Bernanke out of bullets? Heck no!

The pundits who claim there’s no QEIII coming, or that it won’t come until stocks and the economy utterly collapse, don’t have a clue what they’re talking about.

Neither do those who claim the Fed is out of bullets. Fact is, nothing could be further from the truth.

The Federal Reserve is the most powerful institution on the planet. Its Chair is the most powerful person in the world. In reality, even more powerful than the President of the United States.

Don’t get me wrong. I am not a fan of the Federal Reserve, at least not in its current state.

But I am a realist, and fighting the Fed — or underestimating its power and misreading its intentions — is one of the most harmful things you can do when it comes to your wealth.

Indeed, just this week Fed Chairman Ben Bernanke admitted that the central bank is considering “unconventional means” to stimulate the economy.

THIS IS PRECISELY WHAT I TOLD YOU WOULD HAPPEN in my column of September 13 last year, titled The Federal Reserve’s Next Steps.

In that column, I clearly stated that “the Fed had plenty of ammo left” and that “… it has some very heavy artillery that it can — and will — bring to the fight against the debt crisis.”

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Let me review them again with you now …

Fed Weapon #1: The Fed can print as much money as it wants. There is no limit to how much it can print. Period.

Fed Weapon #2: The Fed can also begin buying stocks and real estate for its own account. Or, it can buy commercial paper, corporate bonds, index futures. You name it. There is nothing to prevent the Fed from doing any of that.

Fed Weapon #3: The Fed can lower the bank reserve requirement — which is currently 10% for all bank liabilities over $58.5 million — all the way down to zero.

Fed Weapon #4: The Fed could penalize banks for not lending to the economy.

For instance, right now the Fed pays banks 0.25% on the excess funds they park with the Federal Reserve, funds that are above and beyond what is required to be held at the Fed as reserves.

Instead, the Fed could simply do a 180 — and tell banks that it is no longer going to pay them any interest on their excess reserve funds, forcing the banks to invest or lend their reserves.

The Fed can even go a step further, and effectively tax or penalize banks for not making loans out to the general economy.

Fed Weapon #5: The Fed can continue to engineer a “default on the sly” on all government obligations, effectively inflating away America’s debts, by DEVALUING THE U.S. DOLLAR, forcibly and clandestinely.

That’s ongoing. Don’t kid yourself just because the dollar recently rallied against the euro. It’s still sliding against the Swiss franc, the Aussie and Canadian dollars, the Japanese yen, the Singapore dollar, and other Asian currencies.

There are even other weapons the Fed can use.

  It can cap interest rates on long-term Treasury debt. It did this before in the 1940s, where it capped the long-term Treasury bond yield at 2.5%, ending the cap with the Federal Reserve-Treasury Accord of 1951.

It effectively did the same thing in the 1960s when the Fed manipulated the yield curve by selling T-bills and purchasing an equal dollar amount of Treasury notes to reduce long-term rates.  

  It can even reduce interest rates on corporate securities, by printing up money to hand to the U.S. Treasury for it to purchase corporate securities.

  It can purchase foreign government debt, by printing dollars, then selling those dollars to buy Japanese bonds, euro debt, or what have you. Essentially, this is another way of devaluing the U.S. dollar.

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And more. Keep in mind how Bernanke thinks. In his own words, Bernanke believes that the dollar devaluation of 1933-34 was an “effective weapon against deflation … the devaluation and the rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly.”

Bernanke also believes that “a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition … a central bank … retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is zero.”

In short, the Fed can do whatever it wants, whenever it wants. So it does have plenty of ammo left, just as I said it did way back in September of last year.

In fact, in my opinion, the Fed’s battle against the financial crisis (and deflation) is just in its beginning stages.

The big question is whether the Fed’s actions will solve or alleviate any of the consequences of this great financial crisis.

My answer: I don’t believe it will. I do, however, believe that …

  In the months ahead, the Fed will use many, if not all, of the above unconventional methods

  It will not tell you when it employs them

  The Fed will continue to inflate asset prices, but there will be extreme volatility and unintended consequences

   You should not fight the Fed

And I believe that everyone should own the best asset class you can for these kinds of times: Gold, which has just hit record new highs.

Best wishes,

Larry

P.S. Be sure to attend my online investment briefing with my colleague Tony Sagami, this Thursday, July 21 at 12 Noon ET.

There’s no cost. But since Tony’s in Kuala Lumpur, Malaysia, and I’m in Bangkok, Thailand, we need to make sure our bandwidth can handle the attendance we anticipate. There’s no cost to attend and registration takes just a few seconds. Click here now to register.

Your thoughts on “Bernanke out of bullets? Heck no!”

  1. Dear Larry,

    I am a subscriber to your Real Wealth Report and a regular reader of all your articles on uncommonwisdomdaily, but I wish to comment on your premise that Asia’s economy can be judged by the “people on the street.”

    To quote from your report:

    “I think it’s important that investors hear it from you, first hand, since you spend most of your time
    on the ground travelling throughout Asia.
    Tony: Yes, getting down in the trenches in Asia is the only way to understand what’s going on
    Larry. It’s that simple.
    Sure, the Wall Street crowd talks to CEOs and CFOs, but you often learn much more by talking to
    people on the street, meeting investors, business people, merchants, taxi drivers, housewives, and
    shopkeepers. If you don’t, you can’t expect to possibly understand the different cultures in Asia and
    their common drive to grow their wealth.”

    I believe your analysis is correct, HOWEVER, I want to throw in a word of caution. I lived in Nigeria, Africa for 21 years and I was there during the financial boom of the 80’s and the decline of the 90’s. Starting in 1986 the government started its systematic collapse of the financial system in order to enrich its leaders. The general population (“the people on the street”) did not catch on until 1990-1991 that their economy was being ransacked. Five years of plunder had already occurred but the “people on the street” did not get it until it was too late to do anything about it.

    The “people on the street in Asia” MAY not have the full picture yet, so although I agree with your, and Tony’s, submission, I am still holding back for further clarification.

    I appreciate all of your analysis. It has helped me to make some money this year.

    Thanks
    David

  2. Great stuff, thanks. I agree the Fed can do all of those things, and probably will, as needed.

    But, at the end of the day I think the deliberate intention of the Fed is to simply euthanize the USD and force the planet to a new global central bank and global reserve currency, the SDRs/Bancor, run out of the IMF. It’s the worst kept secret of all time. This is strictly a one way trip for the USD. All the Fed manipulations and machinations are just a means to delay and coordinate a Western monetary system collapse. It needs to happen simultaneously to eliminate safe haven alternatives and to creates a global (desperate) popular mood for a big paradigm change —- with a seemingly off-the-shelf solution —- the IMF and the SDR.

    It’s all a fighting retreat, led by criminals and traitors, backing us right into an ambush on our flank.

    The wobbly fiat USD, as the current world’s reserve currency, stands in the way of a global currency reset that will make the commodity rich BRICs happy. China and the others are merely squabbling about the terms and power relationships for the basket of currencies that will make up the SDR. To wit, the IMF just announced a Chinese national as a deputy minister. The detailed plans are already on the board, and they’ve made no secret that they’re just waiting to implement as things develop. A coordinated global banking collapse will make people beg for a “solution”. The new power banking and manipulations will become centralized, global, and all powerful.

    When you look at the what the world’s central bankers and the politicians are doing through this perspective, their (corrupt) behavior seems less irrational. The Western countries are so indebted they will be immediately devastated by a conversion to a new global currency. Long term, everyone will become debt slaves and lose their democracy and sovereignty to an all powerful global banking system.

    Buy hard assets, gold and silver to opt out and protect yourself. You can’t fight the Fed and you can’t afford NOT to either.

  3. #1 and #2 have already happened. #5 is a given as the dollar can’t rally even with the Euro falling down the stairs.

    I don’t see #4 happening without #3. The banks are struggling as it is and many will need to raise their reserves against the bad mortgages on their books (BofA needs to increase reserves by 50B http://bloom.bg/nwllkm). Now if the Fed were to buy those mortgages (via Freddy and Fanny, as it did before), I could see #3 happening and subsequently #4 also. It would mean that the dollar would go to hell, which is good for anyone holding Larry’s recommended investments. It will probably also mean another crop of bad loans that will bite us in the ass later.

    Financial repression, such as capping treasury rates, will be very bad for savers and very good for gold holders. If there is anything that makes gold go higher, it’s negative real interest rates.

  4. The fed can’t force people to borrow and if they do they’ll get exactly what they deserve you know the old saying fool me once shame on you fool me twice shame on me see ya.

  5. The fact that Americans are forced to use a totally fiat currency that is constantly being devalued means these people are corrupt.Nothing they do has anything to do with what an honest person would do.

  6. Larry,
    What is to prevent Bernake from shorting gold and gold stocks? It seems like strong gold would be a thorn in his side.

  7. Wow. Reassuring to know that the Fed has such abilities. Hopefully we’ll get a 1000 point dive in the Dow Jones to light a fire under it. Unemployment is the primary cause of the excessive deficit. Let’s get businesses hiring and get the damned recovery started. I’m tired of supporting my 25 year old college degree’d son.

  8. Attn: Larry,
    I have read your comments. First of all there are no Real Answers to Trouble facing Americans and the rest
    of the World around us. Wealth, money, gold & silver will not safeguard you in the coming GREAT TRIBULATION that is spoken about in the Holy Scriptures., I refer you to the quote at Matthew 24:verses 21,22.
    The whole context of the Chapter of Matthew is Speaking of the End Time or Last Days of Mankinds Rule
    and Control of Mans Governments of this World., If you Read on in verses 36 thru 39, it tells us The Last
    Days would be like in the time of Noah’s Day before the Flood, where people were going about their business and not paying attention to the WARNING laid before them. You speak of Gold & Silver, yes, The Bible also
    speaks of Riches such as Gold & Silver, but it will not be able to Save people when God decides to bring in
    his KINGDOM RULE., Ezekiel Chapter 7: starting with verse 19 it says in brief: Silver & gold will become abhorrent and it will not be able to deliver them in the day of Jehovah’s fury. Their souls they will not satisfy, and their intestihnes (stomach) will not fill, for it has become a stumbling block causing their error. …

    The Book of Daniel also gives us a clue as to whom we should look to “in the time of the end” of Mans Governments., Daniel Chapter 2: starting with verse 44, it says in brief; That in the days or those Kings (Speaking of our day) That the God of Heaven would set up his rulership and that IT WOULD DESTROY ALL OF MAN’S KINGDOMS, AND IT (THE KINGDOM OF GOD) WILL STAND TO TIMES INDEFINITE.”

    Today, just like in Noah’s time, before the Flood, we as a WORLD HUMAN FAMILY are experienceing the same things, but God the Creator has made a way out, and that is FINDING OUT AND KNOWING THE
    “T R U T H” of what God expects of us. John 8:32 says in brief. ” know the truth and the truth will SET YOU FREE”
    VTU, B hammond

  9. How about Washington seizing private pension funds, IRAs, 401Ks, etc.? Replacing them with an IOU like they did with Social Security.

Comments are closed.