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

Senate Overwhelmingly Passes Bailout Package

Our Elected Wall Street Cronies (Senate) overwhelmingly passed the massive bailout bill tonight with a final tally of 74-25.

Guess our only hope for failure is in the House vote on Friday - Keep sending the emails and phone calls - let them know how you feel!

DON'T LET THIS PASS! Contact your Congressional Representatives and tell them: NO BAILOUT!




The Senate added numerous sweeteners to the Bill on Wednesday and it is now 451 pages - It'll probably grow once again when the house is finished.

Sweeteners:

- The Senate modified the $700 billion financial rescue plan with a provision that gives the Treasury Department the authority to buy troubled mortgage securities.

- The bill also now includes an extension of numerous tax breaks for research and development and renewable energy companies, as well as personal tax breaks for college tuition and disaster victims.

- It proposes adjusting the Alternative Minimum Tax, so it doesn't hit more than 20 million middle class Americans in 2009.

- Another key modification is a one-year increase in the limits of personal bank savings the government insures up to $250,000.


CLOSING:

If you want to band-aid our MASSIVE economic problems only to experience hyperinflation (combined w/economic depression) later in the game, do nothing. Otherwise, get on the phones and email your Congressional Representatives.

Ultimately, we're headed for ENORMOUS economic pain - regardless of whether or not this Bill gets through the House, but we the people have a voice and we need to be heard!

If united, we can work to take down this corrupt cesspool of Banks/Wall-streeters who have pulled the strings in Washington for far too long.

Question:

Is our current status-quo gvt. the appropriate government to pass on to our children?

Before answering that question, I want you to think long and hard about Abraham Lincoln's words given at the Gettysberg Address: so "that government of the people, by the people, for the people, shall not perish from the earth."

Well my friends, that form of government has perished from the earth and Wallstreet now makes all the rules.

Again, do your part as an AMERICAN WHO DEMANDS CHANGE: DON'T LET THIS BILL PASS!

Contact your Congressional Representatives and tell them: NO BAILOUT!

Best regards

Randy

Bailout or no bailout - what's the difference?

Many Americans are being brainwashed into believing that our economic woes can be resolved with the "saving grace" of a $700 Billion taxpayer bailout package - being crafted over the weekend.

Well folks, It just ain't going to happen that way...

This package (if approved) may slow the speed of our debt implosion, but the debt implosion train has already jumped the tracks and can not be stopped. A Massive Recession or Depression is well on its way.

If it's coming anyway (you ask), why not try to slow it down with the bailout?

Well, there are several very harmful side effects of passing this bailout - the most significant being: a falling US Dollar/inflation for every American household.

What do I mean?

Well, if passed, we will still experience the same (albeit slower) consequences of the debt implosion: unemployment figures will rise significantly and the value of our assets (homes, cars, boats, toys and other expensive gadgets) will tumble as people flood the market with these items to (1) get rid of the added household expense and (2)use the proceeds to help put gas in the car/food on the table.

The difference will be: If approved, we will experience a significant increase in the cost of living - simultaneously with debt implosion/falling asset values, etc...

Food, gas, clothing, imports, etc, will all skyrocket in price - significantly increasing the cost of maintaining a household.

Ultimately, this bailout will not be enough money and other bailouts will likely follow (due to this precedent) and the Massive Recession/Depression will turn Hyperinflationary in nature - Sticking it to the average Joe from both ends.

Closing:

I just finished watching the Presidential debates. In a nutshell: I wasn't too impressed with either of them, but one key comment stuck and resonated within my head throughout.

When questioned on the pending bailout package and the economic crisis, John McCain stated" "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."

A keen realization that this package is just a bandaid - to slow the bloodletting, with the understanding that there will be much more bloodloss to come.


Hold on to your hats folks!


Randy

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

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

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)

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

Peter Schiff on Fox: Fannie and Freddie

Peter, once again, telling it like it is.

Click "play" twice to load

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

Bloomberg: Hyperinflationary Depression

Tyche Group Senior Manager Martin Hennecke discussing his expectation for a hyperinflationary Depression in both the US and Europe.

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...

US warns Iran -- $10 Gas?

Back in February 08, I wrote: Iran’s Oil Bourse Set to Open this Sunday which explained how Iran's new Bourse was provoking future military action by posing a huge long-term threat to both the US Dollar & continued American global hegemony.

I warned that rhetoric w/regard to Iran would probably soon ratchet up again; a catalyst to military action would likely be found; and that bombs might be falling from the sky before November 08, as the Bush administration would not take lightly this deliberate slap in the face of US global economic power; nor did they trust leaving the problem for the the next regime.


Times Online today: US warns Iran of retaliation over Iraq action

America's top military officer has ratcheted up the pressure on Iran by issuing an unusual public warning that the Pentagon is planning for “potential military courses of action”. .”

Admiral Mike Mullen, chairman of the joint chiefs of staff, blamed the Iranian government and Quds force of the Iranian Revolutionary Guard for its “increasingly lethal and malign influence” in Iraq. He said conflict with Iran would be “extremely stressing” for America’s overstretched forces, but added: “It would be a mistake to think that we are out of combat capability.

Mullen said he was increasingly concerned about Iran’s growing involvement in supplying munitions and training to rebel Shi’ite militias and “killing American and coalition soldiers in Iraq”.

Speaking at a Pentagon news conference late on Friday, he said recent operations in the southern port city of Basra had revealed “just how much and how far Iran is reaching into Iraq to foment instability”. A Pentagon source said the admiral’s frankness was “extremely significant” and could pave the way for some form of attack on Iran. However, Mullen said: “The solution right now still lies in using other levers of national power, including diplomatic, financial and international pressure.”

Mullen’s tough rhetoric came shortly after General David Petraeus, the US commander in Iraq responsible for the troop surge, briefed Congress about the “nefarious activities” of the Quds force in stirring violence in Iraq. There were a total of 923 civilian deaths in Iraq last month, the highest number since August 2007.

“We should all watch Iranian actions closely in the weeks and months ahead, as they will show the kind of relationship that Iran wishes to have with its neighbour,” Petraeus said.

Petraeus was nominated last week to take over as commander of all US forces in the Middle East from Admiral William Fallon, who resigned in March after becoming an outspoken critic of American policy towards Iran.

My Thoughts:

As a USAF veteran, let me assure you that my following comments are not un-patriotic, but I can NOT buy into ANY of this administration's B.S. propaganda.

The whole middle east issue (Iraq, Iran, Afghanistan, you pick who may be next) is all about controlling Oil, maintaining US dollar hegemony and supporting massive contracts for companies like Haliburton -- to make Dick Cheney's rich friends richer.

Our troops are dying in a futile attempt to (1) save our dying currency (caused by excessive Gvt spending/debt and a Federal Reserve Banking system that has created one too many popping bubbles -- which has ultimately led to the present crashing financial/banking system that will require a hyperinflationary event to save it from a full-blown collapse) and (2) to control dwindling worldwide oil supplies.

Food for thought: The world can currently extract and bring to market ~ 87 Million Barrels of Oil per day (Mbpd) and we consume ~ 86Mbpd -- 40% of which comes from the Persian Gulf market and must traverse through the very narrow Strait of Hormuz (see picture below)... Note where Iran sits on this narrow Channel...

If we DO start dropping bombs on Iran, they will likely mine the Strait and/or sink a supertanker or two with missiles/etc -- locking up 40% of the world's oil supply. You think gas/oil prices are painful today? Better start preparing for $200+ barrel oil and $10+ gallon gas (if you can actually find it anywhere)

Regards

Randy

StopIranwar.com


Which City do we want to lose?

End of the road for FOMC rate cuts; Pause to come?

Consensus feels, due to rising inflation pressures, a slowdown in unemployment figures, a rising equity market and a less volatile credit market, that the FOMC may be towards the end of their rate cutting and many now feel a "pause" will be in order (either this time - April 30th or next - June 25th)


Dollar Rallies on Fed Rate Pause Speculations

The dollar rallied in NY trading Thursday following a WSJ report that the Federal Reserve may signal an interest-rate pause at the next FOMC meeting due to inflation concerns.

A Wall Street Journal report by Fed watcher Greg Ip said the Federal Reserve may cut the federal funds rate by 25 basis points next week and then keep the rate steady from there.


The Case For Dollar Strength?

The FOMC-There’s evidence that policy makers may want to pause now in order to give the actions they have already taken time to work their way into the system. Fed Governor Kevin Warsh said last week that as credit markets begin to operate more smoothly, more of the Fed’s interest-rate cuts will filter through to the economy. "The problems afflicting our financial markets are indeed long-in-the-making," he said. "Time is an essential tool of our policy response."

There have been some remarkable changes recently in how the market sees the FOMC members making policy changes at the April 29-30 meeting and beyond. Four weeks ago, traders saw a 72% chance for a 50 basis point move in April and a 28% chance for 25 basis points. Last week, traders began seeing no chance for a 50 basis point cut and now see an 18% chance the Fed will make no move at all (the rest of the bets are for a 25 basis point cut, which is the outcome that is most likely). What’s more, the chances of the Fed going below 2.0% on the overnight rate are decreasing rapidly-there currently is a 69% chance that the Fed will make no move at all at the June meeting. This doesn't mean the Fed is necessarily finished adjusting policy, but rather a that period to pause in order to assess the effectiveness of the policy changes that have already been made seems to be in order.


U.S. stocks set to face a sterner Fed

U.S. stocks will face renewed pressure next week, with investors facing not only another heavy week of earnings, but also key data that may confirm the U.S. economy is in recession and a Federal Reserve increasingly expected to pause its campaign to lower interest rates

Although many commentators are talking as if the Federal Reserve has already decided to cut interest rates by a quarter-point rate cut next week followed by a pause over the summer, there is a chance the Fed could instead decide to just pause right here, Fed watchers said



My thoughts:

I don't buy it, as there are still far too many uncertainties out there for the Fed. I expect a 25Bp cut this time around followed by another in June (or an emergency cut if warranted beforehand) and a 1.25% rate by the end of the year.

Certainly we may see a small dollar rally beforehand, but I expect the USDX to easily fall below 70 this year as the fed continues to add fuel (liquidity) to the raging economic fire.

We are nowhere near the end of this housing/credit/insolvency crisis and think ZIRP (Zero Interest Rate Policy) is not out of the question in our future. Each time a new crisis erupts, the fed will print/cut/inject in an effort to contain it, but will eventually run out of monetary ammunition... That's when the real hyperinflationary fireworks will begin.

Again, we're no where close to the end of this financial crisis: Will the Fed Cut Rates again? ; Ushering In a New Economic Era

Regards
Randy

News of interest today

Much more of the same (now becoming quite routine) news: Oil Trades Near Record as Dollar Fall Spurs Inflation Hedging

(Hint to our policymakers as to why: It's all because of your inept boom, bubble, bust Monetary Policies! Stop cutting rates/injecting money and trying to bail out our banking/financial systems -- All you can do now is ease the pain, but your policies will likely make it worse over the long run... Another boom is unreachable without first undergoing severe pain and squeezing out the prior excesses that you created.

Easy money policies and >18% M3 increases will drive us into a hyperinflationary recession/depression! Right now your policies are merely creating high prices (stretching consumer budgets to the max), but tomorrow they could cause loss of status for the World's Reserve Currency. .. Therefore, STOP what you are doing to our currency and let the financial/banking system cards fall where they may -- before it's too late -- for both the US consumer and our country!

Crude oil traded near $112 a barrel after closing at a record yesterday as investors purchased futures contracts to hedge against the falling dollar. Brent crude reached an all-time high in London.

The euro is trading less than 1 cent from a record high against the dollar, spurring interest in energy and metals. China, the world's second-largest oil consumer, imported 25 percent more crude in March versus a year ago, offsetting projected demand declines in the U.S. this year.

``As the dollar weakens then the oil price becomes cheaper in terms of the euro and that encourages buying, so there may be some people who view oil as a hedge against dollar weakness,'' said David Moore, commodity strategist at Commonwealth Bank in Sydney. ``The trend in China's imports is something that's contributed to the tightness in oil markets.

Oil has risen 37 percent and the dollar has dropped 12 percent against the euro since the Federal Reserve began lowering interest rates on Sept. 18.

The likelihood of the Fed cutting its target rate for overnight lending between banks by a half-point to 1.75 percent on April 30 rose to 52 percent from 36 percent a week ago, futures contracts on the Chicago Board of Trade show.


Anyone without a void between their ears knew this would become a problem:
Wachovia's Pick-A-Pay Becomes Pick-A-Problem

NEW YORK -(Dow Jones)- Wachovia Corp.'s (WB) controversial Pick-a-Payment mortgage program lets borrowers choose between four monthly payment amounts. Unfortunately for Wachovia, these "Pick-a-Pay" borrowers are increasingly inventing a fifth choice: Not making mortgage payments at all.

The Charlotte bank reported on Monday a $350 million loss during this year's first quarter, due in large part to stunningly high losses within its $121 billion-plus book of flexible-payment, or Pick-a-Payment, mortgages - a legacy of Wachovia's ill-conceived 2006 purchase of Golden West Financial.

On Monday, Wachovia conceded total losses from Pick-A-Pay loans could eventually amount to a staggering 7% to 8% of the loans' combined value, a range of $8.5 billion to $9.7 billion - meaning the bank, and its shareholders, will likely be coping with Pick-a-Pay losses for years to come.

Among Wachovia's book of Pick-a-Pay loans, "nonperforming assets" - or soured loans - "grew 309.8% year-over-year," compared with an annual bad-loan growth rate of 119.7% for Wachovia's traditional mortgages, said Byron MacLeod, an analyst with Gradient Analytics, in a note to investors.


I've been discussing this for months: Food costs rising fastest in 17 years

The U.S. is wrestling with the worst food inflation in 17 years, and analysts expect new data due on Wednesday to show it's getting worse. That's putting the squeeze on poor families and forcing bakeries, bagel shops and delis to explain price increases to their customers.

U.S. food prices rose 4 percent in 2007, compared with an average 2.5 percent annual rise for the last 15 years, according to the U.S. Department of Agriculture. And the agency says 2008 could be worse, with a rise of as much as 4.5 percent.

Higher prices for food and energy are again expected to play a leading role in pushing the government's consumer price index higher for March.

Regards

Randy

Tumultuous Week Ahead

I imagine the Plunge Protection Team (PPT member pictures below) put in quite a bit of overtime this weekend -- in an attempt to repair the damage caused by Bear Stearns, before the contagion spreads throughout the financial world and causes irreversible damage.

Treasury Secretary Paulson (Chairman of the PPT)

Ben Bernanke (Chairman of the Board, Federal Reserve System)

Christopher Cox (Chairman of the Securities and Exchange Commission)

Walter Lukken (Chairman of the Commodity Futures Trading Commission)

Well today, Secretary Paulson let it be known to the world that they are worried, and stated they will stop at nothing to calm the markets:

Treasury Secretary Paulson Says Administration Will Act to Calm Chaotic Economy

WASHINGTON (AP) -- The Bush administration will "do what its takes" to stabilize chaotic markets and minimize the economic damage, Treasury Secretary Henry Paulson said Sunday after a tumultuous week capped by the government rescue of a teetering investment bank.

All eyes now are on Wall Street as leading financial advisers prepared for a Monday meeting with President Bush and the Federal Reserve weighs another deep interest rate cut Tuesday to stem even more deterioration.

The treasury chief sidestepped questions about what would have happened if the Fed had not ridden to the rescue, whether other firms are on shaky ground and the possibility of additional bailouts similar to Bear Stearns'.

At the same time, however, Paulson sought to send a calming message that the administration is on top of the turbulent situation. "The government is prepared to do what it takes to maintain the stability of our financial system," he said. "That's our priority


As if the Bear Stearns problem wasn't enough to deal with this weekend, it now looks as if Goldman Sachs will report huge write-downs early next week.

As the former chairman and chief executive of Goldman Sachs, I imagine the PPT leader (Secretary Paulson) is monitoring the situation very closely…

Goldman Sachs to reveal $3bn hit

Goldman Sachs, Wall Street's most powerful investment bank, will this week announce asset writedowns worth about $3bn (£1.5bn), its biggest jolt to date from the crisis threatening to engulf the world's financial markets.

Goldman, which has largely thrived amid the turmoil elsewhere on Wall Street, is expected to report a fall in first-quarter earnings of about 50 per cent. The write-down will underline how the financial turbulence is now affecting even the most stellar performers.


With this said, I believe we will likely see Wall Street take an “E-Ticket” ride next week – potentially one of the wildest rides ever.

You see, the indexes are so incredibly close to extreme downside support levels that the PPT will fight tooth and nail to prevent a break below support.

If we do happen to fall below key support—automated sell signals will kick in from around the Globe—potentially creating a selling panic/free-fall. Example: Next downside support on the DOW is 11,630 (S&P and Nasdaq look very similar)

With that said, aside from the downside pressure caused by mounting credit problems and looming (additional) write-downs, we can also expect to see numerous Economic reports released next week (I expect very few to be positive) :

Monday
- NY Empire State Index
- Net Foreign Purchases
- Industrial Production
- Capacity Utilization

Tuesday
- Housing Starts
- Building Permits
- PPI
- Core PPI
- FOMC Policy Statement (likely to see a 100bp cut)

Wednesday
- Crude Inventories

Thursday
- Initial Jobless Claims
- Leading Indicators
- Philadelphia Fed


Additionally, it was only a mere 6 months ago that Congress approved a debt ceiling increase for our country (increased ceiling from $9T to $9.8T).

Well, with only $400B to go (see debt clock below) and plenty of bailouts/monetization schemes ahead, it now looks like our inept congressional leaders are once again looking to raise the allowable debt limit.

The Gross National Debt

If passed, this new $10.2 Trillion cap should hold us to ~ Jan 09, but what then?

Why don’t we just raise it to $100 Trillion and be done with it for a few years? Are they scared they might send the wrong signal in doing so?

Come-on, they aren’t fooling anyone… The hole is already far too deep and there are only 2 ways out of this mess: #1) Default or #2) Hyperinflation… I think we all know which route was selected...

House seeks debt limit increase to $10.2 trillion

WASHINGTON (Reuters) - The government's debt limit would be raised to $10.2 trillion under a budget plan for next year approved by the U.S. House of Representatives.

The House's fiscal 2009 budget, which passed on Thursday, would increase U.S. borrowing authority by $385 billion from the current limit of $9.815 trillion, according to the House Budget Committee

Congress last approved an increase in Washington's borrowing authority last September, increasing the credit limit by $850 billion.

Some lawmakers recently have estimated that the Treasury Department could bump up against the current $9.815 trillion limit either shortly after November presidential and congressional elections or early next year, depending on revenues and economic performance.

Lastly, allow me to share with you some snippets from a fantastic Christopher Laird article (from http://www.prudentsquirrel.com/), as Mr. Laird understands the current situation far better than most.

Gold Says That Central Banks Fail To Stop World Deleveraging

Right now, we are looking at the precipice of a total world financial collapse. When the stock markets finally let go, people will wake up to the reality of world financial bankruptcy. Millions of people will lose much of their retirement savings, in a super world stock crash, and you will again see stories about people refusing to open their 401k statements because they don’t want to see how far down they are. That’s what happened right after the Tech crash. Well, think of that episode as merely a taste of what is to come.

I am not exaggerating. To date, the US and EU central banks have put up an astounding $2.5 trillion worth of money to their respective banks and bond markets. They are doing this to prevent a total banking collapse. So far, they are barely staving off a massive wave of bank failures world wide, but particularly in the US and the EU region.

Unfortunately, the ones really on the hook for all this coming market collapse will be the big retirement funds, as they are the ones invested in all these bubbly world asset and financial markets. That shoe will drop.

Bond and securitized debt chaos

We are not going to detail the many stories about how the bond and credit markets are collapsing. But, suffice it to say that many huge credit markets are literally frozen. Whether it’s the mortgage derivative securities, a $3 trillion plus market, or the US GSE markets, something like $ 7 trillion in size (this is Fannie and Freddie and such), or municipal bond markets, $10 or more trillion, and if you can believe this, or even the US treasury secondary market (already existing US T bonds that are sold between investors), these credit markets are freezing up in a big way.

Securitized debt markets new

Just to make a comment on this, the securitized debt market is fairly new. This is where large investors bought big packages of mortgages, or whatever kind of debt you can imagine like credit cards or student loans, that were securitized and sold off. There are many types of these, like CDOs, MBS, SIVs, etc. (CDO – Collateralized Debt Obligations, MBS – Mortgage Backed Securities, SIVs – Structured Investment Vehicles).

This type of lending became a standard in the last ten years, and has effectively absorbed the entire world lending market for everything from corporate bonds to municipal bonds to credit cards to mortgages.

Being a new and very complicated market, and utterly gigantic, the treasuries and central banks have stated that they don’t understand them well enough to try and solve all the problems. The Fed, the ECB, and the BIS have all commented that they don’t understand this new securitized world debt market that has taken over all credit worldwide. This is not a good thing – to put it mildly.

What I am trying to say is that this entire new, huge, world credit apparatus is now imploding.

Gold says central banks are failing this time

Gold has risen in tandem with the credit crisis because the central banks are falling behind the world credit deleveraging since August. If the gold markets felt that the central banks had a handle on the credit crisis and world financial meltdown, ie that cutting rates would work to stop financial deleveraging and economic contraction, then gold would not rise as much.

This time, gold is clearly giving a verdict that Central Banks are failing to reflate a massive world deleveraging, that markets are going to unwind no matter what the CBs attempt to do.
If central banks fail to reflate credit and financial markets, then the only alternative for world governments is big deficits. More programs to bail out banks, more central bank $ trillions to try to stem the losses...Effectively, more debasement of world currencies.

If central banks could succeed in stopping the world deleveraging, and stop the massive financial hemorrhaging on every consumer’s balance sheet, every financial institution’s balance sheets, then gold would not rise as much as it has. If gold expected things to normalize, and gold expected that central banks could escape outright monetization of problem markets this time, gold would not be rising as much as it is now. Gold is up 50% since August, when the credit crisis and world deleveraging began.

Clearly, gold has decided that central banks have lost control of the situation, and the only alternative is more interest rate cuts, which makes borrowing cheaper and is economically stimulative, but lowers the value of currencies. On top of interest rate cuts, central banks are now doing outright bailouts, which also devalue currencies. Outright bailouts are monetization.

World economy credit driven

The trouble is, none of these central bank efforts seem to be working. New big credit markets are freezing up each week. The already frozen ones are not recovering either. Given the fact that our world economy is primarily credit driven, what do you think that means for the next several years for the world economy? I’ll let you answer that yourself.

What is happening in general is that financial and asset markets are deleveraging. The general world economic situation can be regarded this way, as deleveraging, and it won’t be a bad oversimplification. All this borrowing that went into bidding up world financial and asset markets is now going to be unwound. I read a banker’s comment around September that ‘The credit unwinding will not be denied.’

That appears to be exactly what is happening.

USD, Yen, Euro, gold

If you agree with this, then what is the prognosis going forward for the Yen, Euro, and USD? And thusly for gold?

In a nutshell, the central banks will attempt to stop the deleveraging. They have failed so far, and will continue to fail. As the economic contraction worldwide gets more and more painful, they will make more big efforts to stop the deleveraging that ‘will not be denied.’

At some point, I expect one of the central banks among the ECB or BOJ to give up on the reflation efforts (to counteract the deleveraging.) At some point, they will realize that the efforts to stop the deleveraging is futile, and only adding to public debt, and just making things worse.
At that point, everything just finishes unwinding rapidly. It will be very very scary for everyone and every country. The implications are really rather staggering.

Which is why the central banks are fighting this deleveraging as hard as they are now. In fact, the Fed would have cut interest rates faster, but they risk cutting the ground from the USD. Their hands are tied to a significant degree.

The ECB will be forced to cut this year, otherwise the Euro continues its painful strengthening. The Fed has basically no choice but to continue cutting. The alternative would be collapsing stock markets. That will likely happen anyway.

Maxed out this time

Basically, the only solution to massive unwinding of credit, theoretically, is to get borrowing and economic activity to start growing again. That way, world consumers would then start buying everything and, if the economies recover, then the present leverage out now can be carried forward.

But that is not happening, is it?

Why is it not happening? Why are lower interest rates failing to restart things? Because, this time, unlike 2001, people cannot borrow any more. They have already borrowed all they can. This time, cutting interest rates will not work to revive economies. The only other option is government spending, and or using currencies to stimulate things. Using currencies to keep things going will fail because the deleveraging worldwide is way too vast.

If cutting interest rates will not work to revive economies this time, then the deleveraging will continue relentlessly. It is that simple.

And, why are the bond markets freezing, and such? Because lenders of all types, who bought all the securitized debt, now realize that the present levels of debt in every sector, public and private, cannot be kept up. So, then, why do new lending? Everybody is maxed out. The reason for the collapse of the credit markets is also that simple.

The only thing standing in the way of a total world financial collapse right now is all this massive emergency lending by central banks to financial institutions. That means that, when enough big investors realize there will be no economic recovery from cutting interest rates this time, the stock markets will finally collapse big. I expect this to happen sometime this year, election or no election. The problems are just too big.

For the full article, please click link: Gold Says That Central Banks Fail To Stop World Deleveraging


Bottom Line: Things are going to get much worse before they get better and this upcoming week could be the beginning of “the much worse to come”…

As I pen this message, World markets are starting to open with downward pressure (due to ongoing credit turmoil), while the dollar continues its slide into the abyss. Meanwhile, Gold/Silver are up almost ~ 1%.

Hold on to your hats!

Randy

Final US Economic End-Game

I hope this post serves a useful purpose and helps to shed some light on what may potentially lie in store for our economy/way of life.

Today, with bad new all around, many make attempts to dissect the individual aspects of the myriad of economic problems that contribute to our problematic US economic condition, but few really try to think ahead and analyze the final end-game. With this post, I hope to do just that, and will attempt to answer the following six questions:

1) What is happening with regard to our economy?

2) Why would our monetary policy-masters want a weaker dollar?
3) Where do we go from here?
4) What long-term exit strategy can we expect to see from our monetary policy masters?

5) How does inflation help the Government and what are the impacts to its people?

6) How will people cope with reduced purchasing power and a much lower standard of living?

So, what is happening with regard to our Economy?

Though I’ve been talking about it since 05 (and many early on considered me a knucklehead for my non-conformist viewpoint), I think it is now becoming common knowledge that the largest speculative bubble in our world’s history (housing bubble) has popped and its reverberations are being felt across the globe:

Hedge funds are collapsing, bank write-downs are growing, toxic waste marked-to-model Commercial Paper (CP) sitting in off-balance sheets cannot be offloaded, credit markets are completely locked up, home foreclosures (the catalyst to all these problems) are growing, consumer spending (70% of our economy) is waning, consumer inflation is raging, construction spending is down, the dollar is falling off a cliff, job losses are increasing, state revenue is falling—many are slashing budgets, and the list goes on…

The Fed and our Plunge Protection Team (PPT) understand that deflation is taking hold and they are operating in emergency mode... In a brazen attempt to prevent a collapse of the entire banking/financial systems (and hence the US Economy) “Helicopter” Ben Bernanke has officially sacrificed the dollar in the hopes of printing/inflating our way out of this financial mess -- to prevent an economic depression.

Take a look at the US dollar chart below -– NEVER in our country’s history has the US Dollar been weaker. Why so low? Our policymakers are covertly demanding a weak dollar.

But why would our monetary policy-masters want a weaker dollar?

Well, as I see I see it, there are several reasons:

A devalued dollar will (over time) allow the United States to 1) eliminate much of its foreign debt through devalued payback 2) pay for future (currently $60 Trillion) in un-funded obligations through cheaper payouts 3) reduce US labor costs in the global marketplace –- making US manufacturing competitive in the world again, and 4) a side effect -- lower the US standard of living through massive inflation -- ultimately stoking a grass roots demand for some relief and opening the doorway for successful implementation of a new “stable” currency to replace the ailing dollar –- The AMERO.

Additionally, somewhere along the way, we will probably experience a new war to: 1) secure natural resources, 2) create US jobs to support the military/industrial complex, and 3) help to take our minds off the economic misery we are all experiencing.

So, where do we go from here?

As previously stated, the PPT is attempting to fight deflation with new inflation and the Fed’s monetary printing presses are gearing up to start working overtime. (NOTE: Money=Debt and lack of new consumer/corporate debt means less new money to service older debt, which means declining GDP, defaults and deflation)

Today there are > $13 Trillion Dollars circulating the globe and M3 Growth (expanding US Money Supply) is increasing at an annual 18% rate (see chart below).

M3 -- US Money Supply Growth rate & US Dollars in Circulation
(Note: as an aside, only ~ $400 Billion of this, ~ 3%, is available in cold hard cash in the US -- most of these $13T dollars are 1’s & 0’s on a computer hard-drive somewhere—God help us if we experience banking runs…)

Consumer inflation typically lags M3 growth (those with new dollars first can buy more than those who receive dollars later in the game), but we know inflation in the US is currently running ~ 12% today (next chart below -- measuring inflation w/metrics abandoned in the 1980’s– abandoned to understate inflation, reduce Gvt. entitlement payouts over time and to overstate GDP).

Annual Consumer Inflation Chart – The red line illustrates what our Gvt wants you to believe (inflation ~ 4%); the blue line is our actual inflation rate (~12%); Remember, consumer inflation lags new monetary creation, so you can be certain (after looking at M3 again—the 1st chart) that consumer inflation has only one way to go –- UP!

What long-term exit strategy can we expect to see from our monetary policy masters?

Based on what we have just learned above (that monetary growth and consumer inflation are rising, and that the Fed/PPT have officially sacrificed the US dollar to prevent a depression), if we now gaze into our crystal ball and look out at the next 5 years or so, what should/can we expect to see?

Logic reasoning leads us to believe it has now become official Government policy to try to inflate our way out way out of this financial crisis, so lets assume a master plan exists to bail out numerous banks/financial institutions and rescue the bond, housing and various other markets. Let’s then go on to assume a plan exists to eventually ramp up numerous government infrastructure and military/industrial projects to promote US job growth (in the midst of our deep/dark recession).

To keep the math easy, and assuming all of the above takes place, let’s now presume (being conservative here) M3 Growth averages 20% over the next 5 years to fund all these new government efforts… Therefore, in 5 years time, M3 (worldwide US money supply) will have doubled and M3 will equate to ~ 27 Trillion US Dollars. Note: by that time inflation will be raging and the dollar’s purchasing power will be halved (if not more by then; it really depends on foreign dollar holders—will they cash before then?).

How does this inflationary effect help the Government and what are the impacts to be felt by the people?

By continuing to understate inflation (as you saw in the Inflation graph above) over the next 5 years and more, the US government will be able to pay all its currently un-funded obligations (Social Security, Pension Benefits, Military Pay/retirements, Medicare obligations, even foreign held debt) with significantly devalued dollars—costing the government far less over time.

In other words (lets use a Social Security recipient as an example): Grandma will still get her entitled (currently unfunded) $1,200-1,400 monthly Social Security Check (w/annual increases tied to Gvt's lower CPI rate), but if her utility bills have doubled and she now pays $8 a gallon for Gas, $7.50 for a gallon of Milk, $5 for a loaf of Bread, $4 for a pound of Chicken and $10 for a “value meal” at McDonalds, her purchasing power has been reduced substantially. The government still pays its obligation, but with devalued dollars and w/severely reduced purchasing power.

Thus: Inflation (monetary growth of printed dollars) has eroded unfunded Gvt debt/obligations, but at the cost of American purchasing power and standard of living—it will have dropped significantly. Ultimately, over time, the Gvt. actually pays out less than that which it really owes—through devalued dollars (it’s all smoke and mirrors).

So, how will people cope with reduced purchasing power and a much lower standard of living?

With inflation and unemployment raging, tens of millions of Americans will not be able to make ends meet and cutbacks in lifestyle will become the norm.

Americans feeling the pinch will have to eventually downsize (much smaller house or apartment -- to reduce utilities/costs; take on a room mate or rent out a room, purchase a more fuel efficient car; drive MUCH less -- car-pooling will become popular, eating out will stop--it will only be for the well-off; families will eat cheaper foods at home, clothing will be used until completely worn out, churches and aid agencies will become much more involved in the struggling/average American's life, etc...)

Bottom Line: life will become much more expensive/difficult than that which we know today. We could even see oil/fuel shortages due to geopolitical unrest/war, and food shortages could be an issue too -- world food stores are currently at a 50-60 year low with no relief in sight. (Global food crisis—credit crunch could pale in comparison)

Anyway, you ask: What then happens to society?

If you haven’t already done so, read the following links for some thoughts on the issue:

Social Implications of a Significant Economic Downturn

Maslows Hierarchy of Needs and the US Economy

Our long-term way Ahead:

There is however, potentially very good news that will follow this EXTREMELY difficult period in America: Over time, a much lower US standard of living and a significantly devalued US dollar will make it much cheaper to manufacture in the US again, and 15-25 years from now our massive debt loads will have subsided and all those outsourced jobs will eventually come back home. Then we will be able to do more than sell each other cheaply manufactured goods -- we will actually make them again. For more on this subject, read my Jan 06 article: American Wake Up Call

Bottom line to this article:

I think our day of reckoning has finally arrived. We Americans have lived too comfortably for far too long by sucking up 80% of the world's savings and then we wanted more, so we racked up ENORMOUS personal and Gvt Debt loads that must be paid -- paid through Gvt. monetization, massive dollar devaluations and a much lower standard of living.

As stated previously, the PPT is fighting deflation w/inflation, so we will probably experience concurrent deflation and inflation – if/until the deflationary forces are won over.

I expect, over the next 5 years or so, consumer inflation to be completely out of control, but there is nothing the Fed can do about it -- without throwing the economy into a depression.

Ultimately, the US dollar will plummet in value and its fate as the defacto "World Reserve Currency" could soon be brought to question -- but that might be part of our monetary policy master's "master-plan" anyway, as it will allow the Amero to slip right into its place without an American revolt.

I hope this article provided you with some nourishing "food for thought".

Best regards

Randy