful that no one can see the future and this is merely the possible beginning of a new PLE.

As of now it could just as easily be a wicked, suckers rally or dead cat bounce, but we believe we Vultures have two forces backing us up in our position taking. The first is that we laid in wait for Ridiculous Cheap levels to add. Ridiculous Cheap is a good place to be from, as they say, and it means we have company insiders, value bargain hunters, and deep discount "heavies" in there with us for support from time to time. The second is that we Vultures are immune to the concept of time when it comes to our positioning. If this ends up being a false breakout, for example, and yet another test of the panic lows is ahead, then we are quite simply ready for it. Our timing can be stated in Jim Rogers terms, elegantly and simply: Our timing is as long as it takes.

The thing is, as of late January, we actually do not believe this is a sucker's rally for The Little Guys. So far, at least, is feels more like the real McCoy. Call it a hunch. For more on why please refer to our Special Got Gold Report for December 21, published on the blog as a holiday courtesy, mentioned already once above, and again here for convenience. "Why We Remain Bullish on Small Mining Shares."

***

"They didn't make that winner's circle for mealy mouthed cowards. You can't buy cheap and sell dear without doing the former, you know."

Vultures please note numerous changes in our many linked tracking charts for the Vulture Bargain (VB) and Vulture Bargain Candidates of Interest (VBCI) issues (located on the password protected subscriber pages). We continue to make frequent notations as events and conditions change.

We plan to spend the majority of this weekend doing research and preparing our question list for the many CEOs and geos on our contact list, thus there will likely not be a full GGR this weekend. However, a GGR Special Report is possible and we do intend to update all of our technical tracking charts for gold, silver, the miner indexes and important ratios by the usual time on Sunday (by 18:00 ET). Log in then to view them if you please.

Let's call January a reasonably good month and look forward with a little optimism, shall we? That's what the charts above suggest we do. Have a good weekend everyone.

That is all for now, but there is more to come.

Tim Geithner is a Gold Bug

Posted: 27 Jan 2012 04:32 AM PST

Tim Geithner Added To List Of Gold Bugs' Best Friends

from ZeroHedge:

Yesterday we asked rhetorically if Ben Bernanke has become the gold bug's best friend courtesy of his FOMC announcement which led to a surge in gold, and a kneejerk whimper in stocks, which has now been completely wiped out courtesy of a subpar GDP number. Today we note that it is not only the Fed, but the US Treasury, and specifically the ravenous Mr. Geithner, who just got a green light to issue another $1.2 trillion in debt, and bring total debt to $16.4 trillion, which would still be 107% of today's GDP (which we don't see growing much if at all over the next year), that can be added to the list of best Goldbug friends. As the chart below demonstrates quite vividly, in addition to global and local monetary expansion, the price of gold tends to correlate quite well with the US debt ceiling.

¤ Yesterday in Gold and Silver

Dear Gold & Silver Daily Reader,

We know you are used to getting your daily dose of goldbug Ed Steer's assessments of the markets, but unfortunately Ed has caught another type of bug this week. He says he's sicker than he's been in 20 years – so please understand that there will be no edition of Gold & Silver Daily today – and maybe not tomorrow either. In the meantime, we all wish Ed a speedy recovery.

Thank you for your understanding.

Your Casey Research team

Ed Steer is out sick today.

¤ The Funnies

¤ The Wrap

We'll be back with you soon.

Ivory Coast aiming to fight illegal gold production

Posted: 26 Jan 2012 11:00 PM PST

In the northern region of Ivory Coast conflicts between local citizens and illegal gold producers have been escalating. Experts believe that the under-developed mining sector of this West African ...

Gold Bonds: Averting Financial Armageddon

Posted: 26 Jan 2012 10:51 PM PST

by Keith Weiner, ZeroHedge:

After the near-collapse of the financial system in 2008, a growing number of people have come to realize that our monetary disease is terminal. It is that group to whom I address this paper. I sincerely hope that this group includes leaders in business, finance, and government.

I do not believe that my proposal herein is necessarily "realistic" (i.e. pragmatic). There are many interest groups that may oppose it for various reasons, based on their short-sighted desire to try to continue the status quo yet a while longer. Nevertheless, I feel that I must write and publish this paper. To say nothing in the face of the greatest financial calamity would go against everything I believe.

It seems self-evident. The government can debase the currency and thereby be able to pay off its astronomical debt in cheaper dollars. But as I will explain below, things don't work that way. In order to use the debasement of paper currencies to repay the debt more easily, governments will need to issue and use the gold bond.(Wherever I refer to gold, I also mean silver. For the sake of brevity and readability I will only say gold in most cases.

Read More @ MilesFranklin.com

Michael Hudson: Banks Weren’t Meant to Be Like This

Posted: 26 Jan 2012 09:36 PM PST

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

A shorter version of this article in German will run in the Frankfurter Algemeine Zeitung on January 28. 2012

The inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles.

Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. Joseph Stiglitz characterizes the Obama administration's vast transfer of money and pubic debt to the banks as a "privatizing of gains and the socializing of losses. It is a 'partnership' in which one partner robs the other." Prof. Bill Black describes banks as becoming criminogenic and innovating "control fraud." High finance has corrupted regulatory agencies, falsified account-keeping by "mark to model" trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy's allocates its credit and resources.

If there is any silver lining to today's debt crisis, it is that the present situation and trends cannot continue. So this is not only an opportunity to restructure banking; we have little choice. The urgent issue is who will control the economy: governments, or the financial sector and monopolies with which it has made an alliance.

Fortunately, it is not necessary to re-invent the wheel. Already a century ago the outlines of a productive industrial banking system were well understood. But recent bank lobbying has been remarkably successful in distracting attention away from classical analyses of how to shape the financial and tax system to best promote economic growth – by public checks on bank privileges.

How Banks Broke The Social Compact, Promoting Their Own Special Interests

People used to know what banks did. Bankers took deposits and lent them out, paying short-term depositors less than they charged for risky or less liquid loans. The risk was borne by bankers, not depositors or the government. But today, bank loans are made increasingly to speculators in recklessly large amounts for quick in-and-out trading. Financial crashes have become deeper and affect a wider swath of the population as debt pyramiding has soared and credit quality plunged into the toxic category of "liars' loans."

The first step toward today's mutual interdependence between high finance and government was for central banks to act as lenders of last resort to mitigate the liquidity crises that periodically resulted from the banks' privilege of credit creation. In due course governments also provided public deposit insurance, recognizing the need to mobilize and recycle savings into capital investment as the Industrial Revolution gained momentum. In exchange for this support, they regulated banks as public utilities.

Over time, banks have sought to disable this regulatory oversight, even to the point of decriminalizing fraud. Sponsoring an ideological attack on government, they accuse public bureaucracies of "distorting" free markets (by which they mean markets free for predatory behavior). The financial sector is now making its move to concentrate planning in its own hands.

The problem is that the financial time frame is notoriously short-term and often self-destructive. And inasmuch as the banking system's product is debt, its business plan tends to be extractive and predatory, leaving economies high-cost. This is why checks and balances are needed, along with regulatory oversight to ensure fair dealing. Dismantling public attempts to steer banking to promote economic growth (rather than merely to make bankers rich) has permitted banks to turn into something nobody anticipated. Their major customers are other financial institutions, insurance and real estate – the FIRE sector, not industrial firms. Debt leveraging by real estate and monopolies, arbitrage speculators, hedge funds and corporate raiders inflates asset prices on credit. The effect of creating "balance sheet wealth" in this way is to load down the "real" production-and-consumption economy with debt and related rentier charges, adding more to the cost of living and doing business than rising productivity reduces production costs.

Since 2008, public bailouts have taken bad loans off the banks' balance sheet at enormous taxpayer expense – some $13 trillion in the United States, and proportionally higher in Ireland and other economies now being subjected to austerity to pay for "free market" deregulation. Bankers are holding economies hostage, threatening a monetary crash if they do not get more bailouts and nearly free central bank credit, and more mortgage and other loan guarantees for their casino-like game. The resulting "too big to fail" policy means making governments too weak to fight back.

The process that began with central bank support thus has turned into broad government guarantees against bank insolvency. The largest banks have made so many reckless loans that they have become wards of the state. Yet they have become powerful enough to capture lawmakers to act as their facilitators. The popular media and even academic economic theorists have been mobilized to pose as experts in an attempt to convince the public that financial policy is best left to technocrats – of the banks' own choosing, as if there is no alternative policy but for governments to subsidize a financial free lunch and crown bankers as society's rulers.

The Bubble Economy and its austerity aftermath could not have occurred without the banking sector's success in weakening public regulation, capturing national treasuries and even disabling law enforcement. Must governments surrender to this power grab? If not, who should bear the losses run up by a financial system that has become dysfunctional? If taxpayers have to pay, their economy will become high-cost and uncompetitive – and a financial oligarchy will rule.

The Present Debt Quandary

The endgame in times past was to write down bad debts. That meant losses for banks and investors. But today's debt overhead is being kept in place – shifting bad loans off bank balance sheets to become public debts owed by taxpayers to save banks and their creditors from loss. Governments have given banks newly minted bonds or central bank credit in exchange for junk mortgages and bad gambles – without re-structuring the financial system to create a more stable, less debt-ridden economy. The pretense is that these bailouts will enable banks to lend enough to revive the economy by enough to pay its debts.

Seeing the handwriting on the wall, bankers are taking as much bailout money as they can get, and running, using the money to buy as much tangible property and ownership rights as they can while their lobbyists keep the public subsidy faucet running.

The pretense is that debt-strapped economies can resume business-as-usual growth by borrowing their way out of debt. But a quarter of U.S. real estate already is in negative equity – worth less than the mortgages attached to it – and the property market is still shrinking, so banks are not lending except with public Federal Housing Administration guarantees to cover whatever losses they may suffer. In any event, it already is mathematically impossible to carry today's debt overhead without imposing austerity, debt deflation and depression.

This is not how banking was supposed to evolve. If governments are to underwrite bank loans, they may as well be doing the lending in the first place – and receiving the gains. Indeed, since 2008 the over-indebted economy's crash led governments to become the major shareholders of the largest and most troubled banks – Citibank in the United States, Anglo-Irish Bank in Ireland, and Britain's Royal Bank of Scotland. Yet rather than taking this opportunity to run these banks as public utilities and lower their charges for credit-card services – or most important of all, to stop their lending to speculators and gamblers – governments left these banks operating as part of the "casino capitalism" that has become their business plan.

There is no natural reason for matters to be like this. Relations between banks and government used to be the reverse. In 1307, France's Philip IV ("The Fair") set the tone by seizing the Knights Templars' wealth, arresting them and putting many to death – not on financial charges, but on the accusation of devil-worshipping and satanic sexual practices. In 1344 the Peruzzi bank went broke, followed by the Bardi by making unsecured loans to Edward III of England and other monarchs who died or defaulted. Many subsequent banks had to suffer losses on loans gone bad to real estate or financial speculators.

By contrast, now the U.S., British, Irish and Latvian governments have taken bad bank loans onto their national balance sheets, imposing a heavy burden on taxpayers – while letting bankers cash out with immense wealth. These "cash for trash" swaps have turned the mortgage crisis and general debt collapse into a fiscal problem. Shifting the new public bailout debts onto the non-financial economy threaten to increase the cost of living and doing business. This is the result of the economy's failure to distinguish productive from unproductive loans and debts. It helps explain why nations now are facing financial austerity and debt peonage instead of the leisure economy promised so eagerly by technological optimists a century ago.

So we are brought back to the question of what the proper role of banks should be. This issue was discussed exhaustively prior to World War I. It is even more urgent today.

How Classical Economists Hoped to Modernize Banks as Agents of Industrial Capitalism

Britain was the home of the Industrial Revolution, but there was little long-term lending to finance investment in factories or other means of production. British and Dutch merchant banking was to extend short-term credit on the basis of collateral such as real property or sales contracts for merchandise shipped ("receivables"). Buoyed by this trade financing, merchant bankers were successful enough to maintain long-established short-term funding practices. This meant that James Watt and other innovators were obliged to raise investment money from their families and friends rather than from banks.

It was the French and Germans who moved banking into the industrial stage to help their nations catch up. In France, the Saint-Simonians described the need to create an industrial credit system aimed at funding means of production. In effect, the Saint-Simonians proposed to restructure banks along lines akin to a mutual fund. A start was made with the Crédit Mobilier, founded by the Péreire Brothers in 1852. Their aim was to shift the banking and financial system away from debt financing at interest toward equity lending, taking returns in the form of dividends that would rise or decline in keeping with the debtor's business fortunes. By giving businesses leeway to cut back dividends when sales and profits decline, profit-sharing agreements avoid the problem that interest must be paid willy-nilly. If an interest payment is missed, the debtor may be forced into bankruptcy and creditors can foreclose. It was to avoid this favoritism for creditors regardless of the debtor's ability to pay that prompted Mohammed to ban interest under Islamic law.

Attracting reformers ranging from socialists to investment bankers, the Saint-Simonians won government backing for their policies under France's Third Empire. Their approach inspired Marx as well as industrialists in Germany and protectionists in the United States and England. The common denominator of this broad spectrum was recognition that an efficient banking system was needed to finance the industry on which a strong national state and military power depended.

Germany Develops an Industrial Banking System

It was above all in Germany that long-term financing found its expression in the Reichsbank and other large industrial banks as part of the "holy trinity" of banking, industry and government planning under Bismarck's "state socialism." German banks made a virtue of necessity. British banks "derived the greater part of their funds from the depositors," and steered these savings and business deposits into mercantile trade financing. This forced domestic firms to finance most new investment out of their own earnings. By contrast, Germany's "lack of capital … forced industry to turn to the banks for assistance," noted the financial historian George Edwards. "A considerable proportion of the funds of the German banks came not from the deposits of customers but from the capital subscribed by the proprietors themselves. As a result, German banks "stressed investment operations and were formed not so much for receiving deposits and granting loans but rather for supplying the investment requirements of industry."

When the Great War broke out in 1914, Germany's rapid victories were widely viewed as reflecting the superior efficiency of its financial system. To some observers the war appeared as a struggle between rival forms of financial organization. At issue was not only who would rule Europe, but whether the continent would have laissez faire or a more state-socialist economy.

In 1915, shortly after fighting broke out, the Christian Socialist priest-politician Friedrich Naumann published Mitteleuropa, describing how Germany recognized more than any other nation that industrial technology needed long term financing and government support. His book inspired Prof. H. S. Foxwell in England to draw on his arguments in two remarkable essays published in the Economic Journal in September and December 1917: "The Nature of the Industrial Struggle," and "The Financing of Industry and Trade." He endorsed Naumann's contention that "the old individualistic capitalism, of what he calls the English type, is giving way to the new, more impersonal, group form; to the disciplined scientific capitalism he claims as German."

This was necessarily a group undertaking, with the emerging tripartite integration of industry, banking and government, with finance being "undoubtedly the main cause of the success of modern German enterprise," Foxwell concluded (p. 514). German bank staffs included industrial experts who were forging industrial policy into a science. And in America, Thorstein Veblen's The Engineers and the Price System (1921) voiced the new industrial philosophy calling for bankers and government planners to become engineers in shaping credit markets.

Foxwell warned that British steel, automotive, capital equipment and other heavy industry was becoming obsolete largely because its bankers failed to perceive the need to promote equity investment and extend long term credit. They based their loan decisions not on the new production and revenue their lending might create, but simply on what collateral they could liquidate in the event of default: inventories of unsold goods, real estate, and money due on bills for goods sold and awaiting payment from customers. And rather than investing in the shares of the companies that their loans supposedly were building up, they paid out most of their earnings as dividends – and urged companies to do the same. This short time horizon forced business to remain liquid rather than having leeway to pursue long term strategy.

German banks, by contrast, paid out dividends (and expected such dividends from their clients) at only half the rate of British banks, choosing to retain earnings as capital reserves and invest them largely in the stocks of their industrial clients. Viewing these companies as allies rather than merely as customers from whom to make as large a profit as quickly as possible, German bank officials sat on their boards, and helped expand their business by extending loans to foreign governments on condition that their clients be named the chief suppliers in major public investments. Germany viewed the laws of history as favoring national planning to organize the financing of heavy industry, and gave its bankers a voice in formulating international diplomacy, making them "the principal instrument in the extension of her foreign trade and political power."

A similar contrast existed in the stock market. British brokers were no more up to the task of financing manufacturing in its early stages than were its banks. The nation had taken an early lead by forming Crown corporations such as the East India Company, the Bank of England and even the South Sea Company. Despite the collapse of the South Sea Bubble in 1720, the run-up of share prices from 1715 to 1720 in these joint-stock monopolies established London's stock market as a popular investment vehicle, for Dutch and other foreigners as well as for British investors. But the market was dominated by railroads, canals and large public utilities. Industrial firms were not major issuers of stock.

In any case, after earning their commissions on one issue, British stockbrokers were notorious for moving on to the next without much concern for what happened to the investors who had bought the earlier securities. "As soon as he has contrived to get his issue quoted at a premium and his underwriters have unloaded at a profit," complained Foxwell, "his enterprise ceases. 'To him,' as the Times says, 'a successful flotation is of more importance than a sound venture.'"

Much the same was true in the United States. Its merchant heroes were individualistic traders and political insiders often operating on the edge of the law to gain their fortunes by stock-market manipulation, railroad politicking for land giveaways, and insurance companies, mining and natural resource extraction. America's wealth-seeking spirit found its epitome in Thomas Edison's hit-or-miss method of invention, coupled with a high degree of litigiousness to obtain patent and monopoly rights.

In sum, neither British nor American banking or stock markets planned for the future. Their time frame was short, and they preferred rent-extracting projects to industrial innovation. Most banks favored large real estate borrowers, railroads and public utilities whose income streams easily could be forecast. Only after manufacturing companies grew fairly large did they obtain significant bank and stock market credit.

What is remarkable is that this is the tradition of banking and high finance that has emerged victorious throughout the world. The explanation is primarily the military victory of the United States, Britain and their Allies in the Great War and a generation later, in World War II.

The Regression Toward Burdensome Unproductive Debts After World War I

The development of industrial credit led economists to distinguish between productive and unproductive lending. A productive loan provides borrowers with resources to trade or invest at a profit sufficient to pay back the loan and its interest charge. An unproductive loan must be paid out of income earned elsewhere. Governments must pay war loans out of tax revenues. Consumers must pay loans out of income they earn at a job – or by selling assets. These debt payments divert revenue away from being spent on consumption and investment, so the economy shrinks. This traditionally has led to crises that wipe out debts, above all those that are unproductive.

In the aftermath of World War I the economies of Europe's victorious and defeated nations alike were dominated by postwar arms and reparations debts. These inter-governmental debts were to pay for weapons (by the Allies when the United States unexpectedly demanded that they pay for the arms they had bought before America's entry into the war), and for the destruction of property (by the Axis), not new means of production. Yet to the extent that they were inter-governmental, these debts were more intractable than debts to private bankers and bondholders. Despite the fact that governments in principle are sovereign and hence can annul debts owed to private creditors, the defeated Axis governments were in no position to do this.

And among the Allies, Britain led the capitulation to U.S. arms billing, captive to the creditor ideology that "a debt is a debt" and must be paid regardless of what this entails in practice or even whether the debt in fact can be paid. Confronted with America's demand for payment, the Allies turned to Germany to make them whole. After taking its liquid assets and major natural resources, they insisted that it squeeze out payments by taxing its economy. No attempt was made to calculate just how Germany was to do this – or most important, how it was to convert this domestic revenue (the "budgetary problem") into hard currency or gold. Despite the fact that banking had focused on international credit and currency transfers since the 12th century, there was a broad denial of what John Maynard Keynes identified as a foreign exchange transfer problem.

Never before had there been an obligation of such enormous magnitude. Nevertheless, all of Germany's political parties and government agencies sought to devise ways to tax the economy to raise the sums being demanded. Taxes, however, are levied in a nation's own currency. The only way to pay the Allies was for the Reichsbank to take this fiscal revenue and throw it onto the foreign exchange markets to obtain the sterling and other hard currency to pay. Britain, France and the other recipients then paid this money on their Inter-Ally debts to the United States.

Adam Smith pointed out that no government ever had paid down its public debt. But creditors always have been reluctant to acknowledge that debtors are unable to pay. Ever since David Ricardo's lobbying for their perspective in Britain's Bullion debates, creditors have found it their self-interest to promote a doctrinaire blind spot, insisting that debts of any magnitude could be paid. They resist acknowledging a distinction between raising funds domestically (by running a budget surplus) and obtaining the foreign exchange to pay foreign-currency debt. Furthermore, despite the evident fact that austerity cutbacks on consumption and investment can only be extractive, creditor-oriented economists refused to recognize that debts cannot be paid by shrinking the economy. Or that foreign debts and other international payments cannot be paid in domestic currency without lowering the exchange rate.

The more domestic currency Germany sought to convert, the further its exchange rate was driven down against the dollar and other gold-based currencies. This obliged Germans to pay much more for imports. The collapse of the exchange rate was the source of hyperinflation, not an increase in domestic money creation as today's creditor-sponsored monetarist economists insist. In vain Keynes pointed to the specific structure of Germany's balance of payments and asked creditors to specify just how many German exports they were willing to take, and to explain how domestic currency could be converted into foreign exchange without collapsing the exchange rate and causing price inflation.

Tragically, Ricardian tunnel vision won Allied government backing. Bertil Ohlin and Jacques Rueff claimed that economies receiving German payments would recyc

“Mortgage Fraud is a Top Priority for This Administration”

Posted: 26 Jan 2012 09:01 PM PST

By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller.

Since the President is now establishing yet another committee to look into the mortgage fraud crisis, I figured it would be useful to look into the history of the Obama and Bush administrations' approaches to the problem of vast financial fraud. As with most Obama government activities, it's largely a story of policy continuity with the last administration, though the boom-bust cycle meant that there was not a huge amount of public pressure on the Bush administration to act, so their PR apparatus was less visible.

In 2009, President Obama established the Financial Fraud Enforcement Network, whose purpose was "to hold accountable those who helped bring about the last financial crisis, and to prevent another crisis from happening." In the State of the Union, he basically re-established this network, adding a new member, Eric Schneiderman, who has been something of a thorn in the side of the administration. My guess is that at least one reason (but not the only reason) for agreeing to this is that Schneiderman believes he needs the extra resources to investigate the mortgage crisis. But the resources of the Federal government have proven useless because the people who are in government are uninterested in and incapable of holding financial interests accountable for their behavior.

I realized this a few months ago, after a fairly irritating email exchange with a college classmate named Sujit Raman, who is now an Assistant US Attorney in Maryland. Raman is exactly the kind of person you don't want in public service, a budding corporate ladder climber whose expertise in his young career is about how to standardize deferred prosecution agreements. So of course he's an Assistant US Attorney. When I asked him about his department's absurd approach to mortgage fraud, he told me with a straight face that mortgage fraud is one of the top priorities of the FBI and the US Attorney's Office, and referred me to a few cases he had prosecuted of petty crooks (here, here, and here). I thought it was a bizarre statement, since it's obviously not true. But then I went back and looked at the statements from various DOJ and US Attorneys, and they actually think this.

Here's what I mean.

"Mortgage fraud is a top priority for this Administration, especially when public dollars are at stake," West said in a statement at the time.

Department of Justice official Tony West, July 2009

"The vigorous pursuit of real estate professionals who perpetrated mortgage fraud is a top priority for federal authorities in this region," U.S. Attorney Lawrence G. Brown said in a statement.

US Attorney Lawrence Brown, Oct, 2009

"Mortgage fraud is a top priority for this administration," said Tony West, Assistant Attorney General for the Department of Justice's Civil Division. "We will aggressively pursue both individuals and corporations who defraud federal mortgage insurance programs, which are so important to this economy."

Department of Justice official Tony West, Jan 2010

Dennis K. Burke, U.S. Attorney for the District of Arizona, highlighted the significance of this sentence. "Mortgage fraud is a top priority for the U.S. Justice Department in the District ofArizona, where it has destroyed property values, lending institutions, and entire neighborhoods in our community. No question, complex fraud schemes — a prime example, here — played a role in crashing our real estate market. Culprits like these defendants will be tracked down, prosecuted and convicted. I congratulate the FBI for their thorough investigation that led to this significant sentence.

US Attorney Dennis Burke, March, 2010

"The prosecution of those who commit mortgage fraud is a top priority of the Department of Justice and this U.S. Attorney's Office," said U.S. Attorney David Gaouette. "Those who commit such crimes seriously erode the confidence of financial institutions to lend money which is a key element of the future strength of our economy."

U.S. Attorney David Gaouette April, 2010

U.S. Attorney Wifredo "Willy" Ferrer, who was sworn in two weeks ago as the top federal prosecutor for the Southern District of Florida, called fighting mortgage fraud one of his top priorities today during a session with journalists.

Combating fraud was one of three main priorities Ferrer vowed to pursue, following terrorism and public corruption.

"There is rampant fraud in South Florida," he said. "I think that's unfortunate. It is embarrassing that we are known in some circles as the fraud capital of the country. I don't like that title."

US Attorney Wilfredo Ferrer, Southern District of Florida, May, 2010

"The investigation and prosecution of mortgage fraud is a top priority of the Justice Department and this office," said U.S. Attorney John Walsh. "Prosecuting these cases helps protect the integrity of the housing market."

US Attorney John Walsh, Jan 2011

And prior to the Obama administration years, the Bush US Attorney network and FBI adopted the same posture. Here are two examples.

"We all have the same initiatives, the policies all come from Washington, D.C., and right now mortgage fraud is No. 1," Becky Gregory, the Beaumont-based U.S. Attorney for the Eastern District of Texas, told about 50 lawyers munching their boxed lunches during a white-collar crime seminar at South Texas College of Law.

"On the local level lots of times, the big companies are the victims,"said Johnny Sutton, the San Antonio-based U.S. Attorney for the Western District of Texas. Sutton said the FBI is finding a lot of people who illegally took advantage of the lax mortgage system. He said his office just prosecuted 19 defendants in an Austin mortgage fraud case.

Richard Roper, the Dallas-based U.S. Attorney for the Northern District of Texas, said the coming mortgage fraud cases remind him of the bank fraud cases of the late 1980s.

"It's going to be huge in the next few years," he said.

Donald DeGabrielle, the Houston-based U.S. Attorney for the Southern District of Texas, told the gathered group of mostly criminal defense attorneys that "there will be a lot of work for you."

US Attorneys Becky Gregory, Johnny Sutton, Richard Roper, Donald DeGabrielle, July, 2008

Reiterating his comments at the summit, Swecker told attendees that mortgage fraud is a top priority for the FBI, and "prevention of mortgage fraud should be our collective goals. It is vital that policy makers, law enforcement and the public understand the reality and magnitude of the problem and work together to address this issue."

Assistant Director of the FBI's Criminal Investigative Division Chris Swecker, March, 2005

I would be happy to be wrong, of course. I'd love to see real prosecutions of the people that caused the mortgage crisis and rigged the markets to collapse. But it's important to recognize that it is the policy of the Bush and Obama administrations to protect the banks at all costs. That is, not prosecuting isn't a failure, it's a feature. Don't believe me, believe Barack Obama, who said so in his very first State of the Union.

We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.

That's the policy. Oh, and that bit about holding those responsible accountable – didn't you hear that mortgage fraud is a top priority of the administration?

Gold & Silver Market Morning, January 27, 2012

Posted: 26 Jan 2012 09:00 PM PST

Links, 1/27/12

Posted: 26 Jan 2012 08:55 PM PST

Matt Stoller is a fellow at the Roosevelt Institute. You can follow him on twitter at http://www.twitter.com/matthewstoller.

World's First Atomic Laser Created, TG Daily

Candidates unloved in FL town hit by foreclosures, AP. Voters don't really like or trust anyone to help them. They don't blame Obama for the foreclosure crisis, but they don't think he'll solve it. And they don't think Romney will either.

Twitter can now block tweets in specific countries IT World. When in Rome, censor as the Romans do…

Does Technology Affect Happiness? New York Times. Probably? Yes? But maybe not in the way you think? This study looks marginally interesting, basically girls who spend all their time using multi-media tend to be less happy than those that don't. This study will be bandied about with confident cocktail party chatterers proclaiming wisely that Twitter makes you less social or something. Just be aware.

Bill Gates on Using His Money to Save Lives and Fix U.S. Schools, and Steve Jobs, Yahoo News (h/t John Lovie)

Dole Slams Gingrich as 'One-Man-Band' Hurting Party, Bloomberg. This is the one obligatory post on the GOP race and the debate last night, don't worry, there aren't any more in the links post. Your welcome. I included this one because it shows the essential dynamic in the race, which is the Republican establishment ganging up on Gingrich to knock him out of the race. Florida is a TV-driven state, with lots and lots of low information voters. The Mitt media blast may be working. Gingrich has regained his national lead in the polls.

Obama's Financial Crimes Unit: Task Force's Details Emerge, Huffington Post

Paying cash in hand is 'diddling the country', says HMRC's Dave Hartnett, The Telegraph. Geez, who ever could have predicted that horrible austerity policies would cause people to create a black market economy so as to avoid costs they can't afford imposed by a government they no longer trust?

2012 Aurora Borealis, Flickr. Quite beautiful, h/t Francois T.

Smurfs Caught Short as Jakks Toy Bid Gets Cheaper, Bloomberg

UN Gets 35 Pounds of Cocaine Sent From Mexico, Bloomberg

New York Times Co. Faces Leadership Vacuum, Bloomberg. A better headline would have been New York Times in Very Serious Financial Trouble. It doesn't look good for the gray lady, long-term.

JP Morgan Admits It Weighed Euro Exit, FT. Jamie Dimon says his bank remained invested in Europe partially for economic but mostly for "social reasons". Um, ok Jamie. He also says the bank has just $15B of exposure to Europe. Hang on a second. HAHAHAHAHAHAHA. Ok, wait, um, one more second. HAHAHAHAHA. There. Done. HAHAHAHAHAHA. You get the point.

Care for Aging Inmates Puts Strain on Prisons, WSJ. The fastest growing segment of the prison population is 55 years and older.

Mars Pictures: NASA Releases New Images From Mars Reconnaissance Orbiter (PHOTOS) These are cool.

Corruption Scandal Rocks Vatican, Whistle Blower Archbishop Vigano Was Transferred Against His Will, Huffington Post. This is just standard corruption in awarding contracts, not covering up for child rape.

Matthew Broderick Plays Ferris Bueller In Super Bowl Ad , Moviefone

It's payback time as banks boost Dick Lugar rival, Politico. This is actually very interesting. A whole bunch of financial services lobbyists and groups – including the American Bankers Association and the Financial Services Roundtable – are launching a primary challenge in the Republican Party to a senior Republican Senator.

Rep. Brad Miller is Retiring, Being Encouraged to Run for Governor of North Carolina, Politico. This is sad, Miller is one of the best and smartest members of the Financial Services Committee, and he was basically forced out in a Democratic primary. He's also a blogger. I doubt he runs for Governor, but he'll definitely do something interesting going forward.

At Yale, the Collapse of a Rhodes Scholar Candidacy, New York Times. The whole "whoa is me for having to choose between the NFL and the Rhoades Scholarship" was the ultimate humblebrag.

Israel Senses Bluffing in Iran's Threats of Retaliation, New York Times. Is this still going on? Get a room you two and just hump it out. Or start a new world war. Either way can you just shut up?

And your reward is a video of a Boxer puppy greeted by a herd of loving cows.

LISTEN: David Morgan talks with Ellis Martin

Posted: 26 Jan 2012 08:52 PM PST

Ellis Martin and David Morgan visit at the Vancouver Resource Investment Conference where there was record attendance, portending untold investor interest in Canadian Junior Mining Companies and precious metals in general, the likes of which have not been seen previously. Mr. Morgan forecasts another leg up in silver and gold.

~TVR

James Dines on 2012: “No Place to Hide”

Posted: 26 Jan 2012 08:47 PM PST

Dines still bullish on uranium and rare earth elements.

From Jim Puplava and Financial Sense:
James Dines: Forecast for 2012: "No Place to Hide"

Jim is pleased to welcome back James Dines of The Dines Letter to discuss his forecast for 2012. In an interview covering many subjects, Mr. Dines believes gold shares will catch up to the gold price, Chinese growth won't be enough to bail out the world's economies, and that nothing will save the world until a currency link to gold is reinstated and enforced.

Much More @ FinancialSense.com

Silver Update: “Bill of Rights”

Posted: 26 Jan 2012 08:44 PM PST

from BrotherJohnF:
BJF on the silver, koalas, pennants, and tyranny in the 1.26.12 Silver Update.

Got Physical ?

~TVR

Stored for Decades, Hitlers Silver Will Go on Display

Posted: 26 Jan 2012 06:39 PM PST

Willie on Dollar Collapse

Posted: 26 Jan 2012 05:38 PM PST

Jim Willie has been harping on the decline (collapse?) of the dollar. He is usually out front on these matters, often long before others. But pioneer scouts like Mr. Willie are often early and sometimes wrong. Regarding the fate of the dollar and his timing (imminent), I think he is more correct than most. He [...]

Volcker confirms central bank need to suppress gold to stabilize exchange rates at critical point

Posted: 26 Jan 2012 05:00 PM PST

The Surprise Rally In Gold and Silver

Posted: 26 Jan 2012 04:50 PM PST

"Fed Euphoria" Sees Gold Touch 7-Week High as 0% Rates Promised Til 2014

Posted: 26 Jan 2012 04:38 PM PST

Broken Dollar

Posted: 26 Jan 2012 04:36 PM PST

The Legend of Chief Namekagons Lost Silver Mine

Posted: 26 Jan 2012 04:30 PM PST

Atthecreation

Currency Wars

Posted: 26 Jan 2012 12:34 PM PST

The currency wars are heating up. On Wednesday, Federal Reserve boss Ben Bernanke promised speculators he would keep interest rates low until 2014:

'To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.'

The Fed also promised to keep buying longer-term treasury securities with the proceeds from the maturing shorter-term securities in its portfolio. That, along with weaker economic growth forecasts, saw long-term bond yields fall. And when yields fall, prices rise - so bond market investors were happy.

While Bernanke didn't announce QE 3, he said it remains an option. Interest rates aren't going anywhere for another couple of years. The stock market loved it. So the Fed's announcement contained something for everyone - the bond AND stock market investor. Sweet.

We'll explain why, despite the initial reaction, you shouldn't get too excited about stocks in a moment. But the big picture issue to contemplate here is that the Fed has just fired another salvo in the global currency war.

Over the past few months, the Fed has taken a back seat to the European Central Bank (ECB). The sovereign debt crisis engulfing the region has revealed the ECB to be a formidable opponent to the Fed when it comes to money printing.

Of course, the ECB says it's simply providing 'liquidity', but everyone knows that's just another euphemism (the list grows by the day) for printing money. The ECB's actions have resulted in the euro weakening against the dollar, exactly as planned.

A weaker euro allows Eurozone nations to become more competitive in international markets. Despite Germany's apparent distaste for easy money and a weaker currency, its powerhouse export sector is perhaps the biggest beneficiary of the ECB's actions.

While the euro is not yet weak enough versus the US dollar to cause genuine concern, the ECB's newfound monetary vigour is raising eyebrows. Bernanke's promise of low interest rates for years to come and the threat of more QE was a less than subtle reminder that a weak US dollar is a long term Fed objective.

It's also an objective of the ECB, the Bank of England, the Bank of Japan, and the People's Bank of China. The problem is, they can't all be successful. Well, maybe they can against a little currency like the Aussie dollar.

The Aussie is a major beneficiary - or casualty, depending on your viewpoint - of this ongoing currency war. While all the major trading nations and blocs attempt to keep their currency weak to boost exports, capital flows to Australia as it seeks refuge from the hostilities.

The Aussie is again in the headlines as it surges higher against a range of (formally) powerful currencies. This currency strength should provide the RBA with cover to reduce interest rates at its next meeting in early February.

Up until now the RBA has refrained from getting involved in the currency wars. It sees a strong dollar as a tool to contain inflation. But China's economy is coming off the boil, easing the inflationary threat to Australia.

Such a strong dollar, at a time of rising unemployment and moderating inflation, might not be such a welcome tool. So expect the RBA to join the fight this year. While they won't say so explicitly, we're betting interest rates fall to record lows in an attempt to counter the easy money policies of the world's major economies.

Everyone loses in war. In this unfolding currency war, no fiat currency can win. Currency devaluation is a crude method of stealing demand for goods and services off someone else. It doesn't create new demand or wealth. It's a zero sum game. But it does lead to increasing levels of distrust and economic animosity.

As a result, gold and silver (and maybe foreign exchange brokers as the world turns into a casino) will be the only victors. That's why both metals soared on the news of Bernanke's announcement.

And don't expect to be protected by the stock market either. If these currency wars eventually lead to high inflation, as is expected, the stock market might not be the wealth preserver (in times of inflation) it's made out to be.

The last time we experienced high inflation globally was in the 1970s. It was a terrible decade for investors. Inflation in goods and services might mean higher prices but the other side of that coin is high costs - both operating and capital costs.

It also means higher market interest rates. In a world with too much debt, the last thing we need is higher rates (or falling bond prices) in the US or Japan. But the way this currency war is unfolding, that's where we are headed.

Regards,

Greg Canavan
for The Daily Reckoning Australia

Save Your ASSets First

Friday, January 27, 2012