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Archive for August 2010

Uncle Scam

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from Casey’s Daily Despatch
Posted originally Aug 25, 2010

As the fiat money monsters are brought to bay, the price of gold can really only go higher. Overly confident? I don’t think so.

THAT’S BECAUSE WHEN PEOPLE LOSE FAITH IN A CURRENCY, AS THEY WILL BEFORE THIS CRISIS is over, they unfailingly rush to exchange the unbacked paper money for something more tangible. While pretty much anything with an intrinsic value will do – real estate, antique cars, old masters – for all the reasons that Aristotle enunciated, gold is viewed in a class of its own, and so has an unblemished history as a universally accepted store of value. And, thanks to its portability, divisibility, durability, and consistency, it has also always been looked upon as a convenient form of money.

The most pressing macro-observation I’d like to make – an observation that’s critical for investors to understand (though most don’t or won’t) – is that the tectonic monetary shift now underway is truly global in nature. And it’s not going to be over until a new and markedly different monetary regime has been implemented.

It’s like this: Throughout history governments have experimented with fiat money. They have done so because the benefits to the government and the insiders that invariably latch on to power are just so damn attractive. The Romans did it by debasing their coinage, but the modern version goes one better by completely disconnecting a currency from any value whatsoever, and then wantonly printing as politically motivated needs or wants arise.

The latest fiat system kicked off in earnest in 1944 when Uncle Scam, in Bretton Woods, NH, got the leaders of the world’s war-weary countries to agree to accept the U.S. dollar as their reserve currency. In return, the U.S. agreed that the currency notes it would subsequently issue would be convertible into a corresponding amount of gold. Then Tricky Nixon came along in 1971 and canceled the right of the bearer to swap the notes for gold. Overnight, the link between the currency and anything tangible was lost.

That, of course, opened the door to all subsequent politicians to engage in the whole print, print, print thing. The keystone asset of the former system – gold – soon became a distant memory for the new crop of central bankers and, remarkably, to the bearers of the notes.

For any number of reasons, most of which related to the illusion of increasing prosperity, people simply stopped paying attention to what Uncle Scam was up to. Of course, that illusion was largely based on the increase in nominal wealth: if one year you’re worth $100,000 and three years later you are worth $150,000, the tendency is to feel richer even if your actual purchasing power has gone up by far less or even has declined due to a debasement of the currency.

Today’s dollar is worth just 18 cents in 1971 terms. But all scams must, in time, come to an end. And that’s what’s going on now. It ends here. Before this is over, the current iteration of the U.S. dollar – the vaporous construct with no actual value – will lose its value as money.

Which brings me to an important nuance in this discussion. Most failed fiat money experiments involve a single currency. The most convenient recent example is provided by Mugabe’s Zimbabwe. Rather than actually supporting the creation of marketable goods and services in what he sees as his private fiefdom, he took the low road of energetically abusing his fiat currency to the vanishing point.

In a situation such as that, the local citizenry suffers – as well as anyone foolish enough to be holding bonds denominated in the debased currency. But that’s about it. In the current scenario, the keystone of the entire global monetary system is the U.S. dollar. Which means that the primary reserve holdings of virtually all the world’s significant central banks are at risk of going up in smoke.

And it’s even worse that, because the dollar is also the number one trade currency – which means corporations around the world are sitting on huge holdings or are dependent on commercial contracts denominated in dollars. And even that’s not the end of it. Because Uncle Scam has long served as a role model to other world leaders, those leaders have enthusiastically followed suit and universally launched fiat monetary systems of their own. It’s bad enough that the world’s reserve currency is a fiction – but the situation becomes really dire when you accept as fact that all the world’s currencies are a fiction.

Man, we’re in a lot of trouble.

There will be NO double dip…

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by Egon von Greyerz
Matterhorn Asset Management
Posted originally at August 16th, 2010

NO, THERE WILL BE NO DOUBLE DIP. IT WILL BE A LOT WORSE. THE WORLD WILL SOON GO INTO AN ACCELERATED and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced.  But this will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer.

The End of an Era
The hyperinflationary depression that many western countries, including the US and the UK, will experience is likely to mark the end of an era that has lasted over 200 years since the industrial revolution.  A major part of the growth in the last 100 years and especially in the last 40 years has been built on an unsustainable build-up of debt levels. These debt levels will continue to swell for another few years until the coming hyperinflation in the West leads to a destruction of real asset values and a debt implosion.

In the last 100 years the Western world has experienced a historically unprecedented growth in production, in inventions and technical developments leading to a major increase in the standard of living. During the same period government debt, as well as private debt have grown exponentially leading to a major increase in inflation compared to previous centuries.

Until the early 1970s the growth in credit to GDP had been going up gradually since the creation of the Fed in 1913. But from 1971 when Nixon abolished gold backing of the dollar, virtually all of the growth in the Western world has come from the massive increase in credit rather than from real growth of the economy. The US consumer price index was stable for 200 years until the early 1900s. From 1971 to 2010 CPI went up by almost 500%. The reason for this is uncontrolled credit creation and money printing. Total US debt went from $9 trillion in 1971 to $59 trillion today and this excludes unfunded liabilities of anywhere from $70 to $110 trillion. US nominal GDP went from $1.1 trillion to $14.5 trillion between 1971 and 2010.  So it has taken an increase in borrowings of $50 trillion to produce an increase in annual GDP of $13 trillion over a 40 year period. Without this massive increase in debt, the US would probably have had negative growth for most of the last 39 years.

Total US debt to GDP is now 380% and is likely to escalate substantially.

The coming hyperinflationary depression and the credit and asset implosion that is likely to follow will most probably lead to the end of a 200 year era of growth for the Western world. If only the excesses from the 1970s were corrected we might have a circa 20 year decline. But more likely we will correct the era all the way back from the industrial revolution in the 18th century and this could take 100 years or more.

So after the tumultuous and very painful times that we are likely to experience in the next few years, the West will have a sustained period of decline. All the excesses in the economy and in society must be unwound. These abnormal and unreal excesses are not just corporate executives, bankers, hedge fund managers or sportsmen earning $10s to $100s of millions but also a total collapse of ethical and moral values as well as a breakdown of the family as the kernel of society.

Most people believe and hope that this major trend change could not happen today with all the measures that governments have at their disposal. But very few people comprehend that it is precisely the government interference, controls and regulations as well as money printing that have created the problems in the first place. Power corrupts, and the more pressure a government is under the more they intervene. Because they believe that their interference in the economy will save the country – read Obama, or the world – read Gordon Brown. Little do they understand that each interference, each regulation or each dollar or pound or Euro printed will exacerbate the problems of the economy manifold.

Governments now have two options; continue to spend and print money like the US or introduce austerity programmes like Europe. Whichever way they chose will not matter since they have reached the point of no return. The economy of the West cannot be saved by any means. But governments both in the US and in Europe will still apply the only method they know which is to print money.

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The death of cash? All over the world governments are banning large cash transactions

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from The Economic Collapse


ARE WE WITNESSING THE SLOW BUT SURE DEATH OF CASH IN THIS GENERATION?  Is a truly cashless society on the horizon? Legislation currently pending in the Mexican legislature would ban a vast array of large cash transactions, but the truth is that Mexico is far from alone in trying to restrict cash. All over the world, governments are either placing stringent reporting requirements on large cash transactions or they are banning them altogether. We are being told that such measures are needed to battle illegal drug traffic, to catch tax evaders and to fight the war on terror. But are we rapidly getting to the point where we will have no financial privacy left whatsoever? Should we just accept that we have entered a time when the government will watch, track and trace all financial transactions? Is it inevitable that at some point in the near future ALL transactions will go through the banking system in one form or another (check, credit card, debit card, etc.)?

The truth is that we now live at a time when people who use large amounts of cash are looked upon with suspicion. In fact, authorities in many countries are taught that anyone involved in a large expenditure of cash is trying to hide something and is probably a criminal. And yes, a lot of criminals do use cash, but millions upon millions of normal, law-abiding citizens simply prefer to use cash as well. Should we take the freedom to use cash away from the rest of us just because a small minority abuses it?

Unfortunately, the freedom to use cash is being slowly stripped away from us in an increasingly large number of countries. In fact, as countries like Mexico “tighten the noose” around big-ticket cash purchases, our freedom to use cash is going to erode rather rapidly. The following is a summary of some of the very tight restrictions being placed on large cash transactions around the globe right now….

In Mexico, a bill before the legislature would completely ban the purchase of real estate in cash. In addition, the new law would ban anyone from spending more than MXN 100,000 (about $7,700) in cash on vehicles, boats, airplanes and luxury goods. $7,700 is not a very high limit, and this legislation has some real teeth to it.  Anyone violating this law would face up to 15 years in prison.

In Europe, some of the “austerity packages” being introduced in various European nations include very severe restrictions on the use of cash. In Greece, all cash transactions above 1,500 euros are being banned starting next year.  The following is a comment by Greek Finance Minister George Papaconstantinou at a press conference discussing the new austerity measures as reported by Reuters….

“From 1. Jan. 2011, every transaction above 1,500 euros between natural persons and businesses, or between businesses, will not be considered legal if it is done in cash. Transactions will have to be done through debit or credit cards”

Even Italy has gotten into the act.  As part of Italy’s new “austerity measures”, all cash transactions over 5,000 euros will be banned.  It is said this is being done to crack down on tax evasion, but even if this is being done to take down the mafia this is still quite severe.

The United States
The U.S. government has not banned any large cash transactions, and hopefully it will not do so any time soon, but it sure has burdened large cash transactions with some heavy-duty reporting requirements. For example, your bank is required to file a currency transaction report with the government for every deposit, withdrawal or exchange over $10,000 in cash. Not only that, but if a bank “knows, suspects, or has reason to suspect” that a transaction involving at least $5,000 is “suspicious”, then another report must be filled out.   This second type of report is known as a suspicious activity report, and it is also filed with the government.

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The equity bulls were salivating…

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by Dan Norcini
Excerpt from “Hourly Action In Gold From Trader Dan”
Posted on Jim Sinclair’s jsmineset.com
Posted originally August 27, 2010

THE EQUITY BULLS WERE SALIVATING OVER THE PROSPECT OF WATCHING ANOTHER EPISODE of “let’s take the shorts out and slaughter them all” as the world eagerly awaited the giving of the law from Mt. Jackson Hole. With claps of thunder in the background and with flashes of lightning interrupting his keen observations upon the state of the US economy, (some swear that they saw the angelic host), the prophet of Monetary religion sounded forth his prognostications and then looked upon his handiwork. He then saw that his work was good and sat down and rested on the seventh day.

Yessiree folks – Chairman Ben uttered his incantations making all well with the turbulent world and bringing light and order to darkness and chaos. I do not know about you, but I feel so much better today after Ben told us all that he is going to make sure that the recovery is safeguarded from harm. When you combine that with news that instead of the economy slowing from a growth rate of 2.4% down to 1.3% as expected, it only slowed down to a 1.6% growth rate, well, it just doesn’t get any better does it?

I mean, the first thing I immediately thought of is, “Why don’t I rush out and buy lots of copper because things are really getting better in a hurry?”. Already forgotten are the abysmal housing stats of less than a week and the further rise in foreclosures and delinguencies, not to mention the clogged condition of the bankruptcy courts. Chairman Ben has whisked all of that out of the minds of investors with one mere pronouncement.

The fact that it has taken gazillions of conjured-into-existence-out-of-no-where dollars (some call that stimulus) to produce this pitiful growth rate number for the quarter, seems to have escaped the attention of the equity perma bulls who have yet to come to grips with the consequences of all of this. My own view is that it should be a relatively easy matter to get that growth rate up to double the figure given us. All we would need to do to get to 3.2% growth rate is to print twice the number of Dollars and double the rate of government indebtedness. That should be good for another 100 point rally in the Dow. If anyone knows the number that comes after quadrillion, please send that on to Ben and company. They are going to more than likely be needing it.

Seriously, it is hard to hide my contempt of this disgusting scene. This band of fools somehow believes that prosperity can be created by printing money without any consequences whatsoever. The US is sinking under a mountain of indebtedness and the Fed chairman tells us that it stands ready to engage in even more QE should the need arise. Flash to Ben – the need shall arise. China is already balking at buying US debt meaning you are going to have to buy it all yourself Ben.

What we are witnessing is the death throes of a debt-based monetary system of which those presiding over it apparently have come to believe their own delusions. The US public is learning what our grandfathers learned as a result of the Great Depression – Debt is something to be avoided – not heaped up and accumulated. That the borrower becomes the lender’s slave and that living beyond ones own means is inherently foolish and dangerous. That saddling one’s children and grandchildren with a debt burden that they did not create is immoral and wicked. Yet, all of this is lost upon the monetary lords who have their noses so close to the ground sniffing out the scent that they cannot see the path ahead leads off the edge of an abyss from which there is no escape. Or perhaps they do see and are attempting to secure their own parachutes before leading the rest of the masses over the edge.

I repeat – if lasting prosperity could be created by printing money and giving it away, previous generations that were wiser and more frugal than ours would long ago have stumbled upon this axiom.

That brings us to the war on gold. I am still amazed that after all these years and notwithstanding all the evidence to the contrary, there are still those obtuse enough to insist that there are no official sector attempts to manage or stem the rise in the price of gold. Gold is the only currency that these debasement thieves cannot pollute by conjuring more of it into existence. It rises when distrust of paper currencies is high and confidence in the ability of those who supposedly manage monetary affairs wanes. Thus it is and always will be in direct competition with unbacked fiat currencies.

Our money masters hate the yellow metal because its rise mocks their absurd assertions and debunks their claims of being able to “manage the economy”. It strikes, dagger-like, at the very hubris of these elitists who think that they are wiser than the collective judgment of the entire market, they alone possessing such keen insight into the nature of these matters that we should entrust our financial health to their hands. Imagine the conceit of a few men who think that by pulling on this lever or pushing on this button, that they can assure continuous prosperity and lasting wealth for all. Every generation considers itself wiser than the previous one which is why history does indeed repeat itself. Arrogant men never learn for they lack the one thing essential to make one truly wise – the ability to admit that we do not know all things nor that we mere mortals can always fix what ails us.

Hyperinflation, Part II: What It Will Look Like

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by Gonzalo Lira
Posted originally August 26, 2010

I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the United States, clearly struck a nerve. It was a long, boring, snowy piece of macro-economic policy speculation, discussing Treasury yields, Federal Reserve Board monetary reaction, and the difference between inflation and hyperinflation—but considering the traffic it generated, I might as well been discussing relative breast size in the porn industry. With pictures.

To go back to Part 1 of this posting, see https://quantumpranx.wordpress.com/2010/08/24/how-hyperinflation-will-happen/#more-3283

ESSENTIALLY, I ARGUED THAT TREASURY BONDS ARE THE NEW AND IMPROVED TOXIC ASSETS. I argued that, if there was a run on Treasuries, the Federal Reserve—in its anti-deflationary zeal, and its efforts to prop up bond market prices—would over-react, and set off a run on commodities. This, I argued, would trigger hyperinflation. The disproportionate attention my post garnered is indicative of people’s current fears. As I’ve said before, people aren’t blind or stupid, even if they often act that way. People are worried—they’re worried about the current state of affairs: Massive quantitative easing, toxic assets replaced by the full faith and credit of the U.S. government in the shape of Treasuries, fiscal debt which cannot possibly be repaid, a second leg down in the Global Depression that seems endless and only getting worse—people are scared.

Many readers gave me quite a bit of useful feedback, critiques, suggestions and comments on the piece—clearly, what I was discussing touched on a deeply felt concern. However, there were two issues that many readers had a hard time wrapping their minds around, with regards to a hyperinflationary event: The first was, Where does all the money come from, for hyperinflation to happen? The question wasn’t put as baldly as that—it was wrapped up in sophisticated discussions about M1, M2 and M3 money supply, as well as clever talk about the velocity of money—the acceleration of money—the anti-lock brakes on money. There were even equations thrown around, for good measure.

But stripped of all the high-falutin’ language, the question was, “Where’s all the dough gonna come from?” After all, as we know from our history books, hyperinflation involves people hoisting bundles and bundles of high-denomination bills which aren’t worth a damn, and tossing them into the chimney—’cause the bundles of cash are cheaper than firewood. If the dollar were to crash, where would all these bundles of $100 bills come from?
The second question was, Why will commodities rise, while equities, real estate and other assets fall? In other words, if there is an old fashioned run on a currency—in this case, the dollar, the world’s reserve currency—why would people get out of the dollar into commodities only, rather than into equities and real estate and other assets?

In this post, I’m going to address both of these issues.
Apart from what happened with the Weimar Republic in the 1920’s, advanced Western economies have no experience with hyperinflation. (I actually think that the high inflation that struck the dollar in the 1970’s, and which was successfully choked off by Paul Volcker, was in fact an incipient bout of commodity-driven hyperinflation—but that’s for some other time.) Though there were plenty of hyperinflationary events in the XIX century and before, after the Weimar experience, the advanced economies learned their lesson—and learned it so well, in fact, that it’s been forgotten.

However, my personal history gives me a slight edge in this discussion: During the period 1970–’73, Chile experienced hyperinflation, brought about by the failed and corrupt policies of Salvador Allende and his Popular Unity Government. Though I was too young to experience it first hand, my family and some of my older friends have vivid memories of the Allende period—vivid memories that are actually closer to nightmares. The causes of Chile’s hyperinflation forty years ago were vastly different from what I believe will cause American hyperinflation now. But a slight detour through this history is useful to our current predicament.

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Bove: Financial Reform will leave 10 million people without bank services

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by Dan Weil
Originally posted 15 July 2010

TOP BANKING ANALYST DICK BOVE WARNS THAT THE financial reform bill, which is poised to become law, will cost at least ten million Americans their banking services.
That is because the financial penalties the bill imposes on banks will be passed along to their customers as fees. And that means many people won’t be able to afford to use a bank, he told CNBC.

Congress late Thursday sent legislation to President Barack Obama that imposes sweeping new regulations on Wall Street and creates new protections for millions of consumers. The Senate’s 60-39 vote came nearly two years after a financial crisis knocked the economy to its knees.

At a whopping 2,300 pages, the legislation is designed to rein in big banks and protect consumers in hopes of averting a repeat of the 2008 financial crisis. Its ultimate impact, however, will depend on the government regulators assigned to implement it, the Associated Press reported.

The bill places limits on leverage, proprietary trading and investments in private equity and hedge funds for the banks. It also creates a consumer protection agency to oversee areas such a mortgage lending and student loans.
All of this will cost banks money, Bove points out. And they will respond by passing on fees to their customers, he warns.

But many of the customers won’t be able to afford these fees, and that’s why at least ten million will no longer have access to a bank, the Rochdale Securities analyst said.
But not everyone has a dire view of the financial reform bill.
Former Treasury Secretary Henry Paulson sees plenty to like in it and wishes it was in place when the financial crisis began during his tenure in 2007-08.

The bill’s most important provision may be the one setting up a systemic risk council, he told The New York Times. The council would enable government officials to share information and close troubled institutions when the system is at risk.
If that rule had been in place when he was in office, “some things would hopefully have been identified earlier,” Paulson said.

© Moneynews

Written by aurick

27/08/2010 at 11:00 pm

“Democrats have launched America on the most reckless policy experiment in its history”

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by Kevin Hassett
Originally posted August 04, 2010

From Bloomberg: One of the more illuminating remarks during the health-care debate in Congress came when House Speaker Nancy Pelosi told an audience that Democrats would “pass the bill so you can find out what’s in it, away from the fog of controversy.”

THAT REMARK CAPTURED THE TRUTH THAT, WHILE MANY AMERICANS have a vague sense that something bad is happening to their health care, few, if any, understand exactly what the law does. To fill this vacuum, Representative Kevin Brady of Texas, the top House Republican on the Joint Economic Committee, asked his staff to prepare a study of the law, including a flow chart that illustrates how the major provisions will work.

The result, made public July 28, provides citizens with a preview of the impact the health-care overhaul will have on their lives. It’s a terrifying road map that shows Democrats have launched America on the most reckless policy experiment in its history, the economic equivalent of the Bay of Pigs invasion.

Before discussing what the law means for you, we have to look at what it does to government. That’s where the chart comes in handy. It includes the new fees, bureaucracies and programs and connects them into an organizational chart that accounts for the existing structure. It’s so carefully documented that a line connecting two structures cites the legislative language that created the link.

Ornate System
This clearly is a candidate for the most disorganized organizational chart ever. It shows that the health system is complex, yes, but also ornate. The new law creates 68 grant programs, 47 bureaucratic entities, 29 demonstration or pilot programs, six regulatory systems, six compliance standards, and two entitlements.

Getting that massive enterprise up and running will be next to impossible. So Democrats streamlined the process by granting Health and Human Services Secretary Kathleen Sebelius the authority to make judgments that can’t be challenged either administratively or through the courts. This monarchical protection from challenges is extended as well to the development of new patient-care models under Obama’s controversial recess appointment, Donald Berwick, whom Republicans are calling the rationer-in-chief. Berwick will run the Centers for Medicare and Medicaid Services, where he can experiment with ways to use administrative fiat to move our system toward the socialized medicine of Europe, which he has, at times, embraced.

Closer to Home
A sprawling, complex bureaucracy has been set up that will have almost absolute power to dictate terms for participating in the health-care system. That’s what the law does to government. What it does to you is worse.

Based on the administration’s own numbers, as many as 117 million people might have to change their health plans by 2013 as their employer-provided coverage loses its grandfathered status and becomes subject to the new Obamacare mandates.

Those mandates also might make your health care more expensive. The Congressional Budget Office predicts that premiums for a small number of families who buy their insurance privately will rise by as much as $2,100. The central Obamacare mechanism for increasing insurance coverage is an expansion of the Medicaid program. Of the 30 million new people covered, 16 million will be enrolled in Medicaid. And you could end up in the program whether you want it or not. The bill states that people who apply for coverage through the new exchanges or who apply for premium-subsidy credits will automatically be enrolled in Medicaid if they qualify.

Hurting the Elderly
To pay for this expansion, the bill takes $529 billion from Medicare, with roughly 39 percent of the cut coming from the Medicare Advantage program. This represents a large transfer of resources, sacrificing the care of the elderly in order to increase the Medicaid rolls.

For all this supposed reform, you, the American taxpayer, can expect a bill to the tune of $569 billion.

Front and center among the new taxes is the 40 percent excise tax on those lucky people with so-called Cadillac health plans. The higher insurance costs that are driven by the government mandates will push many more ordinary plans into Cadillac territory. If the idea of taxing people with coverage deemed too good doesn’t bother you, maybe the new 3.8 percent tax on investment income will. That will apply even to a small number of home sales, those that generate $250,000 in profit for an individual or $500,000 for a married couple.

In vivid color and detail, Congressman Brady’s chart captures the huge expansion of government coming under Obamacare. Harder to show on paper is the pain it will cause.

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.

Written by aurick

27/08/2010 at 10:29 pm

The Fallacy of ‘Bailing Out’ U.S. Cities and States

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by Rick Ackerman
Posted originally August 27, 2010

AMAZING HOW FAR A REALLY STUPID IDEA CAN TRAVEL. Warren Buffett helped spread and legitimize one a couple of months ago, and now the Wall Street Journal has pitched in on the same topic with an op-ed piece written by one Eden Martin, a lawyer and Chicago muckety-muck. Here is what Mr. Martin wrote:  “The next big issue on the national political horizon may be whether the federal government should bail out the many budget-strapped states and municipalities across the country, especially their overly generous and badly underfunded pension plans.”

And here’s Mr. Buffett on the same topic, testifying before Congress in June on the role the credit rating agencies played in nearly bringing the banking system down: “I mean, if the federal government will step in to help [states and major municipalities], they’re Triple-A. If the federal government won’t step in to help them, who knows what they are.” Buffett himself should know the answer to the question he has implicitly raised, since, no matter who is doing the bailing out, or what is used to pay for it, we – and not some entity called “the Government” — will all pay heavily for it in one way or another.

We’ll explain in a moment. But first, let us be clear that we are not holding our breath waiting for the Journal’s editors to provide responsible counterpoint to all of this bailout claptrap. Unfortunately, the business community’s newspaper of record has always played an aggressive role in telling its readers not what is, but what they presumably want to hear. How else to explain why the Journal would continue to devote hundreds of column inches lately to the possibility that the economy just might be facing a double-dip recession? In plain fact, and as any of the paper’s two million readers could attest, the nation’s economy never even emerged from the first Mindanao-deep dip (except in Washington, D.C. and Georgetown, but that’s another matter).

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Cancer and Desperation of QE 2

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By Dr. Jim Willie
Editor of the “Hat Trick Letter”
Originally posted August 25th, 2010

home:  Golden Jackass website

Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

HISTORY IS BEING MADE. THE AMERICAN PUBLIC HAS NEVER BEEN SO NERVOUS, PERHAPS FEARFUL OF SOMETHING DREADFUL AND IMMINENT. The global monetary system is crumbling. The typical stimulus has failed to jumpstart the US Economy. The 20 months of near 0% short-term official interest rate has failed to revive the moribund US housing market. The phony FASB accounting rules has failed to accomplish anything except a stay of execution for the big US banks, which do not lend much. In fact, the US banks are largely dead entities showing enough life for to receive US Govt largesse aid. Witness the failure of the US financial sector. Witness the climax chapter of failure for the Fascist Business Model.

The US banker brain trust, which possesses only a modicum of economic wisdom, analytic prowess, or foresight, finds itself in a desperate corner. Their talk of an Exit Strategy in the last several months was summarily dismissed as nonsense, propaganda, and wishful thinking by the Jackass here on a consistent irrefutable basis. The US Federal Reserve is ready to embark on the second round of Quantitative Easing. The monetization of US$-based bonds of many types will be done on a second initiative, on cue. Here is the irony, the stupidity, the insanity, the recklessness, the tragedy. What failed, they will do again, maybe even bigger! At risk is global confidence and trust, hardly a zero cost item.

The urgency of the QE2 Launch will be made quite clear by the Hologram Leaders occupying positions of power, after they digest the latest housing data. The July existing housing sales fell by 27.2% in a single month. The July new home sales fell by 12.4% in concert. Few analysts operating with USGovt service badges anticipated that the empty-headed home buyer credit of $8000 would rob forward sales and leave an autumn vacuum in home demand. It did. Check out the silver price, which touched $19 today on Wednesday. And at $1240, the gold price is poised to make new highs any day. My near-term targets are $23.5 for silver and $1300 for gold. Energy prices are soft but precious metals prices are strong. Think heterogeneity!

The QE2 is pure cancer within the monetary body. Foreign creditors are walking away, making distance from the US Treasurys, and especially the US Agency Mortgage Bonds. The US Fed and US Dept Treasury are therefore being isolated. Their US Treasury auctions are often disguised failures, but with the benefit of a falling US stock market, the bond demand has risen. The cancer of QE2 cannot be emphasized enough.

My forecast a few months ago was for NO Exit Strategy implemented. The US Fed balance sheet will NOT be reduced. Interest rates will NOT be permitted higher. My forecast was for an embarrassing About-Face in policy, and a hasty desperate announcement and implementation of a powerful new round of Quantitative Easing. We are seeing it unfold, exactly as forecasted. In fact, my call is for ZIRP and QE, the cancerous twins of Zero Interest Rate Policy and its Printing Pre$ twin, to become permanent residents of the White House and USFed, an incredible pox, blemish, and badge of shame to the nation. The twins scream rot and ruin.

These shills and carnival barker policy makers need a fresh new education. The two most important indicators in my book are continued home foreclosures and renewed rising jobless claims. The rest of the forecasting challenge is remarkably easy. The nitwit barkers prefer to focus on inflation expectorations, encouraged by the wondrous US TBond rally. What nitwits, unable to read simple signals! What charlatans, pretenders to the thrones! What heretics, ignorant of economic principles! See the August special report that criticizes, exposes, and castrates the clueless cast of American economists. The latest revelation was the $120k payment to Frederic Mishkin for writing about the “Financial Stability In Iceland” in March 2006 whose title was changed to “Financial Instability In Iceland”” after Iceland collapsed. Mishkin did no research, almost admitted as much in an ugly exposure to these clowns operating in economist suits. See the Zero Hedge video.

My contention is that Mishkin has no economic skills, and does not understand what money is, just like many on the Federal Reserve Board, whose misguided brain stems extend to most regional governors. Mishkin appears in this instance to be a bonafide whore. One exception might be Hoenig, who has warned of the perils of new monetary expansion. He recently said, “I wish free money was really free, and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no shortcut.” Hoenig of the Kansas City Fed has emerged as an ideological rival to Bernanke. Hoenig might soon need to be ousted for lack of patriotism and obedience to the fascist throng.

Let me make a paradoxical point: THE UNITED STATES WILL BEGIN A RECOVERY WHEN THE TOO BIG TO FAIL BANKS ARE PLOWED UNDER. They are blocking remedy and restructure. They are resisting liquidation of badly impaired assets. They do not lend money, as their credit engines are broken, since they are dead entities that occupy space in the US financial sector. They cast large long shadows. Their removal from the scene of the crime would surely light a fuse of credit derivative accidents, the likes of which the world has never seen. Let’s try THAT experiment!!

Why the leading economists cannot see that credit is down since the big banks are dead is beyond me. One might regard the conclusion is too ugly to contemplate. The entire US financial chapter since 1996, when Greenspan proclaimed irrational exuberance had taken hold of the land, has been ugly, perverse, and ruinous. The nation had its chance to right the US Ship of Financial State in 1987, and instead chose to produce, nurture, encourage, justify, and bless as good a sequence of asset bubbles, while the industrial base was dispatched to Asia. The USEconomy thus replaced legitimate income with grandiose debt sources, followed by national insolvency.

The impact from the cancer and desperation of QE2, the next undermine of the US Dollar (and other major currencies), can be seen in the price of Gold. Better yet, watch the price of silver, whose price movement has actually been leading gold upward. This week, for the first time in perhaps a decade, silver defied the industrial metals and economically dependent energy sector. Silver is money. Both copper and crude oil fell in price, but silver rose strongly. By the day’s end, gold was pulled up by silver. And this happened on a week that features options expiration, which usually sees a strong naked short pounce by JPMorgan, of course to make America strong and liberty exportable. Witness the beginning of outright visible lost control by the syndicate.

Watch the Gold/Oil ratio, which is poised to rise noticeably. Gold is the commodity king, since it is money. The galloping recession will take down the crude oil price, as demand falls. The natural gas price fell 3% just today on Wednesday. Hedging against the US Dollar risk aside, the energy prices have been weak. By contrast, the gold price has risen from direct demand in response to monetary system risk and lost confidence in that monetary system. The global revolt against the US Dollar continues quietly. The government bonds are gradually being considered trash backed by yet more bad paper dispensed by government approved printing houses. My analysis has long pointed to the advantages of silver over gold. Gold fights the political wars, but silver rides in on a shiny white glowing horse to win most gains. The supply factors favor silver. The demand factors favor silver. The shortage is acute for silver.

Again, basic economic thought process not within the mental caverns of US economists. The desperate action to launch QE2 will be quite evident in the coming weeks. It will even become a national priority. The bankers and politicians will rush to destroy whatever credibility remains in the USDollar, or any fiat paper currency. The challenge to banking leaders will be to conceal their desperation and panic. They have had no options or alternatives for almost two years, now painfully evident.

The impact of the launch will be extremely damaging to the prestige of the USFed in general and Chairman Bernanke in particular. He has not understood much of any events, surely has proffered a string of errant views and obtuse forecasts. Witness the discredit of the central bank franchise system. Fiat paper money is dissolving before our eyes. Notice the assaults on sovereign debt in Europe, a trend which will hit the US shores, all in time. Economists do not expect it, since the American bankers possess the Printing Pre$. They will be blindsided by Gold, which pulls the carpet from under the US$-based foundation inside its very structure. The Gold bull market will outlast the USTreasury Bond bubble run. The key word to be heard in the next few months will be CONFIDENCE, as in the absence of it when viewing the US financial helm.

The Powerz in charge will choose inflation over any combination of reform, restructure, and replacement of the helm. A recovery could have possibly been in our grasp, maybe in the future after much pain from adjustment. Unfortunately for the bankers in unchallenged power, the respect, prestige, and faith in the US Federal Reserve will fade like a sea mist after the QE launch. Its christening will be done in deep shame with a bottle of acid. The level of respect is approaching rock bottom, the lowest in decades. Even Alan Greenspan expects slippage and sputters as the housing market resumes its powerful decline. The next recession for the USEconomy could very easily result in a USTreasury default.

Gold and Silver are entering the most favorable season of the year, autumn. Big gains should be expected. Signals are omnipresent for substantial price gains. Shortages exist and are profound. Demand is on the strong rise on a global basis. Lost confidence and faith in the fiat paper system is slowly vanishing. It would be nice to see the investment community add to positions and put on new positions before the breakout, not afterwards, and be more successful. The return of the USEconomic recession and the simultaneous QE2 Launch will mark a major turning point for gold & silver. Fear is on the rise. The precious metals offer an alternative to conventional nutball strategies, a successful one. Check out the track record for gold, the best asset in the 1990 decade. That fact is not mentioned or cited much by the financial press networks. Their sponsors object.

Cancer is a strong word. It conjures up images of internal broken functions, nasty growths, blockage of organs, twisted lives, pain, and death. Yes, that sounds right for describing the USDollar and its flagship the USTreasury Bond, with the accompanying destroyer in Fannie Mae. The word cancer fits perfectly. It has brought a removal of US industry. It has brought a wave of bond fraud centered upon mortgages. It has brought endless war, paid by foreigners. It has brought insolvency to US households. It has brought insolvency to the US banks. It has brought a tumor of REO homes seized by foreclosures and put the US bank balance sheets. It has brought a bloated wrecked USFed balance sheet. It has brought chronic $1.5 trillion USGovt deficits. It has brought a mass of Food Stamp recipients. It has brought Wall Street control of the USGovt finance ministries. It has brought a Black of Hole of tainted money. It has brought diverse toxic bonds. It has brought blockage of any independent audit of the USFed assets or activity. Yes, that qualifies as the many sides of cancer.

Consider the next new cancerous faces of the Quantitative Easing. They new policies and features will be so ugly as to reshape the entire American landscape. They will do to the US financial and economic pastures what the Gulf of Mexico oil volcano did to the Southern Shores. [These concepts are covered in the August issue of the Hat Trick Letter in greater detail.] They are bizarre complicated concepts. They strike dead the heart of US capitalism, and offer a unique brand of fascism and collectivism as a result, with an overtone of desperation. They paint a path toward systemic failure. At the end of that bitter road and death march is the US Treasury Default event, forecasted by the Jackass in September 2008. It earned ridicule, but soon will earn respect, like several other important past forecasts. The path was clear almost two years ago that the US banking system died that month. The obituary cited Lehman Brothers, Fannie Mae, and American Intl Group as pall bearers. The banking system death is undeniable to the enlightened. It will soon be clear enough to the masses after the next leg down in housing.

1) Stiglitz urges another US Govt stimulus program. The last one was hollow. The next should be lackluster and meager, but maybe more on the mark. True reform and broad liquidations are pre-requisites, as they will not be done for preparing the economic topsoil. Bankers will block it. Expect US Govt “beans & rice” handouts rather than conditions for job creation. They should really try capital expenditure immediate writeoffs and job creation tax credits instead, with a slew of obtrusive federal regulations swept aside. Too much capitalist wisdom with such ideas. More ineffective wasteful federal programs and misdirected altering of parameters on the control panel will only aggravate the effect of the QE2 Launch, a typical preface.

2) Former Treasury Secretary Rubin argues against a large scale stimulus plan, and instead for deficit reduction. This economic Rasputin presided over the removal, lease, and sales of the national gold treasury. He led the deregulation movement that opened the door to profound bond fraud. He sat on the Citigroup board when it expanded recklessly into many domains, resulting in the wreckage of the corporation. That qualified him to serve as mentor and chief puppeteer to Geithner and Summers, who run the US Dept Treasury and White House Council of Economic Advisors. Clearly, Rubin has a different agenda. A constant state of sluggishness might work best for Rubin. He advocates deficit reduction as his main priority, and proclaims a goal of restoring confidence. The nation is way past deficit reduction concepts, but should focus rather on collapse avoidance. Confidence can be restored, and better economic performance enabled, only if the current Elite banks are plowed under, much of their impaired assets are liquidated, Goldman Sachs is removed from control of the USDollar altogether, and stern prosecution of colossal criminal bond fraud occurs. That would produce confidence.

3) QE2 will be more cancerous than QE1, as full dependence upon monetary inflation will come. The official interest rate cannot be reduced. QE2 will produce three major effects, all ruinous. All debt is subject to coverage by new money, all to be eligible. Next comes hyper-inflation, as confidence in all things paper evaporates and a great tipping point is breached. The arrival of QE2 will produce three major effects. A) The reliance upon new money growth to monetize rapidly growing debt in the US financial system will undermine all things US$-related. The continued artificial support of the US Treasury Bonds will transfer risk to the US Dollar. B) Whatever respect and prestige in the US Fed will vanish quickly. The bravado of helicopter drops will seen hollow, amateurish, and invite mockery in the open among respected brain trust. C) The smartest people in the room will begin to declare that the current global monetary system is irreparably broken, and that past and future response, even if amplified, will be doomed to fail. We are on the doorstep of hyper-inflation.

4) The FDIC will soon launch what could grow into a vast securitization initiative. It is better described as the QE2 from the rear guard, not well noticed. Since broke, the FDIC has resorted to selling packaged credit assets from failed banks in order to raise cash, new securities with USGovt guarantees. Apparently, viable banks are harder to find for buying much of any assets. The FDIC two years ago served as an investment banker harlot for Wall Street acquisitions. Then it became a matchmaker, finally a liquidator, now a bond issuer. All the while the Deposit Insurance Fund runs more negative each month. Be sure that the Printing Pre$ of monetization is behind the scheme, no longer well disguised, since the FDIC is so closely aligned with the other engineers of bond management within the USGovt (see Fannie Mae). The FDIC bond securities are more monetization.

5) Mortgage relief might be the destination for the next mammoth monetary expansion. The StLouis Fed was permitted to leak the story. James Bullard of the St Louis Fed wrote a breif white paper entitled “Seven Faces of The Peril” in he urged the USFed should immediately restart the purchase of US Treasurys if the deflation scenario takes deeper root, as in QE2. He correctly concludes the high risk of a Japanese-style deflationary outcome in the United States. Next came the speculation by both Morgan Stanley and Merrill Lynch in their concurrent release of analyst reports. They surmised that Fannie Mae and the Federal Housing Admin might be preparing an imminent launch of broad sweeping initiative. The proposed plan would feature an instant automatic refinance program for troubled mortgage loans. It would take millions of borrowers to current market rates overnight. It would stop short of reducing the loan balances of under-water mortgages, those suffering negative equity. In the process, $46 billion of consumer savings per year would be created, from basic reduction of monthly payments.

6) The loan modification pathways will possibly be expanded, maybe meaningfully. Operations have expanded whereby fraudulent home loans have been warehoused in Fannie Mae, under the USGovt roof and aegis for two years. Even the bankers might give pressure to revamp home loans in a skein of modification plans, in reaction to widespread non-payment from strategic default. A major challenge must be dealt with. They must avoid the close examination of massive mortgage bond fraud for at least $2 trillion on home loans. Such scrutiny might uncover a multi-$trillion Fannie Mae clearinghouse of fraud that links several major fraud schemes. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to the failed fat duo Fannie and Freddie, pledging an unlimited credit line. The sewage treatment plant will surely devise more clever projects to handle the toxic waste, since very large liquidity plumbing is promised.

7) QE2 will feature Fannie Mae rental homes, a new vibrant toxic business. Except a major blemish will build further, as defiant non-payment of mortgages will flourish, from strategic voluntary defaults. Look for Fannie Mae to gather in hundreds of thousands, even millions of broken mortgages. They will attempt to build a business subsidiary of the most queer type. An ulterior motive is to bail out big banks but not reveal doing so. A desperation is sinking in with US Govt proposals, perhaps in direct response to open fear of civil disobedience. Consider that 250,000 Bank of America mortgage holders are paying nothing on self-driven strike actions. My forecast made in 2004 and 2005 was for the advent of a bizarre perverse Fannie Home Rental program. Now we see people forfeit title to their homes, lose their equity, but remain in the same home as renters making small monthly payments. The housing market would prevent the dumping of properties on an already bloated housing market. The Fannie Mae investors could have earned a dividend from rent payments, except that FNM stock issues were de-listed. Homeowners are increasingly not making monthly payments, daring the bank to foreclose on the property, challenging them to produce the property title. In many cases, the banks cannot produce the title, because the MERS database is a nightmare of spun spaghetti. The courts have ruled MERS has no legal standing in any foreclosure displacement of occupants. Rumors swirl with gathering strength and persistence. The US Govt might soon take over all failing home mortgages, and have their titles signed over to the US Govt. Then the people would lease the properties to the people who occupy them according to pay scales, in collectivist fashion consistent with the presidential ideology.

IOU Part Two: California to issue IOUs for second year in a row

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Submitted by Tyler Durden
Posted originally August 23, 2010

THE INSOLVENT STATE OF CALIFORNIA, WHICH, JUST LIKE THE COUNTRY OF THE USA, is operating without a budget (and who needs a budget when the Fed-PD complex will buy the bulk of anything and everything needed to fund ongoing daily operations), has once again ended up on the verge of bankruptcy. As a result, it has just passed a measure which for the second time in as many years (going all the way back to the Great Depression), will allow it to use IOUs in lieu of payment on everything from supplies to contracted services and health-care costs, so it can actually preserve cash to make payments to its generous debtors. On the road to banker serfdom, California has once again reached its goal.

From Bloomberg:
California lawmakers passed a bill to let recipients use state IOUs to pay fees and taxes owed to the government in Sacramento, if the warrants are issued.

The bill, from Assemblyman Joel Anderson, a San Diego Republican, passed the Senate unanimously. It requires all state agencies to accept registered warrants issued to pay for goods and services. The Assembly unanimously approved the measure in September. The Senate vote puts the legislation before Governor Arnold Schwarzenegger, whose budget aides oppose it.

California may start handing out warrants to pay some bills within two weeks to conserve cash, Controller John Chiang, a Democrat, has said. The need for the IOUs arose because a legislative logjam over how to erase a $19 billion deficit has prevented passage of a budget. The state will use the chits for everything from supplies to contracted services and health-care costs so it can make payments on priority items such as bonds.

The legislation is aimed at offsetting the hardship IOUs can impose on those who receive them, Anderson said, citing the experiences some recipients had with last year’s warrants.

And who wouldn’t love to accept warrants from a state that is not only once again bankrupt, but can’t even balance its budget, as it is required by law. And the supreme irony is that not even this latest financial gimmick will postpone the inevitable:

Schwarzenegger’s budget office opposes the bill because it may reduce the state’s cash position to less than projected, said H.D. Palmer, a spokesman. Draining the state’s coffers would defeat the purpose of the IOUs, Palmer said.

Less than projected? Based on what non-existent budget? The tragedy of America’s bankruptcy (oh wait, it can never go bankrupt, we keep forgetting) will be a long and painful one.