The CBO’s latest warning on the long-term deficit is scarier than ever.

Editorial, Sunday, June 28, 2009

THE CONGRESSIONAL Budget Office has a tough job: to provide America’s lawmakers with a reality check on their tax and spending plans. Not surprisingly, the CBO’s projections are not always received cheerfully. Both President Obama and leading congressional Democrats were less than thrilled when the CBO estimated that the costs of universal health coverage would be much higher than advertised. To be sure, projecting the cost of legislation involves making assumptions and constructing models that may or may not prove accurate 10 years down the road. Nonetheless, the CBO, with its tradition of scholarly independence, is the best available arbiter, and Congress must heed its numbers — like them or not.

Now comes the CBO with yet more news of the sort that neither Capitol Hill nor the White House is likely to welcome: its freshly released report on the federal government’s long-term financial situation. To put it bluntly, the fiscal policy of the United States is unsustainable. Debt is growing faster than gross domestic product. Under the CBO’s most realistic scenario, the publicly held debt of the U.S. government will reach 82 percent of GDP by 2019 — roughly double what it was in 2008. By 2026, spiraling interest payments would push the debt above its all-time peak (set just after World War II) of 113 percent of GDP. It would reach 200 percent of GDP in 2038.

This huge mass of debt, which would stifle economic growth and reduce the American standard of living, can be avoided only through spending cuts, tax increases or some combination of the two. And the longer government waits to get its financial house in order, the more it will cost to do so, the CBO says.

The CBO’s new long-term forecast is considerably more pessimistic than the one it issued 18 months ago, mostly because of the recession, which has driven the budget deficit above 12 percent of GDP. But the report makes clear that the recent economic downturn did not cause the government’s predicament and that the situation will not necessarily improve once the economy does. The principal cause of long-term fiscal distress is the aging of the U.S. population, coupled with rising health-care costs — which, together, will drive spending on Medicare, Medicaid and Social Security to new heights. Unchecked, federal spending on Medicare and Medicaid combined will grow from almost 5 percent of GDP today to almost 10 percent by 2035 — and to more than 17 percent of GDP by 2080.

Like his predecessors, Mr. Obama is aware of this issue. Like them, he has promised a plan to deal with it. And like them, he has not come up with anything credible yet. It’s time for that to change.

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Gold, Little Changed, May Rise as Price Slump Attracts Buyers

by Nicholas Larkin and Pham-Duy Nguyen

July 28 (Bloomberg) — Gold, little changed in New York, may gain as the lowest prices in almost three months spur demand.

Futures yesterday fell the most in more than three weeks, dropping as low as $1,160.80 an ounce, as a rally in global equities eroded demand for bullion as an alternative investment. Physical demand for gold from buyers in India, China and the wider Asian region was “very visible” as prices declined this week, UBS AG said today.

“From a risk-reward perspective, this level presents a buying opportunity,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. . . .

Yesterday and July 26 were the UBS sales desk’s strongest two days since January for selling to India by volume, analyst Edel Tully said today in an e-mailed report.

“The current decline in the gold price is probably only short-lived,” Eugen Weinberg, the head of commodity research with Commerzbank AG, wrote in a report yesterday. “There are some religious holidays from the end of August” in India, the world’s largest gold consumer, which may propel demand, he said.

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AUSTIN — Fearing unstable international financial markets and the possibility of high inflation, Texas’ higher education investment managers have bought more than $500 million in gold.

The purchases represent only 3 percent of the University of Texas Investment Management Co.’s $22.3 billion in investment funds, but it indicates how deeply the fund managers are concerned about the global financial future.

With the state’s endowment funds designed to generate a 5.1 percent distribution each year to the University of Texas and Texas A&M University, it’s rare for the investment managers to put large sums of money into a commodity whose value usually grows only through inflation.

“If there’s no inflation, that dollar today in gold a year from now should be worth a dollar, UTIMCO CEO Bruce Zimmerman told the University of Texas board of regents Wednesday. “If there is inflation, then a dollar of gold should be worth a dollar plus inflation,” he said.

“Recently we’ve added 3 percent … of our portfolio, into gold as a protection against inflation, but even more as a lack of confidence in financial markets due to extraordinary government fiscal and monetary stimulus,” Zimmerman said.

“I wish I could tell you the future looked rosy. Unfortunately, that’s not our view. At best, we believe the future is uncertain.”

Two of Texas’ other large state investment funds, the Teacher Retirement System of Texas and the Permanent School Fund for the public schools, haven’t bought gold recently, according to spokesmen.

Other UTIMCO executives suggested the endowments have begun to recover from the staggering losses of 2008 and early 2009.

UTIMCO manages investments for all UT system schools and for the Permanent University Fund, which provides money to both UT and A&M. Its assets dropped by almost $3 billion, to $20.5 billion, in 2009.

It’s now back up to $22.3 billion.

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Problem bank list hits 775

By David Ellis, staff writer, May 20, 2010: 12:51 PM ET

NEW YORK (CNNMoney.com) — The government’s list of troubled banks climbed to its highest level since 1992 in the first quarter, although the pace of growth moderated, according to a government report published Thursday.

The numbers, published as part of a broader survey on the nation’s banking system by the Federal Deposit Insurance Corporation, revealed that the number of banks at risk of failing climbed to 775 during the first quarter.

That figure stood at 702 in the fourth quarter of 2009. A year ago, the number of banks on the FDIC’s watch list was 305. Loan losses, particularly in areas like commercial real estate, have hit many lenders hard.

Still, the fact that the number of problem banks rose by just 10% from the end of the year may suggesting that some of the festering troubles in the industry are starting to subside.

That figure stood at 702 in the fourth quarter of 2009. A year ago, the number of banks on the FDIC’s watch list was 305. Loan losses, particularly in areas like commercial real estate, have hit many lenders hard.

Still, the fact that the number of problem banks rose by just 10% from the end of the year may suggesting that some of the festering troubles in the industry are starting to subside.

“You can clearly see the rise in problem institutions moderated in the first quarter,” said FDIC Chairman Sheila Bair.

Banks that end up on the problem list are considered the most likely to fail. But few of the lenders on the list actually reach the point of failure. On average, just 13% of banks on the FDIC’s problem list have been seized and shuttered by regulators.

The names of the banks on the list are never made available to the general public by regulators out of fear that depositors at those institutions may prompt a so-called “run on the bank.

Problems peaking? The FDIC also reported a much-needed increase in its deposit insurance fund, which covers customer deposits when a bank fails.

The fund grew by $145 million during the quarter — the first increase in two years. It still continues to operate in the red however, reporting a deficit of $20.7 billion. That number also takes into account money the agency set aside in anticipation of future bank failures.

So far this year, 72 banks have failed. Bair said Thursday she expected that number to continue to climb, with smaller institutions among the most likely victims.

She noted however, that the agency was expecting the number of failures to peak at some point this year given that there are signs of improvement in some loan categories. She added that many troubled firms have been helped after locating new sources of capital.

Overall, the report painted a more healthy picture of the banking industry than a year ago.

Big Banks Rake It in Again

Banks and other institutions insured by the FDIC collectively earned approximately $18 billion during the quarter. That’s the highest profit since the first quarter of 2008 and was a more than three-fold increase from a year ago.

Much of that jump was attributed to big banks like Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), who returned to profitability in the latest quarter.

Another notable aspect of the latest quarterly report was a decline in the number of institutions insured by the FDIC to below 8,000. That’s the first time that’s happened in the agency’s 76-year history. Two decades ago, the FDIC insured more than 16,000 institutions nationwide.

The latest reading on the health of the industry provided little boost to bank stocks Thursday, however.

The KBW Banking index fell more than 3% respectively in midday trading on broader fears about the European debt crisis and uncertainty regarding Wall Street reform efforts in Washington.

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By Louis Charbonneau

UNITED NATIONS | Tue Jun 29, 2010 4:56pm EDT

UNITED NATIONS (Reuters) – A new United Nations report released on Tuesday calls for abandoning the U.S. dollar as the main global reserve currency, saying it has been unable to safeguard value.

But several European officials attending a high-level meeting of the U.N. Economic and Social Council countered by saying that the market, not politicians, would determine what currencies countries would keep on hand for reserves.

“The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” the U.N. World Economic and Social Survey 2010 said.

The report says that developing countries have been hit by the U.S. dollar’s loss of value in recent years.

“Motivated in part by needs for self-insurance against volatility in commodity markets and capital flows, many developing countries accumulated vast amounts of such (U.S. dollar) reserves during the 2000s,” it said.

The report supports replacing the dollar with the International Monetary Fund’s special drawing rights (SDRs), an international reserve asset that is used as a unit of payment on IMF loans and is made up of a basket of currencies.

“A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency,” the U.N. report said.

The report said a new reserve system “must not be based on a single currency or even multiple national currencies but instead, should permit the emission of international liquidity — such as SDRs — to create a more stable global financial system.”

“Such emissions of international liquidity could also underpin the financing of investment in long-term sustainable development,” it said.

MARKETS DECIDE

Jomo Kwame Sundaram, a Malaysian economist and the U.N. assistant secretary general for economic development, told a news conference that “there’s going to be resistance” to the idea.

“In the whole post-war period, we’ve essentially had a dollar-based system,” he said, adding that the gradual emission of SDRs could help countries phase out the dollar.

Nobel Prize-winning economist Joseph Stiglitz, who previously chaired a U.N. expert commission that considered ways of overhauling the global financial system, has advocated the creation of a new reserve currency system, possibly based on SDRs.

Russia and China have also supported the idea.

But Paavo Vayrynen, Finland’s Foreign Trade and Development Minister, told reporters that he doubted it was possible “to make any political or administrative decisions how to formulate the currency system in the world.”

“It is based on the markets,” he said. “I believe that the economic players in the market are going to have the decisive influence on that issue.”

European Union development commissioner Andris Piebalgs said it would be a bad idea to dictate what the reserve currency should be.

“It is markets that decide,” he said. “Any intervention would just create additional challenges and make things even less predictable.”

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By Rodrigo Campos

On Wednesday July 21, 2010, 5:35 pm EDT

NEW YORK (Reuters) – Federal Reserve Chairman Ben Bernanke’s dour assessment of the U.S. recovery hit stocks on Wednesday, as his comment that the economy faced “unusually uncertain” prospects rattled investors.

Stocks tumbled after Bernanke acknowledged the labor market’s continued weakness while offering few specific options to stimulate lending and investment.

“The market sold off because unfortunately there is no remedy provided in Bernanke’s commentary to the rising threat of deflation, the excess capacity in the economy and the malfunctioning of the credit system,” said Joe Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.

“We are now giving up on the notion of a standard recovery in the U.S. economy.”

The Dow Jones industrial average (DJI:^DJI – News) lost 109.51 points, or 1.07 percent, to 10,120.45. The Standard & Poor’s 500 (^SPX – News) fell 13.91 points, or 1.28 percent, to 1,069.57. The Nasdaq Composite (Nasdaq:^IXIC – News) dropped 35.16 points, or 1.58 percent, to 2,187.33.

Bernanke spoke to the Senate Banking Committee in the first of two days of his semiannual testimony to Congress.

His downbeat remarks sapped most of the buying interest even after a spate of strong earnings reports prior to the market’s open. Morgan Stanley (NYSE:MS – News) was one of the day’s few big winners after it reported stronger-than-expected profit, lifted by new business. Its stock shot up 6.3 percent to $26.80.

Apple Inc (NasdaqGS:AAPL – News) rose 0.9 percent to $254.24 after it posted robust quarterly results, but the company’s conservative margin forecast limited gains.

Another financial stock showing strength was Wells Fargo & Co (NYSE:WFC – News), which rose 0.6 percent to $26.06 after rising loan demand helped lift its earnings more than analysts had expected.

After the closing bell, cellphone chip supplier Qualcomm Inc (NasdaqGS:QCOM – News) rose 4 percent to $37.59 on news its quarterly earnings and revenue beat Wall Street’s estimates on strong smartphone demand.

Online marketplace eBay Inc (NasdaqGS:EBAY – News) added 4.1 percent to $20.99 in extended-hours trading as it beat Wall Street’s quarterly profit estimates, helped by a record performance at its PayPal service.

The benchmark S&P 500 found support during the regular session at its 14-day moving average and held above 1,060, a critical level according to some technical analysts.

Investors have been reluctant to make big commitments in equities due to growing worry about the economic outlook, sparked by disappointing economic data.

“Considering everything the (Fed has) done already, it will be alarming when the time comes that they feel they need to do more,” said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Weighing on the Nasdaq were shares of Internet company Yahoo (NasdaqGS:YHOO – News), down 8.5 percent to $13.91 a day after it posted revenue that missed Wall Street’s estimates.

About 8.68 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year’s estimated daily average of 9.65 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 2 to 1, while for every stock that rose on the Nasdaq, about three fell.

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By: Daryl Guppy
CNBC Contributor
Published: Thursday, 15 Jul 2010 | 1:29 AM ET

Seeing there’s been quite a bit of interest in my recent comments on CNBC about the historical parallels between the Great Depression and the recent financial crisis, I thought it may be appropriate to elaborate further on the chart technicals behind the observation.

The causes may have been different, but the collapse of the U.S. markets in early 2008 followed the same behavioral patterns as the collapse in 1929. The recovery pattern seen in 2010, is also very similar to that developed in 1930.

The crash of the Dow Jones Industrials in 1929 was signaled by the development of a well defined head and shoulder pattern , seen most clearly in its monthly chart. It is a reliable pattern that captures the behavior of investors who are becoming increasingly disillusioned about the future prospects for economic growth.

The downside pattern targets in the 1929 Dow were exceeded with a fall of around 49% before the market recovered in 1930. The 2008 dow pattern targets were also exceeded with a market fall of around 52%.

In 1930, the market developed an inverted head and shoulder rebound pattern recovery that led to a 46% rise in the market.  The Dow rebound in 2009 also developed from an inverted head and shoulder pattern. This was a powerful rise of around 69%.

The historical development of the recovery in the DOW in 1930 ended with a new head and shoulder pattern. This was followed by a rapid market decline that created the first part of a long term double dip pattern. This retreat also exceeded the pattern projection targets with a fall of 28%.

Fast forward to today, we’re seeing the Dow is developing a new head and shoulder pattern which indicates a beginning of a bear market. The rally peaks in the Dow appear in January and May and June. The downside projection taken from the neckline of the pattern sets a target at 8,400, or a 25% decline.

A very bearish analysis using the pattern of retreat behavior in 1930 suggests the Dow could retreat to around 7,500 in 2010.

The head and shoulder pattern in the Dow and its downside targets, are invalidated with a sustainable rise above 10,600.  A move above this level does not signal a resumption of the uptrend, but it does reduce the probability of a double dip.

It must be noted that while the behavioral patterns in 1930 and 2010 are similar, they don’t necessary point to the same result. But it does sound a warning that markets could continue to stand on the edge of a precipice.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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The number of N.C. state-chartered banks in trouble increased 74 percent since October, as delinquent loans and declining real estate values took a toll.

By Stella M. Hopkins
Posted: Sunday, Jul. 18, 2010

Nearly half of North Carolina’s 86 state-chartered banks are on N.C. regulators’ list of troubled institutions, up 74 percent in less than a year and a grim record that underscores the strain of the multiyear downturn.

The tally of 40 troubled banks compares with 23 in October 2009. Typically, there are only two or three on the list.

Regulators are legally barred from disclosing individual bank names or ratings. Doing so could risk a “run” on deposits, which could prevent banks from working through problems.

However, banks where conditions have deteriorated significantly are made public. In North Carolina, there are seven of those, according to state and federal regulators’ records.

“We work hard every day to try to resolve those situations without failure,” said N.C. banking commissioner Joseph Smith. “I can’t promise you they’re all going to work out.”

However, he expects the number of failures to come will “be low, if we have any.”

Mergers are one way to avert failure. On Friday, a Virginia bank announced plans to buy one of the seven most distressed N.C. banks, The Bank of Currituck. The bank has six branches in the state’s northeastern area, including three on the Outer Banks. The deal is expected to close this fall.

Banks, struggling through the national economic crisis, are plagued by plunging real estate values, delinquent loans and weak loan demand. Locally and nationwide, job losses, weak consumer spending and struggling businesses have made it harder for people to repay mortgages, credit cards and other debt.

Harry Davis, an economist for the N.C. Bankers Association, was surprised by the growth in the number of troubled banks. However, like Smith, he doesn’t anticipate a large number of failures.

“The reason there are so many problem banks right now isn’t because they were poorly managed,” said Davis, who is also an Appalachian State University banking professor. “It’s because the absolute bottom has fallen out of the economy.”

So far, North Carolina has had only two bank failures, both last year in Wilmington. Some states have lost many more banks. Georgia has accounted for 41 of the 288 failures nationwide since Jan. 1, 2008, according to the Federal Deposit Insurance Corp.

On Friday, two S.C. lenders failed, bringing the state’s loss tally to three. All have been federally chartered firms, including the Myrtle Beach bank that failed in April. Friday’s casualties were First National Bank of The South in Spartanburg and a coastal S.C. thrift, Woodlands Bank, near Hilton Head.

South Carolina, with 49 state-chartered banks, doesn’t maintain “a bank watchlist or a list of banks we’re concerned about,” said Scott Malyerck, the deputy state treasurer. An Observer review of federal regulatory websites found five state-chartered banks identified as operating under greater regulatory scrutiny.

State-chartered banks are typically community, midsize and regional banks. North Carolina’s largest is BB&T, based in Winston-Salem, which passed the federal government’s worst-case scenario stress test last year and repaid federal bailout dollars.

National firms, such as Bank of America, are not regulated by the state and so could not be on its troubled list.

The most troubled Carolinas banks – those publicly disclosed – are all smaller banks, which are most likely to lend in their immediate area. That means local woes can quickly yield losses. They also are less likely than large banks to have other revenue, such as investment banking fees, to make up for consumer and small business slumps.

Bank of Granite, for example, is heavily concentrated in Caldwell and Catawba counties, which have been hurt by job losses in the furniture and textile industries. The bank, once lauded by Warren Buffett as one of the nation’s best-run community banks, has been operating under a so-called “cease-and-desist” order since August 2009. Those regulatory orders typically direct banks to take specific steps to improve their financial health.

Adding to the pressure, new overdraft fee regulations are expected to reduce what can be an important income stream for small banks.

The last time North Carolina had a lot of troubled banks was about 1990, when 18 of 44 were on the state regulators’ watch list. That was 41 percent of the state-chartered tally, compared with 47 percent now. Back then, only one bank failed.

What’s next for the industry?

UNC Chapel Hill banking professor Lissa Broome has heard bankers and bank directors talking about declining scores this year.

“We’ve been relatively blessed,” Broome said, noting there have been only two failures. “We’re going to have to figure out how to fix the troubled banks.”

That’s a tough assignment because real estate lending, a key income source for smaller banks, isn’t likely to bounce back for a year, maybe several. Commissioner Smith’s agenda for getting banks back to health includes helping them generate loan demand, raise capital and pursue mergers.

He faces a delicate balance of not overstepping his role as regulator and becoming a consultant.

“We’re not in the business of telling people exactly what to do,” he said. However, “we want to encourage banks to keep them healthy.”

Smith is working with bankers and the state’s small business task force to encourage greater use of government-guaranteed loans, such as U.S. Small Business Administration offerings. Those loans, largely backed by the government, can enable banks to spread around scarce dollars.

Smith, like other experts, also says there are deep-pocketed investors seeking bargains.

“Without apology, I’ve been working with our banks to attract capital into North Carolina,” he said.

Those efforts could lead to consolidation, which Smith views with mixed feelings. He wants to maintain a diversity of banking statewide, including community banks, but smaller banks may be more likely investor targets. Smith says the current investment discussions could be “laying the foundations for some regional banks” that would serve the Carolinas and Virginia.

Smith, a lawyer who has been the state’s banking commissioner since 2002, empathizes with the plight of bankers today but calls the problems “resolvable.” He sees banks strengthening over the next three to four years.

“I persist in the belief that our system has integrity, and people should trust the banks,” he said. “We’re trying like heck to help them restructure their business plans.”

He also cautions bank customers not to panic. N.C. regulators have said no customers lost money in the state’s two failures of this downturn, although investor stakes were wiped out.

Depositors are insured up to $250,000, with higher limits for certain business accounts. There’s no similar protection for investors.

“If you’re over the insurance deposit limits, get under them,” Smith said. “If you’re under, you’re safe.”

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By Ambrose Evans-Pritchard, International Business Editor
Published: 8:52PM BST 15 Jul 2010

Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt Photo: AP

The euro rocketed to a two-month high of $1.29 and sterling jumped two cents to almost $1.54 after the Fed confessed that the US economy may not recover for five or six years. Far from winding down emergency stimulus, the bank may need a fresh blast of bond purchases or quantitative easing.

Usually the dollar serves as a safe haven whenever the world takes fright, and there was plenty of sobering news from China and other quarters on Thursday. Not this time. The US itself has become the problem.

“The worm is turning,” said David Bloom, currency chief at HSBC. “We’re in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we’re moving into a new phase because we’re hearing alarm bells of a US double dip.”

Mr Bloom said a deep change is under way in investor psychology as funds and central banks respond to the blizzard of shocking US data and again focus on the fragility of an economy where public debt is surging towards 100pc of GDP, not helped by the malaise enveloping the Obama White House. “The Europeans have aired their dirty debt in public and taken some measures to address it, whilst the US has not,” he said.

The Fed minutes warned of “significant downside risks” and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

“The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” it said. The economy might not regain its “longer-run path” until 2016.

“The Fed is throwing in the towel,” said Gabriel Stein, of Lombard Street Research. “They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months.”

The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

Goldman Sachs said it expects the euro to rise to $1.35 by the end of the year. The yen will appreciate to ¥83, through the pain barrier for most of Japan’s big exporters. The new twist is that SAFE, China’s $2.4 trillion fund, has begun buying record amounts of Japanese bonds, a shift in reserve allocation away from the dollar.

The signs of a deep and sudden slowdown in the US are becoming ever clearer as the “sugar rush” from the Obama fiscal stimulus wears off and the inventory boost fades. California, Illinois and other states are cutting spending, tightening US fiscal policy by 0.8pc of GDP.

Thursday’s plunge in the Philadelphia Fed’s July index of new manufacturing orders to –4.3 suggests that the economy may have buckled abruptly, as it did in mid-2008. The Economic Cycle Research Institute’s ECRI leading indicator has tumbled, reaching –8.3pc last week. This points to a sharp slowdown or recession within three months.

While US port data looked buoyant in June, the details were troubling. Outbound traffic from Long Beach fell from 139,000 containers in May to 116,000 in June. Shipments from Los Angeles fell from 161,000 to 155,000. This drop in exports is worsening the US trade deficit, eroding the dollar.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt. Retail sales have fallen for the past two months. New homes sales crashed to 300,000 in May after tax credits ran out, the lowest since records began in 1963. Mortgage applications have fallen by 42pc to 13-year low since April. Paul Dales at Capital Economics said the “shadow inventory” of unsold properties has risen to 7.8m. “The double dip in housing has begun,” he said.

Alcoa, CSX, Intel, and JP Morgan have reported good earnings, but they mostly did so in July 2008 just before their shares collapsed. Such earnings rarely catch turning points and can be a lagging indicator. Profits have been boosted in this cycle by cost-cutting, which is self-defeating for the economy as a whole.

The minutes confirm the Fed is split down the middle over QE [quantitive easing]. Fed watchers say the Board in Washington wants to be ready to launch another round of bond purchases if necessary, pushing the banks balance sheet from $2.4 trillion towards $5 trillion, but hawks at the regional banks are highly skeptical.

A study by the San Francisco Fed said the interest rates need to be –4.5pc to stabilize the economy under the Fed’s “rule of thumb”. Since this is impossible, massive QE [quantitive easing] needs to make up the difference.

Tim Congdon from International Monetary Research said the US authorities have botched policy response. “They are forcing banks to contract lending by raising their capital asset ratios. They have let M3 shrink by 1pc a month, as in the early 1930s. The solution is simple. The Fed must raise the level of deposits by purchasing bonds from the non-banking system as the Bank of England has done. They refuse to do it,” he said.

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by Matt Day of Dow Jones Newswires, July 15, 2010

NEW YORK (Dow Jones)–Gold futures ended with small gains, but were largely unchanged as a set of mixed U.S. and Chinese indicators clouded an already hazy economic picture.

The most actively traded contract, for August delivery, settled up $1.30, at $1,208.30 an ounce on the Comex division of the New York Mercantile Exchange.

Futures closed within $15 of the $1,200 an ounce mark for the tenth consecutive day Thursday, as the uncertain economic outlook has provided little direction for precious metals prices.

“We’re in a sort of holding pattern,” said Caesar Bryan, portfolio manager of GAMCO’s Gold Fund. “The commentators seem to be somewhat cautious about gold, but the price doesn’t seem to want to go down.”

Futures were supported Thursday by a falling dollar, as the greenback fell to two-month lows against the euro following successful European debt auctions. Gold prices have historically moved inversely to the dollar. Some invest in the metal as an alternative currency or as a hedge against inflation.

Gold prices rose to record highs in May and June as the euro-zone sovereign debt crisis and sluggish U.S. economic recovery sent investors rushing to buy the precious metal, which is thought by some to hold its value better than other assets during economic turmoil. But gold has struggled to find direction as Europe’s fiscal situation has shown signs of stabilizing and the U.S. has entered corporate earnings season.

There is “a lack of clarity about what direction the economy is going,” said Bart Melek, global commodity strategist with BMO Capital Markets. He said markets didn’t find any clarity Thursday, as investors weighed largely disappointing economic data from the U.S. and China against some strong earnings reports.

The most-active silver contract settled higher for a third consecutive day. Comex September silver settled up 7.2 cents, or 0.4%, at $18.362 an ounce.

Nymex October platinum settled up $13.10, or 0.9%, at $1,533.70 an ounce. September palladium rose $1.40, or 0.3%, to $467.20 an ounce.

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