“All over the world, food is causing trouble. Why? Not because there is too much of it or too little, but because it has gone way up in price.Why has it gone up? Well, for one reason, Ben Bernanke and other monetary authorities are pushing more money into the world financial system. The cash has to go somewhere. Much of it seems to be finding its way into the commodities markets – including soft commodities, notably food. In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might have put it, not a feature of the weather. But rather than attack the cause of inflation, the authorities are aiming squarely at its consequences.

Of course, there are other reasons for food price increases. There are a lot more people in the world than there used to be. And the new people have to eat too. Since many of these new people are entering the ‘middle class’ they have more money to spend on food, so they can bid up prices. And, typically, they want more meat. It takes more land to produce meat than it does to produce grains – putting further pressure prices all up and down the food chain.”

Thus speaks the proprietor of a newsletter in the business of watching financial trends.

“Meanwhile, anyone who believes that the worst is over for real estate should keep an eye on New York City’s terminally bloated market. It has not crashed yet, but the likelihood that it will seems as certain a bet as that the sun will rise tomorrow. Last week’s report that prices are up while unit sales are down was regarded, incredibly, as evidence that the Big Apple might somehow be immune to the crash that has already spread to most other big cities. We are asked to believe that the high level of foreign ownership is what is keeping NYC’s housing prices buoyant. But if that were true, then how to explain the fact that Citigroup shares, which are heavily owned by foreigners whose pockets are almost infinitely deep, have fallen by nearly 70%?  

In fact, signs of an impending collapse in New York City real estate have been masked by the sale of a relative handful of apartments at exorbitant prices in the $25 million-$40 million range. Despite this, in the broad middle of the market – i.e., run-of-the-mill co-ops valued at $1.5 million to $3 million — buyers have peen pulling back in droves. Under the circumstances, only an imbecile could believe that NYC real estate will somehow weather the devastation of Bear Stearns, Merrill Lynch and hundreds of other financial firms both big and small…..”

Rick Ackerman.

“Steve Hanke, an economics professor at Johns Hopkins University in the United States, agreed that international action, as well as expansionary fiscal policy in Japan and Europe, were needed to help put a floor under the dollar.

Countries including China and Middle East nations that have large holdings of dollars in their reserves should pledge not to talk about diversifying their portfolios while action is being taken to stabilise the U.S. currency, Hanke told the conference.

Gulf countries in addition should stop talking about de-pegging their currencies from the dollar.

“It’s unproductive and creates a great deal of short-term volatility in the dollar,” he told the Credit Suisse Asian investment conference.

Adams said the dollar was likely to remain under pressure for the next few months because of uncertainty about when the U.S. business cycle will bottom out and how far the Federal Reserve will cut interest rates.

But he said the currency would find its footing, as the American economy is still fundamentally stable and the United States is one of few countries that will be able to keep absorbing huge global capital flows….”

More here from Reuters at GATA.org

A lot of people think there’s no inflation yet and that the current scenario is only deflationary. Monetary reserves are contracting, they say. They point to the Fed’s open market operations as a form of adjustment (taking money from banks with bad debt by buying up mortgage debt and giving to banks in good shape through the sale of Treasuries).

Steve Saville points out why their argument is wrong and why inflation exists along with asset deflation:

“Many pundits still treat M1’s growth rate as an important indicator of monetary conditions on the basis that the amount of ‘narrow money’ is supposed to have a substantial influence on the total supply of money due to the famous “money multiplier” effect. In fact, some well-respected analysts have expressed concern that the lack of growth in the narrowest measures of US money supply over the past couple of years means that Fed policy has been excessively restrictive. But these analysts are failing to appreciate that regulatory changes made by the Fed in the early 1990s caused M1 to become a shadow of its former self with respect to its usefulness as a general monetary indicator.

In rough terms, the rules were changed in the early 1990s to allow banks to dramatically reduce the amount of money held in the form of reserves at the Fed by “sweeping” money from checking accounts (components of M1 that are subject to reserve requirements) into savings accounts (non-M1 components of M2 for which there are no reserve requirements). For example, you might think you have a checkable deposit at your local bank, but in the bank’s books you probably have a zero-interest CD (the type of deposit that has no reserve requirement). Whenever one of your checks is presented the bank’s software “sweeps” the relevant amount of money from the zero-interest CD you never knew you had into the checking account you thought you had.

These rule changes have made commercial banks more profitable because money held in reserve at the Fed is money that doesn’t generate income for the banks; and this, of course, is why the changes were made in the first place.”

Steve Saville in The Speculative Investor

“Major Trends – Inflation, interest rates etc
I am relying on previous analysis that the graph below illustrates on interest rate and inflation expectations in that once the US economy stabalise’s from the dropping like a stone phase, the Fed will reign in inflation during 2009, especially as the high rates of inflation from earlier months leave the 12month indices. The consequences of this is for a US dollar bottom BEFORE the event – sometime this year and therefore become a disinflationary contributor to inflation during 2009.”

Read more of this interesting analysis at GoldSeek.

“– The U.S. dollar will continue to fall against other currencies.
— Oil will march toward $150 a barrel and other commodity prices will continue to increase, as investors race toward holding real things instead of currencies.
— Gold will march toward $1,500 an ounce as worries about the debt contagion spread.
— Last week, the Euro zone of 15 countries became worth more than the U.S. dollar zone, and will continue to be used as a preferred reserve currency, thus aggravating the U.S. dollar’s decline.
— Central banks outside the U.S. will be forced to cut interest rates as the Americans must to prop up economies.
— Banks and brokers around the world will be shakier and more bailouts — possibly another on Wall Street — will occur.
— Canada’s spoiled chartered banks/brokers will start their whining to merge again, blaming the crisis as another lobbying technique.
— The credit bailout plus the U.S. Presidential election will postpone the bankruptcies, foreclosures and writedowns that must be made in mortgages in order to clean up the housing market. And a lousy housing market means the recession will take root in the U.S. and elsewhere.
— Canada and Australia are lucky. Both will continue to boom, along with commodity prices, and the Canadian dollar will move up in tandem.
— Economics will trump Iraq in the U.S. political contests this summer, forcing McCain to choose Romney as a running mate and the Democrats to sharpen up their CEO cred too.”

More by Diana Francis at The National Post.

Comment:

Since I posted this, the well-staged “rescue” by the Fed has occurred and gold has fallen dramatically, the commodity currencies and commodities along with it.

Is this the end of the PM (precious metals) bull? Probably not. We’re approaching the season when gold sells off, usually; we’ve had such a big run that a technical correction was long overdue. Add to that the intense safe-haven buying of recent months, and a downward move was inevitable. Especially with the dollar putting in its own technical recovery.

Note however, that the dollar’s recovery is only likely to be against the majors, like the Pound and the Euro, and the commodity currencies. Against the Yen and Franc, it’s likely to continue to weaken, with some technical bounces along the way.

On FOX Business News this morning, former Fed Governor Lyle Gramley said Congress needs to impose a special tax to allow the goverment to step in and buy all the sub-prime-debt in the system. And it needs to do it now.

Yes. That was a former fed governor coming right out with it. Dispensing with the usual palaver about the banks rescuing people, he cut to to the quick with refreshing frankness – time for the people (otherwise known as savers, tax-payers, pensioners, and other assorted naifs and bag-holders) to rescue the banks.

“As part of the deal, J.P. Morgan Chase, a major Wall Street bank, will buy Bear Stearns for a bargain-basement price, paying $2 a share for a venerable institution that still plays a central role in executing financial transactions. Bear Stearns stock closed at $57 on Thursday and $30 on Friday. J.P. Morgan was unwilling to assume the risk of many of Bear Stearns’s mortgage and other complicated assets, so the Federal Reserve agreed to take on the risk of about $30 billion worth of those investments….” and

“The Fed “is working to promote liquid, well-functioning financial markets, which are essential for economic growth,” Chairman Ben S. Bernanke said in a conference call with reporters tonight. Treasury Secretary Henry M. Paulson Jr., who was deeply involved in the talks though not a formal party to them, indicated support for the actions.”

Comment:

For the first time since the Great Depression (The Guardian) the Fed has extended credit to an investment bank (the normal recipients are the commercial banks). Thus falls an 85 year old Wall Street institution, the 5th largest investment bank, losing 94% of it value. Gold moved up $25 on the news and the dollar sank below 71 against an index of major currencies, hitting fresh lows against the Yen and the Euro.

We think J P Morgan, relatively undamaged by the sub-prime poison, is going to get toxic shock syndrome when this baby (a bank one quarter its size) lodges in its gut.
More at the Washington Post.

Stunning news, this, about Bear Stearns, if there could be anything more stunning than last week’s series of desperate deeds on the Street. There was that quarter of a billion infusion of liquidity from the Fed; there was Hank Paulson’s happy talk about a “strong dollar policy” that quickly morphed into a strangled cry for global central bank intervention; there was a slew of recession-worthy statistics on the economic news; there was gold’s lifetime nominal highs over $1000 and the sickeningly swift decline of the dollar. And to cap it all of there was the suspicious telephone sting operation that tripped up NY Governor Eliot Spitzer over long-term use of call girls as overpriced as any mortgage bond — an investigation that issued, of all places, out of the IRS. [As Greg Palast points out, the IRS is part of the Treasury Dept now overseen by ex-Goldmanite, Hank Paulson]. It couldn’t be a coincidence, could it, that Spitzer (the Sheriff of Wall Street) had earlier tangled with a Goldman Sachs chief over his prosecution of giant insurer AG’s CEO Maurice (“Hank” – they’re all Hank these days) Greenberg and and others in high places. All no doubt joined the traders on the floor to have the only chuckle to be had in last week’s preliminary belches from the financial Vesuvius now erupting in full throttle.

Bill Murphy at Le Metropole Cafe notes:

*Thornburg Mortgage was fine one day, bust the next.

*The Carlyle hedge fund was the crème de la crème one day, and tapioca the next.

*Alan Schwartz, chief executive at Bear Stearns, was on CNBC just the other day saying the rumors about Bear’s problems were UNFOUNDED. Today Bear is going bust.

*So, within 2 weeks, three of the most highly regarded financial entities in the US are gonzo.”

More Comment:

And the billion dollar (oops, Yen, Euro, Swissie..take your pick) question is this.

Who goes next? And for how long?

Stay tuned for more shocks from the United States of Zimbabwe….

Gold could go to $3000 this week or it could freeze and fall. But the odds are we are not just in a recession but on the brink of falling off the cliff.

Expect anything. (Note the resignation of Admiral Fallon, a vocal opponent of war with Iran).

None of the candidates really has a clue. They’re doing nothing more than waltzing on the graves of the middle class while promising them ten acres and a mule.

The only glimmer of cheer is that Ron Paul is still in keeping up the good work.