LUNDIN: And Now The Deluge

The aftermath is often much worse than the storm.

In the wake of the global financial crisis, and with the Fed and other central banks determined to repeat the mistakes of the past, this will be one of those times.

Hurricanes are different from most other natural disasters. Unlike earthquakes and fires, for instance, there is no element of surprise.

You have time to ponder your fate.

This is a bigger deal than the uninitiated might understand. The worry, the “what ifs,” the ceaseless planning in the back of your mind as you try to accomplish other daily tasks — it all wears on your psyche. And for the well-initiated into the fraternity, the “why agains” swirl like eddies through the flow of your emotions.

While there are contrasts with other natural disasters, hurricanes have powerful similarities to financial disasters. In fact, following yet another direct hit by a surprisingly powerful storm, the analogies are too easy to resist for this Louisiana resident.

So I apologize in advance if the following comparisons seem a bit trite. Because, believe me, they are relevant.

The reason: Few realized, before or after, that the aftermath of Hurricane Isaac were going to be worse than the initial effects of wind and rain. And likewise, relatively few have understood how the after-effects of the 2008 credit crisis — primarily the efforts of central banks to mitigate the damage — will be far more impactful and harmful.

Danger From Another Direction

Isaac wasn’t supposed to be much of a storm. It was moving so quickly, it wasn’t expected to have time to grow in strength, even though it was passing over the hot, energy-rich waters of the northern Gulf of Mexico.

Because of the favorable forecasts and the simple fact that the storm’s rapid pace didn’t allow much time to act, most people in its path chose, as I did, to hunker down rather than evacuate.

However, although it was relatively weak and quick, Isaac was a large weather system, and therefore pushed along a disproportionate tidal surge, much as Katrina did seven years to the day previously.

And it had a few surprises in store. First off, the storm hit the Louisiana coast at precisely the worst angle, allowing its counter-clockwise winds to drive its tidal surge through a web of natural and man-made waterways, directly at the once-weak underbelly of New Orleans.

Ahh, but we were prepared this time. The last crisis — Katrina — led the powers that be to prepare for just such an event. The Army Corps of Engineers had spent some $15 billion creating marvels of modern civil engineering, including a 1.8-mile, 25-foot-high concrete wall in the middle of the disappearing salt marsh that once protected New Orleans. The surge took direct aim at this barrier…and the massive wall rebuffed the waters with ease.

But central planning always brings unintended consequences. While the barriers deflected the waters, they unnaturally sent the flood to other areas outside of the protected city. Simply put, if you were within the flood protection system you were fine. If you were outside, you were screwed.

And then there was the second surprise — Isaac stalled as it hit the coast, transforming from a racing, relatively dry storm to a pondering rain-maker.

The result: A surprisingly powerful tidal surge was directed into areas that would have never flooded before. And torrential rains that cascaded into streams, rivers and lakes, imperiling hundreds of thousands for days after the storm had passed.

So the storm’s real danger came from another, unforeseen direction — and largely after the tempest had moved on.

The Aftermath Of The Economic Storm

Here’s where the economic analogy kicks in. The 2008 crisis was the hurricane, coming in and tearing at the infrastructure of our global financial system, before passing over.

Previous crises had led the financial authorities to prepare a system of protections for the system. In addition, they were forced to ad lib in some very significant ways, including the multi-hundred-billion-dollar Troubled Asset Relief Program (TARP).

And, as the recently concluded audit of the Fed (thank you, Ron Paul) revealed, this institution unilaterally loaned out an additional $16 trillion to financial institutions in the U.S. and all over the world.

That means the Fed, on its own authority, loaned a sum greater than the entire U.S. economy to the world’s largest banks. While Lehman was left to founder for the sake of appearances, Goldman Sachs, J.P. Morgan Chase, Citigroup, Morgan Stanley, Bank of America, Barclays, Royal Bank of Scotland and dozens more were allowed to gorge at the trough of the U.S. money supply.

Just as with the hurricane protections in Louisiana, if you were within the protection of the system, you were fine. If you were outside, you were screwed.

But now comes the real danger — the unintended consequences of these rescue efforts — as a flood of money flows into the global economy from countless directions.

Bred To Print Money

The big banks were never allowed to fail as a result of the 2008 crisis, for the sake of the global financial system.

Although the real problem was letting these institutions get so large and leveraged via years of easy-money policies, there are valid arguments for doing whatever it took to preserve the world’s financial system in the midst of the crisis.

But not allowing the banks to fail is entirely different from guaranteeing that they’ll be big winners. And that’s just what has happened, as the trillions in new money naturally made its way into financial assets.

Bonds are being bought, and the stock market continues to forge higher, as tsunami-like waves of liquidity slosh back and forth through the world’s investment markets.

Yet economic growth continues to stall, and even decelerate, in the major economies of the U.S., Europe and Asia. The problem is that the Fed and other central banks are trying to build their economies higher, even as they erode the foundation via a flood of new currency.

The real losers, of course, will be the everyday citizens whose purchasing power and wealth are relentlessly eroded. The big bankers and others safely ensconced within the protection system of Wall Street and Washington will make out fine as financial assets soar in value.

Don’t doubt this result; it’s guaranteed by human nature and thousands of years of economic history.

You see, central bankers will do what central bankers have always done: Print money.

This is the very essence of their being. Like a greyhound is bred to run, central bankers are raised to provide liquidity — however much is necessary — in an economic crisis. On a cellular level, they are programmed to avoid deflation at all costs, even if it means accepting the lesser evil of inflation.

And if there are no signs of inflation then, well, the leash is off. They can print as much money as they please.

Of course, the Fed and their ilk have “adjusted” their measures and definitions of inflation over the decades to allow them more room to move. Long gone is the pesky CPI of Richard Nixon, which led to price controls and other unpopular and ineffective attempts to rein in inflation.

Now the central bankers can move, and they are. The first two rounds of quantitative easing in the U.S. were judged, as we’ve seen from the Fed minutes and Ben Bernanke’s recent speeches, to be very effective with no inflationary impact.

In other words, no harm no foul, and there’s more to come. Much more.

QE As Far As The Eye Can See

I was one of the first, back in May, to predict that deteriorating employment numbers would lead the Fed to launch a new, significant round of quantitative easing.

But even I was shocked at the desperate lengths to which they have reached with their recent announcement of QE3.

No limits. No restraints. Plus a warning that they’ll ramp up the program if data show the quantitative easing isn’t working. And a promise to continue the money printing even if it does turn the economy around.


I took some heat over the past couple of months from a lot of quarters for my steadfast QE3 predictions. And I was gratified to win some bets when Bernanke & Co. announced that they were cranking up the printing presses.

But make no mistake: This isn’t good news for America.

An unlimited QE program like this is truly a sign of desperation by the Fed, which has access to more data and more analyses than any other entity in the world.

What do they know that we don’t?

Early Signs Of Impending Recession

Some hints may be found in the recent second quarter GDP revision, in which estimated economic growth was slashed from an already-low 1.7% to just 1.3%.

That’s stall speed.

To add further evidence of a potential decline in economic altitude, the Philadelphia Fed survey of coincident indicators is now pointing toward an impending recession.

As RBC Capital economist Tom Porcelli notes, “Here’s another indicator flashing red. The three-month trend for the Philly coincident index (which captures state employment and wage metrics) fell to a fresh cycle low of +24 in August — it was +80 just three months ago.

“A reading this low historically bodes ill for future economic activity. Looking back at the last five downturns, this index averaged +41 three months prior to the official start of the recession. We have decidedly crossed that threshold.”

Consider that the Fed launched unlimited quantitative easing at a rate of $40 billion per month, to infinity, not because the economy was slowing, but because unemployment remained stubbornly high.

Of course, they probably had good indications that second quarter GDP growth was going to be revised severely downward. But still, the point remains: If the U.S. slides into recession, can you imagine how aggressive Bernanke will get?

Again, he wasn’t named “Helicopter Ben” for his penchant to pinch pennies. If a recession looms, count on Bernanke and his Fed cohorts to blow the dam and unleash every bit of monetary liquidity at their disposal.

The effect on gold and silver prices, of course, will be extraordinarily bullish. Remember, QE1 and QE2 served to lift the gold price by 167% from trough to peak.

Given the effect of diminishing returns, I previously expected another round of QE to lift the gold price by no more than 20% to 30%.

Now, all bets are off.

Of course, gold soared immediately following the Fed’s announcement of QE3, but it’s important to realize that the current rally began well before any indication of Fed action.

Gold began rallying on indications that the European Central Bank was going to begin aggressive quantitative easing and that China was also going to loosen monetary policy to recharge economic growth.

So this new leg up in gold isn’t reliant upon Fed action alone. It’s based on the growing consensus that we’ve entered another round of massive global monetary reflation.

That’s the fundamental story. And investors — especially those outside the financial levees — need to get prepared for the oncoming flood of money.

Brien Lundin is the editor and publisher of Gold Newsletter, a publication that has ranked among the world’s leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit

Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world’s oldest and most respected investment event. This year’s event will feature Sarah Palin, Charles Krauthammer, Rick Santelli, Dinesh D’Souza, Marc Faber, Peter Schiff, Dennis Gartman and dozens of other top experts…plus a scintillating debate pitting Charles Krauthammer against James Carville and Doug Casey.

To learn more about the New Orleans Investment Conference, click here.

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