Ben Bernanke’s QE 2 Has Given Seigniorage To Oil, Establishing It As A Globally Sovereign Currency

The chart of Oil, USO, shows that investors, knowing that when a central bank monetizes debt, commodity price inflation follows. Ben Bernanke’s quantitative easing policy has given seigniorage to oil as a globally sovereign currency, as the price of West Texas Intermediate Crude, $WTIC, has risen from 72.5 to over $100 since QE 2 was first announce in Jackson Hole in August 2010.

Failure of the economic and political paradigm of Neoliberalism occurred, February 22, 2011, as seigniorage failed, with the downturn in distressed securities, like those held in FAGIX, which caused the stock market, ACWI, to turn lower.

Neoliberalism is a dead man walking; it is a bankrupt, burned out and zombie economic and political paradigm, that has turned toxic with the exhaustion of quantitative easing, and with the onset of “inflation destruction”. Thus neither investment or growth can be sustained or achieved.

The chart of US Stocks Relative To The US 10 Year Government Note, VTI:TLT, and the chart of the chart of World Stocks relative to World Government Bonds, VT:BWX, shows that stocks have lost their leverage on sovereign debt.

A sovereign crisis on a global scale, is just now starting to develop, as is seen in the value of world government bonds, BWX, turning lower from their March 2, 2011 value of 59.70. The Morgan Stanley Cyclical Index Stocks, $CYC, have not recovered from their February 22, 2011 fall, evidencing that the stocks, which precede growth, have topped out.

A new political and economic paradigm, that being rule of the sovereigns, will emerge out of Götterdämmerung, an investment flameout, where a Chancellor, that is a Sovereign, and a Banker, a Seignior, will arise and govern through global corporatism. Such leadership may come out of Germany heralding the strength of a revived Roman Empire, as Germany has its ancestral roots in that former empire. National leaders will waive national sovereignty and announce Framework Agreements. These Agreements will appoint stakeholders to oversee regional economic governance. The two leading Sovereigns will provide a new seigniorage, that is a new moneyness, with austerity and democratic deficit for all.  Perhaps one of these two leaders will be EU Council President Herman Van Rompuy as he has defends the European Union as being the “fatherland of peace”, January 17, 2011. The word, will and the way of the sovereigns will be law replacing constitutional as well as historical rule of law.

Welcome to the post QE World where the ability of a country to print globally acceptable scrip,  especially enhanced script, and have that nation’s currency serve as the reserve currency, is history. Sovereign Nations and the Milton Friedman Free To Choose Currency Regime stand as white washed tombs to a bygone era of fiat prosperity.

Quantitative Easing 1 and 2 have resulting in an explosion of commodity prices, stimulating social revolutions in Middle East, MES, and African, AFK, countries, which have driven oil prices, USO, to the Septemeber 2008 level, and which have in turn, caused inflation destruction, turning down stocks prices, and creating a loss of seigniorage, that is moneyness.

Urban Dictionary defines inflation destruction as the fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies.

On March 4, 2011, with oil moving above $103, world stocks, ACWI, succumbed to inflation destruction, and traded 0.8% lower to 48.71.

The chart of world stocks monthly, ACWI Monthly, shows that an Elliott Wave 3 Down commenced in stocks globally on February, 18, 2010 from a high of 49.24.

The chart of the S&P Weekly, SPY Weekly, shows that an Elliott Wave 3 Down has commenced in the S&P, the week ending February 18, 2010, when SPY fell from 134.53.

The turning down of Banks, KBE, means that the world has passed through an inflection point. The world has passed from the Age of Leverage and into the Age of Deleveraging with the exhaustion of Quantitative Easing and with the failure of yen carry trade investing, as seen in the failure of the Optimized Carry ETN, ICI, on the very day that QE 2 was announced.

The Age of Leverage was characterised by debt expansion, credit liquidity, stability, economic growth and expansion and prosperity … The Age of Deleveraging is characterised by inflation destruction, debt deflation, credit ill-liquidity, instability, economic contraction and austerity.

The old political and economic paradigm supporting seigniorage, and ponzi economics, was neoliberalism, specifically the neoliberal Milton Friedman Free To Choose floating currency regime, which has been based upon US Treasuries, and most recently QE 1 with its TARP Facility, in which money good US Treasuries were traded out for distressed securities like those held in Fidelity Mutual Fund FAGIX, with most of the banks placing the Treasuries in Excess Reserve, as well as QE 2, where Ben Bernanke used his authority to print money out of thin air and buy US Treasuries.

Evidence of the failure of seigniorage also comes from the Jody Shenn Bloomberg report:  “Securities backed by option adjustable-rate mortgages, the home loans that allow borrowers to decide how much they pay each month, dropped for a second week as investors speculated a rally pushed values too high.  Typical prices for the senior-most option-ARM bonds fell as much as 4 cents to about 62 cents on the dollar, according to Barclays Capital”.

Neoliberalism failed February 22, 2011, as seigniorage failed with the downturn in distressed securities, like those held in FAGIX, which caused the stock market, ACWI, to turn lower.

The Great Bull Market which came through carry trade lending and Quantitative Easing 1 and 2 is history. The short, medium, and long term trend is down. Those who are advising their clients to stay invested long, are doing them a dis-service, as they have cut them off from a profitable short opportunity. Clearly an investment demand for gold has arisen and will remain strong. Wealth can only be preserved by investing in and taking possession of gold, GLD, and silver, SLV, bullion.


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