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The Calm Before The Storm

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An eerie calm has descended upon world financial markets as they await perhaps the two most important financial events of the year this week.  On Tuesday, investors will be eagerly awaiting the results of one of the most anticipated midterm elections in U.S. history.  On Wednesday, the Federal Reserve is expected to end months of speculation by formally announcing the details of a new round of quantitative easing.  If either the election or the meeting of the Federal Reserve open market committee delivers a highly unexpected result, it could have a dramatic impact on world financial markets.  In fact, many are looking at this week as a potential turning point for the U.S. economy.  The decisions that are made or not made this week could set us down a road from which the U.S. economy may never recover.

At this point, it looks like the Republicans will take control of the U.S. House of Representatives and will pick up a number of U.S. Senate seats as well.

There are many in the financial world who already consider Barack Obama to be the most “anti-business” president in U.S. history, so a defeat for the Democrats on Tuesday would be greatly welcomed by many on Wall Street.  Barack Obama’s decline in popularity since he was elected has been absolutely stunning.  According to Gallup, Barack Obama had an average approval rating of just 44.7% during the seventh quarter of his presidency, which was a brand new low.  In fact, Obama’s average approval rating has fallen during every single quarter since he took office.  Things have gotten so bad for Obama that one new poll has found that 47% of Democrats now think that Barack Obama should be challenged for the 2012 Democratic presidential nomination. 

However, if the Democrats were able to do surprisingly well on Tuesday, it would not only shock the political pundits, but it would also likely put world financial markets in a very bad mood. 

If the Republicans do very well on Tuesday, it will likely mean that there will be no more extensions for those receiving long-term unemployment benefits.  Some state governments are already anticipating this and are making preparations.  For example, armed security guards are now being posted at all 36 full-service unemployment offices in the state of Indiana.  It is estimated that approximately 2 million Americans will lose their unemployment insurance benefits during this upcoming holiday season if  Congress does not authorize another emergency extension of benefits by the end of November.  If the Republicans do very well on Tuesday, it would make it much more likely that the extension will not happen.

But if millions of unemployed Americans suddenly find themselves without any unemployment checks, that is only going to cause the anger and frustration regarding this economy to grow.

Either way, the unfortunate truth is that this election is not going to change much.

Over the past five elections, incumbents have been re-elected to the U.S. House of Representatives at an average rate of 96 percent.

This time will be a little different of course, but not that much different.  The sad truth is that we are still likely to see about 80 percent of the exact same faces going back to the U.S. Congress for the next session.

However, even if the American people could somehow vote out every single member of Congress, it would still not do much to fundamentally change our economic situation because the U.S. Congress does not run the economy and neither does the President.

Of course both of those institutions can influence the U.S. economy, but it is actually the Federal Reserve that runs the economy.

The Federal Reserve controls the money supply.  The Federal Reserve controls our interest rates.  If the U.S. government wants more money it has to go get it from the Federal Reserve.  It is the Federal Reserve that is tasked with the mandate of keeping unemployment low while also keeping inflation at a “reasonable” level.

But these days, Federal Reserve officials don’t really seem to be that concerned about the dangers of inflation.  In fact, several top Federal Reserve officials have come out in recent weeks and have made public statements not only advocating more quantitative easing, but also suggesting that inflation is not a danger because it is actually “too low” right now.

In fact, there have been some rumblings that many officials at the Fed would actually welcome more inflation because they think that it would somehow stimulate the economy.  In fact, a Federal Reserve paper that was released in September actually floated the idea that a spike in oil prices would be quite good for the U.S. economy.

And these are the people running our economy?

Are we all caught in an episode of The Twilight Zone?

Well, as far as rising oil prices are concerned, the Fed will almost surely get its wish.  As I have written about previously, the price of oil is almost certainly heading to 100 dollars a barrel.

But if the price of oil shoots up, isn’t that going to cause significant inflationary pressure on the prices of thousands of other goods and services?

Of course.

Unfortunately, very few of our leaders seem too concerned about inflation or about protecting the value of the U.S. dollar these days.

In fact, now even the IMF is publicly proclaiming that the U.S. dollar is “overvalued”.

What a mess.

But there is another aspect of a new round of “quantitative easing” that the American people really wouldn’t like if they could actually figure out what is going on.

You see, the truth is that “quantitative easing” is not only just a way to stimulate the economy, it is also a way to give backdoor bailouts to the big banks without having to go through the U.S. Congress.

In a previous article, I described how this works….

1) The big U.S. banks have massive quantities of junk mortgage-backed securities that are worth little to nothing that they desperately want to get rid of.

2) They convince the Federal Reserve (which the big banks are part-owners of) to buy up these “toxic assets” at significantly above market price.

3) The Federal Reserve creates massive amounts of money out of thin air to buy up all of these troubled assets.  The public is told that all of this “quantitative easing” is necessary to stimulate the U.S. economy.

4) The big banks are re-capitalized and have gotten massive amounts of bad mortgage securities off their hands, the Federal Reserve has found a way to pump hundreds of billions (if not trillions) of dollars into the economy, and most of the American people are none the wiser.

Now how do you think the American people would feel about “quantitative easing” if they really understood all this?

But unfortunately, most Americans will be watching the election results on Tuesday night without having even a basic understanding of how our economy is really run.

Already, there are a ton of signs that the U.S. economy is heading in a very bad direction, and dumping a handful of Congress critters out of office might feel good, but it isn’t going to do much to really change our economic problems.

The American people desperately need to be educated about how our financial system really works.  But unfortunately, most Americans will likely not wake up until the whole house of cards comes crashing down.

  • Concerned Reader

    Dear Mike the Administrator:

    Would it be possible for you to writle an article about the prospects of a civil war in the coming years brought on by inflation, unemployment, racial tensions and general dissatisfaction with the system? I have had this feeling in my gut for a long time tht this country is heading for a civil war and would like for you to write about it.

  • justin case

    Not right now!! American Idol is on!!!

  • Hognutz

    Buy Gold and Silver while you still can and hunker down! A perfect Storm is brewing, and it will hit with the force of an atom bomb, and many people will be bewildered…..

  • The US has already reached the point of no recovery with over $200 trillion of financial obligations.

    http://www.planorperish.com/?p=1865

    Most Americans, however, believe that the US is a country with unlimited wealth that is just being poorly managed by the wrong political party.

  • Maria

    What’s done is done. We are suffering the consequences of our poor decisions. We allowed the poison derivatives into the system. We allowed Congress to change banking rules. We allow the Fed and the IRS to exist. We are paying the piper while our mistakes work their way through the entire economic cycle.

    The right Congressional action today may not have much impact tomorrow and maybe not even for a few years for all of us common folk. Its a depression for us.

    But…

    WE CAN PUT A SCREECHING HALT TO THE GLUTTONS BENEFITING FROM THIS MISERY. Stop the bailouts. Stop QE2. That’s just for starters…

    WE NEED TO ABOLISH THE FEDERAL RESERVE AND THE IRS. As long as they exist, our real FREEDOM does not exist.

  • Craig

    Good article. I’d suggest that one of the reasons the Fed will need to quantitatively ease is because when the Fed becomes the buyer of last resort of US Treasuries, they will argue it was their policy all along! The object is to not scare US Treasury or US dollar holder into dumping their holdings lest a panic ensue.

  • David

    I think no matter which way we are going to slice this, the storm is coming and it is inevitable! The situation globally is not sustainable and is doomed to crash! To my humble opinion, let everything crash and start all over again. Many will suffer in the process of this, what else is new anyways with suffering people? We are always the victim of this massive crisis as usual! But for the better world to come, perhaps we are destined to that direction, or else our world will be in total chaos. All Governments will be in total disorders. Reminds me that movie ¨Escape from New York¨. That is the metaphor of what could possibly happen to many cities across the globe. So Gangs and Dukes will take over!

  • William

    The Federal Reserve is UNCONSTITUTIONAL. That the FED has existed since 1913 is but one sign that there is little hope. Speaking of hope, Obama was elected with the hope for change. But, all we got was chump change, or a smart version of Shrub Bush LITE.
    2011 will be a hard year….will 2012 be even worse???

  • It’s a house of cards indeed.

    But the cards do not represent, say, the 50 US states, they represent the 50 or so countries involved in this global scheme.

    The Fed can print as much as it wants as long as others, such as China, Japan or Saudi Arabia, are more than willing to be paid with US dollars that they happily exchange for US treasury bonds, in the process helping the US government to finance its bottomless deficits.

    The whole scheme has little in common with economics, at least “standard” economics.

    It has much more in common with a poker game, where every player is bluffing, adding money to the pot, while no one has anything better than a pair in his hand.

    The only question is: how high can the pot be raised?

    Visit http://brunolem.wordpress.com

  • One of the things which is absolutely necessary for a working civilization is a funtional trading economy built on at least some level of trust. In recent years, this trust has slowly been destroyed as first the value of real estate can’t be trusted, then the value of stocks can’t be trusted, now the next thing to lose trust is the very currency itself — the “vehicle” through which trade occurs. Currency is the “language” of business (unless there is a barter economy) and if no one is speaking the same language, if they cannot communicate because the language means different things to different people, then global trade will grind to a halt and instead be replaced by trading only as far as the next village because all exchange will be in the form of physical goods.

    http://leibowitzsociety.blogspot.com

  • xander cross

    I blame the free market.

  • Gary

    President Bush and a Republican controlled Congress turned a several hundred billion dollar surplus into a three trillion dollar deficit in eight years. That is not the full extent of the damage they did, because the Iraq and Afghanistan wars were never budgeted for (over one trillion dollars), nor were the Bush tax cuts paid for.

    60 Minutes had two excellent segments on last night’s show concerning the fiscal mess that we are in (“Anger in the Land” and “Tax the Rich”)
    http://www.cbsnews.com/stories/1998/07/08/60minutes/main13502.shtml?tag=hdr;cnav

    You know how much I agreed with taxing the rich…:)

  • Mr Carpenter

    As usual, you have hit the nail squarely on the head multiple times.

    Plus the calm before the totally unknown sh*t storm coming on or about the 8th through 11th or 12th of November, of major consequence – predicted by the Web Bot and elsewhere, too.

    One week left of life as we have known it?

  • Flubadub

    People will be skeptical when they hear that “This time is different”. . . until they see the proof. In 1991 I read a book called “Bankruptcy 1995″ that showed a hockey stick curve on the projected national debt chart. For various reasons, the fall of the Soviet union and the economic boom resulting from the growth of the tech industry among them, the predicted bankruptcy was avoided or more accurately postponed.

    This country would be unrecognizable to someone returning after having left in the 50’s or 60’s. It truly is different this time. The deficit and debt, the huge growth in the number of social issues ripping the “united” states apart, the attitude of entitlement that so many of our countrymen and women display are some of the proof that this time is different.

    One of the most disturbing things to hear is talk along the lines of “Hey, we’re Americans and we’ve always stood up and met every challenge – weathered every storm and come through it successfully.” It’s disturbing because you have to wonder if we are the same breed that held together through a civil war
    survived the Great Depression, and won two world wars.

    I recently came across an old textbook. The book, “The People’s Health” by Walter Moore Coleman, was published by MacMillan co. in 1917. Here is a quote from that textbook;

    “A child who does not learn to take cold baths and to bear changes of temperature lightly may become one of those chronic grumblers about the weather. Childhood is the time to learn to bear pain and discomfort well.”

    This was the type of learning that the people who went through the Depression of the thirties and second world war were subjected to. Needless to say, if a teacher or a parent was accused of holding, or for that matter a curriculum included, such opinions these days there would be months of discussion on the cable news programs complete with discussions about the need for firings. In 2010, it seems, many educators and parents feel it’s far more important to instill high levels of self-esteem into their charges regardless of the merit.

    I could be wrong but this time in U.S. history appears to me genuinely and demonstrably different than any time previous on far too many matters both social and economic. What may turn out to be the most dangerous difference is the gap between our attitudes and those of our global competition.

    As a final note: it was just reported that the ad put on by Citizens Against Government Waste showing a Chinese professor of the future addressing reasons why Americans “Now work for us” was deemed too extreme by both ABC and the History channel. Funny what they think they’re protecting us from. Yeah, it’s downright hysterical.

  • sharonsj

    Putting the foxy Republicans back in charge of the hen house will only exacerbate our problems. The Repubs have no solutions and will keep stealing from the poor to give to the rich. The Repubs wants to stop unemployment, food stamps and Medicaid…and privatize Social Security. Nor will they create any new jobs. I wonder what all those minimum-wage no-union, dumbed-down, homeless and hungry red state voters will do next? Riot, I hope.

  • mj

    We Must Have:
    1) honest govt-honest numbers
    2)honest markets -not HFT
    3)stop “bribes” called campaign contrib
    4)de-centralize power, pres is not more powerful than other 2 branches
    5)re-energize states
    6)move from govt dependence to FREEDOM

  • lostinmissouri

    “Now how do you think the American people would feel about “quantitative easing” if they really understood all this?”

    The ones who do understand are buying all the gold and silver they can afford…along with guns and ammo.

    Peace, bro

  • Dan

    It kinda reminds me of Rothschild and the battle of waterloo. Everyone waiting to find out the result. People are positioning themselves for QE2 on a massive level, they will announce QE2 traders will place their bets and then… UHH

    Massive deflation.. what no…

    Ok maybe not but its a possibility, All I know is the mass’s have never been right about anything.

  • I have written a response to this blog post but it is too long to be posted as a response and is an article on economics in its own right. You are welcome to view it by clicking my name above and viewing it on my blog.

    I must say you present an interesting viewpoint but like most you do not provide any solutions to the problems at hand. I do provide solutions to the problems at hand in my article. You may not like or agree with them, but the fact is that they would go a long way toward resolving the ever increasing financial inequality that our great nation is suffering.

  • redgypsy

    The toothpaste is already out of the tube!

  • alice

    It seems that the Fed is more interested in Globalism than what is in our best interest. Our economic future seems to be guided by the Federal Reserve’s actions, not the less meaningful election. We need a major economic reform in the USA, to become competitive in this new world! Anything that will reduce the costs of producing goods will have to come into play. Major (30%) cuts in unnecessary Government services at all levels, eliminate all income taxes replaced with an import tax, pension reform, later retirement age, etc… MAJOR REFORM, NOT TWEEKING AT THE EDGES.

  • MaxPower

    Great post. However I think the damage has already been done. This game is over and we are just watching the final few moves as they are played out.

  • I wish the partisan hacks would give it up.

    That politicians, both brands of which suck, is old news. Blame ain’t even interesting or useful. It is the government. You are the solution.

  • Mr V.

    Unfortunately I tend to agree with most of the economic doom and gloom presented in the articles from this website.

    As an employer for 25 years and privy to employee benefits, including 401(k) balances, salaries, average family financial health etc., I find it unlikely that the massive number of baby boomers are prepared, or are even aware that they are not, to enter a suitable life of retirement that provides an acceptable standard of living. The social programs that have become so unaffordable, as well as unreasonable, will not be available to many folks that expect them. Those relying on personal savings and employer sponsored retirement are probably worse off than those retiring from federa/state government or local municipalities.

    Governments over borrowing, mismanagement of Social Security investments, and massive entitlement programs have crippled the financial health of our system. Not to mention almost $15 trillion in debt, that Obama feels we should increase.

    • Where will the $3+ trillion dollars of FICA funds come from to compensate baby boomers for their contributions (over the past 45+ years)? The money is invested in US Treasury Notes. The feds took every dime and we need to ask Communist China if they will lend us more so we can retire. How likely is that?
    • Medicare/Medicaid is already broke and 10’s of millions (almost 100 million) of aging people will require assistance. Not likely to happen
    • The national debt interest payments may become the largest single line-item for the federal government. (Where will these funds come from as the US economy cools (or reverses) while an aging population refuses to spend their miniscule resources necessary to stimulate a stagnant economy. Many will be applying what’s left to purchase health insurance or other medical products and basic survival items.

    So much of what average working people (teachers, police, fire fighters, etc.) expect to receive is impossible to provide. Most people do not understand that there are limited resources to pay for these programs. They don’t understand that, unlike the past, the US government will now have limits to what it can borrow. Foreign countries will not allow too much more. I haven’t done the math, however I would guess that there is not enough money in the world to finance what the people of this country believe they are entitled to receive.

    Hunker down and wait and see.

  • CJFYuma

    The stock market, and credit markets will crash first, followed by the economy collapsing sometime in 2011. Bond yields will skyrocket, and asset prices will crash first. When the economy starts to collapse (plunging GDP,sales,employment), the Fed has no choice but to hyperinflate at that point,and monetarize the dollar. Game over…Welcome your new, benevolent leader across the pond (EU).

    By the way, expect no huge QE2 on Nov. 3; the fed is smarter than you think. The really, really big QE will come next year during the greater depression. Stocks, bonds, commodities start to crash this month. Pick up gold and silver later, when we enter the greater depression.

  • Gidget

    I am just happy I live an Texas. We will just leave this mess and annex Mexico….

  • mondobeyondo

    What’s everyone so worried about?
    The economy is recovering! We will get new leadership in Congress starting on Wednesday!
    The skies are blue and the future’s so bright, I gotta wear shades.
    How do I know this? Brian Williams and Katie Couric told me so.
    So relax, all is well…

  • Gidget, please take your beloved Texas and leave ASAP! Texas, the state that gave us the S&L scandal, Enron, Jim Wright, Ann Richards, Tom Delay and the worst plague of all, George Dubya Bush! The only thing we want to keep are the Dallas Cowboy cheerleaders (you can keep the Cowgirls football team) and Ron Paul. Oh and keep your Lone Star beer too. That horse piss makes Bud seem good!

  • good article

  • james hoobler

    All you can do now is educate yourself with financial education and “BUY AS MUCH GOLD AND SILVER THAT YOU CAN” make sur it’s physical not ETF’S. You need to be able to touch, feel and see it. If not you are letting yourself being scammed by the banks once again. i recommend getting a copy of “Increase your Financial Education” By Robert Kiyosaki” Fantastic Book. Thank You Robert!

  • james hoobler

    Actually the book is called “Increase Your Financial IQ” Get Smarter With your money! By Robert Kiyosaki! Awsome Book!

  • Yes, we are headed for serious things even worse than civil war. Things are about to get real ugly in this country, and expect major civil unrest really, really, soon. The ‘veil’ is coming off of many Americans eyes now, they see the truth of things and not the ‘illusion’ they have kept them blinded with for so long.

    They already have the FEMA camps prepared and ready for what they themselves have set up to go down in this country. These satan-worshipers are behind all of this confusion so that they can usher in the one world currency and New World Order. Looks like they are right on schedule.

  • GoatLady

    Gidget, Please annex us Arizonians, too!

  • Deuce

    Concerned Reader, a Civil War occurs when two competing groups want control of a government. That will NEVER happen here. What gives you the impression that anyone here wants to control the government. They can hardly control their own lives which is why they have granted the government so much power over them. The current situation is the exact opposite of that which would lead to Civil War.

    And for the record, the US Dollar IS WAAYYY OVERVALUED. The fact that it has more purchasing power than the Chinese Yuan is all the proof I need. The same goods and industries back both currencies, but all the means of production are in China. So how in the world would anyone expect the dollar to be stronger?

  • Jack

    Reality

    google

    Bernanke’s Failed CNBC Predictions

    Eliot Spitzer: “The Federal Reserve Is A Ponzi Scheme” (Inside The Fed’s Secret Pile Of Trash With Ratigan, Spitzer & Toure

    Marvin Barth Says QE2 Won’t Fix `Underlying Problems’

    9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy

    Quantitative Easing Explained

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