The Fed’s Chubby Checker strategy

Bill Bonner explains why some people no longer hear the music.

Come on everybody! / Clap your hands! / All you looking good!

I'm gonna sing my song / It won't take long! / We're gonna do the twist and it goes like this:

Come on let's twist again, / like we did last summer! / Yeaaah, let's twist again, like we did last year!

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Do you remember when, / things were really hummin', / Yeaaaah, let's twist again, twistin' time is here!

Heeee, and round and round and up and down we go again!

Well, Socit Gnrale was wrong. No quantitative easing (QE). Instead, dear reader, it's the Chubby Checker monetary strategy.

Reuters is on the case:

(Reuters) - The U.S. Federal Reserve on Wednesday delivered another round of monetary stimulus and said it was ready to do even more to help an increasingly fragile U.S. economic recovery.

The central bank expanded its "Operation Twist" by $267 billion, meaning it will sell that amount of short-term securities to buy longer-term ones to keep long-term borrowing costs down. The program, which was due to expire this month, will now run through the end of the year.

Fed Chairman Ben Bernanke, speaking at a news conference after a two-day policy meeting, said the central bank was concerned Europe's prolonged debt crisis was dampening U.S. economic activity and employment.

"If we are not seeing sustained improvement in the labor market that would require additional action," he said. "We still do have considerable scope to do more and we are prepared to do more."

The Fed slashed its estimates for U.S. economic growth this year to a range of 1.9 percent to 2.4 percent, down from an April projection of 2.4 percent to 2.9 percent. It cut forecasts for 2013 and 2014, as well.

Hiring by U.S. employers has slowed sharply, factory output has slipped and consumer confidence has eroded, with Europe's festering crisis and the prospect of planned U.S. tax hikes and government spending cuts casting a shadow on the recovery.

The economy grew at only a 1.9 percent annual rate in the first quarter - a pace too slow to lower unemployment - and economists expect it to do little better in the second quarter.

C'mon everybody, clap your hands! The Fed is prepared to do more damage!

But what's this? You just can't please some people. The New York Times tells us about the complainers...

Throughout the Great Recession and the not-so-great recovery, the most commonly discussed measure of misery has been unemployment. But many middle-class and working-class people who are fortunate enough to have work are struggling as well...

We won't keep you in suspense. They're struggling because real, hourly wages are going down. Back to the Times:

These are anxious days for American workers. Many... are underemployed. Others find pay that is simply not keeping up with their expenses: adjusted for inflation, the median hourly wage was lower in 2011 than it was a decade earlier, according to data from a forthcoming book by the Economic Policy Institute, "The State of Working America, 12th Edition." Good benefits are harder to come by, and people are staying longer in jobs that they want to leave, afraid that they will not be able to find something better. Only 2.1 million people quit their jobs in March, down from the 2.9 million people who quit in December 2007, the first month of the recession.

"Unfortunately, the wage problems brought on by the recession pile on top of a three-decade stagnation of wages for low- and middle-wage workers," said Lawrence Mishel, the president of the Economic Policy Institute, a research group in Washington that studies the labor market. "In the aftermath of the financial crisis, there has been persistent high unemployment as households reduced debt and scaled back purchases. The consequence for wages has been substantially slower growth across the board, including white-collar and college-educated workers."

The unease of voters is striking: in a New York Times/CBS News poll in April, half of the respondents said they thought the next generation of Americans would be worse off, while only about a quarter said it would have a better future.

What's the matter with these people? Can't they hear the music? Don't they want to join the party?

Got gold? Don't worry about the fact that the Fed didn't pull the QE trigger yesterday, sparking inflation fears and a rush into gold. There's another, more pertinent, reason for protecting yourself with real, tangible assets.

Read on for today's guest essay...

The Daily Reckoning PRESENTS: Is the problem too much debt, or too much money? Our former City correspondent Adrian Ash head of research at world-leading gold and silver exchange BullionVault picks up the story...

A Grievous Evil

by Adrian Ash

Most peoplestill get it. Hardly anyone dares guess where it leads.

"Part of the austerity mindset," says an Oxford professor, "is the belief that transfers from creditors to debtors are unfair, because they result from the feckless behaviour of the debtor."

"The imposition of austerity," agrees a US think-tanker, "and the waste of human potential this view is generating begs for moral judgement."

So the solution? "Savings today aren't scarce," says another would-be policymaker, getting closer than he knows to the true spoke in the wheel. Governments should therefore add more debt, he says, creating more jobs by borrowing more of the savings glut to finance new spending and get everything spinning again.

Yet already the savers are spooked. "In Greece," say two financial economists at VoxEU, "it is the insolvency of the government that has sunk the banks. In Spain, the banks are sinking the government. What is common in both countries is that savers are running away when they see the banks and the sovereign propping each other up."

Upshot? "[This] might turn quickly into a classic run," they warn, "the consequences of which are hard to imagine." But still it's worth trying to picture it. Because the odds have rarely been higher in the last half-century and more.

"How realistic is this fear?" asks another tenured pundit, this time in the Financial Times. "Quite realistic. One reason for this is that so many fear it. In a panic, fear has its own power. To assuage it one needs a lender of last resort willing and able to act on an unlimited scale."

But eurozone bank deposits dwarf the bailout funds promised so far 28 times over, says another academic economist. "The only way this €14.5 trillion gap could be filled is if the European Central Bank were willing to print a wall of money to plug the hole," she adds. "More importantly, depositors are withdrawing their money from peripheral eurozone banks because they are concerned about their savings being redenominated and devalued away should their country exit the eurozone."

Which brings us back to the blunt equation between money and debt.

"I have seen a grievous evil under the sun," as the nameless misery-guts of the Old Testament's Ecclesiastes moans in chapter five, verse 13 "wealth hoarded to the harm of its owners." And with debtors across the rich West tip-toeing ever nearer default, the creditors on the other side of the balance sheet might want to watch out.

"Rich people," says yet another pundit (very nearly our last!) "don't actually worry much about unemployment: it doesn't really hurt them, even if they lose their jobs. What they do worry about is inflation, since that erodes the value of their dollars."

But this sage could do with meeting some rich people. Or even just a regular saver, now watching this sun-and-sangria replay of what skirted the UK, and then the US starting a little less thanfive years ago.

Retained savings do indeed hate inflation, but they don't fear it anywhere near as much as default. That's what is squeezing the euro's vice-like embrace of Greece still tighter. It's also what drives people to pull their cash out of the banks and buy tangible assets. The steady uptrend in new gold and silver buyers here at BullionVault has been punctuated since 2007 by sharp spikes, not when QE fires up the printing presses (that buoys leveraged derivatives and spread betting bookies), but when the threat of bank or sovereign default hit its peak.

Yes, gold and silver like real estate and what Marc Faber calls all those "worthless collectibles" of stamps, art, fine wine put you on price risk. But the vast bulk of today's "wealth" sits on bank balance sheets, where assets match liabilities, debts match deposits, digits match digits as photons match photons and all that exists is the promise to pay.

Editor's note: Editor of the UK Daily Reckoning from 2003-2007, Adrian Ash is head of research at BullionVault the secure, low-cost gold and silver market for private investors online. Winner of a Queen's Award for Enterprise Innovation, BullionVault saw $2.5 billion in physical gold and silver change hands in 2011. Today its 40,000 users worldwide own more physical gold between them than most of the world's central banks.

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Please note that Fleet Street publications Ltd receives commissions for accounts opened with Bullionvault.

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