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Bernanke Out of Bullets, But Not Bombs

By Michael Pento, September 1, 2010

Word on the street is that the Fed is now “out of bullets.” Many economists fear that in its efforts to spur recovery, the Fed may have already exhausted its array of monetary ammunition and that it has nothing left of significance to fire at the steadily advancing recession. They believe that since interest rates are already near zero and Fed policies have failed to inspire banks to expand commercial and consumer lending (despite ample bank reserves), the tools traditionally employed by the Fed have been rendered impotent.

To their credit, these commentators are 100% correct in asserting that the Fed can’t help the economy by printing more money. But it’s not because the Fed policy is without consequence, but because the Fed has always been incapable of creating real growth. All it can do is manipulate the purchasing power of money. By keeping prices from falling more that they would have naturally, Fed intervention has created a burden. Lower prices would have cushioned the effects of the recession for many people.  

However, because it failed to spark faster GDP growth, most people now agree that Fed’s traditional ordnance, namely purchases of short-duration Treasuries from primary dealers in order to depress the yield curve, has lost effectiveness. But the Fed is never… ever… ever… out of ammo. In fact, according to Mr. Bernanke himself, the central bank may be about to unleash the heavy artillery.   

Our central bank controls the printing press, so it has the ability to create money at will and use it to purchase anything it desires. It can and does purchase longer-dated Treasuries and other bank assets like home loans. If these funds are falling into the black hole of the banking system, there are ways for the Fed to cut out the middle man.

For instance, the Fed could buy stocks and real estate directly from the public. The Fed could buy a trillion-plus dollars worth of S&P 500 stocks. Consumers that sold stock to the Fed would receive funds that didn’t previously exist. M1 money supply would boom as demand deposits surged. But if the Fed continued to hold interest rates to zero, banks would continue to pay near-zero interest on their deposits. So, American consumers would then be faced with a choice: earn pennies on their savings accounts or take the cash out and jump onboard the soaring stock market.

The Fed could also, if it thought necessary, create another bull market in real estate. It could guarantee ‘no down payment’ loans of any amount to any borrower, with a promise never to foreclose or seek compensation in the result of default. By making home purchases risk-free, such a policy would surely re-energize the housing sector.

By spurring price increases for stocks and real estate, the elusive “recovery” could be conjured in an instant. The only flaw would be that nothing would actually improve. By telegraphing unlimited monetary debasement, such policies would cause a run on the dollar. Although the “dreaded risk of deflation” would no longer be discussed, investors would be forced to once again abandon savings and chase runaway prices. In other words, we would find ourselves in the exact same predicament that led to the crash of 2008.

Speculation on non-traditional Fed activity is not a vain exercise. Bernanke’s speech last week gave warning of major initiatives to come. First, there’s this gem: “The FOMC will strongly resist deviations from price stability in the downward direction [i.e., deflation].” He also showed just how strongly he desires a return to rampant money supply growth and asset inflation when he said, “The Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.” What Bernanke means by such rhetoric is that the Fed will not only monetize assets held by banks, but will purchase assets directly from consumers – thereby placing money directly into their hands. 

For good or ill (mostly ill), the Fed can never run out of ammunition. Their bullets cost nothing to produce. In Jackson Hole, Bernanke finally began displaying, or at least describing, his arsenal. Unfortunately, these unconventional tools can cause far more damage to the economy.

We must immediately understand that the Fed can shower liquidity directly on the consumer in any amount it wants. The political pressure to do so will only increase as unemployment rises and economic growth falters. Therefore, rather than fearing phantom deflation, investors should prepare their portfolios for the real upcoming battle with intractable inflation.

This article is written by Michael Pento of Europac and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Europac, please visit:

Endeavour Financial to Release Year End Results On Sept 8

Endeavour Financial Corporation will release its financial results for the year ended June 30, 2010 on Wednesday, September 8, 2010.

Management’s discussion of the year-end financial results will be webcast by V-Call on Wednesday, September 8, 2010 at 11:00am Eastern Standard Time and can be accessed from the Corporation’s website at www.endeavourfinancial.com or by calling the operator at 201-689-8567 or toll-free 1-877-407-0782 prior to the scheduled start time. The call will be archived for later playback on Endeavour’s website until September 8, 2011.

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Alder Announces Appointment of the Honorable Pierre Pettigrew, p.c. to the Board of Directors

Alder Resources Ltd. is pleased to announce the appointment of the Honorable Pierre Pettigrew, p.c. to the Board of Directors of the Company. The Honourable Pierre Pettigrew, p.c. has had a distinguished career with success in both public and private sectors. From January 1996 to February 2006, he served as a Member of Parliament.

Most notably, he led a number of senior government departments in his ten years as a minister in successive federal Canadian governments. Among other positions, he has served Canada as the Minister of Foreign Affairs, Minister for International Trade and the Minister for International Cooperation. He is now with Deloitte & Touche LLP in the role of Executive Advisor, International. Prior to entering national politics, Pierre Pettigrew was the Vice President of Samson Belair Deloitte & Touche International (Montréal), where he acted as an international business consultant.

Mr. Pettigrew states, “I’ve been very impressed over the last few years by the progress Colombia has made toward significant political stability and substantial economic progress. Mining in Colombia, as it has been in Canada, is at the heart of its future. I’m delighted to join Alder’s board as it is poised to take advantage of its good mining code and contribute to a stable development of a country in our hemisphere.”

In conjunction with the Mr. Pettigrew’s appointment, Alder has issued a total of 1.3 million stock options under the stock option plan of the Company to various officers, consultants and directors of the Company. The options shall vest immediately and are exercisable at $0.35 per option, expire on August 31, 2015 and remain subject to receipt of all necessary regulatory approvals, including the approval of the TSX Venture Exchange.

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