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Injections don't heal economy

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Saturday, Jan. 18, 2014, 10:30 p.m.

Ben Bernanke handed the chair of the Federal Reserve to Janet Yellen earlier this month. He did so with the economy showing signs of recovery strong enough for Bernanke to have set in motion a tapering of the Fed's economic stimulus program.

Word that American retail sales rose for December prompted a rise in stock markets. However, little focus was given to the huge Christmas promotional discounts and their impact on profitability.

Gold continued to look shaken from a 28 percent fall in price in 2013. Scant attention was paid to the enormous increases in international debt that continued to accrue in 2013. According to the ING Bank, total world debt in May 2013 — including public, corporate, household, and the financial sector — was a staggering $223.3 trillion. That's 313 percent of the total world gross domestic product.

Emerging world debt amounted to some $11,621 per capita. Among the so-called “developed nations,” where government debt figures do not include government guarantees and social obligations that average $170,401 per citizen and $176,833 in the United States.

Stock markets look uncertain, despite bond-buying stimulus and stock margin levels at all time highs. For the developed world, these figures represent a shocking degree of political irresponsibility and threaten an international debt crisis.

If interest rates rise, a catastrophic currency crisis likely will result. Gold and silver, though disparaged by central banks, have outlasted numerous past collapsed currencies and would become the global default money.

Short of filing bankruptcy, corporations and individuals have the option of “deleveraging” — cutting expenses and paying down their debts.

According to the Fed, households have deleveraged at an unprecedented rate that was not included in the Fed's economic models, which formed the justification for Bernanke's multi-trillion dollar quantitative easing. That explains why, despite injections of monopoly money, consumers are spending less, causing companies to cut employment and keeping wage increases below the rise in prices.

Magnified by increased taxes and charges such as Obamacare, the world and now the United States face recession, if not depression. This concern exerts downward pressure on precious metals. As recent history has shown, however, investors never should underestimate the ability of central banks to make paper money from nowhere and to find novel means of injecting it into the economy.

One might expect trillions of dollars of student loans to be forgiven. Furthermore, the continued purchase of Treasuries might be mandated to justify continued tax benefits within IRA and 401(k) retirement accounts.

Such populist liquidity injections are likely if a Fed leadership dominated by Keynesian academics encourages legislation.

Inflation is muted right now. Therefore, precious metals likely will fall as a recession becomes increasingly evident and official downward price manipulation continues.

If these conditions reverse and interest rates rise to even half their historic levels, an explosion in precious metal prices and panic buying will result.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at

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