Why is the Federal Reserve Propping Up the Bank of Libya?

John Nichols
The Nation

Vermont Senator Bernie Sanders has for months been leading the charge to expose the sweetheart deals the Federal Reserve has worked out for multinational banks and corporations at the same time that working Americans, small businesses, local governments and schools boards struggle to stay afloat financially.

Sanders has tried to make the point that it is simply absurd for the Fed to bail out foreign firms and bad banks and to provide them with low-interest loans at the same time that they are reaping massive profits – and at the same time that federal, state and local governments are supposedly broke.

The Obama White House and other members of Congress grudgingly went along with a proposal Sanders made, as part of last year’s Wall Street reform legislation, to force the Fed to reveal its previously secret bailouts and backroom deals. But, for the most part, official Washington has been slow to share the Vermont senator’s outrage.

They may change now that Sanders is exposing what may be the most unsettling Fed deal yet.
On Thursday, the senator asked Federal Reserve officials to explain why they provided more than $26 billion in credit to an Arab intermediary for the Central Bank of Libya. According to a review by Sanders’ office, the Fed made at least 46 emergency, low-interest loans to the Arab Banking Corp., in which the Central Bank of Libya owns a 59 percent stake.

Sanders is particularly interested in learning why the Libyan-owned bank and two of its branches in New York City were exempted from sanctions that the United States imposed several weeks ago on Libyan businesses controlled by Colonel Moammar Gaddafi and the dictator’s associates.

 At the time the sanctions were imposed, President Obama said: “The Libyan government's continued violation of human rights, brutalization of its people, and outrageous threats have rightly drawn the strong and broad condemnation of the international community. These sanctions therefore target the Gaddafi government, while protecting the assets that belong to the people of Libya.”

But what’s the point of sanctions if they don’t crack down on the dictator’s bank?

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” says Sanders.

The senator is also asking Treasury Secretary Timothy Geithner – a long-time Fed retainer -- to explain the Arab Banking Corp. was borrowing money at almost zero interest from one arm of the government, the Fed, at the same time the Treasury Department was borrowing money at a higher interest rate.
Good questions these. And Bernie Sanders ought not be the only one asking them. Congress should be grilling Geithner and Fed Ben Bernanke on the Fed's Libyan connection and why sanctions don't seem to apply to bankers with friends on Wall Street -- and in Washington.

U.S. Government Bankruptcy – The Finance Establishment Is Getting Nervous

By Andy Duncan, on 3 April 11

The following piece by Detlev Schlichter is reproduced with permission from his blog site, Paper Money Collapse, as first published on Thursday of last week:

No, dear reader, I am not developing an obsession with Bill Gross, America’s most prominent bond manager. I know I wrote about him just recently but this morning I already received a number of messages from friends in the bond business alerting me to another missive from the famed ‘bond-king’. Here it is. So this Schlichter File deals again with the views of Mr. Gross but I hope to put a different spin on things.

In his latest investment outlook Mr. Gross tells us that the U.S government is bankrupt and will most likely default on its debt.

Duh.

Others have told us this for a long time and in much more descriptive language. There are the likes of Doug Casey, Addison Wiggins, Bill Bonner and, last but not least, The Mogambo Guru. And those have thought this through to the necessary logical conclusion: complete dollar meltdown. Mr. Gross, instead, still seems to believe that the default can be ‘managed’ in what appears to be an orderly way. As he puts it so unthreateningly:

“Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”

It all sounds a bit unpleasant but not catastrophic. Bond investors will look back on this period of ‘negative real interest rates’ as one of negative real return. Losses in real wealth, that is. That is why Mr. Gross has sold all his Treasury bonds in his portfolio, the largest bond fund in the world. Credit to him. That is quite a statement.

But it is only half the story.

Does he really use the words ‘less observable’?

Well, maybe initially, but when more people begin to think and act like Mr. Gross and sell Treasuries out of concern over inflation and sovereign default, things will be very observable.

Inflation is not some quiet, elegant method of defrauding the bond investor and inflating the debt away without anybody noticing. At the end of this you won’t need an abacus to work out if real returns on bonds have been positive or negative. –“What was that inflation rate again?”–

When people start selling bonds in earnest, real interest rates shoot up. This hits the economy and makes fiscal deficits grow even more rapidly. The state has to spend more, it takes in less and has to pay higher – much higher – rates on its debt.

The Federal Reserve is already on board to keep yields in check. This is now official central bank policy, as elaborated in detail by Mr. Bernanke. When yields rise meaningfully, the Fed will have to do more of the same: use the printing press to keep rates down and the state (and the financial sector that depends on the state) in business. What happens then? Yields rise even more.

Mr. Bernanke has famously stated that, when inflation rises, he can hike rates in 15 minutes. Ha. When investors lose faith in U.S. government bonds – as the country’s most famous bond investor already has – and yields shoot up, it will take more than 15 minutes of Mr. Bernanke’s time to get things under control again.

Remember this: No government has ever inflated itself out of such a pile of debt in an orderly fashion, that is, without causing a complete meltdown of its monetary system.

Many have tried. France in 1790, Germany in 1923, Argentina in 2001 – to name just a few. Once the market smells the coffee it won’t sit still and accept ‘negative real returns’ for a decade. Bonds and paper money get trashed.

It strikes me that Mr. Gross is not thinking this through. Or maybe, he doesn’t want to think this through. After all, the likes of Doug Casey, Addison Wiggins, et al., can speak their mind, they do not belong to the ‘establishment’. Mr. Gross does. How outspoken does he dare to be? He must already be ruffling a lot of feathers. In selling all his Treasuries he is already making quite a statement, as I said.

That, for me, is the real news. PIMCO has always been a pro-government firm. Most of their ideas on the economy were Keynesian, in principle. Mr. Gross himself suggested a massive government bailout of the housing market in 2008. There appeared to be no problem that couldn’t be fixed with a bit of government deficit spending.

Well, Bill, be careful what you wish for!

But now Mr. Gross is concerned about the inevitable: inflation and default. I think he doesn’t even tell us what he is really thinking.

The news is this: the U.S. finance establishment is afraid. Very afraid.

IMF calls for dollar alternative

NEW YORK (CNNMoney) -- The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency.

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.

SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs.

While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.

Dominique Strauss-Kahn, managing director of the IMF, acknowledged there are some "technical hurdles" involved with SDRs, but he believes they could help correct global imbalances and shore up the global financial system.

"Over time, there may also be a role for the SDR to contribute to a more stable international monetary system," he said.

The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.

In addition to serving as a reserve currency, the IMF also proposed creating SDR-denominated bonds, which could reduce central banks' dependence on U.S. Treasuries. The Fund also suggested that certain assets, such as oil and gold, which are traded in U.S. dollars, could be priced using SDRs.

Oil prices usually go up when the dollar depreciates. Supporters say using SDRs to price oil on the global market could help prevent spikes in energy prices that often occur when the dollar weakens significantly.

The dollar alternatives

 

Fred Bergsten, director of the Peterson Institute for International Economics, said at a conference in Washington that IMF member nations should agree to create $2 trillion worth of SDRs over the next few years.

SDRs, he said, "will further diversify the system."

Dollar firms after starting 2011 weak 

The dollar has been drifting lower so far this year as the global economy improves and investors regain their appetite for more risky assets such as stocks and commodities.

After rising above 81 in early January, the dollar index, which measures the U.S. currency against a basket of other international currencies, eased below 77 earlier this week.

However, the dollar was higher Thursday against the euro, pound and yen as disappointing corporate results weighed on stock prices following several days of gains on Wall Street. The rally in the commodities market also cooled, with the price of oil and metals backing off recent highs.

In addition, renewed concerns about the debt problems facing troubled European economies put pressure on the euro and supported the dollar. The yield on Portugal's benchmark bond rose to a record high Wednesday, and borrowing costs for Ireland, Spain and Greece remain elevated.

"The market is shedding risk, with equities and commodities weakening and the U.S. dollar broadly stronger" said Camilla Sutton, currency strategist at Scotia Capital.

Traders were also digesting comments from Federal Reserve chairman Ben Bernanke, who told Congress Wednesday that despite a strengthening economic recovery, the unemployment rate remains high while inflation is "still quite low."

Those remarks reaffirmed the view that "the Fed would be very slow to tighten policy given its dual mandate of price stability and employment," analysts at Sucden Financial wrote in a research report.
Bernanke also urged lawmakers to come up with a "credible plan" to bring down "unsustainable" federal budget deficits.

"We expect that the outlook for the U.S. fiscal position will weigh heavily on the U.S. dollar in the quarters ahead," said Sutton. In the near-term, however, she said "a strengthening growth profile" could help provide "a temporary period of dollar strength."

Almost A Total Dollar Devaluation By The Fed

Liberty News Radio

By: Bob Chapman

Featured Liberty News Radio Columnist

The Euro zone participants who have financial problems, Greece, Ireland, Portugal, Belgium, Spain and Italy are expected to deflate via austerity and at the same time be more competitive. This is supposed to be accomplished quickly so that overhanging debt can be extinguished. This, of course, is an impossible task. You have the IMF demanding austerity and EU members demanding growth.

The problems of the southern European states are similar to those of the states and municipalities in the US. The product of years of living beyond their means, and being accommodated by banks who knew they should have never been making the loans they were making. These entities cannot print money to solve their problems and they cannot grow fast enough to service current levels of debt, never mind service additional debt necessary to spark growth. They cannot manipulate their money supplies, because they have no control over them. They have no control over interest rates as well. They either find a way to pay the debt or they default. The only other alternative is to find someone to lend to them. That usually takes place at higher interest rates, due to the risk to the lender. These conditions are truly a quandary.

Each nation and state had its own set of problems. The most obvious was and is living beyond their means. Some had uncompetitive economies and some had one interest rate fits all, a condition that tricks unsuspecting countries into borrowing more than they can afford. Some had real estate and stock market bubbles; some had slow growth in part caused by lack of increasing productivity. Some had anemic savings or an economy dependent on loans from bankers who used a fractional banking system that they in error over-expanded. That is the way it was and still is.

We ask ourselves how did so many nations do the same stupid things and why would bankers use disastrous levels of leverage and lending? We certainly cannot totally ascribe it to greed or stupidity. Bankers are not stupid people. The policies followed by these nations were promulgated by the Federal Reserve and the City of London to bring about a crisis that would lead to world government. This is what this whole orchestration is all about.

As the Treasury’s debt figure wanders above $14 trillion, the question arises again will the US dollar remain the world’s reserve currency? The Fed says they’ll spend $900 billion by April or is it June? On the other hand a little bird told us they have already spent $1.7 trillion in their quest to fund the Treasury and Agencies.

The municipal market, as we predicted three years ago, is getting killed. Yields are up by .30% in January after having seen yields fall 1.50% since last October. The bond program Build America bonds is now over and that will keep municipalities from selling more bonds. The yields will be substantially higher, so you will see very few issues hit the market.

In California, Governor Moonbeam Jerry Brown, wants to raise taxes like Illinois has, but those terrible Republicans are blocking him from doing so because any tax increases must be approved by the taxpayers. As you are aware Fed Chairman Bernanke has ruled out bailouts for state or local entities. In addition, elitist Newt Gingrich is pushing for legislation to allow states to go bankrupt. That means all or part of pensions and benefits will be wiped out. If such a bill looked like it was being passed, munis and state bonds would again collapse for fear of default or partial default.

In Europe the Chinese have made it clear that they are buying euro debt bonds. As a result yields have fallen and the euro has rallied from $1.30 to $1.38 in a short period of time. The big question is how much are they prepared to buy and will their purchases make a major difference in the sovereign obligations of the problem countries? As we reflect we can now understand why Chancellor Merkle was so vehement when she announced that Germany would defend the euro. She had to have known that the Asian cavalry was on the way.

The Federal Reserve became law in 1913 and has since that time managed to assist the dollar in losing 95% of its value via its profligate issuance of money and credit. The express purpose of the Fed’s creation was to end panics, depression, recession and business cycles. It has failed to accomplish any of those things and as a result the purchasing power of the US dollar has been destroyed.

This experience has been a far cry from stability. We wonder what the House and Senate were thinking about when they passed such legislation in as much as the Constitution says that only gold and silver can be used as legal tender for payment. That is why the dollar had gold backing until August 15, 1971. The departure was caused by growing US debt and the ability of foreign nation dollar holders to redeem their dollars gained in trade for gold. Thus, you can see the Federal Reserve note is a fiat currency, one having no value or backing other than the good word of a bevy of American and foreign bankers.

There has never been any doubt in our minds that the Fed is unconstitutional. Over the past 50 to 100 years there has been little protest regarding its unconstitutionality until the last several years. Polls now show 70% of Americans want it done away with. The natural question is why did it take so long for people to understand that a group of bankers had been issued a license to steal. The answer has to be a lack of education. It has been a long hard struggle to make people understand how the fruits of their labors were being stolen by a band of common criminals. The people still collectively do not understand that these bankers own them and their country. They accomplish this by buying 95% of our legislators via campaign contributions, lobbying and by other illicit means. They also control the corporations that provide jobs in manufacturing and services. As they set out to control financial America so many years ago they also set out to control the educational process. That is one of the reasons nothing is discussed as to the true mission of the Fed. That is to totally control America society.

The Fed in control of the monetary system has been instrumental in the accumulation of debt by the US government. It does that by buying Treasury and Agency securities. The cash deficit should be in excess of $2 trillion in fiscal 2011 ending on September 30th. One of the things that most investors do not realize is that government does not use GAAP, which US corporations use. Companies have to report cash losses and non-cash losses from the increase in liabilities on there balance sheet. That means the unfunded liabilities such as Social Security and Medicare, etc. would take the liabilities up to $105 trillion.

Unfortunately, Fed funds rates are approximately zero. In 2003 they were 1% for the same reason, which is to pump up the economy. If you couple zero rates and major creation of money and credit you have a toxic mess. That is reflected in the dotcom and real estate booms and bubbles. As a result the net worth of Americans fell 9% during that period. As we wrote previously the rally and problems in the economy and the bear market rally we are deeply involved in will eventually collapse. Just be patient. Yes, that is correct, we never escaped the underlying recession. That means it takes two salaries to replicate purchasing power people had in 1971. This fact is deliberately hidden by government by it producing bogus statistics for CPI, COLA, PPI and employment. We will spare you the details, but bogus covers it all. The government says CPI inflation is 1-1/2%, we say it’s 6-3/4%. They say U6 is 16-7/8%, we say it is 22-1/4%. We are losing about 7% a year. That is why buyers of 10-year T-notes at 3.5% is such a guaranteed loser. The bottom line is the powers believe government should be purging the system, but they won’t do that. They want the game and profits to last as long as possible so they can loot the maximum from the American people. The US doesn’t have the choices they had in 1982, as the world’s largest creditor. Today it is the largest debtor and debt is 89% of GDP. Increasing interest rates won’t help unless you are thinking in terms of 25% to 30% and looking at a real purge. That is what the system has to have, but those in power are unwilling to do that. As a result we could have years of depression.

In 1968 and again in 1980 inflation climbed and so did gold and silver and the shares. This time you will need much higher rates to stop inflation. In addition if we go to QE3 and another $2.5 trillion in spending we could have hyperinflation. It also won’t be long before 25% of tax revenues will be devoted to paying interest on debt. Interest rates are headed higher, so those numbers could change considerably over the next few years. The 10-year US T-note has moved from 2.20% to 3.64%. It is a fact that interest rates are rising in spite of massive buying of long dated paper by the Fed. Rates will move slowly higher to offset the damage caused by artificially low rates used by the Fed to keep the economy from collapsing along with the unbridled issuance of money and credit from out of thin air. Estimates are for 10% rates in 2 to 3 years. We see 10% in 2 to 3 years dependent on how much liquidity is dumped into the system. The unpleasantness has only begun.

Egypt's Unrest May Have Roots in Food Prices, US Fed Policy

A few weeks earlier, political opponents of President Hosni Mubarak had rallied to protest rising prices and to demand price ceilings on products to protect Egypt's poor.

Soaring food prices aren't the only reason that Egyptians took to the streets to try to topple their long-serving president. But they're a significant factor, and a steady surge in global commodity prices reminiscent of 2008 is sure to bring new battles over food security this year.

Protests against food prices recently rocked Jordan and Algeria. These same rising prices were partly why Tunisia's strongman, Zine El Abidine Ben Ali, fled his nation in mid-January. India and China are navigating the difficult waters of trying to control rising prices in their populous nations.

In the trading pits of commodity markets, the buzz is that many poor nations are trying to hoard wheat, corn and other staples. Such stockpiling has added to the bullish sentiment that's driving commodity prices even higher.

"Countries are hoarding grain supplies right now because they don't want to see what's happening in Egypt happen to them," said Phil Flynn, senior market analyst for commodities trader PFG Best in Chicago.

The United Nations Food and Agriculture Organization took the unusual step last Wednesday of updating its guide for policymakers in developing nations. It urged nations to avoid "policy actions that might appear useful in the short term but could have harmful longer-term effects or even aggravate the situation."
Such actions in the past have involved export restrictions by food-producing nations, which aggravated tight global supplies in 2008 and led to a spike in prices. By restricting exports, these nations, which include Argentina and Ukraine, drove down domestic prices, discouraging production and causing even tighter global supplies.

The Food and Agriculture Organization compiles an index of basic food prices around the globe, and it peaked in December.

"With this new price shock only two years after the crisis in 2007/08 there is a serious concern now about implications for food markets in vulnerable countries," Richard China, the director of the U.N. organization's policy and program development support division, said last week in announcing the updated guidelines.

For U.S. farmers, Egypt presents the eighth largest export market, much of it wheat sales, since the country is the world's leading wheat importer. American wheat and corn are sold across North Africa and the Middle East, prompting worries by U.S. farmers that Egypt's problems will spread throughout the region.

Wheat prices have risen by more than 70 percent over the past 12 months, and corn prices climbed in mid-January to their highest level since July 2008, a period when global food prices soared. They've since dipped slightly, to just under $6.60 a bushel Monday, but they're expected to remain volatile, since corn production is expected to drop 14 percent globally, according to the U.S. Department of Agriculture.

U.S. corn farmers traditionally have had 80 percent of the Egyptian market, although that dipped to 50 percent last year. There's less concern about current shipments, especially since Egypt is thought to have adequate inventories for now. The focus is more on what sort of government emerges there.

"I think, longer term, it is really what's going to happen with the transitional government. Is that some sort of continuation," said Chris Corry, the senior director of international operations for the U.S. Grains Council, which represents U.S. farmers.

The issues in Egypt right now are basic, he said, noting, "The government must function for banks to be open, for payments to get transacted, for commodities to be purchased."

A number of factors are combining to drive up the global prices of wheat, corn, soy and other commodities. Some of the story is weather-related. Argentina, Australia and Pakistan have suffered from heavy rains, which have damaged crop production. Russia is recovering from a devastating drought last year.

Another part of the story is demand. Big emerging markets such as China, India and Brazil continue to soak up greater shares of global supplies, and the recovery in the U.S. economy, the world's biggest, is accelerating.

A third explanation that's gaining acceptance is that the U.S. Federal Reserve inadvertently exacerbated the price picture for grains and other commodities. The Fed has been engaged in what economists call "quantitative easing," buying U.S. Treasury bonds to attack the threat of deflation - the phenomenon of falling prices across an economy.

Quantitative easing has the effect of raising asset prices, whether they're the prices of stocks or what traders are willing to pay for commodities such as wheat or corn. One of the side effects of this policy is that the dollar weakens against other currencies, and that's helped push up the global prices of commodities.

"The truth of the matter is that when the Federal Reserve moved on the quantitative easing, it did export inflation to a lot of these emerging markets," Flynn said. "There's no doubt that one of the side effects of the weak dollar and quantitative easing has been rising commodity prices. It helped create this bullish environment for commodities. This is a very delicate balancing act."

It's a view shared by Ed Yardeni, a veteran financial market analyst, who reached a similar conclusion in a research note to investors Monday. He joked that Fed Chairman Ben Bernanke should be added to a list of revolutionaries, since his quantitative easing policy, unveiled last year in Wyoming, has provoked unrest and change in the developing world.

"Since he first indicated his support for such a revolutionary monetary change in his August 27, 2010, speech at Jackson Hole, the prices of corn, soybeans and wheat have risen 53 percent, 37 percent and 24.4 percent through Friday's close," Yardeni noted. "The price of crude oil rose 19.8 percent over this period from $75.17 to $90.09 this (Monday) morning. Soaring food and fuel prices are compounding anger attributable to widespread unemployment in the countries currently experiencing riots."

Although the policy was announced in August, the Fed didn't begin purchasing bonds until November. It's expected to buy $600 billion worth through June, in hopes of driving down the return on long-term bonds and forcing more investor risk-taking in the economy.

"There are a lot of different sticks in the fire here," said Jerry Gidel, the president of Midland Research Inc., which provides assessments of financial risk. What happens to the price of one food crop affects others, he added, because "it is a human-consumption commodity, and things can get emotional, and they do get emotional. And right now, we're kind of in one of those periods."

Fed Report: Bailout is Sixteen Trillion Dollars

Bernanke: I'm Going Nuclear

Economic Policy Journal

Wow!

Federal Reserve Chairman Ben Bernanke, at his speech this morning before the Boston Federal Reserve, made it extremely clear that the Fed is about to embark on a major money printing scheme. His justification is the current high unemployment:

Although output growth should be somewhat stronger in 2011 than it has been recently, growth next year seems unlikely to be much above its longer-term trend. If so, then net job creation may not exceed by much the increase in the size of the labor force, implying that the unemployment rate will decline only slowly. That prospect is of central concern to economic policymakers, because high rates of unemployment--especially longer-term unemployment--impose a very heavy burden on the unemployed and their families. More broadly, prolonged high unemployment would pose a risk to consumer spending and hence to the sustainability of the recovery...

...we see little evidence that the reallocation of workers across industries and regions is particularly pronounced relative to other periods of recession, suggesting that the pace of structural change is not greater than normal. Moreover, previous post-World-War-II recessions do not seem to have resulted in higher structural unemployment, which many economists attribute to the relative flexibility of the U.S. labor market. Overall, my assessment is that the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity that occurred in the wake of the financial crisis and the continuing shortfall of aggregate demand since then, rather than to structural factors

Bernanke showed no concern for the inflationary consequences of Fed money printing. Indeed, he chose to completely ignore the current soaring commodity prices and falling dollar. He took the stance that a little inflation is a good thing:

Let me turn now to the outlook for inflation. Generally speaking, measures of underlying inflation have been trending downward. For example, so-called core PCE price inflation (which is based on the broad-based price index for personal consumption expenditures and excludes the volatile food and energy components of the overall index) has declined from approximately 2.5 percent at an annual rate in the early stages of the recession to an annual rate of about 1.1 percent over the first eight months of this year. The overall PCE price inflation rate, which includes food and energy prices, has been highly volatile in the past few years, in large part because of sharp fluctuations in oil prices. However, so far this year the overall inflation rate has been about the same as the core inflation rate...the FOMC has found it useful to frame our dual mandate in terms of the longer-run sustainable rate of unemployment and the mandate-consistent inflation rate.... the mandate-consistent inflation rate--the inflation rate that best promotes our dual objectives in the long run--is not necessarily zero; indeed, Committee participants have generally judged that a modestly positive inflation rate over the longer run is most consistent with the dual mandate.

This is the most stunning speech that I am aware of that a central banker has ever given.

He is blaming the current high employment rate almost entirely on the Keynesian notion of a lack of aggregate demand. Which, by the way, ignores the conclusion of the recent Nobel winners, who in a convoluted manner, reached the obvious conclusion that the more you pay people not to work, the longer they don't work. Further, he ignores completely the Robert Higgs observation that regime uncertainty plays a role in high unemployment, i.e., firms don't hire when they don't understand the regulatory and tax structure ahead.

On the inflation front, he is ignoring the best indication of inflation, real prices. He is ignoring record high prices for gold, corn. cotton. etc.. etc. Instead, he is looking at questionable indexes assembled by employees of the regime.

It is, of course, important to monitor how much actual printing is going to be done, but all indications are that Bernanke is going all in. He is going nuclear.

The longest-serving chairman of the Federal Reserve Board, William McChesney Martin, famously said that the function of the Fed is to “take away the punch bowl” when the party gets too exuberant. Bernanke is doing the opposite, he is calling ahead to the party and announcing his car is loaded up with gin, vodka, whiskey and tequila. This in itself is bizarre, since by so loudly broadcasting QE2 in advance, he is building in huge anticipation of QE2. To keep the momentum of this mad program, he will have to print more than the expectations that he has built to high heaven, otherwise QE2 will crash out of the gate. Given Bernanke's speech today, it is clear that Bernanke is fully ready to exceed expectations.

What does all this mean, if Bernanke does indeed follow through on his money printing scheme? A very quick turn upward, in a manipulated way, for the economy. Inflation will explode at a rate far in excess of what most expect. Remember, we are for the most part in a period where the desire to hold cash balances is still very high. This will reverse itself at the same time as Bernanke's money printing. Bernanke wants an increase in "aggregate demand", he is going to get it in the form of huge inflation.

Borrowers should lock in long term rates now. Although, Bernanke may start buying long term bonds, and temporarily push down rates, eventually inflation concerns will overtake Bernanke's bond buying.

We are truly headed into uncharted territory. If Bernanke follows through on the statements in his speech today, I fully expect inflation in the United States greater than what was experienced in the 1970's. It will be devastating to any one on a fixed income and it will destroy savers. It will benefit debtors at all levels, including, not coincidentally, federal, state and local governments that are in hawk across the board.

I repeat: It appears we are heading into a period of major inflation. All assets (aside from bonds) will soar in price, especially gold and silver. The billionaire hedge fund manager David Tepper had it right when he said a few weeks ago, "Buy assets, any assets."

Senate votes 96-0 to audit Federal Reserve

Los Angeles Times

By David Lightman, McClatchy Newspapers

May 11, 2010 | 4:06 p.m

Reporting from Washington

The Senate voted 96 to 0 on Tuesday to authorize a congressional audit of the secretive Federal Reserve Board's emergency aid program and full disclosure of who got the money, a plan that could reveal more details about government help for embattled investment firm Goldman Sachs.

Under the plan, Congress' Government Accountability Office would conduct a top-to-bottom audit of all the Federal Reserve's emergency activities since the economic crisis began in December 2007. The Fed also would have to post on its website all recipients of money from the more than $2 trillion in emergency aid that's been disbursed since then.

The GAO also would look into whether the financial deals involved conflicts of interest. It's common for members of the board of directors of the powerful Federal Reserve Bank of New York, for example, also to be executives or directors of banks that got government bailout money.

The Fed also is locked in a court fight over a Freedom of Information Act suit to force it to identify all institutions that secretly got rescue money.

The White House and Fed Chairman Ben S. Bernanke had opposed the Fed audit but relented after two concessions were made: It will be done only once and the list of funding recipients won't appear on the Internet until Dec. 1, rather than 30 days after enactment.

The vote Tuesday was on an amendment to a financial overhaul package making its way through the Senate.

Copyright © 2010, The Los Angeles Times