Fed to buy up US treasuries

There you have it. The Fed came out recently and said that they are not going to shrink their balance sheet and they are buying up US treasuries to help the economy grow. 

Remember a year ago when they said that they have an exit strategy? I thought it was nonsense at that time. They had no way of unwinding their toxic assets. So now one year later, where is that exit strategy?

Now that the Fed has admitted that it will buy up more treasuries, it should be a good signal for investors to sell. Throw the junk government bonds back to the Fed, and use the cash to invest somewhere else. Otherwise, the bond market will collapse in the near future. As more investors realise that the US bond is junk (and I really mean they are junk-grade, not Aaa !!), they will get out of this market, causing prices to fall and interest rates to rise. 

In fact, bond prices should have already fallen long time ago, if not for the fact that investors still perceive the USD as a safe haven, and if not for the fact that the Fed is printing money to buy up their own bonds. When prices fall and interest rates start to rise, the US will really suffer because of their huge debt obligations. Interest-rate wise, right now the govt are just at where the sub-prime home owners were a few years back: they're still on a teaser-rate.The US is completely dependent on low interest rates now.

When interest rates rise, the US has to default, either outrightly or through inflation, the worst being the latter. And judging from the Fed's and politician's historical actions, the latter seems far more likely than the former. Foreign lenders are also increasingly aware of this problem, and they should sell their US debts asap. With foreigners getting rid of their USD by buying up stuff using USD, all the USD will go home to the US to roost. At that time they will face hyperinflation, if they haven't already from the Fed's printing press.

Wealth is purchasing power, and it will not be destroyed when the US collapses. It will simply be transferred to other parts of the world. Sure, there will be some repercussions as exporters dependent on the US consumption will see their businesses take a hit. But there are scores of people well-positioned to benefit from this. China, for one, will see an immense rise in purchasing power through appreciation of their currency relative to other currencies. The chinese will then be able to produce goods and consume their own goods. What is happening now is that the Chinese is lending money and exporting goods to the US so that the US can use the borrowed money to buy the Chinese products. All these just so that the Chinese workers can be paid and have a job. They work so hard but they consume so little. No one works for the sake of having a job. All slaves have a job too. Now the Chinese are exporting goods to the US and the US are exporting inflation to the Chinese. 

In the near future, there will be more and more young westerners in Asia. They have to flee their debt-riden countries. Asia is where the assets are and historically, people always move to places where the assets are. They are not going to stay in their own country and shoulder the burden of the debts.

The US is crumbling from within. Even all its military might will be significantly reduced. Can you have the world's most powerful army when it exists on credit cards? When the world stops lending to the US, the army will be gone as well.

Sayonara US, you are essentially bankrupt.

Quote by Thomas Jefferson

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property - until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people where it properly belongs.

- Thomas Jefferson, 1802

This is so true of our world today. Nowadays, only the politicians and bankers have control of the currencies. The population is at the mercy of these people. I believe every country will end up this way. It is only logical: Print money --> middle class (and the poor) loses purchasing power and wealth --> Demise of the middle class --> chaos. It has been happening in the US since 1913 when the Fed was first created. Here're some statistics:

http://www.businessinsider.com/22-statistics-that-prove-the-middle-class-is-being-systematically-wiped-out-of-existence-in-america-2010-7#83-percent-of-all-us-stocks-are-in-the-hands-of-1-percent-of-the-people-1 

Government is a necessary evil

I like this quote:

"Government spending does not create prosperity. Government is an expense to any nation, it is a necessary expense when it is confined to its legitimate role of simply protecting natural rights from legitimate foreign and domestic enemies, but when it ventures beyond this role and takes on the powers of economic manipulation, it destroys wealth which is the basis of prosperity. Instead of making us richer, it actually makes us poorer for it."

Government is a necessary evil. We can't do without government, yet the flaw of democracy is that govenment is always allowed to grow too big. Eventually it will burden a nation so greatly that it will break down. This is what has been happening for years in US, some European countries, and Japan. The breaking point will be pretty soon.

What's next for US?

The US is bankrupt. What will the US do next?

More wars? More resource-stealing?

Or like Jim Roger says, print money until the world runs out of tree?

Why Miners/Farmers/Fishermen should earn more than Bankers (Real Goods Production Vs Service sector)

Today, many developed nations have a large chunk of their economies dedicated to the service industry. We see huge payouts for bankers and the financial services industry, for example. The US, for one, has become a service economy (Note: Service jobs can range from burger flippers to bankers). But should a healthy economy really be this way?

My simple answer is no. Here is my case for it:

Let's go back to ancient times, when barter trading was the norm and money as we know it still doesn't exist. Let's say I am a cow breeder and you are a fisherman. Every week, I will walk my cow 1 km to your place to trade for some fish. I have purchasing power in terms of cows. Now to get more fish, or in other words to increase my purchasing power, I have to produce more cows. This is the same for our world today. If you want to consume more, you have to produce more. Sadly, this is not the case for the US.

Back to the illustration. So to increase my purchasing power, I breed more and more cows. I became so busy that I had to hire an errand boy to walk my cows 1km to your place every week, while I stay back and tend to my cows. This errand boy can be categorised as a service industry worker. To reward him for his work, I pay him, say, 1 cow for every 10 cows he trades for fish. For every 10 cows traded, his purchasing power is 1 cow, my purchasing power is 9 cows. 

Fast forward to today's economies of the Western world. It seems like the errand boy (the service sector worker) is now earning 20 cows of purchasing power, while I, the real-goods producer, is earning say 5 cows (Sorry, I'm lazy to dig out the figures that I have in my research, so I'll just use some random figures. Do some googling I'm sure you can find some data). How can this type of economy be sustainable in the long run?

Sure, the US politicians and economists would have you believe that the budget deficit is actually a good thing. For even though they have a monstrous trade deficit, they have a capital account surplus. Well, the term surplus does have a nice ring to it. They argue that foreigners are still pouring capital into US, investing in US assets. But what they fail to mention is that the US has to give something in return in the future. Foreigners may be buying US treasuries, but alas this money sure doesn't make the US rich. Instead, they have a liability to repay this money some time in the future, plus interest. And furthermore, foreigners are waking up and realising that the US treasuries will no longer be a safe haven. They are not gonna lend as much to the US. Sovereign bonds are the next big bubble.

And what is the US doing with all these borrowed money from abroad? That's right, they spend it all!! Instead of investing in productive capacity to produce more cows, the government is just hiring more and more errand boys (for eg, they recently hired hundreds of thousands of census workers, and this number greatly skewed the jobs figure (which is manipulated, of course). Again, I forgot the figures, but search online, you can find it pretty easily). See, governments can create jobs, right???

The US has no means to repay the borrowed money, other than printing money and repaying in cheaper dollars. In other words, for every cow that I produce and lend to the US, I can expect to get back 2 cows - 2 very skinny cows, that is.

And don't forget that they are not just borrowing. They are printing money like mad. The whole world is printing money like mad. They are printing cows out of thin air. As a cow breeder, my purchasing power is being diluted like mad. All currencies are falling in value. I'm not talking value relative to other currencies, but value relative to real tangible goods. 

Buy gold and silver. I for one, am borrowing money to buy. The returns will be phenomenal.

Europe Debt Crisis

For the past few weeks, the media has been focusing on Greece and its sovereign debt problems. It seems like the mainstream media has finally caught up with the trouble in Europe.  

As expected, the politicians succumbed to printing money and borrowing and bailing Greece out. It would have been a wise option to let Greece go bankrupt, because this will give a signal to investors that the EU is serious about building a strong Euro currency. But of course, politicians always don't like this option.

Now that the EU (the US is gonna join in the bailing too) is bailing Greece out, there will be more countries asking for assistance - Portugal, Spain, Italy and Ireland. 

Investors have been getting out of Euro into the perceived safe haven of USD, but they will soon realise that the US is in worse shape than Greece. The USD has been strengthening against the Euro, but people are mistaking this for a real strength in USD. If the USD is fundamentally strengthening, gold price would have been dropping. Gold price has held steady around the $1100 level for the past few months, and it breaks $1,200 a few days ago.

The entire world is in debt, and it will never be able to repay all its debt. NEVER. It is just mathematically impossible. Our debt-based monetary system has eventually shown its fatal flaws. The weakest link falls first, and then there will be a cascading domino effect on the other nations. 

This whole system will implode on itself spectacularly. The question is whether we can position ourselves to profit from this. In a few years' time, there will be a huge transfer of wealth from currency holders to those holding real assets such as precious metals, especially silver. So, be prepared for it!

Well done Obama

The feel-good president just passed the Healthcare bill. Well done, another mind-boggling crazy spending program. The US cannot afford it. This is irresponsible and immoral, because ultimately the public, both current and future generations, will have to pay for it.

Well, on the brighter note, this will accelerate the collapse of the USD. And hopefully the people can understand the flaws of the currency quickly and move towards a sounder currency sooner rather than later.

So much stupidity is going on that I am just too lazy to explain them all.