The U.S. economy is continuing to grow at a moderate pace and the economic outlook is positive, the Federal Reserve reported Wednesday, in an assessment that is likely to keep it continuing to pull back, or taper, its stimulus program. The so-called Beige Book found that consumer spending was higher, manufacturing continued to grow steadily and real estate continued to improve. Two-thirds of the 12 districts reported increases in hiring. Wage and price pressures were seen as contained. Some service-sector firms are planning to raise selling prices in the near term, the report said. 

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Fed Beige Book shows positive outlook

We introduced the first chartbook from Incrementum Liechtenstein in the fall of last year. It showed the debt bear market in 50 amazing charts. In their second chartbook, Ronald Stoeferle and Mark Valek from Incrementum Liechtenstein analyzed in great detail the raging war between inflation and deflation, as well as gold’s role in it.

The authors introduce the term “monetary tectonics” as a metaphor for this war. Similar to tectonic plates under a volcano, monetary inflation and deflation is currently working against each other:

• Monetary inflation  is the result of a parabolically rising monetary base M0 driven by the central bank monetary easing policy.
• Monetary deflation is the result of shrinking monetary aggregates M2 and M3 because of credit deleveraging.

The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly.

The chartbook shows several trend which confirm the deflationary monetary pressure:

• Total credit market debt as a % of US GDP has been shrinking since 2007 (“debt deleveraging”).
• US bank credit of all commercial banks is stagnating (close to negative growth), similar to the period 2007/2008. See first chart below.
• Money supply growth in the US and the Eurozone is trending lower. See second chart below.
• Personal consumption expenditures are exhibiting disinflation .
• The gold/silver-Ratio is declining. Gold tends to outperform silver during disinflationary and/or deflationary periods.
• The gold to Treasury ratio is declining. See third chart below.
• The Continuous Commodity Index (CCI) has been in a steep decline since the fall of 2011.

….continue reading and viewing more of these incredible charts HERE

In the 1960s every new $1 in debt bought nearly $1 in GDP growth. In the 70s it began to fall as the debt climbed. By the time we hit the ‘80s and ‘90s, each new $1 in debt bought only $0.30-$0.50 in GDP growth. And today, each new $1 in debt buys only $0.10 in GDP growthat best.

Put another way, the growth of the last three decades, but especially of the last 5-10 years, has been driven by a greater and greater amount of debt. This is why the Fed has been so concerned about interest rates.

You can see this in the chart below. It shows the total credit market outstanding divided by GDP. As you can see starting in the early ‘80s, the amount of debt (credit) in the system has soared. We’ve only experienced one brief period of deleveraging, which came during the 2007-2009 era.

Bernanke couldn’t stomach this kind of deleveraging. The reason is simple: those who have accumulated great wealth as a result of this system are highly incentivized to keep it going.

Bernanke doesn’t talk to you or me about these things. He calls Goldman Sachs or JP Morgan. And most of the Wall Street wealth of the last 30 years has been the result of leverage (credit growth). Take away credit and easy monetary policy and a lot of very “wealthy” people suddenly are not so wealthy.

Let me put this in terms of real job growth (created by startups) vs the “job growth” of the last five years.

According to the National Bureau of Economic Research, startups account for nearly all of the US’s net job creation (total job gains minus total job losses). And smaller startups have a very different perspective of debt than larger more established firms.

The reason is quite simple. When a small business owner takes out a loan he or she is usually posting personal assets as collateral (a home, car or some other item). As a result, the debt burden comes with the very real possibility of losing something of great value. And so debt is less likely to be incurred.

This stands in sharp contrast to a larger firm, which can post collateral owned by the business itself (not the owners’ personal assets) and so feels less threatened by leveraging up. Thus, in this manner, QE and other loose monetary policies maintained by the Fed favor those larger firms rather than the real drivers of job creation: smaller firms and startups.

For this reason, the Fed’s policies, no matter what rhetoric the Fed uses, are more in favor of the stock market than the real economy. That is to say, they are more in favor of those firms that can easily access the Fed’s near zero interest rate lending windows than those firms that are most likely to generate jobs: smaller firms and start-ups.

This is why job growth remains anemic while the stock market has rallied to new all-time highs. This is why large investors like Bill Gross have applauded the Fed’s policies at first (when the deleveraging was about to wipe him out in 2008), but then turned against them in the last few years as a political move. This is why QE is so dangerous, because it increases concentration of wealth and eviscerates the middle class.

Guys like Warren Buffett or Larry Ellison of Oracle can take advantage of low interest rates to leverage up, acquiring more assets (that can produce income) by posting their current assets as collateral (Ellison commonly “lends” shares in Oracle to banks in exchange for bank loans).

Cheap debt is useful to them because the marginal risk of taking it on is small relative to that of a normal individual investor who would have to post a needed asset (his or her home) as collateral on a loan to leverage up.

This system works as long as debt continues to stay cheap. However, in the last 12 months the Fed has definitively crossed the point of no return with its policies. It is not just a matter of timing before this debt bubble bursts.

For a FREE Special Report outlining how to protect your portfolio from this, swing by:http://phoenixcapitalmarketing.com/special-reports.html

Best Regards

Phoenix Capital Research