Bernanke gloomy on economic outlook

By Robin Harding in Washington

Ben Bernanke offered a gloomy outlook for the US economy but the Federal Reserve chairman offered no hint of further monetary easing in testimony to Congress.

“We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we’ve seen recently is enduring, and whether or not the economy is likely to continue to make progress,” he said, warning that progress in reducing a 8.2 per cent unemployment rate “seems likely to be frustratingly slow”.

The testimony initially disappointed markets – which are on tenterhooks for a signal of further monetary easing from the Fed – with stocks falling and the dollar rising before turning around later in the day.

A run of weak reports on the economy, with net job creation falling to 80,000 in June, has led to speculation that the Fed could ease policy further as soon as its August meeting.

Mr Bernanke said that recent data points to annualised growth of less than 2 per cent in the second quarter of 2012. “Households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low,” he said.

The Fed chairman set out a list of options for further easing but refused to say which he might prefer. “The logical range includes different types of purchase programs. That could include Treasuries or include Treasuries and mortgage-backed securities. Those are the two things we’re allowed to buy,” he said.

Asset purchases – also known as quantitative easing – are a way of driving down long-term interest rates to boost the economy when short-term rates are already at zero.

The Fed’s other options include lending via the Fed’s discount window, communications about future policy, or cutting the interest that the Fed pays banks on excess reserves, Mr Bernanke said. “We haven’t really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labour market.”

New data on Tuesday showed little sign of inflationary pressure – the overall consumer price index was up by 1.7 per cent on a year ago – and a rebound in industrial production, which was up 0.4 per cent in June after falling in May.

Mr Bernanke chided Congress for its failure to act on fiscal policy, citing it as one of two main risks to the economy alongside the eurozone crisis, and warning against a repeat of the market volatility and loss of economic confidence caused by last summer’s debacle over raising the debt ceiling.

The Fed chairman has ramped up his rhetoric on fiscal policy with each successive visit to Capitol Hill, but there is little sign that Congress is willing to compromise before the November election, even in order to boost growth.

“The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” said Mr Bernanke. “Doing so earlier rather than later would help to reduce uncertainty and boost household and business confidence.”

Turk - Capital Controls, Panic, The Great Depression & Gold

With tremendous volatility in global markets, today King World News interviewed James Turk out of Europe. Turk told KWN that we are headed into an extraordinarily dangerous time for both the markets and the financial system, that will end in a massive panic. Here is what Turk had to say about what is taking place: “Today was a very important day, Eric, because gold was strong while the stock markets were weak. This is a trend I expect to continue, and one that will baffle many financial analysts, going forward, that don’t understand this type of cycle.”

James Turk continues:

“I was hoping to see more strength in the precious metals at the end of last week, Eric, given the pummeling gold and silver were given. But I guess that was too much to ask for with July option expiry this week.

Having driven the price of gold and silver down to this low level, I assume the paper-shorts will try to keep prices as low as possible, in order to maximize their profit by having calls they sold expire out of the money. We've seen this happen many times over the years....

“But there has not been any change in my thinking. Gold and silver are simply testing the May lows. So far the test has been successful. More importantly, we have to keep foremost in our minds that gold and silver remain in a bull market. I keep being reminded of this fact every time I look at the news, which keeps getting worse over here in Europe.

I think Nigel Farage got it exactly right in his interview with you on Friday. He said that the leaders over here need to resort to financial ‘repression’ to keep the euro project from falling apart. Of course that is not a solution, but simply a stop-gap by panicky leaders, who don't know what to do or who listen to bad advice.

Anyway, after Nigel's interview, the Spanish government announced the imposition of various capital controls, limiting the use of cash by companies and individuals. Expect more capital controls, soon, throughout the eurozone. That will only add to the panic, which is already bubbling just below the surface.

As we know, Eric, government actions like these do nothing to solve the problem. Financial repression is never a solution. Capital controls only buy more time, but you can't do that forever. So money continues to leave the European banks. The bank runs are not disappearing. In fact, they jumped across the Atlantic to South America, where Argentine banks are rapidly losing dollar-denominated deposits.

Bank runs were a focal point of the Great Depression, but they were just part of a bigger 3-step process that has parallels to today. After the 1929 stock market crash, people moved money out of investments and put it into banks. They wanted the liquidity, and, at first, did not fear for the safety of their money on deposit. We went though this step with the Lehman collapse.

As the economy weakened in the 1930s, people started to convert their deposits into cash currency. This was the second part of the crisis, when fear for the safety of one's money became more important than liquidity. We are now at stage two in Europe, and soon will be reaching this stage in the US. The downgrade of the major US banks, last week, is bringing heightened awareness of the fragility of the US banking system, meaning they are extremely very vulnerable to an economic downturn.

Europe's economy is clearly on a downward path, and economic activity in the US is slowing too. So the third step of the process might be closer than we think. That's when, in the 1930's, people moved out of cash, and into gold.

They did so back then because even though the US dollar was still formally tied to gold, people began to understand that there was more paper outstanding than there was gold in the US reserve. They believed that the US government could not possibly keep its promise to redeem $20.67 for one ounce of gold, so they moved out of paper-currency.

Importantly, they were right. President Roosevelt eventually devalued the dollar by 69.4%, dropping the gold content of one US dollar from 23.23 grains to 13.71 grains of fine gold. He adjusted the price of gold from $20.67 an ounce to $35 an ounce.

In the 1930's, if people we lucky enough to get their money out of any of the hundreds of banks that failed, they didn't want to take any more chances, Eric. They soon realized that the paper currency in their hand wasn't much safer than when they had their money on deposit in a bank. The panic to obtain gold or silver marked the bottom of the Great Depression. The solution was a higher gold price, and that is the same solution needed today.

President Roosevelt knew the solution in the 1930s, and lowered the gold content of the dollar, thereby raising the gold price. Central planners don't like that solution because it takes away the power they now have with fiat currencies, backed by nothing but their promises, but a higher gold price is coming nonetheless. It is the only solution.”