I've touched on Fannie Mae's accounting problems several times in the past--here, here & here.
Unfortunately, most folks are still completely unaware of this GSE's massive problems, and are oblivious to the fact that if this company fails, it could lead to complete economic chaos... Allow me to try and sum up the issue in three small words: Government sponsored ENRON. If those three don't work, try these three: $1.5T of Debt .
Anyway, the reason I'm bringing up Fannie Mae again today is because Forbes has just released a new report: Fannie Mae announces new accounting errors and won't meet their deadline for filing their annual financial report (a 2nd straight year). This thing smells worse every time we sniff it...
Am I just paranoid or do others agree this thing could eventually explode?
Monday, March 13, 2006
Gold Volatility
Well, it looks like gold prices finally bounced back a little today and closed with a > $6 gain, but is this a fluke or will the trend continue? In an effort to try and find an answer, I decided to look into what the experts had to say regarding Gold’s short & long-term outlook. What did I find? There are a plethora of opinions on the web discussing both sides of the issue… Some say we are due for further corrections; others say the corrections are over.
With that said, please allow me to share a couple of Articles that I enjoyed (both positive and negative). With this information at hand, hopefully we can all make more informed decisions on the matter.
This Gold Action Article, by Dr. Clive Roffey, uses the Elliott wave pattern of analysis and suggests the recent volatility and price decline in Gold is probably almost over and a major Bull market is expected ahead. (I recommend you read the entire link above, but here are a few snippets for those without the time.)
The fundamentals remain rock solid for a large move in the gold price based on falling global production combined with sharply rising Far East demand in addition to an increasing distrust of the dollar as an investment currency. Sure the gold market is going to have sharp corrections. It is the nature of the yellow metal to move from buying euphoria into selling stupidity in a matter of days. Traditionally it keeps you hanging on by your finger nails before it changes course. But it does not matter. We are into the big wave III that must go above the tops of wave I in 2002. So that any short term sharp correction is just another superb buying area, not a panic selling one.
The sell off hit all the commodities based on a sudden rise in interest rates in the US that theoretically should strengthen the dollar. I have news for you. Technically, interest rates in the US will certainly rise but the bullish effect on the dollar will be negligible. Rising interest rates implies falling bond and equity markets as well as inflation. But the problem will arise in terms of Japanese and Chinese investment in bonds. Will they be happy to see their US investment capital eroded??
At this point of time all the commodities have been doing the same intermediate correction in an ongoing bull market. So it is also buying time for oil and other metals as well as the precious metal sector, as well as the shares in these commodities.
Global gold shares are a superb buy whilst the other general equities continue to machinate in sideways moves.
I must reiterate for the doubters that we are looking at a major long term bull market in gold with the current level being a superb short term and investment buying opportunity.
Another positive article I’d like to share with you (a shorter one) is: Higher Interest Rates Mean Higher Gold Prices.
It's all nonsense. That higher interest rates means lower commodity prices, that is. All the chatter is just that - diversionary clap-trap. If the personal savings rate were to be viewed back to 1960, you'd see that only intermittently did Americans save less than 9%. Today we're setting aside a negative 2.75%! And that's the personal rate. The government's rate of "saving" (surplus) has long since gone down the slop shoe.
You can clearly see that it took a Fed funds rate of close to 20% in 1980 to break the back of gold, and retrieve the US dollar from the abyss. Of course, for Americans it meant a serious depression and misery from which many have not yet recovered. Even then the personal savings rate barely made it back to its former 10% rate, but from 1981 it never looked back and has trended all the way down to where it is today.
As we've pointed out repeatedly, this is an election year. The only goal of the Establishment is to get the incumbents who play ball returned to office. To accomplish that they must see to it that the "Feel Good Index" (Dow Jones) is trending upward, and interest rates are not sufficiently high to break the back of the housing market (voter piggybanks). Can they break commodity prices to forestall a building inflationary climate without harming the Dow Jones or housing? In the short term, it appears that way.
It only matters in the short term, and there is no fundamental political change in philosophy coming our way. The verbiage will become more shrill, yes, but in substance only enough to placate voter insurrection who will vote them another tour in Washington.
At some point the gold price will cross over the Dow Jones and interest rates, Fed and 10-year, will have to exceed 20% for the Federal Reserve to save itself and their political co-conspirators. The stress to accomplish this will fall on the American people to pay the bill.
Take a visual snapshot from the above chart of the period, say 1975 to 1981. Note that big spike in savings followed by a sharp plunge in 1975 is eerily similar to 2005 to the present. Gold began another leg up in 1977 with the savings plunge. That was gold's launch pad to its parabolic rise hitting $850 at one point. Will a Fed funds rate of 20% be enough to save the dollar this time? Can Americans who have no savings tolerate a "Feel Goods Index" drop to 2,500 with a commensurate gold cross at $2,500 per ounce?
I don't know about you, but it doesn't get me all tingly when I think about the outcome.
Finally, Ned W. Schmidt’s article Moneyization, suggests that the gold market is just reaching puberty, and due to structural problems in the US economy $1,300 gold is a real possibility (suggested read).
So far the ride in Gold and Silver has been enjoyable. What needs to be remembered, though, is that the good part is still out there in the future. The global shift away from paper assets to real assets is in infancy. Puberty has barely arrived. Denial is still too widespread among the majority of investors. Individuals remain doubters that the Real Paradigm will reign investment supreme in the years ahead.
Individuals are increasingly moving to the only viable and liquid real alternative to fiat money. Gold's price is where it is today due to individuals selling government money and buying Gold, the natural money. Each individual investor must evaluate the relative merits of their national money. Some situations are more urgent the others. New Zealand, for example, has recently demonstrated that urgency can develop rapidly. Complacency is not rewarded by foreign exchange markets. Getting out needs to be done before the problems develop.
The trade deficit of the U.S. is both structural and long-term in nature. The spewing forth to the rest of the world of green pieces of paper is not about to abate soon. Analytical delusion on the part of the Federal Reserve has prevented and will prevent actions before a dollar crisis is in full bloom. With the U.S. housing market already showing the first signs of implosion, the Federal Reserve will "toss dollars from helicopters" in a vain attempt to stop the collapse of mortgage debt. As the U.S. economy plunges into a policy created economic abyss Canada will be dragged along, like the roped mountain climbers plunging to their death.
Dollar denominated investors, both of them, should be using all buying opportunities to add to their Gold positions. As shown in the last two charts on US$Gold and CN$Gold, those opportunities present themselves on a regular basis. US $1,300 Gold and CN$2,000 Gold are both no longer fantasies about which Gold Bugs write. They are real possibilities!
On the negative side of the issue, Jack Chan at Goldseek wrote a fine article titled Outlook for GLD. In his opinion (with much data/charts to back it up) he suggests that Gold is experiencing a pullback that was expected, but due to supply/demand issues a much larger pullback may be in store. (suggest you open & read the link)
It is not wise to write about gold’s correction. It seems folks prefer to read those four and five digit gold price predictions, therefore, if you belong to the “to da moon” club, read no further. In a bull market, price accelerates, consolidates, then accelerates again. The consolidations could be just a mild pullback, or sometimes a deep correction. What determines whether it is just a pullback or deeper correction depends on two things: support and resistance. When supply overwhelms demand, we have resistance. When demand overwhelms supply, we have support. Simple volume analysis provides excellent feedback on this tuck of war between supply and demand, therefore, support and resistance.
GLD mirrors the movement of the bullion, therefore, gaps occur often due to overnight price pressure from overseas and from the futures market. On 2/07, GLD gapped down on heavy volume, obviously supply was in control. After finding support at the 50ema, it rallied and filled the gap on 3/02. But the volume shrunked by more than 50% from the down gap, and when a gap is filled at lower volume, supply is in control again and price is firmly rejected. To put it simply, when a gap is filled at lower volume, it often becomes support or resistance, in this case, resistance.
Then on 3/08, GLD gapped down once again due to heavy selling in the futures market overnite. Today, gap was filled at about half the volume, therefore, today’s high should become resistance. Since we are rejected by resistance again, price will naturally search for next level of support…..
Gaps galore! In charting, gaps are the magnets and price is the steel. Here are the good news and bad news: Bad news first: there are three lower gaps which are begging to be filled. Now the good news: all these three gaps were on above average volume, therefore, if selling continues but volume dries up, there is plenty of support below. But if volume increases, and these gaps are filled at higher volume, we need to go deep…..
The gold bulls out there must be having a fit. Look, I’m just telling you what I see. If the two down gaps occurred in low volume and left unfilled, that would be very bullish. But because they were filled and now have become resistance, there is no need to revisit them any time soon, especially with so many gaps below current price levels. For the long term well being of the gold bull, it is in our best interests that these lower gaps get taken care of sooner the better. Because the further prices rally away from these gaps, the deeper and more painful the eventual correction will be. That Katrina gap is obviously a “breakaway gap” and may not be filled, ever. Well, not until the next major gold bear market anyways, in the year 2525. According to most gold analysts, $600 gold is a gimme for 2006. Folks, there is no “gimmes” in trading. One baby step at a time.
So, with all this information at hand, what do I think? I personally still believe the long-term trend for gold is a major positive, but I do believe further short-term corrections (possibly major) could be in store.
The reason I’m so bullish long-term: The fundamentals of our US economy are broken and need to be fixed. Only after a resolution of these problems (or 20% + interest rates) will I be bearish on this metal. With that said, I’m even more bullish on Silver than Gold, but we’ll save that one for another day.
Some of the problems I see (reasons to be bullish):
Housing is due for a major correction
Interest rates are on the rise
Oil issues will still be on the radar for the foreseeable future
The Fed will continue to print money like crazy
Our debt and trade deficits continue to increase
Consumers are massively overextended
Blue/white collar job outsourcing is still rampant
Stock market euphoria (irrational exuberance) still exists
The dollar is overvalued
IRAQ is a mess
IRAN is in the crosshairs
Etc
Best of luck in your own decisions
With that said, please allow me to share a couple of Articles that I enjoyed (both positive and negative). With this information at hand, hopefully we can all make more informed decisions on the matter.
This Gold Action Article, by Dr. Clive Roffey, uses the Elliott wave pattern of analysis and suggests the recent volatility and price decline in Gold is probably almost over and a major Bull market is expected ahead. (I recommend you read the entire link above, but here are a few snippets for those without the time.)
The fundamentals remain rock solid for a large move in the gold price based on falling global production combined with sharply rising Far East demand in addition to an increasing distrust of the dollar as an investment currency. Sure the gold market is going to have sharp corrections. It is the nature of the yellow metal to move from buying euphoria into selling stupidity in a matter of days. Traditionally it keeps you hanging on by your finger nails before it changes course. But it does not matter. We are into the big wave III that must go above the tops of wave I in 2002. So that any short term sharp correction is just another superb buying area, not a panic selling one.
The sell off hit all the commodities based on a sudden rise in interest rates in the US that theoretically should strengthen the dollar. I have news for you. Technically, interest rates in the US will certainly rise but the bullish effect on the dollar will be negligible. Rising interest rates implies falling bond and equity markets as well as inflation. But the problem will arise in terms of Japanese and Chinese investment in bonds. Will they be happy to see their US investment capital eroded??
At this point of time all the commodities have been doing the same intermediate correction in an ongoing bull market. So it is also buying time for oil and other metals as well as the precious metal sector, as well as the shares in these commodities.
Global gold shares are a superb buy whilst the other general equities continue to machinate in sideways moves.
I must reiterate for the doubters that we are looking at a major long term bull market in gold with the current level being a superb short term and investment buying opportunity.
Another positive article I’d like to share with you (a shorter one) is: Higher Interest Rates Mean Higher Gold Prices.
It's all nonsense. That higher interest rates means lower commodity prices, that is. All the chatter is just that - diversionary clap-trap. If the personal savings rate were to be viewed back to 1960, you'd see that only intermittently did Americans save less than 9%. Today we're setting aside a negative 2.75%! And that's the personal rate. The government's rate of "saving" (surplus) has long since gone down the slop shoe.
You can clearly see that it took a Fed funds rate of close to 20% in 1980 to break the back of gold, and retrieve the US dollar from the abyss. Of course, for Americans it meant a serious depression and misery from which many have not yet recovered. Even then the personal savings rate barely made it back to its former 10% rate, but from 1981 it never looked back and has trended all the way down to where it is today.
As we've pointed out repeatedly, this is an election year. The only goal of the Establishment is to get the incumbents who play ball returned to office. To accomplish that they must see to it that the "Feel Good Index" (Dow Jones) is trending upward, and interest rates are not sufficiently high to break the back of the housing market (voter piggybanks). Can they break commodity prices to forestall a building inflationary climate without harming the Dow Jones or housing? In the short term, it appears that way.
It only matters in the short term, and there is no fundamental political change in philosophy coming our way. The verbiage will become more shrill, yes, but in substance only enough to placate voter insurrection who will vote them another tour in Washington.
At some point the gold price will cross over the Dow Jones and interest rates, Fed and 10-year, will have to exceed 20% for the Federal Reserve to save itself and their political co-conspirators. The stress to accomplish this will fall on the American people to pay the bill.
Take a visual snapshot from the above chart of the period, say 1975 to 1981. Note that big spike in savings followed by a sharp plunge in 1975 is eerily similar to 2005 to the present. Gold began another leg up in 1977 with the savings plunge. That was gold's launch pad to its parabolic rise hitting $850 at one point. Will a Fed funds rate of 20% be enough to save the dollar this time? Can Americans who have no savings tolerate a "Feel Goods Index" drop to 2,500 with a commensurate gold cross at $2,500 per ounce?
I don't know about you, but it doesn't get me all tingly when I think about the outcome.
Finally, Ned W. Schmidt’s article Moneyization, suggests that the gold market is just reaching puberty, and due to structural problems in the US economy $1,300 gold is a real possibility (suggested read).
So far the ride in Gold and Silver has been enjoyable. What needs to be remembered, though, is that the good part is still out there in the future. The global shift away from paper assets to real assets is in infancy. Puberty has barely arrived. Denial is still too widespread among the majority of investors. Individuals remain doubters that the Real Paradigm will reign investment supreme in the years ahead.
Individuals are increasingly moving to the only viable and liquid real alternative to fiat money. Gold's price is where it is today due to individuals selling government money and buying Gold, the natural money. Each individual investor must evaluate the relative merits of their national money. Some situations are more urgent the others. New Zealand, for example, has recently demonstrated that urgency can develop rapidly. Complacency is not rewarded by foreign exchange markets. Getting out needs to be done before the problems develop.
The trade deficit of the U.S. is both structural and long-term in nature. The spewing forth to the rest of the world of green pieces of paper is not about to abate soon. Analytical delusion on the part of the Federal Reserve has prevented and will prevent actions before a dollar crisis is in full bloom. With the U.S. housing market already showing the first signs of implosion, the Federal Reserve will "toss dollars from helicopters" in a vain attempt to stop the collapse of mortgage debt. As the U.S. economy plunges into a policy created economic abyss Canada will be dragged along, like the roped mountain climbers plunging to their death.
Dollar denominated investors, both of them, should be using all buying opportunities to add to their Gold positions. As shown in the last two charts on US$Gold and CN$Gold, those opportunities present themselves on a regular basis. US $1,300 Gold and CN$2,000 Gold are both no longer fantasies about which Gold Bugs write. They are real possibilities!
On the negative side of the issue, Jack Chan at Goldseek wrote a fine article titled Outlook for GLD. In his opinion (with much data/charts to back it up) he suggests that Gold is experiencing a pullback that was expected, but due to supply/demand issues a much larger pullback may be in store. (suggest you open & read the link)
It is not wise to write about gold’s correction. It seems folks prefer to read those four and five digit gold price predictions, therefore, if you belong to the “to da moon” club, read no further. In a bull market, price accelerates, consolidates, then accelerates again. The consolidations could be just a mild pullback, or sometimes a deep correction. What determines whether it is just a pullback or deeper correction depends on two things: support and resistance. When supply overwhelms demand, we have resistance. When demand overwhelms supply, we have support. Simple volume analysis provides excellent feedback on this tuck of war between supply and demand, therefore, support and resistance.
GLD mirrors the movement of the bullion, therefore, gaps occur often due to overnight price pressure from overseas and from the futures market. On 2/07, GLD gapped down on heavy volume, obviously supply was in control. After finding support at the 50ema, it rallied and filled the gap on 3/02. But the volume shrunked by more than 50% from the down gap, and when a gap is filled at lower volume, supply is in control again and price is firmly rejected. To put it simply, when a gap is filled at lower volume, it often becomes support or resistance, in this case, resistance.
Then on 3/08, GLD gapped down once again due to heavy selling in the futures market overnite. Today, gap was filled at about half the volume, therefore, today’s high should become resistance. Since we are rejected by resistance again, price will naturally search for next level of support…..
Gaps galore! In charting, gaps are the magnets and price is the steel. Here are the good news and bad news: Bad news first: there are three lower gaps which are begging to be filled. Now the good news: all these three gaps were on above average volume, therefore, if selling continues but volume dries up, there is plenty of support below. But if volume increases, and these gaps are filled at higher volume, we need to go deep…..
The gold bulls out there must be having a fit. Look, I’m just telling you what I see. If the two down gaps occurred in low volume and left unfilled, that would be very bullish. But because they were filled and now have become resistance, there is no need to revisit them any time soon, especially with so many gaps below current price levels. For the long term well being of the gold bull, it is in our best interests that these lower gaps get taken care of sooner the better. Because the further prices rally away from these gaps, the deeper and more painful the eventual correction will be. That Katrina gap is obviously a “breakaway gap” and may not be filled, ever. Well, not until the next major gold bear market anyways, in the year 2525. According to most gold analysts, $600 gold is a gimme for 2006. Folks, there is no “gimmes” in trading. One baby step at a time.
So, with all this information at hand, what do I think? I personally still believe the long-term trend for gold is a major positive, but I do believe further short-term corrections (possibly major) could be in store.
The reason I’m so bullish long-term: The fundamentals of our US economy are broken and need to be fixed. Only after a resolution of these problems (or 20% + interest rates) will I be bearish on this metal. With that said, I’m even more bullish on Silver than Gold, but we’ll save that one for another day.
Some of the problems I see (reasons to be bullish):
Housing is due for a major correction
Interest rates are on the rise
Oil issues will still be on the radar for the foreseeable future
The Fed will continue to print money like crazy
Our debt and trade deficits continue to increase
Consumers are massively overextended
Blue/white collar job outsourcing is still rampant
Stock market euphoria (irrational exuberance) still exists
The dollar is overvalued
IRAQ is a mess
IRAN is in the crosshairs
Etc
Best of luck in your own decisions
Friday, March 10, 2006
Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure? Part 1
This March 8th article is the most recent update to an article I shared with you on March 4th: Ominous Warnings and Dire Predictions of World's Financial Experts. This update provides some more insight, and also provides some advice for weathering the looming financial storm.
In a previous article entitled “The Ominous Warnings and Dire Predictions of World’s Financial Experts - Parts 1”, (Part 1 of 6) we learned what was probably in store for us short-term and in the next few years. These experts used words like ‘Economic Armageddon’, “Financial Apocalypse’, ‘Financial Disaster’, ‘Financial Train Wreck’, ‘Deep Funk’, ‘Great Disruption’, ‘Category 6 Fiscal Storm’, ‘Economic Earthquake’, ‘Serious Collapse’, ‘God-Awful Fiscal Storm’, ‘Debt-Driven Meltdown’, ‘Major Upheaval’, ‘Demographic Tsunami’, ‘Rude Awakening’, ‘Economic Pain’, ‘ Systemic Banking Crisis’, ‘An Accident Waiting to Happen’, etc. to describe what we are in for. It begs the question “How should we position our assets given the dire predictions of these imminent economists and analysts who are all much of the same mind as to what may well be in store for the U.S and, indeed, the global economy very soon?” Again, we have compiled a detailed and comprehensive summary of what many of these very same individuals, and others, have to say. It is so extensive and informative we have taken the liberty to divide it into 4 parts.
Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure? Part 1
Martin Weiss, Chairman of Weiss Ratings, Inc. and author of ‘The Ultimate Safe Money Guide,’ has said:
1. “Get out of the stock market.
2. Put up to 60% into short term treasury bills.
3. Put up to 20% in 3-5 year treasury notes.
4. Put 10% to 20% into gold bullion and/or gold mining shares (Editor’s Note: and other precious metals and energy stocks and/or the warrants of those that expire in more than 3 years) depending on how bullish you are on this sector.
5. Put 10% to 25% in one of a variety of hedge funds depending on how aggressive you want to play the market.
6. Be patient and wait for the bottom of the stock market and then buy with both hands but beware of false bottoms. Include gold, etc in such a portfolio because gold is negatively correlated with other asset classes. It is a great way to balance your portfolio.
7. Pay off all your debts including the mortgage on your home.
8. If you are mortgaged to the hilt then sell NOW and rent for a few years and then buy back in, if you wish, once prices have dropped (and they will!) or once the danger of the decline has blown over”.
Robert R. Prechter, in his book ‘Conquer the Crash – You can Survive and Prosper in a Deflationary Depression’ states that “ if you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up NOW, while there is still time, and actively take charge of your personal finances. Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. The main goal of investing in a crash environment is safety because when deflation looms, almost every investment category is associated with immense risks. Let’s look at each category.
1. Bonds: Own short-term federal government bonds which can keep rolling over at even higher yields to compensate substantially for whatever price losses occur.
2. Real Estate: Real estate prices have always fallen hard when stock prices have fallen hard. What screams ‘bubble’ – giant, historical bubble – in real estate today is the system-wide extension of massive amounts of credit to finance property prices. People around the country are nearly unanimous in thinking that this is their last great opportunity to buy or re-finance a house/condo. Naturally, it is the opposite: it is your last chance to sell.
3. Cash: All assets go down in price during inflation except one: cash. If you have cash on hand when the stock market hits bottom you will be able to buy incredibly cheap shares that almost nobody else can afford because they lost it all when their stocks collapsed. What kind of cash? You should own high-quality short term notes such as Treasury bills which are better than having money in a money-market fund given the fees related to holding same. The beauty of safe near term debt is that instead of getting killed by rising interest rates, you van benefit from them by purchasing new ones at expiration.
4. Equities: The number one precaution to take at the start of a deflationary crash is
a) don’t be invested ‘long’ in stocks, stock mutual funds, index futures, stock options or any other equity based investment or speculation.
b) consider short selling specific individual stocks, buying inverse index funds and buying actively managed bearish funds.
5. Commodities: During the three years of intense deflation back in 1929-32 in which the stock market crashed commodities crashed too.
6. Precious Metals: Precious metals are likely one day to become the most important asset class to own so I advocate holding a healthy amount of gold, silver and platinum NOW because these metals should perform well on a relative basis compared to other investments as they will not fall 90% from today’s prices, much less to zero, like so many stocks and bonds and once you have bought gold, silver and platinum you will have it. If investors worldwide begin to panic into hard assets, locking up supplies; if governments ban gold sales; if gold, silver and platinum prices go through the roof you won’t be stuck entirely in paper currency. You will already own something that everyone else wants! Should you buy these precious metals now? Yes, if you want to arrange for capital safety in every way that you can imagine, then diversification into real money is a necessary part of that effort. What type of precious metal holding is best? For maximum safety you should own gold and silver in physical form, outright. Coins are a good medium for smaller portfolios. Mining company shares probably will enjoy no false advantage over other companies during the deflationary market adjustments but should do very well when the overall stock market rallies”. (Editors Note: owning the warrants of mining companies which have an exercise date of in excess of 3 years would be an excellent alternative in such an investment environment.)
Ravi Batra, Professor of Economics at Southern Methodist University and author of the book ‘The Crash of the Millennium’ believes “we are going to have an inflationary depression and when that depression comes, high ticket items, along with oil, raw materials and farm products (i.e. commodities) could experience a serious deflation while the cost of services and imported goods will keep rising. Let’s look at each category:
1. Stocks/Mutual Funds: Stock markets will tumble so it is prudent to sell your shares and related investments. When the Dow is close to 2600, the turning point when the current bull run started in 1991, then perhaps it would be time to re-enter the arena cautiously, via mutual funds.
2. Bonds: Until the downturn is complete bonds are very risky to own so sell what you have unless they are paying in excess of 8%
3. Real Estate: This is not a good time to buy a house. If you own one already, it is time to refinance it, especially if you have a variable mortgage because interest rates are going to rise even further. If you live in an apartment, stay there. Renting is more prudent than buying. In spite of the inflationary nature of the coming depression, property values will tumble in most parts of the U.S. In the long run, house prices will continue to climb. In the short run, however, house prices could sink and sink hard.
4. Precious Metals: Precious metals do well in an inflationary environment. Gold is worth considering only as insurance against a financial meltdown and, as this decade is going to be far from normal, NOW is the time to buy gold – as much as 10% of your portfolio. I prefer gold coins because, while they cost a bit more, they have higher liquidity and some of them are legal tender. In my view gold is preferable to silver and platinum as a hedge against calamity, especially in an inflationary depression. While buying shares of companies involved in gold mining operations is another way to participate in the glitter of gold, such shares are likely to fall when share prices fall in general. (Editors Note: owning the warrants of mining companies which have an exercise date in excess of 3 years would be an excellent alternative in such an investment environment.) When the stock market turns around begin buying gold stocks or precious metal mutual funds in earnest - up to 20% of your portfolio.
5. Cash: To remain liquid and still earn the higher rates I suggest you purchase 1 year and 2 year Certificates of Deposit. They are one of the safest places to park your money. If high inflation is accompanied by official confusion and uncertainty, then 5 year CD’s and government bonds would be preferable to those of longer duration provided they offer a substantially larger return than the two to three year debt instruments. Don’t park more than $100,000, the insured amount, in any one bank. Open accounts in other banks where necessary to keep under that $100,000 insured limit.
6. Currency Trading: With the impending crash of the U.S. dollar it is prudent to invest a portion of your assets in the government bonds of such countries as Canada, Britain and/or Switzerland and a country of your choice using the euro. Another alternative would be the timely purchase of those precious mining company shares (Editor’s note: or 3 year plus warrants) trading in Canadian dollars on the Toronto or Vancouver stock exchanges.
7. Debt: Pay off your credit card debt and all other instalment debt instruments, reduce your discretionary expenditures and start saving a greater proportion of your monthly income to ensure that you can ride out the approaching fiscal storm.
8. Pension Protection: If you are involved in a pension plan such as a Keogh, 401(k) or an IRA, ask the trustee to sell your portion of the stocks and put the money into a NOW account. As soon as the dollar begins to plunge, and interest rates begin to rise, move your pension money into short-term government bonds for one to two years. If you are retired, then take your pension in a lump sum, or as much of it as possible, and deposit the money in money market accounts in different banks. Bank deposits are the safest as they are protected from inflation in that interest rates will rise to offset such increases in inflation and benefit your bank accounts.”
Walter Deemer, Publisher and Principal of Technical Analysis for DMR Inc. and formerly with Merrill Lynch and the Manhattan Fund in New York and Putnam Funds in Boston, in an interview recently with Sandra Ward, stated that “The yield curve is now completely inverted and an inverted yield curve almost always precedes recessions. The stock market always moves up and down before the economy does. Therefore, if the economy is going to have a recession, the stock market is going to have a bear market. It always does. The exception in 1998 may not have preceded a recession – but it occurred in conjunction with a 22% bear market. The odds are overwhelmingly in favor of a recession/bear market.”
It is recommend investors strategically position themselves in a wide variety of assets including precious metals, mining shares and long-term warrants. Nothing like taking what the experts say to heart and investing accordingly.
In a previous article entitled “The Ominous Warnings and Dire Predictions of World’s Financial Experts - Parts 1”, (Part 1 of 6) we learned what was probably in store for us short-term and in the next few years. These experts used words like ‘Economic Armageddon’, “Financial Apocalypse’, ‘Financial Disaster’, ‘Financial Train Wreck’, ‘Deep Funk’, ‘Great Disruption’, ‘Category 6 Fiscal Storm’, ‘Economic Earthquake’, ‘Serious Collapse’, ‘God-Awful Fiscal Storm’, ‘Debt-Driven Meltdown’, ‘Major Upheaval’, ‘Demographic Tsunami’, ‘Rude Awakening’, ‘Economic Pain’, ‘ Systemic Banking Crisis’, ‘An Accident Waiting to Happen’, etc. to describe what we are in for. It begs the question “How should we position our assets given the dire predictions of these imminent economists and analysts who are all much of the same mind as to what may well be in store for the U.S and, indeed, the global economy very soon?” Again, we have compiled a detailed and comprehensive summary of what many of these very same individuals, and others, have to say. It is so extensive and informative we have taken the liberty to divide it into 4 parts.
Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure? Part 1
Martin Weiss, Chairman of Weiss Ratings, Inc. and author of ‘The Ultimate Safe Money Guide,’ has said:
1. “Get out of the stock market.
2. Put up to 60% into short term treasury bills.
3. Put up to 20% in 3-5 year treasury notes.
4. Put 10% to 20% into gold bullion and/or gold mining shares (Editor’s Note: and other precious metals and energy stocks and/or the warrants of those that expire in more than 3 years) depending on how bullish you are on this sector.
5. Put 10% to 25% in one of a variety of hedge funds depending on how aggressive you want to play the market.
6. Be patient and wait for the bottom of the stock market and then buy with both hands but beware of false bottoms. Include gold, etc in such a portfolio because gold is negatively correlated with other asset classes. It is a great way to balance your portfolio.
7. Pay off all your debts including the mortgage on your home.
8. If you are mortgaged to the hilt then sell NOW and rent for a few years and then buy back in, if you wish, once prices have dropped (and they will!) or once the danger of the decline has blown over”.
Robert R. Prechter, in his book ‘Conquer the Crash – You can Survive and Prosper in a Deflationary Depression’ states that “ if you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up NOW, while there is still time, and actively take charge of your personal finances. Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. The main goal of investing in a crash environment is safety because when deflation looms, almost every investment category is associated with immense risks. Let’s look at each category.
1. Bonds: Own short-term federal government bonds which can keep rolling over at even higher yields to compensate substantially for whatever price losses occur.
2. Real Estate: Real estate prices have always fallen hard when stock prices have fallen hard. What screams ‘bubble’ – giant, historical bubble – in real estate today is the system-wide extension of massive amounts of credit to finance property prices. People around the country are nearly unanimous in thinking that this is their last great opportunity to buy or re-finance a house/condo. Naturally, it is the opposite: it is your last chance to sell.
3. Cash: All assets go down in price during inflation except one: cash. If you have cash on hand when the stock market hits bottom you will be able to buy incredibly cheap shares that almost nobody else can afford because they lost it all when their stocks collapsed. What kind of cash? You should own high-quality short term notes such as Treasury bills which are better than having money in a money-market fund given the fees related to holding same. The beauty of safe near term debt is that instead of getting killed by rising interest rates, you van benefit from them by purchasing new ones at expiration.
4. Equities: The number one precaution to take at the start of a deflationary crash is
a) don’t be invested ‘long’ in stocks, stock mutual funds, index futures, stock options or any other equity based investment or speculation.
b) consider short selling specific individual stocks, buying inverse index funds and buying actively managed bearish funds.
5. Commodities: During the three years of intense deflation back in 1929-32 in which the stock market crashed commodities crashed too.
6. Precious Metals: Precious metals are likely one day to become the most important asset class to own so I advocate holding a healthy amount of gold, silver and platinum NOW because these metals should perform well on a relative basis compared to other investments as they will not fall 90% from today’s prices, much less to zero, like so many stocks and bonds and once you have bought gold, silver and platinum you will have it. If investors worldwide begin to panic into hard assets, locking up supplies; if governments ban gold sales; if gold, silver and platinum prices go through the roof you won’t be stuck entirely in paper currency. You will already own something that everyone else wants! Should you buy these precious metals now? Yes, if you want to arrange for capital safety in every way that you can imagine, then diversification into real money is a necessary part of that effort. What type of precious metal holding is best? For maximum safety you should own gold and silver in physical form, outright. Coins are a good medium for smaller portfolios. Mining company shares probably will enjoy no false advantage over other companies during the deflationary market adjustments but should do very well when the overall stock market rallies”. (Editors Note: owning the warrants of mining companies which have an exercise date of in excess of 3 years would be an excellent alternative in such an investment environment.)
Ravi Batra, Professor of Economics at Southern Methodist University and author of the book ‘The Crash of the Millennium’ believes “we are going to have an inflationary depression and when that depression comes, high ticket items, along with oil, raw materials and farm products (i.e. commodities) could experience a serious deflation while the cost of services and imported goods will keep rising. Let’s look at each category:
1. Stocks/Mutual Funds: Stock markets will tumble so it is prudent to sell your shares and related investments. When the Dow is close to 2600, the turning point when the current bull run started in 1991, then perhaps it would be time to re-enter the arena cautiously, via mutual funds.
2. Bonds: Until the downturn is complete bonds are very risky to own so sell what you have unless they are paying in excess of 8%
3. Real Estate: This is not a good time to buy a house. If you own one already, it is time to refinance it, especially if you have a variable mortgage because interest rates are going to rise even further. If you live in an apartment, stay there. Renting is more prudent than buying. In spite of the inflationary nature of the coming depression, property values will tumble in most parts of the U.S. In the long run, house prices will continue to climb. In the short run, however, house prices could sink and sink hard.
4. Precious Metals: Precious metals do well in an inflationary environment. Gold is worth considering only as insurance against a financial meltdown and, as this decade is going to be far from normal, NOW is the time to buy gold – as much as 10% of your portfolio. I prefer gold coins because, while they cost a bit more, they have higher liquidity and some of them are legal tender. In my view gold is preferable to silver and platinum as a hedge against calamity, especially in an inflationary depression. While buying shares of companies involved in gold mining operations is another way to participate in the glitter of gold, such shares are likely to fall when share prices fall in general. (Editors Note: owning the warrants of mining companies which have an exercise date in excess of 3 years would be an excellent alternative in such an investment environment.) When the stock market turns around begin buying gold stocks or precious metal mutual funds in earnest - up to 20% of your portfolio.
5. Cash: To remain liquid and still earn the higher rates I suggest you purchase 1 year and 2 year Certificates of Deposit. They are one of the safest places to park your money. If high inflation is accompanied by official confusion and uncertainty, then 5 year CD’s and government bonds would be preferable to those of longer duration provided they offer a substantially larger return than the two to three year debt instruments. Don’t park more than $100,000, the insured amount, in any one bank. Open accounts in other banks where necessary to keep under that $100,000 insured limit.
6. Currency Trading: With the impending crash of the U.S. dollar it is prudent to invest a portion of your assets in the government bonds of such countries as Canada, Britain and/or Switzerland and a country of your choice using the euro. Another alternative would be the timely purchase of those precious mining company shares (Editor’s note: or 3 year plus warrants) trading in Canadian dollars on the Toronto or Vancouver stock exchanges.
7. Debt: Pay off your credit card debt and all other instalment debt instruments, reduce your discretionary expenditures and start saving a greater proportion of your monthly income to ensure that you can ride out the approaching fiscal storm.
8. Pension Protection: If you are involved in a pension plan such as a Keogh, 401(k) or an IRA, ask the trustee to sell your portion of the stocks and put the money into a NOW account. As soon as the dollar begins to plunge, and interest rates begin to rise, move your pension money into short-term government bonds for one to two years. If you are retired, then take your pension in a lump sum, or as much of it as possible, and deposit the money in money market accounts in different banks. Bank deposits are the safest as they are protected from inflation in that interest rates will rise to offset such increases in inflation and benefit your bank accounts.”
Walter Deemer, Publisher and Principal of Technical Analysis for DMR Inc. and formerly with Merrill Lynch and the Manhattan Fund in New York and Putnam Funds in Boston, in an interview recently with Sandra Ward, stated that “The yield curve is now completely inverted and an inverted yield curve almost always precedes recessions. The stock market always moves up and down before the economy does. Therefore, if the economy is going to have a recession, the stock market is going to have a bear market. It always does. The exception in 1998 may not have preceded a recession – but it occurred in conjunction with a 22% bear market. The odds are overwhelmingly in favor of a recession/bear market.”
It is recommend investors strategically position themselves in a wide variety of assets including precious metals, mining shares and long-term warrants. Nothing like taking what the experts say to heart and investing accordingly.
Thursday, March 09, 2006
Ill's of the US economy: Foreclosure rates, US Debt Ceiling, Trade Deficit, IRAN, Nigeria, looming recession
Recent evidence suggests that ARM rate increases are starting to cause financial difficulty for US homeowners. According to the New York Post, Foreclosures Jumped in January.
March 7, 2006 -- Foreclosure rates around the United States are rising from last year as more homeowners are caught in a web of rising interest rates and gimmicky mortgages.
New York City foreclosures jumped 65 percent in January with 2,632 filings this year compared to 1,595 during the same month last year, according to Irvine, Calif.-based RealtyTrac, which watches rates nationwide.
Those who refinanced or bought homes in the last two years using interest-only, adjustable rate or introductory variable rate loans are now much vulnerable to foreclosure.
"Now when people's loans adjust, with the new interest rates they are seeing their mortgages skyrocket 20 to 25 percent," said James Kenney, President of Foreclosures NH, which follows New Hampshire foreclosure rates and brings investors to such homes.
MSN just released an article too--discussing the same topic: More Americans are losing their homes.
Risky borrowing is catching up with a number of homeowners across the U.S. Foreclosures rose 45% in January compared to a year ago, and experts only expect the pace to accelerate.
The number of homes entering some stage of foreclosure -- from notice of default to bank ownership -- increased 45% in January from the same period a year earlier, according to Irvine, Calif.-based RealtyTrac. That was one new foreclosure for every 1,117 U.S. households.
Rising rates squeeze already-stretched borrowers.Typically, analysts say, it’s a job loss or loss of income from a household breadwinner that drives defaults. But rising interest rates are also beginning to play a role.
“You have a lot of people who stretched to get into a house,” said John Tuccillo of Arlington, Va.-based real estate consulting firm JTA Inc.
In the last few years, many buyers took out interest-only, variable-rate loans, and in some cases put no money down to afford a house, said Frank Nothaft, chief economist with government-chartered mortgage giant Freddie Mac. He estimates one out of every three loans issued in 2005 was an adjustable rate mortgage. Now that we’ve seen 14 consecutive interest-rate increases since June 30, 2004, many of these loan rates are bumping up, increasing the size of mortgage payments.
Nothaft estimates that $500 billion in variable rate mortgages will reset, or rise, sometime this year, leaving many with a payment they can no longer afford. “Those would be the candidates for … delinquent status,” he said.
Foreclosures had been at historic lows in the past three years as rapidly appreciating home prices gave financially strapped owners the option to refinance, sell their house at a profit or take out a cheap home equity line of credit. But with the pace of appreciation slowing in many markets and interest rates rising, for many, these avenues have been cut off.
“You’re really out of options,” said Susan Wachter, professor of real estate at the Wharton School at the University of Pennsylvania.
CNN is even reporting: the US Housing Boom is Over.
The five-year housing boom in the United States is indeed over, judging from growing statistical evidence and the performance of some of the nation's leading builders, and the slowdown is already rippling through the economy.
In the last week, the U.S. Commerce Department reported that January sales of new single-family homes fell 5 percent -- the fourth decline in seven months -- and the backlog of unsold new homes hit a record.
And the National Association of Realtors said used home sales slipped 2.8 percent in January, the fourth straight drop and 5 percent below January 2005.
Builders also reported a few hiccups. Upscale Toll Brothers Inc said signed contracts in the November-January period fell 21 percent from a year ago, and KB Home reported more buyers backing out of contracts.
Around the U.S., builders are throwing in incentives ranging from financing help to free upgrades like swimming pools and granite countertops. Some equal 10 percent of the home's list price.
The median price of an existing single-family home has declined since peaking at $219,700 in July to $210,500 in January, according to the National Association of Realtors. Few analysts expect a sharp drop in national averages, although they say there could be further declines in some areas that have been among the hottest markets in recent years.
David Seiders, chief economist for the National Association of Home Builders, said California, Las Vegas, Florida and the Washington, D.C., area "have the largest potential for a price slowdown."
The rising prices in those markets were fed by speculators who bought homes intending to "flip" or sell them for a quick profit, Seiders said. "The biggest fear I have is investor-owned units coming back on the market in large numbers," he said.
Housing has played a major role in the economic recovery since 2001, so even slower growth in home sales and prices could have major repercussions.
Asha Bangalore, an economist for The Northern Trust Co in Chicago, estimates housing created 43 percent of all new jobs from late 2001 until mid-2005. That included the obvious, such as jobs in construction and mortgage services, but also retail and service jobs that were created because consumers tapped their rising home equity to buy more things.
"The housing slowdown that we are seeing is very modest, not alarming, but I think the ripple effects are going to be enormous because of the employment factor," she said.
On a completely different note, the US government STILL has not increased the US Debt Ceiling and the Treasury department is pulling money from the Civil Servant Retirement and Disability fund
March 6 (Bloomberg) -- The U.S. Treasury today took steps to avoid slamming into the government's legal borrowing limit and to make sure the sale of a 10-year note goes ahead this week.
Treasury Secretary John Snow authorized the government to use the $15 billion available in the exchange stabilization fund on March 3 and issued a ``debt issuance suspension period'' to temporarily stop investments in the Civil Service Retirement and Disability Fund. The Treasury also redeemed some of the fund's current investments.
Today's actions by the Treasury provide ``only a few days of additional borrowing capacity, which we expect will be exhausted by mid-March,'' Snow said in a letter to House Speaker Dennis Hastert. ``Treasury has now taken all prudent and legal actions to avoid reaching the statutory debt limit.''
The moves were the second Treasury has taken in the last month to stay below the debt ceiling. They will ensure the Treasury can auction and settle the 10-year-notes scheduled to be sold this week and allow government operations to continue through mid-March. The Treasury said today it will auction $8 billion in 9 year-11 month 4 1/2 percent notes on March 9, and $18 billion in four-week bills at tomorrow's sale of the securities.
Congress needs to raise the debt limit before it goes on recess March 20, Treasury spokesman Tony Fratto said.
``We cannot hostage the full faith and credit of the United States on these other issues,'' he said.
If Congress doesn't act, the U.S. will reach its borrowing limit, Fratto said. He declined to say what Treasury would do if that happens.
Reuters is reporting much of the same-- US Treasury using last debt limit tool
WASHINGTON, March 6 (Reuters) - U.S. Treasury Undersecretary Randal Quarles said on Monday the government had accessed the last of its liquidity tools to stay under its $8.184 trillion statutory debt ceiling.
The treasury said earlier it is auctioning a 6-day cash management bill and suspending new investments of the Civil Service Retirement and Disability Fund. It said it also will likely auction a one-day cash management bill to avoid breaching the ceiling.
Treasury previously dipped into other government pension ane foreign exchange funds and has halted sales of State and Local Government Series securities (SLGS).
"Today we have begun accessing the last one. So we've used all the other tools," Quarles said following a speech to state treasurers.
Quarles, who is in charge of domestic finance, also said the government was "running out of room" under the debt ceiling and it was imperative that Congress act to lift it before the March legislative recess.
Seeing’s how we’re discussing debt, I guess I should point out that the US Trade Deficit hit another record--Trade Deficit Hits Record $68.5B in Jan
The U.S. trade deficit surged to another record as the country's foreign oil bill climbed sharply, auto imports rose and Americans' taste for imported wines helped increase the deficit in food products. The politically sensitive imbalance with China also rose in January, reflecting a flood of Chinese cell phones and clothing. The Commerce Department reported on Thursday that the deficit jumped by 5.3 percent in January to an all-time high of $68.5 billion. The worsening of the deficit exceeded analysts' expectations and was certain to provide ammunition for critics of President Bush's trade policies.
In other economic news, the number of newly laid-off workers filing claims for unemployment benefits rose to 303,000 last week, an increase of 8,000 from the previous week. It was the first time the level of jobless claims has been above 300,000 in eight weeks. America's trade deficit hit a record of $723.6 billion for all of 2005 and many economists believe this year's imbalance will be even worse. The $68.5 billion January deficit in trade in goods and services surpassed the old monthly record of $67.8 billion set last October.
(THIS ONE JUST HAS TO MAKE YOU LAUGH)-- The Bush administration contends that the country's huge trade deficits primarily reflect the fact that the U.S. economy has outperformed the rest of the world in recent years, boosting domestic demand while American exporters have had to battle weak demand overseas.
IRAN is also back in the headlines. Will we see the OIL markets reflect it soon?
TEHERAN : Iranian President Mahmoud Ahmadinejad said on Thursday that the West would suffer more than Iran if these nations continued to try to stop Teheran from developing nuclear technology. Speaking a day after it became clear that the United Nations Security Council will take up Iran's nuclear case, Mr. Ahmadinejad said Teheran would not be bullied or humiliated.
"They (Western countries) know that they are not capable of inflicting the slightest blow on the Iranian nation because they need the Iranian nation," he said in a speech in western Iran.
"They will suffer more and they are vulnerable," the semi-official ISNA students news agency quoted him as saying.
Supreme leader of Iran Ayatollah Ali Khamenei, echoing the sentiments of Mr. Ahmadinejad, urged the government officials not to give in to western pressure. Ayatollah Khamenei said the move to send Iran's case to the Security Council was part of a psychological war masterminded by the United States and aimed at undermining the nation's clerical rulers.
Lets look at NIGERIA next: Militants warn of further violence in Nigeria's oil-producing zone
LAGOS (MarketWatch) -- Ijaw militants fighting for the control of oil and gas resources in the Niger Delta have warned they will wage a "consistent and intensified mass campaign" against Mobil Producing Nigeria Unlimited, a unit of ExxonMobil Corp. (XOM), until the company pays compensation for an oil spill caused by its operations in January 1998.
SO, how are OIL markets responding to IRAN & NIGERIA? -- Oil Rises From 3-Week Low on Concern Supplies May Be Disrupted
March 9 (Bloomberg) -- Oil rose from a three-week low as concern that supplies may be disrupted countered yesterday's decision by OPEC to continue pumping at full capacity.
``The main concern you have is political unrest or uncertainty,'' said Anette Einarsen, an analyst at Nordea Bank AB in Oslo. ``Prices will fluctuate between $55 and $65, depending on what news we get from Nigeria and Iran.''
Violence in Nigeria has cut production in the country by 556,000 barrels a day, easing pressure on OPEC to cut output, said Edmund Daukoru, the group's president and Nigeria's oil minister.
The United Nations' nuclear agency yesterday cleared the way for the Security Council to consider economic sanctions against Iran after three years of inspections failed to prove the Islamic republic's atomic work is being carried out for peaceful purposes. Iran is OPEC's second-biggest oil producer.
With all these factors (and others) in play, why is it our economy is doing so well? I will leave this answer to the folks over at Marketwatch-- Bulls beware
KAHULUI, Hawaii (YF) -- The major stock indexes surged to multi-year highs and despite recent sell-offs, they're still hovering on the high end of the trading range. The market seems to be forecasting a great economy in 2006, and beyond. Well, we must be missing something.
Perhaps, there's something lost in translation. Granted, at this juncture, business activities appear strong and solid. Yet the market is supposed to be a forward-looking mechanism. And economically speaking, we don't like what we see in late 2006 or for 2007.
Even the most bullish economists project growth for the current year to fall to the 3.3% level. This figure compares to the 3.5% increase recorded last year. From any perspective, growth is slowing down. We double checked the math. Yes, the calculator verified the decline.
So if most economists are predicting a 5.7% decrease in growth, then why the multi-year highs in the stock indexes? Remember, these analysts are employed by Wall Street firms. Hence, their estimates tend to be higher, a lot higher. The behind-the-scenes figures are probably much lower than the publicly stated numbers.
The odds are high that business growth could experience a larger drop. We're worried about the shape of consumers. They entered the new year in a very fragile condition. Therein lies the problem. The consumer accounts for two-thirds of the economy.
U.S. household debt reached a record high $11.4 trillion. The increase in debt was the highest in 21 years. And U.S. households spent 13.75% of disposable income on servicing their debt -- another record high. Credit card delinquencies are at their third-highest level ever. Also, the savings rate of the consumer fell to its lowest since the Depression in 1933.
Unfortunately, the consumer can no longer rely on escalating real estate prices to financially bail them out. Due to soaring property prices, consumers have utilized mortgage refinancing, home equity loans and profits from home sales for their spending. Based on a study by the mortgage company, Freddie Mac, $205 billion was taken from home values in 2005. The number compares to $142 billion in the previous year. A huge jump of over 44%. The money from home values alone was worth as much as 8% of total consumer spending.
Record home prices won't provide monetary support to the consumer anymore. Former Federal Reserve Chairman Alan Greenspan stated that the borrowing against these homes contributed $700 billion to consumers' spending power in 2004. Think of the ramifications to the economy if the consumer reduces expenditures in a significant way.
The various indicators point to a slower real estate market. The housing inventory has shot up by nearly 36%. This backlog will hurt future sales. The chief economist of Fannie Mae, David Benson, believes housing activity will decline 8% in the current year. While the National Association of Home Builders predict home starts should decrease by 6%. We suspect the news could be worse. It's our contention that a hard landing is in the cards. Not a soft one.
What concerns us is how 43% of first-time homebuyers across the country bought properties with no-money down mortgages. Plus, what about all those adjustable-rate deals? There have been 14 consecutive interest rate hikes. And additional increases will follow. To be sure, rates did originate from an artificially low level. Still, these types of loans with rising rates place the consumers and the economy in an extremely vulnerable position. In actuality, the combination of those leveraged obligations and the increase in borrowing costs make the level of interest rates much higher than the quoted figure.
Don't forget the elevated price of oil. It's another bite out of consumers' discretionary income. In so many words, the men and women on Main Street continue to get hit in the pocketbook from all angles.
Do not hold your breath, but the smell of a slowdown is in the air... Or an outright recession. It's perfectly normal that every five to six years, a recession occurs. The last one was recorded from March to November 2001. The economy could be due for another recession next year in 2007.
In the meantime, Mr. Market appears to be in the midst of setting up a major trap. To the astute, warning signs exist. Speculative small-caps and the high-tech sector are back in vogue once again. The retail investor has returned in droves. Mergers and acquisitions have surged. And mutual fund cash positions in the U.S. did drop to a record low. All the aforementioned elements are classic characteristics of a late-cycle market move.
I don't know about the rest of you, but I see MAJOR economic problems on the horizon. Hope you all are starting to prepare...
March 7, 2006 -- Foreclosure rates around the United States are rising from last year as more homeowners are caught in a web of rising interest rates and gimmicky mortgages.
New York City foreclosures jumped 65 percent in January with 2,632 filings this year compared to 1,595 during the same month last year, according to Irvine, Calif.-based RealtyTrac, which watches rates nationwide.
Those who refinanced or bought homes in the last two years using interest-only, adjustable rate or introductory variable rate loans are now much vulnerable to foreclosure.
"Now when people's loans adjust, with the new interest rates they are seeing their mortgages skyrocket 20 to 25 percent," said James Kenney, President of Foreclosures NH, which follows New Hampshire foreclosure rates and brings investors to such homes.
MSN just released an article too--discussing the same topic: More Americans are losing their homes.
Risky borrowing is catching up with a number of homeowners across the U.S. Foreclosures rose 45% in January compared to a year ago, and experts only expect the pace to accelerate.
The number of homes entering some stage of foreclosure -- from notice of default to bank ownership -- increased 45% in January from the same period a year earlier, according to Irvine, Calif.-based RealtyTrac. That was one new foreclosure for every 1,117 U.S. households.
Rising rates squeeze already-stretched borrowers.Typically, analysts say, it’s a job loss or loss of income from a household breadwinner that drives defaults. But rising interest rates are also beginning to play a role.
“You have a lot of people who stretched to get into a house,” said John Tuccillo of Arlington, Va.-based real estate consulting firm JTA Inc.
In the last few years, many buyers took out interest-only, variable-rate loans, and in some cases put no money down to afford a house, said Frank Nothaft, chief economist with government-chartered mortgage giant Freddie Mac. He estimates one out of every three loans issued in 2005 was an adjustable rate mortgage. Now that we’ve seen 14 consecutive interest-rate increases since June 30, 2004, many of these loan rates are bumping up, increasing the size of mortgage payments.
Nothaft estimates that $500 billion in variable rate mortgages will reset, or rise, sometime this year, leaving many with a payment they can no longer afford. “Those would be the candidates for … delinquent status,” he said.
Foreclosures had been at historic lows in the past three years as rapidly appreciating home prices gave financially strapped owners the option to refinance, sell their house at a profit or take out a cheap home equity line of credit. But with the pace of appreciation slowing in many markets and interest rates rising, for many, these avenues have been cut off.
“You’re really out of options,” said Susan Wachter, professor of real estate at the Wharton School at the University of Pennsylvania.
CNN is even reporting: the US Housing Boom is Over.
The five-year housing boom in the United States is indeed over, judging from growing statistical evidence and the performance of some of the nation's leading builders, and the slowdown is already rippling through the economy.
In the last week, the U.S. Commerce Department reported that January sales of new single-family homes fell 5 percent -- the fourth decline in seven months -- and the backlog of unsold new homes hit a record.
And the National Association of Realtors said used home sales slipped 2.8 percent in January, the fourth straight drop and 5 percent below January 2005.
Builders also reported a few hiccups. Upscale Toll Brothers Inc said signed contracts in the November-January period fell 21 percent from a year ago, and KB Home reported more buyers backing out of contracts.
Around the U.S., builders are throwing in incentives ranging from financing help to free upgrades like swimming pools and granite countertops. Some equal 10 percent of the home's list price.
The median price of an existing single-family home has declined since peaking at $219,700 in July to $210,500 in January, according to the National Association of Realtors. Few analysts expect a sharp drop in national averages, although they say there could be further declines in some areas that have been among the hottest markets in recent years.
David Seiders, chief economist for the National Association of Home Builders, said California, Las Vegas, Florida and the Washington, D.C., area "have the largest potential for a price slowdown."
The rising prices in those markets were fed by speculators who bought homes intending to "flip" or sell them for a quick profit, Seiders said. "The biggest fear I have is investor-owned units coming back on the market in large numbers," he said.
Housing has played a major role in the economic recovery since 2001, so even slower growth in home sales and prices could have major repercussions.
Asha Bangalore, an economist for The Northern Trust Co in Chicago, estimates housing created 43 percent of all new jobs from late 2001 until mid-2005. That included the obvious, such as jobs in construction and mortgage services, but also retail and service jobs that were created because consumers tapped their rising home equity to buy more things.
"The housing slowdown that we are seeing is very modest, not alarming, but I think the ripple effects are going to be enormous because of the employment factor," she said.
On a completely different note, the US government STILL has not increased the US Debt Ceiling and the Treasury department is pulling money from the Civil Servant Retirement and Disability fund
March 6 (Bloomberg) -- The U.S. Treasury today took steps to avoid slamming into the government's legal borrowing limit and to make sure the sale of a 10-year note goes ahead this week.
Treasury Secretary John Snow authorized the government to use the $15 billion available in the exchange stabilization fund on March 3 and issued a ``debt issuance suspension period'' to temporarily stop investments in the Civil Service Retirement and Disability Fund. The Treasury also redeemed some of the fund's current investments.
Today's actions by the Treasury provide ``only a few days of additional borrowing capacity, which we expect will be exhausted by mid-March,'' Snow said in a letter to House Speaker Dennis Hastert. ``Treasury has now taken all prudent and legal actions to avoid reaching the statutory debt limit.''
The moves were the second Treasury has taken in the last month to stay below the debt ceiling. They will ensure the Treasury can auction and settle the 10-year-notes scheduled to be sold this week and allow government operations to continue through mid-March. The Treasury said today it will auction $8 billion in 9 year-11 month 4 1/2 percent notes on March 9, and $18 billion in four-week bills at tomorrow's sale of the securities.
Congress needs to raise the debt limit before it goes on recess March 20, Treasury spokesman Tony Fratto said.
``We cannot hostage the full faith and credit of the United States on these other issues,'' he said.
If Congress doesn't act, the U.S. will reach its borrowing limit, Fratto said. He declined to say what Treasury would do if that happens.
Reuters is reporting much of the same-- US Treasury using last debt limit tool
WASHINGTON, March 6 (Reuters) - U.S. Treasury Undersecretary Randal Quarles said on Monday the government had accessed the last of its liquidity tools to stay under its $8.184 trillion statutory debt ceiling.
The treasury said earlier it is auctioning a 6-day cash management bill and suspending new investments of the Civil Service Retirement and Disability Fund. It said it also will likely auction a one-day cash management bill to avoid breaching the ceiling.
Treasury previously dipped into other government pension ane foreign exchange funds and has halted sales of State and Local Government Series securities (SLGS).
"Today we have begun accessing the last one. So we've used all the other tools," Quarles said following a speech to state treasurers.
Quarles, who is in charge of domestic finance, also said the government was "running out of room" under the debt ceiling and it was imperative that Congress act to lift it before the March legislative recess.
Seeing’s how we’re discussing debt, I guess I should point out that the US Trade Deficit hit another record--Trade Deficit Hits Record $68.5B in Jan
The U.S. trade deficit surged to another record as the country's foreign oil bill climbed sharply, auto imports rose and Americans' taste for imported wines helped increase the deficit in food products. The politically sensitive imbalance with China also rose in January, reflecting a flood of Chinese cell phones and clothing. The Commerce Department reported on Thursday that the deficit jumped by 5.3 percent in January to an all-time high of $68.5 billion. The worsening of the deficit exceeded analysts' expectations and was certain to provide ammunition for critics of President Bush's trade policies.
In other economic news, the number of newly laid-off workers filing claims for unemployment benefits rose to 303,000 last week, an increase of 8,000 from the previous week. It was the first time the level of jobless claims has been above 300,000 in eight weeks. America's trade deficit hit a record of $723.6 billion for all of 2005 and many economists believe this year's imbalance will be even worse. The $68.5 billion January deficit in trade in goods and services surpassed the old monthly record of $67.8 billion set last October.
(THIS ONE JUST HAS TO MAKE YOU LAUGH)-- The Bush administration contends that the country's huge trade deficits primarily reflect the fact that the U.S. economy has outperformed the rest of the world in recent years, boosting domestic demand while American exporters have had to battle weak demand overseas.
IRAN is also back in the headlines. Will we see the OIL markets reflect it soon?
TEHERAN : Iranian President Mahmoud Ahmadinejad said on Thursday that the West would suffer more than Iran if these nations continued to try to stop Teheran from developing nuclear technology. Speaking a day after it became clear that the United Nations Security Council will take up Iran's nuclear case, Mr. Ahmadinejad said Teheran would not be bullied or humiliated.
"They (Western countries) know that they are not capable of inflicting the slightest blow on the Iranian nation because they need the Iranian nation," he said in a speech in western Iran.
"They will suffer more and they are vulnerable," the semi-official ISNA students news agency quoted him as saying.
Supreme leader of Iran Ayatollah Ali Khamenei, echoing the sentiments of Mr. Ahmadinejad, urged the government officials not to give in to western pressure. Ayatollah Khamenei said the move to send Iran's case to the Security Council was part of a psychological war masterminded by the United States and aimed at undermining the nation's clerical rulers.
Lets look at NIGERIA next: Militants warn of further violence in Nigeria's oil-producing zone
LAGOS (MarketWatch) -- Ijaw militants fighting for the control of oil and gas resources in the Niger Delta have warned they will wage a "consistent and intensified mass campaign" against Mobil Producing Nigeria Unlimited, a unit of ExxonMobil Corp. (XOM), until the company pays compensation for an oil spill caused by its operations in January 1998.
SO, how are OIL markets responding to IRAN & NIGERIA? -- Oil Rises From 3-Week Low on Concern Supplies May Be Disrupted
March 9 (Bloomberg) -- Oil rose from a three-week low as concern that supplies may be disrupted countered yesterday's decision by OPEC to continue pumping at full capacity.
``The main concern you have is political unrest or uncertainty,'' said Anette Einarsen, an analyst at Nordea Bank AB in Oslo. ``Prices will fluctuate between $55 and $65, depending on what news we get from Nigeria and Iran.''
Violence in Nigeria has cut production in the country by 556,000 barrels a day, easing pressure on OPEC to cut output, said Edmund Daukoru, the group's president and Nigeria's oil minister.
The United Nations' nuclear agency yesterday cleared the way for the Security Council to consider economic sanctions against Iran after three years of inspections failed to prove the Islamic republic's atomic work is being carried out for peaceful purposes. Iran is OPEC's second-biggest oil producer.
With all these factors (and others) in play, why is it our economy is doing so well? I will leave this answer to the folks over at Marketwatch-- Bulls beware
KAHULUI, Hawaii (YF) -- The major stock indexes surged to multi-year highs and despite recent sell-offs, they're still hovering on the high end of the trading range. The market seems to be forecasting a great economy in 2006, and beyond. Well, we must be missing something.
Perhaps, there's something lost in translation. Granted, at this juncture, business activities appear strong and solid. Yet the market is supposed to be a forward-looking mechanism. And economically speaking, we don't like what we see in late 2006 or for 2007.
Even the most bullish economists project growth for the current year to fall to the 3.3% level. This figure compares to the 3.5% increase recorded last year. From any perspective, growth is slowing down. We double checked the math. Yes, the calculator verified the decline.
So if most economists are predicting a 5.7% decrease in growth, then why the multi-year highs in the stock indexes? Remember, these analysts are employed by Wall Street firms. Hence, their estimates tend to be higher, a lot higher. The behind-the-scenes figures are probably much lower than the publicly stated numbers.
The odds are high that business growth could experience a larger drop. We're worried about the shape of consumers. They entered the new year in a very fragile condition. Therein lies the problem. The consumer accounts for two-thirds of the economy.
U.S. household debt reached a record high $11.4 trillion. The increase in debt was the highest in 21 years. And U.S. households spent 13.75% of disposable income on servicing their debt -- another record high. Credit card delinquencies are at their third-highest level ever. Also, the savings rate of the consumer fell to its lowest since the Depression in 1933.
Unfortunately, the consumer can no longer rely on escalating real estate prices to financially bail them out. Due to soaring property prices, consumers have utilized mortgage refinancing, home equity loans and profits from home sales for their spending. Based on a study by the mortgage company, Freddie Mac, $205 billion was taken from home values in 2005. The number compares to $142 billion in the previous year. A huge jump of over 44%. The money from home values alone was worth as much as 8% of total consumer spending.
Record home prices won't provide monetary support to the consumer anymore. Former Federal Reserve Chairman Alan Greenspan stated that the borrowing against these homes contributed $700 billion to consumers' spending power in 2004. Think of the ramifications to the economy if the consumer reduces expenditures in a significant way.
The various indicators point to a slower real estate market. The housing inventory has shot up by nearly 36%. This backlog will hurt future sales. The chief economist of Fannie Mae, David Benson, believes housing activity will decline 8% in the current year. While the National Association of Home Builders predict home starts should decrease by 6%. We suspect the news could be worse. It's our contention that a hard landing is in the cards. Not a soft one.
What concerns us is how 43% of first-time homebuyers across the country bought properties with no-money down mortgages. Plus, what about all those adjustable-rate deals? There have been 14 consecutive interest rate hikes. And additional increases will follow. To be sure, rates did originate from an artificially low level. Still, these types of loans with rising rates place the consumers and the economy in an extremely vulnerable position. In actuality, the combination of those leveraged obligations and the increase in borrowing costs make the level of interest rates much higher than the quoted figure.
Don't forget the elevated price of oil. It's another bite out of consumers' discretionary income. In so many words, the men and women on Main Street continue to get hit in the pocketbook from all angles.
Do not hold your breath, but the smell of a slowdown is in the air... Or an outright recession. It's perfectly normal that every five to six years, a recession occurs. The last one was recorded from March to November 2001. The economy could be due for another recession next year in 2007.
In the meantime, Mr. Market appears to be in the midst of setting up a major trap. To the astute, warning signs exist. Speculative small-caps and the high-tech sector are back in vogue once again. The retail investor has returned in droves. Mergers and acquisitions have surged. And mutual fund cash positions in the U.S. did drop to a record low. All the aforementioned elements are classic characteristics of a late-cycle market move.
I don't know about the rest of you, but I see MAJOR economic problems on the horizon. Hope you all are starting to prepare...
Tuesday, March 07, 2006
Will Rates Continue to Rise? If So, What Happens to Our Indebted Economy?
I've been quite busy lately (not much blogging), but have been able to keep an eye on the markets. The main themes this week seem to be rising treasury yields & stronger dollar.
Stocks: US stocks have slid for three consecutive days now based on higher Treasury yields--the longest losing streak of the year.
Dollar: The Dollar has increased dramatically against the Euro & Yen, as Treasury yields increased, and upon growing speculation that the Fed will increase rates more than the previously expected two more times. The aforementioned Treasury yield improvement, however, will spell more bad news for the mortgage market (increased rates)
Gold: Gold has taken a spill over last couple of days. The positive news for the dollar when combined with falling oil and reduced bullion demand, slammed gold.
So, will rates continue to rise? If so, will this help the dollar and our economy? I believe many of you already know my answer to this, so rather than express my views, please allow me to share the opinions of someone else: J Taylor from HOWESTREET.COM
This is an excellent read!
Will Rates Continue to Rise? If So, What Happens to Our Indebted Economy?
One of the potential threats to our inflationary thesis is that with even the government's illegitimate, understated inflation numbers as seen above, the cost of living in America is on the rise. At the same time, we Americans continue to rely on foreign savings to the tune of about $3 billion per day to fund our extravagant lifestyle. We keep spending more than we earn. But when foreigners begin to factor in the declining purchasing power of the dollar, will they continue to send their savings to the U.S. so that we can continue to consume more than we produce? Which brings me to what I think could be the real threat to continued economic growth and the inflation play.
The one real threat to the establishment is not inflation, because the Fed and the U.S. government can always print more money faster and faster to keep ahead of the rest of us. Those printing the money are always in charge unless the rest of the world wakes up to the fact that the pieces of paper the government and the banking systems calls money is worthless. So the real threat to the establishment and the Anglo-American empire is the potential for the rest of the world to reject the paper they print. That in part is starting to happen with various countries choosing to "diversify" their foreign currency holdings out of the dollar and into the euro and gold, and now perhaps more so the yen as the Japanese economy begins to grow.
The last time the U.S. had a major problem with the dollar's acceptance issue globally was during the double-digit inflation years during the Carter presidency. Paul Volcker provided the solution that saved the American empire, but it was a very painful solution. To get out ahead of the inflation problem of that time, he did not hike interest rates by ¼% every few weeks. He slammed inflation into the ground by slowing down monetary growth to such an extent that "real" interest rates were the highest since the Civil War!
The rise in interest rates that followed Volcker's tight monetary policy coincided with a decline in equity prices and skyrocketing gold price that resulted in a Dow-to-Gold ratio of approximately 1:1 in 1980. Thereafter, America had its deepest recession since the Great Depression.
The discussion about inflation now reminds me very much of the 1970s, when the constraint refrain was, "Oh it isn't too bad. The economy is growing. Profits are good. No need to worry about inflation." And so Arthur Burns and G. William Millar at the Fed kept raising interest rates to make it look like they were fighting inflation, but all the while, monetary policy was behind the inflation curve. By that, I mean a sufficient amount of money was printed to continue an unhealthy artificial growth so as to ensure that a painful recession did not follow. That lax policy was continued until inflation became such a problem that the very survival of the U.S. dollar as the world's reserve currency began to come into question.
I believe we may be seeing a replay of the same kind of lax Fed policy as took place in the 1970s. Only now, America is so much less able to survive a tight monetary policy than it was in the early 1980s, even though as noted above, that period represented the deepest recession since the 1930s. Back then, the U.S. was a net creditor nation. Now, the U.S. is not only a net debtor nation, it is the biggest net debtor nation in history! Back then, the U.S. consumer saved a considerable amount of his income. Now, the U.S. consumer is actually spending more than he is earning! Back then, the U.S. still had an industrial base that was the envy of the world. Now, the U.S. is quickly losing not only its industrial jobs, but with the advent of the Internet, is losing even its service jobs!
Bernanke is the Anti-Kondratieff Winter guy. He was the guy out front, fighting deflation a couple of years ago when it became a real concern to policy makers. But, like the entire establishment, he has signed on to the false doctrines of Keynes and Friedman that wealth can be created from governments spending, increasing debt, and printing money. That patent falsehood has, however, been sold to generations of American economists, who are so blind they cannot see the reality, which is that wealth is generated only by saving not by dissaving. Yet, look and see who is gaining wealth these days. It is the nations that save, like China and India and the Middle Eastern countries that have the oil revenues to even buy and control our port facilities.
The very jobs of the boys and girls you see daily on CNBC depend on keeping their blinders on. But to people who are not sucked into this establishment vortex, like the taxi driver form Iran, or the son of a Latin American minister of energy, or the Armenian landlord I spoke to last week here in Woodside, America is clearly in a decline.
Outside of America, the world is catching on to an unfolding disaster. They see that America and its currency are in decline, so they are starting to sell dollars and buy euros and gold. Our propaganda operation is working overtime to pull the wool over the eyes of us Americans, so that we will be CONNED into believing the dollar is "as good as gold," even though it is constantly worth less. But no matter how hard the ruling elite spin things, as in the case of inflation statistics or reasons for going to war, ultimately, truth will prevail. And ironically, economic truth may present Mr. Bernanke with a "conundrum" that makes Alan Greenspan's long interest rate conundrum look like child's play in comparison.
If the survival of the Anglo-American empire's currency, namely, the U.S. dollar, depends on raising interest at a time when, thanks to our past financial promiscuity, our economy cannot take rising rates, what is Mr. Bernanke to do? Here is a man who said we can eliminate a replay of the Great Depression by printing a sufficient amount of money and then distributing that money by helicopters if need be. Yet, if he carries out that policy when the dollar buys less and less and the world demands higher interest rates to keep funding our gaping deficit, then massive flows of foreign capital out of the U.S. will occur and interest rates will rise to the moon! Or Bernanke will print money at an ever-escalating rate of speed, thus leading toward a possible hyperinflation.
This is a scenario that I think is coming sooner or later to America. How it will play out I don't know, and neither does anyone else. My own thinking is that the defense of the dollar as a means of defending the Anglo-American empire will be of paramount concern. Yet, if Bernanke follows Volcker's policy of slamming on the brakes to defend the currency, then we will get the mother of all Kondratieff winters, as Ian Gordon and his work predicts will occur.
Stocks: US stocks have slid for three consecutive days now based on higher Treasury yields--the longest losing streak of the year.
Dollar: The Dollar has increased dramatically against the Euro & Yen, as Treasury yields increased, and upon growing speculation that the Fed will increase rates more than the previously expected two more times. The aforementioned Treasury yield improvement, however, will spell more bad news for the mortgage market (increased rates)
Gold: Gold has taken a spill over last couple of days. The positive news for the dollar when combined with falling oil and reduced bullion demand, slammed gold.
So, will rates continue to rise? If so, will this help the dollar and our economy? I believe many of you already know my answer to this, so rather than express my views, please allow me to share the opinions of someone else: J Taylor from HOWESTREET.COM
This is an excellent read!
Will Rates Continue to Rise? If So, What Happens to Our Indebted Economy?
One of the potential threats to our inflationary thesis is that with even the government's illegitimate, understated inflation numbers as seen above, the cost of living in America is on the rise. At the same time, we Americans continue to rely on foreign savings to the tune of about $3 billion per day to fund our extravagant lifestyle. We keep spending more than we earn. But when foreigners begin to factor in the declining purchasing power of the dollar, will they continue to send their savings to the U.S. so that we can continue to consume more than we produce? Which brings me to what I think could be the real threat to continued economic growth and the inflation play.
The one real threat to the establishment is not inflation, because the Fed and the U.S. government can always print more money faster and faster to keep ahead of the rest of us. Those printing the money are always in charge unless the rest of the world wakes up to the fact that the pieces of paper the government and the banking systems calls money is worthless. So the real threat to the establishment and the Anglo-American empire is the potential for the rest of the world to reject the paper they print. That in part is starting to happen with various countries choosing to "diversify" their foreign currency holdings out of the dollar and into the euro and gold, and now perhaps more so the yen as the Japanese economy begins to grow.
The last time the U.S. had a major problem with the dollar's acceptance issue globally was during the double-digit inflation years during the Carter presidency. Paul Volcker provided the solution that saved the American empire, but it was a very painful solution. To get out ahead of the inflation problem of that time, he did not hike interest rates by ¼% every few weeks. He slammed inflation into the ground by slowing down monetary growth to such an extent that "real" interest rates were the highest since the Civil War!
The rise in interest rates that followed Volcker's tight monetary policy coincided with a decline in equity prices and skyrocketing gold price that resulted in a Dow-to-Gold ratio of approximately 1:1 in 1980. Thereafter, America had its deepest recession since the Great Depression.
The discussion about inflation now reminds me very much of the 1970s, when the constraint refrain was, "Oh it isn't too bad. The economy is growing. Profits are good. No need to worry about inflation." And so Arthur Burns and G. William Millar at the Fed kept raising interest rates to make it look like they were fighting inflation, but all the while, monetary policy was behind the inflation curve. By that, I mean a sufficient amount of money was printed to continue an unhealthy artificial growth so as to ensure that a painful recession did not follow. That lax policy was continued until inflation became such a problem that the very survival of the U.S. dollar as the world's reserve currency began to come into question.
I believe we may be seeing a replay of the same kind of lax Fed policy as took place in the 1970s. Only now, America is so much less able to survive a tight monetary policy than it was in the early 1980s, even though as noted above, that period represented the deepest recession since the 1930s. Back then, the U.S. was a net creditor nation. Now, the U.S. is not only a net debtor nation, it is the biggest net debtor nation in history! Back then, the U.S. consumer saved a considerable amount of his income. Now, the U.S. consumer is actually spending more than he is earning! Back then, the U.S. still had an industrial base that was the envy of the world. Now, the U.S. is quickly losing not only its industrial jobs, but with the advent of the Internet, is losing even its service jobs!
Bernanke is the Anti-Kondratieff Winter guy. He was the guy out front, fighting deflation a couple of years ago when it became a real concern to policy makers. But, like the entire establishment, he has signed on to the false doctrines of Keynes and Friedman that wealth can be created from governments spending, increasing debt, and printing money. That patent falsehood has, however, been sold to generations of American economists, who are so blind they cannot see the reality, which is that wealth is generated only by saving not by dissaving. Yet, look and see who is gaining wealth these days. It is the nations that save, like China and India and the Middle Eastern countries that have the oil revenues to even buy and control our port facilities.
The very jobs of the boys and girls you see daily on CNBC depend on keeping their blinders on. But to people who are not sucked into this establishment vortex, like the taxi driver form Iran, or the son of a Latin American minister of energy, or the Armenian landlord I spoke to last week here in Woodside, America is clearly in a decline.
Outside of America, the world is catching on to an unfolding disaster. They see that America and its currency are in decline, so they are starting to sell dollars and buy euros and gold. Our propaganda operation is working overtime to pull the wool over the eyes of us Americans, so that we will be CONNED into believing the dollar is "as good as gold," even though it is constantly worth less. But no matter how hard the ruling elite spin things, as in the case of inflation statistics or reasons for going to war, ultimately, truth will prevail. And ironically, economic truth may present Mr. Bernanke with a "conundrum" that makes Alan Greenspan's long interest rate conundrum look like child's play in comparison.
If the survival of the Anglo-American empire's currency, namely, the U.S. dollar, depends on raising interest at a time when, thanks to our past financial promiscuity, our economy cannot take rising rates, what is Mr. Bernanke to do? Here is a man who said we can eliminate a replay of the Great Depression by printing a sufficient amount of money and then distributing that money by helicopters if need be. Yet, if he carries out that policy when the dollar buys less and less and the world demands higher interest rates to keep funding our gaping deficit, then massive flows of foreign capital out of the U.S. will occur and interest rates will rise to the moon! Or Bernanke will print money at an ever-escalating rate of speed, thus leading toward a possible hyperinflation.
This is a scenario that I think is coming sooner or later to America. How it will play out I don't know, and neither does anyone else. My own thinking is that the defense of the dollar as a means of defending the Anglo-American empire will be of paramount concern. Yet, if Bernanke follows Volcker's policy of slamming on the brakes to defend the currency, then we will get the mother of all Kondratieff winters, as Ian Gordon and his work predicts will occur.
Saturday, March 04, 2006
Ominous Warnings and Dire Predictions of World's Financial Experts
This Resource Investor article consolidates the Ominous Warnings and Dire Predictions of some the worlds leading financial experts. These experts suggest that our economic future is not what it seems, and the US economy could be in dire trouble. I highly recommend you take the time to read.
By Dudley Baker and Lorimer Wilson
SAN ANTONIO (Precious Metals Warrants) -- We have assembled some interesting comments from some of the leading economists, financial analysts, economic research firms and financial commentators and what they are saying about our current economic situation and what is most likely to unfold in the months and years ahead. This is a summary of the ominous warnings, dire predictions and perceived devastating consequences as they see it.
We trust you will find this a must read to more clearly understand and appreciate the financial state of the union, the impact it will likely have on various investments, and how better to allocate ones assets. Nobody has a crystal ball, but to just ignore the following warning signs and hope that everything will turn out okay would simply be foolish. Below is Part 1 of our 6 part series of articles.
Ominous Warnings and Dire Predictions of World's Financial Experts - Part 1
Alan Greenspan, an 'original gold bug' and former Chairman of the Federal Reserve, is going to say "I told you so!" as soon as he feels at liberty to comment further on what he already warned us might/will happen to the economy. He will no doubt expand on what he saw as the:
a) potential for a derivative crisis - "I would suspect there are potential disasters running into ... the hundreds."
b) potential drop in asset prices - "This vast increase in the market value of asset claims [stocks, bonds, houses] is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. But what they perceive as newly abundant liquidity can readily disappear ... history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
c) housing bubble - "Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures."
d) coming crisis in Social Security - "The imbalance in the federal budgetary situation, unless addressed soon, will pose serious long-term fiscal difficulties. Our demographics - especially the retirement of the baby-boom generation beginning in just a few years - mean that the ratio of workers to retirees will fall substantially. Without corrective action, this development will put substantial pressure on our ability in coming years to provide even minimal government services while maintaining entitlement benefits at their current level, without debilitating increases in tax rates. The longer we wait before addressing these imbalances, the more wrenching the fiscal adjustment ultimately will be." "When you do the arithmetic of what the rising debt level implied by the deficits tells you and add interest costs to that ever-rising debt at ever-higher interest rates, the system becomes fiscally destabilizing. What you will end up with is a stagnant economic system."
e) oil supply risk - "The current situation reflects an increasing fear that existing reserves and productive crude oil capacity have become subject to potential geopolitical adversity. These anxieties are not frivolous given the stark realities evident in many areas of the world."
f) rising budget deficit - "Large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse." "Monetary policy, for example, cannot ignore the potential inflationary pressures inherent in our current fiscal outlook, especially those that could rise in meeting commitments to future retirees. However, I assume that these imbalances will be resolved before stark choices again confront us and that, if they are not, the Fed would resist any temptation to monetize future fiscal deficits. We had too much experience with the dangers of inflation in the 1970s to tolerate going through another bout of dispiriting stagflation. The consequences for both future workers and retirees could be daunting."
g) rising long-term interest rates - "The fiscal issues that we face pose long-term challenges, but federal budget deficits could cause difficulties even in the near term. Rising interest rates have been advertised for so long and in so many places that anyone who hasn't appropriately hedged his position by now is desirous of losing money."
h) record-high current account deficit - "Given the already substantial accumulation of dollar-dominated debt, foreign investors, both private and official, may become less willing to absorb ever-growing claims on US residents....Net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace...Given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point. The trade deficit cannot continue to increase forever at the recent pace.
i) excessive household debt - Debt in modest quantities does enhance the rate of growth of an economy and does create higher standards of living, but in excess, creates very serious problems.
j) falling U.S. dollar - Although I doubt that the U.S. dollar will lose its status as the world's reserve currency any time soon, there are in my judgment lessons to be learned from the experience of sterling as it faded as the world's dominant currency."
It is interesting to note that at one time Greenspan was an ardent gold bug and a true believer in the gold standard as his following words attest: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of the insidious process."
Deep Funk
Richard Fisher, President of the Dallas Federal Reserve, noted on Feb.6, 2006 that "U.S. consumer spending could suffer if the property market cools too fast but that is unlikely because of the high number of home owners with fixed rate mortgages acting as a buffer against the small fraction of those with variable rate mortgages. It is not unreasonable to think the situation is manageable, albeit worth watching closely."
Regarding the record U.S. current account deficit he said "those urging the United States to rein in its spending should be equally full-throated in prodding countries with excess savings and trade surpluses to create conditions for growing their domestic demand. If they fail to do so, and the U.S. suddenly becomes more virtuous on its own, the global economy could sink into a deep funk."
Financial Disaster
Paul Volker, a former Federal Reserve Board Chairman, is on record as saying "I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. Indeed, there is a 75% chance of a major financial disaster within the next few years."
Great Disruption
David Dodge, Governor of the Bank of Canada, earlier this month said "global imbalances, such as the record U.S. current account deficit and the ballooning surpluses in some Asian countries, are persisting and if not resolved in an orderly way, we face the threat of great disruption with periods of outright recession."
Economic Armageddon
Stephen Roach, Managing Director, Chief Economist, and Director of Global Economic Analysis of Morgan Stanley, has stated that "America's record trade deficit means the dollar will keep falling, interest rates will rise further and U.S. consumers, in debt up to their eyeballs, will get pounded with no better than a 10% chance of avoiding economic Armageddon."
Financial Apocalypse
Kurt Richebacher, former Chief Economist of the Dresdner Bank, has stated that "the bubble-driven consumer-spending boom we are currently in represents artificial, unsustainable demand and further rate hikes by the Fed will prick both the carry trade bubble in bonds and the bubble in housing. A financial Apocalypse will follow. The U.S. economy will lose its chief liquidity source with disastrous effects on a wide range of asset prices.
The U.S. has such serious structural problems they preclude any possibility of a sustained economic recovery. These structural problems include a corporate profits decline, a record savings shortfall, a capital spending collapse, an unprecedented consumer borrowing and spending binge, a massive current account deficit, ravaged balance sheets and record high debt levels. Tops among them are the depression of profits and capital spending which will propel each other downward in a vicious spiral.
In addition, U.S. stocks are still overvalued. The worst part of the bear markets is still to come and it will result in the wholesale destruction of the financial wealth derived from the bubble economy.
The U.S. financial system today is a house of cards built on nothing but financial leverage, credit excess, speculation and derivatives. A recession is coming and it will prove unusually severe and long. The length and severity of recessions or depressions depend critically on the magnitude of the dislocations and imbalances that have accumulated in the economy during the preceding boom and, as such, the U.S. economy is in for a very hard landing. The excessive monetary looseness has only postponed and magnified the coming inevitable crisis.
Growing disillusionment with the U.S. economy is the trigger. The huge capital inflows have become the U.S. financial markets' single most important pillar. Take this pillar away, and those markets will instantly collapse with devastating effects for the U.S. economy, turning quickly into a savage credit crunch. The exposure of the U.S. financial markets to foreign investors and lenders has grown to such preposterous magnitude during recent years that a controlled gradual dollar devaluation no longer appears feasible. The dangers that loom on the currency front are immense. The grossly over-leveraged U.S. financial system is hostage to a strong dollar and permanent, huge capital inflows. The U.S. trade deficit and the accumulated foreign indebtedness have reached a scale that defies any possible action by central banks. The fate of the dollar is beyond any control."
Financial Train Wreck
Nouriel Roubini is Professor of Economics and International Business at New York University's Stern School of Business; Chairman of Roubini Global Economics; Research Fellow at the National Bureau of Economic Research; Research Fellow of the Centre for Economic Policy Research; Member of the Bretton Woods Committee, the Council on Foreign Relation's Roundtable on the International Economy and the Academic Advisory Committee, Fiscal Affairs Department of the International Monetary Fund; former Senior Economist for International Affairs on the Staff of the United States President's Council of Economic Advisors; and co-author of several books on the economy.
Roubini has stated that "if the US does not take policy steps to reduce its need for external financing, before it exhausts the world's central banks willingness to keep adding to their dollar reserves then the large, growing and unsustainable fiscal deficit and U.S. current account deficit will become twin financial train wrecks for the U.S. economy and will lead to a sharp hard landing of the dollar, a sharp increase in long term interest rates, a significant increase in the inflation rate and a sharp slowdown of the U.S. and global economy.
A dollar crash/hard landing would be associated with a bond market rout and would have serious consequences on all other risky and overvalued assets (equities, housing, high-yield debt, emerging market debt).
The effects in the US of higher short and long rates on the housing market, both flows of new housing and new home demand on the value of existing housing, would likely be severe.
Oil prices will skyrocket above $100 per barrel. Then we will get a U.S. and global recession that will pale compared to the one in 1980-82.
I am not being alarmist or unrealistic when you consider our reckless fiscal and public debt policies, the absence of adult policy supervision in Washington and the mediocre or nonexistent US economic leadership."
Demographic Tsunami
David Walker, Director of the U.S. General Accounting Office and Comptroller general of the United States, has stated that "our projected budget deficits are not manageable without significant changes in status quo programs, policies, processes and operations and were such action implemented it would most likely adversely affect the quality of life of every American now and in the foreseeable future. The U.S. faces a demographic tsunami that will never recede.
We would recommend investors strategically position themselves in a wide variety of assets including precious metals, mining shares and long-term warrants. Nothing like taking what the experts say to heart and investing accordingly.
By Dudley Baker and Lorimer Wilson
SAN ANTONIO (Precious Metals Warrants) -- We have assembled some interesting comments from some of the leading economists, financial analysts, economic research firms and financial commentators and what they are saying about our current economic situation and what is most likely to unfold in the months and years ahead. This is a summary of the ominous warnings, dire predictions and perceived devastating consequences as they see it.
We trust you will find this a must read to more clearly understand and appreciate the financial state of the union, the impact it will likely have on various investments, and how better to allocate ones assets. Nobody has a crystal ball, but to just ignore the following warning signs and hope that everything will turn out okay would simply be foolish. Below is Part 1 of our 6 part series of articles.
Ominous Warnings and Dire Predictions of World's Financial Experts - Part 1
Alan Greenspan, an 'original gold bug' and former Chairman of the Federal Reserve, is going to say "I told you so!" as soon as he feels at liberty to comment further on what he already warned us might/will happen to the economy. He will no doubt expand on what he saw as the:
a) potential for a derivative crisis - "I would suspect there are potential disasters running into ... the hundreds."
b) potential drop in asset prices - "This vast increase in the market value of asset claims [stocks, bonds, houses] is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. But what they perceive as newly abundant liquidity can readily disappear ... history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
c) housing bubble - "Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures."
d) coming crisis in Social Security - "The imbalance in the federal budgetary situation, unless addressed soon, will pose serious long-term fiscal difficulties. Our demographics - especially the retirement of the baby-boom generation beginning in just a few years - mean that the ratio of workers to retirees will fall substantially. Without corrective action, this development will put substantial pressure on our ability in coming years to provide even minimal government services while maintaining entitlement benefits at their current level, without debilitating increases in tax rates. The longer we wait before addressing these imbalances, the more wrenching the fiscal adjustment ultimately will be." "When you do the arithmetic of what the rising debt level implied by the deficits tells you and add interest costs to that ever-rising debt at ever-higher interest rates, the system becomes fiscally destabilizing. What you will end up with is a stagnant economic system."
e) oil supply risk - "The current situation reflects an increasing fear that existing reserves and productive crude oil capacity have become subject to potential geopolitical adversity. These anxieties are not frivolous given the stark realities evident in many areas of the world."
f) rising budget deficit - "Large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse." "Monetary policy, for example, cannot ignore the potential inflationary pressures inherent in our current fiscal outlook, especially those that could rise in meeting commitments to future retirees. However, I assume that these imbalances will be resolved before stark choices again confront us and that, if they are not, the Fed would resist any temptation to monetize future fiscal deficits. We had too much experience with the dangers of inflation in the 1970s to tolerate going through another bout of dispiriting stagflation. The consequences for both future workers and retirees could be daunting."
g) rising long-term interest rates - "The fiscal issues that we face pose long-term challenges, but federal budget deficits could cause difficulties even in the near term. Rising interest rates have been advertised for so long and in so many places that anyone who hasn't appropriately hedged his position by now is desirous of losing money."
h) record-high current account deficit - "Given the already substantial accumulation of dollar-dominated debt, foreign investors, both private and official, may become less willing to absorb ever-growing claims on US residents....Net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace...Given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point. The trade deficit cannot continue to increase forever at the recent pace.
i) excessive household debt - Debt in modest quantities does enhance the rate of growth of an economy and does create higher standards of living, but in excess, creates very serious problems.
j) falling U.S. dollar - Although I doubt that the U.S. dollar will lose its status as the world's reserve currency any time soon, there are in my judgment lessons to be learned from the experience of sterling as it faded as the world's dominant currency."
It is interesting to note that at one time Greenspan was an ardent gold bug and a true believer in the gold standard as his following words attest: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of the insidious process."
Deep Funk
Richard Fisher, President of the Dallas Federal Reserve, noted on Feb.6, 2006 that "U.S. consumer spending could suffer if the property market cools too fast but that is unlikely because of the high number of home owners with fixed rate mortgages acting as a buffer against the small fraction of those with variable rate mortgages. It is not unreasonable to think the situation is manageable, albeit worth watching closely."
Regarding the record U.S. current account deficit he said "those urging the United States to rein in its spending should be equally full-throated in prodding countries with excess savings and trade surpluses to create conditions for growing their domestic demand. If they fail to do so, and the U.S. suddenly becomes more virtuous on its own, the global economy could sink into a deep funk."
Financial Disaster
Paul Volker, a former Federal Reserve Board Chairman, is on record as saying "I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. Indeed, there is a 75% chance of a major financial disaster within the next few years."
Great Disruption
David Dodge, Governor of the Bank of Canada, earlier this month said "global imbalances, such as the record U.S. current account deficit and the ballooning surpluses in some Asian countries, are persisting and if not resolved in an orderly way, we face the threat of great disruption with periods of outright recession."
Economic Armageddon
Stephen Roach, Managing Director, Chief Economist, and Director of Global Economic Analysis of Morgan Stanley, has stated that "America's record trade deficit means the dollar will keep falling, interest rates will rise further and U.S. consumers, in debt up to their eyeballs, will get pounded with no better than a 10% chance of avoiding economic Armageddon."
Financial Apocalypse
Kurt Richebacher, former Chief Economist of the Dresdner Bank, has stated that "the bubble-driven consumer-spending boom we are currently in represents artificial, unsustainable demand and further rate hikes by the Fed will prick both the carry trade bubble in bonds and the bubble in housing. A financial Apocalypse will follow. The U.S. economy will lose its chief liquidity source with disastrous effects on a wide range of asset prices.
The U.S. has such serious structural problems they preclude any possibility of a sustained economic recovery. These structural problems include a corporate profits decline, a record savings shortfall, a capital spending collapse, an unprecedented consumer borrowing and spending binge, a massive current account deficit, ravaged balance sheets and record high debt levels. Tops among them are the depression of profits and capital spending which will propel each other downward in a vicious spiral.
In addition, U.S. stocks are still overvalued. The worst part of the bear markets is still to come and it will result in the wholesale destruction of the financial wealth derived from the bubble economy.
The U.S. financial system today is a house of cards built on nothing but financial leverage, credit excess, speculation and derivatives. A recession is coming and it will prove unusually severe and long. The length and severity of recessions or depressions depend critically on the magnitude of the dislocations and imbalances that have accumulated in the economy during the preceding boom and, as such, the U.S. economy is in for a very hard landing. The excessive monetary looseness has only postponed and magnified the coming inevitable crisis.
Growing disillusionment with the U.S. economy is the trigger. The huge capital inflows have become the U.S. financial markets' single most important pillar. Take this pillar away, and those markets will instantly collapse with devastating effects for the U.S. economy, turning quickly into a savage credit crunch. The exposure of the U.S. financial markets to foreign investors and lenders has grown to such preposterous magnitude during recent years that a controlled gradual dollar devaluation no longer appears feasible. The dangers that loom on the currency front are immense. The grossly over-leveraged U.S. financial system is hostage to a strong dollar and permanent, huge capital inflows. The U.S. trade deficit and the accumulated foreign indebtedness have reached a scale that defies any possible action by central banks. The fate of the dollar is beyond any control."
Financial Train Wreck
Nouriel Roubini is Professor of Economics and International Business at New York University's Stern School of Business; Chairman of Roubini Global Economics; Research Fellow at the National Bureau of Economic Research; Research Fellow of the Centre for Economic Policy Research; Member of the Bretton Woods Committee, the Council on Foreign Relation's Roundtable on the International Economy and the Academic Advisory Committee, Fiscal Affairs Department of the International Monetary Fund; former Senior Economist for International Affairs on the Staff of the United States President's Council of Economic Advisors; and co-author of several books on the economy.
Roubini has stated that "if the US does not take policy steps to reduce its need for external financing, before it exhausts the world's central banks willingness to keep adding to their dollar reserves then the large, growing and unsustainable fiscal deficit and U.S. current account deficit will become twin financial train wrecks for the U.S. economy and will lead to a sharp hard landing of the dollar, a sharp increase in long term interest rates, a significant increase in the inflation rate and a sharp slowdown of the U.S. and global economy.
A dollar crash/hard landing would be associated with a bond market rout and would have serious consequences on all other risky and overvalued assets (equities, housing, high-yield debt, emerging market debt).
The effects in the US of higher short and long rates on the housing market, both flows of new housing and new home demand on the value of existing housing, would likely be severe.
Oil prices will skyrocket above $100 per barrel. Then we will get a U.S. and global recession that will pale compared to the one in 1980-82.
I am not being alarmist or unrealistic when you consider our reckless fiscal and public debt policies, the absence of adult policy supervision in Washington and the mediocre or nonexistent US economic leadership."
Demographic Tsunami
David Walker, Director of the U.S. General Accounting Office and Comptroller general of the United States, has stated that "our projected budget deficits are not manageable without significant changes in status quo programs, policies, processes and operations and were such action implemented it would most likely adversely affect the quality of life of every American now and in the foreseeable future. The U.S. faces a demographic tsunami that will never recede.
We would recommend investors strategically position themselves in a wide variety of assets including precious metals, mining shares and long-term warrants. Nothing like taking what the experts say to heart and investing accordingly.
More woes for the US auto Industry
MSNBC just reported that Dana Corporation (US auto-part maker) filed for bankruptsy.
Hit by higher costs and a slowdown in trucks sales at its two biggest customers, Ford and General Motors, Dana has been unable to stop bleeding red ink. Now, the financial meltdown of one of the world’s biggest suppliers will likely drive parts prices higher, putting further pressure on Ford and GM.
Like much of the U.S. auto parts industry, Dana has been caught in a downward spiral that shows no signs of easing. Higher energy and raw materials costs have taken a bigger bite out of its revenues. A steep drop in vehicle sales – especially SUVs and light trucks – means fewer parts orders for the company, which makes brakes, axles and other vehicle parts.
And auto makers, looking to ease their own financial pain, continue to pound their suppliers for lower prices. Parts customers like GM and Ford are increasingly demanding the so-called “China price,” according to Efraim Levy, an auto industry analyst at Standard & Poor’s.
“Parts companies used to be able to get a premium because they did the best job and their technology was better,” he said Levy. “Now (their customers) just say, ‘We can get this done in China at a substantially lower price. So either match it or we’ll take the business away, and forget the quality issue."
My point for posting up this issue: Just another example illustrating that all is not well in our economy. IMHO, GM will file for bankruptsy by 2008 and the economic shockwaves will be massive.
Hit by higher costs and a slowdown in trucks sales at its two biggest customers, Ford and General Motors, Dana has been unable to stop bleeding red ink. Now, the financial meltdown of one of the world’s biggest suppliers will likely drive parts prices higher, putting further pressure on Ford and GM.
Like much of the U.S. auto parts industry, Dana has been caught in a downward spiral that shows no signs of easing. Higher energy and raw materials costs have taken a bigger bite out of its revenues. A steep drop in vehicle sales – especially SUVs and light trucks – means fewer parts orders for the company, which makes brakes, axles and other vehicle parts.
And auto makers, looking to ease their own financial pain, continue to pound their suppliers for lower prices. Parts customers like GM and Ford are increasingly demanding the so-called “China price,” according to Efraim Levy, an auto industry analyst at Standard & Poor’s.
“Parts companies used to be able to get a premium because they did the best job and their technology was better,” he said Levy. “Now (their customers) just say, ‘We can get this done in China at a substantially lower price. So either match it or we’ll take the business away, and forget the quality issue."
My point for posting up this issue: Just another example illustrating that all is not well in our economy. IMHO, GM will file for bankruptsy by 2008 and the economic shockwaves will be massive.
Fed Reserve Vice-Chairman Quits
Has anyone seen this?
TIMES ONLINE reports "US Fed's deputy chief quits"
ROGER FERGUSON, the respected vice-chairman of the US Federal Reserve, surprised Wall Street yesterday when he announced that he is to quit, less than a month after Ben Bernanke took over from Alan Greenspan as Fed Chairman.
Mr Ferguson, 54, said that he would step down from the Fed at the end of April “to pursue other professional opportunities”. The sudden announcement caught Wall Street investors and analysts off guard but markets largely took the news in their stride.
Economists said, however, that Mr Ferguson’s decision to leave so soon after a new chairman took the helm at the US central bank from the revered Mr Greenspan ran some risk of adding to markets’ edginess over the transition at the top.
“The market will probably be very interested in what the President has to say and in who (his) appointee is,” Ed McKelvey, senior US economist at Goldman Sachs, said.
BUSINESSDAY puts a different spin on the situation and states "Bernanke can now play numbers game with Fed traditionalist Ferguson leaving. "
US FEDERAL Reserve vice-chairman Roger Ferguson’s resignation may help new Fed chief Ben Bernanke win support at the central bank for a numerical inflation goal.
Ferguson — whose resignation on Wednesday afternoon takes effect on April 28 after eight years on the Fed’s board of governors — opposes an inflation target, partly because it may limit the central bank’s flexibility. Bernanke’s support for such a move has been a hallmark of his work as an economist.
The absence of Ferguson and former chairman Alan Greenspan removes the two biggest obstacles to a Fed inflation goal, leaving governor Donald Kohn as the only board member known to disagree with the approach.
Ferguson was “one voice that would have been against that change in the Fed’s way of doing business”, said Princeton University economist Alan Blinder, who was Fed vice-chairman from 1994 to 1996.
Ferguson, who was close to Greenspan, leaves the Fed at a time of transition. Greenspan retired last month after more than 18 years atop the central bank, and two new governors, Randall Kroszner and Kevin Warsh, are waiting to be sworn in.
A majority of the board’s seven slots will have turned over in less than a year. Ferguson was the last governor to have been originally appointed before US President George Bush took office.
Like rats bailing a sinking ship, the Fed Reserve has (in 1 short year) lost most of its corporate knowledge base and tenured leaders. How do you think this will impact Fed policy and the confidence of markets? What are the implications to this latest departure? Ben is quickly running up to the 2-month window of change that has caused turmoil for his predecessors. Will we see a crisis anytime soon?
TIMES ONLINE reports "US Fed's deputy chief quits"
ROGER FERGUSON, the respected vice-chairman of the US Federal Reserve, surprised Wall Street yesterday when he announced that he is to quit, less than a month after Ben Bernanke took over from Alan Greenspan as Fed Chairman.
Mr Ferguson, 54, said that he would step down from the Fed at the end of April “to pursue other professional opportunities”. The sudden announcement caught Wall Street investors and analysts off guard but markets largely took the news in their stride.
Economists said, however, that Mr Ferguson’s decision to leave so soon after a new chairman took the helm at the US central bank from the revered Mr Greenspan ran some risk of adding to markets’ edginess over the transition at the top.
“The market will probably be very interested in what the President has to say and in who (his) appointee is,” Ed McKelvey, senior US economist at Goldman Sachs, said.
BUSINESSDAY puts a different spin on the situation and states "Bernanke can now play numbers game with Fed traditionalist Ferguson leaving. "
US FEDERAL Reserve vice-chairman Roger Ferguson’s resignation may help new Fed chief Ben Bernanke win support at the central bank for a numerical inflation goal.
Ferguson — whose resignation on Wednesday afternoon takes effect on April 28 after eight years on the Fed’s board of governors — opposes an inflation target, partly because it may limit the central bank’s flexibility. Bernanke’s support for such a move has been a hallmark of his work as an economist.
The absence of Ferguson and former chairman Alan Greenspan removes the two biggest obstacles to a Fed inflation goal, leaving governor Donald Kohn as the only board member known to disagree with the approach.
Ferguson was “one voice that would have been against that change in the Fed’s way of doing business”, said Princeton University economist Alan Blinder, who was Fed vice-chairman from 1994 to 1996.
Ferguson, who was close to Greenspan, leaves the Fed at a time of transition. Greenspan retired last month after more than 18 years atop the central bank, and two new governors, Randall Kroszner and Kevin Warsh, are waiting to be sworn in.
A majority of the board’s seven slots will have turned over in less than a year. Ferguson was the last governor to have been originally appointed before US President George Bush took office.
Like rats bailing a sinking ship, the Fed Reserve has (in 1 short year) lost most of its corporate knowledge base and tenured leaders. How do you think this will impact Fed policy and the confidence of markets? What are the implications to this latest departure? Ben is quickly running up to the 2-month window of change that has caused turmoil for his predecessors. Will we see a crisis anytime soon?
Wednesday, March 01, 2006
Las Vegas—A House of Cards Bound to fall
Las Vegas is a booming city with very low unemployment figures, and a robust, thriving economy. Over 6,000 new families move here every month, taking advantage of the abundant number of service sector jobs, and the city welcomes them with open arms. Regardless of where you look, construction abounds, as the city tries to keep up with this explosive growth -- building the infrastructure (schools, roads, housing, new casinos, high-rise condo projects, etc) to support this massive expansion.
The situation hasn’t changed much throughout the entire 11 years that I’ve lived here--it has been constant growth. Las Vegas has absolutely flourished in a vibrant U.S. economy, and has expanded to more than twice its size.
With that said, this thriving Las Vegas economy is completely dependent on the discretionary spending of vacationers (Airlines, Hotels, Restaurants, Shows, Gambling, Drinking, Strip Clubs, etc) and the city lacks any real or substantial diversification. Gaming is big money and people have been more than happy to live life to the fullest and part with their cash in a strong U.S. economy. Their spending has kept thousands upon thousands of people gainfully employed in this city.
Again, the last 10+ years have seen an unprecedented economic boon, but what will happen when the U.S. economy finally starts to contract, when millions of U.S. homes start to lose value, when consumers interest rates rise and payments double on credit cards, when gas & travel become prohibitively more expensive, when the American consumer is finally tapped out and no longer has the discretionary money to gamble away in Vegas?
I'll tell you the answer: Currently, Las Vegas hotel/casino occupancy rates are running ~ 90%. Each one of these highly profitable businesses is staffed with thousands of employees (desk clerks, maids, concierges, cocktail waitresses, maintenance workers, moneychangers, card dealers, security, managers, etc.), who depend on the jobs to pay their mortgages, rents, car payments, etc. When tourism & discretionary spending finally start to decline, gaming revenues will drop, hotel occupancy rates will fall, and thousands of layoffs will follow.
Those who find themselves unemployed will quickly find that they have very limited options, as the entire hotel & gaming industry will be feeling the same economic pains. The lack of industry diversification in the city will be a killer...
Once the LV layoffs begin, more homes will go into foreclosure, as people won’t be able to make their mortgage payments. Then businesses outside of the casino industry (local restaurants, retail, home improvements, beauty, health care, etc) will also begin to feel the pain. Eventually, a chain reaction of dominoes will begin to fall, and ultimately the number of outbound U-hauls will vastly exceed those inbound...
The situation hasn’t changed much throughout the entire 11 years that I’ve lived here--it has been constant growth. Las Vegas has absolutely flourished in a vibrant U.S. economy, and has expanded to more than twice its size.
With that said, this thriving Las Vegas economy is completely dependent on the discretionary spending of vacationers (Airlines, Hotels, Restaurants, Shows, Gambling, Drinking, Strip Clubs, etc) and the city lacks any real or substantial diversification. Gaming is big money and people have been more than happy to live life to the fullest and part with their cash in a strong U.S. economy. Their spending has kept thousands upon thousands of people gainfully employed in this city.
Again, the last 10+ years have seen an unprecedented economic boon, but what will happen when the U.S. economy finally starts to contract, when millions of U.S. homes start to lose value, when consumers interest rates rise and payments double on credit cards, when gas & travel become prohibitively more expensive, when the American consumer is finally tapped out and no longer has the discretionary money to gamble away in Vegas?
I'll tell you the answer: Currently, Las Vegas hotel/casino occupancy rates are running ~ 90%. Each one of these highly profitable businesses is staffed with thousands of employees (desk clerks, maids, concierges, cocktail waitresses, maintenance workers, moneychangers, card dealers, security, managers, etc.), who depend on the jobs to pay their mortgages, rents, car payments, etc. When tourism & discretionary spending finally start to decline, gaming revenues will drop, hotel occupancy rates will fall, and thousands of layoffs will follow.
Those who find themselves unemployed will quickly find that they have very limited options, as the entire hotel & gaming industry will be feeling the same economic pains. The lack of industry diversification in the city will be a killer...
Once the LV layoffs begin, more homes will go into foreclosure, as people won’t be able to make their mortgage payments. Then businesses outside of the casino industry (local restaurants, retail, home improvements, beauty, health care, etc) will also begin to feel the pain. Eventually, a chain reaction of dominoes will begin to fall, and ultimately the number of outbound U-hauls will vastly exceed those inbound...
Monday, February 27, 2006
January New Home Sales Tumble
Today, Bloomberg reported that January new home sales dropped substantially, and standing inventory is at an all-time high. Wasn’t it just two weeks ago that we were discussing record new home starts—big numbers not seen in over 33 years?
Hmmm… This news kinda makes you want to sit back and think a little…
Let’s see… January housing starts were 2.276 million (per annum), equating to roughly 190,000 home starts. Today, news reports that January new home sales were down to 1.233 million (per annum), equating to roughly 103,000 home sales. It doesn’t take a rocket scientist (which I’m certainly not) to see that the US housing industry has just added 87,000 excess homes to the market in January 2006. These new homes (once finished) will add to the record number of homes already for sale nationwide (currently 528,000 total).
When you combine the housing information above with (1) The lowest personal savings rate since the Great Depression, (2) Consumer Bankruptcies at an all time high, (3) Increasing interest rate environment, (4) Rising Energy Costs and instability in world oil markets, (5) Continued US Outsourcing and loss of US job market, (6) Failing corporations--GM, Delphi, Ford, US airline industry, etc, (7) Increasing Trade Deficit and US Debt, (8) substantial US dollar problems, (9) Inverted Yield Curve, (10) complete lack of US Government interest in getting our economic house in order, and (11) $1 + Trillion dollars of Interest rate resets in the next 18 months, etc… what do you think will happen to the housing market and our economy? My thoughts: I believe it will be an American Wake Up Call
Anyway, based on the figures released today and the prevailing trend, it’s almost certain the US housing market will continue to cool. If it cools too fast, the abrupt economic fallout could be severe. If it cools slowly, it will be less painful, but any one of the other issues I listed above could create their own potential problems and economic fallout, thus adding to the misery.
Either way, our future doesn’t look nearly as bright as our past, and the housing ATM is going the way of the US government and consumer—completely broke.
This is a very interesting, yet scary time to be alive.
I’ve written other articles about these same issues, and you can read them here, here, here and here.
Hmmm… This news kinda makes you want to sit back and think a little…
Let’s see… January housing starts were 2.276 million (per annum), equating to roughly 190,000 home starts. Today, news reports that January new home sales were down to 1.233 million (per annum), equating to roughly 103,000 home sales. It doesn’t take a rocket scientist (which I’m certainly not) to see that the US housing industry has just added 87,000 excess homes to the market in January 2006. These new homes (once finished) will add to the record number of homes already for sale nationwide (currently 528,000 total).
When you combine the housing information above with (1) The lowest personal savings rate since the Great Depression, (2) Consumer Bankruptcies at an all time high, (3) Increasing interest rate environment, (4) Rising Energy Costs and instability in world oil markets, (5) Continued US Outsourcing and loss of US job market, (6) Failing corporations--GM, Delphi, Ford, US airline industry, etc, (7) Increasing Trade Deficit and US Debt, (8) substantial US dollar problems, (9) Inverted Yield Curve, (10) complete lack of US Government interest in getting our economic house in order, and (11) $1 + Trillion dollars of Interest rate resets in the next 18 months, etc… what do you think will happen to the housing market and our economy? My thoughts: I believe it will be an American Wake Up Call
Anyway, based on the figures released today and the prevailing trend, it’s almost certain the US housing market will continue to cool. If it cools too fast, the abrupt economic fallout could be severe. If it cools slowly, it will be less painful, but any one of the other issues I listed above could create their own potential problems and economic fallout, thus adding to the misery.
Either way, our future doesn’t look nearly as bright as our past, and the housing ATM is going the way of the US government and consumer—completely broke.
This is a very interesting, yet scary time to be alive.
I’ve written other articles about these same issues, and you can read them here, here, here and here.
Sunday, February 26, 2006
The End of Dollar Hegemony
Many returning readers already know my thoughts on the dollar, but for those of you who don’t, I’ll try to quickly summarize: I believe our fiat dollar (the world’s reserve currency) is due for a major correction (devaluation), and when all is said and done, our way of life will completely change.
As the world continues to pay increasingly higher oil prices, cracks in the dollar will begin to appear... Our government officials are spending like mad men while the trade deficit balloons & debt bulges at the seams. Meanwhile, foreign central banks cringe as they see our Federal Reserve printing presses smoking from overuse, and ultimately they begin to realize they'll probably never be repaid.
IMHO, the US dollar’s days, as the world's reserve, is probably very limited. When will we see this happen? Your guess is as good as mine, but I believe it will be sooner (within 15 years) rather than later. With that said, I believe we will experience much economic and geopolitical turmoil before now and the end of this decade, but it will take many, many additional years for the world to transition to a new reserve.
My thoughts for those of you interested in how this relates to the housing bubble: The current US housing bubble is only the latest symptom of broken economic fundamentals and was created by “Easy Al”--through massive liquidity and the lowest interest rates in 40-years. If the dollar happens to collapse before the housing bubble lets out the majority of its excess, the “Bubble” will probably be relegated to a footnote in history, as a dollar collapse will bring the world to its knees. With that said, the roles may be reversed and it may be the housing bubble’s deflation that ultimately brings the demise of the dollar, as 90% of our growth in GDP (2001-05) was due to housing and consumer spending. When the bubble deflates, consumers will lose their "wealth effect" and will have no choice but to pullback on spending. This pullback will send our country into a recession (my prediction is 2007). A U.S. recession will negatively impact the world and we could see a dumping of the dollar (depending on Fed Policy).
Anyway, enough of my “short” summary on the dollar… If you’d like to read more thoughts on the dollar, see my Blog articles here, here, here, and here.
With that behind me, the main reason I’m writing about the dollar today is: Three people independently sent me the same link to one of the finest articles on the US dollar I’ve had the opportunity to read. The article was actually a speech given by Congressman Ron Paul of Texas, before the U.S. House of Representatives on Feb 15, 2006.
If you only read one thing today, I recommend it be this: The End of Dollar Hegemony.
A hundred years ago it was called “dollar diplomacy.” After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, our dollar dominance is coming to an end.
It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.
First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.
Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin-- always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.
This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.
That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations-- those with powerful armies and gold-- strived only for empire and easy fortunes to support welfare at home, those nations failed.
Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: “He who prints the money makes the rules”-- at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.
Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people-- just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.
The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.
When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules-- rules no longer written by those who ran the now defunct printing press.
“Dollar Diplomacy,” a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of “Dollar Diplomacy.” The significance of Roosevelt’s change was that our intervention now could be justified by the mere “appearance” that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government “obligation” to protect our commercial interests from Europeans.
This new policy came on the heels of the “gunboat” diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the “dollar diplomacy” of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar “diplomacy” became dollar “hegemony” in the second half of the 20th century.
This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.
Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress-- while benefiting the special interests that influence government.
Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.
The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.
The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question-- until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.
It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.
Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.
Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.
This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.
During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”
Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.
Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money-- i.e. the dollar system-- to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.
In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.
Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.
Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.
Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to—all to solve the problems artificially created by deeply flawed monetary and economic systems.
In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.
It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.
The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.
The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.
Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.
Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.
Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.
In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.
It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.
There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.
In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.
After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.
It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.
Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.
Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.
It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.
But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony-- it’s dominance as the world reserve currency-- is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.
For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.
It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.
The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources-- we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.
Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.
Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system-- like Iraq, Iran and Venezuela-- become targets of our plans for regime change.
Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.
But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.
The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.
But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.
Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.
And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.
Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.
The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.
As the world continues to pay increasingly higher oil prices, cracks in the dollar will begin to appear... Our government officials are spending like mad men while the trade deficit balloons & debt bulges at the seams. Meanwhile, foreign central banks cringe as they see our Federal Reserve printing presses smoking from overuse, and ultimately they begin to realize they'll probably never be repaid.
IMHO, the US dollar’s days, as the world's reserve, is probably very limited. When will we see this happen? Your guess is as good as mine, but I believe it will be sooner (within 15 years) rather than later. With that said, I believe we will experience much economic and geopolitical turmoil before now and the end of this decade, but it will take many, many additional years for the world to transition to a new reserve.
My thoughts for those of you interested in how this relates to the housing bubble: The current US housing bubble is only the latest symptom of broken economic fundamentals and was created by “Easy Al”--through massive liquidity and the lowest interest rates in 40-years. If the dollar happens to collapse before the housing bubble lets out the majority of its excess, the “Bubble” will probably be relegated to a footnote in history, as a dollar collapse will bring the world to its knees. With that said, the roles may be reversed and it may be the housing bubble’s deflation that ultimately brings the demise of the dollar, as 90% of our growth in GDP (2001-05) was due to housing and consumer spending. When the bubble deflates, consumers will lose their "wealth effect" and will have no choice but to pullback on spending. This pullback will send our country into a recession (my prediction is 2007). A U.S. recession will negatively impact the world and we could see a dumping of the dollar (depending on Fed Policy).
Anyway, enough of my “short” summary on the dollar… If you’d like to read more thoughts on the dollar, see my Blog articles here, here, here, and here.
With that behind me, the main reason I’m writing about the dollar today is: Three people independently sent me the same link to one of the finest articles on the US dollar I’ve had the opportunity to read. The article was actually a speech given by Congressman Ron Paul of Texas, before the U.S. House of Representatives on Feb 15, 2006.
If you only read one thing today, I recommend it be this: The End of Dollar Hegemony.
A hundred years ago it was called “dollar diplomacy.” After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, our dollar dominance is coming to an end.
It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.
First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.
Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin-- always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.
This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.
That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations-- those with powerful armies and gold-- strived only for empire and easy fortunes to support welfare at home, those nations failed.
Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: “He who prints the money makes the rules”-- at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.
Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people-- just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.
The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.
When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules-- rules no longer written by those who ran the now defunct printing press.
“Dollar Diplomacy,” a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of “Dollar Diplomacy.” The significance of Roosevelt’s change was that our intervention now could be justified by the mere “appearance” that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government “obligation” to protect our commercial interests from Europeans.
This new policy came on the heels of the “gunboat” diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the “dollar diplomacy” of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar “diplomacy” became dollar “hegemony” in the second half of the 20th century.
This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.
Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress-- while benefiting the special interests that influence government.
Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.
The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.
The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question-- until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.
It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.
Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.
Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.
This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.
During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”
Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.
Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money-- i.e. the dollar system-- to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.
In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.
Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.
Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.
Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to—all to solve the problems artificially created by deeply flawed monetary and economic systems.
In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.
It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.
The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.
The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.
Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.
Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.
Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.
In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.
It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.
There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.
In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.
After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.
It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.
Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.
Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.
It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.
But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony-- it’s dominance as the world reserve currency-- is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.
For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.
It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.
The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources-- we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.
Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.
Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system-- like Iraq, Iran and Venezuela-- become targets of our plans for regime change.
Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.
But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.
The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.
But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.
Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.
And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.
Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.
The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.
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