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Archive for March 2010

Healthcare and Economic Realities

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by Dr. Ron Paul
Originally posted March 30, 2010

WITH PASSAGE OF LAST WEEK’S BILL, THE AMERICAN PEOPLE are now the unhappy recipients of Washington’s disastrous prescription for healthcare “reform.” Congressional leaders relied on highly dubious budget predictions, faulty market assumptions, and outright fantasy to convince a slim majority that this major expansion of government somehow will reduce federal spending. This legislation is just the next step towards universal, single payer healthcare, which many see as a human right. Of course, this “right” must be produced by the labor of other people, meaning theft and coercion by government is necessary to produce and distribute it.

Those who understand Austrian economic theory know that this new model of healthcare will cause major problems down the road, as it has in every nation that ignores economic realities. The more government involves itself in medicine, the worse healthcare will get: quality of care will diminish as the system struggles to contain rising costs, while shortages and long waiting times for treatment will become more and more commonplace.

Consider what would happen if car insurance worked the way health insurance does. What if it was determined that gasoline was a right, and should be covered by your car insurance policy? Perhaps every gas station would have to hire a small army of bureaucrats to file reimbursement claims to insurance companies for every tank of gas sold! What would that kind of system do to the costs of running a gas station? How would that affect the prices of both gasoline and car insurance? Yet this is exactly the type of system Congress is now expanding in health insurance. In a free market system, health insurance would serve as true insurance against serious injuries or illness, not as a convoluted system of third party payments for routine doctor visits and every minor illness.

While proponents of this reform continue to defy all logic and reason by claiming it will save money, I worry about cataclysmic economic events. Already investors are more reluctant to buy US Treasuries, fearing that the healthcare bill, along with other spending, will cause government debt to explode to default levels. I had the opportunity last week to address my concerns with both Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, especially about the potential for the coming serious inflation. I am not optimistic that these important decision makers truly understand what is coming, why it is coming, and how best to deal with it.

The Federal Reserve finds itself in an unprecedented and unenviable position. To keep up with government spending and corporate irresponsibility, it has increased the monetary base by nearly $1.5 trillion since September of 2008. Excess bank reserves remain at historically high levels, and the Fed’s balance sheet has ballooned to over $2 trillion. If the Fed pulls this excess liquidity out of the system, it risks collapsing banks that rely on the newly created money. However, if the Fed fails to pull this excess liquidity out of the system we risk tipping into hyperinflation. This is where central banking inevitably has led us.

The idea that a handful of brilliant minds can somehow steer an economy is fatal to economic growth and stability. The Soviet Union’s economy failed because of its central economic planning, and the U.S. economy will suffer the same fate if we continue down the path toward more centralized control. We need to bring back sound money and free markets – yes, even in healthcare – if we hope to soften the economic blows coming our way.

Death of Detroit, the first U.S. city to face extinction

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by Gary North
Originally posted Mar 24, 2010

DETROIT IS DYING. YES, I KNOW THAT THERE are lots of books on “The Death of. . . .” That word sells books. But Detroit really is dying. It is the first metropolis in the United States to be facing extinction. We have never seen anything like this in American history. It is happening under our noses, but the media refuse to discuss it. To do so would be politically incorrect. Two factors tell us that Detroit is dying. The first is the departure of 900,000 people – over half the city’s population – since 1950. It peaked at 1.8 million in 1950. It is down to about 900,000 today.

In 1994, the median sales price of a house in Detroit was about $41,000. The housing bubble pushed it up to about $98,000 in 2003. In March 2009, the price was $13,600. Today, the price is $7,000. There has never been a collapse of residential real estate values of this magnitude in peacetime history, anywhere. Detroit is dying.

We are unfamiliar with anything like this. The media are silent. The Powers That Be are not interested in reporting on this, because readers might ask the obvious question: “How did this happen?” Obvious questions tend to lead to obvious answers.

Detroit has been killed by flight out of the city. The 2008 Clint Eastwood movie, Gran Torino dealt with this problem. Eastwood plays an 80-something Korean War veteran who will not leave the neighborhood. His children keep bugging him to sell and move into a retirement home. He will not hear of it. He is alienated from them and from his immigrant neighbors: Hmong refugees from South Vietnam. The Hmong have trouble with the Blacks. Every group is essentially trapped in a neighborhood, with the gangs running the show.

There is no surge of buyers to take advantage of fabulously low prices in Detroit. Can you imagine buying a home for cash for $13,600 in 2009 – a house that had sold for $98,000 six years earlier – and losing half your money? It’s incredible.

The Wall Street Journal recently ran one of the most creative stories I have seen in years. The journalist told the story of the history of a 5-bedroom home in Detroit, from the land purchase to its recent sale. It was built by one of the most influential man you have never heard of, Clarence Avery. Avery was on the Ford Motor Company team that conceived of implementing an assembly line for Ford’s factory. He copied the idea from a hog-slaughtering operation.

His home was a very nice home for the time. The journalist located his daughter, now age 91. She said that she always thought the home was the best home she ever lived in.

As recently as 2005, the home sold for $250,000. It was purchased by a woman who was lent $200,000 to buy it. It was financed by a subprime loan. The asking price was $189,000. Where the other $61,000 went, the woman has no idea. She defaulted. The deteriorating house was bought by a Christian organization that is renovating it. The house sold for $10,000.

This is simply inconceivable to anyone who is unfamiliar with Detroit since 2005. Nothing like this has ever happened. How can we conceive of a lender lending $200,000 to a woman to buy a $250,000 home offered at $189,000? How can we conceive of a fall in price from $250,000 to $10,000? This is the sign of a dying city. This does not happen in a normal environment. Even with the mania created by Fannie Mae and Freddie Mac, in conjunction with Alan Greenspan’s Federal Reserve, nothing like this has happened anywhere else.

If you had predicted anything like this in 2005, you would have been dismissed as a crackpot on crack. You would not have been taken seriously by anyone. Yet it has happened. The city planners, the Federal government’s subsidy defenders, and the welfare state aficionados are all discreetly silent about Detroit. The city funds its schools with property taxes. Property taxes have collapsed as sources of revenue. An honest property tax system will generate less than ten cents on the 2003 dollar.

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A Point of No Return?

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by Thomas Sowell
originally posted in The Casey Report, March 25, 2010

In our most recent edition of The Casey Report, we examined whether the U.S. government has spent itself past the point of no return – the point at which accumulating deficits build a mountain of debt that can never be paid back, no matter what. In this next piece, Thomas Sowell examines a different point of no return. While Sowell’s article reads as if he would prefer a Republican-controlled congress and White House (even though he never explicitly says that), I don’t think that would be any better. We all saw what took place under Bush. And both parties are basically the same these days anyway – they both want bigger government and more power. – Chris Wood, Casey Research, LLC

WITH THE PASSAGE OF THE LEGISLATION ALLOWING THE FEDERAL GOVERNMENT to take control of the medical care system of the United States, a major turning point has been reached in the dismantling of the values and institutions of America. Even the massive transfer of crucial decisions from millions of doctors and patients to Washington bureaucrats and advisory panels – as momentous as that is – does not measure the full impact of this largely unread and certainly unscrutinized legislation. If the current legislation does not entail the transmission of all our individual medical records to Washington, it will take only an administrative regulation or, at most, an Executive Order of the President, to do that.

With politicians now having not only access to our most confidential records, and having the power of granting or withholding medical care needed to sustain ourselves or our loved ones, how many people will be bold enough to criticize our public servants, who will in fact have become our public masters? Despite whatever “firewalls” or “lockboxes” there may be to shield our medical records from prying political eyes, nothing is as inevitable as leaks in Washington. Does anyone still remember the hundreds of confidential FBI files that were “accidentally” delivered to the White House during Bill Clinton’s administration?

Even before that, J. Edgar Hoover’s extensive confidential FBI files on numerous Washington power holders made him someone who could not be fired by any President of the United States, much less by any Attorney General, who was nominally his boss.

The corrupt manner in which this massive legislation was rammed through Congress, without any of the committee hearings or extended debates that most landmark legislation has had, has provided a roadmap for pushing through more such sweeping legislation in utter defiance of what the public wants.

Too many critics of the Obama administration have assumed that its arrogant disregard of the voting public will spell political suicide for Congressional Democrats and for the President himself. But that is far from certain.

True, President Obama’s approval numbers in the polls have fallen below 50 percent, and that of Congress is down around 10 percent. But nobody votes for Congress as a whole, and the President will not be on the ballot until 2012.

They say that, in politics, overnight is a lifetime. Just last month, it was said that the election of Scott Brown to the Senate from Massachusetts doomed the health care bill. Now some of the same people are saying that passing the health care bill will doom the administration and the Democrats’ control of Congress. As an old song said, “It ain’t necessarily so.”

The voters will have had no experience with the actual, concrete effect of the government takeover of medical care at the time of either the 2010 Congressional elections or the 2012 Presidential elections. All they will have will be conflicting rhetoric  – and you can depend on the mainstream media to go along with the rhetoric of those who passed this medical care bill.

The ruthless and corrupt way this bill was forced through Congress on a party-line vote, and in defiance of public opinion, provides a road map for how other “historic” changes can be imposed by Obama, Pelosi and Reid. What will it matter if Obama’s current approval rating is below 50 percent among the current voting public, if he can ram through new legislation to create millions of new voters by granting citizenship to illegal immigrants? That can be enough to make him a two-term President, who can appoint enough Supreme Court justices to rubber-stamp further extensions of his power.

When all these newly minted citizens are rounded up on election night by ethnic organization activists and labor union supporters of the administration, that may be enough to salvage the Democrats’ control of Congress as well.

The last opportunity that current American citizens may have to determine who will control Congress may well be the election in November of this year. Off-year elections don’t usually bring out as many voters as Presidential election years. But the 2010 election may be the last chance to halt the dismantling of America. It can be the point of no return.

Written by aurick

27/03/2010 at 12:01 am

Has the State of California become the Epicenter of the Economic Collapse of America?

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Posted originally March 22, 2010 on The Economic Collapse

ONCE UPON A TIME, CALIFORNIA WAS THE STATE that everyone wanted to move to. The endless sunshine, the gorgeous weather, the beaches, the lure of Hollywood and a booming economy made it extremely attractive to millions of Americans who wanted to fulfill their “California dreams”. But those days are long gone. Now, the state of California has become an economic nightmare.  In fact, many would argue that California has now become the epicenter of the economic collapse of the United States. Everything that once made California great is now being swamped by a tidal wave of unemployment, foreclosures, crime, budget cuts, traffic, taxes and natural disasters. There is a reason why every year now many more people leave the state of California than move into it. The state of California is suffering a slow economic death, and if something is not done it could end up being one of the biggest financial disasters in history.

The economic crisis of the past several years has hit California so incredibly hard that it is hard to describe. According to the U.S. Labor Department, the unemployment picture in the state continues to deteriorate, with an overall unemployment rate of 12.5 percent in January.

12.5 percent may not sound that bad, but the truth is that the situation in many of the urban areas is much worse. There are now 8 counties in the state of California that have unemployment rates of over 20 percent. In this economic environment, not even teachers are safe.  Just last week, the state of California handed pink slips to nearly 22,000 teachers across the state.

It is hard to even convey how bad things are in California right now. California has always been a “boom or bust” state, but what is happening now is really unprecedented. In fact, the number of people now unemployed in California is equivalent to the populations of Nevada, New Hampshire and Vermont combined. Businesses are shutting down at an alarming rate. For example, in the area around Sacramento, California there is one closed business for every six that are still open. Just think about that.

One out of every seven businesses has already shut down. And unfortunately things are going to get even worse. But that is the last thing that people in California want to hear about now.

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Goldman Sachs, Hedge Funds Attack Greece to Smash Euro

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by Webster G. Tarpley
Originally posted March 3, 2010

IT HAS BEEN EVIDENT FOR SOME TIME THAT THE ONGOING SPECULATIVE attack on Greece, along with such other countries as Spain, Ireland, Portugal, and Italy, was not primarily a reflection of their economic fundamentals, nor yet a spontaneous movement of “the market,” but rather an orchestrated action of economic warfare. The dollar had been relentlessly falling through the late summer and autumn of 2009. It obviously occurred to various Anglo-American financiers that a diversionary attack on the euro, starting with some of the weaker Mediterranean or Southern European economies, would be an ideal means of relieving pressure on the battered US greenback.

Since these degenerate elites are incapable of directly solving the problem of the dollar through increased production, full employment, and economic recovery, one of the few alternatives remaining to them is to create a situation in which the euro is collapsing faster, leaving the dollar as the beneficiary of some residual flight to quality or safe haven reflex.

This is what emerged during the first week of December with a speculative assault or bear raid against Greek and Spanish government bonds as well as the euro itself, accompanied by a scurrilous press campaign targeting the “PIIGS,” an acronym for the countries just named, coming from inside the bowels of Goldman Sachs. I have discussed this phenomenon several times over the last two to three weeks on my radio program on GCN.

Now comes concrete proof of this conspiracy in the form of a February 8th “idea dinner,” held at the Manhattan townhouse of Monness, Crespi, Hardt & Co, a boutique investment bank. Among those present were SAC Capital Advisors, David Einhorn of Greenlight Capital (a veteran of the fatal assault on Lehman Brothers in the late summer of 2008), Donald Morgan of Brigade Capital, and, most tellingly, Soros Fund Management. The consensus that emerged that night over the filet mignon was that Greek government bonds were the weak flank of the euro, and that once a Greek debt crisis had been detonated, all outcomes would be bad for the euro.

The assembled predators agreed that Greece was the first domino in Europe. Donald Morgan was adamant that the Greek contagion could soon infect all sovereign debt in the world, including national, state, municipal and all other forms of government debt. This would mean California, the UK, and the US itself, among many others. The details of this at dinner were revealed in the headline story of The Wall Street Journal on Friday, February 26, 2010.

Nor was this the only cabal in town intent on attacking the euro through the week Greek flank. The article cited suggests that GlobeOp Financial Services and Paulson & Co. are also piling on. The zombie banks were also heavily engaged. The article reported that Goldman Sachs, Bank of America-Merrill Lynch, and Barclays Bank of London were also assisting speculators in placing highly leveraged bearish bets against the euro. Note that these zombie banks are alive today because of US taxpayer money, in Barclay’s case through AIG.

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The beginning of the end of the Eurozone as we know It?

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by Yves Smith
Posted originally March 22, 2010 on naked capitalism.com

THE WIDELY-EXTOLLED IDEA, THAT THE EU WOULD FIND a way to muddle through the Greece crisis, looks very much in doubt. The pressure has not simply put the rescue of Greece into disarray, but appears to have led to some positions being taken that, if they hold, could lead to the partial dissolution of the monetary union. This development would have far-reaching ramifications which are far from well understood, to put it mildly.

We have a sober assessment from Wolfgang Munchau at the Financial Times:

At last we are heading towards a resolution, albeit a bad one. After weeks of pledges of political and financial support, Angela Merkel appears ready to send Greece crawling to the International Monetary Fund.

Germany cites legal reasons for its position. In past rulings, its constitutional court has interpreted the stability clauses in European law in the strictest possible sense. These rulings have left a deep impression among government officials. It is hard to say whether this argument is for real or is just an excuse not to sanction a bail-out that would be politically unpopular. It is probably a combination of the two.

I have heard suggestions that a deal may still be possible at this week’s European summit, but only if everybody were to agree to Germany’s gruesome agenda to reform the stability pact. That would have to include stricter rules and the dreaded exit clause, under which a country could be forced to leave the eurozone against its will. I am not holding my breath. But either outcome will mark the beginning of the end of Europe’s economic and monetary union as we know it….

In a column several weeks ago I put forward three conditions necessary for the eurozone to survive in the long run: a crisis resolution mechanism, a procedure to deal with internal imbalances, and a common banking supervisor. Since then, things have been moving in the wrong direction on all three counts. For a start, we have come from a situation in which the “no bail-out” clause of the Maastricht treaty, having been almost universally disbelieved for 10 years, is suddenly 100 per cent credible…

The debate on imbalances is also regressing. It would be unreasonable to ask Germany to raise wages or cut exports, but there is a legitimate complaint about Germany’s lack of domestic demand. Berlin should accept it needs to develop a strategy. But the opposite is happening…

On banking supervision, the main reason for a common European system is macroeconomic. In a monetary union, imbalances would matter a lot less if the banking system were truly anchored at the level of the union, not the member state. As banks can obtain liquidity from the European Central Bank, even extreme and persistent current account deficits should not matter in good times. But they matter in times of crisis. For as long as bank failures remain a national liability, persistent imbalances could ultimately lead to a national insolvency. If the banking sector were genuinely European, imbalances would still be an important metric of relative competitiveness but we would need to worry a lot less, just as we do not worry about the current account deficit of a city relative to its state.

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GATA appeals to CFTC to act against manipulative shorts

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Submitted by C. Powell
Originally posted March 8, 2010

Dear Friend of GATA and Gold:
GATA today delivered to the chairman of the U.S. Commodity Futures Trading Commission, Gary Gensler, a letter from GATA Chairman Bill Murphy, appealing to the CFTC to act against the concentrated and manipulative short positions in the precious metals markets. The commission is expected to hold a hearing this month on establishing position limits in those markets. Murphy’s letter is appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


March 8, 2010
Gary Gensler, Chairman
U.S. Commodity Futures Trading Commission
3 Lafayette Centre
1155 21st St. NW
Washington, DC 20581

Dear Chairman Gensler:
The Gold Anti-Trust Action Committee (GATA) was formed in January 1999 to expose and oppose the manipulation and suppression of the price of gold. What we have learned over the past 11 years is of great importance in regard to the CFTC’s forthcoming hearings regarding position limits in the precious metals futures markets. Our efforts to expose manipulation in the gold market parallel those of Harry Markopolos to expose the Madoff Ponzi scheme to the Securities and Exchange Commission.

Initially we thought that the manipulation of the gold market was undertaken as a coordinated profit scheme by certain bullion banks, like JPMorgan, Chase Bank, and Goldman Sachs, and that it violated federal and state anti-trust laws. But we soon discerned that the bullion banks were working closely with the U.S. Treasury Department and Federal Reserve in a gold cartel, part of a broad scheme of manipulation of the currency, precious metals, and bond markets.

As an executive at Goldman Sachs in London, Robert Rubin developed an idea to borrow gold from central banks at minimal interest rates (around one percent), sell the bullion for cash, and use the cash to fund Goldman Sachs’ operations. Rubin was confident that central banks would control the gold price with ever-more leasing or outright sales of their gold reserves and that consequently the borrowed gold could be bought back without difficulty. This was the beginning of the gold carry trade.

When Rubin became U.S. treasury secretary, he made it government policy to surreptitiously operate an identical gold carry trade but on a much larger scale. This became the principal mechanism of what was called the “strong-dollar policy.” Subsequent treasury secretaries have repeated a commitment to a “strong dollar,” suggesting that they were continuing to feed official gold into the market more or less clandestinely to support the dollar and suppress interest rates and precious metals prices.

Lawrence Summers, who followed Rubin as treasury secretary, was an expert in gold’s influence on financial markets. Previously, as a professor at Harvard University, Summers co-authored an academic study titled “Gibson’s Paradox and the Gold Standard,” (see Footnote 1 below) which concluded that in a free market gold prices move inversely to real interest rates, and, conversely, if gold prices are “fixed,” then interest rates can be maintained at lower levels than would be the case in a free market. This was the economic theory behind the “strong dollar policy.”

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75 years of funny money

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by Martin Masse, Financial Post
Originally published March 10, 2010

A GOOD START TO UNDERSTANDING THE REAL NATURE of central banking is the libertarian bumper sticker saying “Don’t steal! The government hates competition.” The whole purpose of the bureaucratic machine called the central bank is indeed to steal from us.

How does it do this? By constantly printing money (or, nowadays, creating it out of electronic bits on computers) and increasing the money supply, thereby creating inflation.

When you get to the Bank of Canada’s Web site, it says “We are Canada’s central bank. We work to preserve the value of money by keeping inflation low and stable.” Do a little search on the same Web site, however, and you discover that since the Bank started its operations in 1935, the dollar has lost about 94% of its value. A basket of goods and services that cost $100 in 1935 would cost $1600 today. That’s some preservation!

Counterfeiting is understandably illegal and punishable by law. But central bankers do it all the time, the only difference being that they have a legal stick – their dollars are the only permitted legal tender – and they deploy a huge propaganda machine to force us to accept their funny money.

There are big stakes involved. Inflation is a way for governments to spend more without having to directly impose taxes. A central bank is an essential part of big government. Central banking operations also serve as a permanent bailout for debtors. Interest rates are usually kept lower than they would be in a free financial market. And by reducing the value of the money being owed, they make life easier for debtors. So the modern era of central banking is one where debt, public and private, inexorably grows, to the point where the whole monetary edifice now threatens to collapse.

Finally, central banks protect the reckless practices of financial institutions, who lend money that they don’t have under the fraudulent fractional reserve system. With government acting as a lender of last resort, financial institutions are prone to taking greater and greater risks. As we’ve seen recently, wads of cheap cash are always at their disposal to keep them solvent and profitable.

It’s interesting to read (in A History of the Canadian Dollar, a little book produced by the Bank) that the reason Canada went off the gold standard in 1914 was to rescue insolvent commercial banks. “On 3 August 1914, an emergency meeting was held in Ottawa between the government and the Canadian Bankers Association to discuss the crisis. Later that day, an Order-in-Council was issued that provided protection for banks that were threatened by insolvency by making notes issued by the banks legal tender.” Take my money, or else.

That 1914 move off the gold standard became one of the major steps towards creation of the Bank of Canada in 1935 and the full nationalization of money in Canada. All the gobbledegook that passes for monetary economics nowadays aims to obscure the basic economic fact that central banks make us poorer. The Bank of Canada’s archives contain endless studies about ways to calculate money supply, fancy rules on how to manipulate interest rates, etc. This scholarship is supposed to help central bank bureaucrats better “preserve the value of money” when, in fact, the very existence of the Bank is the reason why money gets devalued.

For decades now, anyone raising issues about this has been tagged as a crank. Debates about monetary policy are monopolized by a handful of economists speaking in unintelligible jargon, almost all of them working at central or commercial banks or related one way or another to the network of central bank beneficiaries, as research in the U.S. has shown.

What is most amazing is that even most economists who claim to support free markets ­– apart from a small group who adhere to the Austrian School –approve of central banking, especially in times of crisis. But even if it were true that “flooding markets with liquidities” could kick-start the economy, this logically implies a fundamental violation of property rights and should be unacceptable to them.

Previous eras understood this much better than today, as the heated debates surrounding the creation and abolition of the two first banks of the United States attest. In a sane world, central banking would today be considered an act of expropriation and would be abolished. Let’s hope that an explanation to its logical conclusions will one day become part of the economics curriculum.

Martin Masse is publisher of the libertarian webzine Le Québécois Libre and a former advisor to Industry Minister Maxime Bernier.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2668127#ixzz0iR14gT3Z

Sovereign Debt = Sub-Prime Debt

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by Fayyaz Alimohamed
Originally posted Mar 16 2010

AT THE PDAC MINING CONFERENCE IN TORONTO last week, I thought the turnout was less than last year. This made sense, as by March 2009, investors had lost their shirts and were desperate for information on how to get their money back. Complacency has now set in with this year-long market rally. We know that governments issued unprecedented amounts of debt to rescue the global economy from collapse. But the crisis was caused by too much debt and leverage at a consumer and corporate level. Who will save us when government debt becomes the cause of the next crisis?

The United States is projected to run budget deficits for the next 70 years, based on long-term projections by the Congressional Budget Office. Which means it will never pay back its current gargantuan debt, and which makes the dollar vulnerable. In fact, Moodys, the debt rating service (which regrettably missed warning us about the debt crisis before it happened) is now diligently informing us that the US could lose its AAA rating. In Europe, Standard and Poor’s (the other debt rating agency that missed the whole financial crisis as well) is now on the ball, warning that Europe needs to raise €1.5 trillion this year.

And the games continue as well. Before 2007, there was a $ 10 trillion shadow banking system that was unregulated and leveraged, which blew up. Now we learn that Goldman Sachs helped Greece hide its deficits in order to meet Maastricht Treaty requirements and that governments, such as France and Austria, are using “alternate channels of borrowing” (such as the Société de Financement de l’Economie (SFEF) and Austria’s infrastructure financing companies) to buttress state stimulus programmes with off-balance sheet funding in the tune of hundreds of billions of Euros.

In the meantime, the party continues on Wall Street. Record bonuses are being paid by zombie banks which would be extinct if not rescued by taxpayers and suspension of mark to market and other prudent rules. Japan is mired in economic malaise and its endless stimulus programs have led to a debt to GDP ratio of over 200%. (Source: Economist.com)

PIMCO, the largest bond fund manager in the world, has warned that the sovereign debt explosion has taken us into uncharted waters that threaten global economic stability. It is inevitable that investors will want higher interest rates as this debt tsunami continues. Higher interest rates will jeopardise the economic recovery, leading governments to issue more stimulus, financed by debt! It’s a vicious cycle once it begins.

It is no wonder then that George Soros called gold the ultimate bubble. In a negative real interest rate environment, with competing currency devaluations, gold is a natural hedge. He created some fear with his comment as some investors thought he was calling a top for gold. But all he said was it would eventually be a bubble, not that it was ready to pop. And, as he told Fareed Zakaria on CNN, he invests in bubbles to make money. And to prove it, his Quantum fund increased its holding of the gold ETF, GLD, by 152% in Q4 2009 over Q3, to $ 672 million.

Gold is rising in all non-US$ currencies. It reflects the debasement of these paper currencies, and will reach a new high in US dollars soon. In literature, it is important for the reader to keep his skepticism at bay in order to allow the story to unfold, a “suspension of disbelief”. We are at that stage in the global economy. This liquidity driven rally will continue as long as investors continue to act as if the recovery is real. It is when they finally cannot bring themselves to continue to believe in the creditworthiness of various forms of paper (government bonds and currencies), when they realise it is all sub-prime in nature, that the second leg down will arrive. And this time governments will not be able to save us.

How Big Is Our Deficit?

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by Bud Conrad Chief Economist, Casey Research
Originally posted March 16, 2010

I’VE BEEN WARNING ABOUT BIG BUDGET DEFICITS for years, often looking through the lens of our deficits compared to GDP. Using that ratio, I have pointed out that the current deficits are the biggest since World War II.

Yesterday, however, I came upon a surprising measure that is as simple as it is effective in helping to understand just how extraordinary today’s deficits are. The measure calculates how big the deficit is, expressed in “constant” dollars – dollars that have the same purchasing power over time. Using that measure, the current deficit ($1.4 trillion) is a surprising 260% of what the government deficit was in the worst years of WWII, the biggest war we as a nation have ever fought.

The comparison to WWII is relevant and important, because the effort for that war turned this country completely upside down and saw the government commandeer the levers of industry, for example auto makers and refrigerator plants, to make tanks, airplanes, bullets, and bombs. At its peak, the war effort consumed 90% of government spending.

But there’s a crucial difference between then and today: back then we knew that, in time, the war would end and the elevated government spending would be reduced. Today, however, while the cost of military is a still high 20% of federal spending, the vast majority of our government’s expenses are for non-discretionary items, such as Social Security and Medicare, that aren’t expected to be cut. In fact, they are only going to go higher from here.

I hope this chart concerns you as much as it did me. It’s worth passing along to everyone you know as a way of warning that we are very much in unchartered waters. It is certainly a compelling counterargument the next time a Keynesian economist says deficits don’t matter.

This is too big to ignore, and we are close to unleashing a new paradigm of dollar collapse. Freewheeling spending will meet its limit, and I think we will see something break in the year ahead.