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.

The WSJ reports that the minutes of the August FOMC suggest a FED determined to put a bright outlook on a very uncertain situation.  Basically, the “recovery” depends on an increasingly unemployed consumer deciding to spend more to take the place of federal programs.

This “blurb” from the minutes (emphasis added) as quoted at Calculated Risk shows the FED recognizes that a “recovery” is based on little more than “hope” that consumers will become more willing to spend as a result of their recent “increase in wealth” from all the bank-manipulated stock market gains and some other things the consumer could care less about:

The new estimates of real disposable income that were reported in the comprehensive revision to the national income and product accounts showed a noticeably slower increase in 2008 and the first half of 2009 than previously thought. By themselves, the revised income estimates would imply a lower forecast of consumer spending in coming quarters. But this negative influence on aggregate demand was roughly offset by other factors, including higher household net worth as a result of the rise in equity prices since March, lower corporate bond rates and spreads, a lower dollar, and a stronger forecast for foreign economic activity.

The August FOMC minutes could as easily read something like: “The Federal Reserve believes that a substantial case can be made that the consumer will win the lottery and go on a spending binge later this year”…

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!

Please read William Greider’s article in The Nation in its entirety. Here are a couple of pastes to wet your whistle:

This awkward reality explains the dilemma facing the Fed. It cannot stand too much visibility, nor can it easily explain or justify its peculiar status. The Federal Reserve is the black hole of our democracy–the crucial contradiction that keeps the people and their representatives from having any voice in these most important public policies. That’s why the central bankers have always operated in secrecy, avoiding public controversy and inevitable accusations of special deal-making. The current crisis has blown the central bank’s cover. Many in Congress are alarmed, demanding greater transparency. More than 250 House members are seeking an independent audit of Fed accounts. House Speaker Nancy Pelosi observed that the Fed seems to be poaching on Congressional functions–handing out public money without the bother of public decision-making.

A few months back, I ran into a retired Fed official who had been a good source twenty years ago when I was writing my book about the central bank, Secrets of the Temple: How the Federal Reserve Runs the Country. He is a Fed loyalist and did not leak damaging secrets. But he helped me understand how the supposedly nonpolitical Fed does its politics, behind the veil of disinterested expertise. When we met recently, he said the central bank is already making preparations to celebrate its approaching centennial. Some of us, I responded, have a different idea for 2013.

“We think that would be a good time to dismantle the temple,” I playfully told my old friend. “Democratize the Fed. Or tear it down. Create something new in its place that’s accountable to the public.”

The Fed man did not react well to my teasing. He got a stricken look. His voice tightened. Please, he pleaded, do not go down that road. The Fed has made mistakes, he agreed, but the country needs its central bank. His nervous reaction told me this venerable institution is feeling insecure about its future.

It’s time – once and for all – dismantle the FED.  The bank’s power must be castrated.

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):

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) is blocked by Senate Democrat Leadership from having a vote on his amendment to audit the Federal Reserve by Senator Ben Nelson of Nebraska who raised a “point of order” to prevent the vote.

After being blocked, DeMint directly challenges Senate leadership by pointing out the other GAO audits contained in the bill. The Senate president was forced to agree with Senator DeMint.

The bill is based on a bill authored by Congressman Ron Paul (R-Texas) in the House, H.R. 1207, and Senator Bernie Sanders (D-Vermont) in the Senate, S. 604.

While most traders seem to be getting nervous (or even short like TPC) as the S&P tries to touch its 200 day moving average, Tony Caldaro at Unbiased Trading targets a level for the S&P above the 200 day MA:

“Our upside target for this uptrend remains between two OEW pivots: SPX 1041 (50+% rally), and SPX 1107 (50% bear market retracement).”

It’s unrelated (or maybe it is), but Tony also has an interesting tidbit in his outlook for next week:

“Another busy week ahead. On Tuesday the US reports its Trade and Budget deficits. Wednesday we have Retail sales and Inventories. Thursday the weekly Jobless claims and the PPI. Then on Friday the CPI, Industrial production and Options expiration. As for the FED we now enter the twilight zone. On Monday FED chairman Bernanke returns to where the concept of the Federal Reserve System was originated. I quote WTP; “In 1910, a group of the world’s most powerful financiers traveled incognito by train one night from New Jersey to Jekyll Island, Georgia to covertly design the strategic, political and legislative foundation needed to install the privately-owned banking cartel that we now know as the “Federal Reserve System.” Bernanke will address the Atlanta FED that evening in Jekyll Island. Then he, Geithner and/or others will wisk off to Vouliagmeni, Greece for the annual Bilderberg meeting.

In case you are unfamilar with the Bilderberg meetings: This is a secretive (no press coverage) annual event that started in 1954 at the Bilderberg hotel in Holland. It is by invitation only. Around 125 of the most influential people on the planet meet to privately discuss world events and political/economic strategy for the upcoming year. This year the event is being held between May 14th and 16th. Last year it was held in Chantilly Virginia, USA between June 5th and 7th. As an example of the potential market impact. Last year the hot market was Crude oil. Between Thursday June 5th and Friday June 6th 2008 it surged 14% to $138/bbl before topping a few weeks later. We all know what happened next. This year the hot market right now is equities. Personally I find it absolutely incredible that Bernanke/Geithner addressed the CFR in March, and now Bernanke is going to be at Jekyll Island too. Bernanke, then Treasury secretary Paulson, now secretary Geithner, Rockefeller, Kissinger, Rice C., Summers, Daschle, Johnson J., Schultz G., Wolowitz and Rubin were among the attendees of Bilderberg last year. Should be an interesting week. Best to your trading!”

It’s hard not to be a conspiracy theorist these days…where there’s smoke, there’s fire.   Swamp Report adds these two links for the interested reader to enhance Unbiased Trading’s post:  Bilderberg meetings – secret agenda for this May and WTP (We the People Foundation) .

Mike Shedlock comments on the WSJ’s reporting that the Fed Pushes Citi, BofA to Increase Capital:

The most likely ways for the banks to raise capital are via dilution of Treasury owned preferred stock at taxpayer expense and via the Public Private Investment Plan (PPIP). The latter is a scam to heist taxpayers to the tune of hundreds of billions of dollars.

Government officials stated today “that banks directed to raise more capital shouldn’t be viewed as insolvent.”

What else can it possibly mean when taxpayers have to pony up hundreds of billions of dollars every other month just to keep the banks running?

However as Rolfe Winkler points out, converting preferred to common will not raise the total amount of capital -just increase TCE.  The government will, as Mike says, have to put more in… unless they can sucker some private investors.