Tuesday, April 28, 2009
The Fed was established in 1913 and our currency has been rapidly losing value ever since! In fact, a monetary policy of institutionalized currency devaluation is actually nothing less than criminal "fraud" and "theft".
Thanks to the criminal banksters at the Fed, today's dollar buys less than two cents would have bought back in 1913. That's some major currency devaluation and it is a corporate crime against the American people. These inflationary policies are why the U.S. savings rate has gone negative.
Why should we save when interest on savings is less than the real inflation rate? Today, saving money a losing proposition so we spend like drunken sailors! Also, we can point to years of dollar devaluation as the main reason why the American standard of living has fallen by well over 50% since 1971.
Had enough yet??!!
If so, than let's get these bastards!!!
Monday, April 27, 2009
August 25, 2009
This past January, before the new president was inaugurated, in commemoration of the 30th anniversary of the establishment of diplomatic relations between the US and China, a conference was held by the Chinese People's Institute of Foreign Affairs and the Kissinger Institute on China. Former President Jimmy Carter, Henry Kissinger, Brent Snowcroft and Zbigniew Brzezinski led the US delegation.
Mr. Brzezinski proposed at that conference that a US-China G-2 be formed. He stated a long list of international problems that China could help the US find solutions for, such as the global financial crisis, climate change, North Korean and Iranian nuclear ambitions, tension in India and Pakistan and the Israeli-Palestinian conflict.
Behind Zbig's proposals are his perpetual efforts to act to the disadvantage of Russia, so that a western power base can be built in Eastern Europe and down into the Middle East and over into West Asia. This is really what Iraq and Afghanistan are all about. He cited China's rapid growth of the past 20 years and reminded China that it would have taken years longer without the expansion of US-China trade relations. He said there should be interdependence, yet relations still were those of unending US provocation and hostility.
On the other hand Larry Summers, Mr. Obama's top economic advisor and director of the White House National Economic Council, has proposed a multilateral approach to deal with multilateral global economic problems that would involve a new grouping larger than the Group of Seven richest nations with advanced economies. This, of course, is in opposition to Brzezinski's approach.
It looks like Summers has the upper hand at the moment, even though Brzezinski brought Mr. Obama to his present position.
China faces 30 million unemployed workers and inflation that will soon be close to 20% again. Demonstrations are widespread and often lead to violence and death. China, like the US and UK is taking the easy way out for the moment, but in time they will suffer hyperinflation and eventually deflationary depression. That will lead to a major challenge of Chinese Communist leadership.
Among that 30 million unemployed are bright college graduates who have been unable to find work for a year and they will be joined by 7 million more in 2009. Government expects 8% GDP growth in 2008 and 2009, and we see 6% at best. That represents a time bomb of civil disorder for the government. That would only produce six million new jobs each year leaving 20 million unemployed rural migrant laborers out of work for two years at least.
At the top of the heap are the party members that make large incomes and have access to large loans that do not really have to be repaid. The income disparity is enormous as are job opportunities. This has not gone unnoticed by the public, which displays simmering anger, particularly regarding massive corruption and illegal farmland seizures by private developers, who pay off party members to circumvent the law. Government believes things will work out fine, but we do not. One important problem is declining consumer spending that has been prevalent for ten years, which portends a slowing economy. High-income citizens invest and do not consume what they could and the poor cannot do anything other than to exist.
Zbigniew Brzezinski's communist answer is for China to adapt a full employment objective and an income policy financed by sovereign credit in order to fund such a program. We find it of interest that he didn't recommend using US dollars to finance such a project, but to go into debt to do so. Either that or demand payment for exports in yuan. That would, of course, make the yuan stronger and make Chinese goods for export more expensive, which would cut exports and GDP and put more people out of work.
The communists exercising power as a class of aristocracy want to maintain that position without revolution. They want peaceful rising global influence, but they have to remember how they came to power - by killing over 1 billion of their fellow citizens. The average still sees the blood on their hands. World deflationary depression will bring revolution to China and the destruction of communism; just as the Illuminati's dream of world government will come to no good end.
The Congressional Budget Office, CBO, sees a fiscal deficit of 13% of GDP in 2009 and 10% in 2010, based on a strong recovery from stimulus and other massive spending. At that rate the ratio of government debt to GDP would be 80% by 2018. As a guideline we cite the eurozone Maastricht guideline of fiscal debt limits of 3% of GDP.
Financial history tells us fiscal and monetary profligacy brings about inflation - in today's case, hyperinflation. Instead of purging the system and facing the music, governments worldwide are increasing money and credit at an exponential rate and lowering interest rates to zero. The outcome is guaranteed. Do not forget those sterilized ominous increases in commercial bank reserves sitting over at the Fed will be converted into faster money growth at a ratio of 10 to 1. M2 is already up 15% and M3, our original version, at about 18%. Do not think for one second that the Fed will reduce the excessive stock of money and credit. They can't, because if they do the financial system will collapse.
It should be noted that many prime rated mortgage accounts of big hitters who haven't made their mortgage payments for several months have not been contacted by their lenders - banks. The reason is upkeep, inventory and real estate taxes - all of which banks will have to assume if they take over the house. That means default rates are much higher than statistics show. These good loans now have a 50% default rate for subprime and ALT-A loans and prime loans will soon reach that level. We are seeing a complete looting of the system before they collapse it. Our corporate structure and are government are being run by crooks.
Regarding the stress test, it is apparent that most major banks won't pass the test. They are insolvent and will have to be nationalized. It is no wonder the market was manipulated up to 8200 on the Dow, which was in anticipation of such news. This is a dire situation because banks will be forced to adhere to a higher fee structure. Banks will also have to set aside more funds to meet the requirements of the FDIC. The banks have no cushion for such legitimate demands. What are they going to do when the jumbo and prime loan defaults hit 50%?
Wells Fargo, as many others did committed fraud in their earnings statement. Wait until next quarter. They have 41% of their mortgages in California and 50% of their portfolio is in pay-option ARMs, which are entering a bulge period of resets and are widely considered to be the most toxic of the first lien mortgages.
As tax revenue plunges for all government entities, billions in additional debt will have to be funded. That means higher real interest rates.
The spending on unemployment insurance and other safety-net programs is rising exponentially as unemployment gets set to exceed 20%. Who pray tell will buy all this debt? The Fed, of course, as monetization flourishes. It is a nightmare as government spending has risen 33% in just six months.
Sadly and tragically we predicted all this chapter and verse. As the charlatan Timmy Geithner tells us, "Never before in modern times has so much of the world been simultaneously hit by a confluence of economic and financial turmoil such as we are living through." No kidding Dick Tracy. Where were you nine years ago when we predicted all this? This guy is dumber than dumb. If you want to know who is to blame you need not go any further than our Illuminist banks and Wall Street.
Treasuries continue to sit on the 200 DMA and we have auctions for 2, 5 and 7-year paper coming next week. If that line is broken they'll be lots of selling. If the offerings are larger than expected you can anticipate heavy Fed involvement in the market.
Large-scale layoffs rose again in March: 2,933 more mass layoffs of 50 or more workers. This brought the total number of people who lost their jobs in this manner to 299,388, the highest on a record that dates to 1995.
Since the recession officially began in December 2007 (it began in February 2007), layoffs now total 31,414 since the start of the recession.
In desperation GM wants to exchange $1 billion in bonds for common stock. If they cannot pay interest on bonds or redeem them what good is common stock? This is an attempt by derivative writers to avoid paying much more in credit default swaps. They will only have to wait 39 days to see what is going to happen.
The Federal government is now spending about double what they are collecting in taxes.
Bank of America CEO Ken Lewis was told by Ben Bernanke and Hank Paulson to shut up about the "material adverse change," that took place at Merrill Lynch before their merger. This is called strong-arm tactics in the underworld. Lewis was told if he did not follow orders his board would be disbanded and the management team would be fired. That is extortion as well. Lewis should have pulled the plug on this riff raff, but he didn't have the guts to do so - what a wimp. He shafted the shareholders.
The bottom line now is BoA will be sued by every shareholder for accepting such a losing deal forced on them by government and for accepting this deal and not disclosing material information and lying.
There will now be a run on Bank of America because the liability is unpayable.
NY State AG Andrew Como has released a letter that will lead to lawsuits against BoA, Lewis, Bernanke and Paulson for fraud. The rats are trapped in a corner and are turning on each other.
The frugality trend has just begun, which will take us back to a lifestyle much like that of the 1940s and 1950s. the vast populace hasn't gotten it yet. People do not view the current recession as a major economic phenomenon or as a major event. They believe government won't let it happen, they will save us. They are incapable of thinking the unthinkable.
Unemployment of almost 20% is producing a downward spiral of negative growth. 85% of Americans have no clue as to what lies ahead. Until the system is purged there will be no recovery.
It will be interesting to see how little Timmy deals with Goldman Sachs' TARP desertion. NYSE data shows Goldman traded 5 times as much volume for themselves compared to customer and agency orders in program trading. Huge short interest stocks were the largest market gainers and the cost to borrow shares to short have soared and it is almost impossible to get stock, because illegally the brokerage houses have called in share loans on financial stocks. How's that for rigging the market?
New Rules Let Bank Increase Capital Reserves By $4 Billion: The increase could make a critical difference in the federal government's evaluation of the company's ability to withstand a deepening recession, accounting experts said.
After the FASB change, which allows banks to substitute their own judgment in some cases, Wells Fargo decided market prices were too low by more than $4 billion, and it returned that amount to its capital pool.
Something was curiously absent from Wells Fargo's triumphant first-quarter earnings material: Any statement that the bank would try and quickly pay back government capital. 49% of Wells Fargo's $119 billion of core home-equity loans are now on properties where the combined loan-to-value ratio is over 90%, up from 43% in the fourth quarter. With risks like these, don't expect Wells Fargo to repay the taxpayers anytime soon.
The starkly different fates of the neighboring banks show how the U.S. government's approach to dealing with the industry's worst crisis in a generation has shifted. The decision to allow only one of the two banks to survive has fueled criticism that regulators are picking winners and losers, without disclosing their criteria for making the calls. That, in turn, has shaken the confidence of bankers and private investors trying to decide whether to wade into the troubled sector.
With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.
"Tax receipts are just collapsing," said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt "is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause." The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS.
When Warren Buffett speaks, it's usually worth paying attention. This time, the Oracle of Omaha is voicing concerns about the ability of some battered local and state governments to pay off their debts.
The WSJ notes that hedge funds are competing with end-users for homes. This boosts home sales data but it is a distortion of reality because the homes are not moving into �end user' hands.
The Fed monetized another $7B (3s & 4s) on Thursday. The Treasury auction $8B of TIPS. Who's the patsy?
Morgan Stanley notes that with 40% of S&P 500 reporting earnings, 77% of non-financial companies have met or beat earnings expectations but only 28% have met or beat revenue expectations, Cost cutting is the theme for Q1. But as we have cautioned, cost cutting will be more difficult in coming quarters.
Gold is back above $900. Though most of the western world is ignoring the Taliban's attempt to take over Pakistan and its nuclear arsenal, some people are acutely aware of the gravity of the situation.
The Fed's balance sheet surged to $2.2 trillion due to its monetization of $94.5B in securities for the week ended on Wednesday. The Fed bought an astounding $75B of mortgage-backed securities (MBS).
Last month West Coast real estate rose 3.6% says CNBC, as foreclosures rose 80% in California.
As American citizens bailout the financial system we see bonuses being handed out to incompetents, who caused the problems - companies like Merrill Lynch and AIG should not be giving bonuses. Politicians have expressed outrage but nothing will be done about it. We have also found out government was complicit in the hiding of the Merrill Lynch bonuses. It shows you what kind of government and financial institutions we have. At any price fellow Illuminists have to be bailed out or falsely rewarded. At AIG alone derivative traders received $165 million in taxpayer funds. It is no coincidence that Senator Obama received $103,000 from AIG - his biggest campaign contribution. Treasury's Tiny Tim Geithner engineered all this even when he was at the NY Fed. Then there are the bonuses for Fannie and Freddie employees who lost $100 billion. these were performance bonuses and did not have to be paid - government paid them anyway. Adding frosting to the cake, 12 of the TARP recipient companies owe millions of dollars in back taxes, out of 23. We wonder how much is owed by the other 450 companies?
There is no question that Wall Street, banking and government have betrayed the American people. The question is how long will it be before Americans forcibly take their government back? All 3 branches, Executive, Judicial and Legislative are controlled from behind the scenes by Illuminists.
We are all now paying for the sellout of Congress that began years ago. The main cogs in this horrible machine were the 1999 passed the Gramm-Leach-Bliley Act, which eliminated The Glass-Steagall Act and the 1995 Private Securities Litigation Reform Act, both of which allowed Wall Street to run rampant.
Sunday, April 26, 2009
Michael S. Rozeff
April 22, 2009
I'd like to extend my remarks on Donald Kohn's recent speech in Nashville, because here we have a top FED official clearly outlining the FED's recent actions and, to some extent, trying to justify them. His speech makes clear what the FED has done and why it has done it.
The overall picture he paints is clear. The FED has extended massive new credit to new kinds of borrowers. It has also boosted credit enormously to its traditional borrowers.
As I see it, the immediate result is a huge expansion of credit welfare in the American economy. This is an abundance of funding, usually under favorable rates of interest, that the FED has single-handedly created and bestowed upon parties that were being denied such funding by others. This is a massive circumvention and contravention of free capital markets. It is a massive transfer of wealth and buying power, through inflationary means, to parties that have done nothing to deserve it and away from those who are forced to compete with these parties in using dollars. The parties not favored with the FED's largesse are forced to accept devalued dollars and lower interest rates on their saving.
I will review briefly the FED's credit welfare programs and the FED rationales for them. That will give me an opportunity to mention what I think will be the long-term results of the FED's actions,
Begin with the popular investment vehicle, the money market funds. They make short-term loans to borrowers such as business firms, states and municipalities, banks, domestic and foreign governments, and government-sponsored intermediaries like Fannie Mae. The business loans are called commercial paper. Money market funds are relatively safe. Their prices tend to hold at one dollar a share. The funds warn that the price may fall below one dollar and that the investments are not guaranteed.
Kohn relates that:
"Last fall, when a run on money market mutual funds was severely constricting their purchases of commercial paper, an important source of credit to many businesses, we supported the funds, their customers, and their borrowers by making credit available that allowed funds to meet heavy redemption requests and also provided credit directly to borrowers in the commercial paper market."
In this case, the FED provided two streams of credit welfare. It supported the funds, and it supported business firms by buying their commercial paper that the funds were not buying. The people buying money market funds had always exposed themselves to a risk of loss. The business firms borrowing on commercial paper had always exposed themselves to a risk of their funding being interrupted. When the economy moved into a condition where these risks became realities, the FED prevented or mitigated these losses. The FED acted as a kind of insurer providing free insurance after the fact and at no cost to the parties receiving the welfare.
We find this same pattern repeated in the other of the FED's credit extensions. Kohn has a lengthy list of these recipients of credit welfare:
"...for the first time since the 1930s, we extended credit to nondepository institutions, granting discount window access to primary dealers...
"...we eased the terms on which we lent to depository institutions (our traditional borrowers) quite dramatically.
"We cooperated with foreign central banks through currency swaps to make dollar funding available to banks operating abroad.
"Most recently, in collaboration with the Treasury, we have begun supplying liquidity to purchasers of securitized credit.
"Another aspect of our efforts to affect financial conditions has been the extension of our open market operations to large-scale purchases of agency mortgage-backed securities (MBS), agency debt, and longer-term Treasury debt.
"My remarks will concentrate on actions aimed at broad sectors of the financial markets, not on those aimed at stabilizing individual systemically important institutions, like The Bear Stearns Companies, Inc.; American International Group, Inc., or AIG; and several bank holding companies."
Each credit extension by the FED is credit welfare, and credit welfare is a form of bailout. Each credit extension mitigated losses that, by all rights, should have been visited upon those who assumed those risks.
All of the FED's new credit creation is inflationary. If a carpenter earns $100 and saves $20, he transfers some buying power to borrowers. His loanable funds reduce his buying power from $100 to $80, while expanding the buying power of others. But since the FED does not work and earn money, it does not transfer its hard-earned assets to others. It creates new buying power via an electronic credit, without in any way having itself worked and created goods and services. Those new funds compete with the loanable funds that the carpenter creates as a transfer of earned buying power. This inflation of loanable funds robs the carpenter in two ways. He receives a lower rate of interest than he otherwise would on his $20 of savings; and he competes with the FED's recipients to buy the available pool of goods. This raises the prices of those goods. This reduces the value of his $80.
The FED's credit welfare undermines the foundations of a free society. How? Credit welfare subsidizes favorites, undermines private property, undermines the profit-and-loss system, undermines competition, undermines the dollar, and raises moral hazard.
Kohn admits that the FED chooses favorites:
"...an element of credit allocation is inherent in some of our interventions...we have recognized that the resulting effects can be uneven across markets and lenders."
Borrowers that receive the FED's credits are subsidized as compared with those who do not. Competitors who do not receive credit welfare are disadvantaged. This undermines competition.
The FED's ex post insurance changes private property contracts, conferring benefits on some and losses on others. The contracts initially called for various payoffs under various contingencies. The FED changed those payoffs after the fact. This makes hash out of their initial pricing. It introduces uncertainty into future contracting and influences their pricing.
When the FED provides de facto guarantees, even after the fact, it induces the recipients to change their future risk-taking behavior. They are inclined more greatly to ignore the FED-insured risks. They are provided incentives to take on greater risks and leverage. The FED increases moral hazard.
The FED's credit welfare competes with and thus undermines saving by private savers. Saving is necessary for growth of the capital stock. The net result is an economy whose wealth grows more slowly.
By inflation, Kohn does not mean the money that the FED has already been creating. He means price rises in goods and services. Let us hear Kohn out fully as he addresses the inflation question:
"Will These Policies Lead to a Future Surge in Inflation?
"No, and the key to preventing inflation will be reversing the programs, reducing reserves, and raising interest rates in a timely fashion. Our balance sheet has grown rapidly, the amount of reserves has skyrocketed, and announced plans imply further huge increases in Federal Reserve assets and bank reserves. Nonetheless, the size of our balance sheet will not preclude our raising interest rates when that becomes appropriate for macroeconomic stability."
Kohn and the FED are aware that they must address the reserves they have created:
"However, our newly purchased Treasury securities and MBS will not mature or be repaid for many years; the loans we are making to back the securitization market are for three years, and their nonrecourse feature could leave us with assets thereafter. But we have a number of tools we can use to absorb the resulting reserves and raise interest rates when the time comes. We can sell the Treasury and agency debt either on an outright basis or temporarily through reverse repurchase agreements, and we are developing the capability to do the same with MBS. We are paying interest on excess reserves, which we can use to help provide a floor for the federal funds rate, as it does for other central banks, even if declines in lending or open market operations are not sufficient to bring reserves down to the desired level. Finally, we are working with the Treasury to promote legislation that would further enhance our toolkit for absorbing reserves."
I have the following reactions to his statements. This is guesswork and judgment.
(1) The FED is not going to reverse its credit welfare anytime soon (in the next 1-3 years.) The fact is that it is still expanding its programs. Most of them show little or no signs of decrease. The FED's clients on welfare want it and are getting hooked on it.
Furthermore, the FED has a history of waiting until a recovery is clearly in view. Furthermore, any recovery may be slow and halting.
(2) With the FED not reversing its credit welfare and expanding it, bank reserves will not be reduced. The banks will have stronger and stronger incentives to make loans as time passes and any sort of recovery occurs, whether a natural one or a money-pumped one. Money supplies will expand. In the long run, those expansions will be accompanied by rising prices. In the short run, the behavior of prices is much less certain. However, my guess is that even in the short run, consumer price rises are more likely to surprise people by their strength than by their weakness.
(3) The FED will downplay any price rises and stay with their policies.
(4) The FED will not raise interest rates on its own accord. If the market raises interest rates, the FED will follow if it has to in order to control its balance sheet. The FED at present is happy to be lowering certain long-run interest rates selectively. As Kohn notes
"...the extremely large volume of purchases now underway does appear to have substantially lowered yields. The decline in yields reflects �preferred habitat' behavior, meaning that there is not perfect arbitrage between the yields on longer-term assets and current and expected short-term interest rates."
The FED cannot raise interest rates vigorously by selling off securities without imposing capital losses on its clients whom it is now trying to induce to buy long-term securities.
(5) Even if a recovery gets underway, the dollar is vulnerable to severe shocks. Any number of possible dollar shocks that are politically-induced can undermine the American economy. Such unexpected events would make hash of the FED's rosy game plan. The FED itself is walking a narrow and high tightrope. It acts as if the risks it is taking will not transpire.
The American economy historically has been a strong economy with sound foundations. Over time, these have been eroding. The existing set of FED and government policies does nothing to reverse this process of erosion. The FED and the government are furthering the process. The American economy is becoming a higher-risk economy. It is more vulnerable to shocks from any number of sources, ranging from political problems to natural disasters and diseases. The economy is less and less resilient. It has more and more commitments with less and less productive power to back them up. The government remains busy tying the economy up in knots. People are growing more fearful and angry. It is clear that important new directions are needed. It is equally clear that we are not getting them.
Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York.
Thursday, April 23, 2009
April 20, 2009
The Washington Post today carries a revealing article that highlights the ongoing agenda to forge a “new economic world order” with a vastly empowered IMF acting as a ‘bank of the world’.
Under the headline A Bigger, Bolder Role Is Imagined For the IMF -
Changes Suggest Shift in How Global Economy Is Run, Anthony Faiola describes how the IMF is on course to be transformed into “a veritable United Nations for the global economy.”
Faiola envisages a scenario where “central bankers and finance ministers would meet to convene a financial security council of sorts.”
“Serving almost as ambassadors to the IMF, they would debate ways to put out the world’s economic fires and stifle reckless policies before they ignite new ones.” he continues.
“Bowing to a new economic world order, the IMF would grant fresh powers to the likes of China, India and Brazil. It would have vastly expanded authority to act as a global banker to governments rich and poor. And with more flexibility to effectively print its own money, it would have the ability to inject liquidity into global markets in a way once limited to major central banks, including the U.S. Federal Reserve”
The article then explains that this imagined scenario is taken directly from internal IMF documents, interviews and think-tank reports. The details were thrashed out at the recent G20 summit, and though they may take years to fully implement, this model represents the global financial elite’s blueprint for the near future.
The IMF will discuss it’s role in the new world order at it’s biannual assembly in Washington this weekend.
The Post article essentially describes the ongoing agenda to empower a group of unelected central bankers with the authority to usurp state sovereignty by overseeing benchmarks for national financial governance and setting regulations for financial institutions all over the globe.
The Post’s description echoes that of World Bank President and Bilderberg elitist Robert Zoellick, who earlier this month openly spoke of using the economic crisis to give global financial bodies the power to regulate national policy as part of the larger creation of global government.
“If leaders are serious about creating new global responsibilities or governance, let them start by modernising multilateralism to empower the WTO, the IMF, and the World Bank Group to monitor national policies.” Zoellick stated.
Of course, The Washington Post can openly announce this, as can every other major media outlet in the world. However if you or I discuss it, it is still dismissed as a “conspiracy theory” by the unwitting majority of the population.
As we have previously reported, both the IMF and the United Nations have thrown their weight behind proposals to implement a de-facto global financial dictatorship. Both bodies have expressed support for new world reserve currency system to replace the dollar as part of the acceleration towards a new economic world order.
Earlier this month after the G20 summit, the London Telegraph’s international business editor also highlighted the agenda, noting that under a clause in Point 19 of the communiqué issued by the G20 leaders, the IMF’s power to create money outside the control of any sovereign body was activated.
The new reserve currency would be formed from Special Drawing Rights (SDRs), a synthetic paper currency issued by the IMF that has lain dormant for half a century.
“The world is a step closer to a global currency, backed by a global central bank, running monetary policy for all humanity.” Ambrose Evans-Pritchard wrote.
As we have repeatedly warned, the introduction of a new global currency system, with an overarching regulatory body, is a key cornerstone in the move towards global government, centralized control and more power being concentrated into fewer unaccountable hands.
Wednesday, April 22, 2009
Monday, April 20, 2009
April 17, 2009
It was only two years ago, in early 2007, that subprime lenders and homebuilders began suffering under growing defaults. The global credit crisis had begun. Complicated financial structures - thought safe - began to unravel quickly after word spread that two highly leveraged hedge funds run by Bear Stearns were in trouble.
The eventual failure of those funds in July 2007 pointed a dagger right at the heart of over-leveraged banks, namely those that had made too many imprudent loans. When Northern Rock Bank failed in the UK later that summer, there was no doubt that the crisis was global in scope.
Financial crises are not new. They have recurred throughout monetary history, but became particularly prevalent after the formation of banks that loan out depositors' money. For example, the Bank of England was formed in 1694 and suffered its first crisis in 1696, which is just one of many episodes of financial panic in its long and storied history.
Crises occur for one simple reason - excessive credit expansion. There are recurring periods when banks loan - and borrowers borrow - too much, putting both in dire straights. These imprudent extensions of credit inevitably strain the financial capacity of both the borrower and the lender, as is so clear today.
In short, bank lending engenders the boom: their easy-money lending creates the illusions of prosperity. But prosperity does not come from borrowed money and consumption. It comes from savings and hard work, and those have been in short supply of late.
Credit today is no longer flowing freely because banks are trying to come to grips with those loans that will never be repaid. This reduction of credit, in turn, has taken the froth out of bubbly markets. Overpriced assets, such as housing and stocks, have sharply fallen back to earth.
Many see this wealth destruction and the contraction of credit that caused it as deflationary. However, the cost of living continues to rise. For example, the Consumer Price Index rose 3.3% in 2008. It climbed this January at an even faster annual pace. That didn't happen during the deflation of the Great Depression.
The point is that the dollar is being ever-inflated. Declining prices of houses, stocks and other assets are being measured with a currency that is being inflated. This serves to hide the true drama of their fall by forcing nominal prices upward.
The following chart presents the annual growth rates of M3, the total quantity of dollars in circulation. The blue line is based on Federal Reserve data, which stopped reporting M3 in February 2006. The red line is based on data complied by John Williams of www.shadowstats.com.
At its peak last year, M3 grew at a 17.2% annual rate. After the collapse of Lehman Brothers, annual growth was nearly halved, but was still an alarmingly high 9.8% in November. Since then, M3 growth has remained in double-digits.
Annual M3 growth rates exceeding 10% are not deflationary. The money supply is expanding, not contracting, and a contracting money supply is the main cause of deflation. A rapidly expanding supply of money - and double-digit growth rates are surely that - causes inflation.
The dollar is being inflated and, in my view, is on the cusp of hyperinflation. I expect this to become increasingly clear within twelve months. To understand why, one only has to look at the cause of hyperinflation.
Hyperinflation does not arise from banks lending too much money. It invariably occurs for only one reason - too much government spending. The money needed to meet this spending comes from the captive central bank, but some further explanation is necessary. Hyperinflation manifests itself in two different ways, which depend upon the nature of the currency system used.
For example, in cases such as Weimar Germany in the 1920s and Zimbabwe today, the central bank prints paper currency, which it then gives to the government to spend. In these countries, few people have bank accounts so the preponderance of commerce is conducted by cash transaction using paper currency.
The hyperinflation that wreaked havoc in many countries in Latin America in the 1980s was different. The banking systems in Brazil and Argentina were well developed and most people had bank accounts. Therefore, deposit currency was being used for the preponderance of commerce in these countries. So, instead of moving paper currency by hand to complete transactions, deposit currency was moved by check, plastic card, or wire transfer.
Cash currency was relatively unimportant in Latin America, so unlike Weimar Germany, no one was moving paper currency around in wheelbarrows during their hyperinflationary episodes. Instead, the central bank was busy creating bookkeeping entries to add currency to the government's checking account. As a result, people were seeing zeros added to their bank accounts, turning tens of cruzeiros and tens of pesos into thousands and even hundreds of thousands in a relatively short period of time. This is what I expect will happen as the dollar begins hyperinflating, and as I say is not too far away. The signs are already apparent. Here are some of the signs that a hyperinflation of the dollar is imminent:
1) Gold is rising against all the world's currencies. It has recently reached record highs against most currencies. Gold is a safe haven because physical gold is a tangible asset not dependent upon any bank's promise. Therefore, physical gold does not have counterparty risk. But it is not unreasonable to conclude that gold is also rising for another reason, namely, to protect against inflation. All the money being created by central banks around the world will prove inflationary; so, some people are likely accumulating gold because it is an inflation hedge.
2) Crude oil appears to have double-bottomed at $35. It is now back above $44, even though the US dollar has been relatively strong against other major currencies and demand has been dropping because of the weak global economy. Other commodities also appear to have bottomed. The CRB Continuing Commodity Index dropped 47.4% from its July 2, 2008 peak to its December 5, 2008 low, which clearly is a deep correction. But declines of this magnitude are not unknown in commodity bull markets. Regardless, this CRB Index is still nearly twice its February 1999 low of 182.95, which reflects the loss of purchasing power in the dollar this past decade. More to the point, the CRB is in a long-term uptrend even though the global economy has entered another great depression. We can conclude from this observation that commodity prices are not rising because of improved supply/demand fundamentals. Rather, commodities are moving higher because, as is the case with gold, physical commodities are tangible assets. They do not have counterparty risk, and they adjust to inflation with higher prices.
3) When adjusted for inflation, a bank deposit is losing purchasing power. Nominal interest rates are less than the inflation rate, so real interest rates are negative. Hyperinflation always occurs when real interest rates are negative. What's more, the Federal Reserve and most other central banks are pursuing a zero-interest rate policy, suggesting that negative interest rates will remain for the foreseeable future. Also, they are adding more inflationary fuel to the fire with their so-called plan for "quantitative easing", which is simply another way of saying that they will create more currency from more debt - "monetizing" they call it.
4) Few today understand the cause of hyperinflation, nor are prepared for it. More to the point, the prevailing psychology today contains a reckless blind faith in the Federal Reserve to get things right. It is general knowledge that the Federal Reserve made things worse during the Great Depression. Why should anyone expect them to get it right this time around? In fact, Ben Bernanke is pursuing policies identical to those taken by Rudolf Havenstein, the governor of the Reichsbank during Germany's hyperinflation. Mr. Bernanke is creating more currency by creating more debt, which is the singular underlying cause of hyperinflation.
5) T-bonds always provide an important leading indicator. Back during the highly inflationary 1970s and 1980s, someone coined the term "bond vigilantes". These holders of bonds would sell on the slightest whiff of inflation, forcing up interest rates, which in turn would stop the inflationary pressures that were building. The bond vigilantes are back, and here's why: last autumn when the Dow Jones and S&P were making multi-year lows, money flooded into T-notes and T-bonds, driving their prices to record highs (i.e., their yields went to record lows). The Dow and S&P have now fallen to make new multi-year lows, but the yields on government paper remain higher than last autumn. It is a glaring divergence. US government debt instruments are no longer providing the safe haven they did when stocks declined last autumn. It is also noteworthy that Bernanke's stated intention to buy bonds has not kept them from falling. The bond vigilantes are giving us a message loud and clear that inflation is coming.
6) Most importantly, the federal government has embarked on a course of runaway spending, and it is runaway government spending that causes runaway inflation. The budget deficit is projected at 12% of GDP, a shocking number. It has only been higher during World War II, and is more than twice the worst levels reached during the depths of the Great Depression. But it is likely that the federal government will exceed even this frightening target. The weakening economy will without doubt increase spending - for example, in growing unemployment benefits and more bailouts - while at the same time the weak economy will lower revenue. Together these will widen the deficit.
It is important at this point to ask, "Why does the Federal Reserve exist?" It is not for any of the stated reasons. The continuous, perennial inflation of the dollar makes clear that the Fed does not control inflation. Nor does it create employment, because private industry already does that. The Federal Reserve, just like every other central bank in the world, exists for one reason: to make sure that government deficits are funded, that politicians get all of the currency they want to spend. In the absence of any external discipline imposed on the central bank, as existed under the classical gold standard, the central bank will inflate the currency until it is no longer accepted. It is then buried in the fiat currency graveyard alongside countless other fiat currencies, which is where the US dollar is headed.
In his just-released annual report to shareholders, Warren Buffett had this comment on the federal government's actions to resolve the economic crisis: "This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone 'all in.' Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation."
He reemphasizes the inflation risk later in his report by commenting: "I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price." He also notes that "when the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary...Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long [because] cash is earning close to nothing and will surely find its purchasing power eroded over time."
Mr. Buffett stops far short of forecasting a hyperinflationary collapse, but his message is clear nonetheless. Inflation is a risk, to which I would add, hyperinflation is the real risk. In a world of fiat currencies, the only escape is the precious metals. So, now more than ever, own physical gold and physical silver.
James Turk is the Founder & Chairman of GoldMoney.com. He is the co-author of The Coming Collapse of the Dollar, which has been updated for a paperback version entitled The Collapse of the Dollar.
Saturday, April 18, 2009
San Francisco School of Economics
April 17, 2009
This is a freely edited version of an article by the monetary economist Walter E. Spahr (1891-1970), Head, Department of Economics, New York University, that appeared in the quarterly review Modern Age, Summer, 1960.
An instrumentality of human freedom
Of all institutions the gold standard occupies a paramount position as an instrumentality of human freedom, private property, private enterprise, and responsible government. The nature of the gold standard should reveal something as to why it is a necessary and natural companion of human freedom.
After specifying the standard gold coin and opening the Mint to its free and un-limited coinage on private account, the government must stand aside and let the gold standard perform its functions in accordance with the desires of the people. The right to private property in gold is established and respected. The government shall not interfere with the hoarding, importing or exporting of gold, or with the redemption of non-gold currency into standard gold coin by the banks. An individual may put none, little, much, or all of his property into gold. He may convert all of his property into gold and ship it out of the country without hindrance from the government.
Checkrein on the government and banks
If a person living under a degree of freedom inherent in a gold standard is disturbed by, or disapproves of, the policies of his government or the practices of banks, he may protect his property by presenting non-gold currency for redemption. If a sufficient number of people do this, then the government and the banks are forced to respect the fears or disapproval of the citizens. The government and the banks are thus placed in a position in which they must be careful not to disturb unduly, or to incur the disapproval of, people with property to protect.
Thus do a people with a gold standard at their disposal have the power to keep a checkrein on the fiscal policies of their government. Thus do they force the banks not to pursue reckless credit practices. Thus do they obtain and maintain a responsible government and a responsible banking system.
The people may utilize that power wisely or unwisely; but it is a power they must have if they are to be able to protect themselves from improper government encroachment or tyranny, and against irresponsible banking.
The experience of England
In international relations, all individuals are free under a gold standard to utilize gold as they desire. If their non-gold dollars are not acceptable abroad, they can remit the equivalent in gold. Since gold is the most universally acceptable money known to mankind, the individual is given the widest possible freedom in utilizing his wealth anywhere in the world.
This freedom and these practices were illustrated by England's use of the gold standard for nearly one hundred years from 1816 to 1914. Her people traded, invested, and traveled so widely that it was often said that the sun never sets on British possessions. The pound sterling became the dominant international currency and London the principal inter-national banking center of the world. Respect for and protection of private property and freedom to trade, travel, and invest reached heights never attained before or since.
Irredeemable currency - an instrumentality of servitude
When a government inflicts irredeemable currency on the people, the great rights and freedoms inherent in a gold standard disappear. The government becomes their dictator free from effective control; it curbs their rights and freedom as it sees fit. Constitutional government is subverted in an endless number of ways, and made to conform to the desire of the government to restrict human freedom.
The ability of people to put pressure on the banks and the government through demanding gold is destroyed. With the destruction of that individual right the power of the purse passes from ultimate control by the people to unrestrainable control by the government. Such an arrangement allows, nay, invites, the government to indulge in a spending orgy.
Grabbing the public purse
Once the government grabs the public purse, its power becomes uncontrollable. Combined with the loss by the people of the freedom and rights inherent in a gold standard, unscrupulous politicians can socialize the nation and undermine the republican system of government. The purchasing power of the currency is impaired. The banks are freed from the pressures of control which individuals have previously exercised over them. The quality of integrity in the currency is destroyed. Lacking that virtue, the monetary bloodstream contaminates the economic, political, and social system of the nation and fosters widespread corruption. In international relations, governments which employ irredeemable currency step in to regulate or control foreign trade, exchange rates, investment, travel, the amount of currency that may be taken out of the country. The freedom of private property in international exchange is curbed; the equalizing and self-correcting influences, characteristic of a gold standard, are impaired or destroyed. Foreign trade reaches various degrees of chaos.
Under a gold standard a prolonged un-favorable balance of payments, heavy and persistent losses of gold tend to correct themselves with promptness. But with government controls under the regime of an irredeemable currency economic distortions can long persist and become destructive. This is so because government officials cannot possibly provide the same level of wisdom that millions of people, free to trade, travel, invest, and act in their own interest can.
As problems in foreign trade mount, governments find excuses for more or different controls. A huge bureaucracy is developed to manage these international problems. There is no foreseeable end to these procedures until a nation regains the benefits of a gold standard which requires that the government retire to its proper position of umpire and relinquish its role as dominant participant and dictator.
Irredeemable currency - a tool of totalitarian governments
All socialist, communist, and totalitarian governments utilize it, because an irredeemable currency gives them the power that they need if they are to control the people and deprive them of the freedom inherent in private property and private enterprise. Having experienced these powers, the government is taking further steps into socialism and centrally managed economy. Those in charge reveal that they wish to retain the power acquired through the use of irredeemable currency and to continue the march toward more socialism and more government control. Frequent official words to the contrary are designed to be reassuring or to allay fears; but they have no important effect in arresting the course being pursued.
A national habit-forming drug
A government can take unrestrainable control of the people either by the use of military force, or by the use of irredeemable currency. The former is readily under-stood; the latter is a subtle national drug that is not generally understood, and is readily embraced by its victims. It is, consequently, a favorite device of modern governments that desire to bring the people under thoroughgoing control, for it enables the government to succeed and, at the same time, to have the general, even vigorous, approval of the great mass of people.
The world is literally drugged with irredeemable currency, and with government management and dictatorship as consequences. Under this intoxication there is strong agitation for more and more national spending, more and more government controls, and more and more debt.
The fact that these are common reactions of the great majority of people who have been subjected to the use and effects of irredeemable currency provides no clue as to whether the nation is to be saved from the most serious disaster into which the present course is likely to lead. Most unfortunately, mainstream economists have been working aggressively for a governmentally managed economy, or riding quietly with the tide that is moving in that direction.
It is useless to expect a mass movement on behalf of a sound currency. The daily experiences of people are such that they confirm in their minds the alleged virtues and benefits of irredeemable currency. Like drug addicts, they do not regard it as a dangerous or undermining narcotic. Even the loss of purchasing power does not disturb them to any great extent - their chief response is to try to get more and more of it. The bloating and distortions of business indexes are readily accepted as evidence of economic health. Heavy taxes and mountainous debt are not regarded with anxiety. A frequent or common agitation is for ever more national spending.
If we are to be saved from the ultimate evil consequences of using irredeemable currency, needed action should come from top national officials. Such reforms call for statesmanship. The President and Secretary of the Treasury must be statesmen, act as informed and tough monetary surgeons, men who can and will persuade Congress to re-instate redeemable currency.
Once that step is taken, the people should experience a breath of fresh air and be on the course leading to better days - to a better government that is willing to abide by the Constitution, to greater freedom for the people; in short, to more responsibility by the government and by the banks. Optimism should become wide-spread because the money of the nation would once more have the quality of integrity. The problem of credit-control should be easier to solve. Business enterprise should expand, domestically as well and inter-nationally, and on a sounder basis. Gold should flow in from abroad. Imbalances in foreign trade should rectify themselves. The control of the public purse would be returned to the people as individuals, where it belongs if human freedom is to be preserved and responsible government is to be obtained. Then there would be good grounds for assurance that the republic will be preserved - at least as long as the gold standard is maintained.
Friday, April 17, 2009
In this particular case, after the global corporations and the international bankers were finished buying off the Argentine government, the nations economy went into free-fall collapse. Than the global corporate vultures came in and bought up the nation's vital infrastructure for pennies on the dollar and then they proceed to cut off vital services while looting the public utilities of theit cash reserves. That's how "privatization" works in the real world! The end result of this corrupt and viciously calculated multinational gang rape and robbery of this once prosperous and sovereign nation resulted in 57% of the Argentine people being robbed of their savings, robbed of their jobs and finally being reduced to living squalor.
This is the worst "crime against humanity" that the world has seen since the Holocaust! The bastards who orchestrated this disaster should all be arrested and have their wealth confiscated! Then these corporate crooks and debt-slave merchants should ALL be tried in both an Argentine court and in a world court, and then finally hanged by the neck for being the murderous parasites that they really are!
And as you watch this film, just keep in mind that America today is following the same exact globalist path leading to economic destruction that Argentina has followed. This could be America's future in a few short years from now, or even within the next few months! If the political atmosphere in Washington doesn't change quickly and drastically then this is our certain future! Sweet dreams!
Monday, April 13, 2009
Thursday, April 9, 2009
Tuesday, April 7, 2009
The fact of the matter is that America is finished as a prosperous nation as long as our economy and political decisions are being dictated to by the likes of Wall St., The Federal Reserve, The World Trade Organization, The United Nations and by unelected multinational bureaucrats at The NAFTA Trade Court. Yes! We should kill the Fed!:
By Patrick J. Buchanan
April 2, 2009http://www.humanevents.com/article.php?print=yes&id=31335
For the financial crisis that has wiped out trillions in wealth, many have felt the lash of public outrage.
Fannie and Freddie. The idiot-bankers. The AIG bonus babies. The Bush Republicans and Barney Frank Democrats who bullied banks into making mortgages to minorities who could not afford the houses they were moving into.
But the Big Kahuna has escaped.
The Federal Reserve.
Already in its sixth week on the New York Times best-seller list, this eminently readable book traces the Fed’s role in every financial crisis since this creature was spawned on Jekyll Island in 1913.
The “forgotten depression” of 1920-21 was caused by a huge increase in the money supply for President Wilson’s war. When the Fed started to tighten at war’s end, production fell 20 percent from mid-1920 to mid-1921, far more than today.
Why did we not read about that depression?
Because the much-maligned Warren Harding refused to intervene. He let businesses and banks fail and prices fall. Hence, the fever quickly broke, and we were off into “the Roaring Twenties.”
But, the Fed reverted, expanding the money supply by 55 percent, an average of 7.3 percent a year, not through an expansion of the currency, but through loans to businesses.
Thus, when the Fed tightened in the overheated economy, the Crash came, as the stock market bubble the Fed had created burst.
Herbert Hoover, contrary to the myth that he was a small-government conservative, renounced laissez-faire, raised taxes, launched public works projects, extended emergency loans to failing businesses and lent money to the states for relief programs.
Hoover did what Obama is doing.
Indeed, in 1932, FDR lacerated Hoover for having presided over the “greatest spending administration in peacetime in all of history.” His running mate, John Nance Garner, accused Hoover of “leading the country down the path to socialism.” And “Cactus Jack” was right.
Terrified of the bogeyman that causes Ben Bernanke sleepless nights — deflation, falling prices — FDR ordered crops destroyed, pigs slaughtered, and business cartels to cut production and fix prices.
FDR mistook the consequences of the Depression — falling prices — for the cause of the depression. But prices were simply returning to where they belonged in a free market, the first step in any cure.
Obama is repeating the failed policies of Hoover and FDR, by refusing to let prices fall. Obama, with his intervention to prop up housing prices and Bernanke with his gushers of money to bail out bankrupt banks and businesses are creating a new bubble that will burst even more spectacularly.
The biggest myth, writes Woods, is that it was World War II that ended the Great Depression. He quotes Paul Krugman:
“What saved the economy and the New Deal was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.”
This Nobel Prize winner’s analysis, writes Woods, is a “stupefying and bizarre misunderstanding of what actually happened,”
Undoubtedly, with 29 percent of the labor force conscripted at one time or another into the armed forces, and their jobs taken by elderly men, women and teenagers with little work experience, unemployment will fall.
But how can an economy be truly growing 13 percent a year, as the economists claim, when there is rationing, shortages everywhere, declining product quality, an inability to buy homes and cars, and a longer work week? When the cream of the labor force is in boot camps or military bases, or storming beaches, sailing ships, flying planes and marching with rifles, how can your real economy be booming?
It was 1946, a year economists predicted would result in a postwar depression because government spending fell by two-thirds, that proved the biggest boom year in all of American history.
Why? Because the real economy was producing what people wanted: cars, TVs, homes. Businesses were responding to consumers, not the clamor of a government run by dollar-a-year men who wanted planes, tanks, guns and ships to blow things up.
“The Fed was the greatest single contributor to the crisis that unfolds before us,” Woods writes of today, and “more dollars were created between 2000 and 2007 than in the rest of the republic’s history.”
After 9-11, the Fed kept interest rates low — in one year as low as 1 percent. That money flooded into the housing and stock markets. And in 2008, as the Fed tightened, the bubble burst.
Now the money supply is again expanding, to rescue us from a crisis created by the previous expansion. Of Nicholas Biddle’s Bank of the United States, the great Andrew Jackson was eloquent.
“It has tried to kill me,” he said. “But I will kill it.” And he did.
Should not this creature from Jekyll Island, for all its manifold crimes and sins against the republic, also be summarily put to death?