Dollar: Faltering Foundation of US Economic Strength

I wrote this article back in Jan of 2008 in an attempt to shed light on the past history and likely future of the US Dollar as the World's reserve... Bottom line, dollar hegemony will eventually end and when this happens our standard of living will fall precipitously.

Since the end of World War II, the central foundation of US Economic Strength has rested on the US Dollar. Many of our strategic plans, geopolitical strategies, past and future wars--the entire global chess board if you will, has been played out by trying to maintain our undisputed economic power, based primarily through ownership of the World’s Reserve Currency.

SOME HISTORY ON THE DOLLAR

Throughout the history of the world, there have always been strong currencies, usually held by the economic powerhouses of the day. Theses currencies were primarily called Reserve Currencies. The Pound Sterling was the primary reserve currency for much of the world in the 18th and 19th centuries. But perpetual account and fiscal deficits, financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (sound familiar?).

Post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord, the first major economic transformation toward the end of World War II, established the International Monetary Fund (IMF) and a way to value the various currencies of the world relative to each other. All foreign currencies would trade in relationship to the US Dollar and only the US dollar (as the reserve currency) would be tied to a gold standard (meaning the value of dollars circulating must be backed by gold reserves).

The gold standard caused major problems in the 1960’s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars (they understood that we were printing more money, to finance the Vietnam conflict and fund new social programs, than we had available in gold reserves).

Due to the rapid loss of US gold reserves, President Nixon had no choice but to abolish the Bretton Woods accord in August of 1971 and he took the US dollar off the gold standard (it was $35 per ounce then; today it is ~ $900).

This Nixon shock of August 1971 caused a swift devaluation of the US dollar (gold doubled in price by 1972) and numerous efforts followed (by U.S. leadership) to develop a new system of international monetary management. They felt they must find another way, as currencies around the world were in turmoil and were now floating among one another…

The year 1974 provided the much needed answer. In June of 1974, Secretary of State Henry Kissinger established the US-Saudi Arabian Joint Commission on Economic Cooperation. One of the major components of this commission stated that OPEC would officially agree to sell its oil only for dollars—meaning any country purchasing oil from OPEC had to pay in U.S. dollars. This agreement enormously increased the demand for the floating dollar, as oil importing countries now had to earn or borrow dollars to pay for their oil.

OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

Bottom Line: this 1974 act reestablished the dollar as the global monetary instrument and oil now replaced gold as basis for a strong dollar. Countries competed for dollars and they accumulated huge dollar reserves to sustain their own currencies.

Please allow me to shift gears a bit—we’ll get back to the dollar in a moment:
Post WWII, the US was the world’s manufacturing powerhouse, as our continent was unscathed by the ravages of war and the military industrial machine was running at maximum efficiency.

That however has changed over time, as thousands of corporations succumbed to the pressures of improving their bottom lines. Entire sectors were outsourced: U.S. Manufacturing, Steel, Technical services, Administrative call centers, Research & Technology and numerous others are now gone. Heck, you can’t even find a pair of Levis (the American Trademark) made in the good ole USA anymore.

Why did this happen? It’s all related to profits… A U.S. company can pay a worker overseas $1-2 bucks an hour to do the same job requiring $15-30 hour in the US... Either they outsource or they end up like the rest of our troubled U.S. home bound corporations (below).

Many of the home-bound US companies still trying to compete in the Global marketplace are reeling from high labor costs, pension plans, union benefits, health care costs and the like. Delphi, General Motors and Ford are prime examples of the growing trend of companies feeling the pressures. I expect to see more US corporate and worker problems in the future…

Outsourcing however did have its benefits. For many years we Americans were able to export inflation through the import of cheap manufactured goods and recycled dollars. Foreign manufacturing allowed Americans to purchase many things that otherwise they could have never afforded had they been made in the USA (e.g. $20 Jeans, $29 DVD players, $50 Microwave ovens, $60 cell phones, $100 TV’s; $200 computers, the list goes on and on). Our standard of living rose, but we eventually became a service-based economy dependant upon 1) selling each other foreign made goods and 2) foreigners recycling their excess dollars back to the US.

This foreign recycling of dollars provided Americans with low interest rates, plenty of available credit and it allowed us to live far beyond our means through cheap debt.

On the negative side, foreign governments built up huge dollar denominated holdings that they could use to secure long-term energy agreements, purchase Global assets/corporations, etc and these massive holdings realistically (it will never be admitted) tied our hands geo-politically, as foreign governments could now threaten to dump dollars into the world market as retribution for disliked policy.

Back to the dollar:

Once removed from the gold standard in 1971, the US dollar became a fiat currency (tied to nothing tangible and it was backed only by the word of the US government). The Fed Reserve Banking System could now print money at will -- and they did. Take a look at the chart below and the growth in M3 money supply since 1971. This chart ends in 2006, but (in case your wondering) today’s figure is ~ $12.5 Trillion.




As the world’s reserve currency, the US has been able to, year after year, import goods from the rest of the world (for consumption) and pay for it with dollars that were created from nothing. These dollars are then used by foreign central banks to purchase US assets (corporations, land, properties, etc) or debt instruments from the Fed, or they amass these excess dollars to keep inflation tame within their borders, as many have their own currencies pegged to the exchange rate of the US Dollar.

It is currently estimated that foreign governments (OPEC Nations, China, Japan, India, Great Britain, Korea, Russia, etc) have amassed ~ $4 Trillion of US dollar holdings. China alone is sitting on ~ $1 Trillion (Pretty scary stuff).

Over the last several years, foreign Central banks have started to become leery with the huge debt levels, massive trade deficits and unsustainable fiscal policy of the US and they are quietly working to diversify their dollar holdings.

Additionally, for decades now, many foreign countries have pegged their currencies to the US Dollar, but recent inflation increases, internal to their domestic economies, has become far too severe for them to handle (with the dollar peg, they have to print money as fast as we do, and it is stoking domestic inflation), therefore several countries have started a new trend of depegging. Recently, Vietnam, Qatar and Kuwait have all depegged while a host of others (Russia, and other OPEC Nations) are questioning whether or not they should do the same… When this currency de-peg happens on a larger scale (not if, but when) inflation within our borders will SCREAM. Why? Well, as they de-link from the dollar, their currencies become stronger causing our import costs to increase commensurately (e.g. Oil, consumer goods, etc)

Lastly, governments such as IRAN no longer want to accept dollars for oil. This was also the case with IRAQ back in Saddam Hussein’s day, but we all know what happened there. Anyway, the point is: There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar. If that happens on a larger scale, the artificial foundation for the World’s Reserve currency will be removed and all hell could break loose.

Bernanke: Rather than try to shore up foreign confidence in the dollar, Helicopter Ben Bernanke has made matters worse by officially sacrificing the dollar to save our faltering, sub-prime like, US banking/financial systems… By lowering rates at a time when the dollar is already at its weakest point in history, there is no other explanation to his actions.

Bottom line: Demand for the World’s Reserve Currency (dollar) has been kept artificially high for many years through oil pricing agreements and US inflation was held in check by importing cheaper goods. These were both net benefits for the US in times past, but are quickly moving towards being detriments.


Closing:

The US was once an economic powerhouse who earned the right to own/maintain the World’s Reserve currency, but we’ve squandered this luxury through massive debt loads, poor foreign policy decisions, excessive monetary printing, outsourcing our industrial base, making too many future promises and by living way beyond our means.

Foreign Governments are now growing tired of subsidizing our opulent lifestyles, and the recent fact that we put the world financial system in peril by offloading our toxic securitized garbage was (I believe) one of the final straws to break the dollar’s back. In another ~ 10 years, dollar hegemony will probably be a thing of the past. Our central foundation of US Economic Strength (dollar) is faltering and there is little we can do about it.

With that said, I think the Fed and our government officials are already aware of this and without any viable solutions to our current financial problems (baring raising interest rates and initiating a massive depression) they have made the best choice they can (cut rates and inflate).

I believe it has now become a matter of (unwritten) policy to try to hyper-inflate our financial system out of its current and future insolvency crisis. In their attempt to inflate, the world will experience significant dollar devaluations which will (over time) allow the United States to 1) eliminate much of its foreign debt and 2) pay for future (currently un-funded) obligations through devalued payouts.

As our standard of living drops more in-line with the rest of the world due to loss of purchasing power and a massive economic slowdown, it will (over time) become much cheaper to employ American workers again and this will slowly bring jobs back into our borders. Eventually, 20-30 years from now, our country will become competitive in the world again and we will do more than just sell each other cheaply made foreign goods--we will actually manufacture them again. BUT, we will (most likely) no longer own the World's Reserve Currency nor will we be the World's main economic power.

Ultimately, I believe massive currency devaluation and a much lower US standard of living is our country's only way out of this financial predicament...

The only wildcard I can think of is Oil. How in the world do we survive without cheap oil?
Guess we'll need to work out some new strategic plans and geopolitical strategies -- and I'll bet they lead to:

WAR!

Regards

Randy

Social Consequences of an economic meltdown?

Back in Jan 08, I pondered aloud several questions related to the potential Social Implications of (what was then) a looming economic crisis. Turns out, many readers were wondering the same and this was one of my highest traffic posts ever.

If you haven't already done so, read the info at the following link then come back to read the rest of this post.

SOCIAL IMPLICATIONS of a SIGNIFICANT ECONOMIC DOWNTURN



Well, nine months have passed since those words were written and there can now be no doubt (1) that this crisis is one of the most significant economic downturns in history and (2) the Massive bailout package being worked is just a bandaid to slow the controlled financial implosion. Even John McCain realizes this and recently stated in his debate with Obama: "This is not the beginning of the end, but the end of the beginning - if we come out with a package that will keep these institutions stable..

With that digested and the knowledge things are likely to get far worse, what can we anticipate for our future - just how bad could things get for the little guy living in the suburbs - trying to raise a family?

I'll refrain from trying to list all possible consequences, as there are far too many potential outcomes, but I would like to highlight several major consequences that could be initiated by a worst-case financial panic...

Note: I'm not trying to scare anyone here, but merely trying to create an awareness and food for thought - so that you can use the information to better prepare your family (in the event the worse-case scenario actually happens).

Let us hypothetically propose the economic crisis intensifies:

Hundreds more banks/financial institutions implode and the FDIC runs out of money - a nationwide run on the banks ensue; consumer credit has consistently gotten worse and available credit-card credit-lines have finally been turned off/reeled in - unemployment skyrockets due to the lack of new credit/spending; inflation rages as the dollar falls sharply; the economic crisis deepens and trillions in unpayable derivative contracts unwind quickly - stock markets collapse around the globe and the crushing pressure is exacerbated by foreign holders of US Debt who finally rush to the exit doors.

The Gvt panics and Stock Markets are closed indefinitely while ATM machines, banks and electronic commerce are shut down across the nation (as the government tries to figure out what to do). People grow anxious as their credit cards and debit cards don't work, and with no cash on hand, they can't buy food or gas... Those who do have cash rush to fill up their gas tanks and empty the shelves at their local grocery stores. The real economy comes to a screeching halt as deliveries of food, gas, etc can no longer make it to market.

Social unrest and general panic set in as our just-in-time economy breaks down. People are confused and scared while the government repetitively tries to reassure that they have everything under control. Hysteria eventually sets in as social chaos, looting, and roving gangs terrorize the masses (taking what they need from the unprepared). Similar situations take place across the nation as people who were on the fringes of society become hungry/desperate and/or take advantage of the lawless situation.

Martial law is ultimately declared and National Guard troops are deployed to major cities around the nation - to help restore order, distribute food, etc.

So many unknowns

Could this actually happen? I don't know - you be the judge; but it's probably better to be a prepared alarmist than an unprepared victim... Think about it.

If you've watched Paulson, Bernanke, Bush and the rest of our worried leaders over the last couple of week, you've probably been able to sense their state of alarm - Yes, they truly realize how big this crisis is...

What can you do to prepare?

I could list a thousand things here from generators, flashlights, etc, but the most important (I believe) are:

1) Have at LEAST a couple of weeks worth of non-perishable food/water on hand
2) Have enough cash on hand to make it through a possible electronic commerce shutdown
3) Maintain close relationships with friends/neighbors (help each other out)
4) If you have a gun, know how to use it - to protect your family, friends and valuable assets (cash/food).


Closing:

Yes folks this could be bad, but we Americans are an industrious/resolute bunch and (though it will take some time) we will find a way to pull out of it.

However, be aware: regardless of the ultimate significance of this downturn, America is likely to forever change as the US Dollar loses it's reserve currency status in the not too distant future.

At a MINIMUM, this economic crisis will cause our standard of living to fall and our cost of living to increase significantly.

Bottom Line:

Our future is uncertain, and we're definitely in for some difficult times ahead, but the world will NOT end - and we will survive.

Again, this post was no meant to scare, but to inform by thinking outside the mainstream box. Use this information as you may, but it's probably not a bad idea to prepare for whatever the outcome.

Best regards

Randy

The Federal Reserve and the Stock Market Meltdown

To most Americans, the Federal Reserve is just another name on their dollar bill. They don't know that this secretive private bank controls America's entire economic system. The Federal Reserve is no more federal than Federal Express. Created with no constitutional authority in 1913, the Fed prints money out of thin air and loans it to the U.S. treasury at interest. This can only lead to one outcome: debt. Currently, the Federal Reserve is printing billions of dollars to bail out Wall Street while destroying the middle class and the dollar. If our country wants a sound and transparent monetary system, we need to abolish the Federal Reserve and bring the power back to the American people.

Dollar Collapse - America - It's Time To F_cking Panic

Peter Schiff on the Glenn Beck Show - Hyperinflation mixed with Depression

Max Keiser on Goldman Sachs & Toilet Paper

Hat tip Virgo

Afshin Rattansi in Tehran talks to Max Keiser in Paris about the end of Wall Street, dollars and toilet paper - and Morgan Stanley and Goldman Sachs no longer being investment banks.

Karl Denniger Videos - Must Watch!

Late July 08 Karl Denniger video - from The Market Ticker - EXCELLENT - A MUST WATCH!!

Stop The Bailouts!




17 Sept Karl Denniger Video - The Potential End Of America's Government

AKA: Hyper Drive Engaged - Destination Zimbabwe (Hat tip FoFoa)

Market data and Jim Rogers interview

Asian Markets tanked overnight MAJOR WORLD INDICES

Hang Seng down > 3.8%
BSE 30 down nearly 5%
Seoul down >3%
Taiwan down almost 5%

Meanwhile, US Futures are looking dismal North/Latin America:

DOW down 139 points (Below 10,900 at open)
S&P down 16 (Below 1,212 at open)

The US Dollar is falling off a cliff

US Dollar index currently at 71.37 -- OUCH!

NOTE: ALL TIME LOW FOR INTRADAY TRADE IS 70.96

Gold and silver however are looking real good Live Market Quotes:

Gold up $11 overnight ( $984 oz) headed for $1,200 this year
Silver up $.30 ( nearing 19.50 oz) headed for $28 this year


As an aside:
I saw a video of Jim Rogers on Bloomberg yesterday that I was dying to share with all of you, but it looks like Bloomberg has pulled it already. I did however find the transcript: Rogers Calls Fannie, Freddie Rescue 'Disaster'

Jim was interviewed w/regard to his view on our government's efforts to bolster Fannie Mae and Freddie Mac, the outlook for financial stocks, the dollar and commodities, and his investment strategy. Warning: He held no punches!

CAROL MASSAR, BLOOMBERG NEWS: Our next guest is the man who correctly predicted oil would reach $100 and gold $1,000. Here to join us with his outlook on energy, commodities, the dollar, the credit crisis, everything under the sun, including Fannie and Freddie, Jim Rogers, Chairman of Rogers Holdings. He comes to us from Singapore this morning.

Jim, good morning. So, what do you think about what the government is doing or proposing to do with Fannie and Freddie?

JIM ROGERS, CHAIRMAN OF ROGERS HOLDINGS: It's an unmitigated disaster. I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae. I mean, what is this?

If that is what they are doing with our tax money, why don't they ask us? I didn't say, take my money, my tax money, and buy Fannie Mae. Give it back to us if that's what they are going to do with it.

And what are they doing guaranteeing their debt? The people who bought debt in Fannie Mae and Freddie Mac can read a prospectus. They can read it. It says it is not guaranteed by the government. Anybody who can read a balance sheet knew that both of those companies were a sham and they had problems.

Now, we have to bail out the Japanese? The Japanese owe hundreds of millions of dollars of this stuff and so we are going to bail out the Japanese and the Chinese and everybody else in the world? What is this?

And it ruins the Federal Reserve's balance sheet, and it makes the dollar more vulnerable, and it increases inflation, and it drives down the dollar. Other than that, good morning.

MASSAR: Good morning. All right, so where do you think - all right. You have been very critical of the Fed and certainly some of the government moves here, Jim. So where do you think this is all leading us to?

ROGERS: It is leading to more and more rampant inflation. It is leading to a decline and the eventual demise of the United States dollar. And the FDIC this weekend used 10 percent of its assets to bail out a bank.

Anybody who has got money at Bank of America better make sure they don't have over $100,000, because 10 percent of the FDIC's assets just went there this morning.

MASSAR: Jim, a viewer e-mailed me last night, actually e-mailed Bloomberg, happens to be a mortgage banker and his question was for you. He is wondering if you covered your shorts Friday, especially in Fannie Mae and Freddie Mac?

ROGERS: No, I have not covered my shorts. Obviously I should have, because you know they already are up 50 percent or something since then. If they go up a whole lot more, I will short more. They are basically insolvent. There is no question about that.

The government itself last week said the extra, the pool last week said that they are insolvent. Anybody who can read a balance sheet knows they are insolvent. So if they go up a lot, I will short more. If they go down, I will probably cover.

ELLEN BREITMAN, BLOOMBERG NEWS: Jim, it is Ellen Breitman here. I am looking at the Treasuries, which were little changed this morning. Now you have got the 10-year down 9/32s. Why are we not seeing more of a move in the Treasury market this morning? What should the investor reaction be on that front?

ROGERS: Well, I am short U.S. government bonds and I am short the long Treasuries, so for full disclosure, I think that most people are just sitting here confused and probably relieved at the moment and trying to figure out how this is going to work out.

But let me tell you how it is going to work out. It is going to mean the debt of the United States is going to be downgraded over the next few years. It means that U.S. government bonds are now going to become suspect down the line.

MASSAR: I want to go back to financials. So you mentioned Fannie and Freddie. Are you shorting most of the big names, be it Citigroup, Merrill Lynch? I mean, a lot of them are going to be reporting earnings this week or starting to, Jim. Do you not like any of the names here?

ROGERS: Carol, since I have been coming on your program, I have been short all the investment banks. I have been short Citibank, I have been short Fannie Mae, I am still short every one of them. I will cover them all some day, but some day is a long way from now.
If they rally, I will short some more. But no, why would anybody cover any of these stocks? They are all essentially in terrible, terrible financial shape.

MASSAR: You don't think we are getting to the end of this mess?

ROGERS: Well, Mr. Paulson said we have been coming to the end of it every month for the last year. I don't happen to agree with him.

MASSAR: What is your -

ROGERS: And Mr. Bernanke has also said we are coming to the end of it. Mr. Bernanke under oath told us before Congress that the housing crisis, that there was no problem in housing two years ago and three years ago. Mr. Bernanke under oath has been telling us for a while that everything is okay.


MASSAR: Jim, did we - I want to go back to Fannie and Freddie, if I may. I know I am jumping around here because there is a lot going on. I mean, did we have a choice though with Fannie and Freddie? I mean, they are responsible for what happened, the mortgages that are out there. I mean, could we have let them fail?

ROGERS: Carol, I know you always like to print money, you always like to bail out everybody in sight. But that is not the way capitalism is supposed to work. That is socialism for the rich. That is what that is. Welfare for the rich. Of course not.

Now, if we don't let Fannie Mae go broke and we are not, obviously, what is going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What is going to happen three years from now when the situation is much, much, much worse? Then somewhere along the line, the market is going to hit us and we are not going to be able to do anything if we keep bailing out everybody in sight.

The Federal Reserve has already extended its balance sheet so desperately that they have trouble.

MASSAR: So very critical, Jim, of what the government is proposing to do with Fannie and Freddie. But yet, investors seem to like it and you have got the dollar moving up, so there seems to be a lot of support out there.

ROGERS: Well, of course investors in Fannie Mae and Freddie Mac like it. The companies were going to go bankrupt if they hadn't stepped in to do something and they should have gone bankrupt, all the mistakes they made.

I would like to know why the people at Fannie Mae aren't in jail right now, the people at Freddie Mac aren't in jail.

MASSAR: But why is - Jim, why is the -

ROGERS: You know, a lot of people have gone to jail for fraud and scams.

MASSAR: Jim, why is the dollar up, though, this morning?

ROGERS: Well, I suspect it is because there is so many shorts. Everybody is negative on the dollar, including me, and whenever you have everybody on the same side of a trade, something comes along and you have a big rally. The shorts are covered. It is the way markets have worked for a few hundred years.

MASSAR: Are you still negative on the dollar at this point?

ROGERS: I just said everybody in the world is negative on the dollar, including me. So it is bound to rally, it could rally for another few weeks, few months. How do I know? I hope that if it does rally more this year that I will use that rally to get out of the rest of my U.S. dollars. The dollar is a terribly flawed currency, Carol.

MASSAR: Yes. And that is based on what - what about your expectations for interest rates around the world? I mean, there has been a bit of a debate now about what the Fed may do, but you have certainly seen governments around the globe raising rates to combat inflation. What is your outlook there?

ROGERS: Well, you are going to see higher rates. I am short United States government bonds, long bonds, because rates are going to go higher. The U.S. government says there is no inflation, but the rest - everybody else in the world knows there is inflation.

Most governments don't lie about it any more. They know they cannot lie about them. Inflation - the U.K. just a few minutes ago said they have the highest rate of inflation since 1986. Everybody does, and the U.K. is one of the governments that usually lies about it. So if they are saying it is that bad, you know it is really bad.

MASSAR: So, Jim, how do you think this is all going to be playing out? I mean, you are over there in Singapore, you are watching this. I mean, what is your expectations, first of all, for the U.S. and the economy here in the next, what, six to 12 months - and the markets, if you will?

ROGERS: Well, the United States is in a recession. It is going to be the worst recession we have had in a long time, perhaps since the Second World War, because the federal government keeps making mistakes. The central bank makes mistakes, the Treasury makes mistakes. Everybody keeps making mistakes.

It is going to be one of the worst. It is like Arthur Burns in the 1970s, he kept making mistakes and he had a horrible time. It's like the Bank of Japan in the 1990s, they kept making mistakes and in Japan, they still call up the '90s the ?Lost Decade.?

BREITMAN: Jim, it is Ellen Breitman again. I want to ask you a question I asked an earlier guest today, which is, when you look back over your entire career, how do this play out in terms of the level of history that is being made, Friday, Sunday, and today?

ROGERS: Well, it's a very good question and the answer, I don't think I want to give you the answer because you will probably cut me off the air. What is happening here is they are ruining the value of the U.S. dollar. They are ruining the Federal Reserve. They are ruining what has been one of the greatest economies in the world, bailing out everybody in sight.

This is a disaster for America. This is a disaster for the world. Ben Bernanke and Paulson are bailing out their friends on Wall Street, but there are 300 million of us Americans who are going to have to pay for this and there are six billion people in the world who are going to have to pay for this. And they are doing it with no authorization from anybody.

Paul Volcker said a couple of weeks ago that perhaps what the Federal Reserve has done is illegal. I would submit it is illegal what they have done and what they are doing. They are saddling all of us with hundreds of billions of dollars of debt that they have no authorization to do.

MASSAR: So, Jim, if this had been another industry, take your pick, I mean, look at the woes that we have seen in the housing industry, you don't think the government would have jumped in so quickly to help out?

ROGERS: Well, I have no idea. They jumped in once before and helped out Pfizer 25 years ago, 30 years ago. Who knows? Conceivably, it depends on how many votes they think they can get. If they can buy some votes and right now, they are trying to make all their friends on Wall Street happy. But that is not good for anybody else but Wall Street.

Ben Bernanke picks up the phone every time Wall Street calls. Paulson picks up the phone every time Wall Street calls. You don't see any firemen out there in Nebraska calling him up. You don't see anybody out there with a real job. You don't see any schoolteachers in Oregon calling him up. If they did, they wouldn't take the call.

But all the schoolteachers in Oregon know that prices are going through the roof. It is very difficult for them to stay alive these days and hold body and soul together. They don't care. They take the calls from Bear Stearns. They take the call from Lehman Brothers.

MASSAR: Jim, you know, you sound so negative here. I mean, in terms of the U.S., anything you like within the U.S. market?

ROGERS: Sure. There are plenty of things that you can like in the United States market. I own - I have been buying airline stocks recently. I haven't bought any in the U.S. at the moment, but I have been buying airlines around the world. I have been buying agriculture.

I mean, America is the largest producer of agricultural goods in the world. I love agriculture, I love farmers. I wish everybody else did too.

MASSAR: Speaking of farmers, we know you love commodities. What about this commodity boom? I think recently we talked to you and or I was reading something and it said that we are in the fourth inning of a baseball game. Still there, in your view?

ROGERS: Probably around the fourth inning, that sounds good enough. Maybe the fourth and a half, maybe the top or the bottom of the fifth, something like that. The commodities bull market has a long way to go.

There are going to be corrections along the way, Carol, there always are, but no, nobody has discovered any major oil field in over 40 years. There just aren't any supplies of anything.
MASSAR: Jim, what do you make though of the arguments out there about demand destruction, about a weakening global economy and that is going to start to bring down commodities. I know you talk about some near-term corrections.

So, anything out there though that will substantially drag down commodities, in your view?

ROGERS: Well, recession, if the world goes into recession, of course it is going to drag down the demand. But remember, Carol, in the 1970s we had one of the worst decades in a long time for the economy. And oil went up ten times, the oil commodity, we had one of the great bull markets of all time in commodities because supply went down faster than demand and that is what is happening now too.

Oil can go down - you know the bull market in oil started in 1999. Three times since 1999, oil has gone down over 40 percent. It wasn't the end of the bull market. It just scared the socks off everybody, including me. That can happen again, but it is not the end of the bull market.

MASSAR: So, any pullbacks for a buying opportunity, in your view, whether it is oil, whether it is grains, whether it is base metals?

ROGERS: Yes, of course. Everything. Base metals have already corrected a lot. Wheat has corrected a lot. Sugar has corrected a lot. Get yourself some sugar, take it home, take it home from your Bloomberg.

MASSAR: Let's get back to our guest, Jim Rogers, chairman of Rogers Holdings. So, Jim, got a favorite commodity at this point?

ROGERS: No, nothing really pops into my mind. Agriculture still, some of the base metals I am looking at. Some of the base metals, Dr. Nickel and Dr. Zinc saw the recession coming long before Dr. Bernanke did and they realized that there was problems. They are down 60 percent or something.

So, I am contemplating, only contemplating and only noticing that they are down. Some of these things are down a good amount.

MASSAR: What are you waiting for to buy in?

ROGERS: I don't know, some kind of signal that they have made a bottom. Some kind of panic selling, for instance. And also watching Taiwan and China on the same basis, if we could have panic selling in an old-fashioned selling climax in Taiwan or China, I would buy both of them as well.

MASSAR: You know, the CSI 300 is down 45 percent this year, the second worst performing major benchmark tracked by Bloomberg. Why are we seeing such a pullback?

ROGERS: Well, the market went up a huge amount in the previous two years and the Chinese government acknowledges that there is terrible inflation in China. They are doing their best to cut it back. They have raised interest rates seven times in the last year. They have raised reserve requirements 15 times.

The United States central bank has cut interest rates seven times. They have thrown gasoline onto a raging inflationary fire.

MASSAR: Are you selling any of your Chinese holdings?

ROGERS: No, never sold any Chinese shares. Own them all. I hope that my daughters own them some day. I think China has got a fabulous future. Selling China in 2008 would be like selling America in 1908, just as we were on the verge of becoming a fantastic, great success story.

MASSAR: So, Jim, I am guessing, and tell me if I am wrong, though, as a pullback in Chinese shares, do you see that as a buying opportunity?

ROGERS: Well, if they have a selling climax, yes. And probably the best opportunity will be Taiwan, because for the first time in my life, there is going to be peace in Taiwan. And so that whole economy, that whole nation is now going to have a dramatic change and it will be great for the world, but certainly for Taiwan.

BREITMAN: Jim, it is Ellen again. I am curious in terms of commodities, just switching back there. So much government intervention when it comes to the financials, do you think we could see any kind of government intervention when it comes to commodities or trying to talk down some of these prices?

ROGERS: Of course we can. Do you remember 1929? They passed the Smoot-Hawley Act, which led to the Great Depression, even though 1,000 economists went on record as saying you are making a terrible mistake. Politicians did it anyway.

Remember the weapons of mass destruction? We invaded Iraq because of weapons of mass destruction. Of course, politicians can do all kinds of simple, stupid things.

The IPO market has been driven out of America now because American politicians passed some absurd laws. They will probably do something. It will drive the commodities trade outside the U.S.

You know, the United States has dominated the commodities business for over 100 years. If the Congress of the United States is about to give the world on a silver platter and say; ?Here, take what you want. We are going to give you the commodities-trading business, it is going to leave America.?

At the same time, the politicians are saying pension funds can't invest in commodities. University endowments cannot invest in commodities. At a time where there is terrible inflation, they are going to say to the pension plans, you cannot protect yourselves from inflation, too bad. And I'd do that.

MASSAR: Jim, just 30-

ROGERS: It is insane, but they will do it.

MASSAR: 30 seconds left here. I know you mentioned you are kind of looking, eyeing at base metals. Anything else you think investors should be looking at, just kind of keeping on their radar, just quickly if you could?

ROGERS: Agriculture, agriculture. You should be buying agriculture. I am buying agriculture.

MASSAR: All right. We are going to leave it on that note. Jim, as always, good to get some time with you. Have a great day. Jim Rogers of Rogers Holdings.

Washington Mutual and National City Lead to Steepest EVER Bank Stock Decline

Investors, Depositors and FDIC are worried -- this is HUGE folks!

Steepest-Ever Decline in Bank Stock Index (Update2)




July 14 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, and National City Corp., Ohio's largest bank, led the steepest-ever decline in the two-decade history of an index of bank stocks after IndyMac Bancorp Inc.'s collapse spurred concern more lenders are vulnerable to bad home loans.

IndyMac's failure has people worried about others.

The Standard & Poor's 500 Banks Index had its worst one-day decline since its was created in 1989, falling as much as 10 percent to close at 136.01.

``Take a very low profile,'' Laszlo Birinyi, who oversees more than $350 million in Westport, Connecticut, said in an interview on Bloomberg Television. ``There's an awful lot of fires that need to be put out. I'm concerned about how we get them all out.''

Investors are speculating about which banks may fail after the demise of Pasadena, California-based IndyMac, which once ranked as the second-biggest U.S. mortgage company.

The collapse of IndyMac and deterioration in the construction, mortgage and auto lending markets indicate that losses at U.S. regional banks will force dividend cuts and additional capital raising, said analysts at Goldman Sachs Group Inc. and CreditSights Inc.

``After IndyMac, everyone asks, 'Who's next?' but I can list several names that strike me as far more likely to fail than National City,'' said Sterne Agee & Leach Inc. analyst Sean Ryan in an e-mail. National City has ``tons of capital and a real deposit base.'

Goldman put Zions, Utah's biggest bank, on its ``conviction sell'' list. Lehman Brothers Holdings Inc. predicted $26 billion in cumulative losses for Seattle-based Washington Mutual, and M&T Bank Corp., based in Buffalo, New York, posted a 25 percent decline in second-quarter profit.

Banks may report record unrealized securities losses of $35 billion in the second quarter, up 64 percent from the previous three months, the Goldman analysts said in a report today. Zions, SunTrust Banks Inc., Regions, Comerica Inc. and Bank of America Corp. are among companies that Goldman and CreditSights said may cut their dividends to help restore depleted capital.

IndyMac was seized after a run by depositors left the California mortgage lender short on cash last week. The government stepped in to help beleaguered home lenders Fannie Mae and Freddie Mac yesterday when Treasury Secretary Henry Paulson asked Congress for authority to buy unlimited stakes and lend to the companies to halt a collapse in confidence.

The decision to protect Fannie Mae and Freddie Mac was needed to ``stem the growing risk of credit contraction in the U.S.,'' the Goldman analysts said.


So, IndyMac was the first domino to fall and is now operating under Gvt Conservatorship. I'm curious how that went today -- first day operating in this mode.

Customers swamp IndyMac to withdraw money

PASADENA, Calif.—Worried customers with deposits in excess of insured limits flooded IndyMac Bank branches on Monday, demanding to withdraw as much money as they could or get answers about the fate of their funds.
With the failed bank now under federal control, hundreds of people lined up before dawn outside its headquarters branch in Pasadena.

The crowd swelled throughout the day, with customers seeking shelter from the hot sun under makeshift tents. Many waited for hours to get inside what became IndyMac Federal Bank after its takeover Friday by the Federal Deposit Insurance Corp.

"I didn't think this could happen," said Charles Tengeri, a retired school teacher who emerged from the bank with a check for $171,000—an amount he said represented most of his savings.

"I'm glad to get anything out," he said.

After waiting more than seven hours in line, Amy Miller walked out of the bank offices with a check for the funds she had invested in a one-year certificate of deposit. The crowd of fellow IndyMac customers burst into applause.

"Finally," the 35-year-old travel agency owner said, then took a bow. "I just couldn't wait for my money anymore."

Customers had been limited over the weekend to taking out funds through automated teller machines, debit card transactions and checks.

Customer Harvey Soldan spent Sunday night at a hotel near the bank so he could be among the first in line. With more than $100,000

in deposits, he anxiously waited to speak with bank officials.
"It's a question of how much we can get and how soon," Soldan said while waiting in line.

FDIC spokesman David Barr, who was stationed outside IndyMac headquarters, said it could take several years before the agency fully addresses customer claims.

"We have to completely unwind the affairs" of the bank, Barr said. "We may sell a portion to another bank, sell real estate. There may be lawsuits. There are a lot of different aspects to this."

IndyMac is the largest regulated thrift to fail and the second-largest financial institution to close in U.S. history, according to its regulator, the Office of Thrift Supervision.

The FDIC insures bank deposits of up to $100,000 per depositor and up to $250,000 for funds in retirement accounts such as an IRA.


Speaking of the FDIC, I wonder how are they handling this potentially, very contagious, consumer loss of confidence in our public banking system?

With lots of Reassuring Propaganda -- of course:

With that calming reassurance out of the way (don't you feel better now), let me now tell you a couple of things the FDIC doesn't really want you to know/understand.

The FDIC has a set Designated Reserve Ratio of 1.25% of estimated, insured deposits -- therefore they have ~ $53 Billion (in insurance funds) backing total FDIC insured deposits of ~ $4.5 Trillion.

Current estimates for IndyMac's failure is between $4-8 Billion.

For ease of math (I imagine this initial failure estimate is very low), lets pick $8 Billion.

Therefore, the FDIC has ~ 45 Billion (53-8=45) left.

Let's now hypothetically suggest WAMU, National City and a few other banks also tank within the next year or so and this crisis completely depletes FDIC insurance... What then?

Glad you asked... How about another government taxpayer Bailout! Why not -- the Gvt will have already taken over Fannie and Freddie by then, and what's a few more trillion shared among the broke citizens of an already insolvent country.

Bottom line to the FDIC "what if": Depositors will still get their $100,000 insured by the FDIC, but it will take some time -- money will first need to be printed (causing a massive wave of new inflation). So by the time depositors get their physical money, inflation will have eroded away its purchasing power... It may or may not buy you a roll of toilet paper, but look at the bright side: even if it doesn't, you can use the dollars for the same purpose.

Weimar here we come!

Closing Note: We currently have > $14 Trillion circulating the globe and, in the U.S., less than 3% of that is available in cold, hard, cash -- the rest are ones and zeros on computer hard drives... Really makes one stop and think...

Do you have enough cash on hand in the event YOUR Bank closes it's doors? What if it take 6-months to a year to get your hyperinflated FDIC insurance money? Are you prepared?

Randy

Fannie and Freddy -- walking dead

I've been hammering Fannie and Freddy since my very first post in 2005 and have always suspected that they were merely walking dead, but the Gvt. couldn't allow the public to know this, so they propped up their carcass of a body just like the characters did their boss in "Weekend at Bernie's"

Well, it now looks like the cat is out of the bag, as former St. Louis Federal Reserve President William Poole said Freddie Mac and Fannie Mae are insolvent and that the government might need to step in to rescue the struggling lenders.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole said Wednesday.

In other words, he believes they're virtually bankrupt!

Fannie, Freddie Tumble on Bailout Concern

July 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, fell to the lowest levels in 17 years in New York trading after a former Federal Reserve president said the companies may need a government rescue.

Fannie Mae tumbled as much as 24 percent and Freddie Mac slumped as much as 34 percent in New York Stock Exchange composite trading after UBS AG analysts said in a report today that Freddie Mac's decline creates ``challenges'' for the company's plan to raise $5.5 billion

Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don't have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.

The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data.

Government Ties

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.

The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.

``We know in a crisis the Federal Reserve tap would be open,'' said Poole, now a senior fellow at the Cato Institute.

The bailout of Bear Stearns Cos. by JPMorgan Chase & Co., arranged by the Fed, demonstrates the government's unwillingness to allow ``large, systemically important'' financial institutions to fail, he said. Bear Stearns collapsed after customers fled amid speculation the company faced a cash shortage.

``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

Bottom line:

This is huge folks! If Fannie and Freddy were allowed to fail (won't be allowed), we would quickly fall into an ECONOMIC DEPRESSION (i.e. lack of new home loan credit = lack of new money circulating, destruction of debt/bond/equity markets, a complete lack of home sales/swiftly building inventories, MANY times more home loan defaults than expected and an ABSOLUTE COLLAPSE IN HOME PRICES -- compounding several times over the current banking/financial system crisis and significant economic pains that we are now experiencing).

If the GVT indeed does bail them out (likely) expect a HYPERINFLATIONARY Spiral -- followed by a depression anyway. We're talking TRILLIONS of new dollars quickly added to a bloated fiat system that is already creating new money at a near 20% annual rate -- adding explosive fuel to a raging forest fire and increasing the velocity of US Dollar decline and ultimately Dollar hegemony collapse.

Once again, the Plunge Protection Team and Gvt are stuck between a rock and a hard-place, and the days of easy fixes have long since past... We should have taken our harsh medicine after the Dot.com crash, but the Maestro (Greenspan) wanted to leave his chair on a high note. Though honored, knighted and revered around the globe, Alan Greenspan (when history is written/analyzed) will likely go down as one of the WORST Fed Chairman EVER! I hope he can sleep well at night, knowing what he hath wrought.

As an aside: for those who don't understand the word hegemony (used above), I highly suggest you read a superb Ron Paul article written back in 2006: The End of Dollar Hegemony

All the best

Randy

Argentina's Economic Collapse

Possibly a glimpse into what our future may hold?

Argentina's Economic Collapse of 2001 - Part 1




Part 2



Part 3


Part 4


Part 5


Part 6


Part 7


Part 8


Part 9


Part 10



Part 11


Part 12

Peter Schiff: $5000.00 Gold By 2012 - Dollar Never Recovers - Game Over

Though a bit dated (mid May 08) Peter Schiff states that gold will see $2,000 in 2009 and likely $5,000 by 2012. (Ironic Note: I predicted the same target range back in my Jan 08 post -- Gold: how high?)

Additionally, Peter says silver will probably do better than gold and that the US dollar will NEVER recover.

The U.S. recession, the dollar, oil and IRAN

From Paris, Max Keiser, journalist and broadcaster speaks to Afshin Rattansi in Tehran.

Mr. Keiser absolutely nails the real issue that no one in America is talking about!

Could it be that the news we receive through our corporate owned media system is being controlled (not allowed to talk about this subject)? Hmmm...

Prepare for the Collapse of the US Dollar

Lindsey Williams, author of the 'Energy Non Crisis' explains how the US Dollar Crisis is upon us via the World Bankers choice of using Oil as the US Dollar's backing.

Prepare for the collapse of the Dollar



Suggest you watch the prior set of Lindsey William videos for a better understanding of what he's talking about here.

Ron Paul interview on state of the US economy

A superb/fascinating one-on-one interview with Presidential candidate, Congressman Ron Paul.

Perhaps the last honest politician in Washington, Congressman Paul speaks candidly about the Federal Reserve System, our system of easy credit/debt, inflation, falling dollar, gold/silver, poor foreign policy, entitlements, taxes, the US Constitution and the economic collapse that will likely soon follow...

Bottom Line: The poor state of our economy, the falling dollar and our corrupt system bodes quite poorly for our future.

Clips 1-3 below mainly discuss the issues mentioned above;

Clips 4 & 5 cover Ron Paul's Presidential campaign, biased media coverage, freedom & liberty, etc.

Enjoy!


Part 1



Part 2



Part 3



Part 4



Part 5

Deconsumption: Timeline for Unfolding Crisis of Mankind

I'd like to refer you to a very prophetic article written by Steven Lagavulin back in May 2004 (Mainpage: deconsumption.typepad.com).

Steve's 2004 vision is absolutely amazing, and though his timeline has been off slightly, he has NAILED many of the events that have transpired through 2008. With such spot-on foresight (thus far), I think his outlook & viewpoints for the next decade should be seriously considered.

Main thoughts are: As we enter into a predicted depressionary period, we will deindustralize, deconsume, detach from the material world AND detox from mindless spending... Resources will become scarce, US Superpower status will be lost and WW III becomes quite possible. This depressed period will hone and temper our souls... Those that chose this as a test, and rise to the occasion will do just fine... those that are weak and cannot change will enter into the dustbin of history.

It is quite a long article and I've extracted the "meat" of it for you, but if you desire the full effect, please click on hyperlink below

Timeline for Unfolding Crisis of Mankind

Rules of Prediction

Rule #1) The three principle factors to take into consideration in any prediction are the Force of the event being viewed, the Conditions external to it that can alter its propagation, and the length of Time outward which we are trying to foresee. This rule really only applies in generality, since it inherently shows that there are so many different variables affecting the totality of events proceeding in the world and their further influences on each other, that we can really only claim to view possible future outcomes in broad brushstrokes. It also shows that the ability to foresee the future necessarily only takes into question the particular field we have elected to consider.

Keeping this rule in mind, I will try to present this outline in broad brushstrokes, and ask the reader to remember that the items I’ve selected to represent the unfolding Crisis are simply my own subjective reference points. Also, I make no attempt to look further out than 10 years, and will be broadening the brushstrokes even that far out until hopefully, like a Master Brush-painter, I’ll be able to represent the essence of the thing with only a minimum of ink. And if that isn’t the case, then maybe try to think of it as a work by Jackson Pollack…

Rule #2) The tendency when making predictions is to accelerate the natural propagation of events, and to do so on even course. Experience shows that large-scale events tend to unfold “in fits and starts”: moving at what seems to be glacial speed, and then suddenly seeming to “erupt” when some extraneous event acts as a catalyst to precipitate them.

Rule #3) It’s not realistically possible to predict how the Power Possessing Beings of the world will react to influence events, but they will almost certainly do so adversely. It’s somewhat easier to foresee the reactions of a large group of people than those of a small group, since a greater number of entities serves to regulate and streamline the degree of choices that are available to individuals. And the chief reason why the future almost never unfolds “naturally”, and in the manner we foresee that it will is because powerful people are always trying to manipulate it. Thus government entities, corporate directors, religious leaders, etc are continually acting to try to shape the future in their image. It’s a perfectly human impulse, and rooted in the nature of our consciousness: if we have this unique capacity to foresee how cause and effect will unfold, then our response will usually be to try to alter conditions—to the degree that we're willing and able—in an attempt to achieve a more desirable outcome. We all do this at almost every moment of every day. People with power, however, can obviously accomplish things on a much larger scale. But at the same time their actions will always be directed by their own imperfect, subjective view of the world--and almost invariably a view of the world that helps them to achieve more money, more power and more control.

Possible Timeline for Unfolding of Crises (w/ a US-centric bias):

Year 2004-2006

At first the significant stressors to Mankind will be economic collapse, social unrest, and to a very limited extent, the first signs of difficulty coping with the transition to a life of hydrocarbon scarcity.

During this period, currency devaluation—especially in the US Dollar—will be the significant problem, along with the resulting inflation as prices of basic commodities rise (or more accurately, fluctuate wildly following a general rising direction). There may be a triggering event which causes a sharp downward movement in the price of the Dollar, or it may be a continuation of the slow, “controlled” devaluation we are seeing currently, but regardless, even that will eventually accelerate as the foreign holders begin to capitulate. Inflationary pressures will be further exacerbated by the rising costs of gasoline and fuel oil, and their residual price effect on transport and shipping, travel, and food production. This will not be a result of “Peak Oil” conditions—although this will likely rise up to become the “cause du jour” for American and European activists. Rather, higher oil prices will simply be reflecting the instability of conditions in oil-rich regions, and also the insistence by foreign suppliers for higher prices to offset the declining value of the US Dollar (which oil is currently priced in). In fact, toward the end of this period we can expect to see oil-rich countries demanding payment in Euros or even Gold. This will accelerate the fall of the Dollar if it has not already crashed prior to this event, since Dollars will no longer be necessary to settle trade in the world’s most important resource.

In the US, the Federal Reserve will find itself chasing two rabbits (and catching neither): trying to reverse the massive inflation they’ve created over the past couple decades while simultaneously raising interest rates. The will try to telegraph each rate move in hopes they can control the resulting bond market decline. Consumers, especially in the US, will begin to drastically rein in their spending as rising interest rates force them to confront their massive personal debts. Unemployment will continue to rise in the US and EU as companies struggle to control costs and pare back under the growing realization that their customers are tapped out. On the heels of these events, debt default on all levels (Government, Corporate, and Personal) will likely begin to become problematic for banks and finance companies, which will be forced to turn the screws a little bit on their debtors. We may even see the first hints from Congress or the Senate toward reforming or repealing personal bankruptcy laws. There might be a return to “union busting” as corporations become desperate to survive, and strikes may become commonplace.

Housing prices will begin to decline, especially in upscale suburbs, as interest rates are forced up and many people find they cannot support—or are even upside-down on—their mortgage loans. Downsizing will become attractive (or more likely, necessary) in the face of rising unemployment. However, modestly-priced houses—especially those in or near cities having a diverse economic core—should hold up well.

There will likely be the beginning of a shift in public opinion away from SUV’s and toward the newly “fashionable” hybrid cars (and possibly alternative fuel cars as well). Expect the Hummer to become a watershed symbol for the end of an era. Still, it’s unlikely that Americans will give up their SUV’s without a fight, so it’s possible that Hybrid-Hummers, Enviro-Escalades, etc will be slated by the Big 3 automakers in an attempt to put a mind-spin on the more legitimate fuel-efficiency movement. National energy conservation and fuel economy campaigns appear.

The rising cost of oil will take its toll initially on industries such as air and ground transport and intensive agriculture. We will undoubtedly see at least one more major airline go under, and possibly more, as the government will be extremely hard pressed to get any kind of bail-outs approved. The rising costs of nitrogenous fertilizer and diesel fuel will drive up food production prices—further aggravated by the increased fuel costs for transport. As such, non-corporate, local agriculture and meat producers will become more competitive.

Violent civil unrest will begin to increase around the world as any number of angry, disenfranchised groups take their lessons from the Al-Queda handbook. The effectiveness of focused, persistent terror-strikes has grafted itself onto the world-view as a successful means for combating authority…or just simply sending a message. It’s possible the next terrorist attack on America will not involve foreigners….

The US-Mid-East War (nee War on Terror) is a major area of uncertainty because of the high probability for unexpected events. The US looks to be on track for repeating the mistakes of Vietnam, and public opinion is currently declining as the US is losing control of Iraq in many ways. The problem is that, unlike Vietnam, the US cannot simply “withdraw” as the region will quickly destabilize without their presence (thus cutting-off their control of the oil). The reinstatement of the Draft is already being bandied about, which might have flown if Gen-Xers were still of military age, but Boomers are not going to be eager to send their children off to Viet Nam II….especially when CNN has already shown them how un-romantic the defense of freedom really is over there. Still, a significant terror-event could serve to turn public opinion around, especially one on American soil…which is highly likely over this period of time. (Should such an event happen shortly before the November 2004 elections, however, it could backfire and become a public-relations time bomb for the current administration….). There is little doubt that Middle Eastern terrorist gangs are plotting attacks on American soil, and most likely the plans are of a sufficiently large scale to justify the effort. Most of these, however, will be poorly executed or thwarted altogether. Still, it’s likely that American society will have to suffer images of car-bombings at Pike Place Market in Seattle, or rockets fired into a major Las Vegas hotel, or some such.

One incident of high likelihood is that the rulership of the Saudi royal family will be overthrown or effectively compromised. This will severely weaken the US military position in the Middle East, and probably lead to a withdrawal of forces. In this event, oil prices would rise much more quickly and speed along most of the events in this Timeline.

World opinion of the US will probably continue to slide along with its economic and imperialistic fortunes. If President Bush is defeated for re-election this year, and his successor blames all problems on him and promises to redeem the American image, then there might be an opportunity to improve the country’s branding with the world. At least for a while. Any successor will find himself immediately caught up in the oil addiction issue, and with bad feelings in the Middle East and our troops already embedded there, it may seem awfully tempting to continue the Project for a New American Empire agenda. Meanwhile, Australia and Russia will be courting their Chinese neighbors, since that’s where their bread will be buttered. The same goes for the East Asian countries, including Japan.


2007-2010

This is the period where life will begin to seem more uncertain, and “triggering events” will undoubtedly pop up in many spheres to propel mankind headlong into the future. Because the “tectonic plates” of human interaction will be sliding and grinding together in all directions, there is also a high likelihood for some type of new and unexpected “extraneous” crisis to erupt—one that could not even be imagined today.

The Western-centric concept of “Globalization” will be fizzling fast as it becomes more costly to move resources around the globe. Money will be flowing fast out of the US looking for safe havens, and probably out of Western Europe as well. Asian currencies may become the beneficiaries of this, if their economies haven’t been stalled by the devaluation of their own massive dollar holdings, and the dwindling external markets for their products. But all currencies will be sliding, so perceived “strength” in any of them will be only relative. China will be hard-pressed to orchestrate a transition from an export economy to an import one, turning toward its own internal prosperity to provide a market for their goods. With massive overpopulation, it’s going to be almost impossible to sustain the kind of heated growth they’ve enjoyed for the past few years—without even mentioning the ravaging effects this growth is having on the environment worldwide. Critical pressures for food and oil there (China currently has no arable land left) will almost certainly turn Chinese aspirations northward toward Russia, with its overabundance of both—perhaps to forge friendly alliances…or perhaps not….

If not already underway, there is a high likelihood of a derivatives crisis triggering global bankruptcy in the financial world during this period, probably initiating in the US mortgage industry. Governments will be unable to honor real or implied guarantees. This will effectively doom any hope that the Central Banks might be able to “manage” the economic and currency crises that have been unfolding. Bond rates will continue to soar, driving bankruptcy rates much higher, especially among residential and small business borrowers.

Worldwide, a void will begin to be felt by the beginning decline of the US as a superpower. The signal for this won’t be hard to miss: China will “repatriate” Taiwan. Regional (or tribal) wars will spark up everywhere as both social distress and resource scarcity escalate. In South America, drug-cartels will almost certainly step up their terror-tactics against local authorities. Indian/Pakistani relations will probably breakdown become a global concern, for want of a more specific word…. The worst tragedies will occur in Africa, which will further become a basket-case of violence and disease.

China’s oil consumption will be outpacing any kind of conservation the US and Western Europe are struggling to achieve. Relations between these regions will almost certainly break down as they vie for control of remaining reserves. Much of this will obviously depend on developments in the US / Middle East conflict. If the US does not have direct control of Middle Eastern reserves, then it US will probably be on the short end of the negotiations, as Russia and the Middle East side with (or bow to) China in oil agreements. Poorer countries will be crushed by the cost of fossil fuel, and may become suicidally desperate (North Korea comes to mind…). The United Nations might possibly try to enact some type of import/export restrictions to help ease the strain on poorer countries. If World War III is in the cards for the Human race, we will probably see the powers of the globe positioning themselves sometime around 2010.

The US might likely begin implementing “stabilizing” policies to control the price of oil during this period, and certainly we will see more energy conservation campaigns to address electricity and natural gas use. By now the whole economy will be suffering, but hard-hit industries during this period will include ground transport, petrochemical processing, mail and shipping dependent companies, the automotive industry, and tourism. On the brighter side, congestion may clear a bit in major cities as two-car families downsize, and the poor return to the “car-free” way of living they’ve traditionally enjoyed. (This applies primarily to the car-centric US, where the number of registered vehicles presently exceeds the number of registered drivers). If not already, expect to see legislation imposing some type of sin tax on gas-guzzlers (perhaps even singling out SUV’s) and corresponding subsidies on fuel-efficiency and alternative-fuel vehicles. Flying thousands of miles to lie on a beach will become a thing of the past for all but the wealthy. Only a couple airlines will survive bankruptcy through this period, and its likely that the government will be initiating emergency subsidies to keep them going. Small resorts within two or three hours of major metropolitan cities will experience increased business.

Sometime in this period the media may assert the belief that we are making real headway in correcting our oil crisis. This might be attributed to new investments in drilling and exploration triggered by the past few years of rising price-profits at energy firms, and which will be coming online during this period. Or there may be reports of large new reserve discoveries (probably invented, but no one will be able to verify them). It may also be touted that we have been offsetting consumption by adopting a kind of hodge-podge of alternative energy systems. Regardless, this feeling that perhaps all will be right with the world once again will be illusory and will not last long, since China/East Asia will continue to gobble up all the hydrocarbons that we are potentially pumping or saving—and out-negotiating us for import contracts.

Power outages in the US and Western Europe will become more problematic as the outdated transmission infrastructure begins to sag. Rising natural gas prices will take heating and electrical generation costs with them. Here again, energy rationing will be all the rage, as it was in the 1970’s. Photovoltaic systems (solar electricity panels) should finally achieve a roughly breakeven cost-effectiveness toward the end of this period, as technological advances combine forces with the rising costs (and unreliability) of getting electricity directly from the grid. Still, PV and Solar-Reflective generating plants will be slow to come online. Domestic PV systems will be most popular, but only the well-off will be able to afford truly self-sufficient homes. Solar domestic water heating systems, however, will become de facto in new home construction, and will improve the resale value for existing ones.

We will probably begin to see a shift in housing demographics away from the suburbs, as people begin to migrate either “inward” to the convenience of the cities or “outward” to the safety of more rural areas (most likely to communities about 1 ½ to 3 hours from a major city). Furthermore, many people in cold climates will begin to move southward, while people in extremely hot climates move a little further north. Lastly, some will decide to leave the country altogether, perhaps in an effort to stretch the value of their remaining savings as far as possible.

The “whole foods” movement will really begin to latch-on in Western societies, as industrialized, processed foods, meats and milk become more expensive than locally produced goods. This, combined with economic hardship and unemployment, will lead many people—especially those in small towns—to rediscover to some extent an economy of barter and local markets.

Social discomfort will erupt in various ways, and we could expect at least a couple incidents of large-scale rioting in one or more large cities (highest probability lies with Los Angeles). More common will be the rising presence of anti-government and anti-corporate sentiment. In the drive to become independent of the high costs of social infrastructure, many will embrace the emerging popularity of sustainable-living communities, or eco-villages. This will lay the groundwork for how our society will overcome the Crisis period, and will involve a re-discovery of the “local economies” that people participated in before hydrocarbon energy fueled the Industrial Age.

Movies will begin to take on much lighter, more uplifting subject and tone. The classic Musical may return as a popular style.

There is some chance—probably somewhat less than 50/50—that the US may see a legitimate Third-party contender for the Presidency in 2008. If so, it would be a populist candidate running on a platform of public austerity and a return to the pre-Wilson ideology of US independence from international imperialism and diplomatic endeavors.


2011-2015

By this time period, the “impending-ness” of Peak Oil will be much more apparent. If no significant new reserves have been discovered, or conversely if China / East Asia have not experienced an economic collapse, then the developed countries of the world will find themselves in a position of extreme desperation to take direct control of the world’s supply from whomever currently has it—which will mean world war, concentrated in the Middle East, especially Saudi Arabia. Even if new reserves are found, where they are discovered will be a significant factor. If sufficiently large reserves are found in North America, violent crisis will be easily avoidable for the time being. The chance of this is extremely unlikely, however. Therefore, it needs to be recognized that if these events ensue then, because oil will mean life-or-death for the developed (and even under-developed) nations of the world, any conflict will quickly escalate to the use of nuclear and other “weapons of mass destruction”. If this happens then there will be no way to predict how the future will unfold, and the rest of the predictions for this period will be either accelerated or just moot….

In the US, oil and gas will gradually become more regulated as it is concentrated in places of greatest need, such as electrical generation, agricultural production, water processing, necessary transport, military uses, etc. Undoubtedly some kind of high-level (regulated) and/or low-level (unregulated) black market will develop, especially for gasoline. On the renewable front, solar photovoltaic systems may become more widespread, especially if sufficient investment has been made over the past few years to encourage the PV manufacturing industry.

Life in the cities will begin to break down, as basic services become unreliable and fresh food becomes scarce, and lines will frequently form at grocery stores when shipments come in. Things like blue jeans and tennis shoes may become luxury items. Crime of all kinds will have increased dramatically. Racial strife may flare up in some cities. Western communities will probably find that access to water becomes a point of contention, as rivers and reservoirs become coveted resources, especially around Denver, Phoenix and Southern California.

Even as city life becomes more difficult, many rural towns will experience a rebirth as they find themselves reorganized into eco-villages and self-sustaining communities, experiencing an influx of educated, industrious individuals. Life will begin to de-centralize (from an urban-centric structure) and regionalize (around natural resources), and the price of arable land and “hobby farms” will skyrocket. With this return to small, prosperous communities where whole families will be working together for the benefit of the community, a renewed sense of spirituality may begin to bloom. As distribution to these rural areas becomes costlier and more problematic, many things will become unavailable outside of the cities: fast food restaurants will close, as will many other chain stores, and things like truck stops, overnight hotels, and billboards might begin to disappear. However, items that are difficult to manufacture locally will also become scarce, or disappear altogether from smaller communities: electronics (including computers and cell phones), pharmaceutical medicine and medical supplies, plastic and rubber items, etc. Also, rural life may not be entirely safe and secure, as it’s likely that many people with more fearful, xenophobic tendencies will adopt the Survivalist mentality and form paramilitary communities far from the cities. This may lead to civil conflict over local land and resources, which would entail further government intervention in domestic security. More likely, however, is that most these groups will just bunker down with their fingers on their triggers until society appears to stabilize, and then seek to reunite and find a place within more organized and prosperous communities.

In developing countries, it seems likely that poverty and food scarcity worldwide will lead to civil disorder and social strife, especially in urban areas. This may in turn lead to government intervention in the daily life of people. There is some chance that outbreaks of disease will take their toll, especially in Africa, India, China, East Asia and Indonesia, as medical treatment becomes difficult to sustain at suitable levels and malnourishment and breakdown in social services become more widespread.


My closing thoughts: it's a pretty dire viewpoint but very plausible considering the events that are unfolding (food shortages looming, consumer inflation raging, Unprecedented US debt levels (consumer/corporate and gvt), dollar falling quickly, oil becoming scarce while demand increases, G7 financial crisis unwinding, China/Russia bonding and their control of natural resources growing, and the list goes on...)

Guess only time will tell, but I think Steve's viewpoint is worth serious consideration in any future planning.

Regards

Randy

San Francisco Federal Reserve Symposium

I'm reposting this article back towards the top of my Blog--for those of you who haven't yet read. If you have the time, take a look at the comment section also.

Last Thursday afternoon (April 10th) I had the opportunity to attend a three-hour Fed symposium at UNLV and meet three representatives of the Federal Reserve Bank of San Francisco. This symposium is held biannually and is geared towards providing Undergrad and Grad students with a better understanding of the operations of the Federal Reserve Banking system.

I’m a friend of someone who is enrolled in an executive MBA program and we often discuss current economic conditions and the Fed Reserve System, so when he became aware of this symposium, I was the first person he thought of and invited.

The symposium started with welcome introductions and was quickly followed by a 24-slide presentation/briefing from Karen “S” (Manager of Administrative Services, Banking Supervision and Regulation, FRBSF) on current banking conditions and trends.

Karen has worked for the Federal Reserve Bank of San Francisco for over 20 years and prior to that, worked for Barclays bank for 10yrs, so one would surmise she is well seasoned in her field.

Karen discussed the regulatory role of the Fed and several other regulatory agencies (FDIC, Office of Thrift Supervision, Comptroller of the Currency—Administrator of National Banks, etc) and then moved on to cover the Top-3 current Banking Risks:

1) Subprime & Residential Lending
a. Mortgage underwriting weak
b. Consumer Disclosures questionable
c. Property values continue to decline

2) Commercial Real Estate
a. Loan concentrations high
b. Properties unoccupied

3) Liquidity Risk
a. Non-core funding dependence increasing

Each of these areas was covered with slides/charts/graphs etc, but there were really only a few takeaways worth sharing:

1) National home prices have already dropped 9% (Peak-to-trough) thus far, but the briefing suggested we should expect to see a total drop of 20% by Spring 2009—Sub-prime resets, falling home values and tight credit conditions being the main factors (1 of every 4 subprime residential loans is in past due status)

2) National Foreclosure rates are at a 27 year high and expected to worsen

3) 12th District Bank Construction and Land Development Loan Concentrations at all-time highs (% of equity vs. Allowance for Loan and Lease Losses); much higher than even before or during the 90’s California RE collapse

4) Many bankers are “in denial” and not acknowledging problems; loans are being downgraded to “substandard” or worse; bank loss rates rising sharply

5) Bank Construction and Land Development loss rates likely to go much higher

6) Many issues on the radar screen for Banking Risks—Credit Risks, Compliance, Market/liquidity Risks, etc.

During her briefing, Karen heaped most of the blame for our current housing crisis on relaxation of underwriting standards, mortgage fraud, predatory practices, etc, but she spoke not one word about partial responsibility being tied to fed policies. After listening and twisting in my chair for some time, I finally asked: “You’ve placed much of the blame for our current housing predicament on all these factors, but you’ve not once addressed Fed policy and the fact that Greenspan held interest rates at a 40 year low for far too long… Don’t you think the Fed deserves part of the blame for this crisis?”

After a somewhat long pause came the words: “Well yes, Fed policy was partly to blame.”

Karen then searched for thoughts/words to make her answer seem less “Fed-negative” than it was, so she tried to refocus and babbled on for quite some time about how these ultra low rates and Fed policy provided the opportunity for millions to live the “American Dream of home ownership -- even if it was just for a short time. "

I was incredulous and couldn’t believe my own two ears. The whole time she spoke of this, I was thinking: Sure, inept Fed policy/easy money allowed MILLIONS to “taste the American Dream” -- but now MILLIONS will lose their homes, ruin their credit, ruin family relationships, lose jobs, etc, but she felt it was all worth while… "They tasted the Dream.”

Bottom Line: Her reply was absolutely ludicrous. But what else should a person expect to hear from a Fed employee who drinks the Kool-aid?


Next up was Renee “C”, a rather young, attractive Fed Research Analyst who presented a briefing on the Federal Open Market Committee (FOMC). Renee spoke with a bubbly/positive outlook on things, but seemed a bit naïve – she struck me as a regurgitator of data that has been heard/learned over time, but really incapable of independent thought or an understanding of the “Big-Picture”.

She did however appear to be very enamored/proud to be employed by the SF Fed -- a true Fed Soldier.

Renee discussed:

1) Her Group’s Role at the Fed
a. Public Information
b. Economic Research

2) US Monetary Policy Goals
a. Maximum sustainable output and employment
b. Stable prices

3) Tools of Monetary Policy
a. Open Market Operations
b. Discount Window
c. Term Auction Facility
d. Primary Dealer Credit Facility
e. Term Securities Lending Facility
f. Reserve Requirements

4) Monetary Policy Meetings
a. Eight times a year in Washington DC

5) Monetary Policy Decisions
a. National in scope
b. Forward looking
c. Tradeoffs of between short-term and long-term goals

6) Fed Policy Statements
a. A secondary policy instrument (first is the Federal Funds Rate)

7) Economists at the Fed—who they are/what they do
a. Fed is the largest employer of economists
b. Economists conduct and publish research
c. Produce economic briefings for FOMC members

Early on in the briefing, Renee put up a cartoon depicting Bernanke holding a balloon inscribed with the word "inflation" in one hand and a rope tied to a dollar sign tilting off a ledge in the other, and then asked if anyone can interpret what the cartoon is trying to say.

I stated the Fed is worried about inflation, which is rising, but can’t do much about it by cutting rates and therefore risks allowing the dollar, the world’s reserve currency, to fall off a cliff—and added: “He is in quite the pickle right now…” Renee politely giggled and said, that’s good, but I’m actually using the dollar to depict the US economy, and as for the balloon, inflation always needs to be positive, but not too high… It must be a delicate balance and the fed walks a fine line…

Later, when discussing Monetary Policy she stated that: “Monetary Policy Lags and needs time to take effect” which I agree with, but I stated “Inflationary Policy also lags.”

I don’t know if she really understood my point: Using the numerous new Fed Tools to inject while cutting rates is highly inflationary and we consumers are already feeling the first wave. With the many recent/deep cuts yet to take full effect, it’s only going to get much worse (while the dollar gets creamed)…

I also asked if Fed decisions are politically influenced. (e.g. reporting to the public that the glass is half full vs. half-empty). Renee was firm in stating that analyst research and the sharing/publishing of data is NOT politically motivated and she highly doubts that the FOMC public release is either.

My thoughts were: Move along now, nothing to see here… Continue drinking the kool-aid and all will be fine…


Yelena “T”, Ph.d. Economist of Russian decent, gave the last economic briefing. Yelena was pleasant, seemed to be very intelligent (far more so than the other two), but you could sense that she was only providing surface-level, somewhat optimistic forward looking data, and seemed to be holding back on what could be said to the audience.

Yelena discussed:

1) Current Economic Outlook
a. GDP is dropping faster than earlier Fed Predictions
b. Personal income is flat/dropping slightly
c. Consumption expenditures—a noticeable drop
d. Unemployment is increasing; employment fell for 3rd month
e. Weaker Dollar (Note: she stated a weaker dollar is good for US exports. I chimed in: “That’s good, but we’ve exported most of our manufacturing capacity and until we get it back we’re still going to continue running MASSIVE trade deficits.” Oil yesterday hit $112 and the Yuan broke 7 to the dollar and is gaining speed. Inflation can mainly be attributed to a weak dollar — she nodded/seemed to agree with all)
f. Real GDP Growth has been reduced by a decline in Real Residential Investment
g. Inflation is a source of concern (depicted charts of Core PCE, Total PCE and CPI rising above trend line: I wanted to state that her "understaed" numbers were all completely bogus, but it would have been inappropriate in this collegiate setting)
h. Mixed Signals for long-term inflation expectations

2) Federal Reserve Board of SF National Forecast
a. Little GDP growth in first half 2008, but likely improvement in 2nd half
b. Monthly GDP forecasts have fallen every month since Aug 07
c. Inflation should decline going forward due to slower economy
d. Housing inventories climbing; >2x higher than normal; downward price pressures

3) Potential Risks to their Forecast
a. Continued home price declines may impact construction and consumer spending more than anticipated
b. Continued tightening of lending standards may make housing situation worse
c. Jumbo mortgage rates remain high; increased spreads between 10yr Treasury rate and Mortgages rates -- even conforming mortgages
d. Increased Credit Market Stress

When the briefings were finished, the forum was open to questions. A few relatively easy questions were asked by audience members and were promptly answered.

I later, after much internal consternation, asked how we can sit here and discuss rate cuts, stimulus packages and Monetary Policy, yet fail to address our ailing US Dollar and it’s faltering status as the World’s Reserve Currency. I highlighted that back in 1971, US total monetary aggregate was merely $700 Billion, but now it’s > $14 Trillion and is growing by 18% annually.

I then stated numerous countries have already pulled or are discussing pulling their currency-dollar pegs (due to high domestic inflation rates—as they have to print money as fast as we do). I also opined that Treasury Secretary Paulson and Bernanke’s “Strong-Dollar policy” is preposterous/laughable. How can they continue to cut rates/inflate while the dollar falls to all time lows around the globe, yet “claim to support a strong dollar?” (Note: I was getting a little worked up by now)

I was told this “Dollar Exchange Rate” issue isn’t really taken into account when discussing Monetary Policy, but there are departments internal to the Fed that do study monetary exchange rates/etc. Additionally, I was told that monetary aggregates aren’t important or studied. (Internally, I laughed at the ignorance).

I had many, many more questions/concerns boiling inside of me, but at this point, I had already been the most vocal audience member of the day and had taken far too much of the forum’s time… It wasn't like I was getting intelligent answers anyway… So I bit my lip and said no more.

In closing, what more can I say -- except that I expected more from this symposium. Here were three Fed Bank employees with many years of economic experience, yet their answers seemed uninformed and absolutely baffled the informed mind. I guess that’s what Fed programming/propaganda does to a person. Drink the misinformation Kool-aid for too long and become part of the problem -- passing on ignorance as fact and supplying high school level, nonsensical answers to those with valid questions/concerns.

If these three folks actually represent a typical cross-section of Fed employment/knowledge base, then God help us all, because the misinformation/ignorance problem we have is much bigger than even I thought.

Best regards and until next time

Randy

Economicrot Homepage