EurAnalysis

Well in the end it's not going to matter what the Fed says because while the US "may" lead a recovery, Asia will be deflating further and the Eurozone will be dividing its 17 nations into many more mini nations with more member parliaments and more disagreement sending them further away from the EC's dream of a EUSSR. The debt problems will get worse as the economies slump and eventually instead of bailing out a misbehaving south, Germany (and its AAA rated northern partner states) may in fact be the first to leave the EZ rather than Greece or Spain.

true.

The FED mandate provide some very wide interpretations. Let’s first look at it;

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.

First in the mandate is “Maximum Employment”. That’s what we don’t have but could improve with a lower valued dollar.

Secondly “Stable Prices”. We say we have stable prices but in reality the inflation started to tick in long time ago. So you can say it's a mandate but it needs to be in balance with the employment part and it is not today.

Thirdly “Moderate Long-Term Interest Rates”. I would day check to that one. They are quite moderate.

Now we can start to balance all this out and argue why we do this and not that and so forth. In other words the FED in the light of the serious situation has all the leeway they need to experiment before Congress would even consider to change anything in relation to the FED.

With that said then the FED, The President (whoever that may be), Congress, Goldman Sachs and a few other large entities are so intertwined that it doesn't make any difference. Collectively they are sitting on and with the ultimate power to move around Countries on the face of the Earth as they please. I’m not saying they do and honestly I think they are trying to do the very best they can. But by the end of the day – they are all Americans and Americans can become quite sentimental by the end of the day when the Sun set and the flag come down. We are patriots first of all (I think - I hope I'm not the only one) and will do what’s best for our Country.

The US could have done many things different but it is what it is. To get a deeper understanding of the US, it’s power and why it is doing what it is I recommend anybody with interest in the greater scheme of things all the way down to the possibilities in the EURUSD relationship to see the documentary “The World Without Us”.

http://www.theworldwithoutus.com/ (edit to provide a link)

I do not agree with your view on politics. When we start to see the bigger picture it becomes clear that no single president can whoosh around the US as he pleases. I know the candidates say so but whatever they say have no bearings. It really doesn't matter who wins in November. It’s all circuses to entertain the masses.

I do see Southern Europe present a serious problem. Authorities need to keep a lid so the situation doesn't escalate into civil unrest and war. However the Europeans don’t have guns like we have here and stones don’t go very long or causes much destruction. So if you ask me who will suffer the most either the US or Europeans the above should answer this. Citizens in the US will stand up and have more tools to convince politicians. The NRA has 4.3 million members (including politicians) and all have a variety of weapons. The European citizens just can’t match that so I don’t think they will perform much of a fight against austerities. Honestly I think an exit from the EUR is way more realistic.

http://www.nra.org

I agree with you PT that we are possibly heading towards “The End” very quickly and simultaneously on a number of critical areas. When such tings play out (with history in mind) we leave what is “normal” and as individual traders need to be prepared for daily things being completely different.

For a start I personally use tight stops. I trade more and more from the edges with respect for the greater trends with “tiny” SL (reason for my name) and I prefer my RR to be at least 1:10. So far so good.

By the way - talking about bearish sentiment. The latest COT figures show increase in EUR shorts. That could point to a retracement on the July/September uptrend before we race towards the 1.40

http://fxtrade.oanda.com/analysis/co...nts-of-traders

..... well I think elections (anywhere in the world) always exacerbate perspectives on weaknesses especially when the economy is not booming in a country like the US that is used to +/- always be on the high.

This last recession has only confirmed that the US as a country has reached the point of a mature country and is not any longer the "new" power house like in the last 80 years (let that for the new Brics coming in the next wagon and China) where "filling the gap" of the decaying European empires was an "easy ride", easy enough to propel the US as the number 1 and most powerful country in the world (still is by far and without discussion) .

Lots of noise from politicians, front pages and discussion everywhere from the bouncer in the local pub to late night shows talking about it, etc, etc make negative things look worse than they actually are.

Don't get me wrong fiscal cliff, debt, etc are real problems that must be addressed but from there to the end of the world next quarter .... definitively no!!!...

Let's review how the feeling of doom and the "doomers" in the US are in Q2/3 2013 when election are long gone (whoever win is irrelevant), the budget on track and the average Joe more interested in the the next cool commercial in the Super Bowl rather than "discussing"/reading/analyzing" complex technical monetary or fiscal policy issues, listening to politicians "misleading/misusing" these issues to create fear or manic exaggerated sentiments (republicans / democrats).

sisse

Austerity doesn't work unless the people cooperate. It's as simple as that. Civil unrest, whether with guns or with stones, throws a wrench in the working of the economy. The US has the tools to counter any such unrest, but the Eurozone does not. One of those tools is a centralized government that has the authority and democratic legitimacy to govern fiscally. In Europe no such entity exists. Not only is the European council not democratically elected, but also they are bound by 27 nation and 17 nation treaties that prohibit them from any such activity. The fact is that the Eurozone does not have a fiscal transfer system like a united nation of states such as the US does. In the US, if Florida is doing well and California is on the brink of bankruptcy, Washington has the right and obligation to take from Florida and give to California. See the difference? The Eurozone is a collection of 17 different social and economic cultures that will never see eye to eye until Brussels gains the democratic legitimacy to make it so and force it down their throats. So, we can do nothing but dream on or pray that Germany and perhaps other prosperous EZ nations agree to bail out the south. Until then, it's all downhill.

I totally agree. And then on top they have to live with a strong EUR soon approaching 1.40 what a total mess.

Yep the Euro will see 1.3850 eventually... perhaps after 1.18

Well, don't forget that with sufficient thrust, PIIGS fly just fine.

Market Meridian Theory from marketanthropology.com

These videos on macro status of US equities is worth perusal. Technical studies.

http://www.marketanthropology.com/p/video-of-week.html



.

maybe you see something different but I honestly do not think news are euro bearish anymore.

with ECB backed by Germany to some extent and Ben Bernanke ready to own the risks for MBS. ECB finally going to easy and inject much needed liquidity to monetary contracting countries....via bond purchases....seems the EU is actually taking some right steps to solve or help this mess.

yield is more important than instability.

In my post just preceeding yours Red Lion there is also a video called "constructive inteference" basicaly a chronology of the overconfidence of the Central Banks which arose out of globalization and the rise of too big to fail mega institutions.

If one looks beyond Central Banks there still remains that elusive creature the market, the hopes, dreams, emotions and money of billions of people.

Central Banks are just one aspect of the whole, they are part of the market but not the market. Infallible is not a word to be used in the operational results of these players.

Would venture that the move from an organic based financial system based upon the collective mind to a market that is wholly dependent upon the decisions of a few is not far removed from the very centralized wealth accumulation/control that preceeded the onset of the Great Depression.

History in markets does repeat, so am not excluding from my analysis the very real possibility that central planned economic models fail the robustness test. My macro view and trade scenario is from this primary idea, that too few people with controling power now dominate a very unstable environment.

Massive egos and overleverage have broken markets throughout recorded history, we find ourselves similarly burdened today. We all know what an overleveraged trading account can do, is the debt ponzi any different that Governments are invoking today?


.

October 15TH, 2012

http://staticapp.icpsc.com/icp/loadi...acec/image/gif

____________________________________________________________________________

MOTHER OF ALL BUBBLE'S? U.S.BOND MARKET!

Shiela Bair, chairman of the Federal Deposit (banking) Insurance Corp (FDIC) 2006 to 2011 was at the center of policy-making - one of the big four who also included the Treasury secretary, Fed chairman and chair of the SEC - during the subprime crisis and housing bubble.

We face huge dangers now, says Bair, of another financial crisis - this time from the ballooning US Government debt and the Federal Reserve's vast support for that debt - nearly $80 out of every $100 of US Government bonds are now bought by the Fed.


"The Fed is letting the Congress and the Administration off the hook by funding all this. 77% of the new (Treasury bond) stuff the Fed is buying. Didn't third world countries always do that. It ends badly. We say we're different. We're the U.S. We can get away with it.... (I-don't-believe-that tone.)

She goes on to say -


"If I thought the Fed's quantitative easing was helping the economy, creating jobs, I would be supportive. But it's not. It is just creating huge risk. We're in the MOTHER OF ALL BOND BUBBLES. Any incremental benefit to the economy is very difficult to see."

(You can't spot bubbles?)

"Look at 2006, you (have) got the minutes of the FOMC (Federal Open Market Committee) meeting, and Tim (Geithner) and others were saying 'Everything is fine.' They missed it. I'm fearful they're missing this (bond bubble) too.

_______________________________________

Monday, October 15, 2012 4:58:46 AM


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Daily Forex Brief

London: Monday 15th October 2012http://www.fxpro.com/sites/default/f...jpg?1350288298
If you are having problems viewing the chart, click here.Data/ Event Risks

The Minsky Moment

Debt (leverage) can be a very good thing when used properly. For instance, if debt is used to purchase an income-producing asset, whether a new machine tool for a factory or a bridge to increase commerce, then debt can be net-productive.

Hyman Minsky, one of the greatest economists of the last century, saw debt in three forms: hedge, speculative, and Ponzi. Roughly speaking, to Minsky, hedge financing occurred when the profits from purchased assets were used to pay back the loan, speculative finance occurred when profits from the asset simply maintained the debt service and the loan had to be rolled over, and Ponzi finance required the selling of the asset at an ever higher price in order to make a profit.

Minsky maintained that if hedge financing dominated, then the economy might well be an equilibrium-seeking, well-contained system. On the other hand, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy would be what he called a deviation-amplifying system. Thus, Minsky's Financial Instability Hypothesis suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by (stable) hedge finance to a structure that increasingly emphasizes (unstable) speculative and Ponzi finance.

Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. He claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops; and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As the climax of such a speculative borrowing bubble nears, banks and other lenders tighten credit availability, even to companies that can afford loans, and the economy then contracts.

"A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles." (Wikipedia)

But a business-cycle recession is a fundamentally different thing than the end of a Debt Supercycle, such as much of Europe is tangling with, Japan will soon face, and the US can only avoid with concerted action in the first part of the next year.

A business-cycle recession can respond to monetary and fiscal policy in a more or less normal fashion; but if you are at the event horizon of a collapsing debt black hole, monetary and fiscal policy will no longer work the way they have in the past or in a manner that the models would predict.

There are two contradictory forces battling in a debt black hole: expanding debt and collapsing growth. Without treading again on ground covered in many past letters, let's take it as a given that if you either cut government spending or raise taxes you are going to reduce GDP over the short run (academic studies suggest the short run is 4-5 quarters). To argue that raising taxes or cutting spending has no immediate effect on the economy flies in the face of mathematical reality. Note that I'm not arguing for one approach or the other, just simply stating that there will be consequences, either way. The country might be better off with higher taxes and/or more spending, or the opposite. But those choices are going to have consequences in both the short and long term.

Second, there is a limit to how much money a government can borrow. That limit clearly varies from country to country, but to suggest there is no limit puts you clearly in the camp of the delusional.

From John Maudlin...


Economic Singularity

By John Mauldin | Oct 15, 2012

"Concern about politics and the processes of international co-operation is warranted but the best one can hope for from politics in any country is that it will drive rational responses to serious problems. If there is no consensus on the causes or solutions to serious problems, it is unreasonable to ask a political system to implement forceful actions in a sustained way. Unfortunately, this is to an important extent the case with respect to current economic difficulties, especially in the industrial world.

"While there is agreement on the need for more growth and job creation in the short run and on containing the accumulation of debt in the long run, there are deep differences of opinion both within and across countries as to how this can be accomplished.

What might be labelled the 'orthodox view' attributes much of our current difficulty to excess borrowing by the public and private sectors, emphasises the need to contain debt, puts a premium on credibly austere fiscal and monetary policies, and stresses the need for long-term structural measures rather than short-term demand-oriented steps to promote growth.

"The alternative 'demand support view' also recognises the need to contain debt accumulation and avoid high inflation, but it pushes for steps to increase demand in the short run as a means of jump-starting economic growth and setting off a virtuous circle in which income growth, job creation and financial strengthening are mutually reinforcing. International economic dialogue has vacillated between these two viewpoints in recent years."

– Lawrence Summers, The Financial Times, October 14, 2012

C Man your posts raise some interesting points.
Current CB policy is to reflate the economy as they have in the past. For now the markets are expecting that policy will be successful.

The difficulty remains that as a result of raising inflationary expectations as well as recovery expectations that commodity costs have risen to reflect a new cost of living threshold. But this is anticipatory in action, and now requires consumers to assume ever greater debt levels to pay for the already built into cost increases generated by the CB's.

So we have high intial purchase price in direct conflict with consumer ability and willingness to pay for it. This upon reflection does not bode well for a sustainable recovery.

Because the prior debt bubble was so large the CB's had to reflate to a higher level then ever before whereas earning power has not risen. If anything earning power has fallen since we entered the post 2008 economy.

There would seem to be out ahead a price adjustment still to come as a result of the aforementioned fall in purchasing power.


.

Jim,
As a relief from all the serious questions in this market, I thought you may enjoy this.
CIGA John
Three German Shepards Walk into a British Pub

Jim,
Before turning in for the night Sunday I took a look at the "opening" of the access market. What was clear to me was this was the opening of the Cartel’s bombing raid on precious metals, day#2.

Sure enough, 10′ish Monday morning on the CRIMEX we again saw a paper-induced waterfall drop of prices in both Gold (from Friday’s $1758.90* close to under $1730) and Silver (from Friday’s $33.69* close to under $32.50) in mere seconds.

Big whoop! I will not be captive to these ‘seconds-by minutes-by hours’ fakey ‘boogeyman’ games, so the dog and I enjoyed a nice walk in the forest instead. His comment was ‘Meh! Let’s take the hike these clowns need to take one of these days." Neither of us was either ‘skeered’ or ‘impressed’ as we were supposed to be.

Did Central Banks suddenly make everything "all better?" Well, NO. Greece is in worse shape now than it was six months ago, and the same goes for Spain, Italy, France, Japan, Argentina, and many-many others.

Classic Cartel ‘running the Muppets back-and-forth’ with their "fear on, fear off" gimmicks hoping their pre-election price suppression scheme delays the reckoning long enough for Central Banks to solve a problem that cannot be solved. But, they cannot ‘save’ themselves in the end, and only a fool thinks they are going to ‘save’ anyone else.

We’re all completely on our own in this. Well, mea culpa, this is not exactly true…there are a few voices of reason and honesty in the current wilderness of shills peddling misinformation to the sheeple. Jim Sinclair, Eric DeGroot, Dan Norcini and Eric Sprott come to mind immediately. There are a few more out there, but precious damned few.
Want some ‘good’ news? This all coincided nicely with the announcement that JPM’s profit was UP 34%. Who friggin’ knew that processing those EBT cards could be so rewarding?

So, in all candor some full disclosure here: Having gone all-in when Gold was near $700 and Silver in the low $20′s and gotten completely OUT of Dollar-denominated paper of any type years ago, I can "do the math" without taking off my shoes or getting into the shower and the math tells me these short-term paper ‘games’ are meaningless and pointless to me, as they should be to anyone with two wits to rub together.

Whether you think Gold is going to-and-through $3500 or even higher, and Silver to-and-through $50 again… it’s crystal clear that the dollar is fast approaching zero and we have almost run out of road to kick the can down.

Sell? You’ve GOT to be sh*tting me! (channeling my best inner Lewis Black). I only wish I was flush enough to buy even more at these bargain (suppressed) prices! (But, that said, I absolutely refuse to get leveraged.)
Buckle-up, this fun ride is far from over!


CIGA Richard S

Dear CIGA Richard S,
You said it perfectly. Definitely better than the herd of gold writers. My congratulations.
Regards,
Jim
http://www.jsmineset.com/wp-content/...004_thumb1.gif

I have concluded for good reasons that there is no solution to the serious problems created by the Central Banks and the Politicians.

This SHELL game has been active since first August 15, 1971 and then the Year 1999 when Glass Steagel was put into the garbage can.

Then came Fannie Mae and Freddie Mack which lead to Lehman and the meltdown in September 2008. Then they used TARP and followed with QE and QE 2 followed by Operation Twist.

By this time Europe joined in with LTRO One and Two.

Then along came QE Forever.

There is NO SOLUTION and the sooner the public accepts that then there might be a way out of the mess.

There needs to BE the cutting of expenses and that is NOT NEGOTIABLE in the long run. There must be the raising of Revenues and GUESS WHAT ? It can only come from the 1%.

The Middle Class is TAPPED OUT !!!

Whether Obama wins again or Romney wins NOT A THING WILL CHANGE until it does.

The Odds are 75% for and 25% against that once China pulls the plug when they have reduced the US Paper they hold and Interest Rates in the USA goes to 6% and above that the US Economy will collapse and ALL BETS are off...

We just have never never never ever had such a situation where Central Banks can print Trillion of Dollars.

We shall see difficult times during 2013 and those ahead of the curve will become very rich and many of the rich will become very poor.

You cannot pay your bills when the Dow reaches 6000 and Gold goes over $3000 and your IRA is all in the Stock Market.

That is the way that I see and understand it. All opinions and views are welcome.

Submitted by cpowell on 05:38PM ET Monday, October 15, 2012. Section: Daily Dispatches

As Money Hides Away, Gold Heads for a Blowoff

By John Dizard

Financial Times, London

Sunday, October 14, 2012

http://www.ft.com/intl/cms/s/0/e576c...44feabdc0.html

It's difficult for anyone with as skeptical a view of human nature as mine to advise people to be be anything other than permanent hoarders of cash. Yet I resist the temptation. Right now, I believe, we are going into a long period when holding currency and bonds will turn out to have been the wrong thing to do. I have a framed French assignat note from 1792 on my desk; it's a good reminder of what can happen to apparently liquid wealth.

Considering all the risks in the world, I understand why someone with money can turn into an autistic recluse, refusing to come out of hiding until people they like have been elected. That basically describes the behaviour of the banking system and corporate treasuries in the developed world. Having been told for more than four years that the taking of speculative views is the devil's work, they have been refusing to take any views at all. That has worked out pretty well; holders of the better class of government bonds have profited from the flight away from other assets.

... Dispatch continues below ...


Think about this: Among all the issues, real and consultant-manufactured, in this US election season, the risk of inflation has not made an appearance. There has been lots of talk about the middle class, but not the classic threat to the value of the money they hold.

There is a lot of talk about how "we" can't waste any more of the taxpayers' money on wars, welfare, healthcare costs, subsidies for the wealthy, and so on. Notice, though, that there's much less talk, even on the anti-Wall Street side of the national divide, of not wasting the depositors' money.

The political class has begun to wake up to the effect that the enforcement of strict lending standards and capital ratios has had on growth and voter satisfaction. Financial regulators are told to be independent of political influences, but they're not, of course. The people who vote for their budgets want money pushed out into the economy, and that's what they're going to get.

Even (initially) gentle rises in bond yields will begin to have a punishing effect on the banks, insurance companies, and corporate treasuries. The cash hoards are going to be spent much more quickly than monetary economists and securities analysts think. Why take less than 2 per cent for 10-year bonds when you can buy another company with a much higher return on equity? Why not profit from low nominal rates by building up some commodities inventories?

The long-term bull market in the prices for industrial commodities has paused in the middle of this year, but this correction seems to be coming to an end. The banks' lending rates have been hammered to the floor and the inspectors are being told to ease off on forcing asset liquidations. The last people to understand this, it seems, were the attendees at Basel bank regulatory meetings, but even they are getting the picture: It's time to get that velocity of money circulation moving again.

That means that a hyperbolic, 1979-1980 style blowoff in the gold market is becoming much more likely. From the time of the gold price low in the autumn of 1999, the demand for gold has been supported by a gradual shift from net central bank selling to net central bank buying, and from the interest of more or less professional investors. The broader public has not really been drawn into any gold mania, as it was in the late 1970s.

An interesting signal of this acceleration of the long-term rise in the price of gold has been the recent outperformance of gold shares relative to the metal. Up to now gold shares have tended to disappoint, but since the spring, the price of gold shares has been going up much faster than the price of the metal. In the third quarter, for example, the dollar price of gold rose by 10.9 per cent while the broad XAU index increased by 21.7 per cent.

But we don't have the sort of bubble in gold stock demand that you see in a real mania. The money flows into gold stocks have been modest, and valuations relative to the cash flows, or the net asset value of gold reserves, are still fairly low. There hasn't been any flood of dubious junior mining stocks based on pieces of moose pasture in northern Ontario or desert in Nevada. No doubt that will all come, or some early 21st-century version of those 1970s phenomena, but not yet.

I've noticed that gold manias, or, if you will, crashes in the value of paper money tend to occur in three phases. Initially there's a gradual, creeping devaluation of a currency, which can take a decade or so to gather force.

Then there's an initial inflating of the gold bubble, or deflating of the currency value. That's more or less what we saw between 1972 and 1974. Then a pause and pullback in gold's price momentum, followed by the seemingly unstoppable rise. That came from 1978 to early 1980.

All manias come to an end, of course. The one that's ending now is the seemingly insatiable demand for developed country sovereign debt.

http://www.financialsense.com/contri...-system-afloat

Money Printing Is the Only Thing Keeping the System Afloat...

Last Monday GoldMoney published my article showing the frightening growth in money-quantities for the US dollar. In that article I stated that the hyperbolic rate of increase, if the established trend is maintained, is now running at over $300bn monthly, while the Federal Reserve is officially expanding money at only $85bn.

The first thing to note is that the Fed issues money because it deems it necessary. The hyperbolic trend increase in the quantity of money is a reflection of this necessity, implying that if the Fed’s money issuance is at a slower rate than required, then strains will appear in the financial system. There are a number of reasons behind this monetary acceleration, not least the need to perpetuate bubbles in securities markets, but there are three major underlying problems.
Government spending

Federal government spending is accelerating, due to rapidly escalating welfare commitments, not all of which are reflected in the budget. Demographics, particularly the retirement of baby-boomers, government-sponsored healthcare, and unemployment benefits are increasing all the time; yet the tax base is contracting because of poor economic performance and tax avoidance. Furthermore, state and municipal finances are dire.
Economy

The US economy is overloaded with debt to the point that it no longer reacts positively to monetary stimulus, and successive government interventions have led misallocation of economic resources to accumulate towards crisis levels. The private sector is now teetering on the edge of an abyss overloaded by both debt and government intervention.
Commercial banks

The banks are cautious about lending to indebted borrowers, and they have failed to adequately devalue collateral against existing loans. The result is that with no bank credit being made available to support renewed buying of assets, asset valuations are constantly on the verge of collapse. Put another way, banks have backed off from creating ever-increasing levels of debt to perpetuate the pre-crisis asset bubble.

One should not take comfort in attempts to improve asset ratios. According to the Federal Deposit Insurance Corporation, the ratio of total assets to risk-adjusted Tier 1 level capital is currently 11.25; but this does not adequately reflect off-balance sheet activities and non-assets such as derivatives. The inclusion of derivatives on US bank balance sheets as a net as opposed to gross exposure, seriously misstates actual risk.

Banks therefore face two different problems. An on-paper write-down of collateral assets of less than 9% wipes out the entire with a far lower threshold for many banks. Changes in GAAP accounting rules over asset valuations in the wake of the Lehman crisis have allowed them to hide losses, a situation that is still unresolved and suggests the banking system is already close to the edge. Furthermore, any failure in the derivative counterparty-chain threatens to trigger a collapse of the larger banks where derivative exposure is concentrated.
Conclusion

We are in the eye of a financial storm, for which the only solution – other than mass default – is an accelerating supply of money.

Deteriorating financial conditions in either government, banks, private sector or securities markets are almost certain to trigger a run on the others. And that is why a far larger figure than QE3’s $85bn per month may be required to keep the system afloat.

http://www.financialsense.com/contri...nds-fed-policy

Fed chairman Ben Bernanke is at odds with Brazil, China, and even the IMF over his policies. Please consider the BBC report Bernanke defends Federal Reserve stimulus measures

Brazil has said US monetary easing to keep interest rates low and weaken the dollar has hurt emerging economies.
And International Monetary Fund chief Christine Lagarde warned on Sunday of consequent asset bubbles developing in emerging nations.

Speaking in Tokyo, where the International Monetary Fund and World Bank are holding annual meetings, Mr Bernanke said: "The linkage between advanced-economy monetary policies and international capital flows is looser than is sometimes asserted."

On Friday, Brazil's finance minister, Guido Mantega, warned that his country would take "whatever measures it deems necessary" to fight the problem.

"Emerging markets can't passively endure large and volatile capital flows and currency fluctuations caused by rich countries' policies," Mr Mantega said in Tokyo.

"Advanced countries cannot count on exporting their way out of the crisis at the expense of emerging-market economies," he said. "Currency wars will only compound the world's economic difficulties."

In a speech at the end of the IMF meeting, Ms Lagarde said: "We have seen several bold initiatives certainly that the IMF highly praises and values as major contributing factors to stability."
But she acknowledged that "there are diverging views within and across countries about important issues including the management of capital flows".

She said monetary easing "could strain the capacity of those economies to absorb the potentially large flows and could lead to overheating asset price bubbles.

Bernanke's Speech

Let's take a closer look at Bernanke's speech that has Brazil clearly upset, and the IMF questioning what Bernanke is doing. Here are a few snips from "Challenges of the Global Financial System: Risks and Governance under Evolving Globalization," by Ben Bernanke in Tokyo, Japan.

Although the monetary accommodation we are providing is playing a critical role in supporting the U.S. economy, concerns have been raised about the spillover effects of our policies on our trading partners. In particular, some critics have argued that the Fed's asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies. These capital flows are said to cause undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows.

I am sympathetic to the challenges faced by many economies in a world of volatile international capital flows. And, to be sure, highly accommodative monetary policies in the United States, as well as in other advanced economies, shift interest rate differentials in favor of emerging markets and thus probably contribute to private capital flows to these markets. I would argue, though, that it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies, for several reasons.

Three Point Defense

Here is Bernanke's three point defense of Fed policy followed by my rebuttal.

Bernanke: First, the linkage between advanced-economy monetary policies and international capital flows is looser than is sometimes asserted.

Mish: That is a meaningless statement. Here is an equally true but also meaningless statement. The linkage between advanced-economy monetary policies and international capital flows is tighter than is sometimes asserted. The key word is "sometimes". It all depends on who is doing the assertion.

Bernanke: Second, the effects of capital inflows, whatever their cause, on emerging market economies are not predetermined, but instead depend greatly on the choices made by policymakers in those economies. In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth.

Mish: Of course it depends on how policymakers in those countries react. They can placate to Ben Bernanke or they can promote exports just like the Fed is attempting to do.

Bernanke: Finally, any costs for emerging market economies of monetary easing in advanced economies should be set against the very real benefits of those policies. The slowing of growth in the emerging market economies this year in large part reflects their decelerating exports to the United States, Europe, and other advanced economies. Therefore, monetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well.

Mish: If monetary easing in the US was supposed to boost growth in emerging markets, then why didn't it? The fact is that all of this manipulation is undesirable, regardless of what county is doing it. Proper signals come from free market flows, not central-planner fools who have a track record of producing boom and bust cycles of ever-increasing amplitude.

In regards to the latter point, note that IMF chief Christine Lagarde speaks out of both sides of her mouth at once, each saying different things.

One side of her mouth praises the Fed, the other says "monetary easing could strain the capacity of those economies to absorb the potentially large flows and could lead to overheating asset price bubbles."

So which is it Christine?

Bernanke Calls for Emerging Market Currency Appreciation

The Wall Street Journal reports, Bernanke Calls for Emerging Market Currency Appreciation

Federal Reserve Chairman Ben Bernanke encouraged policy makers in developing economies to let their currencies appreciate, delivering a strongly worded counterargument to their own critiques of the Fed.

"In some emerging markets, policy makers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth," he argued. "However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation." Capital surges and inflation in these markets, in other words, are problems that policy makers in these markets could address themselves if they chose to, he argued.

The passage was an apparent shot at authorities in China, who intervene aggressively in foreign-exchange markets to keep their currency closely tied to the dollar, though Mr. Bernanke didn't mention any countries by name.

His comments come as other policy makers have been very critical of the Fed. Brazil's finance minister, Guido Mantega, has accused the Fed of starting a "currency war."

Mr. Bernanke has made similar arguments before, but these were especially pointed and come at a sensitive moment. The Fed in September launched a new bond-buying program that has sparked a new wave of global criticism.

Mr. Bernanke argued that central bankers in developing economies should "refrain from intervening in foreign-exchange markets, thereby allowing the currency to rise."

What's Good For the Goose

Bernanke has the gall to complain about currency manipulation when his policies are designed to do the same thing. QE is designed to weaken , and somehow that is OK, but not straight-up currency intervention.

Speaking of which, why is Bernanke and the entire rest of the world willing to sit back and say nothing about the biggest straight-up currency manipulation in history? I am talking of course about the Swiss National Bank and its unlimited measures to prevent the rise of the Swiss Franc vs. the Euro.

Quite frankly, they are all beggar-thy-neighbor hypocrites, which is what currency wars are all about.

Source: Global Economic Analysis