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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Richard Russell
November 17, 2010
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The big question on my mind is this: Will Fed Chairman Ben Bernanke back off from QE2? There's been a lot of criticism about how little QE1 has accomplished, and many influential economists are complaining that all Bernanke has succeeded with his quantitative easing is in destroying the purchasing power of the dollar and piling up US debt.

It's obvious that Bernanke with the help of QE2 wants to drive longer-term interest rates down and at the same time push asset prices (particularly stocks and real estate) higher. Because of the sheer size of Bernanke's new spate of money-creation, some analysts are describing QE2 as "a whole new ball game."

Over the coming eight months the Fed will buy $600 billion of US Treasuries, but that's not all. The Fed will also buy up to $300 billion of agency debt which will be coming due. That means that roughly $900 billion of new money will be entered into the system, all of this new money created via computers and out of thin air.

So the question I'm asking myself is this: Will Bernanke (in the face of international criticism) back down on his strategy of defeating the forces of deflation by printing money?

My immediate answer to this question is that Bernanke will NOT back down. Bernanke is a true, dyed-in-the-wool Keynesian, and he's already apologized on the part of the Fed for allowing the money supply to shrink during the Great Depression of the 1930s.

To back down now would mean that Bernanke, in effect, was conceding that his whole strategy of quantitative easing has been misguided. To back down now, would mean that Bernanke was giving in to the forces of deflation. I can't see that happening. I think Bernanke would quit his chairmanship at the Fed before he gave in to the discipline of Austrian economics.

The second question I have been thinking about is whether fiat currencies, and I mean all of them, are going to survive? As subscribers know, I believe currencies created by government fiat are a fraud, and that they are both illogical and immoral. I believe that ultimately, fiat currencies, all of them, are doomed. Every fiat currency in history has died, and today's fiat currencies will be no different.

This brings up the critical question: Does it make sense to hold any fiat currencies -- including the dollar, through the coming hard times? At this point there is no definition for the dollar (actually, they are Federal Reserve Notes). Today the dollar is only defined in terms of other currencies. The dollar's chief competitor is the euro, the fiat currency of the so-called European Union. The world is worried about the euro. Currently, there are questions about Ireland, Greece and Portugal. If any of these nations default, the euro will be hit hard. Ironically, if the euro fades, the dollar will be "stronger," since the dollar trades as the mirror opposite of the euro.

Gold, in turn, is priced in dollars. So if the dollar strengthens, it will require fewer dollars to buy an ounce of gold. Therefore, ironically, the price of gold is a function of the strength or weakness of the euro.

This is what's happening as I write. The euro has recently weakened, and with it the price of gold has weakened.

All of which brings up the basic question: How much of our assets should we hold in fiat money, either in dollars or euros or in any other fiat currency?

I've said before that our main task in the years ahead (maybe for as long as a decade) will be to avoid losses, and to avoid losing purchasing power. Stocks are now overvalued based on the return on the investment (i.e. dividend yields). The great 30-year bull market in bonds is over. Bond prices could be heading down in an extended primary bear market. World deflation will put pressure on many commodities. Housing is questionable, and the bulk of foreclosures lies ahead.

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