Click The Chart To Get Full Size--- Amounts (Billions)---Above is a chart of the CRB Index (from stockcharts.com) beginning to show some resistance at just above 200, a level unseen for a decade. Below that is a table from Bloomberg showing the total cost of everything in this deepening financial crisis.
Limit Current
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Total $11,623.63 $3,800.18
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Federal Reserve Total $7,565.63 $1,478.88
Primary Credit Discount $110.74 $65.14
Secondary Credit $0.19 $0.00
Primary dealer and others $147.00 $25.27
ABCP Liquidity $152.11 $12.72
AIG Credit $60.00 $37.36
Net Portfolio CP Funding $1,800.00 $248.67
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.82
Maiden Lane III (AIG) $30.00 $24.34
Term Securities Lending $250.00 $115.28
Term Auction Facility $900.00 $447.56
Securities lending overnight $10.00 $5.59
Public-Private Investment Fund $1,000.00 $0.00
Term Asset-Backed Loan Facility $1,000.00 $0.00
Currency Swaps/Other Assets $606.00 $417.86
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $33.58
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
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FDIC Total $1,551.50 $400.30
FDIC Liquidity Guarantees $1,400.00 $261.30
GE $139.00 $139.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
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Treasury Total $2,206.50 $1,621.00
TARP $700.00 $387.00
Tax Break for Banks $29.00 $29.00
Stimulus Package $168.00 $168.00
Stimulus II $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Citigroup Bailout $5.00 $0.00
Bank of America Bailout $7.50 $0.00
Support for Fannie/Freddie $400.00 $200.00
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HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
The figure of $11.623 trillion is truly shocking and is the amount that the US government has thus far pledged and spent to spur economic growth and to bail out banks.
The effect of all this money being pumped through the system will be highly inflationary. This is not a bad thing as the battered US economy needs a period of reflation to counter the possibility of deflation.
To get back to the chart and the table; there is a strong correlation between the two. There is a systemic link between inflation and commodity prices. With inflation presently at less than 0.1% and with a strong dollar, commodity prices can only fall, particularly with the massive slump in demand being experienced globally.
Therefore the $11.6 trillion cash injection should shield the worlds economies from the ravages of deflation. If deflation is not to be a factor, then we may have the basis for a global recovery.
Even Marc Faber, the prophet of Gloom, Boom and Doom said to Bloomberg this week:
“I see the comments from my readers and a lot of them, they want to short the market,” said Faber, 63, on Feb. 23. “This is something I would not necessarily do.”
Are we at the end of the recession? No, but we may be at the end of the beginning of a new cycle.
The tsunami of freshly printed cash will lead to a devaluation in the value of the dollar, at the same time pushing up the prices of gold and oil. The scarcity of physical gold will lead to massive investment in gold mining conglomerates such as Barrick and Freeport McMoran as well as into quality juniors such as Ivanhoe.
An interesting byproduct of the coming great inflation and dollar crash will be the effect that it has on T-bills. Creditor governments such as China and Japan are at major risk.
For example, foreigners may hold USD 7 trillion in US fixed-income assets. If the dollar depreciates by 15%, they will lose USD 1 trillion in real terms. That is equivalent to the total value of outstanding sub-prime mortgages.
However, they may have a plan to offset US inflation. To quote The Guardian from March 2nd 2009:
"And they will naturally be looking to gold as part of their reserve asset management strategy, and I see them buying."
China, the biggest foreign holder of dollar denominated treasury securities with some $681.9 billion or about 12 percent of treasury papers outstanding, could reverse that by paring its dollar holdings.
"China has $2 trillion of reserves, and only one percent in gold and nearly all of the rest is in U.S. dollars," said Marcus Grubb, managing-director of investment research and marketing at the industry-sponsored World Gold Council.
"What we are seeing is a reassessment of the risk associated with the high exposure to the dollar".
We are now in a new inflationary phase of this crisis. The day when China moves to protect its dollar assets may be closer than we think.
To quote Bloomberg from March 5th:
"Inflation expectations tumbled in the second half of last year, and by December had reached the lowest since September 2002. During that period, the CRB had its biggest six-month decline since the index was created in the 1950s. Expectations for inflation have since rebounded, signaling commodities will climb, Pento said.
“The government has created a massive increase in the monetary base, and it means we are entering a massive inflation cycle,” Pento said in a telephone interview from Holmdel, New Jersey. “Inflation will be intractable. All of these commodities will start to act as an alternative to currency and start to pick up. Gold should be the primary investment, and energy and base metals should be secondary.”
Gold may jump as much as 54 percent to between $1,250 and $1,400 an ounce by late 2009 or early 2010, Pento said. Copper will surge 77 percent to $3 a pound, he said".
I still believe that gold may yet drop to below $900. But even at todays price of $940, it is a bargain.
So rarely do we have a systemic bull that this is going to be too good to miss.
To conclude. On the basis, that we know what we know: We know that inflation is coming and that the dollar is overbought with massive weakness coming in order to kick start the demand for American goods. We know that this dollar weakness and inflation strength will be hedged by gold.
So don't be depressed by the decline in the CRB Index, see it as an opportunity. Don't look at the $11.623 trillion Bush/Obama spending packages as wasteful pork but as the foundation that will facilitate greater wealth for you in the future.
There is a perfect storm arriving but it has a blue sky in tow.
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