FT’s Martin Wolf says (ht Tech Ticker),

…the Fed is helping the banks recapitalize themselves.  The banks aren’t lending because they’re still trying to recover from all the lousy loans they made three years ago (and because there aren’t all that many folks to lend to).  So there’s nothing else to do with the money other than hoard it, buy safe Treasuries, and pay huge bonuses…

John Mauldin is in the “mild” inflation camp, while Bill Bonner is in the deflation camp.  Mauldin cites the elements resulting in a tendency toward deflation as rising unemployment, massive wealth destruction, decreased final demand, low capacity utilization, massive deleveraging and a very weak housing market. But, then he bravely argues that our powerful, benevolent Federal Reserve will allow neither Bonner’s deflation scenario…nor large rates of inflation as posited by Peter Schiff:

The Fed is going to do what it takes to bring about inflation (in my opinion). But they will not monetize US government debt beyond what they have already agreed to. If they need to “print money” to fight deflation, they can buy mortgage or credit-card or other forms of private debt, which have the convenience of being self-liquidating. Read the speeches of the Fed presidents and governors. I can’t imagine these people will recklessly monetize US debt. You don’t get to their level without having a stiff backbone.

Mauldin’s apparent  blind faith in an effective, competent, and non-captured FED seems out of character.  It’s probably not naivete’ , but whatever else it is, it’s dangerous advice to bet on a potent FED in these times.  For our own part, the elements supporting deflation, as listed by Mauldin, are outside the FED’s control.  If they were within the FED’s control the FED would never have allowed them to begin in the first place.

A recent article in the WSJ talks of “China Nurtur[ing] Futures Markets in Bid to Sway Commodity Prices“:

Chinese leaders are concerned that their nation’s enormous economic expansion is becoming an excuse for foreign suppliers to inflate commodity costs. So, they hope to use their three futures exchanges to fight back.

Government officials say the country is positioning its futures markets to be major players in setting world prices for metal, energy and farm commodities. By letting the world know how much its companies and investors think goods are worth, China hopes to be less at the mercy of markets elsewhere.

Its easy to see why China would want to protect itself from recent large fluctuations in commodity (mainly oil) prices, when they spent $180 billion importing oil last year. They won’t have a very easy time doing it, however. China is still a communist government and they do not have a legal system in place to support futures contracts. None of them would be enforceable. There is also a huge policy bias towards large state-owned enterprises like China Oil. The Shanghai Futures Exchange won’t be an open, competitive, and effective market until small players in the exchange can get equal rights. The authoritarian Chinese Government policy makers (dictators) only allow the economy cake to grow on the condition that the largest piece is received by their friends in high positions at giant state-owned enterprises.

Unfortunately, just as the Chinese economy is manipulated by a small group of people, the US (and world) economy is manipulated in the same manner by the FED and entities like Goldman Sachs. China should be setting it’s sites on getting rid of Goldman Sachs instead of setting up its own pitiful exchanges. There is not much of a link between the HUGE fluctuations in oil prices and China’s steady increase in demand for oil (and other commodities). The true culprit and beneficiary behind these things is (government sponsored) Goldman Sachs. GS manipulated who would be rescued by with its immense amount of government cronies in Washington, successfully killing off its competitors, and then rode the energy curve up and down gaining huge rewards in the mean time.

If China’s goal is control and manipulate the biggest economy in the world (it is), all it has to do is take a look at the US’s Federal Reserve. We do it much better here in the states! We set up an authoritarian entity, claim that its “private” and separate from any form of oversight, then let it freely give out trillions of tax payer dollars to support whatever manipulative policy it desires! All without any of its skeletons coming back to haunt any elected officials.

Zero Hedge points out the strong correlation between Federal Reserve bank reserve creation and the rise in the stock market. Their chart is just the latest in a long series of evidence:

SPX Monetization Corr_0

The relation is just too strong to lead to any other conclusion…the Federal Reserve (with the cooperation of its owners) has orchestrated the rise in the stock market since March to pad the income statements of the banks, with the side benefit of building a false confidence in the consumer.

The FED has lost (so far) in the Bloomberg suit to force it to reveal details about firms who received FED support during the financial crisis.  Will the FED appeal? We doubt it.  Too much negative publicity and little chance of winning.  However, will they stall until after Helicopter Ben is reappointed? -it’s likely…

Bloomberg said in the suit that U.S. taxpayers need to know the terms of Fed lending because the public became an “involuntary investor” in the nation’s banks as the financial crisis deepened and the government began shoring up companies with capital injections and loans. Citigroup Inc. and American International Group Inc. are among those who have said they accepted Fed loans.  “When an unprecedented amount of taxpayer dollars were lent to financial institutions in unprecedented ways and the Federal Reserve refused to make public any of the details of its extraordinary lending, Bloomberg News asked the court why U.S. citizens don’t have the right to know,” said Matthew Winkler, the editor-in-chief of Bloomberg News. “We’re gratified the court is defending the public’s right to know what is being done in the public interest.”

According to Rassmussen Reports, 75% of Americans support auditing the Federal Reserve. In contrast, only 9% of adults surveyed were against the idea of a FED audit. In the face of all this support, Fed Chairman Ben Bernanke is continuing to push back against the Federal Reserve Transparency Act, that would give the Comptroller General – the head of the Government Accountability Office – the power to audit the central bank.

Economist Dean Baker, who’s been a vocal critic of the Fed, recently commented:

“The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed’s disastrous policies. Millions of people are losing their homes and tens of millions are losing their life savings. The country is likely to lose more than $6 trillion in output ($20,000 per person) due to the Fed’s inept job performance.”

The Federal Reserve Transparency Act MUST pass in order for our economy to recover for the long term. Contact your representative TODAY to show your support for the bill!

The power to  create money rests with Congress.  But Congress farmed out (abdicated) its responsibility to a third party – private banks – in return for kick-backs in the form of campaign contributions.  Washington’s blog has some good thoughts on this. For example:

And in 1933, Congressman Wright Patman asked Congress the following rhetorical question:

“Why is it necessary to have Government ownership and operation of banks? Let us go back to the Constitution of the United States and follow it … The Constitution of the United States says that Congress shall coin money and regulate its value. That does not mean … that the Congress of the United States, composed of the duly elected representatives of the people, have a right to farm out the great privilege to the banking system, until today a few powerful bankers control the issuance and distribution of money – something that the Constitution of the United States says Congress shall do.”But FDR did not heed the insights of McFadden or Patman. He kept the status quo of the Federal Reserve acting as the “central bank”, even though the Fed caused the Depression.

He also maintained the Fed’s power of creating money and credit, and charging the government interest on that money, even though that was contrary to the intention of the Founding Fathers and the Constitution. See this, this and this.

If we can get the FED audited, we can make the average American understand this scam and FORCE the government to properly exercise its responsibility to create money WITHOUT delegating it to a special interest.

Below is a copy of Hank Paulson’s prepared testimony for tomorrow’s (June 16th) hearings which will cover the assistance that FED’s provided to Bank of America (thanks Zero Hedge):

Goldman Sachs had one of its biggest quarters ever by reaping the benefits of the Fed’s currently cheap discount window while still operating with hedge fund levels of risk. That doesn’t even take into consideration the profits they gained from the AIG bailout. From Rolfe Winkler’s blog:

In addition to the federal money it took last fall, it benefited from the government’s bailout of the American International Group, being paid 100 cents on the dollar for its $13 billion counterparty exposure to the insurer, and it has $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation.

They simply should not be allowed to continue doing this. Making record profits by trading with tax payer protection is not going to create the jobs that are needed for the economy. Gasparino has some remarks about the topic in the video below.

Senator Jim DeMint (R-SC) was on Fox News yesterday urging Democrat leaders in Congress to stop blocking a vote on legislation to audit the Federal Reserve, authored by Rep. Ron Paul (R-Texas) in the House, H.R. 1207, and Sen. Bernie Sanders (I-Vt.) in the Senate, S. 604.

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