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Protection and Profit from
Bailouts Doomed to Fail
by DeepCaster LLC, deepcaster.com | September 26, 2008
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Consider Rep. Ron Paul’s wisdom on the Fed/Treasury Proposed Bailout Scheme:

“Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The events of the past week are no exception.

The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."

That describes the current bailout package to a T. And we're being told it's unavoidable.

The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.

Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.

Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.

There goes your country.

Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.

Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.

Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.

The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?

When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?

Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be. (emphasis added)

In liberty,

Ron Paul
September 24, 2008"


To determine how to protect and even profit from the recent outrageous Bailouts culminating with the impending Mother of All Bailouts, the TARP (Troubled Assets Rescue Plan) Scheme, it is essential to understand why they are doomed to fail.

The Bailouts are doomed to fail primarily because, if any Bill similar to the original Fed-Treasury proposal passes, the U.S. Treasury (that is to say U.S. Taxpayers) will be encumbered with several trillions of dollars of additional debts for which there is no possible way of paying, other than, ultimately, dramatically debasing the U.S. Dollar.

The Fatal Flaw of the TARP Bailout Scheme is that the average American Taxpayer is already swamped with debt, and adding an even greater debt burden will ensure that defaults will continue and increase. And the defaults will not be limited to mortgages, but will extend to consumer credit card, and commercial loans as well.

Moreover, the Average American Taxpayer/Consumer is about 70% of the U.S. GDP. As the purchasing power and, indeed, solvency of this huge group of Americans is increasingly impaired by increasing debt, the U.S. Economy will be further impelled into a Hyperinflationary Recession, or even Depression.

That is why the proposed TARP Bailout cannot succeed. Just consider what the un-elected Powers-That-Be, led by Ben Bernanke at the private for-profit U.S. Federal Reserve and Hank Paulson at the U.S. Treasury, are attempting to commit (via the TARP Plan) the U.S. Taxpayer directly, and investors and others indirectly, to paying or insuring:
Financial Institutions would be allowed to sell their illiquid “Troubled Assets” to the Treasury in exchange for U.S. Taxpayer-provided cash - - for cash yet!! This cash would be obtained from the Federal Reserve, which prints it for nothing out of thin air, in return for Treasury Securities on which the interest would have to be paid in the future by American Taxpayers. The cost of this delightful plan will potentially be several trillion, and not the original $700 billion, because, inter alia, Taxpayer defaults and diminished purchasing power would continue to increase.
The original Fed/Bush Administration plan was to provide “only” $700 billion to cover mortgage-related securities “at any one time” (i.e. the Secretary could come back for more). The proposal has now been expanded to allow the buying any “troubled assets” (this provision alone would guarantee the U.S. Taxpayer obligations will be at least a trillion dollars).
The Fed indicated they would make de facto unlimited funds available to financial institutions to purchase asset-backed commercial paper for Money Market Funds. The cost of this could be in the hundreds of billions.
The Treasury, in addition, indicated it would secure “up to $50 billion” in distressed Money Market Funds Investments at financial companies. These are the ones that are not FDIC insured. Of course, the $50 billion is just a “starter number.”
The foregoing covers those “Troubled” Mortgage “Assets” and other “Troubled Assets” which were not covered by the earlier combined bailout of Fannie Mae and Freddie Mac. That bailout already will cost at least $1 trillion and probably $2 to $3 Trillion in Taxpayer money, as Deepcaster earlier pointed out.
Taxpayers would also cover the wholly inadequate FDIC insurance reserves. That ultimate liability could be over a Trillion Dollars, if there are, as we expect, 1000 bank failures, as suggested by billionaire Wilbur Ross. Indeed, if as many as half of all the banks in the U.S. could fail (as recently suggested by Ken Lewis of Bank of America), the liability could be even greater. Consider that it took just a couple of days for the Official Estimates of the cost of this FDIC Capitalization Plan to triple from $50 to $150 billion. At that rate of increase…who knows that the ultimate number will be?
As well, Taxpayers and investors will get to pay in spades through the Loss of Purchasing Power via the Hyperinflation that this geyser of Fed money printing will cause. Deepcaster expects M3 to have to go to well over 20% annualized (from its current 14% annualized level, according to shadowstats.com) to cover the “cash” necessary.
As proposed, the Plan would allow the Secretary of the Treasury to pay up to full notional value of the troubled assets, rather than current much diminished, or nonexistent Market Value - - i.e., it would allow payment of “Top Dollar” to the Major Financial Institution beneficiaries even though the Market Value, if any, is Orders of Magnitude less.

The Treasury Secretary’s decisions “would not be reviewable by any court…”

Thus, understandably, as of the date of this writing (Friday, September 26, 2008) the Plan is under severe attack in Congress.

Nonetheless, political pressure ensures that some Plan will be enacted, and will likely contain several of the aforementioned provisions.

Assuming that is so, it is likely the most serious negative consequences of all these planned Bailouts can thus be summarized in two statements:
The Bailouts are in fact Bailouts of Wall Street and certain “favored” Major Financial and other Institutions at the expense of the American Taxpayer and Small Investors and Businesses. This makes a mockery of the free enterprise capitalist system.

It is Socialism for Certain of the Rich: allowing Privatization of Earlier Profits while forcibly Commonizing Current Losses.
Other than enriching the Financial Institutions favored by The Fed and Treasury, The Bailouts cannot succeed because the American Taxpayer who will ultimately be obligated for these additional trillions is sorely financially stressed already.

Since the average American Taxpayer/Consumer is 70% of the U.S. GDP, no Solution can be achieved without a restoration of the Financial Health of those Taxpayers/Consumers. But the American Taxpayer is already facing unemployment of about 14% annualized and Consumer Price Inflation in excess of 13% annualized (shadowstats.com). Consider what those numbers will likely be when Trillions in extra debt is loaded on. Consider how many additional defaults and insolvencies there will be. Bottom line: any Plan at all similar to the one proposed cannot succeed.

Indeed, Deepcaster’s view is that if any Bailout Plan is to be passed, American Taxpayers should insist that they get a better deal than Warren Buffet got when he bought into Goldman Sachs.

A Strategy for Profit and Protection

Normally, (that is to say in a Genuine Free Market situation) the go-to “Safe Haven” Assets in times of Financial Crisis would be the Precious Monetary Metals Gold and Silver, as well as other assets such as Strategic Commodities. We say “normally” because nearly every time another Financial Market Crisis has come prominently into the public eye in recent years The Cartel* of Central Bankers has successfully taken down the price of what would normally be the Safe Haven Assets - - the Precious Monetary Metals. A prime example occurred during the much-publicized demise of Bear Stearns in March, 2008, which was accompanied by a vicious Takedown of Gold and Silver. In a non-manipulated Market, given the fact that Bear Stearns reflected great weaknesses in the Financial System, Gold and Silver should have skyrocketed.

*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Key Central Bankers and favored financial institutions to read Deepcaster’s July, 2008 Letter containing a summary overview of Intervention entitled “Market Intervention, Data Manipulation - - Increasing Risks, The Cartel End Game, and Latest Forecast” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”

Yet, the September, 2008 Crisis appears to be different. Gold has launched from the mid $700s/oz. to around $900/oz. during the past few days of September, 2008. Similarly, Crude Oil experienced a $25 spike on Monday, September 22, 2008.

So the question is, is it different this time around? Have Gold and Silver finally thrust off the shackles of Cartel Intervention? Or will The Cartel be able once again to cap and take down the prices of these Precious Monetary Metals and Strategic Commodities? Deepcaster has addressed this question in a Forecast he recently issued for the likely fate of Gold, Silver, Crude Oil & the U.S. Dollar in the Alerts Cache at www.deepcaster.com.

One thing is certain: The Cartel will certainly attempt again to take down Gold, Silver and Crude Oil at the earliest opportunity because the Strategic Commodities and Precious Monetary Metals are Competitors as Stores and Measures of Value with the Central Bankers’ Treasury Securities and Fiat Currencies.

Yet there is a Strategy which accommodates Cartel Interventional attempts and at the same time provides excellent Profit Opportunities, whether the Interventional attempts are successful or not.

A major premise of The Strategy is that one can certainly remain a Hard Assets Partisan (as Deepcaster is) while at the same time insulating oneself from future Takedowns. The following points provide an outline of The Strategy (particularly as applied to the Gold and Silver Markets) and are designed to help avoid Portfolio unpleasantness, or even possible financial ruin, in the future, as well as to profit along the way:
Recognize that The Cartel is still Potent, as difficult as that may be psychologically for Deepcaster and other Hard Asset Partisans to acknowledge. The Cartel is still the Biggest Player in many markets and, if the timing and market context are propitious, the Biggest Player makes Market Price. In addition, The Cartel has the advantage of de facto controlling the structure and regulation of various marketplaces and that is a tremendous advantage; just as the Hunt Brothers years ago discovered much to their dismay and misfortune, when they tried to corner the Silver Market.
Accumulate Hard Assets near the Interim Bottoms of Cartel- induced Takedowns.
In order to know when one is near the bottom of a Cartel-generated takedown, it is essential to take account of the Interventionals as well as the Technicals and Fundamentals.
For example, regarding Gold & Silver, near such Interim Bottoms, accumulate a combination of the Physical Commodity (Deepcaster prefers “low premium to melt” bullion coins) and well-managed Juniors with large reserves. (Deepcaster provides a list of such Junior Candidates in our December 20, 2007 Alert “A Strategy for Profiting from Cartel Intervention” available in the Alerts Cache at www.deepcaster.com.) The “Physical” and “Juniors” are for holding for the long-term as a Core Position.
Then, to the extent one wishes to speculate on the next “long” move, one should buy the major producers or long-term call options on them. These latter positions are for ultimate liquidation at the next Interim Top and are not for holding for the long-term.
However, there will be a time when The Cartel price capping is ineffective and Gold & Silver make record moves upward. The benefit of this Strategy is that one will likely be long in one’s speculative positions when this happens.
Near the next Interim Top, liquidate the long options and majors. Again, in order to know when we are close to the next Interim Top, it is essential to monitor the Interventionals, as well as Fundamentals and Technicals.
Near that Top, sell short or buy puts on Majors. We re-emphasize the Majors as preferred vehicles for trading positions because such positions are more liquid and tend to be quite responsive to Cartel moves.
At the next Interim Bottom, cover your shorts and liquidate your puts and go long again to begin the process all over again. We emphasize that it is essential to consider the Interventionals as well as the Fundamentals and Technicals in order to determine the approximate Interim Tops and Bottoms.
Finally, Hard Assets Partisans have the opportunity to become involved in Political Action to diminish the power of the Central Banker Cartel. It is truly outrageous that the average unsuspecting citizen, and prospective retiree, can and does put his hard won assets in Tangible Assets only to have those assets effectively de-valued by Cartel Takedowns. This is extremely injurious to many average citizens in many countries who are saving for the rainy day or retirement and have their retirement and/or reserves effectively taken from them. In order to help prevent this and similar outrages, we recommend taking three steps:
Become involved in the movement to abolish the U.S.

Federal Reserve (a private for-profit Cartel of International Banks) as Deepcaster, ex-Presidential candidate Rep. Ron Paul, and legendary investor Jim Rogers, all have advocated. Rep. Paul has introduced a Federal Reserve Abolition Act, H.R.2755.
Join the Gold AntiTrust Action Committee which works to eliminate the manipulation of the Gold and Silver markets (www.gata.org). GATA is a non-profit organization which makes a great contribution by gathering evidence regarding the suppression of prices of Gold, Silver and other commodities.
Work to defeat The Cartel ‘End Game.’ Deepcaster has laid out the evidence regarding the Ominous Cartel “End Game.” Clearly The Cartel is sacrificing the U.S. Dollar to prop up Favored International Financial Institutions and to maintain its power. But this sacrifice cannot continue forever.

One of several key components of The Cartel’s Ominous “End Game” is the planned replacement of the U.S. Dollar with the Amero. This would give even greater de facto power to the international Cartel of Central Bankers. We encourage readers to review the evidence for the entire multifaceted “End Game” Program in the following: Deepcaster’s Alert of 8/13/06 “Massive Financial Geopolitical Scheme Not Reported by Big Media” and Deepcaster’s June, 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” - - both available at www.deepcaster.com. Fortunately there is even a resolution in the U.S. Congress that would stop this “End Game” attempt (H.Res.40 - - Goode, R-Va).

Conclusion

The Starting Point for Protection and Profit is to determine how much of one’s investable assets one wishes to have in a Core Position of Gold, Silver and other Tangible Assets and then, importantly, to determine which investment vehicles in which to hold them. This Core Position is truly a long-term position and should represent a significant portion of one’s investable assets.

Regarding deployment of the balance of assets devoted to one’s Tangible Assets Portfolio, we recommend The Strategy outlined above.

Since the cornerstone of The Cartel’s Power lies in maintaining the legitimacy of their Fiat Currencies and Treasury Securities, the last thing they want is to have Gold, Silver and Tangible Assets held by investors as Measures and Stores of Value. In obtaining, and adding to, one’s own Core Position near the bottom of Cartel-induced Takedowns, one not only can help bolster one’s Core Assets for the future, but also can help defeat the Cartel’s nefarious ‘End Game’ initiative.

Essential to this Strategy, of course, is paying close attention to the Interventionals - - such attention has facilitated Deepcaster’s profitable recommendations displayed at www.deepcaster.com. A dramatic side benefit of this strategy is that it helps insulate one against vicious Cartel Takedowns such as the one of March 18-20, 2008.

If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable profit along the way.