Friday February 15, 2013

Back in the Middle Ages something called alchemy was attempted. It was a craft that took something ordinary, plentiful and of little value and tried to miraculously transform it into something rare, precious and therefore valuable. Of course, we all know that the experiment failed.

But alchemy has returned to the world in the form of the Federal Reserve and its fellow central banks. Their goal is the same as the quacks of the Middle Ages. They are certain that they can create paper and turn it into something very special. Instead of calling it alchemy, since that would not sit well with even the comatose public, they call it quantitative easing, bond buying, inflation, employment targeting and so on.

But the Federal Reserve’s alchemy is on steroids. It takes debt and magically turns it into something of value by declaring it an asset. As the governments of the Western developed world sink ever deeper into the debt abyss, these central banks "buy" this debt (government IOUs from technically insolvent nations) by the creation of electronic digits in a computer which they then credit to the too-big-to-fail banks.

These banks then place this debt as an asset on their balance sheets which they use to make loans and therefore create more debt. Including the unfunded liabilities (Social Security, Medicare and Medicaid) the U.S. government debt has been estimated to be near $220 trillion.

The insane number of dollars created have to find their way into something. This causes asset bubbles to blow up in stocks, commodities and bonds. The U.S. Treasury bond bubble is the largest in financial history.

Anyone with a functioning brain cell knows that all asset bubbles end badly. But the central banks only know one thing: keep increasing the quantity of paper money until inflation destroys the poor and the middle class. In the meantime, the bubbles may continue to expand thanks to the paper money creation and the mainstream press which assures everyone not to worry because everything is OK. But it’s not OK. Nothing that caused the financial crisis in 2008 has been fixed or even addressed.

Modern-day alchemists are guaranteed to fail. All you have to do is to keep your eye on the Treasury bond market and the U.S. dollar. When they start to plunge, head for your bunkers.

CHARLES STEINHACKER

Great Barrington