28 February 2009

A reader's resources on systemic collapse

Thanks so much to Bones, who proves out the collabarative power of the internet.

Additional information and resources.


My definition of an expert in any field is a person who knows enough about
what's really going on to be scared.
- P. J. Plauger, Computer Language, March 1983


Economic Depression, Civil Unrest and the breakdown of order in America.

The resources I've enclosed below are by credible people - professionals,
educators, journalists, policy makers, businessmen and nationally and
internationally recognized experts.

For example, Joseph M. Miller retired as a board member of the Chicago
Mercantile Exchange. One of his associates is a physicist who worked for
Control Data Corporation. The other, Marion Butler, has a background as a
CFO. Niall Ferguson holds a Chair in the history department at Harvard.

There's an article by Israeli historian Martin van Creveld. Dr. Krassimir
Petrov is from Prince Sultan University, Saudi Arabia. Pranab Bardhan is a
professor of economics at Berkley. David Rosenberg is Merril Lynch's North
American Economist. Carmen M. Reinhart is a professor of economics at the
University of Maryland. Phil Howison is from Victoria University, Wellington,
New Zealand. Professor Michael T. Klare is from Hampshire College.

Most of the other resources (enclosed below) were prepared by people with
similar backgrounds. Individually, and as a group, their work appears to lead
to the same general conclusion: Life as we've always known it is just about


Warren "Bones"
Author and Researcher


First, a couple of news items:

February 19, 2009
The U.S. Economy is being Marched to the Gallows Predictions of
hyperinflation, dollar decline and civil unrest
by Andrew Hughes

On Bankruptcies:

U.S. Personal Bankruptcies Climbed 34% in January (Update1)
By Christopher Scinta
Feb. 3 (Bloomberg)

Company crashes set to hit record next year
Financial Times
By Richard Milne and Anousha Sakoui in London

Record numbers of companies will go bankrupt next year with 200,000
insolvencies in Europe alone and "an explosion" of failed businesses in the
US, according to the world's largest credit insurer.

The US will see 62,000 companies go bust next year, compared with 42,000 this
year and 28,000 last year, says a report by Euler Hermes, part of German
insurer Allianz.

Xanadu, Perhaps a Folly for Our Times
February 21, 2009

< snip >
Howard Davidowitz, the chairman of Davidowitz & Associates, a national retail
consulting firm and investment bank, said the concept of mixed entertainment
and retail at the Meadowlands was a high-stakes idea that might have
succeeded in a better economy.

"We're going to close 220,000 retail stores this year," he said. "Who's doing
well? Family Dollar. Dollar Tree. Wal-Mart, McDonald's. Netflix. Consumers
have no money. This is the total opposite of what's succeeding. It's not
viable in this market."
< snip >

Commercial Real Estate Leaves An Awkward Taste
Feb. 06, 2009
Nicholas Jones
Analyst, Oxbury Research

Experts predict tougher times ahead of commercial real estate market
Washington Business Journal -
by Mara Lee Staff Reporter
Tuesday, February 3, 2009

IMF Says Advanced Economies Already in Depression (Update1)
By Angus Whitley and Shamim Adam

Worse than the Great Depression.
by Dr. Krassimir Petrov
Prince Sultan University, Saudi Arabia
February 2, 2009

"Some Inconvenient Truths"
David Rosenberg
Merril Lynch's North American Economist.

Increasing Number of States Declaring Sovereignty
Posted on February 8th, 2009 by David-Crockett

Map located here:

February 19, 2009
Firestorm Brewing Between U.S. States and Federal Government
by Lance L. Landon

Majority Of U.S. States Join Sovereignty Movement, Assert 10th Amendment
February 23, 2009

California Split
by Gar Alperovitz
February 10, 2007
New York Times

Something interesting is happening in California. Gov. Arnold Schwarzenegger
eems to have grasped the essential truth that no nation - not even the nited
States - can be managed successfully from the center once it reaches certain

Catastrophic Fall in 2009 Global Food Production
by Eric deCarbonnel

A grim warning on food shortages Ian Sample
January 27, 2009

Brzezinski warns of riots in US
Sat, 21 Feb 2009 15:34:12 GMT

WTO chief warns of looming political unrest
Feb 7, 2009

Rapidly Collapsing U.S. Foreign Policy


Auction-Rate Bonds Claim Victims Year After Collapse (Update1)
By Michael McDonald
Feb. 20 (Bloomberg)

Bank of America, AmEx May Suffer on Card Defaults (Update3)
By Hugh Son
Feb. 19, 2009 (Bloomberg)
(ed. Collapse in credit card 'deritivatives.')


Now, for more scholarly references and resources:

Foreign Policy In Focus Asia: The Coming Fury
Walden Bello | February 9, 2009
Editor: John Feffer

December 2001
By Joseph M. Miller, Daan Joubert, Marion Butler

Empires with Expiration Dates
By Niall Ferguson
September/October 2006

Long Cycles: Prosperity and War in the Modern Age
Joshua S. Goldstein
New Haven: Yale University Press, 1988.

The Rise and Decline of the State
By special arrangement with the publisher (Cambridge University Press), the
Mises Institute is very pleased to make available this hugely important work
by the Israeli historian Martin van Creveld.

The Decline of the Nation State
Phil Howison
Victoria University, Wellington,
New Zealand
October, 2006

World Trade Order and the Beginning of the Decline of the Washington,
Howard Wachtel
International Politics and Society, 3/2000, 2000

Beyond the Nation-State: National Identity and Citizenship in a Multicultural
Society - A Response to Rex
by Gerard Delanty
Department of Sociology, University of Liverpool
Received: 17/7/96
Accepted: 11/9/96
Published: 2/10/96

Nationalism and Historiography
Georg G. Iggers
George Mason University
October 28, 2005-10-15

The New Map: Terrorism and the Decline of the Nation State in a Post-Cartesian
Jeff Vail

By Alvin Toffler

Economic Revolution Alvin Toffler forecasts conflict on rough seas of economic
By John Dunn


Eight hundred years of financial folly
Carmen M. Reinhart
19 April 2008

Paul Saffo Predicts End Of U.S. Economic Model
By Adario Strange,
September 11, 2007

Collapse of the US dollar: Global systemic crisis. The phase of global
geopolitical dislocation
Global Research, February 17, 2009

Long Waves in Economics and International Politics
Nikolai Dmitrijewitsch Kondratieff (1892 - 1938)
University of Washington

The Past and Future of America's Economy: Long Waves of Innovation that Drive
Cycles of Growth
(Edward Elgar, 2005)

"Decentralization, Corruption And Government Accountability: An Overview,
Pranab Bardhan and Dilip Mookherjee
Boston University

also: http://en.wikipedia.org/wiki/Political_corruption

Property Rights, Land Reforms, and the Hidden Architecture of Capitalism
By Craig J. Richardson
Thursday, April 6, 2006

Known Unknowns: Unconventional "Strategic Shocks" in Defense Strategy
Authored by Mr. Nathan P. Freier.
Senior Fellow, International Security Program

HR 645 IH 111th CONGRESS 1st Session H. R. 645 To direct the Secretary of
Homeland Security to establish national emergency centers on military

Brigade homeland tours start Oct. 1
3rd Infantry's 1st BCT trains for a new dwell-time mission. Helping people at
home may become a permanent part of the active Army
By Gina Cavallaro - Staff writer
Sep 30, 2008
Army Times

Overkill: The Rise of Paramilitary Police Raids in America.
by Radley Balko

Urban Warfare Drills Linked To Coming Economic Rage
Prison Planet.com
Monday, February 23, 2009

The Pentagon's New Map
Thomas P.M. Barnett, U.S. Naval War College

Although some information is dated, and while some of his own premises are
somewhat suspect, Thomas Chittum provides one likely scenario about the
breakup of America:

Civil War Two by Thomas W. Chittum

Faith and Survival; Surviving the Unthinkable
Glenn Beck

Second American Revolution to Begin in 2009?
January 13, 2009
by: Allison Bricker

Professor Igor Panarin: When America fell to pieces the shouting was
26 November, 2008

A Planet at the Brink: Will Economic Brushfires Prove Too Virulent to
By Professor Michael T. Klare
Hampshire College

The Five Stages of Collapse
Dmitry Orlov
FEBRUARY 22, 2008


Cascading failure
From Wikipedia, the free encyclopedia

Self-correcting Information Cascades
Jacob K. Goeree, Thomas R. Palfrey, Brian W. Rogers, and Richard D. McKelvey

Monday, 24 May 2004

google: 'Endogenous innovation waves and economic growth' "Social Wave-Front
Analysis" 'Long Waves of Innovation' 'Long Waves in Economics and
International Politics' 'Elliot Waves and Civilization.' 'THE BIG PICTURE:


27 February 2009

Eastern Europe Blowing Up

While investors are correctly paying a lot of attention to the programs being put out by the White house this week, just under the radar is the rapidly developing Eastern European situation that is threatening to exacerbate the world banking crisis. Last week Moody's rattled the markets a bit when it said it was considering downgrading a number of European banks because of severe problems with their loans to Eastern Europe. The concern immediately faded to the background, however, as it was overshadowed by the barrage of news coming out of Washington on the stimulus package, the banking situation, the mortgage programs and the proposed budget. We think that it won't be long before the Eastern Europe economic and financial distress will be a major topic on the front pages and cable news.

What's happening is that the economies of the Eastern European nations and ex-Soviet republics are crumbling at a time when they owe vast sums to European banks. On average, GDP in the Baltic countries is down 17% and their stock markets down 70%. Still, they have raised their short rates by 500 basis points to defend their currencies that are plunging, thereby making the economic situation even worse. In Poland, 60% of the mortgages are denominated in Swiss francs and the zloty has plunged against the franc. Their industrial production has declined 14.9%. In the Ukraine, GDP has dropped 20% year-over-year while industrial production has declined 34%. The Hungarian forint is down 30% against the euro, and almost all of their mortgages are denominated in foreign currencies, making them more difficult to service. The Hungarian stock market is down 60% and auto sales are off by 50%. Other Eastern European countries are facing similar situations.

The problem is that the aforementioned group of nations has borrowed $1.7 trillion from foreign countries, with $1.3 trillion of it from European banks. They must pay back or rollover $400 billion this year, an amount equivalent to one-third of the group's GDP. With credit markets frozen, however, this is an impossible task, and without a massive bailout, these countries will blow up. Especially vulnerable are banks in Austria, Sweden, Greece, Italy and Belgium. Austrian banks alone have exposure of $280 billion to emerging Europe, an amount equal to 64% of its GDP.

The European Bank for Reconstruction and Development (EBRD) estimated that the bad debts of Eastern Europe and the ex-Soviet republics would exceed 10% and possibly be as high as 20%. Hans Redeker, Chief Currency Strategist at PNB Paribas said, "We're nearing the level where things can get out of hand". IMF head Dominique Strauss-Kahn expects a "second wave of countries to come knocking" after prior IMF bailouts of Latvia, Hungary, Ukraine and Belarus. IMF reserves are rapidly running down after a series of aid packages to emerging nations.

Austrian Finance Minister Josef Proll is trying to put together a rescue package before the situation deteriorates further. Der Standard in Vienna said that "A failure rate of 10% would lead to the collapse of the Austrian financial sector". German Finance Minister Steinbruck said that the Western European governments may be forced to bail out Eastern Europe. With Western European economies already in terrible shape, this will not be accomplished without a lot of time and turmoil. It will be exceedingly difficult to get the various nations to agree on a package and the citizens of Western Europe will certainly protest at having to bail out foreign countries when they are having such a rough time themselves. We think this means some more significant downturns for global markets.


No chance of a return to the dark days of the 30s? Don't kid yourself

Nice work if you can get it. The Royal Bank of Scotland has clocked up the biggest corporate loss in UK history and the bloke at the helm when the ship went down trousers a pension worth £650,000 a year. Understandably, there is concern that Sir Fred Goodwin should have no money worries for the rest of his life, but ministers have only themselves to blame. They could have sacked him last October and saved themselves a tidy sum. As it is, the furore over Goodwin's pension has helped to disguise the fact that the taxpayer is now underwriting the biggest insurance policy in UK history in the hope that indemnifying RBS against future losses will get the bank lending again.

Public fury at Goodwin and the other failed bank chiefs is inevitable, but a diversion from the big issue: that policymakers are rapidly running out of road in their attempts to pull the global economy out of its nosedive. There is little agreement on what marks the difference between a recession and a depression, but the one put forward by Stephen Lewis of Monument Securities is as good as any. A recession is where policy works; a depression is where it doesn't.

Judged in this way, there is scant cause for optimism. America is in a terrible state: factory output has nosedived, unemployment is going up by more than half a million a month and consumer confidence has collapsed. Courtesy of globalisation, the acute weakness in the world's biggest economy has had a domino effect on Japan, China, Germany, eastern Europe and every other corner of the planet.

Here in Britain, the picture is a bit more mixed. The Nationwide building society has reported that house prices continue to plummet and are now down more than 20% from their peak, but the never-say-die spirit of the British consumer has meant that the latest news from the high street has been less bad than expected. Let's be clear, though: the situation is now grave. Long gone are the days when policymakers assured us that this would all quickly blow over or that decoupling would ensure that the emerging markets could act as the locomotive of the global economy.

Alistair Darling hopes that the rapid retrenchment in the global economy will lead to an equally rapid recovery, but there is no guarantee that this will happen. To be sure, everything and the kitchen sink has been thrown at the problem; interest rates have been cut, fiscal policy has been eased and there is now talk of cranking up the printing presses to boost the money supply. This is a heady cocktail and eventually the expansionary policies will work. The key word, though, is "eventually". A credit bubble of unprecedented proportions is deflating and in those circumstances it is nigh-on impossible to predict a turning point. Darling may well prove right in his prediction of a V-shaped recession but you would be mad to bet the farm on it. For one thing, badgering the banks to increase the supply of credit without increasing the demand for credit is a half-baked solution to an economic crisis. If consumers are losing their jobs, or are worried about losing their jobs, they are not going to be taking on more debt. As Nick Parsons, analyst at NAB Capital, put it: "The conversation over the breakfast Coco Pops is hardly going to be 'Oh, I see the asset protection scheme has now been introduced, shall we go and buy a new car on Saturday dear and have a look at a bigger house?' "

It is also a concern that policymakers continue to attack the symptoms of the problem rather than the cause. Banks in the US, the UK and elsewhere will remain on life support until a floor is put under house prices, because losses in real estate feed through into losses for the banks and an increase in toxic waste. In those circumstances, bail-out will follow bail-out until the tidal wave of foreclosures is stemmed. Danny Gabay, of Fathom Consulting, says the UK government should use a £50bn slug of the money it intends to print on buying up homes at threat of repossession for a discount and allowing their owners to rent them back.

This is a drop in the ocean compared with the sums that have been spent on propping up the banks, but there would be a risk of re-inflating the bubble that caused all the problems in the first place. We may look back next year and ask why nobody warned that cheap money, tax cuts, bank guarantees and public spending increases would lead to a sudden burst in inflation. It is quite conceivable, for example, that the price of oil will shoot back up towards $100 a barrel if and when real green shoots start to appear.

Sadly, however, there are no longer any risk-free options. Policymakers are preoccupied by the need to avoid debt deflation and depression, but they have never been in control of this crisis and are now making it up as they go along. There is a reluctance to let banks fail but also a reluctance to nationalise them. State ownership could make sense even if the aim is to return the institutions to the private sector as quickly as possible, since governments can use the state balance sheet to recapitalise the banks at a cheap rate; but ideology, both here and in the US, has trumped common sense. Barack Obama may be getting top marks for his oratory, but the performance of his new treasury secretary, Tim Geithner, has thus far been undistinguished. The plan to revive the banking system is sketchy, and bears all the hallmarks of being made up on the hoof.

The Federal Reserve, for its part, floated the idea late last year of using quantitative easing but has now gone cold on the idea. This looks like a serious error, and one that threatens to blunt the impact of the much-vaunted stimulus package. Until the slide in prices that began in 2006, there had never been a single year since the second world war in which US house prices had fallen. The latest figures show that in the major cities they are now down by more than a quarter since the peak. The real purpose of quantitative easing is to bring down long-term interest rates, which affect the cost of a hefty proportion of American mortgages. Although the cost of borrowing has come down over the past few months, it has fallen by far less than during the much less severe downturn of the early 1990s.

The reason we are supposed to be cheerful is that bad as things are, at least will be no repetition of the 1930s, when egregious policy errors led to slump, protectionism and extremism. This prediction, like all the others blithely made since August 2007, looks highly suspect. Look around the world and what do you see? You see signs of deep economic distress and policy mistakes. You see emerging markets being starved of capital, because the big western economies are looking after their own domestic constituencies. And you see the first stirrings of real public anger at the way in which those responsible for the biggest economic catastrophe since the second world war appear to be getting away scot-free. No chance of a return to the 1930s? Don't kid yourself.


Bonner on Gold

Now, suddenly, question marks are in demand. People are pulling them out of closets and desk drawers; there’s hardly a sentence that doesn’t seem to need one. Every one of them is an interrogatory: ‘When will this bear market end?’ ‘What do you mean you can’t pay me?’ ‘Are you doing any hiring?’

Investors buy gold because they want something that doesn’t have a question mark behind it. Does the yellow metal depends on its lenders? No. Are its earnings at risk? No. Does it have any toxic assets? No.

Gold is what it is…and nothing more. Useless most of the time; occasionally indispensable.

*** Uh oh… gold is putting in a “double top” says Frisby:

“I remain convinced of gold’s long-term future, but it looks like we are in the early stages of an intermediate correction.

“I suppose a 50% retracement of the gains since October is not an unreasonable target. That would take us back to the $850 area. (It would also give us a superbly bullish, inverted head-and-shoulders pattern – more on that another day). I said in my new year predictions in MoneyWeek magazine that a retest of $1,000 was likely in the first part of the year, but that gold would not break through $1,000 until next autumn or winter. We still seem to be on course for that. For now though, the late February to March seasonal correction for gold is playing out to the script…”

*** Gold is correcting from its recent high. It rose over $1,000 last week. Since then, it’s been giving ground. Yesterday, for example, it lost $3 more…taking it down to $966. Colleague Byron King ruminates on the subject:

“It’s as if the ancient Chinese or Babylonians or Etruscans all figured out how things work in the universe of money, savings and exchange. The trick was to use gold as the key unit of monetary measure. They figured it out back in ancient days. They all had their own Galileo who explained the monetary equivalent of how planets orbit the sun, moons orbit the planets…how the universe worked…except it was that their Galileos explained the meaning of gold. When you have gold, you possess wealth. And it keeps your society honest.

“And in the 20th century, along came the central bankers of the world… modern monetary Copernicuses, of a sort. ‘No,’ they said. ‘Gold is irrelevant. It’s a barbarous relic.’ It’s the monetary equivalent of saying that the planets all orbit around the earth. So no wonder that nobody in modern monetary theory can explain anything, or solve the current mess. Just as you can’t explain the positions of the planets with Copernican methods, modern monetarism is unable to explain why the economy has frozen and won’t get moving again. No one can trust the money. The modern financiers created so much fake currency, that nobody trusts anybody anymore.”

Gold Chart

Dilbert on the Bailout hearings

Gold: Plus Ca Change, Plus Ca Reste La Meme Chose

A good part of the population voted for change but not less than a month into the new administration's term, change is nowhere in evidence. President Bush's Plan A involved the purchase of Wall Street's toxic assets but then Henry Paulson switched to Plan B by buying stakes in the banks themselves. President Obama's Plan C devised two plans, a $2 trillion bank rescue plan which sets up a government controlled "bad" bank and yet another economic stimulus plan. President Obama's much anticipated package was a mixed bag of plans from support for dodgy assets to tax breaks to the de facto nationalization of Wall Street. Creditors and even shareholders will be protected at the expense of the taxpayer - how inclusive indeed. But still nothing seems to work as America stumbles from one rescue to the next. Debt on debt won't work.

Yet despite promises of change, Mr. Obama appears to be pursuing the identical tax cuts and deficit spending policies of his predecessor. Unfortunately the President all but repeats Bush's Keynesian approach of borrowing and spending the country's way back to prosperity, without tackling the underlying causes of the crisis. Even with his stimulus plan, the Congressional Budget Office (CBO) estimates that the deficits will amount to $2.9 trillion over the next three years and Obama's stimulus plan will spend only 20 cents of every dollar in fiscal 2009 (roughly $650 billion will be spent later).

The Audacity of Change

Is it really different this time? Obama's stimulus plan is promising relief when the ink is not even dry on the last bailout package. Sadly, this stimulus package was more political than economic stimulus. Obama's goal is to create or save 3 million jobs when there are no jobs. The US lost 2.5 million jobs last year at a pace not seen since the forties. Adding these jobs only replaces the ones lost and yet unemployment is still rising. So $787 billion later, like his predecessor, the only change to the status quo is no change.

Much of this "seat of the pants" spending is directed to helping the consumer by stimulating the housing sector. The Treasury Department also hopes to attract private money to finance along with the Fed. Since America's GDP is composed of more than 70 percent consumer spending, the government's bailouts are now being redirected to these sectors with an ever increasing role for government. Yet the housing sector has too much capacity and the problem cannot be cured by a pickup in demand. Indeed, there is a one year supply of new homes today that are vacant. The problem is that more debt will not revive the housing sector nor reverse the effects of a burst bubble on Wall Street. Besides, US cars sales are at their lowest in 40 years despite generous cash incentives.

The markets remain frozen and despite, lending or spending almost $3 trillion over the past two years, financial institutions are still grappling with the same problems when the crisis seized up over eighteen months ago. As it happened, by running the printing presses overtime, the government is creating a monumental monetary overhang that raises the inflation risk significantly and even bigger financial instability.

Are the Toxic Assets Really Assets?

Looming in the background are some $3 trillion worth of once highly rated asset-backed securities backed by subprime, credit cards commercial mortgages or complex derivatives that are festering on the banks' books that have yet to be sold or dealt with. A key element missing from Obama's stimulus package is how the government plans to value the toxic (oops legacy) assets that would be rescued under the plan. Unfortunately neither Bush and now Obama can't put lipstick on this pig.

The public purchase of these troubled assets was initially proposed by Paulson but the banks' problems became so troubled that they required funding themselves. Trillions of their impaired assets simply cannot be valued because for many they are worthless today and will be tomorrow. Besides, if written down, who will take the loss? And, why set up a bad bank when there are already "bad banks" out there such as Bank of America and Citigroup for those investors willing to buy them. In buying the toxic assets, the Treasury is pouring good money after bad money of which their value is unknowable, unsecured and in many cases, outright fictitious.

Not only does the valuation issue need to be resolved, but in previous clean-ups such as the Swedish model or the Resolution Trust setup in the eighties to fix the S&Ls, the assets were first acquired by government and then split up into a "good" or "bad" bank with the bad bank holding the insolvent assets. This time it is different. The centerpiece of Obama's "fuzzy" proposal partners with the private sector and leverages the Fed's balance sheet by 10 to 1 or a whopping $1 trillion which is insufficient to finance the growing loan losses anticipated in the $2 trillion or so range. Left unclear is what would happen to the thinly capitalized bank's capital after they transferred the troubled assets and wrotedown the value of any loans which would further erode their precious capital. Or, if the assets were provided with overgenerous valuations or guarantees, who pays the price? They should accept the reality that the banks are insolvent and not too big to fail. Let the banks go and clean-up the remaining banks. Central banks have become central planners.

Addiction to Debt

And where will the Treasury find all those dollars in order to pay for the world's first trillion deficit? There is only one answer. The Treasury has been printing money and flooding the banking system with cash without sterilizing the monetary consequences. Since August, the Fed has tripled its balance sheet by taking on the toxic assets of Wall Street and acquiring stakes in banks. And despite spending trillions to restore consumer confidence, the economy is still sinking. Moreover, government revenues have slipped as the private sector copes with the meltdown so the budgetary deficit itself will be even bigger. Easy money is not the panacea.

America's dream was built on cheap credit and the US is going even deeper into debt to dig itself out of its economic hole. Multi-year trillion dollar deficits and dollar debasement will not solve this crisis since the cure for the credit bust is not more credit.

The root of the current crisis lies in excessive debt, cheap money and the monetary excess that led to a boom and the inevitable bust. Following the Second World War, public debt stood at 100 percent of GDP to finance the rebuilding of America. America's public debt to GDP ratio could approach 60 percent next year up from 38 percent today. However, including housing-related private debt, the ratio of private and public debt to gross domestic product was a whopping 358 percent in the third quarter, surpassing the peak in 1933.

To finance this growing deficit the US Treasury must issue record debt. Already yields on 10 year Treasuries rose to almost 3 percent up from just over 2 percent at yearend. The rise in yields has pushed 30 year mortgages up, causing the Fed to consider capping rates by purchasing debt as they did in the Great Depression.

America's Ponzi Scheme

Today's bailouts replaces private consumption with government consumption and Americans still have not figured out who is to pay for big brother's largesse.

Governments have unlimited powers of money creation. The Treasury issues bonds and the Fed purchases them (quantitative easing) by putting money in the system by explicitly printing money. The funds then go to pay for bailouts, SUVs and even Obama's inauguration.

While the US is still a creditworthy borrower, foreigners no longer appear to have the capacity nor desire to allow the Americans to continue to subsidize their consumption with borrowed money in a now capital starved global economy. And China, with more than $1 trillion of American debt is spending its cash hoard instead domestically to revive its own economy. And by calling China a "currency manipulator", newly minted Treasury Secretary Geithner masks his problems. Despite a 20 percent revaluation of the yuan since 2005, the US trade deficit has worsened each year. America needs less rhetoric from its policymakers and more dollars. Creditor nations like China and Japan who already own trillions of dollars of US denominated debt, will lose confidence in America's ability to repay its debt and its addiction to debt. With only five percent of the world's population, America accounts for some 25 percent of the world's debt.

Billions were lost in the collapse of Bernie Madoff's biggest Ponzi scheme. The pyramid scheme collapsed like others under its own weight of greed. But the government itself is running a bigger Ponzi scheme than Madoff. To finance its debts, the Federal Reserve has resorted to monetizing the debt in a Ponzi-like scheme.

To keep their homes, millions of ordinary taxpayers borrowed from institutions solely for the purpose of repaying another without the remotest expectation to repay the loan they arranged. Similarly, the United States is borrowing billions and now trillions from creditor nations when there is also no hope of repaying the loans until the next round of funding. Now with the bursting of the greatest credit bubble in history, the government is attempting to reflate this bubble, by "quantitative easing" in which the Fed increases its balance sheet by printing money. And since the government has little hope of paying off the debt, the printing of money itself devalues that debt but risks higher inflation, which ironically reduces the debt as if repaid by another source.

The widening gap between the drop off in future revenues and its growing expenses in the wake of the global meltdown dictates as in all Ponzi schemes, the government must get new investors to buy out current obligations. In getting Peter to pay Paul, they are also hoping that the old investors get paid from the new investors so that they will not be the bag holders. The last one holding the paper eventually loses. As in a game of musical chairs, countries like China and Japan were the early investors and are banking on the government to create new investors. Bernie Madoff's Ponzi scheme failed in a widely publicized crash, but the failure of Wall Street exposed an even bigger failed Ponzi scheme today with its failed CDOs, subprime mortgages, and soon to be defaulted credit default swaps. Foreign central banks were stung in the last go around and the American taxpayer will be stung from this go around as those IOUs come home to roost. After all, who is going to lend to a bankrupt county that is using Ponzi-like schemes to finance its consumption?

Who Is Lord Keynes?

There is much debate about using public funds to plug a capital hole too big to fill in any single way with public or private funding. Mainstream economists continue to push for a prescription of Keynesian-inspired spending in the belief that throwing good money after bad will somehow reverse the downward spiral. Amazingly, most money managers today do not even know about Lord John Keynes. Keynes was a British economist whose ideas and theories enjoyed a following thirty years ago. Old-fashioned Keynesian economic theories are enjoying a revival as justification for the recent bout of public spending and tax cuts. In Keynes' 1936 book, "General Theory of Employment, Interest And Money", he argued it was better for government to use fiscal policy to stimulate economies suffering from a lack of demand. Keynes advocated regulating the economy through investment, not consumption by using low rates of interest and cheap money.

In only a few weeks of his inauguration, the Obama administration unveiled the greatest increase in government spending in history. It is our belief that government spending whether for reduced taxes, pork barrel spending or infrastructure spending is still government spending. Today having exhausted monetary policy measures, the government has revived Keynesian economics to justify priming the pump. The Fed has even resorted to using unorthodox tools to stimulate the economy and is hinting of more. Many forget that it was Keynesian economics and the reckless spending spree that led to runaway inflation and double digit interest rates in the seventies. Ironically, it was Paul Volcker the now Chair of Obama's Economic Recovery Advisory Board that had to deal with the consequences of Keynesian economics by sending rates to double-digit levels to conquer inflation in the eighties.

Modern Day Underworld

Three decades ago, the banks provided $3 out of every $4 of credit worldwide. The debt to capital leverage then was a robust 8:1. Today, the share of the big banks has shrunk to only $1 out of $4 of credit world-wide and the leverage ratio is a more robust 20:1. Securitization filled this vacuum and the private equity and leveraged hedge funds provided more loans to the credit markets than the banks. The combination of computing and mathematics created fancy structured products like collateralized debt obligations (CDOs) or credit default swaps (CDS) which replaced bonds and equities. These "made in Wall Street" securities allowed investors to gamble on prices or defaults and leverage grew exponentially, outpacing economic activity. There were even CDS securities that insured against the default of CDOs. Mortgages were "sliced and diced" into securities, backed by paper and resold to investors around the world. Rating agencies gave their seal of approval and these funny money derivatives exploded into such size, that Warren Buffett called them, "financial weapons of mass destruction".

A largely unregulated "shadow banking system" made up of money markets, hedge funds, financial conglomerates and private equity funds came into existence. This modern underworld evolved into a mammoth leveraged over-the-counter (OTC) system and provide the credit that forever changed the banking and credit market scene and is the source of our problem today. Because today, there is no real value for many of these products nor is there any idea of their attendant risks and what is actually left are trillions of illiquid, leveraged and thus toxic paper - a legacy indeed for the next generation.

As a consequence, the trillions of bailouts have had little effect because this modern day financial system was rooted in debt. Government funds have largely been directed to the big banks rather than this much bigger underworld of securitized products and unregulated players. Not wanting to miss the rewards of this alternate banking system, the banks created conduits and special entities to create and trade these derivatives. Ironically, it was those vehicles that sank America's banking system. The disappearance of many of the participants has left a large hole in America's financial system hurting liquidity which cannot be plugged by just a few trillion dollars.

Be Careful What You Wish For

Shareholders were at one time happy when managements' interests were aligned with their own but soon discovered that the same group gave themselves princely bonuses and stock options, turning shareholders into bag holders. Indeed in 2007, bonuses on Wall Street exceeded the bailouts last year. Bankers became promoters of the new and improved structured products based on flawed arithmetic formulas that spawned ever newer derivatives, the lifeblood of the shadow banking system. With the implosion of the bubble, Wall Street's icons have disappeared. But now, the survivors are lining up at the public trough and just don't seem to get that by accepting taxpayer monies, there are strings attached and they must adhere to conditions, new codes, morals and even salary caps. And one by one, they must endure a public flaying over their role. The buccaneers have been hoisted on their own petards or in one case, commode.

What To Do

The non-partisan Congressional Budget Office (CBO) projected a record deficit of a $1.2 trillion this year, even before the cost of Obama's nearly $787 billion package and of course entitlements. Bailouts today are only down payments. So what to do?

To get out the deep economic hole, America needs to rid itself of its spendthrift ways, encourage investment, thrift and savings. America must reduce its dependency on cheap energy and tackle global warming. Central banks need to try other ways than the age-old familiar tools that led to bubbles and inflation. Governments, for example, could reduce or eliminate the capital gains tax which would encourage sustainable investment. And to pay for the loss of taxes, reduce deficit spending.

Where to start? Start by reducing America's dependency on expensive energy that allows America's competitors and enemies to accumulate dollars that are often used against America's interests. Start by killing subsidies, equalization payments and other pork barrel spending. Start by allowing institutions to fail.

What Not To Do

In 1933, the unemployment rate was 25 percent and in January of that year the credit system collapsed as economic output fell even more steeply. Investors are clinging to the historic parallel of Mr. Obama with the election of FDR. Common in both times was the need to restore confidence. Italy and Japan then had modest deficits, but a move to competitive devaluation gave each a trade advantage, which brought the introduction of the much reviled Smoot-Hawley bill and trade barriers. Today, Mr. Obama's stimulus package has similarly stoked the embers of protectionism this time with a "Buy America" clause.

The US has a current account deficit of almost 8 percent of GDP, but its problem is not of exporting so much but that they import too much. In 1930 the US had a large manufacturing base but today the economy is largely service based and even with the decline in the dollar, exports will not reduce the deficit that much. As a consequence, the erection of protectionist-type barriers is ineffective and will only antagonize America's creditors. Indeed, the threat of a loss of the United States' coveted AAA rating like Spain or Iceland is looming since all face the same predicament, of a downward spiralling over-leveraged financial system.

The Need For A New Currency

With the shift to Keynesian deficit financing, politicians are following the path of least resistance, fiat currency debasement. The dollar is the world's reserve currency backed by America's balance sheet which is now stretched from Keynesian-style bailouts. But the purchasing power of the dollar is collapsing as trillions of dollars are created every few months.

America's problems began when President Nixon went off the gold standard in August 15, 1971. No longer backed by gold, the greenback was instead backed by the government's balance sheet. In the eighties, the dollar sank amid a heavy bout of deficit spending and the subsequent spike in inflation required an expensive devaluation. This time, it is not inflation that is undermining the dollar, but the growth in debt which will lead to another currency devaluation, driving more assets out of dollars. The bottom line is that without the discipline of gold, the dollar is being devalued by first a series of burst asset bubbles and now a debt bubble. Furthermore, by guaranteeing trillions of dollars of private indebtedness, more money is being printed to finance even bigger fiscal deficits. And of course, in the process of deleveraging the private sector, the government has transferred more liabilities onto its own books. What we are really seeing is a transfer of private debt to public debt and that too has limits.

New Economic Order?

Without a reserve currency, the global financial system is dysfunctional. Trust itself has fallen by the wayside without which there is no money, exchange rates and capital flows. What is needed also is a revamp of our institutions such as the International Monetary Fund (IMF) and World Bank to give recognition to rising powers such as China allowing them to play a bigger role in the new economic order. The Americans must recognize that their trillion dollar deficits must be financed which cannot be sustained by sucking up the savings from other global markets.

Although China has the world's largest reserves that country has only 3.7 percent of the IMF quotas or "voting rights" and fast growing India has 1.9 percent. Meanwhile the US has 17.1 percent of the IMF's quotas. There can be no restructuring unless the creditors are allowed a seat at the table. Since the IMF has inadequate resources to help out troubled governments, the best start will be to expand the quotas to many of the emerging countries particularly those with large reserves. Also, since China's trillion dollar cash hoard is largely made up of US Treasuries, the country could protect its reserve position by buying gold with some of its US dollars. Gold is denominated in dollars and such purchases would protect China against a declining dollar.

Gold Is an Antidote to Our Problem

Today, the public is worried. The World Gold Council reported that investment demand for physical gold increased 25 percent in the fourth quarter last year. If the current trend continues, inflation is a certainty with positive implications for hard assets like commodities and negative implications for the dollar.

Gold is a good thing to have. The modern financial system is bust. Financial alchemy is past. The shadow banking system is in need of unwinding. The age of leverage is done.

We believe Obama will be good for gold, but bad for the dollar as he inflates the cost of debt away.

Obama's policy prescription is to print our way out of the financial hole which will lead to currency debasement. Inflation is next. Inflation allows the government debt to be repaid, in devalued dollars causing a massive transfer of wealth from savers to borrowers. Inflation of credit and then prices allows Obama to repudiate the mountain of debt with devalued dollars.

What remains is a need for a resurrection of trust and honesty. Needed is a light on the shadow banking system with a deleveraging process and time for the system to absorb the as yet unquantifiable losses to come. Needed is transparency and Wall Street to become a vehicle for capital building not destruction. Needed is an emphasis on capital preservation instead of short term speculation. Needed is the bankruptcy of the "too big to fail" entities.

Part of the solution for the current crisis is to remove the potential cause of future crises - the build-up of debt. Paper money is done. Needed is a new currency of trust.

We continue to believe gold is the antidote to our problems. There are too many dollars being printed and devaluing debt significantly raises the inflation risks. Inflation is the product of excess money creation. We believe the rising deficits must be financed and US creditors will no longer accept devalued dollars in exchange for their currency or inflation. Gold will continue to rise in value as long as the United States keeps printing more money than the economy can use.

Gold Is the New Currency

Gold is thus the new currency. Gold's rise is inevitable. As such, we also suggest the introduction of a basket of currencies with gold as an anchor. Moreover, the usage of gold today as backing for an asset backed security like the International Monetary Fund Special Drawing Rights (SDR) is already in existence. The IMF, the third largest official holder of gold on behalf of its member countries is also in need of funding. Created in 1969, SDRs are international assets whose value is tied to a basket of widely traded foreign currencies. The International Monetary Fund can issue SDRs to member countries or increase member profits which would supplement reserves and provide needed liquidity. The IMF proposed to sell 403 tonnes of gold in 2007 to fund itself but needed is congressional approval which is unlikely amid today's climate. More likely we believe is the growing usage of gold.

We suggest the creation of a new asset-backed security, but this time backed by a real asset, gold. Good money will always drive out bad money. The United States is the world's largest holder of gold at 261 million ounces or 8,133 tonnes representing 77.2 percent of their reserves. The Fed could issue gold backed debentures, using its holdings as backing which would both create needed liquidity and trust in its already weakened financial system. Alternatively we could modify and expand the usage of SDRs. The bottom line in that gold will become the new currency.

Gold is within a few percent of its all time high and despite the fall in jewellery demand, physical and investment demand has picked up. Today, the gold exchange traded funds (ETFs) are now among the top ten holders of gold in the world. Meanwhile the supplies of gold are declining as mine costs continue to rise and central banks themselves have opted for gold's safe haven characteristics for preserving worth. When will the Chinese decide to buy gold? It is only a matter of time, simply because they are not going to keep on buying deflated dollars.

Gold is a finite currency, its value against the dollar must rise. After all it has already hit record highs in sterling, yen and euros. Keynes once called gold "a barbarous relic". Gold is a barometer of investor anxiety and today there is much. Gold will hit $2,000 an ounce this year. Again Keynes will be shown to be wrong.

Gold Recommendations

Gold stocks finally revived led by the senior producers like Barrick whose market cap makes it the largest company on the TSX today. Gold stocks still lag bullion but are enjoying a resurgence as investors seek safe havens. Since the October Lehman collapse last year, the Toronto gold index has actually returned more than 100 percent. During the same period, bullion has risen 30 percent demonstrating shares' superior leverage to the gold price. We continue to recommend Barrick as the go to institutional favourite, we believe that with a new CEO, Barrick will continue its acquisition ways, since it is cheaper to buy ounces on Bay Street than to explore. We also like the growth midcap producers like Agnico Eagle who will triple its production as well as more junior Eldorado for its strong balance sheet and growth profile. Since there are so few mega ounces deposits left to be developed we also like Detour Gold and silver players MAG Silver and more junior Excellon. As for the junior exploration stocks which have been largely neglected and pounded by tax loss selling, there are opportunities as this group will likely enjoy a revival around the March PDAC when exploration results are released. Producers such as Aurizon and Detour Gold are expected to attract attraction and will likely be involved in M&A activity.


26 February 2009

We never had a fracking clue.. economist on economists

"The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics profession. Over the past three decades, economists have largely developed and come to rely on models that disregard key factors—including heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context—that drive outcomes in asset and other markets. It is obvious, even to the casual observer that these models fail to account for the actual evolution of the real-world economy. Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon.2 In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession…”

“The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did…”

“This failure has deep methodological roots. The often heard definition of economics—that it is concerned with the ‘allocation of scarce resources’—is short-sighted and misleading. It reduces economics to the study of optimal decisions in well-specified choice problems. Such research generally loses track of the inherent dynamics of economic systems and the instability that accompanies its complex dynamics…”

“In our view, economists, as with all scientists, have an ethical responsibility to communicate the limitations of their models and the potential misuses of their research. Currently, there is no ethical code for professional economic scientists. There should be one…”

“The most recent literature provides us with examples of blindness against the upcoming storm that seem odd in retrospect. For example, in their analysis of the risk management implications of CDOs, Krahnen (2005) and Krahnen and Wilde (2006) mention the possibility of an increase of ‘systemic risk.’ But, they conclude that this aspect should not be the concern of the banks engaged in the CDO market, because it is the governments’ responsibility to provide costless insurance against a system-wide crash…”

“Given the established curriculum of economic programs, an economist would find it much more tractable to study adultery as a dynamic optimization problem of a representative husband, and derive the optimal time path of marital infidelity (and publish his exercise) rather than investigating financial flows in the banking sector within a network theory framework…”

“Currently popular models (in particular: dynamic general equilibrium models) do not only have weak micro foundations, their empirical performance is far from satisfactory (Juselius and Franchi, 2007). Indeed, the relevant strand of empirical economics has more and more avoided testing their models and has instead turned to calibration without explicit consideration of goodness-of-fit… It is pretty obvious how the currently popular class of dynamic general equilibrum models would have to ‘cope’ with the current financial crisis. It will be covered either by a dummy or it will have to be interpreted as a very large negative stochastic shock to the economy, i.e. as an event equivalent to a large asteroid strike…”

“We believe that economics has been trapped in a sub-optimal equilibrium in which much of its research efforts are not directed towards the most prevalent needs of society. Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis. It has failed in its duty to society to provide as much insight as possible into the workings of the economy and in providing warnings about the tools it created. It has also been reluctant to emphasize the limitations of its analysis. We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises.”

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Gold coin shortage as demand soars

The rush by retail investors into bullion coins is creating shortages as mints across the world struggle to meet the surge in demand, dealers and mint officials say.

The scarcity is lifting coin premiums to as much as 5 per cent above the spot gold price, a level reached briefly after the collapse of Lehman Brothers last September, when coin shortages also surfaced.

Spot gold in London on Wednesday traded at $972 an ounce, below last week’s peak of $1,004.5.

“There is demand for double or triple what the US mint is able to produce,” said Michael Kramer, president of MTB in New York, one of the four US gold dealers authorised to purchase bullion coins directly from the government’s mint.

The US Mint has sold 193,500 ounces of its popular American Eagle gold coin in the first seven weeks of this year, the same amount it shipped during the whole of 2007 and about the same as in the first six months of last year.

“The demand is extraordinary. All the coins we got on Monday are gone today [Tuesday] and we will not be able to take any order until the following week,” Mr Kramer said. “It is the same with other mints.”

Bullion coins used to be bought mainly by collectors and gold bugs, but the financial crisis is leading regular retail investors to embrace them, dealers say.

Although the surge in coin demand is a bullish signal for gold prices, the fact that mints cannot match demand means that the potential extra consumption does not push spot prices higher, but just drives premiums above normal levels.

The Rand Refinery in Johannesburg, which mints the world’s most popular gold coin, South Africa’s Krugerrand, said demand was above its maximum capacity, even after doubling last month to 20,000 ounces from 10,000 ounces a week.

Johan Botha, head of precious metals sales at the Rand Refinery, said there was demand for more from international investors, pointing to strong sales to Switzerland, the UK and Germany. “If we were able to produce 30,000 ounces,the market would absorb it,” he said.

Mr Kramer said MTB had Krugerrand orders equal to three months of refinery supplies to the company.

The New Zealand Mint said it was doing as much business in a day as in a month a year ago, mostly servicing global investors.

Michael O’Kane, head of gold sales at the New Zealand Mint, said: “Most mints and bullion manufacturers are struggling to meet current demand levels.”


China comes out on "The tomb of Empires"

Your blogger was in Afghanistan just before the Russians in his wandering days, what an adventure that was. It was different then;when I got sick (Amoebic dysentery) the professionals at Kabul Hospital were marvelous, efficent and free andthe city was lovely. A planned day trip to Bamian was delayed when a addicted european stole everything I had, which, remarkably, I recovered in two hours by a energised determination that can only be described as remarkable.....but thats a story for another day.

Our interest in the "Tomb of empires" dates from then.

"Compare the two leadership styles and learn, because this relationship will guide the world:

"Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership." -- China's former Communist Party Leader, Deng Xiaoping.

"But I can say that the president of the United States said during his campaign and in the debates that if there is an actionable target, of a high-level Al Qaeda personnel, that he would not hesitate to use action to deal with that" -- Vice President Joseph Biden.

nulwee :: The Middle Kingdom Ends Its Silence On Obama & Afghanistan.
There is a fascinating article about China's Afghanistan policy in the Asia Times, written by Indian fmr. Ambassador MK Bhadrakumar. After long avoidance, China's given voice to its interests in the Himalayan foothills. Despite the years of "Red Menace" hype, China prefers to act out of a path of least resistance, being an anti-US located between (US-Russia) extremes and neighboring conflicts. For this reason, the old moniker "The Middle Kingdom" retains relevance. Bhadrakumar begins with the Xiaoping quote, and ends with this paragraph:

It seems China has no problem with such an agenda [of occupation]. China will "hide its capacities" - to quote Deng - even as the US and Russia collide and negate each other and eventually drop down in exhaustion. As The People's Daily concludes, Afghanistan is known as the "tomb of empires". Therefore, China must focus on securing its position and simply bide its time - a strategy Deng could surely appreciate."


America's Coming Financial Vortex; 6 predictions for 2009-2012

by Paul Mladjenovic

It has been an incredible year loaded with surprises but I think that the next few years will surprise even more. Whenever I feel certain about something coming, I'm glad to put it in print. In 2004, I had successfully forecast many economic events such as the housing bubble popping and the credit crisis among other events. Current economic conditions and political outcomes have laid the groundwork for more events that we should be prepared for. All of these events combine to create a "Financial Vortex" that will hit us in the coming years.

First of all, be aware of what current conditions will help lay the groundwork for this financial vortex. They are:
America's debt load. The U.S. government has now $12 trillion in debt. Consumers and businesses are drowning in debt. America's gross domestic product (GDP) is about $13 trillion yet its total debt is over $44 trillion.
Derivatives. Derivatives are complicated, arcane and risky securities that now total about $500 trillion. That makes this market ten times greater than the dollar value of the world economy which is just under $50 trillion.
Unfunded Liabilities. The current future tally of the unfunded liabilities of Social Security, Medicare and Medicaid is nearly $99 trillion.
Growth of government. The expansion of the government's involvement in the economy is (and will be) massive. Taxes, regulations, controls, spending, etc. at all levels of government (both domestic and international) will be problematic by an order of magnitude that the private sector will not be able to tolerate.

Think about it for a moment. The past few months have shown us what a few trillion in bad debt and derivatives can do to the market. The Dow is down several thousand points in the past few months and is down nearly 40% since hitting its all-time high in October 2007 of 14,164.53. What will happen to the stock market when many multi-trillions of debt, derivatives and unfunded liabilities start hitting us like a powerful vortex in the coming years? The economy is extraordinarily weak right now and it would not take much to see millions of hard-working folks get devastated. It is time to prepare. America needs to know what is coming. Some of these events are now unavoidable so being fore-warned and getting prepared is crucial.

Here are my forecasts for what I believe is coming during the next few years:

1. You will see an inflationary depression that will be evident by 2010. Maybe I'll be off a few months either way but an inflationary depression is almost guaranteed. Why? The latest batch of elected officials see government intervention as either a moral good or a necessary evil. The most likely policy initiatives that we will see in the coming months will be government controls, increased taxes and extraordinary "money" creation (inflating the money supply). In fact we have (and will) see trillions of new dollars will flood the economy in the coming months. This will probably cause the stock market and some economic indicators to rise and give the illusion of economic health during early 2009. This will cause many commentators to proclaim that we are coming out of the current recession. People will think that government intervention worked. Typically, government intervention only alleviates some of the symptoms in the short-term while postponing the problem(s) toward the long-term. Right now many commentators are calling the current economic environment "deflationary" but it is massive de-leveraging by huge financial entities that are selling off everything from stocks to commodities to accrue cash and stave off bankruptcy. As trillions of dollars flood into the economy, that condition will change. If they report the statistics properly, then we will see a contracting economy (measured by GDP) coupled with rising prices. A good example of this is Venezuela where that economy is struggling while their inflation rate is currently over 36% (as of October 2008). The government, in an attempt to revive consumption and job creation will increase the money supply by an order of magnitude never seen before in this country. Seeing the inflation rate soar to 20% and beyond during 2010 (or 2011) is a solid bet.

2. Unemployment in the private sector will soar into double-digits by 2010. As the recession morphs into a depression and as the government grows partly as a "solution" to economic difficulties, the increased burdens of government (taxes, controls, spending, etc.) will grow to burdensome levels for both consumers and businesses. Government spending on unemployment benefits and "make work" projects will soar to address the large job losses in the private sector. Right now you should re-assess your job, your company and your industry to see if you are at risk.

3. More state and municipal governments will be federal bailout candidates. I forecast this condition many months ago in my national seminars but recently this became headline news so it's not such a great forecast new.. California and New York State are already seeking taxpayer money from the Federal government. However, we will see much more of this. During 1995-2008, many state and local governments over-extended themselves. Because they thought that good times (and housing booms) would last indefinitely, they took on more spending and more borrowing. Many of these jurisdictions will be forced into either spending cuts, higher taxes or both. Some will be forced into bankruptcy. Because of these events, there will be some areas that will experience social unrest due to difficult financial conditions.

4. Commodities will be in the next leg of their long-term bull market starting in 2009. Commodities such as oil, grains, precious metals, etc. had a great upleg in early 2008 and then had a brutal correction during the second half. Although much of it is attributed to deflation and "demand destruction", these conditions are short-lived. Why? Two basic reasons; shortages (supply destruction) and rising inflation. Since government policy makers will make every effort to avert an economic contraction, they will flood the economy with inflation and renewed government spending. Economic policy decision-makers at the federal level think that "increased consumption" is the key to economic growth because they are influenced by the Keynesian school of economics. The world hasn't figured out yet that John Maynard Keynes' policies are flawed and dangerous. The bottom line is that conditions are ripe for commodities to resume their bull market and reach new highs during 2009-2010. As an offshoot of this, you will also see conflicts across the globe tied to natural resources as countries with growing populations need more food, water, etc.

5. We will see oil hit $200 as Peak oil becomes obvious to all during 2009-2012. Don't be fooled by the recent drop in oil from $147 in the summer of 2008 to $50 during November 2008. the recent data from the world energy market indicates that oil depletion ("supply destruction") is far more severe than the recent headlines blaring the misleading condition of "demand destruction". The most severe energy crisis in history is in my mind an unavoidable certainty during the next few years. America needs to go full-bore toward energy independence since we will have no choice. This energy crisis will be very difficult to get through and will cause tremendous social and economic difficulty.

6. International conflicts over natural resources will hit the headlines during 2009-12. As governments across the globe seek to address the wants needs of their growing populations, there will be aggressive competition for the world's limited resources. Natural resources will be seen as strategic as well as economic. National and economic security for America will be a vital concern.

Now you can see why I refer to it as a "Financial Vortex". We pray for our country and we hope to get through this with a minimum of suffering but it behooves all of us to be ready. It is better to prepare for problems that may occur than to ignore reality and be set up for pain. Although the Financial Vortex conference will be held in New Jersey on December 6, 2008, let me share with you a few of the strategies that will be covered that day:
Buy gold and silver bullion. Yes...there have been physical shortages reported but that shouldn't stop you from getting some for your portfolio. Precious metals retain their value during a period of economic uncertainty and rising inflation.
Keep a cash cushion. Have money set aside in a safe venue such as a treasury money market fund. This is not for long-term purposes since inflation will be a major issue; it is there for an emergency fund for day-to-day needs.
Shift your retirement portfolio into stocks and ETFs tied to "human need" such as food, water, energy, etc. These companies and sectors will have a better time surviving the coming years than other sectors that are problematic such as real estate, financials and cyclicals (such as autos and other "big ticket" items). I believe that much of the conventional stock market will get slammed.

The Financial Vortex is coming. Millions will be blindsided but those that prepare will survive and even thrive. I am doing my conference primarily because I want people to be safe and do those things that will ensure greater financial security. It is also why experts such as David Morgan, Jay Taylor and Roger Wiegand will join me that day so that people can get specifics on what to expect and how to prosper. The bottom line is that it is better to be safe than sorry.


Global Downside Breakout ~ Barbera

Global Downside Breakout

Well, I don’t know about you, but I know I will sleep a lot better tonight having tuned in for Mr. Bernanke’s semin-annual ‘pearls of wisdom.’ According to Uncle Ben, who testified today in front of the Senate Banking Committee, “there is a reasonable prospect that the recession will end this year,” provided that the credit markets and financial markets operate “normally.” I know I feel better already, don’t you? Of course, if we go back and look at some of Uncle Ben’s prior comments, well, maybe we might not feel so confident. Let’s see, I guess it was June of 2008 when he addressed the International Monetary Conference in Barcelona, Spain. Back then, Bernanke summarized his outlook stating,

“The Outlook:

With this broader perspective as background, I turn now to a brief discussion of the current situation and outlook. Broadly speaking, the functioning of financial markets has improved of late, but conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery. Some borrowers, such as highly-rated corporations, retain good access to credit, but credit conditions generally remain restrictive in areas related to residential or commercial real estate. Residential construction continues to contract, and the overhang of unsold new homes remains large, although it has declined some in absolute terms. Consumer spending has thus far held up a bit better than expected, but households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall. Businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand. However, the strength of foreign demand for U.S. goods and services has offset, to some extent, the slowing of domestic sales. Overall economic growth was quite slow but apparently positive in both the fourth quarter of 2007 and the first quarter of this year. Activity during the current quarter is also likely to be relatively weak. We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009. However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth. Our decisive policy actions were premised on the view that a more gradual reduction in short-term rates could well have failed to contain the financial and economic problems confronting us. For now, policy seems well positioned to promote moderate growth and price stability over time.”

As we re-read his comments from only a few months ago, we see a relatively perfectly well balanced, carefully crafted, very “close to the vest” analysis. Yes, it is true that the analysis touched on many salient points both PRO and CON, accurately noting the deterioration in housing and the slow down in consumer spending. However, in reading and re-reading many of the speeches by many Fed members, not just Bernanke, it is always in the conclusions where things go wildly to pieces. In concluding that “we may see somewhat better economic conditions during the second half of 2008,” and “growth picking up in 2009,” “moderate growth and price stability” ...What? How about the potential for a heart-stopping recession, or did that thought ever cross your mind? I guess not, as the Federal Reserve has been wrapped up in its own grandiose view of its dominion over the world economy. As new readers should understand, prior to six months ago, recessions had been officially outlawed by the Fed and consigned to the trash bin of history. Well, with the entire Western world sinking into nothing less than a global DEPRESSION six months later, one can only look back and wonder what the heck the Fed was collectively smoking, starting with Greenspan and ending with Bernanke.

These are not the guys who are going to get us out of this, and unfortunately, nothing coming out of Washington of late is going to do anything else but the make the situation that much worse down the road. As many highly qualified writers have noted on Financial Sense, you cannot borrow your way into prosperity and the hope of Keynesian Deficit Spending as the magic elixir is at the moment, badly misplaced. We seriously doubt that the Bernanke recovery forecast is much more than a ‘feel good’ roborant lacking any sound underpinning from the message of the markets or the economic data.

Speaking of the financial markets, the message emanating loud and clear from most corners of the world is that of two words, “downside continuation.” That’s right, rather than a warm and cozy dose of ‘chicken soup for the soul,’ the downside confirmation coming from both US and Foreign Stock Indices is more akin to the markets choking on a ‘chicken bone in the throat.”

Note on the chart below that as the Dow Jones Industrial Average has broken below the 2002-2003 market lows, the Dow Jones Transportation Average is making fresh new lows in lockstep. While the Trasnportation Average performed better during the last bull cycle as a result of strength in the Railroad stocks, over the last few weeks the Transports have been a lot weaker than the Dow. Over the last eight trading sessions dating back to the intra day high on February 9th, the DJIA peaked at 8376.56 with the DJTA at 3250.18. Since then, both indices have tumbled for the balance of the last eight days (prior to today’s bear bounce) with the DJIA hitting a low last Friday at 7226.29, and the DJTA hitting a low of 2607.48. Over the eight day stretch, the Transports fell 19.77% while the Industrials fell 13.73%, Transports in the lead on the downside. What’s more, on a year-to-date basis, the DJIA is down 18.47% from its January 2nd peak of 9034.69, while the Transports are down an amazing 27.39% from their equivalent January high.

Above: DJIA and lower clip, DJTA.

In my view, not only is there a freshly minted Dow Theory downside confirmation signal, but the fact that deeply cyclical Transportation Average is acting so poorly tells us that the odds of recovery are low indeed. Of course, we would not, even for a second, want to understate just how important it is that the Industrial Average has now broken down new multi year lows. In my view, this is the ultimate downside continuation signal as the Industrial Average is being well confirmed by markets and other indices worldwide. In the case of the perhaps more important (cap weighted) S&P 500, the breakdown below the 2002-2003 lows at 780 to 800 is being confirmed by a MACD that remains deeply ensconced at levels well below the zero line. While some may join the ‘clutching at straws committee' pointing at a minor divergence with prices, in my experience the fact that MACD had virtually no bounce over the last few months and has now reversed to the downside once again in deeply negative territory is just about as negative a technical signal as I could imagine. Simply put, it implies a market getting ready to move a great deal lower in the weeks and months ahead.

Above: SPX with Weekly MACD

Elsewhere around the world, we still see a large number of markets that continue to act quite poorly. In the case of the European Stock Markets, back in June of 2008 I wrote about some of the so called “Club Med” markets which in my view had great downside potential.

In a 6/24/08 article entitled, “Trouble Ahead for the The Four Horsemen and Europe's Not So Sunny Side” I wrote about the Italian Stock Market stating:

“In the case of the Italian stock market, the MBI Index last quoted at 23,879 is likely to break support at 23,000 and could then decline rapidly toward the 17,000 to 18,000 price level in the months just ahead. These patterns agree with other charts we have featured in this column showing Hong Kong and Paris in recent weeks. The message in our view is universal: global equity markets of all stripes are in for a lot of difficulty as 2008 wears on and investors should be looking to sidestep what appears to be an approaching decline of very large proportions.

Since then, the MBI Index has plunged from a 6/24/08 reading of 22,873 to a close last Friday of 12,804, a striking decline of 10,069 index points or 44.02%. So far in 2009, the MBI Index is already down 20.46% from a January peak of 16,099 to a recent quote near 12,804. Downside momentum has never abated and the index is falling on high downside momentum with no signs of a positive divergence or a well formed bottom.


THEN back on 6/24/08 we showed the chart above of the Milan MBI Index about to break down into another extended decline. We targeted a move down to below 17,000, and as can be seen in the chart that follows, our forecast was actually too conservative.

TODAY: the Milan MBI Index – Today still in free fall.

In fact, as can be seen in the chart above, over the last few weeks the MBI Index has thoroughly collapsed below the 2002-2003 lows which I believe will end up as a good leading gauge for other markets. In my view, one important element in focusing on the action in the European stock markets has to do with the actions of the ECB. So far the ECB has been, at least in tone, the most hawkish central bank, refusing to lower short term interest rates as rapidly as most other central banks. While it is true that ECB is doing a great deal of money printing just like the Fed, because the ECB reacted a lot later to the down turn, most European countries are feeling the heavy dose of deflation to a very intense degree. As a result, the stock markets of some of the more debt laden, export dependent European countries are often breaking down in advance of other markets with countries like Italy, Greece and Spain leading the way. In my view, the MBI Index appears likely to continue its decline in the coming months with the next Fibonacci downside target the 8,500 to 9,000 zone on the MBI (see dashed line).

In Spain, the IBEX 35 has also plunged to new multi-year lows with the index closing below its October and November 2008 lows and the 7,700 mark over the last few weeks. Back in June of 2008, I noted that with the IBEX then trading at the 12,132 mark, that: “The Elliott Wave structure for the Spanish and Italian stock markets agree with the bearish chart formations, wherein for the Spanish stock market, a decline toward the 9,300 to 9,600 range – a major third wave decline looks to be dead ahead.

BEFORE: From Financial Sense Article 6/24/08 I have the chart reproduced of the Spanish stock market coming out of a broadening top and heading into a likely massive third wave decline. Watch out below!

AFTER: the IBEX Market today, now plunging to new lows below 7,700 with a close last week near 7,601.

Like the price action of the Italian stock market, the Spanish IBEX has also collapsed in recent months with the violent third wave down carrying prices below 8,000. Over the last few months, IBEX has traded between 7,700 on the low end and 9,600 on the high end, that is until the breakdown to new multi year lows over the last few weeks. From here, we see a continued decline (punctuated, of course, by the occasional fast and furious bear rallies) down to the 2002-2003 lows, which for the IBEX reside in the 5,200 to 5,300 zone. From present levels, this implies an additional 30% decline, which in my view underscores last week's notion that the worst is yet to come. Among the larger European stock markets, the DAX, the CAC and the FTSE have all broken down to new lows for the bear market over just the last few weeks. Thus far, none of these markets have yet to break their 2002-2003 lows, but in each case the momentum profile at present remains ultra bearish.

Above: German DAX Index with MACD, DAX has made new lows.

In the case of the German DAX Index, I believe that the bear market still has a long way to go on the downside with longer term Fibonacci ratios suggesting that the DAX could eventually
Decline below 2,000 toward the 1989 to 1991 levels between 1500 and 2000. That implies that remaining downside risk in German stocks could be on the order of another 50%+, with similar potential decline unfolding in both Paris and the UK.

Above: Paris CAC– 40 Index

For the Paris CAC 40 Index, a continued bear market decline could see the index blasting below the 2002 to 2003 lows and ultimately targeting a major low in the 1600 to 1700 zone perhaps early next year. With the CAC currently in the 2750 zone, once again we are looking at the prospect of still enormous downside risk on the order of 40% or more. For the London based FTSE, now in the 3900 zone, we arrive at a longer range downside objective of 2200 to 2500
(so let’s call it, 2,350 +/- 150 points) for an additional decline of around 40%.

Above: London – the FTSE 100 – 1965 to present

Above: FTSE 100 with long term Elliott/Fibonacci targeting.

If and when these longer range targets are approached, the odds will be very high that the global bear market for equities is nearly complete and that the deflationary contraction now underway will then yield to broad scale re-inflation. For most individuals, that will mark the beginning of the real ‘hard times' as the return of consumer wholesale inflation will probably be unlike anything the world has seen in decades. For the global economy, the ‘depressionary’ economic roller-coaster of the next 5 to 8 years will likely have more violent twists and turns than most of us would care to imagine. For investors, the 100% emphasis will need to be on an adaptable mindset and on market timing in lieu of ‘buy and hold’ investing.

That’s all for now,

Frank Barbera

Copyright © 2009 All rights reserved.

charts here

But look at the upside ~ of depression

ANNANDALE, Va. (MarketWatch) -- It's become fashionable in recent months to look to the 1930s for an analogy to what we're suffering through today.
But how many of the commentators who so blithely throw the comparison around have actually analyzed what it would really mean to play out that decade's script?
I think you know the answer.
So, for this column, I decided to take that analogy seriously. And, not surprisingly, I found that it presents a very depressing portrait of what might lie ahead. If we think we've had it bad so far -- and we have -- we haven't seen anything yet.
Believe it or not, however, I also found some good news.
That, at least, is the conclusion to emerge from a recent interview with Jeremy Siegel, the Wharton finance professor and author of the classic investment book, "Stocks for the Long Run."
To locate the date during the 1930s that is most analogous to today, Siegel looked for the point at which the stock market after 1929 had -- as is the case today -- declined by half. He relied on a stock-market benchmark that he has calculated which takes dividends into account and also adjusts for inflation.
This point of 50% decline came very early in the Great Depression, according to Siegel -- at the end of 1930, in fact. As in the current bear market, that initial point of 50% decline came just 16 months after the August 1929 stock-market top.
But the bear market had only barely begun at that point. Over just the next five months, according to Siegel, on an inflation-adjusted total return basis, the stock market fell an additional 60%.
You read that right: That's a 60% drop on top of a 50% drop -- or should I say "on bottom of ..."?
If the stock market today were to suffer a further decline of similar magnitude, the Dow Jones Industrial Average ($INDU

) would be trading below the 3,000 level by the end of July.
To this extent, therefore, we had better hope that the analogy with the 1930s doesn't hold.
The news isn't all bad, however. That's because, according to Siegel, the stock market quickly recovered from its 60% plunge in early 1931 -- within two years, in fact. By June 1933, the market was actually ahead of where it had stood at the end of 1930.
Furthermore, over the five years beginning at the end of 1930, the stock market, on an inflation-adjusted total-return basis, produced a 7% annualized return -- notwithstanding the 60% drop in the first five months of that five-year period.
In other words, even if you had been so unlucky as to buy stocks right before a six-month decline of 60%, you would have been whole again within just two years and would have earned a 7% real return over the next five years.
Few investors would object to that outcome today, of course. A 7% real return over the next five years sounds awfully attractive, in fact. And, yet, assuming the analogy with the 1930s holds up, that is what will happen between now and February 2014.
Of course, there's no way of knowing whether we're really playing out a 1930s script. And even if we are so unlucky as to endure a 60% drop over the next five months, there are no guarantees that the market will recover as quickly as it did following the first half of 1931.
Nevertheless, insofar as we choose to compare the current bear market and the Great Depression, we owe it to ourselves to carefully analyze what that analogy holds. And, as awful as that analogy is, it also contains some welcome and surprising silver linings.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

25 February 2009

Aden Gold Outlook

Kitco Commentator's Corner: "Gold shot up, reaching a nearly one year high today, and rapidly approaching its record high area.
The ongoing current A rise that started last November is the strongest in this bull market and the strongest since 1999. Since this is an abnormally strong 'A' rise in an abnormal world recession, if gold reaches a new record high above $1004, gold will most likely be embarking on the start of a great bull market rise.Gold shot up, reaching a nearly one year high today, and rapidly approaching its record high area.
The ongoing current A rise that started last November is the strongest in this bull market and the strongest since 1999. Since this is an abnormally strong 'A' rise in an abnormal world recession, if gold reaches a new record high above $1004, gold will most likely be embarking on the start of a great bull market rise."

Doomed by the Myths of Free Trade: How the Economy Was Lost

By Paul Craig Roberts
Tuesday, February 24, 2009


The American economy has gone away. It is not coming back until free trade myths are buried 6 feet under.

America's 20th century economic success was based on two things. Free trade was not one of them. America's economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.

World War II and socialism together ensured that the US economy dominated the world at the mid-20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism [in terms of the priorities of the capitalist growth model: Editors.]

The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America's cold war and foreign policies. For example, Turkey's US textile quotas were increased in exchange for overflight rights in the Gulf War, making lost US textile jobs an off-budget war expense.

In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the "free market" Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.

Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington aided and abetted the erosion of America's economic position. What we didn't give away, the United States let be taken away while preaching a "free trade" doctrine at which the rest of the world scoffed.

Fortunately, the U.S.'s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America's diminishing economic prowess.

This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly American and other First World corporations discovered that a massive supply of foreign labor was available at practically free wages.

To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.

As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.

"Free market economists" covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn't long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.

The American corporations quickly learned that by declaring "shortages" of skilled Americans, they could get from Congress H-1b work visas for lower paid foreigners with whom to replace their American work force. Many US corporations are known for forcing their US employees to train their foreign replacements in exchange for severance pay.

Chasing after shareholder return and "performance bonuses," US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and America’s ability to finance its trade deficit.

As the American economy eroded away bit by bit, "free market" ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these "old economy" jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the "service economy" of software and communications would provide a leg up for the work force.

Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.

The "free market" economists, who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, "outsourcing's inner circle has deep roots in GE (General Electric) and McKinsey," a consulting firm. Indeed, one of McKinsey's main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama's White House National Economic Council.

The pressure of jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive "performance" bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporation's function. Instead, the goal is to minimize labor costs at all cost.

Thus "free trade" has also destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart.

I have read endless tributes to Wal-Mart from "libertarian economists," who sing Wal-Mart's praises for bringing low price goods, 70 per cent of which are made in China, to the American consumer. What these "economists" do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.

The demise of America's productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a "security." The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.

In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an asset's value. If an asset "insured" by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.* [See footnote.)

The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.

This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.

The US government should never have used billions of taxpayers' dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of "troubled" assets that threaten financial markets.

The billions of taxpayers' dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.

Taxpayers, equity owners, and the credit standing of the US government are being ruined by financial shysters who are manipulating to their own advantage the government's commitment to mark-to-market and to the "sanctity of contracts." Multi-trillion dollar "bailouts" and bank nationalization are the result of the government's inability to respond intelligently.

Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.

The uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to ripoff American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous day. In other words, speculators could not make money at others' expense by ganging up on a stock and short-selling it day after day.

As a former Treasury official, I am amazed that the US government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the uptick rule is reinstated.

The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen still prevails and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners and pension funds to the financial sector.

The Bush and Obama plans total 1.6 trillion dollars, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the US dollar, its role as reserve currency, the ability of the US government to service its debt, and the price level. These staggering costs are pointless and are to no avail, as not one step has been taken that would alleviate the crisis.

If we add to my simple menu of remedies a ban, punishable by instant death, for short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals and, perhaps, wars.

According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism's purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street's greed endangering all the economies of the world. The greed of Wall Street and the negligence of the US government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox "News," presented a program that predicted riots and disarray in the United States by 2014.

How long will Americans permit "their" government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a catastrophe.

If truth be known, the "banking problem" is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1b visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.

The other serious problem is the status of the US dollar as reserve currency. This status has allowed the US, now a country heavily dependent on imports just like a third world or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.

If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.

If incompetence in Washington, the type of incompetence that produced the current economic crisis, destroys the dollar as reserve currency, the "unipower" will overnight become a third world country, unable to pay for its imports or to sustain its standard of living.

How long can the US government protect the dollar's value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world's fiat currencies.

*(An excellent explanation of swaps can be found here.)


Paul Craig Roberts was assistant secretary of the treasury in the Reagan administration. He is coauthor of "The Tyranny of Good Intentions." He can be reached at PaulCraigRoberts@yahoo.com.