The Beginning of the Panic By Porter Stansberry Tuesday, June 7, 2011 In the next few weeks, our country will enter a period without precedence in our experience. On June 30, the Federal Reserve has pledged to cease buying U.S. Treasury bonds. This is the second time since the financial crisis it has intervened in the Treasury market in a major way. The program of buying new Treasury issues has been dubbed "quantitative easing II" (QE2). We'd wager not one in 1,000 Americans has any idea (or at least any real understanding) of what has been going on in the market for U.S. Treasury bonds since the financial crisis. For the last nine months, the Fed has been printing up new dollars and buying huge amounts of newly issued debt from the U.S. Treasury $600 billion of bonds. And these purchases followed a $1.75 trillion program of quantitative easing that ran from March 2009 to March 2010. It is no exaggeration to say that a printing press has kept our economy going for the last two years. But what will happen when the printing stops? While we honestly don't know, we're going to speculate that, in the short term, the U.S. dollar will rally and commodities will suffer a serious correction. We will see a dramatic slowdown in the rate of monetary inflation. People will think prices will stop going up. Economic activity will begin to decline. Fear will lead a lot of investors to "go to cash." That means buying short-term U.S. Treasury bonds because they're the most liquid, most frequently traded form of cash. As this process unfolds, we expect to see another global panic. Especially if Bernanke's decision to stop the presses coincides with a Republican political gambit refusing to raise the debt ceiling, which could cause a default on U.S. Treasury bonds. Whether the debt ceiling is raised or not, it's only a matter of time before the Fed will have to turn on the presses again. And when "QE3" begins, it will send our creditors an unmistakable message: You will never be repaid in anything other than massively devalued paper. That will be a horrible day for the value of our currency. It may even mean the end of the U.S. dollar as the world's reserve currency. But rather than face these unpleasant facts and consider where they are leading us, most people continue to think, "It can't happen here. This is America." Meanwhile, our country has been depending on a printing press to make our economic system work. When is the last time that happened in America? The Civil War. How many other things most people didn't think would ever happen in America have happened recently? What about the collapse of our investment banks, the bankruptcy of General Motors, the liquidation of Fannie Mae and Freddie Mac, the failure of AIG, hundreds of banks being seized, millions of homes in foreclosure, or real unemployment rates close to 20%? We could go on... As we frequently point out to our critics, the question isn't when this crisis will begin it started in 2008. The question is, when will it end... and how bad will it get before it does? We believe every American ought to be ashamed, outraged, and furious that the most powerful political union in history proceeded down the path of these bankrupting policies. But most of all, you ought to be afraid of where these policies have led us. Don't forget: At the end of this month, the Federal Reserve will stop buying Treasury bonds. That's the first time since March 2009 our economy will stand on its own two feet. And we expect that just like a child riding a bike without training wheels for the first time... it will crash. We are not alone. Bill Gross, manager of the world's largest bond fund, has put 4% of his fund short U.S. government bonds. Just consider that for a minute: The most powerful fixed-income manager in the world (not just in America) is selling the U.S. Treasury short. The University of Texas endowment fund recently took physical delivery of $1 billion gold bars. That's an enormous bet from some of the wealthiest and best-informed investors in the world that the U.S. monetary system falls apart. Finally, in what we believe is the ultimate death knell for the U.S. dollar, our trading partners are moving out of the dollar and into gold. Mexico, for example, one of our most important trading partners, just purchased almost 100 tons of gold. All around the world, more and more central banks are selling dollars and buying gold. They're doing so because they can plainly see America's credit has become unreliable and the value of the dollar is likely to decline. If you think you might be trading in something other than U.S. dollars in the future, you might not want to be holding U.S. dollars. You might want to be holding that currency. And if you can't hold that currency, consider holding gold. Good investing, Porter
What if, say, the FED stops printing money and bank liquidity dries up and banks impose withdrawal restrictions? Why would anyone rush to a medium of exchange or liquidity for which access is not guarenteed? When banks begin imposing controls over the capital of individuals to preserve their balance sheets, all scenarios that don't consider a bank run will be off the table, imo.
Valid point - but what if the Banker and the Taxman require payments in FIAT only - those who have loans and have to pay tax will have to rush to paper money. and there are plenty of those around.
But that is no change to the current situation, they currenty do require payment in their printed currencies. The changed circumstance is when the banks lock up your liquid assets for their benefit AND people need to rush into their bank accounts. Suddenly, those who need their money can't get it. This is the very same money they can't print enough of at the moment. They turn off the sprigots off and the banks steal your savings through installing withdrawal controls. That's the game changer not considered in the article. In fact, I just read on maxkeiser.com that the French Postal Bank has just halved maximum daily withrawal limits to 1,500 euro. So you want to buy a new refrigerator because the old one just packed it in, as happened to me recently? 1,500 euro doesn't get you very far. I don't see investors buying bonds or fiat currency when they can't get at it. It takes the liquid out of liquidity and what's left doesn't make any sense, to me, in the scenario outlined.
What on earth would motivate a flood to the USD away from commodities... I know they say its a speculation, but why would people do that?
I've read opinion that says its possible to keep printing and keep inflating forever. They're going to kick the can down the road as far as they can, and then retire, leaving the can to someone else to either deal with or kick some more. If I was a country, and the USA owed me money, I'd wish I could ask for it in gold.
That seems pretty well balanced from Porter Stansberry. I heard Schiff flame him on radio recently for lying about his "predictions".
After QE3 will be QE4/5/6/7/8................... They have NO choice! No QE means no sales of US Bonds, means no income, means no expenditure, means no.... Hang on, it is going to be one hell of a ride.
I suppose the market IS sustainable. As long as the public have faith in the market - it continues (even though its based on nothing hard) But as soon as people start getting the courage to respond to reality, it would expose the sytemic fault in the market and it will correct, which will motivate the fear trade and potentially have systemic breakdown. As long as sentiment is up, the fantisy continues, if people are willing to pretend there is no problem, it continues. As soon as the Emporer is revealed to have no clothes - it collapses.
