Stimulus spending is one reason. Tax revenues also drop during a recession.
To put some context on a new estimate that puts this year’s federal deficit at $1.8 trillion, consider this: That amount had never been spent by the federal government in a single year until 2000, let alone borrowed.
That’s right. As the decade began, the US government spent $1.8 trillion in a year for the first time. Now it’s poised to spend that much in excess of its tax revenues.
The Treasury released the latest figures Wednesday, showing spending of about $3 trillion in the past 10 months, and revenues of only $1.74 trillion.
With two months to go in the fiscal calendar, the Obama administration is projecting that the imbalance will end up totaling $1.84 trillion, more than four times last year’s record-high. The monthly deficit for July, also reported this week, came in a bit above what economists had expected.
The record red ink stems from familiar sources. The government is spending prodigiously on stimulus, to lift the economy out of recession, and on rescuing the financial system from a credit crisis. The cost of wars in Iraq and Afghanistan add to the tab.
Meanwhile, in recessions tax revenues tend to fall, and this one is no exception. Government receipts were down about 6 percent in July from a year before.
The good news is that many of these forces are cyclical or temporary. The massive stimulus won’t last forever, and revenues from taxes should rise again when the economy grows healthier.
“We expect this year’s deficit will be … 10.5 percent of GDP [gross domestic product] and next year’s to equal 8.3 percent of GDP as the spending spree and revenue weakness persist into the first year of the recovery,” Merrill Lynch economist Drew Matus wrote in a report last week. The report predicted shrinking deficits after that, but warned that the “the long-term outlook remains poor.”
That’s the bad news, many economists agree. The fiscal position will remain difficult, since baby boomers are already starting to retire in a wave that will grow more costly in coming years.
The soaring deficits have raised worries among foreign owners of US Treasury securities including the Chinese, the largest holder of such debt. President Barack Obama’s economic team sought to reassure the Chinese during high-level talks last month that the administration is committed to reducing the deficits once the current economic and financial crises have been resolved.
The concern, however, is that rates could begin rising if foreigners lose confidence in the government’s ability to manage its debt burden.
In bond markets, prices fell Wednesday after a fairly weak auction of $23 billion in 10-year Treasury notes. The Treasury Department is auctioning a record $75 billion in debt this week.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.75 percent from 3.70 percent ahead of the auction results and 3.67 percent late Tuesday.
The total public debt now stands at $11.6 trillion. Interest payments on the debt cost $452 billion last year, the largest federal spending category after Medicare-Medicaid, Social Security, and national defense.
Material from the Associated Press was used in this report
This is the real solution to any crisis, interest free money. No bailout, no new economic system, just interest free notes.
by Cedric X
From The Final Call, Vol. 15, No.6, On January 17, 1996
On June 4, 1963, a little known attempt was made to strip the Federal Reserve Bank of its power to loan money to the government at interest. On that day President John F. Kennedy signed Executive Order No. 11110 that returned to the U.S. government the power to issue currency, without going through the Federal Reserve. Mr. Kennedy’s order gave the Treasury the power “to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury.” This meant that for every ounce of silver in the U.S. Treasury’s vault, the government could introduce new money into circulation. In all, Kennedy brought nearly $4.3 billion in U.S. notes into circulation. The ramifications of this bill are enormous.
With the stroke of a pen, Mr. Kennedy was on his way to putting the Federal Reserve Bank of New York out of business. If enough of these silver certificats were to come into circulation they would have eliminated the demand for Federal Reserve notes. This is because the silver certificates are backed by silver and the Federal Reserve notes are not backed by anything. Executive Order 11110 could have prevented the national debt from reaching its current level, because it would have given the gevernment the ability to repay its debt without going to the Federal Reserve and being charged interest in order to create the new money. Executive Order 11110 gave the U.S. the ability to create its own money backed by silver.
After Mr. Kennedy was assassinated just five months later, no more silver certificates were issued. The Final Call has learned that the Executive Order was never repealed by any U.S. President through an Executive Order and is still valid. Why then has no president utilized it? Virtually all of the nearly $6 trillion in debt has been created since 1963, and if a U.S. president had utilized Executive Order 11110 the debt would be nowhere near the current level. Perhaps the assassination of JFK was a warning to future presidents who would think to eliminate the U.S. debt by eliminating the Federal Reserve’s control over the creation of money. Mr. Kennedy challenged the government of money by challenging the two most successful vehicles that have ever been used to drive up debt – war and the creation of money by a privately-owned central bank. His efforts to have all troops out of Vietnam by 1965 and Executive Order 11110 would have severely cut into the profits and control of the New York banking establishment. As America’s debt reaches unbearable levels and a conflict emerges in Bosnia that will further increase America’s debt, one is force to ask, will President Clinton have the courage to consider utilizing Executive Order 11110 and, ifso, is he willing to pay the ultimate price for doing so?
Executive Order 11110 AMENDMENT OF EXECUTIVE ORDER NO. 10289
AS AMENDED, RELATING TO THE PERFORMANCE OF CERTAIN FUNCTIONS AFFECTING THE DEPARTMENT OF THE TREASURY
By virtue of the authority vested in me by section 301 of title 3 of the United States Code, it is ordered as follows:
Section 1. Executive Order No. 10289 of September 19, 1951, as amended, is hereby further amended-
By adding at the end of paragraph 1 thereof the following subparagraph (j):
(j) The authority vested in the President by paragraph (b) of section 43 of the Act of May 12,1933, as amended (31 U.S.C.821(b)), to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury not then held for redemption of any outstanding silver certificates, to prescribe the denomination of such silver certificates, and to coin standard silver dollars and subsidiary silver currency for their redemption
However its sometimes interesting to see what patents are referenced in the patents, and which ones reference the one your looking at. This allows you to actually find out some interesting related patents as well….
Bloomberg files this report on the recent rise of insider selling, company executives dumping the most shares since mid-2007, shortly before the broad stock market’s peak.
Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.
Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show.
…
Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.Surely this can’t be a good development for your typical retail investor, many of whom have just recently convinced themselves that it’s OK to put some money back into stocks again.
The good news is that the 2007 stock market peak didn’t occur until some four months after insider selling peaked in June. Here we are, almost exactly two years later, and it appears that the timing could be again aligned for a fall season that does not treat equity markets kindly.
Why is insider selling so important? It’s quite simple…
“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”
…
“They’re looking to take some money off the table because they think the rally will come to an end,” said Ben Silverman, the Seattle-based research director at InsiderScore. “It’s the most bearish we’ve seen insiders, on a whole, in two years.”
The last time there were more U.S. corporations with executives reducing their holdings than adding to them was during the week ended June 19, 2007, the data show. The next month, two Bear Stearns Cos. hedge funds filed for bankruptcy protection as securities linked to subprime mortgages fell apart, helping trigger almost $1.5 trillion in losses and writedowns at the world’s biggest financial companies and the 57 percent drop in the S&P 500 from Oct. 9, 2007, to March 9, 2009.
There’s much more information in the report about stock sales at individual companies, but, perhaps the most important detail is that insider selling reached an all-time record back in the first quarter of 2000, as the 18-year bull market in stocks reached its climax, the official demarcation point between “dotcom” and “dotbomb”.
Alexander Emerick Jones is an American paleoconservativeradio host and documentary filmmaker. His nationally syndicated talk show (titled The Alex Jones Show) airs via the Genesis Communication Network on over 60 AM, FM, and Short Wave radio stations across the United States, as well as having a large internet based audience. Alex Jones has been referred to as a “conspiracy theorist” by mainstream media outlets, while Russia Today has referred to him as an investigative journalist. Alex Jones was born February 11, 1974.
The elite put Alex Jones in place to be the leader and symbol of the alternative media.
Alex Jones repeatedly attacks the idea that TV Fakery was used on 9/11. It has become obvious to serious investigators of 9-11 that no airplanes were used in the attack. Is Alex Jones naive to catch on, or is he deliberately covering up evidence that links the mainstream media to 9-11?
Indeed, Alex Jones would appear to have a clear motive for wanting to cover up the media’s role in 9-11. His network, GCN Live, has close ties to ABC News. In fact, ABC NY provides satellite broadcasting services for The Alex Jones Show. Some say that this is only a business deal, and is not very important… but think about it — why would part of the controlled media provide satellites to a network that was dangerous to them?
This is easily explained by considering that Alex Jones is not really on the side of real truth. His job is to distract us from following the most important people in the world… the Jesuits.
ABC is owned by Walt Disney, which has had a Jesuit priest on it’s board of directors since 1996. This brings us to the question of why Jones is seemingly reluctant to talk about the role of the Society of Jesus in world corruption.
When Alex Jones released his famous “Dark Secrets: Inside Bohemian Grove” film, he gave us detailed background information about the Grove, yet, for some reason he left out the fact that Roman Catholic masses take place at the Grove, and that the Bohemian Club’s patron saint is John of Nepomuk, a Roman Catholic figure who symbolizes the Seal of Confession. The story of John of Nepomuk was developed by Bohuslav Balbín, a Jesuit.
Alex Alex Jones’ suspicious connections do not end there. He has close ties with the John Birch Society. His father was a member of JBS and he had it’s President, John F. McManus, on his show. McManus was trained by Jesuits at Holy Cross College and was involved in US Air Force Weapons Development.
We all know I have been warning of this bear market rally. I know it has been a rough ride, but at the end of the day, a dollar is a dollar and a loss is a loss. I do hope nobody is surprised. This may not even be the end of the bear market rally, but the internals have been looking weak for the last week or two, and we all know how I felt about the fundamentals and the macro outlook.
ECB warning prompts shift from equities. Risk appetite suffered a sharp deterioration on Monday as fresh uncertainty about the global economy and the financial system prompted investors to shift away from equities, commodities and emerging market assets into the perceived safety of government bonds and the dollar.
Eurozone banks face additional losses of more than $283bn this year and next as continental Europe’s severe recession intensifies strains on its financial sector, the European Central Bank has warned.
The fates of the eurozone economy and its banks have become increasingly interlinked, the ECB reported on Monday in its latest “financial stability review” with banks losses expected to be focused on their loan exposures. Risks to the stability of the financial sector remained high, it said, while “uncertainty prevails” over the shock-absorbing capacity of the banking system.
And from that bastion of unbiased reporting, CNBC: Asian Markets Slide, Optimism May Be Misplaced
No need to worry, we still have reasons to be bullish in the media. Check this out:
From WSJ’s Market Beat:
Rochdale Research analyst Richard Bove’s weekend note on Bank of America got a bit of attention today, largely for the section in which he writes “Bank of America is now experiencing horrific loan losses. It may have loan loss provisions of $46 billion this year.”
As Jon Ogg over at 24/7 Wall Street notes, the core call of the note is surprisingly positive. Bove upped his price target on Bank of America shares to $19 from $14, citing growing confidence in management. Bove also kept his “Buy” rating on the stock and wrote that Bank of America’s purchase of Merrill Lynch — and even Countrywide — will help it offset the losses it’s suffering on loans.
Concerning those losses, Bove has a couple interesting observations as to why Bank of America’s loan losses may be more pronounced than some competitors:
A key to the company’s success in driving its operating costs lower has been the implementation of automated systems and uniform products. The reduction in labor intensity in the process has carried with it a reduction in the personalized approach to lending.
The credit card industry or auto lending are examples of this process. Credit card loans are in fact personal loans that historically were provided after a customer spoke with a loan officer who generally knew the client’s background. Now the bank provides the loans to people it has never met and never interacted with using a systemized process. This is also true of automobile loans and in many cases of mortgages and home equity lines of credit.
These systems, now many decades old, are widely supported by consumers and have combined to lower the cost of originating loans and in increasing loan volumes. The problem with these systems is that they fail to detect changes in the borrower’s condition until losses start to appear. Then it is generally too late so that losses soar before the bank gains control of the process once again.
This is now happening throughout the industry and to a greater degree at Bank of America.
Countrywide is a veritable boiling cauldron of putrid assets and potentially devastating liabilities that are actually labeled as assets. Merrill Lynch was collapsing under its own weight in real time and BofA needed government assistance to close the deal. Bove says that these companies will help offset the losses it (BofA) is suffering on its loans, but the loans it is suffering from stem largely in part from Merrill and Countrywide. Circular logic moving in an ovular pattern????
by Justice Litle, Editorial Director, Taipan Publishing Group June 10, 2009
Among its many other sins, the greenback is a press hog. The world’s reserve currency, loved and loathed as it is, simply gets most of the ink these days.
In that light many a U.S.-based commentator, not least your cynical Taipan Daily scribes, have repeatedly waxed eloquent on the long-run death of the dollar.
But in our zeal we sometimes forget that, in order for the dollar to die, it has to die relative to other fiat currency offerings… and some of those others are looking pretty sick too. (The main exception, of course, being gold – the one and only “stateless currency” not subject to the whims of a printing press. As Grant’s Interest Rate Observer quips, “Show us a monetary asset whose value is not subject to governmental debasement and we will show you a Krugerrand.”)
In short, the dollar is not the only basket case out there. Take the euro, for example. Now there’s a troubled currency if ever one existed.
As pollyanna stock market bulls are finding out the hard way, rising interest rates (via falling bond prices) can have ugly consequences. The same is true of a rising currency when coupled with a weak economic backdrop.
In this particular case, the stronger the euro gets, the more it cuts into European export sales. At a time when most all of Europe is sick, the economic pain of a too-strong currency becomes intense above a certain threshold.
On top of that, various bits of Europe are in the process of blowing up… or falling apart… or both. There is deep trouble brewing in multiple corners of the continent. Let’s take a quick look on a country-by-country basis to see why Europe is being held together with duct tape.
Britain on the Brink
We’ll start with Britain – not an adopter of the euro, but a member of the EU (European Union) nonetheless.
Britain has been hurled into political chaos, thanks to an unholy combo of deep financial crisis, explosive Labour Party scandals, and the hapless lame-duck status of embattled Prime Minister Gordon Brown. Cabinet Ministers are resigning left and right in protest as Brown’s popularity plummets, calling for the PM to step down. Election results tallied this week showed the Labour Party (Brown’s party) putting in its worst showing since 1918.
June 03, 2009 “Information Clearing House” — Last week’s ructions in the bond market, leave little doubt that the financial crisis has entered a new and more lethal phase. Of particular concern is the spike in long-term Treasuries which are used to set interest rates on mortgages and other loans. On Thursday, the average rate for a 30-year fixed loan jumped from 5.03% to 5.44% in just two days. The sudden move put the mortgage market in a panic and stopped the refinancing of billions of dollars in loans. The yields on Treasuries are going up because investors see hopeful signs of recovery in the economy and are moving into riskier investments. More money is moving into equities which is why the stock markets have been surging lately. (The Federal Reserve’s multi-trillion dollar monetary stimulus has played a large part, as well.) The bottom line is that investors are looking for better returns than the paltry yields on government debt. That will make it harder for the Fed to sell up to $3 trillion in Treasuries in the next year to finance Obama’s proposed economic recovery plan. For now, foreign central banks are still buying enough short-term Treasuries to cover the current account deficit, but that could change in a flash, especially given Fed chief Bernanke’s propensity to print more money at the drop of a hat. That’s making foreign holders of dollar-based assets more jittery than ever.
Bernanke is in a bit of a pickle. He needs to sell boatloads of US debt, but if he raises interest rates; he’ll kill the recovery and send the stock market reeling. What to do? Eventually the Fed chief will arrive at the conclusion that there’s only two ways out of a credit bust of this magnitude; either raise rates and crush the economy or print more money and face a funding crisis. Either way, there’s a world of hurt ahead.
Here’s how economists Christian Broda, Piero Ghezzi and Eduardo Levy-Yeyati sum it up in their report “The New Global Balance: Financial de-globalisation, savings drain, and the US Dollar”: Read the rest of this entry »
Collapsing home prices and credit markets continue to put downward pressure on consumer spending, forcing the Federal Reserve to take even more radical action to revive the economy. Last week, Fed chief Ben Bernanke raised the prospect of further monetizing the debt by purchasing more than the $1.75 trillion of Treasuries and mortgage-backed securities (MBS) already committed. The announcement sent shock-waves through the currency markets where skittish traders have joined doomsayers in predicting tough times ahead for the dollar. Foreign central banks have been gobbling up US debt at an impressive pace, adding another $60 billion in the last three weeks alone. That’s more than enough to cover the current account deficit and put the greenback on solid ground for the time-being. But with fiscal deficits ballooning to $3 trillion in the next year alone, dwindling foreign investment won’t be enough to keep the dollar afloat. Bernanke will be forced to either raise interest rates or let the dollar fall hard.
Export-led nations are looking for an edge to revive flagging sales by keeping their currencies undervalued. But the strong dollar is making it harder for Bernanke to engineer a recovery. He’d like nothing more than to see the dollar tumble and reset at a lower rate. That would reduce the debt-load for homeowners and businesses and send consumers racing back to the shopping malls and auto showrooms. Perception management is a big part of stimulating the economy. That’s why the financial media has been air-brushing articles that focus on deflation and shifting the attention to inflation. It’s an effort to kick-start consumer spending by convincing people that their money will be worth less in the future. But deflation is still enemy number one. Rising unemployment, crashing home prices, vanishing equity and tighter credit; these are all signs of entrenched deflation.
Bernanke faces three main challenges to put the economy back on track. He must remove the hundreds of billions in toxic assets from the banks balance sheets, reignite consumer spending to offset the sharp decline in aggregate demand, and fix the wholesale credit-mechanism that provides 40 percent of the credit to the broader economy. Treasury Secretary Timothy Geithner has taken over the distribution of the remaining TARP funds, and created a new program, the Public-Private Investment Partnership (PPIP), for purchasing toxic mortgage-backed assets. The PPIP will provide up to 94 percent “non-recourse” government loans for up to $1 trillion of assets which are worth less than half of their original value at today’s prices. The Treasury’s plan is an attempt to keep asset prices artificially high so that the losses will not be realized until they’ve been shifted onto the taxpayer. Here’s how John Hussman of Hussman Funds summed up Geithner’s PPIP:
“From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount – the remainder being “non-recourse” financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.
Make no mistake – we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own. All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans.” (John Hussman, “The Fed and Treasury – Putting off Hard Choices with Easy Money, and Probable Chaos, hussmanfunds.com) Read the rest of this entry »
GAAP-Based 2008 Federal Deficit Hits $5.1 Trillion
Government Bankruptcy/Hyperinflation Just a Matter of Time
As discussed in the December 15th Alert, the U.S. Treasury published its 2008 Financial Report of the United States Government on December 15th: http://fms.treas.gov/fr/08frusg/08frusg.pdf. A summary of the generally accepted account principles (GAAP)-based detail is shown in the following table:
U.S. Government – Alternate Fiscal Deficit and Debt
Reported by U.S. Treasury
Dollars are either billions or trillions, as indicated.
Sources: U.S. Treasury, Shadow Government Statistics.
Fiscal
Year (1)
Formal
Cash-Based
Deficit
($Bil)
GAAP
Ex-SS Etc.
Deficit
($Bil)
GAAP
With SS Etc,
Deficit
($Tril)
GAAP
Federal
Negative
Net Worth
($Tril)
Gross
Federal
Debt
($Tril)
Total(2)
Federal
Obligations
(GAAP)
($Tril)
2008
$454.8
$1,009.1
$5.1
$59.3
$10.0
$65.5
2007
162.8
275.5
1.2
(3)
54.3
9.0
59.8
2006
248.2
449.5
4.6
53.1
8.5
58.2
2005
318.5
760.2
3.5
48.5
7.9
53.3
2004
412.3
615.6
11.0
(4)
45.0
7.4
49.5
2003
374.8
667.6
3.0
34.0
6.8
39.1
2002
157.8
364.5
1.5
31.0
6.2
35.4
(1) Fiscal year ended September 30th. (2) Revised to include gross federal debt, not just “public” debt. While the non-public debt is debt the government owes to itself for Social Security, etc., the obligations there are counted as “funded” and as such are part of total government obligations. (3) On a consistent reporting basis, net of one-time changes in actuarial assumptions and accounting, SGS still estimates that the GAAP-based deficit for 2007 topped $4 trillion, with negative net worth of $57.1 trillion and total obligations of $59.8. So as to maintain consistency with the official GAAP statements, the “official” numbers are shown in the table for 2007. (4) SGS estimates $3.4 trillion, excluding one-time unfunded setup costs of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (enacted December 2003). Again, in order to maintain consistency with the official GAAP statements, the “official” numbers are shown in the table for 2004. Link to the 2008 statements: http://www.fms.treas.gov/fr/08frusg/08frusg.pdf
Against what had been the recently publicized, cash-based “official” fiscal 2008 (year-ended September 30th) federal deficit of $454.8 billion, and parallel $161.8 billion deficit in 2007, the U.S. Treasury reported that the 2008 deficit [change in net position] was $1,009.1 billion, versus $275.5 billion in 2007, using GAAP. Since 2002, the Treasury has been reporting the government’s finances using annual statements prepared using accounting standards similar to those used in corporate America.
Those numbers, however, did not account for the annual change in the net present value of unfunded Social Security and Medicare liabilities, except in discussions and footnotes. Counting those changes, as a corporation would for its pension and healthcare liabilities for retirees, the 2008 annual deficit was $5.1 trillion, versus $1.2 trillion in 2007. Such showed total U.S. obligations — gross federal debt outstanding plus the net present value of unfunded liabilities — at $66 trillion, roughly 4.6 times the level of reported U.S. GDP, and greater than total estimated global GDP. These numbers are unsustainable, as suggested in the accompanying graphs, and already are deteriorating severely for fiscal 2009. They also doom the U.S. dollar to hyperinflation, as discussed in the Hyperinflation Special Report of April 8, 2008.
An actual U.S. deficit of $5.1 trillion is uncontainable, and it is about to get a great deal worse. The shortfall cannot be covered by taxes, and the needed spending cuts tied to Social Security and Medicare cannot be worked politically. The rapidly deteriorating economic conditions promise reduced tax revenues, while the incoming Obama Administration has promised significantly increased spending.
Impact of Systemic Solvency Crisis to Be Seen in 2009 Numbers. As the U.S. Treasury responded in tandem with the Federal Reserve in 2008 to address a collapsing financial system, placing Freddie Mac and Fannie Mae into conservatorship added about $13 billion to the annual deficit and government liabilities for fiscal 2008. Most of the impact from that and other actions, however, will not show up until 2009 accounting. In like manner, the Troubled Asset Relief Program (TARP) was not enacted until fiscal 2009 and will be so accounted for.
As reported so far in fiscal 2009 (see the Federal Deficit comments in the Reporting section), the “official” cash-based (not GAAP-based) accounting shows for October and November 2008 — the first two months of the 2009 fiscal year — that the official deficit more than doubled to $401.6 billion, from $154.1 billion in the same period of fiscal 2008.
Faced with collapsing economic activity, President-elect Obama has promised a massive economic stimulus package that likely will total close to $1 trillion, spiking the “official” cash-based deficit to possibly $2 trillion in fiscal 2009, more than four times the 2008 record level. All that will have to be funded by the U.S. Treasury, on top of its regular refunding needs. Therein lies a problem for the markets and the incoming Administration.
U.S. Treasury funding needs exploded by about $500 billion in October 2008. Yet, even as Treasury issuance began to spike in calendar third-quarter 2008, foreign purchases of those instruments began to falter, as reflected in the Federal Reserve’s flow-of-funds data, which tend to be unreliable. Nonetheless, the U.S. Treasury has relied on foreign net purchases of an average 80% of its net debt issuance since 2002. As foreign investors increasingly shy away from a losing proposition with the U.S. dollar, faltering demand for U.S. Treasuries will become a problem for the Federal Reserve, the U.S. Treasury buyer of last resort. At such time as the Fed monetization of U.S. debt accelerates meaningfully, the risks of hyperinflation will move in over the horizon.
Risks of U.S. Default. As discussed in the prior newsletter, stories keep circulating in the global markets of a possible default on U.S. debt within the next year or so, as result of the explosive growth in federal debt. Such remains unlikely, unless foreign lenders start making not-so-unreasonable demands that the United States issue its debt in yen, pounds, euros, etc. As shown by the latest GAAP-statements, the United States already had no prospects of ever honoring the obligations that were in place before the current crisis, which will push this year’s cash-based deficit possibly to $2 trillion (perhaps $8 trillion GAAP). Under such circumstances, most governments would opt to use the printing press to inflate their way out of debt, rather than to go through a formal debt default.
That is why the agencies that issue sovereign debt ratings usually will give a “AAA” rating, when debt is issued in the sovereign’s currency, backed by the power of being able to create whatever currency is needed in order to meet the obligations.
If, however, the U.S. had to start covering new obligations in something other than the U.S. dollar, then the risk of formal default would become meaningful, and sovereign ratings on non-dollar U.S. Treasury debt easily could fall below investment grade. Given that the U.S. government has no way out of its obligation bind within the traditional system, offering non-U.S. dollar denominated debt would not be a desirable option. Such would raise the risk of actual debt default and a possible ratings downgrade that would not otherwise be seen, while possibly accelerating the onset of hyperinflation in the process.
The Federal Reserve apparently can’t account for $9 trillion in off-balance sheet transactions.
When Rep. Alan Grayson (D-Orlando) asked Inspector General Elizabeth Coleman of the Federal Reserve some very basic questions about where the trillions of dollars that have come from the Fed’s expanded balance sheet, the IG didn’t know.
Worse, nobody at the Fed seems to have any idea what the losses on its $2 trillion portfolio really are.
“I am shocked to find out that nobody at the Federal Reserve is keeping track of anything,” Grayson says.
Grayson asked Coleman if her agency had done any research into the decision not to save Lehman Brothers, which “sent shockwaves through the entire financial system,” Coleman said it had not.
“What about the $1 trillion plus expansion of the Federal reserve’s balance sheet since last September?” Grayson asked.
“We have different connotations,” Coleman replied. “We’re actually conducting a fairly high-level review of the various lending facilities collectively.”
Translation: Nobody at the Fed knows where the money went.
Do you know what who got the $1 trillion or more in the Fed’s expansion of its balance, Grayson pressed.
“I do not know. We have not looked at this specific area at the particular point on that specific review,” Coleman answer.
What about the trillions of off-balance transactions since last September, Grayson asked.
Coleman demurred again, saying the IG does not have jurisdiction to audit the Federal Reserve.
Grayson pointed out that it was the inspector general’s job to audit such spending and asked again if the office had done any investigation at all.
Coleman’s answer: Not enough yet to even respond. “We are in not a position to say if there losses.”
Grayson concluded, “I am shocked to find out that nobody at the Federal Reserve, including the inspector general, is keeping track of this.”
Meanwhile, Federal Reserve Chairman Ben Bernanke says the bank is working on ways to rein in the massive balance sheet commitments.
“A majority of the members who made these projections just recently took 2 percent as being an appropriate number” for inflation, Bernanke said Monday.
“Somewhere between 1-1/2 to 2 percent is basically the number that our committee has individually stated is the appropriate medium-term inflation rate.
“To achieve that we need to demonstrate that we will be able to exit from the balance sheet position that we currently have, and have been working on this intensively,” Bernanke said in response to questions after a speech to a conference organized by the Federal Reserve Bank of Atlanta, reported by Reuters.
Well, I did it. I started fooling around with Fibonacci numbers and I scared myself half to death. Leonardo Fibonacci, was perhaps the greatest mathematician of the Middle Ages. I pried open his seven hundred year old crypt, dusted him off and asked him his specialty … a question about the future. The question I posed, “Are we headed for inflation or deflation in 2009?” I was stunned by the clarity of his answer. This Einstein of his day warned, inflation of nightmare proportions and worse, is coming to this nation soon.
He does it through his Fibonacci sequence of course. A segment of which looks like this: 3, 5, 8, 13, 21, 34 … You add the last two numbers to get the next number in the sequence. No one knows why, but this number sequence echoes the rhythms of nature. Look at the petals on flowers. There are 3, 5, 8, 13, even 21 (daisies). Exceptions are rare. This is why four leaf clovers are good luck, you can find one, but it will take you all day. Look at you elbow and your knee cap. They are located .618% up the length of your extremity. You get .618 every time you divide any number in Fibonacci’s sequence by it larger neighbor. 144 ÷ 233 = .618. I always hated math, now … not so much.
As to the question at hand, we have had two periods of hyperinflation in America. The first period was during the Revolutionary War (not worth a Continental). The second was during the Civil War (greenbacks and graybacks). With 1776 as an obvious starting point, I leapt forward to 2009 and got a Fibonacci 233 years. The Civil War ended in 1865. Leap forward to 2009 from 1865 and you get a Fibonacci 144 years. If you’ve got your thinking cap on you’re already wondering about the length of time between 1776 and 1865, and yes, it is a Fibonacci 89 years.
But wait, it gets worse! Hyperinflation in 2009, would only be a side dish, the main course is war. Note well, these were not simply wars, but wars with ourselves. The Civil War was sometimes literally brother against brother until it ended in 1865. King George was our King, we were his subjects, until we declared independence on the fourth of July, 1776.
Are we really headed for war with ourselves and hyperinflation once again in 2009? This cluster of Fibonacci numbers linking up and landing on the year 2009 is striking and elegant. Is this the year where the old world ends and the new world begins? Leonardo Fibonacci says yes.
Adrian Salbuchi an Argentine International Analyst explains the current global meltdown. Who is behind this? Can the world get out of it? Will the world head towards World War? YouTube :
An Argentine opinion on the Global Financial Crisis, describing the whole Global Financial System as one vast Ponzi Scheme. Like a pyramid, it has four sides and is a predictable model. The four sides are:
(1) Artificially control the supply of public State-issued Currency,
(2) Artificially impose Banking Money as the primary source of funding in the economy,
(3) Promote doing everything by Debt and
(4) Erect complex channels that allow privatizing profits when the Model is in expansion mode and socialize losses when the model goes into contraction mode.
With the US monetary base expanding at a breathtaking pace and nations around the world worrying about the value of their US holdings, the dollar looks virtually guaranteed to lose its status as the international reserve currency. This begs the question: how big a deal is the loss of the dollar’s reserve status?
According to Wikipedia, at the end of 2007, 63.90% of the identified official foreign exchange reserves in the world were held in United States dollars. Therefore, total dollar reserves at the beginning of 2008 were about $4,408 billion (63.90% of $6,898 billion). However that is not the end of the story, as we still need to account for stabilization funds or Sovereign Wealth Funds. Wikipedia explains:
Excess reserves
Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations, however, other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds, otherwise known as sovereign wealth funds.If those were included, Norway and Persian GulfStates would rank higher on these lists, and UAE’s $1.3 trillion Abu Dhabi Investment Authority would be second after China. Singapore also has significant government funds including Temasek Holdings and GIC. India is also planning to create its own investment firm from its foreign exchange reserves.
Central banks have traditionally kept their reserves in relatively low-yielding, highly liquid government securities, agency debt, money-market instruments and bank deposits. The most current official IMF figure for official worldwide foreign currency reserves is US$5.89 trillion [Worldwide foreign currency reserves increased by about 1 trillion over 2007]. At US$1.35 trillion, China holds the world’s largest pool of official reserves, followed by Japan with US$911 billion and Russia with US$403 billion.
In addition to these reserves, market estimates for the total value of Sovereign Wealth Funds (SWF) run as high as US$2.5 trillion. This compares to US1.6 trillion for hedge funds. These are state-owned and operated funds, comprising of financial assets such as stocks, bonds, or property not included in the IMF figures.The use of these funds enables large reserve holders to invest in higher yielding instruments.
With around 40 percent of stabilization funds invested in the US, the dollar holdings of sovereign wealth funds are around $1,000 billion (40% of $2,500 billion). After combining the numbers from foreign exchange reserves and stabilization funds, the dollar holdings of foreign governments are about $5,385 billion. Meanwhile, as you might have noticed from the CIA’s ranking above, the United States holdings of foreign currencies is around $71 billion.
Implications of the loss of the dollar’s reserve status
As the dollar loses its reserves status, at least half of the world’s $5,385 billion dollar reserves will be sold off and replaced with other currencies (yuan, euro, khaleeji, gold, rand, etc…). The US, with its $71 foreign reserves, will not be able to do anything to counteract this mass exodus from the dollar. With outflows of this magnitude, the dollar’s value will collapse to a fraction of where it is now.
The process of foreign nations extracting themselves from the dollar is not going to be pretty. The likely impacts are:
1) The dollar’s value will plunge as investors see the writing on the wall and jump ship.
2) US credit markets will collapse. As the dollar fall, a mass exodus from credit market will begin. Investors sitting on toxic securities will sell at firesale prices to escape the currency depreciation.
3) The fed’s balance sheet will explode beyond all reason. In response to the mass exodus from credit markets, the fed will buy trillions worth debt in a desperate attempt to hold interest rates down. Unfortunately, the more debt the fed buys, the more quickly the dollar will fall, and the more panicked the credit selloff will become.
4) US interest rates will soar, despite (or because of) the fed’s efforts.
5) Countries around the world will be hurt badly by the dollar’s decline. These countries include:
A) Nations which are heavily dependent on US exports: Japan, Mexico, etc… B) Nations with large dollar reserves: Japan, China, Gulf oil states, etc… C) Nations which receive large amount of US foreign aid: Israel, Egypt, etc… D) Nations which rely on remittances from citizens working in the US: Mexico, India, etc… E) Nations which use dollars as their official currency: Liberia, Panama, etc… F) Nations which have large amounts of dollars in circulation: Central and South America (especially Argentina), Eastern Europe, etc…
6) Some nations will see benefits from the dollar’s decline. These countries include:
A) Nations with large gold reserves: EU zone, Switzerland, etc… B) Nations which owe dollar denominated debt will see that debt wiped out: Iceland, African nations, etc… C) Nations who stable currencies: EU zone, Switzerland, China, etc…
7) World politics will be greatly altered. There will be considerable anger at the US from nations hurt by dollar’s fall. The US will lose influence to Asia (mainly China).
8) US retailers will get crushed. As the dollar falls, the cost of imports for retailers will increase, but the American consumer will be unable to afford to these higher prices. Competition between desperate retailers will force them the sell inventory at below cost, creating massive losses. Retailers most heavily dependent on imports (ie: Wal-Mart) will be the first to go under. Eventually as more and more retailers go bankrupt, the few survivors will be able to raise prices enough to cover costs, and the sector will stabilize at a fraction of its current size.
9) American lifestyles will change radically. The end of cheap oil, low interest rates, and deficit spending will mean a lower quality of life and higher taxes.
10) The price of gold and other precious metals will explode.
Vicious selling continues on Wall Street and the pathetic action of the financials is dragging down the entire market. So far, the banking index has declined by roughly 83% from its highs! As I have said for years, banking is the only industry which is always in a state of permanent bankruptcy and people have finally realised that the emperor has no clothes! We can thank the fractional reserve banking system for this mess; a totally fraudulent system which allows banks to create multiples of credit compared to bank deposits. This is the reason why I urged you repeatedly to stay well clear of financial shares and I hope that you followed my advice.
Today, investors in financials have lost nearly everything and before this is over, I suspect the majority of banks in the West will be nationalised. This would mean a total catastrophe for those who invested in bank stocks or corporate bonds. So, no matter how strongly your private banker pushes you to load up on “cheap” financial stocks, please DO NOT go “bottom fishing” in this bankrupt industry. Banking is no longer a growth industry and financials will disappoint investors for many years. Furthermore, if you have any exposure to hedge funds, structured products, accumulators or derivatives of any kind, I sincerely urge you to get rid of all this highly toxic garbage. Such ponzi schemes were very good for the private bankers (due to the huge amounts of commissions involved) but they are a disaster waiting to happen. Today, our planet has roughly US$600 trillion worth of derivatives and this is roughly 10 times the size of the global economy! So, please get rid of your derivatives based “investments” immediately.
Even though the financials are getting killed, our fundamentally sound stocks in solid sectors continue to report good operating results and their stock prices are much higher than the lows recorded last fall. So, this is a positive divergence and shows that the market’s internal breadth is improving with fewer stocks breaking down to new lows. Another positive sign is that the Asian markets are faring much better and are nowhere near the lows recorded last fall.
During such turbulent times, it is worth remembering that your stocks represent partial ownership in underlying businesses with real assets (plants, reserves, land, machinery, technology, cash and human resources). And even though the stock market’s current appraisal is not favourable, it has no connection with the intrinsic value of your holdings.
Various central banks continue to steer this economy like drunken sailors and they are injecting TRILLIONS of dollars into the system. I would argue that many nations in the West are already bankrupt (US, Britain, Germany, Spain, Iceland and Ireland come to mind) and the ONLY thing they can do now is to print even more money. For example, America’s total debt is worth US$54 trillion and there is no way the US can ever hope of repaying its debt in today’s money. In other words, either the US will default (highly unlikely in my view) or it will print and inflate so that this huge mountain of debt feels much smaller in the future due to the loss of its purchasing power. Remember, the best way to make debt more manageable is by inflating the supply of money in the system. And this is precisely what the various central banks are doing.
It is worth noting that nations like Germany and the US have already started using the printing press and more nations will soon follow. When the entire planet is covered with oceans of paper “money”, its purchasing power will sink and hard assets will sky-rocket. At least this is what has happened throughout history. So, please don’t be fooled by this temporary contraction in hard assets and hold on to your positions. If anything, take advantage of the ongoing fire-sale and if your financial situation permits, convert more cash to quality assets in the resources sector.
A bunch of turkeys have hijacked our monetary system and all they know is how to print money. Rather than let the market clear itself out, central banks continue to use tax payers’ money to bail out insolvent institutions. This brilliant strategy has NEVER worked in the past and it will not work this time around. Instead of robbing innocent people of their savings, the establishment must allow the weak banks to go bust. For example, if Citibank is on the verge of collapse, then the US Treasury must let it go bust! All Mr. Geithner needs to do is to protect the customers of Citibank, allow Citibank’s investors (shareholders and bondholders) to suffer and sell the bank’s book to another institution. This is all that needs to happen. This way, depositors will not lose anything and only investors in Citibank will suffer – and they should! Why should the public share the losses with these investors? When Citibank did well in the past, did its shareholders and bondholders distribute the profits to the public? Of course not! So, why should the reverse occur now?!
Personally, I find these bail-outs absurd, unethical and a total waste of valuable resources! Who gave these politicians the authority to act like investment bankers? Mr. Geithner is not a qualified ‘merger & acquisition’ expert, so how does he have the audacity to use other people’s money to take over insolvent banks? Likewise, Mr. Bernanke is now using American taxpayers’ money and buying distressed debt! I find this outrageous! Is he going to act like a debt collector when people default on their loans?
Mark my words – the establishment is only making matters worse and prolonging the pain. Moreover, by printing insane amounts of paper, the politicians are setting everyone up for an inflationary nightmare! One thing is for sure – before this drama ends, the viability of the US Dollar as the world’s reserve currency will come under question. When the US Dollar starts to implode, hard assets will go through the roof. Remember, commodity prices went ballistic in the late 1930’s as well as during the 1970’s. We should expect similar action in the years ahead.
This speech sounds so familiar. All this has been partly accomplished. The idea of the founding father of the JBS was good, saddly this organization has turned the back on America and is an opposition based group used measure and control opposition. By this they can limit and control the amount and quality of opposition information. Another PSYOP
A reporter contacted me recently with the following question:
“I am a reporter, and I am doing a story on Bernard Madoff’s life after pleading guilty. As part of this, I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize?”
Here is my answer fleshed out in full:
Americans lived in a “Made-off” and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.
When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.
And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with negative amortization and an initial teaser rate, was also playing a Ponzi game.
And private equity firms that did over a $1 trillion of leveraged buyouts (LBOs) in the last few years with a debt-to-earnings ratio of 10 or above were also Ponzi firms playing a Ponzi game.
A government that will issue trillions of dollars of new debt to pay for this severe recession and socialize private losses may risk becoming a Ponzi government if–in the medium term–it does not return to fiscal discipline and debt sustainability
A country that has–for over 25 years–spent more than income and thus run an endless string of current account deficit–and has thus become the largest net foreign debtor in the world (with net foreign liabilities that are likely to be over $3 trillion by the end of this year)–is also a Ponzi country that may eventually default on its foreign debt if it does not, over time, tighten its belt and start running smaller current account deficits and actual trade surpluses.
Whenever you persistently consume more than your income year after year (a household with negative savings, a government with budget deficit, a firm or financial institution with persistent losses, a country with a current account deficit) you are playing a Ponzi game. In the jargon of formal economics, you are not satisfying your long-run inter-temporal budget constraint as you borrow to finance the interest rate on your previous debt, and are thus following an unsustainable debt dynamics that eventually leads to outright insolvency.
According to Hyman Minsky and economic theory, Ponzi agents (households, firms, banks) are those who need to borrow more to repay both principal and interest on their previous debt; i.e., Minsky’s “Ponzi borrowers” cannot service either interest or principal payments on their debts. They are called “Ponzi borrowers” as they need persistently increasing prices of the assets they invested in to keep on refinancing their debt obligations.
By this standard, U.S. households whose debt relative to income went from 65% 15 years ago, to 100% in 2000, to 135% today were playing a Ponzi game.
And an economy where the total debt to GDP ratio (of households, financial firms and corporations) is now 350% is a Made-Off Ponzi economy. And now that home values have fallen 20% (and they will fall another 20% before they bottom out) and equity prices have fallen over 50% (and may fall further), using homes as an ATM to finance Ponzi consumption is not feasible any more. The party is over for households, banks and non-bank highly leveraged corporations.
The bursting of the housing bubble, the equity bubble, the hedge funds bubble and the private equity bubble showed that most of the “wealth” that supported the massive leverage and overspending of agents in the economy was a fake bubble-driven wealth. Now that these bubble have burst, it is clear that the emperor had no clothes, and that we are the naked emperor. A rising bubble tide was hiding the fact that most Americans and their banks were swimming naked; and the bursting of the bubble is the low tide that shows who was naked.
Madoff may now spend the rest of his life in prison. U.S. households, financial and non-financial firms, and government may spend the next generation in debtor’s prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over-consumption and risk-taking.
Americans, let us look at ourselves in the mirror: Madoff is us and Mr. Ponzi is us!
There is a grave risk of a global L-shaped depression.
For those who argue that the rate of growth of economic activity is turning positive–that economies are contracting but at a slower rate than in the fourth quarter of 2008–the latest data don’t confirm this relative optimism. In 2008’s fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.
There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here’s why:
First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January’s sales increase is a fluke–more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.
For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.
Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.
With economic activity contracting in 2009’s first quarter at the same rate as in 2008’s fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing–even unorthodox–is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don’t react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.
How Venice Rigged the First and Worst Global Financial Collapse
This article is reprinted from the Winter 1995 issue of FIDELIO Magazine.
by Paul Gallagher
Six hundred and fifty years ago came the climax of the worst financial collapse in history to date. The 1930’s Great Depression was a mild and brief episode, compared to the bank crash of the 1340’s, which decimated the human population.
The crash, which peaked in A.C.E. 1345 when the world’s biggest banks went under, “led” by the Bardi and Peruzzi companies of Florence, Italy, was more than a bank crash—it was a financial disintegration. Like the disaster which looms now, projected in Lyndon LaRouche’s “Ninth Economic Forecast” of July 1994, that one was a blowup of all major banks and markets in Europe, in which, chroniclers reported, “all credit vanished together,” most trade and exchange stopped, and a catastrophic drop of the world’s population by famine and disease loomed.
Like the financial disintegration hanging over us in 1995 with the collapse of Mexico, Orange County, British merchant banks, etc., that one of the 1340’s was the result of thirty to forty years of disastrous financial practices, by which the banks built up huge fictitious “financial bubbles,” parasitizing production and real trade in goods. These speculative cancers destroyed the real wealth they were monopolizing, and caused these banks to be effectively bankrupt long before they finally went under.
The critical difference between 1345 and 1995, was that in the Fourteenth century there were as yet no nations. No governments had the national sovereignty to control the banks and the creation of credit; or, to force these banks into bankruptcy in an orderly way, and replace fictitious bank credit and money with national credit. Nor was the Papacy, the world leadership of the Church, fighting against the debt-looting of the international banks then as it is today; in fact, at that time it was allied with, aiding, and abetting them.
The result was a disaster for the human population, which fell worldwide by something like 25 percent between 1300 and 1450 (in Europe, by somewhere between 35 percent and 50 percent from the 1340’s collapse to the 1440’s).
This global crash, caused by the policies and actions of banks which finally completely bankrupted themselves, has been blamed by historians ever since on a king—poor Edward III of England. Edward revolted against the seizure and looting of his kingdom by the Bardi and Peruzzi banks, by defaulting on their loans, starting in 1342. But King Edward’s national budget was dwarfed by that of either the Bardi or Peruzzi; in fact, by 1342, his national budget had become a sub-department of theirs. Their internal memos in Florence spoke of him contemptuously as “Messer Edward”; “we shall be fortunate to recover even a part” of his debts, they sniffed in 1339.
A “free trade” mythology has been developed by historians about these “sober, industrious, Christian bankers” of Italy in the Fourteenth century—“doing good” by their own private greed; developing trade and the beginnings of capitalist industry by seeking monopolies for their family banks; somehow existing in peace with other merchants; and expiating their greedy sins by donations to the Church. But, goes the myth, these sober bankers were led astray by kings (accursed governments!) who were spendthrift, warlike, and unreliable in paying debts which they had forced the helpless or momentarily foolish bankers to lend them. Thus, emerging “private enterprise capitalism” was set back by the disaster of the Fourteenth century, concludes the classroom myth, noting in passing that 30 million people died in Europe in the ensuing Black Death, famine, and war. If only the “sober, Christian” bankers had stuck to industrious “free trade” and prosperous city-states, and never gotten entangled with warlike, spendthrift kings!
The Real Story
Two recent books help to overturn this cover story, although perhaps that is beyond the intention of their authors. Edwin Hunt’s 1994 book The Medieval Supercompanies: A Study of the Peruzzi Company of Florence,* establishes that this great bank was losing money and effectively going bankrupt throughout the late 1330’s, as a result of its own destructive policies—in Europe’s agricultural credit and trade in particular—before it ever dealt with Edward III. “Indeed, the great banking companies were able to survive past 1340 only because news of their deteriorated position had not yet circulated.” Just as in 1995. Read the rest of this entry »
With all the hype from various US dollar bears about the crisis with US banks, few on this side of the Atlantic are paying any attention to happenings in Europe.
For those who look, a strong case can be made that European banks are as bad off if not much worse off than their US counterparts.
Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region’s GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
“This is the largest run on a currency in history,” said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico’s car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
East Europe that is blowing up right now. Erik Berglof, EBRD’s chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.
Europe’s governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia’s central bank governor has declared his economy “clinically dead” after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
Somehow the myth persists that the Euro will be the world’s reserve currency. The “somehow” usually stems from those who believe in the tooth fairy and global decoupling while staring straight into a magic mirror that only highlights the problems in the US. Here is a better question….
John Mauldin explores that question in his latest Outside The Box: Can The Euro Survive?
Milton Friedman famously predicted that the euro would not last past their first economic crisis. This week we look at commentary by Niels Jensen that explores the news from Euroland. Can the euro survive? He explores a number of options which are most definitely not on the radar screen for most investors. It is good to get a perspective from those outside of our own back yard. Note that when he says “our country” he is referring to Great Britain.
Do BRICs (and Germans) Eat PIGS?
When the euro was introduced about ten years ago, the pessimists didn’t give it much chance of reaching its tenth anniversary. The euro, or so the argument went, was doomed from the outset because of the wide spread in economic performance and discipline amongst the member countries. At one end you had, and still have, the highly disciplined, but also slow growing, economies of Germany and the Netherlands. At the other end you find the faster growing but poorly disciplined countries such as Spain and Greece. As icing on the cake, you also had, and still have, countries that lack in both departments, such as Italy, making it difficult for the union to ‘gel’ – well, according to sceptics.
What they [the sceptics] failed to realise was that Europe, together with the rest of the world, was about to enter a period of unprecedented prosperity. The good times would not only gloss over the deeper problems, but the euro would actually go from strength to strength to a point where it now threatens to unseat the US dollar as the premier reserve currency of the world. It is therefore perhaps a mystery to some of you, why one should question the longer term viability of the euro. That is nevertheless what I intend to do.
The problem, as I have already alluded to, is poor discipline amongst several of the member states. Ever heard of the four PIGS? This less than flattering acronym stands for Portugal, Italy, Greece and Spain, four members of the euro zone which are all in much deeper trouble than they are prepared to admit.
Let’s take a closer look at the unit labour cost index for various countries
2007 Unit Labour Cost Index (2000=100)
Since the introduction of the euro, the PIGS have failed miserably to keep up with Germany on this measure of competitiveness. So has Ireland by the way, hence its current predicament.
Another issue, which is potentially even more destabilising for the euro longer term, is the massive liabilities facing Europe as its population ages.
Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050 if the current pension and social security programme is left unchanged. The Greek government is painfully aware of this and have been working on several new initiatives. It was the passing of one of those new laws which caused the riots in Athens before Christmas.
A third problem facing Europe is the sheer scale of the banking crisis. Although this is not just a European problem, European countries are probably worse off than the US because a larger part of European debt has to be financed externally. As you can see from chart 1, more than $2 trillion of European and U.S. bank debt needs to be re-financed before the end of next year. Unless there is a material improvement in market conditions, re-financing at such a massive scale is simply not doable.
Maturing Bank Securities in 2009/10 (USD)
Kenneth Rogoff and Carmen Reinhart published a research paper about a month ago which should be mandatory reading for all investors2. They have studied every single banking crisis of the past 100 years and reach some rather unsettling conclusions. As they point out: “Broadly speaking, financial crises are protracted affairs”.
Following a banking crisis, asset prices fall more and for longer than most investors realise. So do output and unemployment. Most importantly, though, the real value of government debt explodes but not for the reasons you might think. Yes, the bailout costs are significant, but the main driver of rising government debt is actually the subsequent collapse of tax income. [Mish note: See article for charts]
So when we are told that the bailout cost, although large, is still manageable, it is only half the story. The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted – rise in public debt. Have you heard any mention of that from your government?
In Frankfurt, the ‘eurocrats’ are currently congratulating themselves that they, through strict monetary discipline, killed inflation in the aftermath of last year’s explosion in commodity prices. The reality, however, is that the credit crunch killed inflation – they didn’t – and Europe is now at a junction where even the smallest policy mistake could be very expensive indeed.
So, could all this lead to the destruction of the euro? Could the currency union actually break up? It is not that the risk to the PIGS has not been recognised by bond investors. As you can see from chart 3 below, investors in long dated Greek government bonds now earn about 2.5% more than they do by investing in correspondent German bunds.
PIGS Sovereign Debt Spreads over Germany
On the other hand, I may disappoint one or two readers (I will certainly disappoint Ambrose Evans-Pritchard of the Daily Telegraph who appears to have declared war on the euro), but I firmly believe that the euro will almost certainly survive the current crisis. I am much more worried about some of the member countries.
There is nothing in the Maastricht treaty which prevents a member country from leaving the euro, yet the decision to join is effectively irreversible. There are a number of reasons for this, the most important being economic costs. Take Italy which has a history of compensating for lost competitiveness through regular devaluations. If Berlusconi did the unthinkable tomorrow (sorry – nothing is unthinkable in Berlusconi’s world), Italy’s borrowing costs would explode. My guess is that bond investors would demand double digit returns on a Lira denominated bond to compensate for the dramatically increased devaluation risk. Already in a precarious fiscal position, Italy could quite simply not afford that.
So, if any country were to leave the euro, it would more likely be from a position of strength, and only one country possesses enough strength to pull that off in the current environment. That country is Germany. And, although the euro is not particularly popular in Germany, I believe it is extremely unlikely for Germany to make such a move unilaterally.
At the same time, the fact that the euro has saved the bacon of more than one country in recent months – Ireland being the most obvious example – should not be ignored. For this very reason, the euro membership is actually far more likely to grow than to shrink as a result of the financial and economic crisis engulfing the world. The issue the EU has to deal with is whether the new applicants should actually be welcomed. Most of those who would want to join will bring plenty of baggage.
Another possible outcome, which you hear almost no mention of, is the possibility of a new Transatlantic currency. When I mention this possibility, everyone laughs, but think about it for a second. The economic crisis on both sides of the Atlantic is enormous. Both are resorting to the same formulas – large fiscal stimulus and quantitative easing (a word invented by central bankers because ‘printing money’ smacks too much of Zimbabwe). There is a real risk that the entire financial and monetary system on either side of the pond needs to be re-designed. If that were to happen, I am pretty confident that the Fed and the ECB would at least sit down and discuss the possibility of a joint currency. That would also allow the UK to join a currency union without too much egg on its battered face.
In the short to medium term, though, there is no such bailout on the horizon. D-day is now firmly on the horizon. As I see things, it is not inconceivable that a member country could be forced to default on its sovereign debt.
Another, and more likely, outcome is the possibility of one or more member countries coming under EU administration. The recent crowd trouble in Greece could very well turn out to be the dry run for much bigger and more organised labour market unrest across Europe as reality begins to bite.
For the time being, though, European governments continue to be in denial. When the IMF recently recommended that Spain implement various structural reforms, the idea was flatly rejected by Prime Minister Zapatero. In the meantime, you can sit back and prepare for the drama to unfold. Very simplistically, it is a choice between Zimbabwe and Japan. Our central bankers can choose to monetize their way out of the current slump and run the risk of much higher interest rates and a rapidly deteriorating currency like Zimbabwe or they can show fiscal discipline and accept perhaps ten years of below par growth a la Japan. Or they can find the delicate balance in between the two and everyone will live happily thereafter. But that requires both skill and luck.
Those are long snips from a very long article that is worth a read in entirety. In aggregate, my take is that the Eurozone, the UK, and the US all face similar problems, and many countries are in far worse shape than the US. And while Italy is likely to do a lot of sabre rattling, none of the PIGS are apt to be so foolish as to leave the European Union.
However, there is going to be increasing pressure on Germany to bailout the other Eurozone countries yet there is no reason to think they will (or should) oblige.
One of the consequences of the Mad Race to ZIRP (Zero Interest Rate Policy) is that Japan, the UK, US, and EU all have interest rates at or approaching zero. Thus a big reason to enter various carry trades has gone up in smoke.
On the plate now is a meltdown possibility in US banks, UK banks, and Eurozone banks as the entire global banking system is insolvent. Conceivably a framework for a new transatlantic or even global currency could come out of such a meltdown.
However, it is impossible to agree to a solution when Central Bankers do not even understand the problem. The problem is micromanagement of interests rates and currencies by central bankers in conjunction with fractional reserve lending and deficit spending everywhere. Right now, president Obama, Bernanke, and nearly every politician and central bank in the world is focused on curing symptoms instead of curing the disease.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com Article Source
A secret 17-page paper discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday, also warned that government attempts to buy up or underwrite such assets could plunge the European Union into a deeper crisis.
National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors – particularly those who lend money to European governments – have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent – of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned. “
“It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”
European Commission officials have estimated that “impaired assets” may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.
In addition, so-called ‘available for sale instruments’ worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.
Banks account for their assets in different ways. Assets put into the “trading book” have to be marked to current market values, while those in the “banking book” are loans and other assets which the institution believes it can hold to maturity. Other assets are classified as “available for sale”, which are also marked to market values.
The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.
In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.
“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.
NEW YORK – The Obama administration economic stimulus package is going to force the Treasury to borrow approximately $2.5 trillion in 2009 and another $4 trillion in 2010, with the result of increasing the current $10 trillion national debt by 65 percent in just two years.
If the Obama administration increases the national debt by 65 percent every two years, the debt will be $16.5 trillion in 2010 and $27.225 trillion by 2012, the year of the next presidential election.
To answer the question of how big a problem borrowing $6.5 trillion will be over the next two years, we decided to examine just how large 1 trillion actually is.
One trillion is the number 1 followed by 12 zeroes, as in: 1,000,000,000,000.
If you had gone into business on the day Jesus was born, and your business lost a million dollars a day, 365 days a year, it would take you until October 2737 to lose $1 trillion.
If you spent $1 million a day, every day since Jesus was born, you would still be only slightly more that three-quarters of the way to spending $1 trillion.
One trillion dollars divided by 300 million Americans comes out to $3,333 per person.
One trillion one-dollar bills stacked one on top of the other would reach nearly 68,000 miles into the sky, about a third of the way from the Earth to the moon.
Earth’s home galaxy, the Milky Way, is estimated to contain about 200 billion stars. So, if each star cost one dollar, one trillion dollars would buy five Milky Way galaxies full of stars.
One trillion seconds of ordinary clock time equals 31,546 years. So, spending money at the rate of one dollar every second, or $86,400 every day, would still take nearly 32,000 years to spend $1 trillion.
If someone were to build city blocks that contained 10 homes valued at $100,000 per home, you would end up with ten houses to a block, ten blocks to a mile and a hundred blocks per square mile. It would take 10,000 square miles to reach $1 trillion in value. This would be more than the size of six U.S. states: Vermont, 9,615 square miles; New Hampshire, 9,351 square miles; New Jersey, 8,722 square miles; Connecticut, 5,544 square miles; Delaware, 1,954 square miles; and Rhode Island, 1,545 square miles.
Craig Smith, founder and CEO of Swiss America, estimates it would take approximately four generations of Americans to pay off the interest of the U.S. Treasury bonds sold as debt to create the $1 trillion stimulus package, factoring in a 3 percent growth rate in the economy throughout that time.
With the estimated population of the United States at 305,556,415 people, each citizen’s share of the national debt is $34,769.40.
In September 2008, the digital display on the Times Square National Debt Clock was modified to eliminate the dollar sign, so the national debt in tens of trillions of dollars could be displayed.
The clock, created in 1989 by Manhattan real estate developer Seymour Durst, is now being redesigned so it can display the national debt in numbers measured in the hundreds of millions, with a dollar sign that could be eliminated should the national debt ever reach $1 quadrillion.
The new clock should be ready to install early this year.
The Bush administration added more than $4 trillion to the national debt, increasing it more than 70 percent from the time George W. Bush took office Jan. 20, 2001.
Yet trillions may no longer be enough to measure important financial statistics on a global basis.
The Bank of International Settlements now estimates that derivatives, the complex bets financial institutions and sophisticated investors make with one another on everything from commodities options to credit swaps, now top $650 trillion worldwide – that’s $ 0.65 quadrillion.
A quadrillion, a trillion multiplied by 1,000, is a 1 followed by 15 zeroes, as in: 1,000,000,000,000,000.
The Second Bank of the United States was authorized for a twenty year period during James Madison’s tenure in 1816. As President, Jackson worked to rescind the bank’s federal charter. In Jackson’s veto message (written by George Bancroft), the bank needed to be abolished because:
It concentrated the nation’s financial strength in a single institution.
It exposed the government to control by foreign interests.
It served mainly to make the rich richer.
It exercised too much control over members of Congress.
It favored northeastern states over southern and western states.
Following Jefferson, Jackson supported an “agricultural republic” and felt the Bank improved the fortunes of an “elite circle” of commercial and industrial entrepreneurs at the expense of farmers and laborers. After a titanic struggle, Jackson succeeded in destroying the Bank by vetoing its 1832 re-charter by Congress and by withdrawing U.S. funds in 1833.
The bank’s money-lending functions were taken over by the legions of local and state banks that sprang up. This fed an expansion of credit and speculation. At first, as Jackson withdrew money from the Bank to invest it in other banks, land sales, canal construction, cotton production, and manufacturing boomed.[25] However, due to the practice of banks issuing paper banknotes that were not backed by gold or silver reserves, there was soon rapid inflation and mounting state debts.[26] Then, in 1836, Jackson issued the Specie Circular, which required buyers of government lands to pay in “specie” (gold or silver coins). The result was a great demand for specie, which many banks did not have enough of to exchange for their notes. These banks collapsed.[25] This was a direct cause of the Panic of 1837, which threw the national economy into a deep depression. It took years for the economy to recover from the damage.
The U.S. Senate censured Jackson on March 28, 1834, for his action in removing U.S. funds from the Bank of the United States. When the Jacksonians had a majority in the Senate, the censure was expunged.
Every 15 months, the USA owes another trillion dollars against Gov expenses!
Prop up the bad guys with money and reward mistakes & incompetence!
Money Supply has increased 70% since October!
Every American owes: $586K for FED debt
“Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon.” Richard W. Fisher, the President and Chief Executive Officer of the Federal Reserve Bank of Dallas.
Link Fed reserve Bank of Dallas: Storms on the Horizon – Fisher’s Remarks before the Commonwealth Club of California
…and this excludes contingent liabilities such as social security, government pensions and Medicare. The economy is 2-3 times more debt-dependent – with at least $29 Trillion DEBT EXCESS – - compared to the 1950-1970s! $175,154 per man, woman and child – or $700,616 per family of 4!
80% ($42 trillion) of today’s debt was created since 1990.
“Foreign interests have more control over the US economy than Americans, leaving the country in a state that is financially imprudent. More and more of our debt is held by foreign countries – some of which are our allies and some are not. The huge holdings of American government debt by countries such as China and Saudi Arabia could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.” David Walker, the US comptroller general. 23 July 2007
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. The abandonment of the gold standard made it possible for welfare statists to use the banking system as a means to an unlimited expansion of credit (debt creation)” – Alan Greenspan (#8), 1966
Rate of Personal Saving Plunges 114% – a record low in world history – $1.1 trillion missing
If families have less inflation-adjusted income, despite more mothers working, then family personal savings must suffer as a consequence – unless, of course, families reduce their consumption. But, families increased consumption spending and, to cover this, they reduced savings to historic lows and increased household debt to historic highs. Dangerous Trend !!!
Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:
* Outright lying in official statistics such as money supply, inflation or reserves.
* Suppression of publication of money supply statistics, or inflation indices.
* Price and wage controls.
* Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or something similar.
* Adjusting the components of the Consumer price index, to remove those items whose prices are rising the fastest.
None of these actions address the root causes of inflation, and in fact, if discovered, tend to further undermine trust in the currency” ( Jim Sinclair)
8 Feb 2009, 1705 hrs IST, Swaminathan S Anklesaria Aiyar, TNN
High foreign exchange reserves have, in the current global recession, saved Asian countries (including India) from the travails they suffered in the Asian financial crisis of 1997-2000. So, they must aim for rising forex reserves in future too, right? Wrong.
In truth, high Asian forex reserves are an important reason for the current recession. High reserves promise safety in a storm. But, beyond a point this safety becomes illusory, because rising forex reserves worsen the global imbalances that have precipitated the recession.
The global recession has many roots. One is the erosion of traditional US household prudence. US households used to save 6% of their disposable income. But in recent years they went on a borrowing and spending spree, and household savings dropped to virtually zero. Corporations and financiers also ran up record debts, partly to buy assets such as houses, stocks and commodities. This created huge bubbles in all three markets.
When the bubbles finally burst, US households, corporations and financiers found themselves in dire straits. Many financial giants were rescued by the government. Meanwhile households, sobered by the turn of events, started saving 4% of disposable income, up from zero. More saving meant less spending, and made the recession deep and sharp.
In the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt.
People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products.
Businesses began to fail as construction work and factory orders plunged. By 1928, the Construction Boom was over.
By 1929, public consumption was markedly down. Freight carloads and manufacturing fell drastically. Automobile sales declined by a third in the nine months before the crash.
Construction was down $2 billion in the period since 1926.
Stock market crash begins October 24, 1929. Investors call October 29 “Black Tuesday.” Losses for the month will total $16 billion, an astronomical sum in those days.
By February, 1930, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Expands the money supply with a major purchase of U.S. securities. However, for the next year and a half, the Fed will add very little money to the shrinking economy.
Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay.
The first bank panic occurs later this year; a public run on banks results in a wave of bankruptcies. Bank failures and deposit losses are responsible for the contracting money supply.
With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.
Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
Marriner S. Eccles, FDR’s Fed Chair noted: “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. That is what happened to us in the twenties.”
AND THIS IS WHAT HAPPENED TO AMERICA IN THE 1930′S
Me? What do i know about high finance? Not much, to be sure, but how much does one need to know to recognize the incredible black hole that “high finance” now finds itself in? The strange thing is that those who were supposed to know, those High Priests of the financial world have proved at best, to even know less….. at worst , they knew but dared to speak. That did not stop the Top Cats from becoming Fat despite knowing that the bubble was about to burst!
In plain, simple language, banks over the world knew what was going on. All banks, finance companies, building societies and loan companies were falling over themselves to lend people money.
Buy a new car!
Get a mortgage for a new house …. Or even a second house!!
Get a loan to get on holiday!
Buy a yacht!
Whatever you have always desired you can have it with one of our Magic Carpet Loans!
All the adverts, not just of these institutions, but all consumer oriented producers, were inviting us to get into debt so we could buy their “unnecessary necessities” on the never-never. And like children at the Credit Candy Store, we fell for it.
True, our greed WAS the grease that made this Money Monster slide, but were we not relying on the Financial Gurus to have sussed out the repayment details correctly for us? And yet, behind our greed was another factor, their greed!
The consumer society that was to drive all countries to spread wealth to us all soon became just a debt machine where one bank sold its debt to another and that one to yet a third and fourth and so on. Each entity was holding huge book assets that in reality were not much more than fantasy book-entries. With such imaginative figures they made everyone believe they were all profitable organizations.
But were are all the millions, billions, trillions and zillions of after-tax profits that they were all declaring to their shareholders and proudly displaying in their balance sheets? Where have they disappeared to now that this money is sorely needed?
“Oops, sorry guys but we’ve paid our president and vice presidents, our managing directors and executive officers …. the coffers are empty”
Not just empty, but owing so much that the government of every country in the world are rushing to plug the holes rapidly sinking ship of fools before the Consumer Society & its financiers disappear into a black hole of devalued Dollars, Pounds, Euros and Yens.
Now just a minute…
What got us into all this mess was the over-marketing of excessive credit. What got us into this mess was the loaning machine with financial institutions built and accelerated into overdrive. What got the world into this mess was precisely that, CREDIT. And such indiscriminate credit tricked society and each and every one of us into accepting life-long debt as the modern way of life. Now that it is blatantly obvious that these institutions have squandered these moneys, inflated their balance sheet, hoodwinked the stock market and … in short… tricked every one including themselves… now that we all know this, our governments are bailing out the very culprits by giving them freshly printed money so they can… wait for it .. give us all more credits and loans!
Why? Because then the ordinary man in the street will have to work harder to make profits for the very institutions that squandered the money they made from us in the first place! When they were making huge profits, they shared these exclusively among themselves. Mr and Mrs Man-In-The-Street did not even get a whiff of that. But now that they are bankrupt the Tax Money or Mr and Mrs Man-In-The-Street is going to be used … is being used… to keep the very same institutions – in most cases with the very same executive officers – afloat. After getting out tax money at just a nominal interest rate, they will loan it to us at a much higher rate and make us work harder… to pay back what we already given to our governments to keep for our society’s infrastructure. So we end up losing, not once, but twice.
And this is High Finance?
Personaly, I fell that governments should and must step in, but to help the people that are caught in this web of loans and credit directly, not through the proved inefficient institutions that created the mess in the first place.
As an example, if a person is incapable continuing mortgage payments on his first home (not his luxury second home) then the government should buy the remaining debt from the bank and allow the person to live in his home as a paying tenant. The rent would be an amount well below the mortgage repayment he can no longer meet so as to give him the financial respite needed to get back on his feet again. This is DIRECT HELP to those that need it.
True, this does lead to nationalisation but would be a “beneficial nationalisation”, not an enforced one. In any case, is that any worse than the tragic situation we are facing now? Is that any worse than supporting the very institutions that have caused the huge and world-wide financial collapse?
But as I said in the beginning … what do I know of high finance? All I know is that when there are debts to pay, giving further loans only worsens a bad situation. Giving such loans through those at so grossly mismanaged matters the first tome is utter stupidity.
Blog Author Comment
I believe the fundamental problem with the financial crisis, lies in the creation of money itself. I invite any and all reader to find about the system called the “Fractional Reserve”. This system permits a bank to lend up to 10 times the amount of a deposit, or can lend ten times the amount of reserves it holds. On a grand scale it is easy to see it is a Ponzi scheme. This unsustainable system, has been the real “hidden hand” permitting crisis, and make Fat-Cats, even fatter.
• $2 billion earmark to re-start FutureGen, a near-zero emissions coal power plant in Illinois that the Department of Energy defunded last year because it said the project was inefficient.
• A $246 million tax break for Hollywood movie producers to buy motion picture film.
• $650 million for the digital television converter box coupon program.
• $88 million for the Coast Guard to design a new polar icebreaker (arctic ship).
• $448 million for constructing the Department of Homeland Security headquarters.
• $248 million for furniture at the new Homeland Security headquarters.
• $600 million to buy hybrid vehicles for federal employees.
• $400 million for the Centers for Disease Control to screen and prevent STD’s.
• $1.4 billion for rural waste disposal programs.
• $125 million for the Washington sewer system.
• $150 million for Smithsonian museum facilities.
• $1 billion for the 2010 Census, which has a projected cost overrun of $3 billion.
• $75 million for “smoking cessation activities.”
• $200 million for public computer centers at community colleges.
• $75 million for salaries of employees at the FBI.
• $25 million for tribal alcohol and substance abuse reduction.
• $500 million for flood reduction projects on the Mississippi River.
• $10 million to inspect canals in urban areas.
• $6 billion to turn federal buildings into “green” buildings.
• $500 million for state and local fire stations.
• $650 million for wildland fire management on forest service lands.
• $1.2 billion for “youth activities,” including youth summer job programs.
• $88 million for renovating the headquarters of the Public Health Service.
• $412 million for CDC buildings and property.
• $500 million for building and repairing National Institutes of Health facilities in Bethesda, Maryland.
• $160 million for “paid volunteers” at the Corporation for National and Community Service.
• $5.5 million for “energy efficiency initiatives” at the Department of Veterans Affairs National Cemetery Administration.
• $850 million for Amtrak.
• $100 million for reducing the hazard of lead-based paint.
• $75 million to construct a “security training” facility for State Department Security officers when they can be trained at existing facilities of other agencies.
• $110 million to the Farm Service Agency to upgrade computer systems.
• $200 million in funding for the lease of alternative energy vehicles for use on military installations.
For those who haven’t been paying much attention to the financial situation recently, the U.S. Treasury has just entered what I call the “final blowout phase” of debt desperation. As FT.com reports, the Treasury is set to auction off $67 billion in debt next week, to be followed by increasingly frequent auctions of yet more debt, to the tune of unknown billions (or even trillions) each year.
The question is: Who is stupid enough to actually buy a 30-year debt note from the U.S. Treasury? The hilarious answer is: The Federal Reserve, of course!
Yes, the Fed will begin creating yet more money out of thin air in order to buy the IOUs of the U.S. Treasury and create the appearance that somebody is still buying U.S. debt.
At this point, it should be apparent to anyone with functioning brainwaves that the only reason the Fed has to step in and buy the debt is because nobody else is willing to pay for it! If you’re a rich oil sheik in the Middle East, do you want to trade your hard-won wealth for pieces of paper with IOUs written on them from a nation that has no financial future and can’t even find buyers for its debt anymore?
Of course not. Especially not for a measly 2.9% interest rate. The number of international suckers willing to pony up cash in exchange for empty promises from a bankrupt country is dwindling fast. So the only remaining buyer is the private company running the counterfeiting machines: The Federal Reserve.
The upshot of all this, by the way, is that the Fed’s creation of new money to buy Treasury debt will result in the rampant acceleration of hyperinflation of the U.S. currency. The layers of madness in all this simply defy explanation. The financial pros are taking their money and exiting the U.S. banking system faster than a room full of Senators running away from responsibility.
There are now only two lawmakers in Washington who seem willing to stand up to the Fed: Rep. Ron Paul and Rep. Dennis Kucinich. (Neither are Senators, by the way.)
Enjoy the puppet show… ouch!
The Fed buying debt from the Treasury through the use of made-up money is something of a circus. Or, perhaps, a puppet show. And that puppet show goes something like this: I have a puppet on my right hand named Treasury, and it talks to a puppet on my left hand named Fed. My right-hand puppet (Treasury) says it needs some money, so it writes up a collection of IOUs on some scrap paper. My left-hand puppet (Fed) prints up a bunch of green paper money and trades them for the IOUs.
My right-hand puppet then hands that cash to rich, elite bankers who run Wall Street while my left-hand puppet prints up yet more cash to replace the cash it used to buy the IOUs. When they’re done with all that, both puppets plunge deep into my pockets and grab me by the balls because, of course, I’m a taxpayer, and that’s who ultimately gets squeezed in this racket.
Let me be very, very clear to everyone bright enough to get this. I want to be CRYSTAL clear and on the record with this: Anyone left holding U.S. dollars when the music stops is going to lose most of the value those dollars once represented. In time, we will see a mass exodus from the U.S. dollar take place, and when that scenario unfolds, only about 1% – 2% of the people will be able to cash out or convert their dollars into something representing real value. The remaining 98% (or so) could lose everything. That’s because the U.S. dollar is a house of cards based on vanishing echoes of lingering faith in the solvency of the now-bankrupt U.S. government (that’s still fighting and funding two wars).
It’s all just paper, after all… truly just pieces of paper with larger and large numbers printed on them. That paper is backed by the “full faith and credit” of a nation that’s so far beyond bankruptcy that its political leaders can’t even utter the phrase “national debt” anymore without being chased off stage by angry voters.
It won’t be long before the world realizes just how fragile the whole racket really is. Remember this: What Madoff was arrested for (the Ponzi scheme), the Fed has been pulling off for nearly a century! The U.S. Treasury / Federal Reserve debt scam is the greatest Ponzi scheme this world has ever witnessed. The only difference is that while Madoff screwed the rich, the Fed is screwing everybody.
A banker walks into a bar…
Here’s a new twist on an old joke you might find funny:
Three rich Wall Street banksters and a Federal Reserve official are flying over New York City in a private jet bought with bailout money. The first banker says, “Why don’t we throw a thousand dollars out the window and help somebody?”
The second banker says, “Why don’t we throw a million dollars out the window and help even more people?”
The third banker says, “Why don’t we throw a trillion dollars out the window and help everybody?”
The Federal Reserve official pauses, looks at the bankers and says, “Again?”
And finally, the (Libertarian) co-pilot turns around and says, “Why don’t we throw you guys out the window and just help ourselves?”
Las Vegas, which by some accounts already glitters, wants $2 million for neon signs.
Boynton Beach, Fla., is looking for $4.5 million for an “eco park” featuring butterfly gardens and gopher tortoises.
And Chula Vista, Calif., would like $500,000 to create a place for dogs to run off the leash
These are among 18,750 projects listed in “Ready to Go,” the U.S. Conference of Mayors’ wish list for funding from the stimulus bill moving through Congress. The group asked cities and towns to suggest “shovel ready” projects for the report, which it gave to Congress and the Obama administration.
Although the bulk of proposals are roads, sewers and similar projects, some wouldn’t require a shovel at all. The mayors group sees a potential 1.6 million new jobs from the projects, though a few of them wouldn’t create any.
Some localities are using a kitchen-sink strategy. “Our approach has been to list everything, because we don’t know what the final guidelines will be or what the final dollar amount will be,” says Greg MacLean, public-works director in Lincoln, Neb.
Among entries on Lincoln’s list is a $3 million environmentally friendly clubhouse for a municipal golf course. “From a public-perception standpoint, I see how it could be an issue,” Mr. MacLean says. But, he says, construction would create 54 jobs.
The debate about what is appropriate stimulative spending, now raging in Washington, echoes differences over the Works Progress Administration during the Depression. It built 651,000 miles of roads and 24,300 miles of sewer lines, but was sometimes lambasted because it also paid for murals and battlefield monuments. “That’s when the word ‘boondoggle’ first came into use” in its modern sense, says William Creech, of the U.S. National Archives and Records Administration.
Some Proposed Projects
Location
Project
Cost
Jobs Created
Austin, Texas
Building a 36-hole disc golf course
$886,000
4
Boynton Beach, Fla.
Development of an “eco park” with butterfly garden
$4.5 million
50
Virginia Beach, Va.
Replacement tennis courts
$1.8 million
38
Shreveport, La.
Purchase of eight police-equipped Harley-Davidson motorcycles
$150,000
1
Chula Vista, Calif.
Construction of a dog park
$500,000
7
Source: The United States Conference of Mayors’ Main Street Economic Recovery report
The mayors’ $149 billion project list is just one of many circulating in Washington and state capitals. Massachusetts — which, like other states, will have a say in distributing the money — has 4,000 project submissions from 51 towns competing for stimulus money. The San Diego Association of Governments came up with 1,043 possible projects in its region.
With their needs acute, some localities are abandoning boosterism, promoting their community as being more run-down than the next town. In central Maine, Pittsfield Mayor Tim Nichols says the roof on a town-owned theater is rickety, potholes are a “pain in the hiney,” and underground pipes are so decrepit “you got sewers backing up in cellars and in lawns.” Pittsfield would like about $6 million from Washington.
In Randolph, Vt., Town Manager Gary Champy says federal money to fix “old and pockmarked” roads in his town would lift the mood of residents, because “they’d feel like the government was working for them.” He adds: “This money isn’t going to banks.”
Shreveport, La., has $2.3 billion in projects ready to go. Mayor Cedric Glover’s priority is repairing roads, but he’s also asking $6 million for three aquatic centers with water slides, which he says would improve quality of life and create construction jobs.
And he would like the U.S. to buy Shreveport eight new Harley-Davidson motorcycles for its cops. This item would produce little local hiring, he acknowledges, but “Harley-Davidson is a great American company. Orders coming from municipalities like ours to a company like that certainly would be stimulative.”
The Conference of Mayors report has about a dozen golf-course-related projects. A lot of cities want to use funds to upgrade parks, such as Chula Vista, with its plans for a dog park that would include shading and fountains. San Bernadino, Calif., wants $1.1 million for park improvements, including a skateboard ramp and two “splash-park installations.” City officials in the communities say these aren’t their top priorities, but defend the projects as worthwhile.
Austin, Texas, could use $886,000 to build a 36-hole “disc golf” course, for frisbee tossing. It would be “environmentally and financially sustainable.” John Hrncir, government-relations officer, says the project list “was put together on very short notice,” and “we are not going to submit anything that is questionable when we seek actual funding.”
Heather Boushey, a senior economist with Center for American Progress, a liberal think tank in Washington, D.C., says parks and golf courses shouldn’t be deemed frivolous if they create jobs and are seen as long-term investments by their cities. She says the flood of proposals underscores a need for transparency in stimulus spending, which officials have promised.
The stimulus bill the House approved last week provides an array of tax cuts and a heavy dose of spending for new roads and bridges, public safety, expanded jobless benefits, food aid, wider broadband service and renovations for schools and public housing. Congress has said funds will be distributed to local governments through existing federal programs, either directly or through the states. Though the House approved an $819 billion bill, the final cost will depend on the Senate’s vote and on compromises the House and Senate make.
The House bill envisions a board and inspectors general to review the overall spending. It says governors, mayors or others who make funding decisions will have to post details of each project, such as its purpose and cost, on a special Web site, and certify that it’s a good use of taxpayer money.
Las Vegas, in seeking stimulus money for neon, says there’s a shortage of glitz off its beaten path. “When people think of Las Vegas, they think of the Strip, of Caesar’s Palace,” says city spokesman Jace Radke, but he says this project would help revitalize a blighted neighborhood.
As for the eco-park envisioned by Boynton Beach, its parks superintendent, Jody Rivers, says the $4.5 million project would generate jobs, teach residents about environmentally friendly living and highlight nature, such as the “unique gopher tortoises on the site.”
Dave Hansen, deputy city manager in Virginia Beach, Va., says localities are seeking funding for “some stuff that’s just a Santa Claus wish list.” He compiled $1 billion worth of local projects for inclusion in the mayors’ report. He calls that a “Holy Grail” list that town officials have now ranked by priority.
A former colonel in the Army Corps of Engineers, Mr. Hansen says the town’s top priorities are replacing a 50-year-old bridge ($90 million) and building a pumping station to alleviate flooding ($20 million). Lower on Virginia Beach’s list are items like “urban tree canopy protection” for the city ($3.75 million).
Also, $1.8 million to build municipal tennis courts. “Is it a bona fide need? Absolutely,” Mr. Hansen says. “Do you want to compare it to replacing a 52-year-old school? Well, probably not.”
In “Will U.S. Treasuries Be the Next Asset Bubble to Burst?”, Nouriel Roubini writes:
In 2009, any signs of a less than dire economic outcome as deflation may burst the bubble in Treasuries.***
This bubble is motivated by fear rather than greed. Investors are seeking to protect themselves against deflation and declining stock markets by blindly acquiring “risk-free” government bonds [Financial Times - "FT"]
Institutional investors also contributed to the bond bubble. Pension funds, insurers and others have sold off toxic securitized triple-A rated bonds and replaced them with Treasuries. Government bonds are attractive for diversification purposes since they have held up while just about everything else in their investment portfolios has collapsed (FT)
The Federal Reserve’s signals that it might buy longer U.S. government maturities added momentum to the epic rally (FT)
The median forecast of 19 primary dealers is that 10yr bond yields will rise to 3% and 2yr yields will rise to 1.2% in 2009 (Bloomberg)
Because of the low income on Treasury securities, it would take only a small rise in yields for total returns on Treasuries to turn negative (Merrill)
Given the level of extension in yields, it would not be difficult to generate losses of say 10% in the 10-year Treasury bond, and as much as 20-25% in the 30-year Treasury bond over a very short period of time [Hussman Funds - "Hussman"]
If the dollar holds steady, Treasury bond prices are likely to plunge; if Treasury prices hold steady, the value of the dollar is likely to plunge. Either way, foreign holders of Treasury securities are facing probable losses, and they know it (Hussman)
The specter of deflation and Japan’s experience in the 1990s suggest bond yields could fall significantly further – 10yr JGB yields went on to find a low of 0.45% despite massive fiscal stimulus. Ironically, it was the start of quantitative easing in March 2001 when yields ticked up (JPMorgan)
While Roubini does not explicitly talk about shorting long-term treasuries, as do Marc Faber and Jim Rogers, he does appear to believe that the long-term treasury bubble will likely burst. However, this is subject to two large caveats:
(1) If the economic situation remains dire, the treasury bubble may continue for a while; and
(2) Instead of treasuries tanking, the dollar might tank.
Russian Military Intelligence reports circulating in the Kremlin today state that an attempt to shoot down an American passenger plane over New York City carrying some of the top officials from the United States largest bank, and largest financial services company in the World, Bank of America, failed when the pilot quickly reacted to his crippled and burning aircraft by landing it in the Hudson river extinguishing the spreading flames and saving the lives of all aboard.
Quoting some of the direct statements from passengers on the attacked aircraft (including Jeff Kolodjay who stated “I heard a loud explosion from the left side of the plane [and] the smell of gas was strong.”, and Dave Sanderson who also stated “I heard an explosion and saw some flames coming from the left wing.”) the FSB additions to these reports state that ‘without a doubt’ the missile used to attack this US aircraft was a Russian made Igla-S man-portable air-defense system manufactured at the Degtyarev factory in the city of Kovrov due to its ‘unique frequency signature’ recorded by [listening devices] located at Russia’s UN Mission offices in New York City and orbiting satellites.
It has long been known by Russian Intelligence Analysts that the American Central Intelligence Agency (CIA) has been in possession of 50 Igla-S missiles stolen from Russia by the British MI6 terrorist spy ring run by their agent Hemant Lakhani, and who in 2003, while being pursued by FSB commandos was ‘rescued’ by CIA forces and brought to the United States where he remains today.
It should be noted that the United States has stated that Hemant Lakhani was ‘convicted’ by their Federal Court and sentenced to 47 years in prison for his arming of terrorists with stolen Russian weapons, but to this date, FSB requests to have this verified, and to actually see and interrogate Lakhani, have been denied by US Intelligence Officials.Likewise, repeated Russian requests to have the stolen Igla-S missiles returned have been denied as the Americans have stated that they are still being used as ‘evidence’.
To the reason behind this attack upon some of the most powerful bankers in the United States, these reports continue, was to further the collapse of the American economy by ‘assassinating by plane crash’ Bank of Americas top officials who were returning to their home base in North Carolina after negotiating a $138 Billion US government bailout, and which would ‘totally destroyed’ the stock value of Americas largest bank plunging the US into further financial chaos.
As to why these most powerful of American bankers would even be allowed to fly on aircraft normally used by ordinary people, these reports continue, the US Congress had previously pressured all of their Nations top industrial and banking officials to stop using their private airline fleets while at the same time accepting from the American taxpayers billions of dollars in bailout funds.
FSB opinions on this new American policy, however, point out that to refuse such high officials the protections and security offered by their own private airline fleets is ‘insanity’ as it not only exposes these officials to assassination but poses the ‘greatest danger possible’ to all other ordinary people surrounding them when attacks such as this occur.
Not being understood by the American people about the Bank of America, is that unlike its failed, and collapsed, counterparts on Wall Street, it has not only survived the initial onslaught against the United States financial system, but has actually been expanding by picking up some of the most lucrative parts of what has been left from the destroyed New York banks it had previously outwitted.
However, Russian Financial Analysts state in these reports that as Bank of America has now become the ‘final lynchpin’ needed to be destroyed in order to totally, and finally, collapse the United States economy, those ‘forces’ seeking to destroy America must ‘bring it down’.
This may harder, though, than its ‘adversaries’ have planned for, continue these reports, as the present day Bank of America is comprised of the two most powerful banking forces of the Vatican these past nearly 150 years with one part being the Bank of Italy,founded in San Francisco by Amadeo Giannini in 1904, and the other part being the Southern United States banking giant NationsBank located in Charlotte, North Carolina, which merged to become what today is Bank of America.
Oil prices could bounce back toward $100 a barrel as the huge decline over the past twelve months looks set to give back up to half of its fall, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC.
“After a major fall like that you would expect it to retrace a quarter, a third or a half of the previous fall and as that was an enormous fall, quite a decent bounce is likely to come,” he said.
Oil has fallen well over $100 a barrel since the high of above $147 hit in July. If prices were to regain half of their declines, oil could be back up in the $90-$100 range, according to Griffiths’ predictions.
The “downtrend has now come to an end,” he said. “There is in fact a well-established seasonality to the oil price and the lows tend to form around now,” he added.
Jan. 28 (Bloomberg) — Investors will have a tougher time assessing Federal Reserve policy when officials today replace interest rates with emergency credit programs as their main tool for steering the economy.
Without rates as their main policy gauge, Chairman Ben S. Bernanke and the Federal Open Market Committee also will find it more difficult to anticipate the impact of their statements on financial markets during the worst credit crisis in seven decades.
“It’s not only harder for them to predict, but it’s harder for them to get traction” from the Fed’s $1 trillion effort to revive credit, said Keith Hembre, a former Fed researcher who is now chief economist at FAF Advisors Inc. in Minneapolis.
The new focus on changes in the size and composition of the central bank’s assets makes it harder for policy makers to revive confidence in bond and stock markets, Fed watchers said. Such confidence is needed after financial shares tumbled 29 percent and unemployment hit a 16-year high since the Fed cut the main rate to a record-low 0.25 percent or less on Dec. 16.
The central bank, while pursuing its policy of easing credit, probably won’t alter borrowing costs today and for the remainder of 2009, according to the median forecast of analysts surveyed by Bloomberg News.
That means analysts can’t base their predictions for Fed decisions on a simple interest rate benchmark for the first time since the FOMC began releasing policy statements in 1994.
“It’s not multiple-choice anymore,” said RBS Greenwich Capital chief economist Stephen Stanley, a former Richmond Fed researcher. “It’s essay questions.”
The FOMC will release a statement at about 2:15 p.m. in Washington at the conclusion of a two-day meeting.
Reliable Measure
Policy makers lost one reliable measure of market sentiment in September when futures ceased to be an indicator of investor expectations for interest rate decisions.
The Fed had failed to align its policy target rate with the rate banks charge each other for overnight loans. Traders had looked at the so-called federal funds rate when determining their bets on what the policy makers will do.
Central bankers have yet to dispel investor uncertainty by announcing targets for the size or composition of its balance sheet beyond current programs, such as plans to purchase mortgage bonds and housing-finance totaling $600 billion. Assets held by the Fed have more than doubled to $2.04 trillion over the past year.
In January 18, 2009, the Associated Press reported that in an interview aired on “Dateline NBC” the Chairman and CEO of Berkshire Hathaway Inc., Warren Buffett said that the “US is engaged in an economic Pearl Harbor.”
A shiver ran down my spine!
There was hardly any comment by any of our national dailies or the leading financial dailies.
Obviously, what Warren Buffett said is open to several interpretations. Whatever it may be, it cannot be good.
Why?
If the United States is engaged in an economic Pearl Harbor, it follows that there must be an enemy. Who is this enemy?
When the Japanese attacked Pearl Harbor, it gave President Roosevelt the pretext to enter World War II, at a time when the nation was against going to war. It was a day of infamy and American blood must be avenged. The rest, as they say is history – but a distorted one at that. It is now widely held that President Roosevelt had received advance warnings about the Japanese attack on December 7, 1941. But the intelligence never reached the US Fleet and the ensuing anger and outrage compelled what was once a reluctant public to join the British induced war against Germany.
But recently, this reference to Pearl Harbor by the neo-cons gave rise to the Global War of Terror in 2001 which postponed the day of financial reckoning by seven years, when President George Bush pumped over US$3 trillion into the war economy.
Recall what the neo-con think tank, Project for the New American Century foretold: “the process of transforming the US into tomorrow’s dominant force was likely to be a long one, in the absence of some catastrophic and catalyzing event like a new Pearl Harbor.”
September 11 was the catalyzing event, the New Pearl Harbor which enabled the neo-cons to put into action their plan for global domination. And like the events leading to the original Pearl Harbor, President Bush and his regime were warned by eleven countries and were supplied with specific intelligence in the months before 9/11 but no actions were taken.
It was another day of infamy and the United States was led once again by the nose to embark on a military misadventure in Afghanistan and Iraq. The Global War on Terror was unleashed!
This is the third time that a catastrophic event is invoked to justify a certain course of action.
Why?
That it is Warren Buffett who is making this reference is most telling, for he is the hidden economic and financial adviser to President Obama. Warren Buffett has in fact said that Obama is the best man for the job!
Warren Buffett is not the effable businessman that the mass media make him out to be. He is an insider in every sense of the word.
I have said repeatedly for over two years that there is an ongoing global currency warfare and what is at stake is the hegemony of the US dollar. Warren Buffet knows that if the dollar ends up officially as toilet paper, his fortune and that of his global partnership – the hidden manipulators would be finished.
This message that the US is in an economic Pearl Harbor is meant for the enemy, as yet to be disclosed to the American public. It is a warning no less.
President Obama has echoed the sentiments in the course of his inauguration speech.
Food for thought:
In both the previous Pearl Harbor events, there were advance warnings of the impending attacks on the United States, which were later used as a pretext for waging global wars – World War II and the Global War on Terror.
What is in store for the United States and the world in this, the third and final Pearl Harbor?
Since Warren Buffett has stated that the United States is already “engaged in an economic Pearl Harbor” I can only conclude that we are going to be in a real big mess very soon – to be precise, the end of the first quarter of 2009!
Matthias Chang is a frequent contributor to Global Research. Global Research Articles by Matthias Chang
High foreign exchange reserves have, in the current global recession, saved Asian countries (including India) from the travails they suffered in the Asian financial crisis of 1997-2000. So, they must aim for rising forex reserves in future too, right? Wrong.
