"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, February 1, 2013

Modern Day Alchemists

Those of you who have been regular readers of this site have seen me use this phrase to describe the Western Central Bankers. I wish to explain this a bit further so you can understand my take on this modern phenomenon.

Back during the Medieval Period, a craft developed which attempted to find a method whereby common, ordinary and PLENTIFUL materials, could be transmuted into something rare, precious and accordingly, valuable. Through various experiments, they took lead, iron and other metals and tried to create a foolproof method for generating untold sums of wealth and thereby prosperity.

We all know that such attempts ended in disappointment/failure but at least we did enhance somewhat our understanding of chemistry and some other earth sciences a bit in the process.

Fast forward to today - what we are witnessing in the Central Bank actions of this last decade is unprecedented as far as its scope but not in its goal when we clear away all the fog and obfuscations involved. The goal of these modern day alchemists remains EXACTLY the SAME as that of the quacks of the Medieval period, namely, the transmutation of common, ordinary and plentiful materials into something of value which will herald in a new era of lasting prosperity.

What I am referring to goes by various names, Quantitative Easing, Bond Buying Programs, Inflation Targeting, etc. but in its essence it is identical. It is no less than the attempt by Central Banks to turn paper into something of value. In this case it is even worse, because it takes DEBT and somehow cosmically turns that into VALUE by declaring it an asset. I cannot think of anything more opposed to sound logic and economic common sense and yet this is where we are at today.

Think about what these hucksters have foisted upon this generation - As the governments of the West sinking deeper and deeper into a debt abyss, these Central Banks "buy" this debt (government IOU's from technically insolvent nations) by the creation of electronic digits in a computer which they then credit to a primary dealer (large bank). This large bank then declares this an asset against which it may generate loans and thus the new "credit" makes its way down through the economy ending up, supposedy, in creating more spending (more debt) which in turn is supposed to stimulate demand for all manner of products and services.

Along the line, the size of the debt burden gets bigger and bigger and bigger, while the citizens are told not to concern themselves with such things. "Don't worry" we are told, "The Fed can continue to enlarge its balance sheet and accomodate as much liquidity as is needed to deal with matters."

MEanwhile, here in the US, the federal debt is now firmly over 100% DEBT to GDP. The last time that this happened in this nation was back during WWII, when the nation was forced to deficit spend in order to ramp up for that conflict. However, and this is key, the DEBT/GDP ratio did not stay there long as the path for that ratio was one of decline. Today however, and this is what is absolutely terrifying, the trajectory for the US debt is not one of decline. Quite the contrary, it is one of a PARABOLIC INCREASE.  We only have to look 4 years out the curve to see that the nation's deficit will increase by a minimum of $4 TRILLION taking the total well over $20 TRILLION. Heaven only knows where we will be in a decade!

Yet, this CERTAIN DEVELOPMENT seems to have been completely and utterly relegated to the back corner of some faraway room when it comes to the current wave of euphoria, and I might add, downright GIDDINESS, that has infected the chattering financial class and the majority of the wildly bullish analysts now urging continued buying of stocks by investors worldwide. Shortsightedly, they point to corporate profits, low interest rates and continued intervention by the Federal Reserve to make their point that equities are the GO TO investment that the public needs to buy right now, because "they are still cheap". It is as if an intoxicating brew or opiate has been poured out from on high upon the generation who are declaring with absolute confidence that the "worst is over".

Case in point is Japan, which has a DEBT to GDP ratio of over 200% and is climbing. As a matter of fact, the new government there ran on a platform that it would force the Bank of Japan to target an inflation rate of 2%. In other words, buy as much debt, print as much yen, etc. as is needed to FORCE inflation to move to a 2% rate. Take one look at what this has done to the value of the Yen, but particularly to the value of the Yen compared to Gold. It has plunged 16% against the value of the US Dollar in 5 months.

It has fallen a whopping 80% against the value of an ounce of gold in 12 years time.

The same thing is happening to the Yen in relation to the Euro, against which is continues to also plummet.

If you think that the grand experiment is not going to impact the average Japanese citizen, take a look at the following chart of Brent Crude oil when priced in terms of the Yen. Notice the rocket shot higher that has occured since the currency began strongly devaluing. Crude oil prices in Japan are certainly experiencing that "benign" inflationary impact. Since Japan imports the vast bulk of its crude oil, its devaluation of the yen, caused by massive yen printing/creation, is going to hit the average Japanese citizen quite harshly.

Of course, the authorities there are banking on the fact that they expect the Nikkei to continue rising sharply also thereby muting the impact from the higher cost of living that is coming to their shores. They are also expecting the sales of Japanese made electronics/automobiles,equipment, etc. to increase globally due to this competitive devaluation with the hope that this will spur additional growth in the domestic economy; more jobs and thus more spending.

In other words, it has become a vicious circle with the nation continuing to press its currency lower in order to ward off the impact from years of overleveraging and excessive debt.

The point in this however is that the purchasing power of the Japanese citizen is going to fall as their currency devalues.

Another chart is the Brent Crude in Dollar terms just to provide a gauge to see that while crude has been rising even in Dollar terms, the rise in not nearly as pronounced as it is in Yen terms. 

That brings us fact to our initial point. What the Western Central Banks have all opted to do is basically the same as the Japanese although the Japanese, to their credit, are far more open and honest about what they are attempting. 

This is the reason that heretofore the GRAND EXPERIMENT of the MODERN DAY ALCHEMISTS has not yet ended in apparent failure. In a world in which only one nation was engaged in this massive bond buying/liquidity injection/money creation attempt, that nation would see its currency collapse in value against the other major global currencies, thereby impacting its average citizen (the middle class and especially the poor) as their standard of living inexorably declines, much to their bewilderment and loss to explain. Rampant inflation would be seen even in the midst of a soaring stock market as the inflation manifests itself FIRST in that sector.

Were the Fed the only Central Bank engaged in this madness, the Dollar would have already gone the path of the Yen and begun its INEVITABLE and UNAVOIDABLE devaluation. Both the Yen and the British Pound however are beating the Dollar to the devaluation punch.

Even at that, the US Dollar is still barely holding its own right now. Look the monthly chart and see how the Dollar is beginning to sink. Again, were it not for the weakness in the Yen and the British Pound, the Dollar would be the "sick man" of the global economy based on the sheer size of this Federal Reserve alchemy.

Take one good hard, long look at the long term chart of the US Dollar and tell me if that inspires the least bit of confidence that any of this will end well for the average middle class and poor US citizen. Japan will be our example of what to expect. That is why gold will ultimately prove to be the best defense against what I now call the DEPRADATIONS of the Federal Reserve. Their alchemy will ruin the Dollar as surely as that of the Japanese monetary authorities is ruining and will ruin the Yen.

So, the party can continue and will continue for a while longer with the revelers enjoying their euphoria but the Republic is in grave danger, which though out of sight and out of mind for the immediate time being, continues to fester until such time as it erupts into full sight. Then and only then will this generation come to their senses and realize the utter folly of their faith in these modern day Alchemists and their effervescent promise of permanent prosperity with no pain and no consequences from that age old enemy called DEBT.


Yes, we can now have it all, courtesy of our monetary masters and their brave new world of modern day alchemy.

Blue skies, nothing but blue skies ahead. or to steal a partial quote from Dickens; "IT WAS THE BEST OF TIMES..."

Behold what a paradise Central Bankers have given to us all! Let us be the first to salute them for what they provide to us.... Hail Caesar....

Just keep that bread and those circuses coming to amuse and entertain us. Meanwhile, enjoy the stock market rally while it lasts.


  1. trim tabs is with ya!


    have a great weekend!

    1. 77 - good link - thanks much... I have not been tracking margin debt but my guess is that it is sharply rising - heck - you can have both a Dollar Carry trade and a Yen Carry trade now to finance ever more leveraged buying of equities.

  2. This comment has been removed by the author.

  3. Your long-term US dollar chart looks like it could be forming an inverse head-and-shoulders/triple bottom.

  4. Excellent.
    I would like to see you do more posts like this. They reinforce my commitment to stack and hold

  5. Thanks Dan , you will be driven to ever greater writings to get this madness off your chest.

  6. Let’s see how these charlatan alchemists will deal with 43.3 metric tons of gold standing for physical delivery after option expiry!!! Blythe will be busy in her lab the next few days trying to convert this entire amazing spike in physical demand into fiat paper at a huge premium to spot prices. Let’s hope that whoever stood for physical delivery will refuse to trade their due for fiat currency as whatever premium the Blythe will offer them will be pale in comparison to the sharp rise that gold will have in the not too distant future.

    I can’t wait to see what will happen at this month’s option expiry for silver…!!! I can smell a huge short squeeze in the air. We might finally be closing to the turning point where the cash market will overtake the paper market.

    And by the way, my computer screen shows me that on the CME Group web site has the Silver March Option at 31.82 while the May is at 31.60. I am not sure if I am reading the right site or if my understanding is the right one but isn’t it what is called backwardation in the future market? What would this imply for Blythe in her lab?!!!


    Have a good weekend Dan!

  7. Dear Dan...thumbs up!

    I particularly appreciated 2 sentences :

    1) "their standard of living inexorably declines, much to their bewilderment and loss to explain. "

    Put a frog (middle class) into boiling water, and it will jump out of it. But put it into warm water and simply regularly increase the temperature...and it will stay there and die! This time is no different. Middle class is IMHO the laboratory rat of these modern alchemists...probably having fun about it, because they know the end result, and already bought physical gold. This is all a huge scam, a huge wealth transfer under the nose of the ignorant middle class.
    Where is Robin Hood???

    2) "That is why gold will ultimately prove to be the best defense against what I now call the DEPRADATIONS of the Federal Reserve."

    You have all my sympathy, just as Jim Sinclair, for trying to warn those who are willing to listen through the MSM bullshit.

    In France, we have a movie's famous sentence (I think it was Mathieu Kasowitz's) : it's a guy who JUMPS from a 50 floor building. Falling through the air down the unevitable crach, arrived at 40th floor, he says "until now, everything is ok".
    at 30th floor : "until now, everything is ok".
    at 10th floor : "until now, everything is ok".

    Which floor do you think we are now?
    Does the previous question really matter?

    Let's just be aware and take the right colored pill to get out of the CB's Matrix.

    1. Hubert Du Haut;

      Thanks for a great analogy. That is a perfect picture to describe that current mania. These things can last longer than many expect until it reaches a near fever pitch before the giant "SPLAT" sound occurs.

  8. I found the link :)
    Sorry, there must be a translation in english somewhere...
    the text :

    "It's the story of a man who falls from a 50 floor building. The guy, while falling and falling, repeats to himself to feel reassured and give himself courage : until now, it's ok. until now, it's ok. until now it's ok. But the important, it's not the fall. It's the landing."

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  10. Hi Dan, Wasn't it about that same time in history that some enterprising tailors convinced the emperor that they were making him a gorgeous wardrobe of new clothes?

    1. Power Corrupts - I have it on good authority that those same tailors started the alchemists guild and then sold derivatives to the King's Court guaranteeing them risk free profits!

      Thanks for a fun comment!

    2. Glad you enjoyed it. Tailors selling derivatives? Burst my bubble, I always thought they made an honest living...

  11. Really great read Dan. Its seems obvious to me that the USH3 DXY and the Gold Silver Ratio are in varied stages of the same HS pattern now confirmed in the YEN. Its just a matter of time, weeks only i think. GBP first, the USD and GSR ..and USH3 last. Stock market will fall later this year i think although NAS seems to be HS too. 1 Month behind the rest.

    Its truely insane whats occuring in the world at present and the average citizen has absolutely no idea of the danger that awaits us all.

  12. Hi Dan,

    Great post. From the hinterlands of Japan here the inflation has not kicked in yet. Besides the 'normal' post 2008 'non-inflation' of most supermarket items being repackaged into smaller containers at the same price, worldwide phenomenon.

    Amazingly gasoline is still hovering around 139Y / L , but I've heard in the cities its much higher. That'll be the first telltale soon.

    Keep up the good work,



  13. «Why the Japan of today is important t - it as much oil? '' This situation due to Fukushima, I have extensively explained on my blogs since this March 11, 2011. It is not due to earthquake and tsunami impact to which any nuclear plant in the world could survive, but at the fall of rubble on external power lines unprotected and pumping ocean water plumbing non-protected. So just to repair and strengthen and everything is as before.So, Yes! The import of oil and gas for power plants is a mafia problem.

  14. Thanks for sharing the information. That’s a awesome article you posted. I found the post very useful as well as interesting. I will come back to read some more. best advisory company

  15. The way I see this is that we are in a no win situation. Caught between a rock and a hard place, or whatever you want to call it.

    The FED had no choice but to increase the monetary base or see unemployment at 10% or more. That would have been totally unacceptable to main street. Logic is irrelevant. Eployment is paramount. Mainstreet does not read Trader Dan and has no clue about what is going on in the world of economics.

    So go with the flow, see what the Monetary Base is doing, meaning $2.8 trillion by the end of the month, and expect the price of gold to be $1,700. Simple math and inevitable.

    Quoting Bible verses will not change the future. Faith and economics are like oil and water. They do not mix.


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