Signaling All-Clear?

Signaling The All-Clear Horn?

By Chuck Butler, President | 3 April 2008
Everbank World Markets

Good day... And a Tub Thumpin' Thursday to you! Well… You heard it! Big Ben B. says that everything is going to be all right! Man, do I feel better about that! Just when I was getting all nervous and out of whack because of the debt situation, the jobs situation, the war situation, the credit situation, the housing situation, and the awful state of financial institutions… Whew! Everybody back in the pool! Big Ben says the water is fine! Whoa! (in my best John Wayne)… Now, just wait a minute there, pa-ahdna… Haven't we heard these words of euphoria before from Big Ben? Hmmm… Seems to me that last July, he told us that the mortgage meltdown wouldn't filter out into the rest of the economy… And then he followed that gem up with the August all-clear sign that the housing meltdown had bottomed… Now… He expects us to believe him that the economy will be strong again in the second half of this year? Hmmmm… OK… But before I go on, I had better tell you what happened so you can catch up… I just realized I immediately went into level 4 on Big Ben… OK, so, yesterday, Big Ben was talking to Congress about the economy… He admitted that the economy would contract (notice the mass media didn't pick up much on that last). He also said that the there are "downside risks"… But then he put lipstick on the pig by quickly switching to statements about how the economy would be strong in the second half of this year…[[a-a-ah, the infamous second half of the year! : normxxx]] Well… You know my old saying, folks… You can dress up the pig… You can put lipstick on the pig… But in the end… You still have a… PIG! I want to know and I can't understand why the lawmakers don't ask him this stuff… But I want to know where this growth that he's spouting off about is going to come from? Or how about this one, B3… Why don't you SHARE with us what you feel the downsides risks are? Nah… You wouldn't want to do that, because it would expose the awful job you and your Fed Heads have done! I feel like Ricky Ricardo… Hey Lucy, you got some 'xplainin' to do! I could go on… But I've had it with this guy! He has begun to give me the same kind of rashes Big Al Greenspan gave me!

So… The currencies gyrated all over the place yesterday… First rallying on the Triple B words of a contracting economy, but then seeing the dollar rally on the "recovery" words. At the end of the day, the euro was back to rally mode, moving close to the 1.57 handle once again. Then came a report on Reuters that the Eurozone was going to voice concern at the euro's gains at the next G-7… That sent the euro back down.

This morning… The euro saw further selling when Eurozone Retail Sales unexpectedly declined in February, thus signaling to the markets that the U.S. recession is spreading to Europe… That news was followed by a German bank announcing a $6.7 billion write-down… So… The euro has taken on some water from the weakening of the economy… But, hey! We all knew the U.S. recession would spread to other parts of the world… What I kept thinking, though, was that it would not be as devastating to other parts of the world, especially the Eurozone, as it had in the past. So much for that…

I know, I know, I too dislike the saying, "But this time will be different…" That saying cost people trillions of dollars a few years ago… But my point here is that one of the reasons the Eurozone was created was to buffer the countries from suffering along with U.S. slowdowns… 80% of all Eurozone trade is amongst themselves… And let's face it, the exports of BMW's, Mercedes, and other high-end cars shouldn't see that much of a shift… Rich people don't suffer recessions!

So… We have the euro trading in the mid 1.55 handle… IT'S NOT A TREND REVERSAL! I said this the other day, but it's worth repeating… We've seen these "flash in the pan" dollar rallies several times over the past 6 years of the weak dollar trend… Nothing, fundamentally has changed… So, why would the dollar reverse the trend? OK… Another note on Iceland this morning… Yesterday, there was an OP-ED in the Wall Street Journal titled: Iceland Isn't Melting… Here's a snippet.

"But fears of a meltdown in my sub-arctic homeland are vastly overblown. True, the current account deficit was 16% of GDP last year, but that's an improvement from more than 25% in 2006. And while net private-sector debt is about 120% of GDP, there is virtually no public debt in Iceland. This is largely the result of unparalleled political stability and continuity."

That's all nice… But it was written by an insider… A board member of the central bank of Iceland… I detect a note of "homerism"… But… Soothing words nonetheless, eh? George Soros, a guy that I personally wouldn't have over for dinner, called the current financial crisis "the worst since the Great Depression"… He also noted that the "markets will fall more this year after a brief rebound." Well… I may not like the guy, but I agree with him on the second statement… Seems the markets are getting all pumped up on the kool-aid Big Ben is serving up… But these are just words, folks… We'll see who's right and who's wrong on this… His track record isn't so good!

The Carry Trade is back on the books after spending the month of March getting unwound… This is good news for Aussie and kiwi… And should be good news for South Africa and Iceland… But I think the "once bitten twice shy" campers have had enough of the volatility of these currencies and are sticking to Aussie and kiwi… So… Aussie and kiwi rallied yesterday, bucking the sell-off of euro, yen, francs, and sterling.

Remember what they taught you in 6th-grade science… A star burns brightest right before it burns out… And I think this can be applied to the Carry Trade… But we'll have to wait-n-see, eh? One of my fave currencies… The Norwegian krone has held strong during this euro weakness… And this morning, Norway reported that Retail Sales jumped 5.6% in February… Seems that the recent wage increases there, the largest in 5 years, spurred consumer spending… Hmmmm.

That would work here too… EXCEPT! Wages haven't increased in the U.S. in so long, people have forgotten what that looks like! My friend Bill Bonner of the Daily Reckoning had this to say about wages yesterday… "The part of the economy in worst shape now is the consumer. He’s the one whose salary has not gone up. He’s the one whose house is being foreclosed. And he’s the one who’s got to buy gas and food."

Here's another note Bill made that I believe is important to note: "Again, we see the sad evolution of the U.S. of A. since the end of the ’60s. Then, fewer than five million people received food stamps. Now, nearly six times that number are living on them… after what was supposed to be the biggest boom the world has ever seen."

But not to worry, Bill… Big Ben, or B³, as I like to call him, tells us that it will be alright on that night in the second half of this year… I sure hope he's right! That would certainly make things easier for me and my family! That's it for today… I found out yesterday that I will be doing a joint presentation with my friend Addison Wiggin at the Agora Vancouver Investment Conference in July… Addison, by the way, has done an update of his best seller, "Demise of the Dollar," and it should be available soon… I was honored to write the foreword for the book! You'll need to check that out when available! So… If you're interested in the Vancouver Investment Conference, check it out.

ߧ

Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

A Derivatives Chernobyl?

Fed's Rescue Halted A Derivatives Chernobyl

By Ambrose Evans-Pritchard, Telegraph.Co.UK | 25 March 2008

When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake. Indeed, we may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital. "There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system." All through early March the frontline players had watched in horror as Bear Stearns came under assault and then shrivelled into nothing as its $17bn reserve cushion vanished.

Melcher was already prepared— true to form for a man who made a fabulous return last year betting on the collapse of US mortgage securities. He is now turning his sights on Eastern Europe, the next shoe to drop. "We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen," he said.

Fed chairman Ben Bernanke has moved with breathtaking speed to contain the crisis. Last Sunday night, he resorted to the "nuclear option", invoking a Depression-era clause— Article 13 (3) of the Federal Reserve Act— to be used in "unusual and exigent circumstances". The emergency vote by five governors allows the Fed to shoulder $30bn of direct credit risk from the Bear Stearns carcass. By taking this course, the Fed has crossed the Rubicon of modern central banking.

To understand why it has torn up the rule book, take a look at the latest Security and Exchange Commission filing by Bear Stearns. It contains a short table listing the broker's holding of derivatives contracts as of November 30 2007. Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP— at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.

On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit. "Twenty years ago the Fed would have let Bear Stearns go bust," said Willem Sels, a credit specialist at Dresdner Kleinwort. "Now it is too interlinked to fail." The International Swaps and Derivatives Association says the vast headline figures in the contracts are meaningless. Positions are 'off-setting' [[we are continually assured— providing everyone pays up as committed, of course: normxxx]]. The actual risk is 'magnitudes lower' [[or so they like to believe/claim: normxxx]].

The Bank for International Settlements uses a concept of "gross market value" to weigh the real exposure. This is roughly 2 per cent of the notional level. For Bear Stearns this would be $270bn, or so. "There is no real way to gauge the market risk," said an official. "We don't know how much is backed by collateral. We don't know what would happen in a crisis, and if we don't know, nobody does," he said. Under the rescue deal, JP Morgan Chase will take over Bear Stearns' $13.4 trillion contracts— lock, stock, and barrel.

Ben Bernanke, the Fed chairman, took decisive action when Bear Stearns began to collapse.

But JP Morgan is already up to its neck in this soup, with $77 trillion of contracts. It will now have $90 trillion on its books, a sixth of the global market. Risk is being concentrated yet further. There are echoes of the old reinsurance chains at Lloyd's, but on a far vaster scale. The most psychotic niche is the $45 trillion market for credit default swaps (CDS). These CDS swaps are a way of betting on the credit quality of companies without having to buy (or short) the underlying bonds, which are less liquid. They have long been the bête noire of New York Fed chief Timothy Geithner, alarmed that 10 banks make up 89 per cent of the contracts.

"The same names show up in multiple types of positions. These create the potential for squeezes in cash markets, magnifying the risk of adverse dynamics," he said. "They could increase systemic risk, by amplifying rather than dampening the movement in asset prices," he said. This is what happened as the banking crisis gathered pace. The CDS spreads measuring default risk on Bear Stearns debt rocketed from 246 to 792 in a single day on March 13 amid— untrue— rumours that the broker was preparing to invoke bankruptcy protection. Was it the spike in spreads that set off the panic run on Bear Stearns by New York insiders? Or are the CDS spreads merely serving as a barometer?

In the old days it was hard for speculators to take "short" bets on bonds. Credit derivatives open up a whole new game. "It is now much easier to short credit, " said James Batterman, a derivatives expert at Fitch Ratings in New York. "CDS swaps can be used for speculation, and that can cause skittish markets to overshoot," he said. For now the meltdown panic has subsided. Yet the hottest document flying around the City last week was a paper by Barclays Capital probing what might happen in a counterparty default.

It is not for bedtime reading. Direct losses from a CDS breakdown alone could be $80bn, but the potential risks are much greater. In theory, the contracts are matching. One sides loses, the other gains, operating through a neutral counterparty (ie Bear Stearns). But if the system seizes up, the mechanism is not neutral at all. It becomes viciously one-sided. "Upon the default of the counterparty, [traded] derivatives would be immediately repriced, with spreads widening dramatically," said the Barclays report.

This is "gap risk", the stuff of trading nightmares. Fortunes can vanish in a moment. One side would suddenly be trapped with staggering losses on their books. Yet the winners would be unable to collect their prize from the insolvent bank in the middle. It would take years to unravel all the claims in court. By then the financial landscape would be a scene of carnage.

Warren Buffett famously described derivatives as "weapons of mass financial destruction". The analogy is suspect, of course. Allied troops never found the alleged weapons in Iraq. But, this time, Washington's pre-emptive shock and awe may have been well-advised.

ߧ

Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Crisis Worst Since '30s

Us Economist Calls Financial Crisis Worst Since 1930s

By The Economic Times | 24 March 2008

WELLINGTON, NewZealand: The current financial crisis is the worst the world has seen since the Great Depression of the 1930s and the US Federal Reserve move to cut interest rates will not make much difference, the Nobel Prize winning economist Joseph Stiglitz said on Wednesday.

"It will have some impact— it will do a little bit to stem the blood— but it's not addressing the fundamental problems underlying the collapse of the financial sector," Joseph said. Stiglitz, who won the Nobel Prize in economics in 2001, is a former chief of the World Bank and chaired former US president Bill Clinton's council of economic advisers. He is in New Zealand on a lecture tour.

He said the Federal Reserve's move to cut its funds rate by three-quarters of a percentage point was "just trying to ease the economy down rather than try to address the underlying problems." Stiglitz said the main problem was the fact that an estimated 2 million Americans were going to lose their homes because they could not repay mortgages which exceed the value of their property as house prices fell dramatically. "As people walk away from their mortgages there will be more and more defaults— that undermines the whole financial system," he said.

Stiglitz said the Bush administration was bailing out banks, but accused it of refusing to do anything to help poor people stay in their homes which would stabilise the housing market. "It's very easy to do something about it," he said, suggesting the administration could give assistance to write down mortgages to about 90 per cent of the value of a house which would enable people to stay in their properties [[he's dreaming(!); apparently he is not aware of those sub-prime mortgages with 'teaser rates' and the people who eagerly snapped them up: normxxx]].

However, the Bush administration has unveiled plans designed to help homeowners in danger of losing their homes by allowing holders of sub-prime mortgages to borrowers with poor credit to more easily apply for refinancing. The government will also send out tax rebate cheques in May. Stiglitz said it was ironic that former Federal Reserve head Alan Greenspan had said it was the world's worst economic problem in the last 50 years, adding, "He is the source of much of the problem."

He said mismanagement by the Federal Reserve over the last seven years was one of the major factors underlying the current problem. "They had the regulatory authority to prevent some of these bad practices that we are now paying for and he chose not to do it." Stiglitz said the reason related in part to the war in Iraq and the very negative effect on the economy. "They didn't want Americans to know exactly how bad the war was for the economy so they flooded it with liquidity, they looked the other way with regulations and they deliberately, I think, postponed the problem into the future and now we're all paying the price."

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Sorry, I Wasn’t Pessimistic Enough!

Sorry, I Wasn’t Pessimistic Enough!

By Martin Hutchinson | 17 March 2008

On August 27, 2006 this column suggested that US house prices would fall by 15% nationwide, peak to trough. On March 11, 2007 this column suggested that the total bad debt loss from the mortgage crisis would be about $1 trillion. At a meeting at the American Enterprise Institute Wednesday, it became clear that in both cases I was not pessimistic enough. Sorry!

I was probably closer on the bad debt loss. At AEI, Nouriel Roubini suggested that the total credit losses from the housing meltdown would be about $3 trillion, but on inspection his figure included credit cards, credit default swaps and a whole host of other non-housing items. From housing alone, Standard and Poors has now admitted to $285 billion among financial institutions (plus untold amounts among investors such as pension funds that are not financial institutions) while Goldman Sachs, generally somewhat optimistic, has proposed a figure of about $500 billion. I believe that both those figures are low, but that my original $1 trillion figure, which included losses to investors of all types, may be only modestly low. The final figure might be closer to $1.5 trillion, or about 13.5% of the $11 trillion pool of mortgage loans.

The house price decline from top to bottom will now pretty clearly be larger than I predicted. The decline in 2007, according to the Case-Shiller index, was almost 10%; more ominously, in the fourth quarter of 2007, prices were dropping at a 20% annual rate. It thus seems unlikely that the overall decline in house prices will be limited to 20%, and more probable that when prices finally turn, they will have dropped 25-30%, with drops of as much as 50% in some heavily speculative markets such as much of California. This is an exceptional outcome by US standards, ranking with the 1930s as a house price downturn, but it must be remembered that in Japan Tokyo house prices dropped by over 70% from their 1990 peak before stabilizing.

The depth of house price declines has a near-exponential effect on mortgage defaults, since a borrower can walk away from a home mortgage without declaring bankruptcy— the transactions are generally non-recourse. Roubini estimates that if house prices decline 20% 16 million mortgages would be "under water" with principal amount greater than the value of the underlying asset, and that 50% of those underwater mortgages will default. If house prices decline 30%, 21 million mortgages will be underwater, with the same percentage defaulting.

At the lower price decline, that seems to me a little pessimistic. A borrower who can make payments on his mortgage, and whose house is temporarily worth 5% or even 10% less than the mortgage is unlikely to default, if only because he has to live somewhere and moving costs, let alone real estate brokerage are substantial (he would also damage his credit rating.) Thus once we get beyond the universe of people who should never have had a mortgage in the first place, a moderate decline in house prices does not necessarily hugely increase defaults. However as price declines approach the 25-30% level, let alone the 50% that is possible in California, the percentage of mortgages defaulting is likely to rise sharply.

It is clearer now than it was a year ago that losses in housing debt will not be isolated. They will lead to losses in credit cards, leveraged corporate loans, automobile loans and most areas of the credit economy. Even emerging market debt, at first sight insulated from the problem, is in practice endangered by its concentration in Latin America and Russia, both dependent either on the US economy itself or on the high oil prices to which US easy money policies have led. Finally credit default swaps, with an outstanding volume of an extraordinary $50 trillion, appear to be an accident waiting to happen. Thus a mere $1.5 trillion in housing debt losses may indeed produce total losses of $3 trillion or more when collateral damage is included.

Not all of those losses will be felt by financial institutions, although the extraordinary appetite for risk that such institutions have exhibited over the past decade suggests that a high proportion of them may indeed come to rest in the financial area. If that is the case, we have a problem: the total capitalization of the US banking and brokerage system is only about $1 trillion.

The Bear Stearns intervention on Friday was a first symptom of what we can expect. (The Northern Rock disaster in London was a case simply of appallingly inept regulation of a bunch of hyper-aggressive used car salesmen who moved into the home mortgage business.) Bear Stearns, while not without its reputation for sharp elbows is a major house with an important market position. Bear Stearns was more concentrated in the mortgage business than several of its competitors, but that may simply have led the tsunami now approaching the world’s financial system to reach Bear Stearns first.

If Roubini is anything close to right as to the total size of the disaster, and it spreads as appears likely to areas beyond mortgages, then there is no reason to believe that any of the world’s major financial institutions is exempt, although in practice some of them will have been exceptionally conservative in their adoption of new financial techniques or will have concentrated their business in areas such as emerging markets that are relatively less affected.

As the mortgage blow-up has shown, many of the "modern finance" techniques that have been designed in the last 30 years have shown themselves fatally flawed. Of all such innovations, probably the one posing most current danger for the world’s financial system is the credit derivatives market.

Like most modern finance products, credit derivatives were marketed as hedges. A bank could reduce its credit exposure to a particular borrower by entering into a contract whereby another bank would make payments to it if the borrower fell into bankruptcy.

Needless to say, once Wall Street’s trading desks got hold of credit derivatives, all thought of hedging was lost. Instead of selling a credit exposure once, banks sold it 10 times, or even 20. Instead of selling credit exposure to another bank or an insurance company, who would be able to handle the credit exposure and could be relied upon to pay up in case of trouble, credit derivatives traders sold credit derivatives to hedge funds, private equity funds and any riff-raff that walked in off the street.

As a result, the credit derivatives market is a time-bomb waiting to explode. It will remain quiescent while credit losses on the underlying loans are low or moderate, but at some point rising credit losses on the underlying loans will be multiplied by the credit default swap mechanism to produce a payment requirement that is several times the size of the underlying defaulted loans. Theoretically, that mega-payment requirement would be offset by mega-profits in other corners of the web of counterparties. In practice, the losses are likely to be large enough to cause counterparties to default, particularly if they are "men of straw" such as hedge funds, so the profits will prove ephemeral while the losses prove all too real. Losses of even a modest fraction of a $50 trillion principal amount would bring down most of the banking system.

It is in this context that the Bear Stearns crisis must be viewed. When the Knickerbocker Trust went bankrupt in 1907, J.P. Morgan was able to bail out the banking system because the Knickerbocker had limited relationships with other banks. Even when Drexel Burnham went bankrupt, the authorities were able to solve the problem by allowing a two-stage process, whereby the expansionist Michael Milken and other top management were removed in March, 1989, while the institution continued to do business on a sharply reduced basis before its final bankruptcy in February, 1990. This was hard on Drexel’s shareholders, who might well have salvaged something substantial from the wreckage if Drexel had been forced into Chapter 11 early enough, but it was good for Drexel’s network of counterparties, who were given time to get out.

As the above discussion has shown, the network of counterparties for a major house such as Bear Stearns is now many times the size and complexity of that constructed by Drexel and poses huge systemic risk. Bear Stearns may not be too large to fail, and it has no depositors requiring insurance of their money, but its network of interlocking obligations is far too complex and extensive to allow it to cease payments.

The Fed is doing everything it can to stave off disaster, but frankly, it is not rich enough. With assets of about $800 billion, having instituted $400 billion of rescue programs in the last week plus unspecified intervention with Bear Stearns, it is pretty nearly tapped out. It does of course have available a further source of liquidity, the Federal printing press. With inflation already moving at a brisk trot, use of that source will replace an incipient recession with a deeper and highly inflationary recession.

Thus the participants in the AEI seminar were misguided in touting Treasury bonds as the last safe haven. In an era of inflation, long term Treasury bonds yielding less than 4% are not a safe haven, they are a guaranteed route to loss, particularly for any investor so unfortunate as to pay tax. The fact that five year Treasury Inflation Protected Securities now yield less than zero, even though the inflation figures on which they are based are comprehensively fiddled, is a sufficient indication of the incredible laxity of current monetary policy. Of course, since house prices peaked at about 45% above their equilibrium level, a 30-40% burst of consumer price and wage rises, perhaps two years at 15% inflation, may be just what is needed to bring house prices and incomes back into balance. In an era of very cheap money, all investments are overvalued (the stock market still has much further to fall) but Treasury bonds are perhaps the poorest buy of all.

This is not a pretty picture. The losses to come are probably large enough to wipe out the banking system, and the interconnected network caused by modern finance is sufficiently fragile that the failure of any one major house, if carried out through normal bankruptcy processes, would be sufficient to bring down the world economy as a whole.

It is as if the US power grid had been installed without fail-safe mechanisms, so that a local outage caused by a snowstorm in Vermont or a hurricane in Florida could cascade through the whole system and wipe out power service for the entire United States. Needless to say, failsafe mechanisms have been put in place precisely to prevent such an occurrence. When we dig ourselves out from what seems likely to be an unprecedented banking system catastrophe, we will no doubt design similar mechanisms to prevent contagion throughout the banking system. They will destroy much legitimate business, just as did the 1933 Glass-Steagall Act, which de-capitalized the investment banks, making it almost impossible for companies to raise debt and equity capital for the remainder of the 1930s.

The barriers to new business caused by the new control regulations will be the last but by no means the least of the enormous costs imposed on mankind by the crack-brained alchemists of modern finance.

ߧ

Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

The End Of Your Way Of Life?

Stagflation/Hyperinflation Or Just The End Of Your Way Of Life?

By Craig Harris | March 2008

I haven't written anything for public consumption in a while, because I've been busy living in what I like to call, "the real world" and making my living by trading my own money. That's what I do these days. I'm a fly on the wall with electronic access to the dens of thieves. If I come out on top then I transfer those digits for things I need. Yes I'm still long gold from $290, and crude from $60 but whatever, I've been doing ok. I've been doing ok that is, if the money I have was worth what it used to be, but it isn't. Rather than just slap a label on what it is when words have already arguably lost their meaning, let's discuss it. I am personally more concerned about quality of life issues than I am about money given the current circumstances. The last time when I wrote publicly, I was talking about the decline of the empire and the end of the pre eminence of the US dollar...war, that sort of thing. That's what's going on now— what I was talking about then.

The US is currently in what I like to call a period of "decay". It is in a period of decay in every possible way. If you live in the real world like I do, it is evident. If you consume a diet of the corporate media cheerleading squad, then you don't live in the real world and it could be difficult for us to communicate during the rest of this essay. We've got people charged with cleaning up the corrupt broken system going out with an $80,000 hooker bill and being replaced by a blind man. The current El Presidente is a wind-up doll for a bunch that should all be in orange jumpsuits. It would be comical if it weren't so sad to watch it all go down. It is a modern day tragedy being played out in real time in the context of a giant government/corporate media theatre production.

It's amazing to me how people who are into politics or religion or whatever will violently oppose some opinions, when people simply report the facts they see around them. Anyway, again... another subject. Politics and religion are both the same thing. They are both simply effective methods to control large masses of people. I just figured that one out not too long ago when I was into my learning the history of the world project. It has always been that way and always will be.

Anyway, that's all I do to make my living. I assimilate the facts I see around me and invest accordingly. I keep a diary of what I think and why, and I even publish it. If I'm right I make money and if I'm wrong I lose money. I like it that way. It keeps me honest.

That's one reason I don't write a lot publicly these days. It is becoming increasingly difficult for people who live in the real world to communicate with those who don't, and there is an increasing number of those who don't just simply because most people believe what they are told and the lies they are being told are now monumental. Astronomical in size. That's one of those universal rules about human beings; the majority will always go along with whatever you tell them. That's just the way it always has been and always will be. All good propagandists know that.

For those who do think for themselves and live in the real world however, everything that is happening today has been entirely predictable and even expected. I mean, the corporate media will say "no one ever saw this" or "they never saw that" and really the case is they just choose not to have those people appear. That's a whole subject in itself however.

I was noting to my subscribers the other evening that if you take a look at a picture of a pump price for gas from ten years ago until now, that's around an 18% increase annualized every year for ten years. All the other prices in the real world have risen at commensurate levels like healthcare and all the big items people like me in the real world need to spend money on.

Furthermore, if you plot energy in the last five years, the numbers are bigger. If you plot the last two the numbers are bigger yet. The last one, bigger yet. What we have here in the real world are prices accelerating at an ever-increasing double-digit rate. Call that what you want. We have real wages basically constant and good jobs are harder to come by. We have a middle class that is going away. We have the majority of the citizens having their wealth, if they still have any, confiscated due to the ravages of inflation, or with toxic financial contact with the healthcare/pharma, legal or government money machines. In the "not real world" big brother and his corporate media outlets wants you to believe that there really hasn't been much inflation or any significant changes to the status quo and that lie is so big that you may even believe it.

If you do, then you don't live in the real world and we cannot communicate effectively because what you think you know is the product of a corporate boardroom. What I know is the product of living.

The other big thing that has happened since I last wrote is that the guys on Wall Street figured out how to loan a bunch of money to people that had no ability or even real desire to repay that money except for the fact that house prices were sure to go ever higher— which is the definition of a mania. Working through a little bit of that math, with an estimated 30% of homeowners currently upside down on their mortgages, that works out to around ten trillion dollars of real estate still to be walked away from according to simple math and a few basic assumptions I worked out the other night.

In the "not real world" they have told you from the outset first that there was no real estate bubble, then that there might have been one, then that it would be over quickly and now they aren't sure when it will be over— and the PR firms are busy working on what to tell you next.

It's not going to be over any time soon. The big question in my mind is whether the whole thing is about to go kaput or if we are just going to witness continuing decay as the wealth shifts into an ever smaller percentage of the population... as the 'middle class' flames out [[anyone earning less than $200k per: normxxx]]. Again, that is a subject in itself. That is the subject of the Straussian nightmare; a change in the form of government that is pitched as the same thing as the old government.

On top of this Wall Street genius of lending money to people who could not pay, you have the cure for all this mess being the printing of more money (creating more debt). They're going to fix a problem of too much debt by creating more debt. Perfect. They're even monetizing it by taking nearly worthless debt for brand new money created with the push of a button and an organized media campaign to tell you what they did and why it was good for you and why it was not monetization or covert nationalization of the banking system. It is what it is, call it what you want.

The idea is that by just pushing a few buttons you can cure these ills, but the reality is that big pile of new money is diluting the old money and sending the US dollar into the toilet. I mean, they're pitching it as all good, but what's left of the free markets are in sharp disagreement with the party line.

Now; the only reason the USA has gotten away with the idea that this balance sheet was compatible with the idea of being the world's reserve currency was that the USA was the global kingpin, the Mac daddy... until the empire did what all empires do and that's get too big for its britches.

They always start expanding the empire into places that are too expensive to maintain, imposing their will on people who don't want their will imposed on, and then, when that all gets too expensive and they start making endless enemies, they go bankrupt. That's what always happens. It always does. That's probably another one of those human nature things.

In the real world right now, we have a situation where the banks are bankrupt, the government is bankrupt, the people are bankrupt, and the cure for this is to lower interest rates and create more money (debt) by pushing a button... diluting the value of the money further and causing everything we have going on now. It all makes sense here in the real world. All the pieces to the puzzle fit and none don't.

So is this stagflation or is this hyperinflation? Well, I'm not carrying a wheelbarrow around with my money in it yet, but I do know the prices and costs of everything I need to live are going up at an ever-increasing rate.

The shape of that curve is a polynomial consistent with ever accelerating inflation which some would call hyperinflation. I know that if I earn a 20% return, then I might be keeping up with the increase in the costs of everything I need to maintain my personal status quo. If you can balance a checkbook and multiply, then you know. If you are one of the ones who believe everything you're told, then you have to disbelieve your lying eyes or be unable to balance a checkbook.

When the cure for all problems can only be to lower interest rates and dilute the supply of the money by creating more money, then that is a vicious cycle consistent with acceleration or hyperinflation.

I really don't like it when people casually compare what is going on right now to 1929, because in 1929 the cure was basically to spend less [[most economists would strongly disagree with that! : normxxx]] and now the cure is basically to spend more. Even worse, being the geniuses we are, we figured out a way to amplify spending, called derivatives. They're based on the real thing but amplified like 100 times. Maybe, we've been doing the "cure" for so long that the patient is no longer responding?

What we are currently seeing, in both gold and crude oil is a loss of confidence. It's a loss of confidence that this whole thing makes any sense. It's a loss of confidence in the absurd idea that you can create wealth by pushing a button. Since this whole thing now relies solely on confidence and not any intrinsic value, commodities, especially gold and crude oil, are acting as alternative wealth storage devices to paper currency.

If you have a bushel of corn, then you know what that is. You can eat it, or do a bunch of other stuff with it. With a piece of paper with a picture and official looking numbers on it, well you aren't as sure as you were yesterday what you can do with that. There will be no run on the banks this time around, because the banks can be endlessly refilled with ever more worthless money. Instead of a run on the banks, there will be a run on the dollar. A run on the dollar (or run into commodities) is the modern equivalent to a run on the banks back then, for the reasons I'll get into shortly.

There is a general loss of confidence roughly equal to the loss of people's confidence in the government and the banking system. This decreased confidence is fueled by the fact that they are creating too much money. The idea with fiat money is that you only grow the amount of it as the total output of the economy increases otherwise you are diluting it. The thought experiment for that goes like this. You have one giant pile of stuff, and one giant pile of money. Right now there is enough money so that one-dollar gets one pound of stuff. Now, if you double the amount of that money, then it takes two dollars to equal one pound of that stuff. Unless the pound of stuff doubles in size, you have just caused 100% price inflation. Operations like just zapping a half a trillion or so into existence out of thin air means just a bigger pile of money going after the same amount of stuff [[well, not quite; already the "markets" have erased several trillion dollars of IOU money (derivatives), so the net result is anybody's guess: normxxx]]. That's what we have going on now. These are financial engineering acts of desperation to save a system by giving it more of what got it to this point in the first place... debt. When regular people like me think about that, they think, that doesn't make any sense, and they lose confidence.

That's in the real world. On TV things are still good though. If you don't like what you're reading here, then go turn on the TV. You'll feel better.

I hate to simplify things too much, but this is the reason Mr. Greenspan called gold the conscience of the central bankers back in the 60's before he lost his mind or whatever happened. Maybe he couldn't resist the power of the ring or something... I don't know. Anyway, it's their conscience because they can't just zap gold into existence with the stroke of a pen.

Guess what? They can zap any amount of "money" into existence now. Poof— you've got money.

Any amount you want. That's why this is fundamentally different from the great depression. This time, they can just increase the giant pile of money. they can just drop it out of helicopters if they have to. They even said so... and it isn't going to buy as much stuff. It doesn't already.

You still have the same basic problem from a human standpoint. That's the really interesting thing. In other words, whether you have a deflation like in the 30's or an inflation like now, the people suffer similar effects. It's hard to find a job, you can't make ends meet, city and government functions and services are understaffed and underfunded, and you are hungry. They are both different kinds of states of decay. Both usually end in war too.

The last one did. This one is different however in a lot of ways... and it's potentially more serious. It is fundamentally different because it is the end of the world's first experiment in government by the people and it has been replaced by something new.

If you're into labels, then maybe you can find a label for what to call this. I like to quote Lenin on that:

"Fascism is capitalism in decay." -Vladimir Lenin

I really don't want to get into all that implies in a short essay, but I will condense it all and say the US is in a state of decay. Political, socioeconomic, leadership, influence, status, any label you can think of.

The US is losing power and influence in the world, and it only has 5% of the world's population, and they're all bankrupt. I like to think of it like a continuum from the US coming out on top after WWII to a banana republic run by El Presidente. That's what I call them now, whoever he or she is, El Presidente because that's what they are. A corporate spokesman who is put there, bought and paid for by some Acme corp.

The country has lost its way and is increasingly operating at the whim of corporate lobbyists and special interests that own the politicians, as the stench of it all starts to smell so foul that even the corporate media disinformation campaign can't convince your lying eyes. It is not what it appears to be. It is Rome circa 400+A.D. It has already bankrupted itself 'policing' an unsustainably large, unruly, and ever more restive global empire. The Soviets tried brute force and failed; now we are trying the same (and even in the same counttries, e.g., Afghanistan). You have to live through the decline.

That all gets into people living in the real world versus those who are not. Again, it's safe to say that the world is voting with its dollars... and the 5% of the world's population are going down hard on 95% leverage. They aren't going to like it either.

Tune in next time to hear which states secede from the 'empire' first.

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

The Profit Of Doom

The Profit Of Doom

By Robert Kiyosaki | 4 March 2008

Prophets of doom have always taken risks in terms of ridicule and humiliation. If you stand on a street corner holding up a sign that reads "The End Is Near," passersby will laugh and heckle. People will say you're like Chicken Little, running around telling people the sky is falling. Yet after an economic crash like the subprime-induced one we're experiencing now, people always say, "Why didn't someone warn us?" or "What's the government doing to save us?"

Well, in May, the government will reward the kind of greed and ignorance that sparked the subprime mess with a $168 billion stimulus package. Instead of heeding the warnings of the markets, the incompetent and irresponsible get bonus checks. Small wonder the country has money problems.

Ignored Warning

As for "the end is near" proclamations, the Jan. 11, 2008, U.S. edition of the Financial Times published one of the biggest ones I've ever seen. Next to a photo of Federal Reserve Chairman Ben Bernanke, the front-page headline read, "U.S.'s Triple-A Credit Rating Under Threat." Unfortunately, not many people paid attention to it. I doubt that many people even know what it means, or what Moody's is, or why their warning is important.

In overly simplified terms, Moody's was saying that the United States may soon become a subprime nation. That is, the world markets will no longer recognize us as a financially responsible country, and we won't be able to maintain our financial and economic supremacy. In short, the end really is near— from Moody's perspective, it's less than 10 years away.

The Empire In Decline

Worse, none of the leading presidential candidates even mentions this potential downgrading of credit worthiness as a problem. While I think it's noble that Barack Obama and Hillary Clinton campaign for universal health care, I've never heard either of them mention the fact that we can't afford the health care we already have. Do I think John McCain (or, in a long-shot, Mike Huckabee) would do a better job than the Democrats? No. I have no confidence in either party or the current processes of government to tackle this issue.

The problems of health care and Social Security have grown too big and are clearly beyond our control. All empires come to an end, and the American Empire is no exception. We've fought too many foreign wars, swept too many domestic problems under the rug, and paid for our greedy consumption with money borrowed from too many countries around the world. The end isn't just near, it's inevitable.

Bad Times, Few Solutions

In less than three years, the first of approximately 75 million American baby boomers will turn 65. No government can change that, so until someone discovers the fountain of youth, the end is not far away. In a few years, the U.S. government will begin to operate in the red [[and what else have we been doing since…the beginning of the twentieth century!?! I suspect he means beyond any semblence of a possibility of NOT going broke, as the interest on our gargantuan debt compounds beyond any hope of arrest and we sell off larger and larger parts of our birthright (oh, and how we made fun of Esau), until nothing is left: normxxx]], paying for campaign promises made years ago by politicians who are long dead. Do the math. If 75 million baby boomers begin collecting $1,000 a month in Social Security and Medicare benefits, that comes to $75 billion in additional monthly spending [[or about $900 billion a year— say a cool $1 trillion a year in round numbers (it will be over that, shortly, anyways, as more and more boomers continue to retire and inflation increases those payments): normxxx]].

That's a lot more than the one-time $168 billion stimulus package due out in May. Why would anyone want to run for president at this point in history? Do they believe they can solve our growing economic problems? Or will they do what every other politician has done in the past— simply expending their energy figuring out a way to leave the problems for their successors?

Don't get me wrong— I'm impressed with the people running for president. I love the fact that we have a woman, an African-American, a war hero, and a Baptist minister to choose from. I just feel that the looming financial problems are beyond their ability to control [[and, lately, even presidents and presidential candidates don't bother to mention it— as vice-President Cheney so wittily observed, "deficits don't matter"— except, when they do(!) : normxxx]].

The Looming Gloom

Do I see doom and gloom ahead? Absolutely. But I also see tremendous opportunities made possible by the impending murk. In fact, that Financial Times article about the downgrading of U.S. credit worthiness only validates my current investment strategies. Regardless of what our national credit rating is, people will always want a roof over their heads, food on their tables, fuel for their cars, and clothes on their backs. Instead of betting on the Democrats or Republicans to take care of me, I would rather count on my financial IQ to guide me through the coming years.

I see it as my personal responsibility to invest wisely in the equities of strong companies, well-financed real estate, energy, commodities, and precious metals, and minimize my taxes. The people I'm concerned about are the ones who are watching their retirement accounts dropping in value with the stock market, their homes lose value rather than appreciate, and their purchasing power decline as the dollar drops.

Always A Silver Lining

For these people I'm an advocate of financial education, but I also know that many of them aren't interested in becoming more financially astute. So instead, I recommend that they buy silver coins, as long as silver is under $25 an ounce. Today, silver is cheap and easy to acquire and manage, while real estate and businesses are both management-intensive; silver requires no management, expect for a safe storage place. In addition, the iShares silver ETF (SLV) is convenient.

Silver is consumed in many industries, and it's reported that the world has less than a 10-year supply of it left. That's why I believe silver is currently one of the best investment opportunities there is— even for people with limited financial training.

[ Normxxx Here:  Except that, in India— and many similar poor countries— the rich put their savings in gold ornaments, which they wear until needed, and the poor do the same with silver, as the Hunt brothers so famously found out!  ]

Even if the end is near, there's always a silver lining.

[ Normxxx Here:  So, in the end, this is nothing more than another pitch for an 'easy out'— at least for some!  ]

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

The Year Ahead

The Year Ahead

By Glen Allport [Edited] | 10 January 2008

Crisis = Danger + Opportunity
~ Chinese ideogram for "crisis"^*

Luck is what happens when preparation meets opportunity.
~ Seneca (5 BC— 65 AD)

2008 will be a year to remember. Big events are coming, and the notion that crisis brings opportunity will be sorely tested.

Tipping points are approaching in several interrelated areas. The most important areas of concern include:

1. Financial/Economic Problems: Multiple financial system crashes are in progress or on the way. Will there be any ray of sunshine in the aftermath? For that matter, will we reach the aftermath in the coming year, or will these problems drag on, perhaps for decades?


2. Politics And Government Action: Will 2008 be the last gasp for liberty or the start of a Great Unraveling for tyranny? Or neither?


3. Food Shortages: will dire predictions from the 1960s and 1970s (not to mention Malthus) of mass famine finally come true— as now appears possible? Or will technology and the markets (or perhaps something else) save the day yet again?


4. Environmental Damage: the jury is still out on global warming but the oceans may be dying and the rest of the planet isn't doing so well either. Will we respond appropriately and in time, and if not, how quickly and how severely will the problems worsen?


5. Oil, Metals, And Other Natural Resources: Peak Oil (which some believe is a scam or an error) is quite real and probably a genuine threat [[even if you realize that Peak Oil is merely Peak CHEAP Oil: normxxx]]. Combine rapidly-depleting older oil fields with less oil being found, with the new finds mostly being deep-ocean or otherwise difficult to harvest, with more of the oil now harvested being lower-grade (including tar sands and shale oil, which require huge amounts of energy and water to extract and refine), and— here's the kicker— with dramatic growth in oil usage in China, India, and many other nations, and you have a supply and demand problem of potentially epic proportions. A similar situation is playing out for metals (yes, Peak Metal)— as with oil, the easy-to-harvest resources have already been harvested. We may thus be entering a new, broader Age of Scarcity. If so, how can we best respond?

[ Normxxx Here:  Gee; just in time for Global Warming to conveniently remove the ice covers from Antartica and Greenland and allow mining of those resources!  ]

Looking at these problems as a group, it doesn't feel like "opportunity" or "luck" ahead so much as "disaster." But the largest opportunities sometimes do arrive in the form of disasters or crises. For example, dramatically higher oil prices are once again fueling a boom in conservation, in alternative energy, and in solutions we might otherwise never have considered or even imagined. The coming year will bring plenty of problems to solve, and I look forward to seeing what I hope, but don't necessarily expect, will be creative and positive responses.

Financial And Economic Outlook

On the financial front, it appears that 2008 will be the Year of the Collapse.

Not everyone sees it that way; here is a conversation with several investment bankers, CEOs, and financial advisors who see 2008, for the most part, as a year of recovery in the markets. But others in the financial world are gravely worried. The London Telegraph ran a story on 12/27/2007 titled Crisis may make 1929 look a 'walk in the park'. The article includes chilling expert commentary:
All Commands

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression. "It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds. Lenders are hoarding cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor— the interbank rates used to price contracts and Club Med mortgages— are stuck at 80 basis points even after the latest monetary blitz [[about $600 BILLION so far: normxxx]]. The monetary screw has tightened by default. York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster. "The central banks are rapidly losing control."

There are many recent articles and commentaries with the same basic message, and some even more pessimistic< (see also here). For my part, I am surprised that the imbalances and deceptions of the world financial system have not brought us to a 1930’s-style depression— or something different but just as severe— before now. Investor and author Doug Casey calls what is coming The Greater Depression and however it plays out (hyperinflation, severe and prolonged stagflation, severe deflation, or something else), I expect the name will be appropriate. Significantly higher unemployment numbers combined with widespread underemployment, defaults on debt of every kind (from mortgages to credit cards to pensions to bonds to zillion-dollar derivatives), dramatically lower housing prices combined with higher prices for nearly everything else (real inflation levels of ten percent or more, and possibly much more) are in the cards for next year, or so I believe.

I discussed the economic situation in more detail previously in Money (October) and Destruction by Paradigm (March). Nothing magical has happened to solve the problems that were so apparent then; the train-wreck of our post-1913 financial system continues. Using "money" created from thin air and printed (mostly electronically now) as fast as corrupt banking and government authorities desire has never worked well for long and has always brought disaster in the end— see today's Zimbabwe, for example, or read about the German hyperinflation of the early 1920s or the John Law episode in 18th Century France. Central bankers and governments know perfectly well about the long-term destruction they are causing; there is a great deal of history on the subject to draw from. Central banks are designed to siphon wealth from the masses to the banks (and their owners) and to the corporations and government agencies (and hence to the actual people) favored by the power elite. That is the true purpose of central banks; nothing more, despite the various official excuses for such institutions. (Link is to a 11 min video; see also this 41 minute video from the Mises Institute).

Eventually, the central banking/fiat currency scheme collapses and millions are impoverished or worse. But then, the power elite has never been concerned about the masses; siphoning away wealth from the poor and the middle class is how the elite became wealthy in the first place; the elite are no more concerned about the masses than lions are concerned about gazelles. Some in the elite got rich by creating value in the market, but— here is the simple truth— getting rich is so much easier with government contracts (preferably no-bid) and especially with government-granted monopolies— the Federal Reserve being the ne plus ultra in this regard.

With nearly the entire world now suffering under such schemes (how many nations can you think of that do not have a central bank and a slowly [or rapidly!] collapsing fiat currency?), there is no reason to believe the present crisis will end well. There is always the chance that central bankers will be able to inflate one last bubble or drag out the deflating of this one without causing a full-on crash, but I wouldn't bet on it.

Snapshot forecast: Severe economic recession or worse, possibly much worse. Real estate crisis intensifies; prices drop further, financing is harder to get, the number of people whose finances allow for home ownership drops as unemployment mounts and inflation eats away at buying power even for those who still have jobs. Outright failure of several very large financial institutions (possibly averted with buy-outs, most likely from government sovereign funds or foreign corporations) along with bankruptcy of many sizable corporations. Currency controls, price controls, gold and other asset confiscation, and/or other authoritarian nonsense likely in response. Fifty percent chance for a downturn so dramatic that even the Old Media propaganda machine begins calling it a "depression." Americans will not handle truly hard times with the grace and dignity so many showed in the 1930s. If things get that bad, then riots due to food shortages and general conditions of widespread (and for many, sudden) poverty will begin in America and Bush will get a chance to make use of those Halliburton-built 'detention' centers along with the many such centers left over from FDR's incarceration of 120,000 Japanese-Americans during WWII.

Potential upside and opportunity: Today's economic pain is already helping to wake up the masses to the harm being done to them by governments, by corporatism, by central banks, and by fiat currencies. See the next section below for how this might, under the most optimistic of scenarios, lead us back from the brink— or at least point us in the right direction after we go over the brink. For example, few today think a gold-based currency is possible, but that is now slowly changing. Gold and silver were the basis of currency in America and much of the world for over a century (and were used as money for thousands of years before that) and worked far better than what we have today, for reasons that become obvious when you study economics. America's founders certainly understood economics, and thus Article 1, Section 10 of our Constitution requires that our money be only gold and silver, which means that today's fiat currency is literally illegal (any chance the perps will do jail time?) [[but see also, "Legal Tender Cases." In any event, all of today's paper money are Federal Reserve notes, which obligate the U.S. Government in no way.: normxxx]].

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." ~ Thomas Jefferson (1743— 1826), Letter to the Secretary of the Treasury Albert Gallatin (1802)

The collapse of the present corrupt, fantasy-land financial system will bring strong pressure to bear for a more realistic, workable, and fair system— for a system not rigged against the masses in favor of the elite— and that will require something other than pure fiat money. The monetary restraint of using gold (and perhaps silver) as money in place of fiat dollars would, by itself, make our current level of tyranny impossible to maintain [[but insure regular panics/depressions whenever inflation was being wrung out of the system, such as we had before the '30s: normxxx]]. By definition, using gold as money prevents the ongoing official counterfeiting of currency that makes your dollars worth less every year and which provides government with a tsunami of dollars to pay for Blackwater and Halliburton and military intervention overseas and the new billion-dollar biometric FBI database and a thousand other things that impoverish and tyrannize the people while enriching the elite. America spends more on its military than every other nation on Earth combined! Does that make America more secure, or does it just make the military-industrial complex more wealthy and powerful?

There is now, finally, talk even in the Old Media (at least when Ron Paul is being interviewed) about ending the Federal Reserve and abolishing the hated income tax and the IRS. That would have been unthinkable even a year ago, and the noisily-approaching financial collapse is a big reason why it is thinkable today. Those simple and obvious action items would, by themselves, be a huge step forward in real, on-the-ground freedom and would be a massive defeat for those who think it their right to 'think for' their fellow man.

A more limited and personally rewarding possible upside of the economic downturn or crash could be strong returns from investments in precious metals, scarce resources, and other such forms of real wealth. For relevant sources of information I suggest visiting http://www.321gold.com, http://www.agorafinancial.com, http://www.prudentbear.com, and similar contrarian, non-mainstream sites. Reading up on Austrian economic theory wouldn't hurt, either. Remember, however, that gold and other asset confiscation by government (including by America's own federal government^**) has a long history. Once a government has impoverished its nation to a degree where it can no longer extract the levels of wealth it is used to getting from from current national income, the next step is to begin confiscating saved wealth on almost any pretext. Get those assets out of the country while you still can, and keep your gold in the form of relatively liquid assets such as mining stocks, ETF shares, and so on. Consider also taking delivery of the confirming paperwork, although where to store that is another problem: I don't believe even your safe deposit box will be safe; the banks are practically another arm of the government by now [[in 1933 when "gold hoarding" was made illegal, safety deposit boxes were 'sealed' and could only be opened under the watchful eye of a government inspector: normxxx]]. (Take the standard disclaimer to heart; do your own research and think for yourself. No one, including me, can be sure what the future will bring; timing and the prediction of discontinuous events ('accidents') especially are never finely predictable for things as complicated as the polity or economy).

Real estate will again be a good investment after it hits bottom, (but bottom may not be hit until after 2009 and, in any case, almost certainly hasn't happened yet). Nor are prices likely to rise again quickly, so returns may take years to materialize. Keep in mind the Japanese housing crash (nearly 20 years in duration so far...) and other examples that refute the "real estate always goes up" mantra.

Inflation Adjusted Home Price Appreciation: 1998-2006

Source: Office of Federal Housing Enterprise Oversight

United States Housing Bubble

US Housing Bust vs. Japan Housing Bust

Source: Japan Statistical Yearbook

Politics And Government Action

For decades, libertarians were the Trekkies of American politics: they were seen as silly, useless, nerdy, and on the fringe. But decades of espousing notions appealing to "limited government" and "greater personal freedom" activists are finally paying off. Today, with the dollar collapsing, with the housing bubble morphing into a foreclosure epidemic, with millions of well-paid American jobs having been outsourced to low-paid foreigners, with America's militaristic interventionism around the world provoking anti-American terrorism everywhere— costing trillions of dollars per decade that America doesn't have in the first place— with the head of the federal GAO touring the country to sound the alarm about America's impending bankruptcy, and with the Bill of Rights under assault by secret-police agencies and police-state legislation, Americans are at last opening up to libertarian ideas in increasing numbers.

I never thought I'd see this happen, but here it is: the 1988 Libertarian Party candidate for president is no longer just a 'fringe candidate' by most measures, including by demonstrated fund-raising ability, internet (and increasingly, traditional) polling, website hits, unofficial supporter websites, early caucus wins, and volunteer enthusiasm. What other candidate has his own (borrowed) blimp? How many other candidates in the field can raise over $6 million in a single day, without even asking for the money— only weeks after raising $4.3 million on another single day? What other candidate has supporters buying full-page ads in USA Today and the New York Times on his behalf? Why Dr. Ron Paul, of course.

The "Ron Paul Revolution" is clearly not about the man (worthy though he is) but instead about what he stands for: liberty itself. How could this radical idea get loose in the world again? The powers-that-be must be asking each other, "Didn't we put a permanent lid on that one?"

A lifetime of pro-'government' propaganda from 'government' schools (which teach you what to think— and never, never to think for yourself, despite all the contrary propaganda), from similarly biased media (addicted to status quo 'talking heads', for instant approval of the 'accepted/consensus' view, or obviously weird 'pundits', for instant ridicule of any other view)— from seemingly everywhere— has not been enough to completely hide the truth from millions of ordinary people who are now finally seeing through the lies behind their own impoverishment (and enslavement to the 'consumption = happiness' myth). Dr. Paul's campaign is educating millions more— about the Federal Reserve and fiat currency generally, about Constitutional restrictions on federal power (routinely ignored by Government and its agents), about America's violent, interventionist foreign policy— with 702 military installations in foreign countries— and its dire results both abroad and at home, about the "soft fascism" of lobbyists control of government and how it has (inadvertently?) contrived to impoverish us and lead us down the road to a police state, and about many other things.

[ Normxxx Here:  But as Chalmers Johnson has documented, the figure of 702 foreign military installations is certainly too low, for it does not include installations in Afghanistan, Iraq, Israel, Kosovo, Kuwait, Kyrgyzstan, Qatar, and Uzbekistan. Johnson estimates that an honest count would be closer to 1,000. See also Global U.S. Troop Deployment, 1950-2003  ]

Snapshot forecast: I am largely in agreement with Denmark-based Saxo Bank, which forecasts chaos in 2008. For example, on the economic side, they see oil going to 175 dollars per barrel. They see U.S. markets dropping a solid 25 percent and other markets having problems also; they expect the Chinese market to collapse by 40 percent.

Saxo has a surprisingly good track record (here are their predictions for 2007) but no one is right all the time.

The year ahead will be interesting indeed.


……………………………………………………………………………………………………………………………………………………………………………………

^* On the adage of Crisis = Danger + Opportunity, the linked page points out the following in regards the Chinese symbols:

1. Nevertheless, a crisis is still a dangerous state of affairs— regardless of the language.



2. Crisis wei ji still means "a situation that has reached an extremely difficult or dangerous point".



3. But, a dangerous situation can become an opportunity if wei ji becomes zhuan ji.



4. Zhuan ji means "turn for the better". (Zhuan means "turn into" and ji means "opportunity". So zhuan ji means "turn into opportunity".)



5. In this sense, the Chinese symbol crisis can mean "opportunity" in a time of "danger".



6. Others also point out that using the Chinese characters for "crisis" to support the adage is not entirely sensible; see the related essay on Wikipedia for one example. The image file of the characters used above is a resized version of one used in the linked article (here it is again).

^** To be more precise, in 1933, U.S. gold coins were "called in" and possessing more than $100 worth was made illegal, with stiff fines and jail terms for offenders. People got paper dollars for their gold, and gold jewelry and numismatic-grade coins were not affected. This particular mass violation of Constitutional rights in America was perpetrated by FDR, the same criminal who had all those Japanese-Americans, most of whom were U.S. citizens, forced into detention camps for the duration of World War II. That was blatant racism combined with raw tyranny (not to mention obdurate stupidity), yet the same people who today pounce on anyone who utters a remotely racial word are (in the main) somehow able to continue their hero-worship of Roosevelt.

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Normxxx    
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