"The Fed spoke and financial markets rallied," began the Associated Press report on how the stock market responded after the policy-making panel of the Federal Reserve Board issued a statement Tuesday, saying the federal funds rate (the interest banks charge other banks for borrowed money) would be held to 0 to 1/4 percent through the middle of 2013. The Dow Jones industrial average surged more than 429 points, just one day after its biggest decline since 2008.
But the Fed's influence over the volatile stock market is of short duration and its ability to bolster a sagging economy is illusory. The Federal Open Market Committee's promise of low interest rates was accompanied by an assessment of current market conditions that look anything but promising. "Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed," the committee reported. On the plus side, "business investment in equipment and software continues to expand."
With gold bouncing up from $1,668 an ounce on Friday, August 5 to $1,778 on Tuesday, August 9, it was the biggest three-day rally since the start of the great recession in 2008. At the same time, the equities markets were falling precipitously, losing over 600 points on the Dow on Monday alone. What is the connection?
The easy answer is fear, loss of confidence, and uncertainty. A credit rating agency has taken away the United States' top-tier AAA rating on its bonds, the spreading debt crisis in the Eurozone has now reached Italy and Spain, and the assumptions tying the financial system together are beginning to be questioned. In its report entitled “On the Coming Gold War,” Redburn Partners says a “rising gold price is a warning signal: it casts doubt on the US economy…. Gold is the only asset to outperform in periods of either uncontrollable inflation or deflation: the US economy is on the knife-edge between the two … gold is a vital barometer.”
The communist Chinese dictatorship blasted the U.S. government for endangering its massive dollar holdings, calling for America to rein in its out-of-control debt by slashing military spending and welfare. The regime also demanded international supervision of the dollar and even suggested the creation of a new global reserve currency.
The attack came in the form of an editorial from Xinhua News Agency, one of the dictatorship’s official propaganda arms, following the downgrade of American debt last week by Standard & Poor's (S&P). It immediately made headlines around the world.
“China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets,” read the commentary. “To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.”
Former Federal Reserve Bank Chairman Alan Greenspan came up with a novel way to claim the U.S. government would never default on debt: print the difference. Greenspan told NBC's "Meet the Press" August 7, in response to a question about the recent downgrade in the U.S. bond rating by Standard and Poor's:
This is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.
Analysts ask, Zimbabwe-like inflation of the dollar is not default? They say that Greenspan won't find that argument very persuasive to bond-holders, who won't be able to buy anything with their bonds when they come due.
As fears over global markets grow, the European Central Bank (ECB) signaled that it would start buying more European-government bonds in an effort to prop up the economies and governments of beleaguered nations and the region as a whole. In other words, it will print even more money to temporarily bail out reckless regimes drowning in debt.
But rather than calming investors, the announcement only sparked more confusion and turmoil. Follow-up reports added fuel to the fire.
Citing traders, several news outlets claimed that the central bank bought Irish and Portuguese bonds on August 4 — not Spanish or Italian debt as was expected. Ireland and Portugal, of course, have both received hundreds of billions in bailouts already.
Claiming that presidential candidate Ron Paul leads the “economic suicide wing” of the Republican Party, Brent Budowsky, writing for The Hill, says that Paul is the “worst possible role model” for Republicans because he suggested that a default by the government “would be OK.” Budowsky calls Paul a “Banana Republican,” claiming that Paul is taking an extremist position, adding that keeping the debt ceiling in place and putting the government on a diet would “literally crash American and global markets … that would do grave damage to our nation.”
The extreme hard-line attitude of many Republicans [including Paul] has significantly raised the prospects for a national default and rating agency downgrades that would sweep across the nation and many states, causing an economic cataclysm and public outrage unlike anything ever seen in the history of the republic.
According to no less a source than Forbes magazine, a U.S. default is no longer a question of if. It’s when. In a July 23 article, Forbes’ Addison Wiggin warned readers not to get caught holding U.S. dollars when the United States government defaults — again.
During a 2½ year period starting at the end of 2007, the Federal Reserve provided more than $16 trillion in secret bailouts to banks and other companies around the world, according to a government audit of some of the U.S. central bank’s operations.
Much of the Fed's largesse was lavished on banks in Europe (such as Barclays, pictured) and Asia, the audit revealed. More than $3 trillion, for example, went to financial institutions in just five European countries. Trillions more flowed toward some of the biggest banks in America. Institutions from Brazil and Mexico to South Korea and Canada also benefited.
The 266-page report, produced by Congress’s non-partisan investigative service known as the Government Accountability Office (GAO), has already sparked intense outrage since its release on July 21.
When public debt abounds, politicians look to slippery ways to keep buying votes with tax dollars while reassuring skittish markets that everything is okay. America, of course, faces a deficit showdown driven, largely, by the explosion in federal expenditures during the reign of Obama. The glut of mandated money (currency backed by the “full faith and credit of the United States” — and nothing else) has produced predictable economic behavior.
People invest in what they believe will be safe. Real estate, historically, has been a good investment for most Americans. But when the federal government pushes and bribes big lenders to make imprudent loans, and the predictable avalanche of defaults occurs, then an artificial glut of housing drives down the market price and strips hard-working families of the investment that had been the principal economic asset of the family.
Money is anything that is commonly accepted as a medium of exchange, with government interjecting itself into the equation by designating certain notes as "legal tender." Historically, mediums of exchange have included gold and silver as well as other forms of what might be called commodity money. Yet, you cannot pay your electric bill or your mortgage with a gold bar or even gold coins. You have to sell your gold for cash in order to use it to pay for things. Of course, at one time gold coins were used as money, but they aren’t today. And there was a time when paper money was backed by gold or silver. Paper money was then redeemable in gold and silver at a fixed price. Those of us who are seniors remember the time when dollars were silver certificates. Now they are backed by the “full faith and credit of the government.” But with government borrowing trillions of dollars in order to spend trillions of dollars, that “full faith and credit” is about to go down the drain.
Article One, Section 8 of the U.S. Constitution states that Congress shall have the power “To coin Money, regulate the Value thereof, and of Foreign coin, and fix the Standard of Weights and Measures.”